Opinion
January 7, 1935.
March 25, 1935.
Taxation — Mortgages and participation certificates — Trust company — Taxation for state purposes — Taxation for county purposes — Assessment against trust company trustee — Act of June 17, 1913, P. L. 507 — Estoppel to assess tax — Creation of trust — Mortgage pool as active trust — Situs of trust.
1. Mortgages given by individual mortgagors or by first-class or nonprofit corporations not paying a capital stock tax, and which have not been assumed by, nor the interest thereon paid by, a corporation paying a capital stock tax or a tax on shares, legal title to which is of record in the name of a trust company, and unacknowledged assignments to individuals of which mortgages, termed participation certificates, by their terms provide for an undivided interest in the certificate holder in the proceeds of such mortgages, payable from such proceeds with interest, that the trust company shall hold separate and apart from its assets a pool of bonds secured by first mortgages, that the trust company shall collect the interest on such mortgages, retaining therefrom compensation for its services before payment to the certificate holder, and that the trust company guarantees the payment of the principal and interest of the certificates in the event of default on the part of the mortgagors sufficient to affect payment from the pool, are not taxable for state purposes under section 17 of the Act of June 17, 1913, P. L. 507, and its amendments; and this is so although the certificates reserve the right of the trust company to withdraw any mortgage or bond in the pool and replace it with another mortgage or bond. [86-90]
2. Such participation certificates, likewise, are not taxable for state purposes under section 17 of the Act of 1913 and its amendments. [86-95]
3. Such mortgages are taxable for county purposes under section 1 of the Act of 1913, and its amendments, and the tax is properly assessed against the trust company. [86-95]
4. The county commissioners are not estopped from assessing such tax against a trust company for a particular year because they demanded and received taxes on the certificates for that year from some of the holders thereof, and the trust company, knowing of this practice, did not retain the tax from the interest paid by it to the certificate holders, or because no effort was made prior to that year to assess the tax against the trust company. [98-9]
5. An agreement or contract in writing made by a person having the power of disposal over property, whereby such person agrees or directs that particular property or a certain fund shall be held or dealt with in a particular manner for the benefit of another, raises a trust in favor of such other person against the person making it. [95]
6. An active trust is created where mortgages are placed in a pool and participation certificates are issued. [96]
7. Property held in trust should be assessed to the trustee where he resides. [97]
8. No estoppel in pais can be asserted against the exercise by the State of its taxing power. [98]
9. Under section 1 of the Act of 1913, failure to assess or return the tax does not discharge the owner or holder of the property taxed from liability. [99]
Argued January 7, 1935.
Before FRAZER, C. J., SIMPSON, SCHAFFER, MAXEY, DREW and LINN, JJ.
Appeal, No. 68, Jan. T., 1935, by defendant, from decree of C. P. Cumberland Co., Dec. T., 1933, No. 120, in case of County of Cumberland v. Lemoyne Trust Company. Judgment affirmed.
Appeal from decision of board of revision of taxes.
The facts are stated in the opinion of the lower court, REESE, P. J., as follows:
This is an appeal by the Lemoyne Trust Company from the assessment of the board of revision which materially increased the assessment of personal property of the appellant subject to tax for county purposes for the year 1932. The facts, agreed upon by the parties in a case stated, are briefly and substantially as follows:
Pursuant to the Act of June 17, 1913, P. L. 507, the appellant made, in due time, a return for the year 1932 of the personal property held, owned or possessed by it as active trustee, attorney in fact, agent, or in any other capacity for the use, benefit or advantage of other persons, and taxable for county purposes, in the total amount of $120,885.
Thereupon the county commissioners, exercising their powers as a board of revision, increased the assessment to $2,501,932. Due notice of the increase was given to appellant, and at the hearing, the time and place for which were fixed in the notice, the appellant appeared to oppose the increase in the assessment which, however, was sustained by the board of revision. Thereupon an appeal was taken to this court.
It further appears from the case stated that on the assessment date, January 1, 1932, the trust company, appellant herein, appeared on the records of the recorder of deeds to hold legal title to mortgages, given by individual mortgagors in the total amount of $1,980,549.46, and also to mortgages, given by, or assumed by or on which interest is paid by corporations paying a capital stock tax or a tax on shares, in the total amount of $77,820. On the same date the trust company had issued and there were outstanding against mortgages, legal title to which appeared of record to stand in its name, assignments of the beneficial interests of such mortgages and of the bonds secured thereby in the total amount or value of $1,688,200. These assignments were termed "Participation Certificates."
It appears, therefore, that the latter mortgages and the bonds secured thereby were placed by the trust company in what is commonly termed "a mortgage pool," and the beneficial interest therein assigned to various persons by the "participation certificates." In the pool were mortgages given by individual mortgagors or by first class or nonprofit corporations not paying a capital stock tax, and which had not been assumed by, nor the interest thereon paid by, a corporation paying a capital stock tax or a tax on shares. Participation of certificates, assigning beneficial interests in the latter type of mortgages in the pool, were issued in the following amounts to various holders: to charitable organizations, $33,115; to nonresidents of Pennsylvania, $11,700; to individual residents of Pennsylvania, $1,650,400; and of this latter amount, to individual residents of Cumberland County, $1,128,300. The amount last mentioned, as appears later herein, is the amount actually in controversy in the present proceeding.
The "participation certificates," by their terms, show that the trust company assigned to the purchaser "an undivided interest in the proceeds of first mortgages on real estate standing in the name of the Lemoyne Trust Company, payable from such proceeds" at a given date "with interest . . . payable semiannually"; that the trust company agreed with the purchaser to "at all times hold separate and apart from its assets a pool of bonds secured by first mortgages on improved real estate, of which the principal debt actually due thereon shall be equal to or in excess of the principal of this certificate and all other certificates of participation issued against such pool"; that the trust company agreed to "collect the interest on said mortgages, deducting and retaining as compensation for its services under this agreement and for the guaranty hereinafter set forth the difference between the interest collected and the interest paid" to the holder of the certificate. In the certificates, the trust company reserved "the right to accept at any time partial payment on any bond or bonds included in such pool or to withdraw any or all of such bonds and to substitute therefor bonds secured by first mortgages on improved real estate, provided that it shall maintain at all times an aggregate amount of principal due on such bonds equal to or in excess of the principal sum of all outstanding certificates issued against such pool." There was also a reservation of certain rights to redeem the certificates before maturity or to extend the time for redemption. Further, the trust company guaranteed the payment of the principal and interest of the certificates according to the terms and conditions thereof.
It further appeared from the agreed facts in the case stated that the trust company retained possession of the "pool of bonds" and the mortgages securing them and all papers relating thereto "for the purpose of facilitating collection of principal and interest thereon." It also appears that the participation certificates have not been recorded in the office of the recorder of deeds, nor were they acknowledged for that purpose, but they have been noted on the books of the trust company as assignments of specific mortgages "which mortgages are kept separate and apart from the other assets of said trust company."
It must be carefully noted that the question submitted to us involves the taxability of those mortgages in the pool which were given by individual mortgagors or by first class or nonprofit corporations not paying a capital stock tax, and which had not been assessed by, nor the interest thereon paid by, a corporation paying a capital stock tax or a tax on shares. Further, under the question submitted, we are to consider only those mortgages just described, participation certificates for which were issued to and held by individual residents of Cumberland County, and, as stated before, the amount or value thereof was $1,128,300.
In disposing of the present controversy we must answer three questions:
(1) Are the mortgages or participation certificates described taxable for state purposes under section 17 of the Act of June 17, 1913, P. L. 507, and its amendments? or
(2) Are they taxable for county purposes under section 1 of the Act of 1913 and its amendments?
(3) If taxable under section 1, should the tax be assessed against the trust company or against the individual holders of the participation certificates?
As to the first question, section 17 of the Act of 1913 as amended by the Act of July 15, 1919, P. L. 955, imposes a tax of four mills for state purposes on "all scrip, bonds, certificates, and evidences of indebtedness issued, and all scrip, bonds, certificates and evidences of indebtedness assumed, or on which interest shall be paid, by any and every private corporation, incorporated or created under the laws of this Commonwealth . . ." Are the mortgages involved in the present case taxable under section 17? They were not issued by the trust company but by individuals. Neither has the trust company assumed the payment of the mortgages nor does it pay interest on them. The mortgages are placed in a pool and the principal and interest collected by the trust company and remitted to the holders of the participation certificate. The interest is not paid by the trust company out of its own funds. True, the trust company, in the certificate, guarantees the ultimate payment of the principal and interest. But unless and until there has been a default on the part of the mortgagors sufficient to affect payment from the pool, there is no obligation upon the trust company to pay from its own funds. There is no suggestion of any such default, and we conclude that the mortgages are not taxable under section 17.
Are the participation certificates taxable under section 17? Are they evidences of indebtedness issued by, or on which interest is paid by the trust company? We understand that the department of revenue of the Commonwealth has taken the position that where mortgages have been placed in a pool and the participation certificates are issued as in the instant case, the participation certificates will be considered as evidences of indebtedness and therefore taxable under section 17, where the certificates specifically reserved the right of substitution, i. e., the right at any time to withdraw any mortgage or bond in the pool and replace it with another mortgage or bond. Such a right was reserved in the certificates under consideration.
For this position the department of revenue is apparently relying upon the decisions of the federal courts in Mortgage Guarantee Co. v. Welch, 38 F.2d 184; Willcuts v. Investors' Syndicate, 57 F.2d 811; Lawyers' Mortgage Co. v. Anderson, 1 F. Supp. 462, 11 Am. Fed. Tax Reports 1165. We must examine these cases to ascertain whether the presence or absence of a reservation of a right of substitution is a proper test to determine whether the personal property involved in the instant case is taxable for state purposes under section 17 or for county purposes under section 1.
In the first case cited, the appellant, the Mortgage Guarantee Company, loaned money on mortgages, thereafter placing the mortgages with a trust company upon a trust agreement and assignment by which the trust company took title to the mortgages and agreed to hold them for and on behalf of purchasers of participation certificates thereafter issued and sold by the appellant which reserved the right to exchange securities from time to time. The Circuit Court of Appeals, Ninth Circuit, held that the participation certificates were "corporate securities" and subject to a stamp tax imposed by 26 USCA, section 901, upon "Bonds, debentures, certificates of indebtedness, and other corporate securities. On all bonds, debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, issued by any corporation, with interest coupons or in registered form known generally as corporate securities." The court said, "it seems clear that the 'certificates' involved in this section are 'securities' within the meaning of that term as used in connection with the subject of investments, and that, being issued by a corporation, they are 'corporate securities.' " It was also held that such certificates are generally known as "corporate securities." But in arriving at this conclusion, we can not find that the court placed any emphasis whatever on the reservation of the right of substitution. Nowhere does the court indicate, either directly or indirectly, that without this reservation the certificates would not have been "corporate securities" under the stamp tax act.
The court further said, "Without attempting to analyze the relative rights and duties and obligations of the appellant and of the trustee and of the holders of the certificates in question, we think it is clear that the certificates issued by the appellant were of the kind Congress intended to tax when it enacted 26 USCA, section 901." In contrast with this, we think that, to determine whether personal property is taxable under section 1 or section 17 of the Act of 1913, it is most important to analyze and ascertain the relative rights, duties and obligations of the trust company and the holders of the certificates involved in the instant case.
In the Welch case, the legal title to the mortgages was assigned to the trust company by the Mortgage Guarantee Company, the mortgagee. In the case at bar, the trust company, the mortgagee, retained record title to the mortgages in the pool. There is thus a dissimilarity in facts. When we consider the purpose of the stamp tax act passed by Congress and the purpose of the Act of 1913, together with the fact that the reservation of a right of substitution does not seem to have been controlling in the federal court's decision that the participation certificates were "corporate securities," we can not accept the Welch case as an authority that the certificates in the instant case are corporate obligations and taxable for state purposes under section 17 of the Act of 1913.
In the second case cited, Willcuts v. Investors' Syndicate, supra, the plaintiff syndicate issued "accumulative installment certificates" according to which, in consideration of the annual installments paid by the purchaser, it agreed to repay a stipulated amount with interest. The plaintiff also agreed to keep on hand first mortgages on improved real estate or other securities to insure the payment of the certificates. Apparently the plaintiff reserved or had the right of substitution. The Circuit Court of Appeals, Third Circuit, held that the certificates were "corporate securities" under the same stamp tax act involved in the Welch case.
But the court said, "In our opinion, the intention of Congress was that the statute involved should be broad and comprehensive. . . . It is to be noted first of all that the tax imposed was not a property tax [italics ours]; nor was it a tax on transactions. It was a stamp tax." The court quoted with approval from Lederer v. Fidelity Trust Co., 267 U.S. 17, 22, "We do not regard the precise limits of the trust company's undertaking as important." Under the Act of 1913, we feel this consideration is important, and further our act does impose a property tax. As in the Welch case, the court attached no significance to the reservation of the right of substitution. In fact, no mention was made of it. We can not accept the case just discussed as authority for the position of the department of revenue.
In the last case cited, Lawyers' Mortgage Co. v. Anderson, supra, the participation certificates issued by the plaintiff assigned an undivided interest either in a specified mortgage or in a pool of mortgages. These certificates bore more resemblance to those in the case at bar than did the certificates in the first two cases cited. In the case under discussion, the Anderson case, there was no reservation of a right of substitution. The circuit court of appeals held that the certificates were not "corporate securities" under the stamp tax act.
Discussing the reservation of a right of substitution, the court said, "The plaintiff [does not] have the right to substitute other bonds and mortgages than those named in the certificates; those therein are irrevocably dedicated to the participating certificate holders to whom shares in them are assigned. It is implicit in the situation that the assignee of a certificate and his fellow assignees are the equitable owners of the securities given by the third party mortgagors." We can not find that the fact that there was no reservation of a right of substitution was a controlling factor in the court's decision, nor did the court indicate that it would have reached a contrary result if there had been such a reservation. On the other hand, it distinguished the Welch case on more basic and fundamental grounds. The court said, "In the Welch case, . . . the certificates were not in fact, whatever they were in form, assignments of an interest in specific mortgages, nor were the certificate holders equitable owners of them. Such certificates were the direct obligations of the Mortgage Guarantee Company, in respect of which it was secured to the extent it deemed advisable by a number of bonds and mortgages in the hands of the trust company." Parenthetically, there seems to be no doubt that in the Investors' Syndicate case, discussed supra, the certificates were likewise direct obligations of the syndicate. The court, in the Anderson case, continued, "Here the plaintiff's liability for the amount of the certificates is secondary only. Its certificates are not, therefore, bonds, debentures, or certificates of its indebtedness, nor are they its corporate securities. Indeed the plaintiff's entire relationship to each certificate holder is purely fiduciary, except in respect of its guaranty." The language just quoted is especially applicable in the present case, as is also the following by the same court: "The certificate holders are the owners of the [mortgages], at least in equity, and assuming the case of a default by the mortgagors they would lose their investment, if the plaintiff were unable to implement its guaranty. . . . The certificates here in question are rather certificates of the indebtedness of, and hence securities of, other third party mortgagors."
A careful consideration of the case just discussed in the light of the provisions of the Act of 1913 makes it extremely difficult to view the case as an authority for the position taken by the department of revenue. Indeed the case seems to be persuasive authority that the mortgages in the instant case are taxable for county purposes. The certificates in the instant case are not evidences of contracts whereby the holders loan money to the trust company for which the trust company is under obligation to pay interest out of its own assets, but rather the certificates are contracts under which the holders to whom they are issued pay money to the trust as the purchase price for the assignment or sale to them of an undivided share in the beneficial or equitable interest of the mortgages in the pool. We, therefore, conclude that the certificates in the instant case are not obligations or evidences of indebtedness of the trust company and are not taxable under section 17 of the Act of 1913.
But are the mortgages or certificates taxable for county purposes under section 1 of the Act of 1913? Section 1, as amended by the Act of May 2, 1929, P. L. 1509, provides, inter alia:
"That all personal property of the classes hereinafter enumerated [inter alia, mortgages], owned, held or possessed by any person . . . bank or corporation whatsoever . . . whether . . . held . . . in its own right or as active trustee, agent, attorney in fact, or in any other capacity, for the use, benefit or behoof of any other person . . . is hereby made taxable, annually, for county purposes, at the rate of four mills on each dollar of the value thereof . . .
"That corporations . . . liable to tax on capital stock for state purposes, shall not be required to make any report or pay any further tax, under this section, on the mortgages, bonds and other securities owned by them in their own right; but corporations . . . holding such securities as trustees, executors, administrators, guardians, or in any other manner, shall return and pay the tax imposed by this section upon all securities so held by them as in the case of individuals." (Italics ours.)
In the case at bar, is the pool of mortgages held by the trust company as trustee, agent, or in any other capacity for the use and benefit of the holders of participation certificates? Any agreement or contract in writing made by a person having the power of disposal over property, whereby such person agrees or directs that particular property or a certain fund shall be held or dealt with in a particular manner for the benefit of another, raises a trust in favor of such other person against the person making it: Perry on Trusts, page 79; Cressman's App., 42 Pa. 147; McAuley's Est., 184 Pa. 124; Eshbach's Est., 197 Pa. 162; Ranney v. Byers, 219 Pa. 332.
The certificates in this case assign the beneficial interest in the mortgages placed in the pool to the holders thereof. But the trust company retains record title to the mortgages and by its failure to acknowledge the certificates renders impossible the recording of them as assignments. The trust company retains the bonds and mortgages in its possession and it continues to exercise the rights, powers and remedies of mortgagee as against the several mortgagors as though the certificates did not exist. But the bonds and mortgages are earmarked and set apart in the pool from the assets of the trust company, which collects from the mortgagors the interest and remits it to the certificate holders. It collects and pays over the principal when it falls due. It pays nothing out of its own assets on account of principal or interest unless and until by reason of default of the mortgagors it becomes liable on its guaranty, and no such default appears here. We must, therefore, conclude that the trust company holds the pool of mortgages as a trustee for the certificate holders.
But the trust company contends that if it is a trustee it is not an active trustee. It is to be noted that section 1 of the Act of 1913, above quoted, first used the expression "as active trustee, agent, attorney in fact, or in any other capacity." The amendment of 1929, supra, however, omitted "active" in providing "as trustee, executors, administrators, guardians, or in any other manner." The legislative intent does not seem to require a trust relationship to rise to an active trust. This is indicated by the provision that it is sufficient if the securities are held "in any other capacity" for the use and benefit of another.
But we believe there is an active trust in the present case under the general principles announced in Buch's Est., 278 Pa. 185; Owens v. Naughton, 23 Pa. Super. 639. Further and more specifically, our courts have indicated that an active trust is created where mortgages are placed in a pool and participation certificates are issued. In Werner v. Gordon, 38 Dauphin 8, 12, the court said, "The legal effect . . . was to create a trust wherein the bank was trustee of certain mortgages . . . and the certificate holders stood in the position of cestuis que trustent." The court cited U.S. Bank Trust Co.'s Case, 311 Pa. 320, in which the Supreme Court, under similar facts, accepted without question or objection the agreement of the parties that the legal effect was to create a trust wherein the bank was trustee of the mortgages and the certificate holders were cestuis que trustent. We also again call attention to Lawyers' Mortgage Co. v. Anderson, supra, one of the cases apparently relied upon by the department of revenue, in which the court said that, under similar facts, a fiduciary relationship is created wherein the certificate holders are equitable owners of the pooled mortgages. See also Anthracite Trust Case, 34 Lack. 53.
Even if there is no active trust, certainly the language of section 1 of the Act of 1913, as amended, manifestly covers the mortgages in the instant case. They are "held or possessed" by the trust company in some ("any other") capacity or manner for the use and benefit of the certificate holders. We therefore conclude that the mortgages involved in the present case are taxable in the hands of the trust company.
The parties have agreed that only those mortgages of the type described herein should be taxed, participation certificates for which are held by individual residents of Cumberland County. We will adhere to this agreement, although it would seem that mortgages of the type involved would be taxable in the hands of the trust company even though the certificate holders were individuals resident outside the county or even outside the State: Com. v. Phila. Mortgage Trust Co., 15 Dauphin 96, (appealed to the Supreme Court to No. 20, May Term, 1912, and non prossed). "Property held in trust should be assessed to the trustee where he resides": Guthrie v. Ry., 158 Pa. 433.
We find no merit in the contention that the tax should be assessed against the individual holders. As we have stated, the Act of 1913, section 1, seems manifestly to make the mortgages taxable in the hands of the trust company. Further, a consideration of the facility of administering the Act of 1913 seems to require assessment of the tax against the trust company. The certificates are not acknowledged and, hence, can not be recorded. The taxing authority would experience great difficulty in ascertaining the identity and residence of the various holders of the certificates. To assess the tax against the holders of the certificates seems contrary to the spirit and purpose of the various acts, including the Act of 1913, which require the recorder to obtain accurately the residence of all persons to whom interest is payable on recorded securities and to forward periodically such information to the taxing authority.
The trust company further contends that the county commissioners are estopped from assessing the tax against the trust company for the year 1932 because they demanded and received taxes on the certificates for that year from some of the holders thereof and from the estates of other deceased holders, and the trust company, knowing of this practice, did not retain the tax from the interest paid by it to any of the certificate holders, and further because no effort was made prior to 1932 to assess the tax against the trust company. In the first place, it is doubtful whether all the elements of estoppel are present. In the second place, the appellant's contention is fully answered by the following: "No estoppel in pais can be asserted against the exercise by the State of its taxing power. Accordingly, the State is not estopped to levy and collect taxes on particular property by failure to assess it for a number of years, nor can the rights of the State in this respect be forfeited by the laches of its agents; and the same rule applies in the case of municipal corporations": 61 C. J. 87, and cases cited. "Neither a state nor a municipality is estopped to tax property because of failure for a number of years to exercise such right": Cooley on Taxation (4th ed.), page 159. See also Chicago, etc., Ry. Co. v. Douglas Co., 114 N.W. (Wis.) 511. It is also to be noted that section 1 of the Act of 1913 provides, inter alia: "No failure to assess or return the same shall discharge such owner or holder thereof from liability therefor."
The parties have agreed that the trust company's assessed valuation shall be reduced by the aggregate value of the certificates, taxes upon which have been paid by the holders or the estates of deceased holders. We feel that we may safely depend on the county commissioners to act equitably in this regard by making proper exonerations.
And now, April 10, 1934, the value of personal property of the Lemoyne Trust Company subject to tax for county purposes for the year 1932 under the Act of June 17, 1913, P. L. 507, and its amendments, is fixed and assessed at $1,128,300, less proper exonerations; the assessment by the board of revision of taxes is modified to the extent indicated, and, as modified, is sustained; and the appeal of the Lemoyne Trust Company is dismissed.
Bill dismissed. Defendant appealed.
Error assigned, among others, was decree, quoting record.
E. M. Biddle, Jr., with him John E. Myers, for appellant.
L. Floyd Hess, with him Caleb S. Brinton, County Solicitor, for appellee.
John Y. Scott, Deputy Attorney General, with him Charles J. Margiotti, Attorney General, for Commonwealth of Pennsylvania.
A thorough examination of the record in this case convinces us that all questions raised for our consideration have been fully considered and correctly disposed of in the opinion of President Judge REESE. Nothing further need be added to what the learned trial judge has so well said.
Judgment affirmed at appellant's costs.