Owensboro National Bank v. Owensboro/Opinion of the Court

The claim of contract arising from the Hewitt act need not be considered, as it is disposed of adversely to the contentions of the plaintiff in error by the opinion expressed in Citizens' Sav. Bank of Owensboro v. City of Owensboro (just decided) 19 Sup. Ct. 530. We therefore dismiss that subject, and the questions arising from it, from further consideration.

The other issues which the cause presents group themselves under two distinct headings: First, a contention that the taxes levied were illegal, because imposed in violation of the act of congress regulating the method of taxation which the respective states may exert against national banks or their stockholders as such; second, because the taxes imposed are discriminatory.

This latter question has a twofold aspect, since some of the charged discriminations are asserted to be in violation of the act of congress and others are claimed to arise because of an asserted contravention of the state law and constitution. Of course, we are concerned only with the discrimination claimed to constitute a violation of the law of the United States. We need not, however, dissect the discriminations relied upon so as to separate the federal from the state questions in this regard, at least until we have disposed of the contention that the taxes were levied upon the bank and its property in violation of the laws of the United States; since, if error in this regard is found, the taxes will be illegal, and it will become unnecessary to determine whether they were discriminatory even from a federal aspect.

Were the taxes complained of levied upon the bank, its property, or franchise, and, if so, were they legal? is the question which, then, arises on the threshold of the case.

Two elements are involved in the determination of this question; that is, the extent of the power of the respective states to tax national banks, and the ascertainment of the scope and purport of the law by which the taxes complained of were levied.

Early in the history of this government, in cases affecting the Bank of the United States, it was held that an agency, such as that bank was adjudged to be, created for carrying into effect national powers granted by the constitution, was not, in its capital, franchises, and operations, subject to the taxing powers of a state. McCulloch v. Mcryland, 4 Wheat. 316; Osborn v. Bank, 9 Wheat. 738.

The principles settled by the cases just referred to and subsequent decisions were thus stated by this court in Davis v. Bank, 161 U.S. 283, 16 Sup. Ct. 503:

'National banks are instrumentalities of the federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt by a state to define their duties, or control the conduct of their affairs, is absolutely void, wherever such attempted exercise of authority expressly conflicts with the laws of the Unitee States, and either frustrates the purpose of the national legislation or impairs the efficiency of these agencies of the federal government to discharge the duties for the performance of which they were created. These principles are axiomatic, and are sanctioned by the repeated adjudications of this court.'

It follows, then, necessarily, from these conclusions, that the respective states would be wholly without power to levy any tax, either direct or indirect, upon the national banks, their property, assets, or franchises, were it not for the permissive legislation of congress.

The first act providing for the organization of national banks, passed February 25, 1863 (12 Stat. 665), contained no grant of power to the states to tax national banks in any form whatever. Doubtless the far-reaching consequence to arise from depriving the states of the source of revenue which would spring from the taxation of such banks, and the error of not conferring the power to tax, early impressed itself upon congress; for the following year (13 Stat. 99) power was granted to the states, not to tax the banks, their franchises, or property, but to tax the shares of stock in the names of the shareholders. This provision subsequently was amended ans supplemented in various particulars (15 Stat. 34), and the result of this legislation is embodied in section 5219 of the Revised Statutes, which is as follows:

'Sec. 5219. Nothing herein shall prevent all the shares in any association from being included in the valuation of the personal property of the owner or holder of such shares, in assessing taxes imposed by authority of the state within which the association is located; but the legislature of each state may determine and direct the manner and place of taxing all the shares of national banking associations located within the state, subject only to the two restrictions, that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such state, and that the shares of any national banking association owned by non-residents of any state shall be taxed in the city or town where the bank is located, and not elsewhere. Nothing herein shall be construed to exempt the real property of associations from either state, county or municipal taxes, to the same extent, according to its value, as other real property is taxed.'

This section, then, of the Revised Statutes is the measure of the power of a state to tax national banks, their property, or their franchises. By its unambiguous provisions the power is confined to a taxation of the shares of stock in the names of the shareholders and to an assessment of the real estate of the bank. Any state tax, therefore, which is in excess of, and not in conformity to, these requirements, is void.

So self-evident are these conclusions that the adjudicated cases justify the deduction that they have been accepted from the beginning as axiomatic and unquestioned, since the controversies as to taxation of national banks illustrated in the opinions of this court mainly depend, not upon any attempted exercise of a power to tax the property and franchises of the banks, but involved controversies as to whether, when the shares of the stock in the names of the shareholders had been assessed according to law, the tax could be imposed upon them because of alleged discrimination or other illegalities.

Does, then, the Kentucky statute tax the shares of stock in the names of the shareholders, or does it impose a tax upon the bank, its property or franchise?

Without undertaking to recapitulate the provisions of the Kentucky statutes in virtue of which the taxes here in question were imposed, we content ourselves with reiterating, in the margin, the statement of the taxing statutes of Kentucky mad by the court in Adams Exp. Co. v. Kentucky, 166 U.S. 175 et seq., 17 Sup. Ct. 527.

The effect of the statutory provisions contained in the third article, sections 4077 et seq., as construed and interpreted by the court of appeals of the state of Kentucky, were considered in Henderson Bridge Co. v. Kentucky, 166 U.S. 150, 17 Sup. Ct. 532 and Adams Exp. Co. v. Kentucky, supra. In the Bridge Company Case, referring to the 'franchise' tax there in controversy, it was said (page 154, 166 U.S., and page 534, 17 Sup. Ct.): 'The tax in controversy was nothing more than a tax on the intangible property of the company in Kentucky, and was sustained as such by the court of appeals as consistent with the provisions of the constitution of Kentucky in reference to taxation.'

In the Adams Exp. Co. Case, the court said (pages 180, 181, 166 U.S., and page 530, 17 Sup. Ct.):

'Taking the whole act together, and in view of the provisions of sections 4078 to 4081, we agree with the circuit court that it is evident that the word 'franchise' was not employed in a technical sense, and that the legislative intention is plain that the entire property, tangible and intangible, of all foreign and domestic corporations, and all foreign and domestic companies possessing no franchise, should be valued as an entirety, the value of the tangible property be deducted, and the value of the intangible property thus ascertained be taxed under these provisions; and as to railroad, telegraph, telephone, express, sleeping car, etc., companies, whose lines extend beyond the limits of the state, that their intangible property should be assessed on the basis of the mileage of their lines within and without the state. * *  * There is nothing in the statute which exempts any intangible property owned by any corporation, company, or individual taxpayer from taxation, or discriminates between them. * *  * The tax mentioned in section 4077 is not an additional tax upon the same property, but on intangible property which has not been taxed as tangible property.'

True it is, since the decision referred to the court of appeals of the state of Kentucky has, it is asserted, in the case of Louisville Tobacco Warehouse Co. v. Com., on a rehearing (48 S. W. 420), examined the terms of section 4077, and is stated to have said:

'The latter clause, 'also every other corporation, company or association having or exercising any special or exclusive privilege or franchise not allowed by law to natural persons, or performing any public service,' seems to us to have been added for the purpose of including such corporations as were not strictly ejusdem generis with the companies previously enumerated, but which might possess exclusive privileges; and, as a provision for the future, to impose the intangible property tax upon corporations to be thereafter created, which might have exclusive privileges, or perform public services.

'The only authority relied upon in support of the contention that this language includes all corporations is the case of Telegraph Co. v. Norman, 77 Fed. 27. But that case was in relation to a company specifically named in the statute under consideration. The question here presented did not arise in that, and was, presumably, not argued; and the suggestion made by the learned judge who delivered that opinion was made in argument in reaching a conclusion to reach which the dictum cited was not necessary.'

In deciding that the conviction of the corporation for willfully failing to file with the state auditor the statement required by the Kentucky Statutes (sections 4077 and 4078) was erroneous, the court in that case, it is also stated, has, moreover, further observed:

'Nor can the appellant corporation be said to have any intangible property subject to taxation under this statute. Its tangible property-its warehouse, drays, and personal property-is of no greater value in the hands of the corporat on than it would be if owned and managed by the natural persons who are its stockholders. This is also true of its choses in action, etc. The value of its capital stock must necessarily be the value of its tangible property, choses in action, etc. It had no intangible property subject to taxation under the statute, and, as matter of law, could have none. * *  * The revenue law of the state is not unconstitutional because it does not require natural persons, possessing no special franchise or privilege, to make report of special privileges and franchises for taxation; nor is it unconstitutional in failing to require a report from all classes of corporations which can possess the intangible property sought to be taxed by this statute. The tax upon tangible property of all corporations is elsewhere provided for.'

The opinion, however, from which the foregoing extracts are made, has not as yet been officially reported. But, if the court of appeals of Kentucky has given to the state statute the construction indicated, the ruling does not affect the present case, as banks are specifically mentioned in the statute.

The tax, then, as defined in the law, as interpreted by the court of appeals of Kentucky and by this court in the opinions from which we have excerpted, is a tax nominally on the franchise of the corporation, but in reality a tax on all the intangible property of the corporation. The proposition, then, comes to this: Nothing but the shares of stock in the hands of the shareholders of a national bank can be taxed, except the real estate of the bank. The taxes which are here resisted are not taxes levied upon the shares of stock in the names of the shareholders, but are taxes levied on the franchise or intangible property of the corporation. Thus, bringing the two conclusions together, there would seem to be no escape in reason from the proposition that the taxing law of the state of Kentucky is beyond the authority conferred by the act of congress, and is, therefore, void for repugnancy to such act.

It is, however, urged that while the taxes may not be in form imposed on the shares of stock in the names of the shareholders, and may be in form a tax on the franchise or property of the bank, nevertheless they are equivalent to a tax on the shares of stock in the names of the shareholders, and therefore do not violate the act of congress. But this proposition concedes that the taxing statute does not conform to the act of congress, and yet invokes its permissive authority, since, as already shown, without the grant made by the act of congress, there would be no power to tax at all. Passing, nevertheless, this contradiction, and looking beneath the mere form, we come to the substance of things. The alleged equivalency, in order to be of any cogency, must, of necessity, contain two distinct and essential elements, equivalency in law and equivalency in fact. Does it contain either? is the question.

To be equivalent in law, involves the proposition that a tax on the franchise and property of a bank or corporation is the equivalent of a tax on the shares of stock in the names of the shareholders. But this proposition has been frequently denied by this court as to national banks, and has been overruled to such an extent in many other cases relating to exemptions from taxation, or to the power of the states to tax, that to maintain it now would have the effect to annihilate the authority to tax in a multitude of cases, and as to vast sums of property upon which the taxing power is exerted in virtue of the decisions of this court holding that a tax on a corporation or its property is not the legal equivalent of a tax on the stock in the names of the stockholders. A brief review of the two classes of cases by which the doctrines just stated are overwhelmingly established will make the foregoing result clear.

The earliest case in the reports of this court is Van Allen v. Assessors (1865) 3 Wall. 573. The tax was on the shares of stock in the names of the shareholders pu suant to the act of congress. Two issues were presented: One, the assertion that the state banks were assessed on their capital and surplus, and therefore that stockholders in national banks were substantially discriminated against. This was held to be well taken; clearly, therefore, deciding that there was no equivalency between taxing the capital and surplus in the hands of the bank and taxing shares in the names of the shareholders, for, if the two had been equivalent, the decision would necessarily have been otherwise. The other question in the case was thus stated by the court, through Mr. Justice Nelson (page 581):

'The main and important question involved, and the one which has been agrued at great length and with eminent ability, is whether the state possesses the power to authorize the taxation of the shares of these national banks in the hands of stockholders whose capital is wholly vested in stock and bonds of the United States.'

This question was examined, and it was decided that, as the shares of stock in the hands of the shareholders were distinct and different subject-matters of taxation from the property or rights of the bank, that, therefore, the power conferred by congress could be exercised so as to tax the shareholders, even although the property of the bank was invested in nontaxable bonds of the United States, because the two were distinct and different things.

It is to be remarked that it is patent from the opinion of the court that, if the shares of stock had been considered as in any wise the equivalent of the bonds in which the property of the bank was invested, the tax would have been held invalid, despite the authority to tax the stock given by the act of congress, as such authority would not have been construed as authorizing a violation of the faith of the United States by taxing bonds issued by the government which were not subject to taxation. It follows, then, that not only did this decision refute the claim of equivalency between the tax on the bank or its property or franchises and the tax on the stock in the names of the stockholders, but by a negative affirmative it demonstrates that, if the two are equivalent, the tax in this case would be illegal, since the record here admits that a sum at least the equivalent of the capital, surplus, and undivided profits of the bank was invested in bonds of the United States. The contention of equivalency then destroys itself, and, if it were conceded, would bring about the illegality of the tax in support of the legality of which the argument is advanced.

Following this came the decision in People v. Commissioners (1866) 4 Wall. 244, in which, reiterating the decision in Van Allen v. Assessors, it was held, because the property of the bank was distinct and separate from the shares of stock in the names of the shareholders, therefore the latter were not entitled to deduct exempt property belonging to the bank from the assessment on their shares. The court said, again through Mr. Justice Nelson, and in part quoting from the opinion in the Van Allen Case (page 258):

'The corporation is the legal owner of all the property of the bank, real and personal; and within the powers conferred upon it by the charter, and for the purposes for which it was created, can deal with the corporate property as absolutely as a private individual can deal with his own. * *  * The interest of the shareholder entitles him to participate in the net profits earned by the bank, in the employment of its capital, during the existence of its charter, in proportion to the number of his shares; and, upon its dissolution or termination, to his proportion of the property that may remain of the corporation after the payment of its debts. This is a distinct, independent interest or property, held by the shareholder like any other property that may belong to him;' and, we add, of course is subject to like taxation.'

The next case in order of time is Bradley v. People (1866) 4 Wall. 459. The questi n which the case presented was whether a tax on the property or rights of the bank was the legal equivalent of a tax on the shares of stock in the names of the shareholders. The argument of counsel was that in determining this question the method was immaterial, but the substance would be considered. The argument urged (page 460): 'Neither the national government, the creator of the species of property now taxed, nor the shareholders, can be interested in the methods which may be adopted by the state for the imposition of the tax.' The court, through Mr. Justice Nelson, after referring to the decision in Van Allen v. Assessors, and the tax there imposed, said (page 462):

'It was in that case attempted to be sustained on the same ground relied on here,-that the tax on the capital was equivalent to tax on the shares, as respected the shareholders. But the position was answered that, admitting it to be so, yet, inasmuch as the capital of the state banks may consist of the bonds of the United States, which were exempt from state taxation, it was not easy to see that the tax on the capital was an equivalent to a tax on the shares.'

In National Bank v. Com. (1870) 9 Wall. 353, a statute of the state of Kentucky which imposed a tax of 50 cents a share on bank stock, or stock in any moneyed corporation, of loan or discounts, owned by individuals, corporations, or societies, was held to authorize a tax on the shares of the stockholders, as distinguished from the capital of the bank invested in federal securities; and this, although the tax was collected from the bank instead of the individual stockholders. In the opinion of the court, delivered by Mr. Justice Miller, a summary statement was made of the doctrine enunciated in the prior decisions recognizing the distinction between the property owned by an incorporated bank as a corporate entity and the property or interest of the stockholders in such bank, commonly called a 'share.'

These cases interpreting the act of congress have never been questioned, and, indeed, form the basis upon which the taxation of the shares of stock in the names of the shareholders allowed by the act of congress has been made efficacious for the purpose of bringing a vast amount of property within the taxing power of the states, which would have been excluded had not the principles which the cases announced been established. If the postulate upon which they necessarily rest be overthrown by saying that there is an equivalency between the taxation of the property of the bank and the shares of stock in the names of the stockholders, it would follow that the principles upheld by the cases would disappear with the destruction of the reasons upon which they were placed. It would then necessarily follow that the grant by congress of authority to tax the shares of stock in the names of the shareholders could not be exercised where the bank held bonds of the United States exempt from taxation; that, the two things being the same, the shareholders would be entitled to deduct the property of the bank from the sum of the taxation of the shares; in other words, that the right to tax the shareholders would be a vain thing.

It has been suggested that other cases, decided since the cases referred to, while not questioning the latter, in effect admit a doctrine which tends to a contrary result. We do not stop to review in detail the cases from which this result is claimed to arise. They are Palmer v. McMahon, 133 U.S. 660, 10 Sup. Ct. 324; Bank of Redemption v. Boston, 125 U.S. 60, 8 Sup. Ct. 772; Davenport Nat. Bank v. Davenport Board of Equalization, 123 U.S. 83, 8 Sup. Ct. 73; Mercantile Bank v. City of New York, 121 U.S. 138, 7 Sup. Ct. 826. It suffices to say that the claim is devoid of foundation. In all the cases referred to the taxation was specifically imposed on the shares of stock in the name of the shareholders, and the question, presented in various forms, was whether the provisions of state taxing laws created a discri ination in favor of other moneyed capital and against the shareholders in national banks, contrary to the act of congress. On these questions, interpreting the act of congress with the liberality of construction resorted to in the Van Allen Case and those which followed it, the court in most of the instances rejected the charge of discrimination. The result of the cases in question tended to give efficient vitality to the grant of congress to tax the shares of stock in the names of the shareholders. The argument now relied on would, if it were adopted, operate to destroy the power to tax, which the act of congress sanctions.

It cannot be doubted that, as a general principle, it is settled that the taxation of the property, franchises, and rights of a corporation is one thing, and the taxation of the shares of stock in the names of the shareholders is another and different one. This doctrine has been applied to sanction the taxation of the one where the other was covered by a contract of exemption. As the result of its application, it is unquestioned that much property has been brought within the range of the taxing power which otherwise would have escaped taxation. It is unnecessary to multiply citations on this subject, as the question has been in recent cases reviewed and restated fully by the court. Thus, in Bank of Commerce v. Tennessee, 161 U.S., at page 146, 16 Sup. Ct. 460, it was said, through Mr. Justice Peckham:

'The capital stock of a corporation and the shares into which such stock may be divided and held by individual shareholders are two distinct pieces of property. The capital stock and the shares of stock in the hands of the shareholders may both be taxed, and it is not double taxation. Van Allen v. Assessors, 3 Wall 573; People v. Commissioners, 4 Wall. 244, cited in Farrington v. Tennessee, 95 U.S. 687.

'This statement has been reiterated many times in various decisions by this court, and is not now disputed by any one. In the case last cited, Mr. Justice Swayne, in delivering the opinion of the court, enumerated many objects liable to be taxed other than the capital stock of a corporation, and among them he instanced (1) the franchise to be a corporation; (2) the accumulated earnings; (3) profits and dividends; (4) real estate belonging to the corporation, and necessary for its business; and he adds that 'this enumeration shows the searching and comprehensive taxation to which such institutions are subjected where there is no protection by previous compact.' And in Tennessee v. Whitworth, 117 U.S. 129, 6 Sup. Ct. 645, at page 136, 117 U.S., and page 647, 6 Sup. Ct., Mr. Chief Justice Waite, in delivering the opinion of the court, says: 'That in corporations four elements of taxable value are sometimes found: First, the franchise; second, the capital stock in the hands of the corporation; third, the corporate property; and, fourth, the shares of capital stock in the hands of the individual stockholders.'

'The surplus belonging to this bank is 'corporate property,' and is distinct from the capital stock in the hands of the corporation. The exemption, in terms, is upon the payment of an annual tax of one-half of one per cent. upon each share of the capital stock, which shall be in lieu of all other taxes. The exemption is not, in our judgment, greater in its scope than the subject of the tax.'

And in the case of New Orleans v. Citizens' Bank of Louisiana, 167 U.S. 371, 17 Sup. Ct. 905, although it was held that the capital of the bank was exempt from taxation by a charter contract, and that, owing to the peculiar provisions of the charter, it would violate the contract to compel the bank to pay a tax levied on its shareholders, nevertheless the exemption did not preclude the levy of a tax upon the stock in the names of the stockholders, the court said (page 402, 167 U.S., and page 915, 17 Sup. Ct.):

'The doctrine that an exemption of the capital of a corporation does not, of necessity, include the exemption of the shareholders on their shares of stock, is n w too well settled to be questioned.'

There being, then, no equivalency between the assessment of the bank and the assessment of the shares in the names of the shareholders, it follows that the tax here complained of, which was assessed on the franchise or intangible property of the corporation, was not within the purview of the authority conferred by the act of congress, and was, therefore, illegal.

While this conclusion suffices to dispose of the case, we advert to the contention that, although there may not be a legal equivalency, there is nevertheless one in fact, and therefore the tax should be sustained. It may be that in the case before us there is a coincidence between the sum of the tax levied upon the corporation and the amount which would have been imposed had the shares of stock in the names of the shareholders been assessed according to the act of congress. But that this is not the necessary result of the taxing statute is too plain to require comment. The fact that it is not is well illustrated by Henderson Bridge Co. v. Kentucky, supra, for there the tax which was sustained on the franchise or intangible property of the corporation admittedly enormously exceeded the total of the capital stock, and proceeded upon the theory that the bonds issued by the corporation were an element to be taken into consideration in fixing the value of the franchise or intangible property. If the mere coincidence of the sum of the taxation is to be allowed to frustrate the provisions of the act of congress, then that act becomes meaningless, and the power to enforce it in any given case will not exist. This follows since, if mere coincidence of amount, and not legal power, be the test, only a pure question of fact would arise in any given case. The argument that public policy exacts that where there is an equality in amount between an unlawful tax and a lawful one the unlawful tax should be held valid, does not strike us as worthy of serious consideration.

The system of taxation devised by the act of congress is entirely efficacious, and easy of execution. By its enforcement, as interpreted, settled policies of taxation have been evolved, embracing large amounts of property which would not otherwise be taxable, and which, as we have seen, will escape taxation if the past development of the system be destroyed by recognizing, without reason, a principle inconsistent with the law, and destructive of the safeguards which it imposes.

From the foregoing conclusions, it results that, as the taxes were imposed upon the bank and its property or franchise, and not upon the shares of stock in the name of the stockholders, such taxes were void, and the decree below must be, and the same is hereby, reversed, and the cause be remanded for further proceedings not inconsistent with this opinion; and it is so ordered.