This suit was originally instituted in a court of the state of Kentucky by the plaintiff in error, the Owensboro National Bank. The relief prayed was that the city of Owensboro and its tax collector, Simmons, be perpetually restrained from enforcing the collection of alleged 'franchise' taxes for the years 1893 and 1894, claimed by the defendants to have been assessed under authority of a revenue act of the state of Kentucky enacted November 11, 1892, as amended. The taxes in question were laid upon the amount fixed by the state board of valuation and assessment provided for in the act, which valuation equaled the combined sum of the par of the capital stock of the bank, its surplus, and undivided [173 U.S. 664, 665] profits. It is admitted on the record that the avails of the bank to the amount of the valuation were invested in nontaxable bonds of the United States. Various reasons why the taxes should be declared illegal were urged in the petition and the amendments thereto. Without going into detail, all the grounds are substantially included in the following summary:
(1) That the levy of the taxes in question impaired the obligation of an alleged irrevocable contract entered into in 1886 between the bank and the state, and embodied in a legislative enactment referred to as the 'Hewitt Act,' which contract was protected from impairment by the constitution of the United States.
(2) That the taxes complained of were unlawful, because they were not laid on the shares of stock in the names of the shareholders, but were actually imposed on the property of the bank, contrary to the act of congress.
(3) That, if the taxes were not on the property of the bank, then they were imposed on its franchise or right to do business, derived from the laws of the United States, which the state was, under the law of the United States, without power to tax, either directly or indirectly.
(4) That, even if the taxes were otherwise valid, they were unlawful, because discriminatory, inasmuch as certain state banks which were incorporated prior to the year 1856 were entitled to a low rate of taxation, resulting from charter contracts, and it was illegal to tax national banks at a higher rate than that assessed against the most favored state bank.
(5) That the law under which the taxes were levied, and the modes of procedure adopted in carrying the law into effect, operated to produce inequality in taxing the property of the bank, to its disadvantage, as compared with other property within the state, contrary to the state constitution.
(6) That the rate of taxation imposed by the city of Owensboro for the year 1893 was in excess of that authorized by the state constitution or laws.
(7) That if the taxes complained of were considered laid, [173 U.S. 664, 666] not upon the capital or franchise of the bank, but upon the shares of stock in the names of the shareholders, then they were discriminatory as against shareholders who were the heads of families, as such shareholders were not permitted to deduct from the assessment against their shares an exemption authorized by a statute of the state in favor of the class of individuals referred to.
(8) That, if the bank could be legally taxed upon its property of any kind, it was a foreign corporation as to the state of Kentucky, and could only be taxed to the extent that its property was invested and had been earned in the city of Owensboro.
The petitions and the amendments thereto were demurred to, and an answer filed reserving the demurrers. Motions were made to dissolve a preliminary injunction which had been allowed. On these motions testimony was heard. The court dissolved the injunction and sustained the demurrers, and, the plaintiff failing to plead further, the petition and amended petitions were dismissed. On appeal the court of appeals of the state of Kentucky affirmed the judgment of the lower court (39 S. W. 1116), and the cause was then brought here for review. Geo. W. Jolly, Wilfred Carico, and W. T. Ellis, for plaintiff in error.
J. D. Atchison and Chapeze Wathen, for defendants in error.
Mr. Justice WHITE, after making the foregoing statement, delivered the 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 [173 U.S. 664, 667] 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:
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:
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,1 the statement of the taxing statutes of Kentucky [173 U.S. 664, 670] 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 [173 U.S. 664, 671] 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 [173 U.S. 664, 672] 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.): [173 U.S. 664, 673] '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 [173 U.S. 664, 674] 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.):
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:
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:
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. [173 U.S. 664, 677] 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):
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 [173 U.S. 664, 678] 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 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):
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 [173 U.S. 664, 680] 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 founda- [173 U.S. 664, 681] tion. 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:
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.):
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 [173 U.S. 664, 683] 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. [173 U.S. 664, 684] 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.
note articie contains the general provisions relating to the assessment and collection of taxes 'upon all property.' Sections 4019 and 4020 are as follows:
express company, electric light company, electric power company, telegraph company, press dispatch company, telephone company, turnpike company, palace car company, dining car company, sleeping car company, chair car company, and every other like company, corporation or association, and 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, shall, in addition to the other taxes imposed on it by law, annually pay a tax on its franchise to the state, and a local tax thereon to the county, incorporated city, town and taxing district, where its franchises may be exercised. The auditor, treasurer and secretary of state are hereby constituted a board of valuation and assessment for fixing the value of said franchise, except as to turnpike companies, which are provided for in section 4095 of this article, the place or places where such local taxes are to be paid by other corporations on their franchises, and how apportioned, where more than one jurisdiction is entitled to a share of such tax, shall be determined by the board of valuation and assessment, and for the discharge of such other duties as may be imposed on them by this act. The auditor shall be chairman of said board, and shall convene the same from time to time as the business of the board may require.
fair cash value thereof, estimated at the price it would bring at a fair voluntary sale, and such other facts as the auditor may require.
express, sleeping, dining, palace or chair car company, the lines of which extend beyond the limits of this state, the said board will fix the value of the capital stock as hereinbefore provided, and that proportion of the value of the capital stock, which the length of the lines operated, owned, leased or controlled in this state, bears to the total length of the lines owned, leased or controlled in this state and elsewhere, shall be considered in fixing the value of the corporate franchise of such corporation liable for taxation in this state; and such corporate franchise shall be liable to taxation in each county, incorporated city, town or district through, or into which, such lines pass or are operated, in the same proportion that the length of the line in such county, city, town or district bears to the whole length of lines in the state, less the value of any tangible property assessed, or liable to assessment, in any such county, city, town or taxing district.
state board of equalization to equalize the assessments returned to them from each county.'
By section 4092, banks and trust companies are required to file the report referred to in section 4078 by a date named. The section also prescribes when taxes are payable, and that upon failure to file the reports 'or to pay said taxes said banks and trust companies shall be subjected to the same fines and penalties as prescribed in section fifteen ( 4091) of this article.'
[ Footnote 1 ] See note at end of case.