CHAPTER VII. TAXATION OF CORPORATIONS. I. PRINCIPLES. The marvelous development of the country industrially has been accompanied by, if indeed it is not largely attributable to, the great centralization of capital applied to industry under the forms of corporate organization. The amassing of wealth under the ownership of an impersonal legal entity and the superior marketing facilities for the stocks and bonds, representing not merely the wealth but the measure of probable continuing earning ability of the corporation, has given rise to problems of taxation that have been difficult of solution. If evidence is needed of the difficulties involved in the solution of these problems, it is afforded by the most cursory investigation of the methods adopted by various states. There is an utter lack of agreement on even fundamental matters and the whole question may be said to be involved in a cloud of legal chaos. However, this much is certain, that the problem of handling corporation assessments is one that must be dealt with according to the needs of the situation; and the situation is one that is peculiar to the corporate form of industrial organization. Prof. E. R. A. Seligman, after a thorough discussion of the subject of Taxation of Corporations, draws certain conclusions and states certain principles which may well form a guide for future legislation on the subject. These conclusions are as follows: 1. "Corporations should be taxed separately and on dif ferent principles from individuals." 2. "Corporations should be taxed locally on their real estate only." 3. "Corporations should be taxed for state purposes on their earnings or on their capital loans." 4. "Only so much of total earnings or capital should be taxed as is actually received or employed within the state. In the case of transportation companies, a convenient and fairly accurate test is mileage." 5. "Where capital and loans are taxed, the residence of the shareholder or bondholder should be immaterial.' 6. "There should be no distinction between domestic and foreign corporations. Each should be taxed for its business done. or capital employed within the state." 7. "If corporations are taxed on their property, property beyond the state should be exempt." 8. "If corporations are taxed on their capital stock, they should not be taxed again on their property." 9. "Where the corporate stock or property is taxed, the shareholder should be exempt. If corporate loans are taxed, the bondholder should be exempt." 10. "Where the corporation and the shareholder or bondholder are residents of different states, the tax should be divided between the states by interstate agreements." 11. "An additional tax should be levied on corporations which have through natural, legal or economic forces become monopolistic enterprises." II. CLASSIFICATION OF CORPORATIONS FOR PURPOSES OF ASSESSMENT IN NORTH DAKOTA. For purposes of assessment, corporations in North Dakota may be divided into five classes: 1. Those coming within Section 1503 of the Code of 1905, which provides for the assessment of all companies or associations whether incorporated or unincorporated, according to a method therein prescribed, excepting therefrom banking corporations, whose taxation is specially provided for. 2. Banking corporations, the assessment of which is provided for in Section 1508 of the Code of 1905. 3. Railroads, express companies, telegraph, telephone companies, freight line companies, etc., which are assessed by the state board of equalization. 4. Light, heat and power companies, which under the Laws of 1911 are assessable by the tax commission. 5. Foreign Insurance Companies. In the discussion which follows it will be impossible to entirely separate these classes one from the other on account of provisions of the law which overlap and seemingly apply to more than one class. I. COMPANIES AND ASSOCIATIONS GENERALLY. a. The Law: Section 1503 of the Code of 1905 provides for the assessment of companies and associations as follows: "Property of Companies or Associations, how and by whom Listed. The president, secretary or principal officer of any company, or association, whether incorporated or unincorporated, except banking corporations whose taxation is especially provided for in this article,shall make out and deliver to the assessor a sworn statement of the amount of its capital stock, setting forth particularly:" 1. The name and location of the company and association. 2. The amount of capital stock authorized and the number of shares into which said capital stock is divided. 3. The amount of capital stock paid up. 4. The market value, or if they have no market value, then the actual value of the shares of the stock. 5. The total amount of all indebtedness except the indebtedness of current expenses, excluding from such expenses the amount paid for purchase or improvement of property. 6. The value of all real property, if any. 7. The value of its personal property." "The aggregate amount of the fifth, sixth and seventh items. shall be deducted from the total amount of the fourth, and the remainder, if any, shall be listed as 'bonds or stocks,' under subdivision 23 of section 1496. The real and personal property of each company or association shall be listed and assessed the same as other real and personal property. In all cases of failure or refusal of any person, officer, company or association to make such return or statement, it shall be the duty of the assessor to make such return or statement from the best information he can obtain." It is manifestly the aim of this statute to provide a means of measuring what is called "corporate excess," "franchise value" or "good will.’ This excess is the value of the corporate stock over and above the value of its tangible property. The statute quoted above is vitally defective in the means provided for arriving at this value. b. Defects of the Law. Economic Defects: The statute quoted above is economically defective in laying down the rule for determining the value of "corporate excess." It provides for the subtraction of corporate indebtedness from the market value of the stock thus authorizing what is tantamount to a double subtraction of indebtedness. If it is to be assumed that the faculty of the corporation is a proper basis for taxation then the law should provide a means of measuring the faculty which will correspond with actual conditions in the field of corporation finance. If a corporation has a capitalization of one hundred thousand dollars, tangible assets valued at seventy-five thousand dollars and a corporate indebtedness of fifty thousand dollars the amount of corporate indebtedness, of course, reduces by the same amount the market or actual value of the stock. If from this market or actual value as already reduced the indebtedness is subtracted we have a remainder that will under usual conditions fall below the tangible property, consequently we will have no "corporate excess. The actual working capital of the corporation will be an amount equivalent to the market or actual value of the stock plus the indebtedness, except indebtedness for current expenses, and it is this sum that reppresents the faculty of the corporation. If from this sum the value of the tangible property, otherwise assessed, is subtracted we arrive at the " corporate excess. The highest economic authorities support the view that in arriving at the corporate faculty the market value of the stock and indebtedness should be added. On this point Prof. E. R. A. Seligman says the following: "This issue of mortgage bonds by a corporation is simply another mode of increasing the working capital. Correct policy demands the taxation of corporation bonds, as well as of stock, of loans as well as of share capital." (Essays in Taxation, page 214.) This view has the support, not only of economic authority but the principle is one that has commended itself to officials charged with the assessment of corporations elsewhere. 1873 the board of equalization of Illinois has used the principle above referred to in arriving at the assessment of corporate stock. The following resolution adopted by the Illinois State Board of Equalization in 1909 shows the method there pursued in assessing corporations: The main features of this resolution have been embodied in the rules of the state board of equalization since 1873. 66 'Resolved, That for the purpose of ascertaining the fair cash value of the capital stock, including the franchise, of all companies or associations now or hereafter created under the laws |