[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 3 The decedent was domiciled in the state of Connecticut, where he died in 1893; leaving, by his will, his *Page 4 residuary estate to his two sons, also residents of that state. A part of the residuary estate consisted in shares of the capital stock and in the bonds of corporations incorporated under the laws of this state and which were in the testator's possession at his domicile. They had been handed over to the residuary legatees, prior to the institution by the comptroller of the city of New York of this proceeding to appraise them for the purposes of taxation under the Transfer Tax Act (Chap. 399, Laws of 1892). It was held by the Appellate Division of the Supreme Court, reversing the decree of the Surrogate's Court in the county of New York, that the executors were not liable to pay a transfer tax upon the basis of the stocks and bonds in question. The claim of the comptroller is that, both by the terms of that act and by force of the Statutory Construction Law of the state, and upon the theory that these bonds and shares represent interests in corporations incorporated under the laws of this state, they were, although not physically within the state, properly assessed for the purposes of such taxation.
The act, under which this tax was sought to be collected, was passed in 1892, (Chap. 399, Session Laws), and is known as "The Transfer Tax Act." By section one, a tax is imposed upon the transfer of any real or personal property of the value of five hundred dollars or over, in the following cases, viz.: when the transfer is by will or by the intestate laws of this state from a resident decedent; or when the transfer is by will or intestate law, of property within the state and the decedent was a non-resident at the time of his death. The important words to be noticed in this section, which imposes the tax, are, in the case of a non-resident decedent, "property within the state." Their importance is evident; inasmuch as the attempt of the state to collect a tax, where the decedent was not subject to its jurisdiction, is limited to that which possesses the legal attributes and characteristics of property here. In that connection, reference may be made to section 22 of the act, which defines the word "property," as used in the act, as meaning all property, *Page 5 or interest therein, "over which this state has any jurisdiction for the purposes of taxation." In the endeavor to ascertain the intention of the legislature, with respect to what should be assessable for the purposes of taxation as property under this act, we need go no further than the act itself; which, in imposing the tax, undertakes, in addition, to give a definition to property, the transfer of which by will, or by the intestate laws of the state, creates the liability to taxation. It seems unimportant to consider that section of the Statutory Construction Law, which gives a definition to the term "personal property" (Chap. 677, Laws of 1892, § 4); if indeed applicable. The act contains within itself a complete system for the taxation of transfers of property, in cases of testacy and of intestacy, and, also, controlling definitions for such words used in its sections as, in the judgment of the Legislature, might seem to require definition. The section of the Statutory Construction Act, in terms, is only applicable, as I think, to a statute, where its general object, or the context of the language construed, or other provisions of law, do not indicate that a different meaning is intended.
Whatever may be argued in support of the right to subject the bonds of domestic corporations to appraisement for taxation purposes under this act, when physically within the state, upon some theory that they are something more than the evidences of a debt and constitute a peculiar and appreciable species of property, within the recognition of the law as well as of the business community, such argument is certainly unavailing in this case; where the bonds themselves were at their owner's foreign domicile. They did not represent "property within the state" in any conceivable sense. What property they represented consisted in the debt of their maker and that species of property, unquestionably, must be considered to be, as a chose in action, the holder's and owner's and to be inseparable from his personality. The Supreme Court of the United States held in theForeign Held Bonds Case (15 Wall. 300), where the state of Pennsylvania *Page 6 assumed to tax the interest payable upon bonds issued by a Pennsylvania corporation, secured by a mortgage upon its property and held by a non-resident, that the tax was invalid. It will be profitable to quote some of the language of the opinion in that case, the soundness of which has never been questioned: "But debts owing by corporations, like debts owing by individuals, are not property of the debtors in any sense; they are obligations of the debtors, and only possess value in the hands of the creditors. With them they are property, and in their hands they may be taxed. To call debts property of the debtors is simply to misuse terms. All the property there can be, in the nature of things, in debts of corporations belongs to the creditors, to whom they are payable, and follows their domicile, wherever that may be. Their debts can have no locality separate from the parties to whom they are due. The principle might be stated in many different ways, and supported by citations from numerous adjudications, but no number of authorities and no forms of expression could add anything to its obvious truth, which is recognized upon its simple statement." It seems difficult to furnish an argument, in support of the view that the debt owing to a creditor is the property, which follows him everywhere, and not the written or printed obligation expressing the indebtedness, that is not resumed in the foregoing opinion. In our consideration of the question, we should not lose sight of the fact that the state, through the Transfer Tax Act, is exerting its taxing power only over that as to which it had jurisdiction for the purposes of taxation; and we should not be confused, in that consideration, by statutes or decisions which bear upon the exercise of that power over residents within its territorial limits.
The Inheritance Tax Act, or, as it is known to-day, the Transfer Tax Act, imposes a tax upon the right of succession. (In re Swift, 137 N.Y. 77; In re Merriam, 141 id. 479; In reHoffman, 143 id. 329.)
It was said of it by Judge ANDREWS, in the Enston Case (113 N.Y. 181): "It is not a general but a special tax, reaching *Page 7 only to special cases and affecting only a special class of persons;" and, as he also observed, in substance, there must be a clear warrant in the law for the imposition of the tax. In theSwift Case (137 N.Y. 77), it was decided that the personal property of a resident decedent, wheresoever situate, within or without the state, is subject to the tax. The act of 1885 was under discussion, and the general theory of the Inheritance Tax Law was considered, and it was held to be a fundamental requirement that there should be jurisdiction over the subject taxed, or an actual dominion over the subject of taxation at the time the tax is imposed. In the Phipps Case (77 Hun, 325), which was affirmed here upon the opinion of the General Term (143 N.Y. 641), the question was whether the right to an unpaid legacy left to a non-resident decedent in the will of a resident decedent was property within this state and, as such, assessable for purposes of taxation under the act of 1887. It was held that it was not such property; upon the principle that the residence of the debtor does not fix the situs of the debt, but the domicile of the creditor. It was there observed that "a mere chose in action, a right to recover a sum of money, has never, as yet, been given the attribute of tangibility." By the act of 1887 (Chap. 713), the legislature had amended the Inheritance Tax Law, as it existed under the act of 1885, so as to impose a succession tax with respect to the property of non-resident decedents, which should be within this state. In the James Case (144 N.Y. 6), we had occasion to consider the operation of that act. An Englishman, who died abroad, left property deposited within this state, consisting in stocks and bonds of corporations of this and of other states. The question was considered whether, in view of these words in the act, "which property shall be within this state," it was its intendment to reach, for purposes of taxation, any personal property that was not within the state, either in fact or because of the domicile here of its owner. We thought not and that it would be highly improper to impute to the legislature an intention to tax that over which there was no jurisdiction. *Page 8 It is obvious that the state has no jurisdiction over a right of succession which accrues under the laws of the foreign state. That is something in which this state has no interest, and with which it is not concerned. The legal title to these bonds, or the debts they represent, vested in the personal representatives of the decedent by force of foreign laws. The decedent was a creditor, to whom the obligors in the various bonds were indebted; the extent and terms of whose obligation were evidenced by those bonds. The legal situs of the indebtedness was at the creditor's domicile and as the actual situs of the bonds themselves was, also, there, upon no theory can it be held that the provisions of the Transfer Tax Act could reach them in its operation. The logical result of the proposition which has been established, that the tax is upon the right of succession to property, is, in my opinion, to confine the operation of this law, where non-residents' estates are concerned, to cases of property having a tangible and visible existence, and being the actual subject of the ownership.
But, with reference to the shares of capital stock owned by the decedent, I think we are compelled to differ with the Appellate Division. The attitude of a holder of shares of capital stock is quite other than that of a holder of bonds, towards the corporation which issued them. While the bondholders are simply creditors, whose concern with the corporation is limited to the fulfillment of its particular obligation, the shareholders are persons who are interested in the operation of the corporate property and franchises and their shares actually represent undivided interests in the corporate enterprise. The corporation has the legal title to all the properties acquired and appurtenant; but it holds them for the pecuniary benefit of those persons who hold the capital stock. They appoint the persons to manage its affairs; they have the right to share in surplus earnings and, after dissolution, they have the right to have the assets reduced to money and to have them ratably distributed. Each share represents a distinct interest in the whole of the corporate property. As said *Page 9 in Jermain v. L.S. M.S.R. Co. (91 N.Y. 492), it "represents the interest which the shareholder has in the capital and net earnings of the corporation;" or, as PARKE, B., put it, inBradley v. Holdsworth (3 M. W. at p. 424), it is "a right to have a share of the net produce of all the property of the company." Corporate shares must be regarded as property within the broad meaning of that term. Certificates of stock, in the hands of their holder, represent the number of shares which the corporation acknowledges that he is entitled to. In legal contemplation the property of the shareholder is either where the corporation exists, or at his domicile; accordingly as it is considered to consist in his contractual rights, or in his proprietary interest in the corporation. In the case of bonds, they represent but a property in the debt and that follows the creditor's person. Hence, it cannot be said, if the property represented by a share of stock has its legal situs either where the corporation exists, or at the holder's domicile, as we have said in the Enston and James cases, (In re Enston,113 N.Y. 181; In re James, 144 id. 12), that the state is without jurisdiction over it for taxation purposes. As personalty, the legal situs does follow the person of the owner; but the property is in his right to share in the net produce, and, eventually, in the net residuum of the corporate assets, resulting from liquidation. That right as a chose in action must necessarily follow the shareholder's person; but that does not exclude the idea that the property, as to which the right relates and which is, in effect, a distinct interest in the corporate property, is not within the jurisdiction of the state for the purpose of assessment upon its transfer through the operation of any law, or of the act of its owner. The attempt to tax a debt of the corporation to a non-resident of the state, as being property within the state, is one thing, and the imposition of a tax upon the transfer of any interest in, or right to, the corporate property itself is another thing. The corporation is the creation of state laws and those who become its members, as shareholders, *Page 10 are subject to the operation of those laws, with respect to any limitation upon their property rights and with respect to the right to assess their property interests for purposes of taxation.
It results from these views that the order appealed from must be reversed, to the extent that it reversed the order of the surrogate affirming an assessment upon the estate of the decedent based upon an appraisal of the shares of stock of domestic corporations, and the determination of the surrogate in that respect is affirmed. In other respects the order appealed from is affirmed and the matter is remitted to the Surrogate's Court, to be proceeded with in conformity with our opinion.
Under the circumstances, no costs are awarded to either party.