However the dissenting opinion, written by Justice Thurgood Marshall and joined in by Justices Harlan and Stewart met the "instrumentality" issue head on-contending that national banks should no longer be treated as Federal "instrumentalities." 59 Observing that decisions of the Court tended toward restricting "the scope of immunity [from taxes] of private persons seeking to clothe themselves with governmental character," Mr. Justice Marshall suggested that the wisdom of that trend counseled a rejection of the constitutional argument in the Agricultural Bank case. The Court at its last term had declared that "there is no simple test" for ascertaining whether an institution is a tax-immune instrumentality and, over the years, had applied different formulations of "the controlling test" in different cases, using various specific factors and characteristics to determine the status of specific institutions. His opinion then continued:

"Under any of those rubrics and applying the factors listed above. . a national bank cannot be considered a tax-immune Federal instrumentality. It is a privately owned corporation existing for the private profit of its shareholders. It performs no significant Federal governmental function that is not performed equally by Statechartered banks. Government officials do not run its day-to-day operations nor does the Government have any ownership interest in a national bank.

"Appellant points to two factors as leading to the conclusion that national banks are Federal instrumentalities: that they 'owe their very existence to congressional legislation,' and that they are subject to extensive Federal regulation. But the fact that institutions 'owe their existence to,' i.e., are chartered by, the Government, has been definitely rejected as a basis alone for determining they should be tax immune.

"Similarly, a whole host of businesses and institutions are subject to extensive Federal regulation and that has never been thought to bring them within the scope of the 'Federal instrumentalities' doctrine. The plain fact is that one could hold that national banks have a constitutional tax-immune status today only by mechanically applying the three seminal cases of M'Culloch, Osborn, and Owensboro."

Having referred to "three seminal cases," Mr. Justice Marshall examined the functions performed by national banks involved in those cases. He pointed out that the Second Bank of the United States, involved in McCulloch and Osborn, was partly owned by the United States; was directed by a Board that included Presidential appointees; was the designated depositary for all Government funds, subject only to special exceptions; issued legal tender currency; transmitted funds for the Government without charge; and acted as fiscal agent of the Government. "Even the national bank involved in Owensboro," the opinion continued, "might warrant tax-immune status were it in existence today." This bank, established under the National Currency Acts of 1863 and 1864, had an important currency-issuing function.

All of this, said the Justice, was radically changed with the passage of the Federal Reserve Act of 1913 and by subsequent developments with respect both to the Federal Reserve System and to national banks:

"To capsulize those developments greatly, suffice it to say that the Federal Reserve Banks (and System) are now the monetary and fiscal

Ibid., pp. 352-59. Footnotes in quotations that follow are from the opinion, numbered as in the opinio"

agents of the United States. 12 USC 391. By 1935, the power of national banks to issue currency had ceased and now Federal Reserve banks are the only banking institutions that can do so. . . . The diminished importance of national banks as Federal functionaries was compensated for by the enactment of legislation designed to make them more competitive with State banks, e.g., branch banking, 44 Stat 1228 (1927), as amended, 12 USC 36(c); fiduciary powers, 76 Stat 668 (1962), 12 USC 92a; rate of interest on loans, 48 Stat 191 (1933), as amended, 12 USC 51; and interest on time and savings deposits, 44 Stat 1232 (1927), 12 USC 371.

"To be sure, the Federal Reserve System could not function without national banks, which are required to be members therein, 12 USC 222, and in that sense they are part and parcel of the establishment and effectuation of the national fiscal and monetary policies. But, in my view, that does not make them sufficiently quasi-public to enjoy the tax-immune status of Federal instrumentalities. If that alone were enough, then it would seem that State banks which elect to join the Federal Reserve System should also be tax-immune Federal instrumentalities.7

"In any event, there is little difference today between a national bank and its State-chartered competitor: the ownership, control and capital source of each is private; each exists for private profit. More importantly, neither may issue legal tender.

Today the national banks perform no significant fiscal services to the Federal Government not performed by their State competitors. Any federally insured bank, State or national, may be a government depository. 12 USC 265. The principal checking accounts of the Government are carried today, not by national banks, but by the Federal Reserve banks. When a new issue of government securities is offered, the Federal Reserve banks receive the applications of purchasers. When government securities are to be redeemed or exchanged, the transactions are handled by the Federal Reserve banks. Those banks administer for the Treasury the tax and loan deposit accounts of the banks in their respective districts.

"In Graves v. New York ex rel. O'Keefe, 306 US, at 483, 83 L Ed at 935, 120 ALR 1466, Mr. Justice Stone wrote for the Court:

[T]he implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and where that immunity is invoked by the private citizen it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed.' That is precisely the situation here; I would heed those words and hold that national banks, today, are not immune from nondiscriminatory State taxation as Federal instrumentalities. I might also add that I am a bit mystified that

7 "As of December 31, 1966, membership in the Federal Reserve System was composed of 1,351 Statechartered, and 4,799 national, banks. The Federal Reserve System: Purposes and Functions, [5th rev. ed. 1967], at 24-25."

8"Accord, Indian Motorcycle Co. v. United States, 283 US 570, 580, 75 L Ed 1277, 1283, 51 S Ct 601 (1931) (Stone, J., dissenting)."

"Compare the rejection of a national bank's contention that it, as a Federal instrumentality, should be exempt from the Federal labor laws, NLRB v. Bank of America, 130 F2d 624, (CA 9th Cir. 1942) (footnote omitted):

"It is a privately owned corporation, privately managed and operated in the interest of its stockholders. The United States did not create it, but has merely enabled it to be created.

under the Court's decisions in this field the Federal Government in practical effect must pay a State tax in dealing with its contractors (who pass the tax on to the Government), see, e.g., Alabama v. King & Boozer, 314 US 1, 86 L. ed. 3, 62 S. Ct. 43, 140 A.L.R. 615 (1941), but that a national bank, a private profit-making corporation, is constitutionally immune from State taxation."

Should the reasoning of Justice Marshall be supported by a majority of the Justices of the Supreme Court, the Federal Reserve Act will no longer affect the taxable status of national banks one way or the other. When the permanent section 5219 goes into effect in 1972, as provided in P.L. 91-156, national banks can be taxed the same as State banks under nondiscriminatory laws. Thus, Congress has removed the shield national banks have enjoyed as "instrumentalities" of the United States. It would seem that Congress recognized the changed status of national banks under the Federal Reserve Act whereas the majority of the Supreme Court had not. Will the courts also recognize that national banks are no longer Federal "instrumentalities," and, if so, when?

H. The years of litigation: 1864–1921

The history of Section 5219 cannot be confined to a review of legislation, no matter how detailed it may be. The provisions may seem clear to the reader but until the courts have interpreted the various words. and phrases their meaning in the statutes will lack certainty. After the courts have spoken the States must conform. An understanding of Section 5219, therefore, requires careful study of decisions of the Supreme Court and State courts.

From its adoption in 1864 until the enactment of the amendment of 1923, the courts were busy interpreting the provisions of Section 5219. Over fifty-five such cases came before the Supreme Court, fourteen were heard by lower Federal courts, and more than fifteen decisions were rendered by State courts.60 The litigation of this period and up to the early 1930s, was carefully described by John B. Woosley in his State Taxation of Banks and by Ronald B. Welch in his State and Local Taxation of Banks in the United States,61 volumes frequently quoted and cited in this study. The discussion by Welch is largely topical, so that decisions are considered in the substantive areas to which they apply. Woosley's discussion of court decisions is mainly historical and for the most part deals with the State taxation of shares of national bank stock. Since States could tax national banks only on their shares and real estate from 1864 to 1923, Woosley's chapter III, "The Interpretation of Section 5219 by the United States Supreme Court," is an invaluable reference and a work of genuine authority.

In the short time available for this study, it seems better to incorporate Woosley's discussion of the decisions of the courts from 1864 up to the time of the 1923 amendment than to review these decisions again and write another account of their meaning and significance."

62

60 Count based on Welch, op. cit., pp. 238-40, and Hearings before the Committee on Banking and Currency of the House of Representatives, 61st Congress, 2nd Session, on H. R. 7752 (H. R. 12490), part I, May 9, 1930, pp. 162-63. The lists were obviously incomplete as to cases before lower Federal courts and State courts. 61 Woosley, op. cit., was published in 1935 and covers court decisions through 1932. Welch, op. cit., was published as Special Report of the State Tax Commission, No. 7,by the State of New York, J. B. Lyon Co., Printers, Albany, 1934, and deals with decisions as late as 1933.

62 Incorporation of Woosley's painstaking work in this report gives the writer real pleasure because Woosley made his study at the University of Chicago in 1931, as a doctoral dissertation under my direction. It was later revised for publication. John B. Woosley was not only my student but a valued friend. Reproduction here of this part of his book recognizes, in part, his valuable contribution to the literature on bank taxation. Accordingly, his text is incorporated with grateful acknowledgment.

The incorporation of Woosley's chapter in full results in some duplication of discussion of such decisions as the Richmond case and the Guthrie Center case which arose before and after the 1923 amendment of section 5219. This will serve not only to indicate how different scholars view these events but also to emphasize the work of the courts and the confusion created by some of the decisions.

[The text reproduced here (with written permission from the publisher, The University of North Carolina Press) is chapter III of the monograph, State Taxation of Banks (1935) by John B. Woosley, late professor of economics, the University of North Carolina.]

CHAPTER III

THE INTERPRETATION OF SECTION 5219 BY THE UNITED STATES SUPREME COURT

TH

HE perusal of the few lines which comprise Section 5219 does not clearly the scope of

sur

vey of the numerous relevant decisions of the Supreme Court of the United States alone demonstrates its ramifications.

Certain powers the states1 clearly do not have. The states cannot tax any property of the bank other than its real property,2 save only the investment in shares of other national banks. Nor could a license or franchise tax be levied against a national bank until the amendment of 1926 so provided. Exemption of the assets of the banks, other than the real property, extends likewise to insolvent banks in the hands of receivers, but the shares of such insolvent banks, if of any value, are taxable. While the shares are taxable, the capital may not be assessed.5 Assessment of shares in solido is not permissible if operating as a tax on the bank. Finally, states cannot tax the shares of state banks owned by national banks, but they may tax the shares of national banks 1 Defined to include territories. Talbott v. Silver Bow County, 139 U. S. 438 (1891).

1

'Bradley v. The People, 4 Wall 459 (1866); Rosenblatt v. Johnston, 104 U. S. 462 (1881); Owensboro National Bank v. Owensboro, 173 U. S. 664 (1899); Third National Bank of Louisville v. Stone, 174 U. S. 432 (1899); Home Savings Bank v. Des Moines, 205 U. S. 503 (1907); Bank of California v. Richardson, 248 U. S. 476 (1919); First National Bank of Gulfport v. Adams, 258 U. S. 362 (1922).

* Owensboro National Bank v. Owensboro, 173 U. S. 664 (1899). See chap. 6, infra, for franchise tax as authorized in 1926.

* National Bank v. Commonwealth, 9 Wall 353 (1869); Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897); Third National Bank of St. Louis v. Stone, 174 U. S. 432 (1899).

• Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897).