*1388 Held, the so-called "bonus" exacted from corporations by the State of Pennsylvania for the privilege of increasing authorized capital stock is not a tax, and does not constitute an allowable deduction in computing taxable net income under the provisions of section 234(a)(3) of the Revenue Act of 1926.
*1382 These are proceedings for the redetermination of deficiencies in income tax determined by the respondent for the years 1926 and 1927 in the amounts of $6,669.86 and $4,226.21, respectively. The issue is whether or not the respondent erred in refusing to allow the petitioner to deduct from its gross income for the year 1926 a payment of $49,306.38 and from its gross income for the year 1927 a payment of $25,971.28, which amounts the petitioner was by law required to pay and did pay to the State Treasurer of Pennsylvania, for the use of the Commonwealth of Pennsylvania, for the privilege of increasing its outstanding capital stock.
The proceedings were consolidated for hearing and report.
FINDINGS OF FACT.
The following facts were stipulated*1389 by the parties:
The petitioner is a corporation organized August 21, 1925, by merger and consolidation proceedings under the general corporation law of the State of Pennsylvania, with its principal office at Philadelphia.
During the year 1926 the petitioner increased its capital stock and on account of said increase made to the State of Pennsylvania a payment of $49,306.38, required by Pennsylvania law and designated by said law as a bonus.
Said payment, as received by the State of Pennsylvania, was made to the State Treasurer for the use of the Commonwealth and placed in the General Fund and accounted for by him under the subtitle "Corporation Taxes."
During the year 1927, the petitioner increased its capital stock on nine different occasions and on account of said increases made to the State of Pennsylvania payments amounting to $25,971.28, each of which was required by Pennsylvania law and designated by said law as a bonus.
*1383 Said payments, as received by the State of Pennsylvania, were made to the Secretary of the Commonwealth and by him transmitted to the Treasury Department, placed in the General Fund and accounted for by the Treasurer under the subtitle*1390 "Corporation Taxes."
The salary of the Governor of Pennsylvania, the salaries of his cabinet officers, the salaries of the various officers and members of the Pennsylvania State Legislature, the salaries of the various judges of civil and criminal jurisdiction throughout the state, the salaries of the state police, the maintenance of the National Guard of Pennsylvania, together with all other running expenses of the government of the State of Pennsylvania, are appropriated from the general fund into which the said payments were made.
During each of the years 1926 and 1927, the payments designated as bonus, received by the State of Pennsylvania and placed in its general fund, exceeded $1,500,000.
The petitioner, within thirty days after each increase of its capital stock, made a "return of actual increase" to the Secretary of the Commonwealth required by law, and in addition to making the required payments of $49,306.38 in 1926 and $25,971.28 in 1927, each of which was on account of an increase of capital stock, paid the required filing fee of $5 for each increase, making a total fee of $5 so paid in 1926, and total fees of $45 so paid in 1927.
OPINION.
TRAMMELL: The question*1391 raised in these proceedings is whether or not the payments made by the petitioner to the State of Pennsylvania on account of increases of its capital stock during the taxable years, under the circumstances indicated in the stipulated facts, constitute "taxes" within the purview of section 234(a)(3) of the Revenue Act of 1926, which provides that in computing the net income of a corporation there shall be allowed as deductions, among other things, "taxes paid or accrued within the taxable year," with exceptions not important here.
The petitioner deducted the controverted amounts in computing its net taxable income, and contends that said amounts constitute deductible "taxes" within the meaning of the statute. The respondent disallowed the claimed deductions, and asserts that the Pennsylvania capital stock "bonus" is not a tax.
The name by which said payments were designated in the Pennsylvania statute is not necessarily controlling, nor is the designation given thereto by the state treasurer. They are referred to in the state statute as a "bonus," and they were accounted for by the treasurer as "corporation taxes." In order to determine whether *1384 or not they are taxes, *1392 we must inquire into the purpose and essential nature of these exactions. New Jersey v. Anderson,203 U.S. 483">203 U.S. 483; Choctaw & Gulf R.R. Co. v. Harrison,235 U.S. 292">235 U.S. 292.
The revenue act does not define the term "taxes," and the word must, therefore, be given its ordinary and commonly accepted meaning as established by the judicial decisions.
In Lane County v. Oregon,7 Wall. 71">7 Wall. 71, 80, the Supreme Court quoted with approval the following definition:
A tax is an impost levied by authority of government upon its citizens, or subjects, for the support of the State. It is not founded on contract or agreement.
The same court has also approved the following definitions:
A "tax" says Webster's dictionary, "is a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state." "Taxes are burdens or charges imposed by the legislature upon persons or property to raise money for public purposes." (Cooley on Constitutional Limitations, 479.)
Colter, J., in *1393 Northern Liberties v. St. John's Church (13 Pa. St. 104), says, very forcibly, "I think the common mind has everywhere taken in the understanding that taxes are a public imposition, levied by authority of the government for the purpose of carrying on the government in all its machinery and operations - that they are imposed for a public purpose." Loan Association v. Topeka,20 Wall. 655">20 Wall. 655, 664.
In the case of Greensburg Coal Co. v.United States, decided April 9, 1929, the District Court of the United States for the Western District of Pennsylvania held that an amount paid to the State of Pennsylvania as a bonus on an increase in its capital stock was not a tax within the meaning of the revenue act. This decision was rested squarely upon two prior decisions, as appears from the following statement contained in the court's opinion:
In support of this conclusion, we need only say that the Court of Appeals of this Circuit has ruled that the capital stock bonus paid by Pennsylvania corporations is not a tax. *1394 Re York Silk Mfg. Co.,188 Fed. 735; Penna. v. York Silk Mfg. Co.,192 Fed. 81.
The case of Re York Silk Mfg. Co., supra, arose out of bankruptcy proceedings. The Commonwealth of Pennsylvania filed with the referee in bankruptcy a claim against the bankrupt, York Silk Manufacturing Company, for a "bonus" imposed by the State law (P.L. 1901, p. 5 P3), on account of an increase of the capital stock of the company. The capital stock had been increased prior to, but no return of increase had been made until after, the corporation had been adjudged a bankrupt. The Commonwealth contended that the "bonus" was a tax, and should therefore be allowed as a preferred *1385 claim. The District Court, affirming the decision of the referee, held that the "bonus" was not a tax, but a consideration payable to the Commonwealth for a benefit conferred.
The United States Circuit Court of Appeals for the Third Circuit (192 Fed. 81), in affirming the dedicion of the District Court, said:
The Supreme Court of Pennsylvania, we are advised, has never construed the Pennsylvania Act of 1901 respecting the payment of a bonus when the capital*1395 stock of a corporation is increased * * *. The Legislature denominated the payment a "bonus". A bonus is a debt, and, as a consideration for a grant by the state, it may be payable before or after the grant according to the terms of the statutory contract.
The "bonus" is required for the privilege of being permitted to increase capital stock. It is in the nature of a grant of authorization in consideration of a fee, rather than in the nature of an excise tax on the doing of certain things. It is not a recurring imposition. Even if such a requirement or obligation be placed in a revenue law, it is not material and certainly not determinative that it is a tax. Nor does it throw any light on the question that the "bonus" money is turned into the state treasury for public purposes. Fees are undoubtedly so turned in and used as well as taxes. In our opinion the so-called bonus was not a tax, but a fee, and as such is governed by our decision in the case of Logan-Gregg Hardware Co.,2 B.T.A. 647">2 B.T.A. 647, where we said: "Fees paid to a state on account of the increase of the capital stock of a corporation are capital expenditures and are not deductible in computing net*1396 income."
That a payment required to be paid to the state in connection with increase of capital stock may sometimes be held to be a fee and sometimes a tax, see Holeproof Hosiery Co.,11 B.T.A. 547">11 B.T.A. 547, and Borg & Beck,24 B.T.A. 995">24 B.T.A. 995. An analysis of the state law is required in each case.
Reviewed by the Board.
Judgment will be entered under Rule 50.
SEAWELL dissents.