74

An interesting point was raised by one member in each House, but was immediately passed over. Mr. Stafford contended that shares owned by nonresidents would not be taxed under the income tax. Mr. Wingo pointed out that they could only be taxed at the location of the bank, and read into the Record the proposed section 5219 as agreed to by the conferees. Other corporate intangibles or income from them are taxed at the owner's domicile (unless the business situs is different), but this treatment could not be applied to national bank shares under section 5219. In the Senate, Senator Smith observed that collection of the share tax at the location of the bank deprived the county where the shareholder lived of tax revenues from such shares. Senator Kellogg's reply was, "that has always been the law for taxing national banks."75 So not much more attention was given to this, although the Senate did discuss the income tax on nonresidents.

6. Validation controversy.—Although the question of validating previously levied State taxes on national banks involved a transitory problem, the debate which it engendered—particularly in the House— was as heated and almost as extensive as the discussion of other aspects of the proposed amendments to section 5219. Validation was also among the last of the disagreements to be settled between the House and Senate. In the end, the House prevailed.76

Several members were doubtful that Congress had power to validate the State taxes. Senator Kellogg contended that the Congress should give its consent to validation of the taxes by the States themselves. He presented a legal brief in support of this position. The Senate was concerned also with the morality and wisdom of validation. Some members thought this action would constitute a legislative veto of a judicial decision. On the other hand, Senator Johnson pleaded that anything that could be done to correct the situation should be done. In the end, affirmative action was taken.77

Validation was especially important to Massachusetts, New York, and North Dakota, with their income and low-rate taxes on intangibles. It was estimated that Massachusetts would lose $12 million unless State taxes previously levied were made valid, and New York from $17 to $20 million.78

7. Passage of amendment.-On February 27, 1923, the House receded from its disagreement to the Senate amendment relative to validation and concurred therein with 220 yeas, 85 nays, and 122 not voting. Mr. Mills remonstrated that the matter before the House had been seen by only three members, and that after having been before the House for two years it had to be passed in an hour's time. Mr. Wingo pointed out, however, that the Conference Committees had agreed on all of the section 5219 amendment, except the share tax provision. This remained in dispute. He told the House that the Senate proposal would continue the "special privilege" of lesser taxation of private bankers in some States, whereas the House proposal would protect national banks against discrimination in favor of private bankers. The State could tax national banks without limit.

74 Ibid., pp. H4800, 4801.

75 Ibid., pp. S2172-3.

76 Cf. ibid., pp. H2504 (Jan. 26, 1923), S4959-60 (March 1), H5556 (March 3).

77 Ibid., pp. $846, S847, S849-50 (December 22, 1922), S2220-23 (January 23, 1923), H2504-5 (January 26), H4782-95 (February 27).

78 Ibid., pp. 82220, S2221, 4788.

against it arose almost as soon as it became effective. The outcries of State tax officials probably reached their height at the annual conference of the National Tax Association, at White Sulphur Springs, West Virginia, in late September, 1923.

It was contended that the 1923 amendment did not change the share tax at all but put into the statute the rule pronounced in the Richmond decision, even though it was the supposed intention of Congress to correct the resulting uncertainty. The wording of the 1923 amendment was criticized as not clear. In the "other moneyed capital" clause, the words "in competition with the business of national banks" were likely to cause as much difference of opinion as the words "other moneyed capital." They would certainly open the door to further litigation. 82

-as

Officials of States utilizing corporate and personal income taxes, such as New York and Massachusetts, were particularly critical of the 1923 amendment. It did not allow them to tax the banks on net income and then include bank dividends in the taxable income of individual shareowners as was done in the case of other corporations. A similar point was made by one who said the amendment "makes it impossible to tax the national banks *** as farmers are taxed," by which he meant that farmers were taxed on their property and again on their incomes.83 This was prevented by the requirement in the amended section 5219 that each State choose a single method (in addition to the real property tax) for taxing national banks. This limitation of the choices within each State was a phase of the controversy that had received scant attention in the Congress. In short, the 1923 amendment was not what the State officials "had requested nor was it what they desired." 84

Several delegates at the 1923 National Tax conference were on the other side. One thought the 1923 amendment was "a very fair piece of legislation for the present." Another thought that, considering the times, legislatures could not be trusted to tax banks fairly. One of the New York delegates thought the amendment was acceptable to neither the States nor the banks. 85

When it came to making specific recommendations about changes in the 1923 amendment, a considerable controversy arose (expressed largely in procedural arguments) over a proposed conference resolution on the subject. The resolution that was finally adopted asked that section 5219 be amended so as "to permit the States to tax national banks without any limitations other than those prescribed in the Fourteenth Amendment.” 86

During debate on this resolution at the tax conference, outright repeal of section 5219 was advocated by a State tax official. But if that were done, others observed, the States might not be able to tax national banks at all; some form of congressional authorization was

82 Proceedings of the National Tax Association, 1923, pp. 182-231, 366-402. Gary, at p. 191; Law, p. 211; Thomas, p. 218; King, p. 222; Satterlee, p. 226; Lord, pp. 385-7, 392-3.

63 King, in ibid., p. 221; Satterlee, p. 226; McKenzie, p. 377. Martin Saxe, New York attorney representing various banks, said (ibid., p. 216): "Without doubt, section 5219 as amended is not perfect. There is sound reason why, in the income tax states, they should have the right to tax dividends of stockholders as personal income if they also *** tax the dividends of stockholders of corporations as personal income, and I think this would be conceded."

Gary, ibid., p. 185. Mr. Gary, counsel to the Virginia State tax board, acknowledged that the amendment "did, however,... far surpass what they [the State officials] had reasons to hope for throughout the entire conflict.

85 Powell, ibid., p. 213; Blodgett, ibid., pp. 389-90; Law (New York State senator), ibid., p. 212. Cf. Bryan, attorney for the Virginia Bankers Association, ibid., p. 218.

For the text of the resolution, cf. ibid., pp. 361-2. The vote was 79 to 12 (ibid., pp. 401-2).

required. Moreover, elimination of section 5219 would not stop litigation-"we'd still have plenty of litigation." &

2. Events of 1924 and 1925-After the 1923 tax conference, agitation for further amendment of section 5219 quieted considerably, although individual State officials continued to work for change. No bills to amend the section were introduced in the first or second sessions of the 68th Congress.88 Nor is there any record of discussion or presentation of resolutions on bank taxation at the National Tax Association conference in St. Louis, Missouri, in September, 1924. However, at the next conference, in New Orleans, Louisiana, in midNovember, 1925, a resolution was adopted without discussion, creating a committee of the Association to "confer with similar committees of such other organizations as may be interested"-the American Bankers Association "to the end that suitable amendments may be made," etc., to section 5219.89

This was just what happened. An agreed amendment was the result. Its progress through Congress was rapid.

90

3. Legislative history of 1926 amendment.-On March 3, 1926, identical bills to amend section 5219 were introduced in the Congress. Mr. McFadden introduced H.R. 9958, and Senator Pepper introduced S. 3377. The bills were referred to the respective Committees on Banking and Currency. Mr. McFadden explained to the House:

"... before I introduced this bill I saw to it that it was approved by the American Bankers Association special tax committee; it was approved by the National Tax Association; and the heads of the State tax departments of both New York and Massachusetts appeared before the House Banking and Currency Committees and approved of this legislation."

He also read telegrams from Governors Al Smith (New York) and Alvin Fuller (Massachusetts) urging adoption of the amendment." The purpose of the bill, Mr. McFadden explained, was

"... to enable States that have adopted income-tax methods to abandon the ad valorem taxation of the shares of national banks and apply income-tax methods to national banking associations within their limits, without thereby favoring national banks and their stockholders, as compared with other corporations generally and their stockholders. In other words, to make it possible for income-tax States to tax national banking associations and their shareholders on a complete taxing parity with other corporations and their stockholders." 92

The bill proposed no change in the Federal statutory provision relating to ad valorem taxation of shares in national banks, despite earlier contentions by State tax officials critical of the Richmond decision and the 1923 amendment and a fresh reaffirmation of the Richmond decision by the Supreme Court in January, 1926. These officials contended that section 5219, as judicially interpreted, was a major deterrent to State efforts to develop and use classified property taxes in place of general property taxes on intangibles.

87 Cf. ibid., pp. 212-13, Celsus P. Link (Colorado Tax Commission) and H. M. Powell; p. 219, Leser; p. 220, Hough; p. 228, Bryan.

First session, December 3, 1923 to June 7, 1924; second session, December 1, 1921 to March 4, 1925, No bills listed in Congressional Record index.

89 Proceedings of National Tax Association, 1925, p. 357.

90 Committees met in New York, January 22-23, 1926. Proceedings of National Tax Association, 1926, p. 283.

91 67 C. R., p. H6084 (March 23, 1926).

22 Ibid., pp. H6032-3.

Cf. the next subsection, discussing the Guthrie Center case.

Debate was brief and perfunctory. The Senate approved the bill on March 18. The House acted a few days later, and the new law was signed by the President on March 25, 1926.94

The text of the 1926 law is reproduced in appendix 1-A of this report,95 where it is identified as section 548 of title 12 of the U.S. Code before amendment by Public Law 91-156, December 24, 1969. There were no further changes in section 5219 during 1926-1969, although proposals for amendment were offered from time to time. These are reviewed in a later section.

4. The Guthrie Center case.-As the committees of the National Tax Association and American Bankers Association were arranging to confer about amendment of section 5219, the United States Supreme Court announced another decision declaring void a tax on national bank shares-in this instance, an Iowa tax levied in 1920.

In the case of First National Bank of Guthrie Center v. Anderson, County Auditor, 96 the Court concluded, on the basis of facts alleged by the plaintiff bank, that individually-owned intangible property, "consisting chiefly of notes, mortgages, and money loaned at interest," was "moneyed capital. .. in competition with the business of the bank." These moneys and credits were taxed at a rate substantially lower than that applied to bank shares. Accordingly, there was "serious discrimination" and the tax was void.

The bank alleged that all bank stock (of State and national banks) in the county was assessed at $316,850 and taxed at a rate of 143.5 mills on the dollar; and that the assessment of "notes, mortgages and other evidences of money loaned and put out at interest by individual citizens of the county," although not precisely known to the plaintiff, was believed to exceed $5 million and was subject to a tax rate of 5 mills on the dollar.

Though the tax in question was levied for 1920, the Supreme Court commented on the 1923 amendment of the share tax provision of section 5219, in view of a contention by the defendants that this was intended as a legislative interpretation of the restriction imposed by the Richmond and earlier decisions-and that the congressional proceedings that led to its adoption would show this. The opinion does not indicate that the Court examined the legislative record to ascertain the intent of Congress in approving the 1923 amendment, but it includes the following comment:

"But assuming that this is true the situation is not changed; for the reenactment did no more than put into express words that which, according to repeated decisions of this Court, was implied before. In Mercantile National Bank vs. New York, . . . it was distinctly held that the words 'other moneyed capital' must be taken as impliedly limited to capital employed in substantial competition with the business of national banks. In later cases that definition was accepted and given effect as if written into the restriction. It, of course, would exclude bonds, notes or other evidences of indebtedness when held merely as personal investments by individual citizens not engaged in the banking or investment business, for capital represented by this class of investments is not employed in substantial competition with the busi

94 Cf. 67 C.R., p. H5442 (March 11, 1926), S5446 (March 12), S5760-62 (March 17, including a reprint of House report 526 on H. R. 9958), S5822-23 (March 18), H6080-89 (March 23), S6124, S6150, and H6209 (March 24), and S6217 (March 25). Cf. Welch, op. cit., pp. 48-50; Woosley, op. cit., pp. 62-5.

95 Supra, p. 1

96 269 U.S. 341 (1926).