Commonwealth v. Ocean Oil Co. , 59 Pa. 61 ( 1868 )

The opinion of the court was delivered, May 27th 1868, by

Read, J.

The capital of oil companies is generally nominal, and when therefore the capital of this company is called $1,000,000, it is very evident that this sum was not paid for the 4 acres of land, but that it was valued for the purposes of a division into stock at one million. “ Some stock sold at $4, some .$20 per share,” says the treasurer, “original shares sold low— land had not been developed then.”

This company calling and returning its capital at one million, is taxed upon its capital stock at that sum, but by the Act of-the 30th April 1864, Pamph. L. 218, the “ net earnings or income” of said corporation are subjected to a state tax of “ three per centum upon such annual net earnings or income, in addition to the taxes now imposed by existing laws.”

The question therefore is, what is the meaning of “ net earnings or income?” Does it mean, as it was construed by the treasurer in his report to the auditor-general, the product of the business after deducting expenses only ? if so, then the settlement by the auditor-general and state treasurer is correct.

But it is contended by the company, that the annual product must first be applied to the repayment of capital, and this would leave no net earnings or income to tax. The court below compromised between these two constructions, and held that there must be an application of so much of the annual product, as would repay the capital, in the probable number of years that oil would flow or be taken from the land, and then the surplus would be the net earnings or income subject to taxation. This mode requires the interposition of a jury wherever there is a difference of opinion between the company and the state authorities,

f I can see no warrant for such a reading of the law. The injcome from the works of the company after deducting all expenses, appears in this case by the testimony of the treasurer, to have ,'been paid to the shareholders as dividends, and were no doubt ■' advertised as such, thus enhancing largely the value of the stock in the market.

When a capital stock is created, and paid into a corporation, authorized to transact any business whether of banking, manufacturing or mining, and is divided into shares of a fixed amount, that capital is presumed to remain until its dissolution. The value of the stock and the shares into which it is divided, may rise or fall according to the success of the enterprise. In banks, for instance, the profits may be largely remunerative, or if unfortunate, the capital may be utterly lost. This is the theory of incorporated companies, the capital invested remains either really or nominally to their close.

The present company pays dividends which are of course its net earnings or income, and it is the net income, whether declared or not, the state intended to tax. This is the plain common sense meaning of the term, made familiar to every one since the formation of the internal revenue system. The theory of the company is, that the capital must be repaid to its shareholders, and then it has no capital left.

But if this company has paid $600,000, it must be different from all other such companies, if its shareholders have not been overpaid already. The court below were therefore in error in allowing a portion of the net earnings to be applied to the reduction of the capital stock.

Judgment reversed, and venire de novo awarded.