Page:The Green Bag (1889–1914), Volume 24.pdf/28

 Taxation of Guaranteed Stock most cases means the stock of a few public service companies. This artifi cial demand has inflated prices of such stocks to an artificial level and trustees are obliged to run the risk of an invest ment which the courts may declare improper if they should shrink in value when tax reform enacts a fair tax on all intangibles. For the present, however, it is resulting in a profitable monopoly of trust investments by those who finance the great public service corporations, and who therefore exert a powerful influence in the councils of both political parties, which so far has been sufficient to prevent tax reform. The artificial price of non-taxable stocks results, how ever, in an artificial local market, and it is becoming increasin'gly difficult to sell such stock outside Massachusetts. Further issues of the stock of such pub lic service corporations, moreover, must be issued at prices fixed by state com missions, which will be not far below the current market price, so that the Massa chusetts market must finance future developments of transit facilities. Hence, when the new railroad monopoly needed money for big improvements on the Boston & Maine Railroad, which its sponsors had promised in order to secure legislative ratification of their purchase through the device of a holding company, the railroad was obliged to inform the public that to carry out these improve ments the savings banks of Massachu setts must furnish the money, and they therefore asked that bonds of the Bos ton Railroad Holding Company should be made legal investments for savings banks in the expectation that the banks could then be made to invest in these new securities. The savings banks, how ever, were reluctant to accept this privi lege and opposed the legislation with such effect that the rai'road changed its plan, and determined to look to the

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trustees for funds by offering them a non-taxable security. It therefore asked legislation exempting from taxation bonds to be issued by the Holding Company, which bonds should be se cured by the stock of the Boston & Maine Railroad Company which is owned by the Holding Company. Before this legislation was put through, how ever, it was discovered that such an arbitrary exemption would be unconsti tutional, and as a last resort the idea of issuing a bond was ostensibly aban doned, and it was proposed that the Holding Company issue preferred stock which, as the Holding Company is a domestic corporation, it was assumed would be non-taxable. But since the preferred shares of an unincorporated public service holding company had been declared by the Supreme Judicial Court an improper investment for trus tees,8 the promoters of this scheme found it necessary to give to their wares added stability and security. This bit of his tory explains the origin of the legal curiosity which was thereupon authorized and which has since been sold as a nontaxable trust investment. Chapter 639 of the Acts of 1910 pro vides that the Boston Railroad Hold ing Company may issue preferred stock, the holders of which shall be entitled on liquidation or on default in the payment of any stipulated dividend, in prefer ence to ail other stock, to the payment of par and accrued dividends, and shall further be entitled to semi-annual cumu lative dividends out of the net profits of the corporation not exceeding five per cent. This stock is without voting power, and subject only to the rights of creditors existing at the date it is author 'Smith v. Smith, reported only in Banker & Tradesman of June 27, 1908. It never appeared in the official reporter because the parties settled the case and consented that it be dismissed for want of jurisdiction.