Page:The Green Bag (1889–1914), Volume 24.pdf/32

 Taxation of Guaranteed Stock though having many features incident to pre ferred stock. The whole ingenious and exceed ingly able argument for the appellants proceeded upon the assumption that this is ordinary pre ferred stock, because called preferred stock, and because it possesses the incidents of such stock (but it ignored the fact that it has a quality which preferred stock has not), and the conclu sion thence deduced was, that being that kind of stock it has no preferential lien. Now, the converse is exactly true. If the statute plainly gives a lien and a preference, then the so-called preferred stock is not ordinary preferred stock at all, no matter what it is called and no matter what incidents it may have in common with pre ferred stock, and therefore it has not that particu lar characteristic which, if it were ordinary pre ferred stock, would defer it to the claims of unse cured creditors. Brushing aside the name, let us see what are the essential qualities of this statutory creation. The earlier statute created what is properly preferred stock, but the amendment giving the shareholder a lien altered the nature of the pre ferred stock and made it something that it had not been under the earlier statute. Preferred stockholders may be given a lien, but in that case it cannot be distinguished from an income bond (citing cases). It is unnecessary to say that giving a lien was void because a lien was incon sistent with the properties and qualities of stock. There is neither a physical nor legal impossibility in the way. The substance of the thing was changed. The name was retained. None of the cases cited in opposition arose under statutes like this.

The court, therefore, held that the provision for a lien was valid and the stock properly issued but, further held that the lien was not applicable to the insurance fund.* If it were merely a question of nomen clature the Massachusetts court might properly hesitate to criticize the de scription of the Legislature, but there is involved a question of the constitutional right to exempt from taxation. The justification given by the Massachusetts court for the exemption from taxation of stock in domestic corporations is based on the conception that their right is proprietary and not an obligation. "Hfiler v. Marine Bank. 89 Md. 602, 610, 611, 612.

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"If a reasonable excise tax is lawfully imposed upon a corporation, according to the amount of its property or business, it is in the power of the Legislature, for the purpose of avoiding double taxation, to exempt its property held and used in the business for which the excise tax is paid, and to exempt the stockholders or owners of the beneficial interest in this property from lia bility to a property tax upon it."10

As there is no express exemption from taxation in the charter of the Holding Company,11 its privilege depends on the general exemption of domestic stock referred to in the above quotation.12 There is, therefore, much ground for contending that the Courts should de clare this so-called stock a bond for the purposes of state taxation. But even if the principal security here is properly called "preferred stock," what is the nature of the so-called guar anty of the New Haven Railroad annexed to it? A guaranty is, so to speak, a triangular obligation. It is usually an obligation dependent upon and referring to another obligation, and identical in scope with it; that is, it is a conditional agreement to pay or per form the obligation of another. Is the right of a preferred stockholder the result of a contractual obligation of the corporation and if so is it as extensive as the obligation of the so-called guar anty in this case? The essential nature of stock in a corporation, as distin '"Opinion of the Justices, 195 Mass. 607. 661. "Chap. 519 of Acts of 1909. "An amusing complication arises here. The exemption, as has been seen, is based on the fact that the corporation pays the state a franchise tax. The Boston Railroad Holding Company, not being a railroad company, is liable to a franchise tax as a "domestic business corporation" under Sec. 43 of Part III of Chapter 490 of the Acts of 1909 upon the value of its corporate franchise. This is ascer tained under Section 4 1 by making certain deductions from the market value of the shares of domestic corporations. One of these deductions is the value of "securities which, if owned by a natural person resident in this commonwealth, would not be liable to taxation." As all the assets of the Holding Com pany consist of shares in the Boston & Maine Rail road Company which are tax exempt, the Holding Company in fact pays no franchise tax whatever.