The opinion of the Court was delivered by
Sterrett, J.
By the tenth section of the revenue act of 1879, which is substantially a re-enactment of the sixth section of the act of May 1st, 1868, certain individuals, companies, and corporations therein mentioned are required to make report to the auditor-general, setting forth the entire amount of net earnings or income received by them from all sources during the preceding year, and pay a tax of three per centum thereon for the use of the Commonwealth : P. L., 118.
The corporation, plaintiff in error, being clearly within the provisions of the act, made its return of earnings or income for the tax year ending October 31st, 1879, and included therein $28,615.73 interest on United States bonds, and $15,375 interest on Pennsylvania bonds, both of which items, however, it claimed were exempt from taxation. It was also claimed, that in ascertaining its net earnings or income, the difference between the par value of $307,000 United States bonds, which were called in and paid during the year, and the price at which they were purchased several yeai’s before, should be treated as a loss and be deducted from its gross receipts. The accounting officers having refused to allow any abatement on account of either of these three items, the tax thereon, amounting to $2068.19, was paid under protest and an appeal taken from the settlement. The decision of the Court below was also adverse to the plaintiff in error on the points in controversy. The questions thus presented by the record are: Whether the income derived from either class of bonds is exempt from taxation, and whether the difference between the price paid for the United States bonds and their par value should be regarded as a loss and be deducted from the gross receipts.
It may be conceded that the bonds, as such, are not taxable by the Commonwealth; but the ta« in question is not laid on the bonds. It is a tax on the corporate franchise of the plaintiff in error, measured by its net earnings. The right of the State to impose a tax on the franchise of any corporation that is indebted to it for existence and protection is too clear for argument. If the right exists, as it undoubtedly does, the manner of its existence must be left to the wisdom of the legislature ; and perhaps no standard or measure of taxation can be adopted that will operate more justly and equitably than a per centum on net earnings or income.
The interest received by the company on the bonds undoubtedly formed a part of its income, and while the bonds themselves are exempt from taxation by virtue of the laws under which each class respectively was issued, it does not follow that the same immunity adheres to the money paid from time to time in discharge of the interest due on the securities. When so paid it loses the non-taxable characteristic of the bond on which it accrued, and should thenceforth be treated as any other species of income derived from other sources. But, as already intimated, the tax is not laid on the money and other receipts of the company. Its net earnings or income is resorted to simply as a just measure of the tax to be paid for the enjoyment of its corporate franchise.
There is an obvious difference between a direct tax on the properly of a corporation and a franchise tax measured by its earnings, which, proximately at least, represent either the value of the franchise granted or the extent of its exercise. The distinction has been repeatedly recognized by both Federal and State Courts. In Society for Savings v. Coite, 6 Wallace, 594, corporations of the class to which the plaintiff in error in that case belonged, were required to pay annually a sum equal to three-fourths of one per cent, on the total amount of their deposits; and it was held that this was a valid franchise tax and not a tax on property, and that the society had no right to claim exemption therefrom to the extent of its deposits invested in non-taxable securities of the United States. Under a similar law in Massachusetts, it was held that a savings institution having a portion of its deposits invested in Federal securities was liable to a tax on account of such deposits as fully as on account of other deposits, notwithstanding the securities were declared, by the act of Congress under which they were issued, to be exempt from taxation under State authority: Provident Institution v. Massachusetts, 6 Wallace, 611.
A distinction somewhat similar in principle is made in the cases of State Freight Tax and State Tax on Railway Gross Receipts, 15 Wallace, 232 and 284, in the latter of which it is held that a statute imposing a tax on the gross receipts of railway companies is not repugnant to the Constitution of the United States, though the receipts are made up in part of the freights received from inter-state transportation of merchandise.
The difference between the amount paid for the United States bonds and their par value cannot in any proper sense be regarded as a loss; but if it were otherwise, the plaintiff in error is not entitled to the deduction claimed. A deciease of capital does not necessarily diminish the annual net earnings. It is the latter that has been adopted as a just measure of the taximposed on the franchise. The contention of the plaintiff in error on this point has been so fully answered by the learned judge of the Common Pleas, in the concluding portion of his opinion, that further comment is unnecessary.
Judgment affirmed.