"SEC. 41. And be it further enacted, *** Provided, That nothing in this act shall be construed to prevent all the shares in any of the said associations, held by any person or body corporate, from being included in the valuation of the personal property of such person or corporation in the assessment of taxes imposed by or under State authority, at the place where such bank is located, and not elsewhere, but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State: Provided further, That the tax so imposed under the laws of any State upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any of the banks organized under authority of the State where such association is located: Provided also, That nothing in this act shall exempt the real estate of associations from either State, county, or municipal taxes to the same extent, according to its value, as other real estate is taxed."

Since the question later arose as to whether the national banks were "instrumentalities" of the U.S. Government, it is important to note that several important functions were given the national banks. The Secretary of the Treasury was empowered to designate them as "depositories of public money, except receipts from customs." They might also "be employed as financial agents of the government; and they shall perform all such reasonable duties, as depositories of public money and financial agents of the government, as may be required of them." To insure prompt payment of public money deposited with them and to assure the faithful performance of their duties as financial agents, the Secretary of the Treasury was to require such security as the deposit of "United States bonds and otherwise." As depositories they also had to accept at par all national currency bills "by whatever association issued." "

As indicated in the quotation above, Congress specifically conferred (or recognized) the right of the States (1) to tax the shares of stock in national banks, as personal property, to persons or corporations at the place where the bank was located (and not elsewhere) at a rate no greater than was applied to shares of State banks, and (2) to tax real estate of national banks to the same extent, according to its value, as other real estate was taxed. Local governments also were permitted to tax bank real estate situated in their jurisdictions. These enumerated provisions correspond with practices then prevalent in the States.10 Some of them taxed shares of stock as personal property, although the personal property tax was a badly administered tax everywhere and never had been made to work uniformly or equitably. All the States and localities imposed taxes on real estate where it was located. In essence, therefore, the taxes provided for in the Act of 1864 were usual and customary. Nor were the States forced to develop new tax devices to reach the national banks. What was intended was the equal taxation of State and national banks. Or, stated another way, taxes on national banks were not to be at a greater rate than taxes on State banks. Congress sought to prevent State tax discrimination against national banks or in favor of State banks, since it wanted to encourage the chartering of additional national banks. As it was, State banks then greatly outnumbered national banks. The State tax provisions in the Act of 1864 were liberal and fair, so far as •Act of June 3, 1864, loc. cit., sec. 45.

10 In later pages the State tax systems about 1860, 1922, and 1969 are briefly described. Infra, pp. 27288-309. 66-236 0-72-pt. 3- -11

the intentions of Congress were involved." There seems to be no question that Congress could have exempted national banks from all taxation had it chosen to do so.

C. Tax on State bank notes, 1865

The Act of 1864, although it was a great improvement over the national bank act of 1863, did not restrict the circulation of issues by State banks. Accordingly, in the Act of March 3, 1865, Congress imposed a tax of 10 percent beginning July 1, 1866, on all State bank issues.12 This tax effectively stopped all such issues.13 It created much resentment among the States.1

14

While the Act of 1865 provided a prohibitive tax on the circulation of State bank notes,15 it did not directly affect or relate to the taxation of national banks by the States. It provided an impetus to the formation of new national banks, giving the States more national banks to tax.16 Although this act said nothing about how these banks were to be taxed by the States, it had a significant indirect effect. It added to the resentment against national banks, particularly in the West, where greater quantities of currency were needed. It was also regarded by many as an encroachment on States rights. It was a greater handicap to State banks than anything in the national bank act. Mr. Justice Nelson concluded his dissenting opinion in Veazie Bank v. Fenno with these words: 17

The purpose [of the law] is scarcely concealed, in the opinion of the court, namely: to encourage national banks. It is sufficient to add, that the burden of the tax, while it has encouraged these banks, has proved fatal to those of the States; and if we are at liberty to judge of the purpose of an act, from the consequences that have followed, it is not, perhaps, going too far to say that these consequences were intended.

Bitterness over this interference may have played a part in the attempts of States to extract increasing sums from the taxation of the rival national banks. Bolles described the law as "giving the State banks another strong boost out of existence." 18

D. Act of February 10, 1868

The Congress in 1868 made a slight modification in the bank tax provision of the Act of 1864 concerning the place where national bank shares were to be taxed. It authorized the legislature of each State to

" Cf., Leland, The Classified Property Tax in the United States, Houghton Mifflin Co., Boston, 1928, p. 204. 12 13 Stat. at L., 469, at p. 484 (38th Congress, 2d session). The title of the Act was, "An Act to amend an Act entitled, 'An Act to provide Internal Revenue to support the Government, to pay Interest on the Public Debt, and for other Purposes, approved June thirtieth, eighteen hundred and sixty-four."" The taxing provision was as follows: "Sec. 6. And be it further enacted, "That every national banking association, State bank, or State banking association, shall pay a tax of 10 per centum on the amount of notes of any State bank or State banking association, paid out by them after the first day of July, eighteen hundred and sixty-six.' "' For an interesting discussion, see Judge Thomas M. Cooley, "Federal Taxation of State Bank Currency," Publications of Michigan Political Science Association, no. 1, pp. 40-56 (1893).

13 This tax was upheld in Veazie Bank v. Fenno, 8 Wall. (75 U.S.) 533 (1869). In reviewing the legislative history of the Act, Chief Justice Chase pointed out that under the Act of February 25, 1863, a tax of 2 percent annually was imposed on circulation but that soon after, under the Act of March 3, 1863, 12 Stat. at L., p. 712, a lighter tax "of 1 percent annually was imposed on the circulation of State banks, in certain proportions to their capital and of 2 percent on the excess; and the tax on the national associations was reduced to the same rates." (At p. 538.) He mentioned also that under the Act of June 30, 1864, the rate of tax was continued at 1 percent and that the shareholders of the national banks were subjected to taxation by the States on their shares. Ibid. He also pointed out that at first (in 1863) "Congress was inclined to discriminate for, rather than against, the circulation of State banks; but that when the country had been sufficiently furnished with a national currency... the discrimination was turned, and very decidedly turned, in the opposite direction." Ibid., p. 539.

14 Cf. Charles S. Tippetts, State Banks and the Federal Reserve System (New York: Van Nostrand Co., 1929), , pp. 7-8.

15 For example, one bank in Arkansas had to pay $160,000. Statement by Mr. Stevenson, Congressional Record, House, vol. 64, pp. 955-6 (Dec. 17, 1922), hereafter abbreviated 64 C.R., pp. H955-6 (Dec. 17, 1922). 16 On November 15, 1864, only 584 national banks had been organized; by October 1, 1865, 1,566 associations had been organized. Davis, op. cit., p. 103.

17 8 Wall. (75 U.S.), at p. 490.

18 Albert S. Bolles, op. cit., p. 226.

determine and direct the manner and place of taxing all the shares of national banks located within the State, except that shares owned by non-residents of the State could be taxed only in the city or town where the bank was located.19

E. Enter Section 5219: 1875

A codification of United States statutes as they existed on December 1, 1873, was printed in 1875.20 It included the Act of June 3, 1864, as amended in 1868, covering State taxation of national banks. Here for the first time the relevant provisions of these acts became Section 5219.21 Even though in later codifications this section came to be known as title 12, Section 548,22 the designation of 5219 has stuck with the provision, and generally in the literature, whenever State taxation of national banks is discussed, reference is made to the provisions of section 5219.

In the codification of 1873 a few minor changes in words were made, compared with texts of the Act of 1864 as amended in 1868. These changes appear to be textual or literary rather than substantive.23

A change in the words governing the place where national bank shares were taxable has already been noted. Of this change, Welch has said: 24

"The amendment [of 1868], as both houses were repeatedly assured by the chairmen of the reporting committees, involved a single change.

19 Act of February 10, 1868; 15 Stat. at L., 34; ch vii. For the text of the act, see section C in appendix 1, at p. 4 above.

20 Revised Statutes of the United States, Passed at the First Session of the Forty-Third Congress, 1873-74, with an Appendix Containing "An Act to Correct Errors and Supply Omissions," Government Printing Office, Washington, 1875. (Since the codification was of statutes as they existed in December 1, 1873, that date may be used as a reference as well as the publication date, 1875.)

21 Ibid., title LXII ch. 3, sec. 5219, p. 1015. The origin of section 5219 has frequently been given as 1878 where sec. 5219 also appears. Second Edition, Revised Statutes of the United States, passed at the FortyThird Congress, 1873-74; with an appendix; Government Printing Office, Washington, 1878; title LXII, ch. 3, sec. 5219, p. 1009. Cf. Saxe, "State Taxation of Banks," in Current Problems in Public Finance, Commerce Clearing House, Chicago, 1933, p 207.

22 As for example in the U.S. Code, 1940 ed., title 12, ch. 4, section 548, at p. 838, or United States Code, 1964 edition, Supplement V, U.S. Government Printing Office, Washington, 1970, title 12, ch. 4, sec. 548, at p. 673.

23 The wording of sec. 5219 is identical in the Revised Statutes printed in 1875 and 1878. Differences from the 1864 and 1868 version are as follows:

24 Welch, op. cit., p. 16, citing Packard v. The City of Lewiston, 55 Me. 456 (1867) and Austin v. Board of Aldermen of the City of Boston, 96 Mass 359 (1867).

Instead of requiring that all shares be taxed 'at the place where such bank is located,' the place at which shares of resident stockholders were to be taxed was left to the discretion of the State. The interpretation of this phrase in the earlier act had already been called into question in two of the New England States where it was customary to tax personal property at the residence of the owner."

Welch called attention also to the fact that the second of two earlier separate limitations upon the magnitude of a tax on shares was not included in the revision of 1875. In the Act of June 3, 1864, that limitation was as follows:

"Provided further, that the tax so imposed under the laws of any State upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any bank organized under the authority of the State where such association is located."

Welch commented that, "no mention having been made in the act of 1868 of the second limitation, it was deleted in the Revised Statutes." 25

But the Revised Statutes did state another limitation exactly as it had appeared in the Act of February 10, 1868, "That the shares of any national bank owned by nonresidents of any State shall be taxed in the city or town where said bank is located and not elsewhere." It would seem that Congress intended this to be substituted for the proviso set forth in the Act of June 3, 1864. The codifiers so interpreted the 1868 amendment.

F. Taxation of notes and deposits: 1894

On August 13, 1894 Congress passed an act providing for the taxation of bank notes, U.S. circulating notes, coins, and bank deposits by States at the same rate as other money within the State. 25 This act has been almost uniformly ignored, or passed over, in writings on the taxation of national banks by States, perhaps for the reason that the act specified that its provisions were not to be "deemed or held to change existing laws in respect to the taxation of national banking associations." However, Ronald Welch, in his State and Local Taxation of Banks in the United States, not only discussed the law but also printed it with other federal acts pertaining to section 5219.27

Despite the disclaimer that the act was not to affect section 5219, Congressional consent to State taxation of money and deposits to individual owners was the same type of action as the permission given in the Act of 1864 for States to tax bank shares to the owner, except that shares were to be taxed "at the place where such bank is located." Since most intangibles then and since have been taxed where the owner is domiciled, the amendment of 1868 provided that for resident stockholders "the place" could be anywhere within the State as would be determined by State law. Thus, for stockholders living within the State where the bank was located, the situs of taxation might be either within the jurisdiction where the bank was located or the place where the stockholder lived and paid property taxes.

25 Ibid. Cf. Woosley, op. cit., p. 17. Saxe, loc. cit. in Current Problems in Public Finance, p. 207, says that the reference to State banks was eliminated "for the reason that shares in State banks constituted 'other monied capital' and further, to leave the States free to tax their own banks by whatever method they saw fit."

26 Act of August 13, 1894, ch. 281, secs. 1, 2; 28 Stat. at Large, 278; reproduced above in appendix 1-F, p. 8. 27 Welch, op. cit., pp. 115 and 222-23.

The law with respect to the taxation of bank shares was the subject of continuing litigation over the meaning of "other moneyed capital" and the taxation of intangibles "in the hands of individual citizens of such State." 28 No such cases seem to have arisen in connection with the taxation of money, circulating notes, or bank deposits seeking the invalidation of taxes on national banks. Where owners of intangibles were taxed at lower rates than national banks, the differential, as in the Richmond case,2 29 was fatal, but the cases did not arise specifically as to bank deposits, even though the individuals whose activities were held to be "in competition with national banks" may have had money on hand or in bank deposits.

At the time the Act of 1894 was passed, several States, among them Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode Island, and Vermont, were taxing bank deposits, usually savings deposits, to the bank. In Pennsylvania all money was taxed to individuals. Later as the movement to adopt low-rate taxes on intangibles spread, special bank deposit taxes were widely adopted.30 A discussion of these taxes, interesting as they are, will not be carried further because it would lead away from developments under section 5219.

A parallel between State taxes on bank shares and bank deposits is further seen in the application of collection-at-the-source to both taxes. To help make the share tax effective, the Act of 1864 required each bank to keep a list of stockholders "in the office where its business is transacted" open to the inspection of shareholders, creditors, “and the officers authorized to assess taxes under State authority.' 31 The lists were also to be transmitted to the Comptroller of the Currency. These provisions made the share tax "the most effectively enforced of all personal property taxes." 32 But as long as all property under the general property tax was treated uniformly under the law, discrimination which resulted from poor administration did not, at first, invalidate taxes on national banks to which similar tax rates were applied. However, later decisions of the courts invalidated even general property taxes on national banks where substantial discrimination was shown to exist in fact.

In some States, particularly in New England, where special taxes were placed on deposits (usually savings), the tax was generally levied on the banks. In other States, deposits, like money, were listed for taxation by individuals. The self-assessed taxes proved to be defective-like other personal property assessments. Hence collection of such taxes from the banks as agents of depositors, with rights of reimbursement, began to develop. The tax was legally assessed against the depositor but was paid for him by the bank. By 1930, 11 States were collecting their low-rate taxes on deposits at the source.33

In 1942, 19 States and the District of Columbia did not impose ad valorem taxes on bank deposits.34 In 22 States, depositors had to report for taxation the amount of their deposits, and pay taxes on them. In Georgia the banks could report the tax if authorized by the depositors;

28 For further discussion, see infra, pp. 165–89, 195–202, 216–17, 251-52, 311, 323–25.

29 Discussed below, pp. 175–76, 195–202.

30 Cf. Leland, op. cit., pp. 216-21; Welch, op. cit., pp. 117-21, 125–32.

31 Section 40, quoted in Woosley, op. cit., pp. 11-12.

32 Ibid., p. 12.

33 Cf. Welch, op. cit., pp. 126-30.

34 Details in this paragraph are based upon "State ad valorem taxation of bank deposits." Survey made by Legal Department of American Bankers Association, as of January 1, 1942 (mimeo., 14 pages).