The defendants pointed out that the allegation of § milion, of ather 1:Clever CADILA. O ADEJE. 0: 1 "Goes That of itself se that it Was embove. E. COLPITE WITH THE DUNK They argued that the petrtion falls short of showing a discrnaination, in favor of a relatively substantia anion of moneyed capital se employed The Court rejected this argument declaring that this allegation, was se related to the others that to be TELEN ELÄÐrstood it had to be rose with thoni tha. T. Was IL actor, with the theợ” under cing the other allegations; and that it served, with then, “te show a serious discrimination, against the bank's shares alid in favor of a relatively substantial amount of In this case, as in the Richmond cast, where the evidence also was not controverted, the existence of competition was inferred from the law as adjudicated earlier and from the plaintiff's allegations, rather that from demonstrated facts. In the Court's view, for share-tax purposes, individually-owned mtanginies were in competition with national banks unless otherwise proved. 99 5. Changes made by 102 amendment.—The major change made by the 1926 amendment from that of 1923 was the addition of a fourth option under which States could apply to national banks a tax “aecoring to or measured by their net income." The tax base could include all income, even that derived from hitherto tax-exempt securities 100 But the excise tax was subject to the following proviso: e In case of a tax on or according to or measured by the not income of an association, the taxing State may, except in case of a tax on net income, include the entire net income received from all sources, but the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations doing business within its limits: Provided, however, That a State which imposes a tax on or according to or measured by the net income of, or a franchise or excise tax on, financial, mercantile, manufacturing, and business corporations organized under its own laws or laws of other States and also imposes a tax upon the income of individuals, may include in such individual income dividends from national banking associations located within the State on condition that it also includes dividends from domestic corporations and may likewise include dividends from national banking associations located without the State on condition that it also includes dividends from foreign corporations, but at no higher rate than is imposed on dividends from such other corporations." If a State imposed a general income tax on other corporations, it could not tax national banks at a rate higher than it applied to financial corporations or than the highest of the rates assessed upon moreantile, manufacturing, and business corporations. The amendment thus 269 U.S. 341. at 349, 350. The Mercantile National Bank v. New York, 121 U.S. 188, here ofted by the Court, was decided in 1887, 36 years before the 1923 amendment, 269 U.S. 341, at 351, 352. Ibid. Cf. Woosley, op. cit., p. 64. 100 This was in accordance with the decision in Flint v. Stone Tracy Company, 290 US 107 C Welch, op. cit., pp. 49-50. covered the situation in New York with its general corporate income tax and that in Massachusetts with its selective rates. National bank dividends could be included in the taxable income of resident stockholding taxpayers, provided dividends of other corporations were similarly treated. If dividends from out-of-state corporations were included in personal taxable incomes of residents, dividends from out-of-state national banks could also be included. If personal taxpaying capacity is to be measured, it is important that income from all possible sources be included in the taxable income of the individual. If tax rates are progressive, the inclusion of all such income in the base is doubly important. As noted earlier, the 1923 provision relating to the taxation of shares was not changed. However, in order "to make it clear that the phrase taxing district' [in which banks were located and where shares owned by nonresidents could be taxed] should not be construed so narrowly as to prevent State administration," the phrase was made to read “shall be taxed by the taxing district or by the State where the association is located and not elsewhere." 1 The 1926 amendment, like those preceding it, made no change in the provision governing State or local taxation of bank-owned real property according to its value (paragraph 3). The earlier validating provision was modified to permit States to legalize, ratify, or confirm taxes paid, levied, or assessed before March 25, 1926, upon the shares of national banks, if the tax would be valid under the amended law (paragraph 4). 6. Defects of 1926 amendment. The 1926 Amendment of section 5219 was in no sense a comprehensive solution of State problems in taxing national banks. It was no solution at all of share tax problems, especially in light of the Supreme Court decision in the Guthrie Center case. Nor did it permit States to tax personal property, tangible or intangible, of national banks. Many States tax the furniture and fixtures of State-chartered banks and trust companies. Some national banks may even voluntarily pay such taxes. Helmberger said about the 1926 amendment: "*** Section 5219 seems to require discrimination in favor of national banks (and to encourage such discrimination in favor of State banks) only insofar as: (1) the tangible personalty of national banks may not be taxed, and (2) most States levy many different business taxes on other corporations-taxes which cannot be applied to national banks. If a State has or chooses to adopt the excise tax on banks, a corporate income tax, and a personal income tax which includes dividends generally in its base, and, if it chooses to abolish the other business taxes, the only remaining discrimination would lie in the fact that national banks' tangible personalty could not be taxed. All of the above, except the exemption of bank tangible personalty, are included in the recommendations of the Committee [of the National Tax Association] on a Model System of State and Local Taxation." 4 The limiting proviso in the 1926 amendment relative to "a tax on or according to or measured by" net income was vague. When it said 1 The reference is to paragraph 2 of the "conditions" set forth in section 5219. The change was made at the suggestion of the National Tax Association committee. See their report in Proceedings of the National Tax Association, 1926, p. 286. 2 Cf. ibid., p. 287. 3 See above, pp. 216-17. 4 Helmberger, op. cit., p. 122. that "the rate shall not be higher" than the highest of the rates assessed by the taxing State on financial, mercantile, manufacturing, and business corporations, it did not indicate whether the comparison was to be in terms of stated tax rates or actual (effective) tax burdens. Nor did it specify how comparisons were to be made, whether by averages of various types, single instances, or otherwise. It is not a simple matter to make comparisons on the basis of averages, as had been indicated to the Senate in 1923 by Senators Kellogg and Pepper and other proponents of an amendment to limit ad valorem rates on bank shares. Comparisons of effective rates or burdens require "elaborate statistical analyses of the tax burdens on other corporations...., unless such corporations are subject to the same type and rate of taxation as is applied to banks." 6 Most of those who have had occasion to compare bank taxes with other taxes have used statistical measures of burden -ratios of one kind or another. Writing in 1960, Helmberger noted that seven States then equated "rate" with "burden," and he commented as follows: 7 "Since these other corporations pay taxes other than the excise and real estate taxes, the overall burden (measured by net income) on them would be higher than that imposed on national banks if all corporations paid the same excise rate as such. The seven States have chosen in effect to interpret the excise rate on other corporations to mean the ratio to their net income of all State and local taxes paid by them other than real estate taxes. It is their view, for example, that an 8 percent excise tax on national banks accompanying a 5 percent excise tax on other corporations is within section 5219-provided that these other corporations paid taxes, other than the excise tax as such and real estate tax, equal to 3 percent or more of their net income. Excise rates on national banks are said to be built-up' if those rates exceed the excise rate as such applied to other corporations. The built-up concept can be utilized in two ways: (1) Applying the built-up rate to banks only, leaving the old (and lower) rate in effect on other corporations to compensate for the fact that the latter pay other taxes to which national banks cannot be made subject, and (2) Applying the built-up rate to all corporations alike but permitting the offset of State and local taxes paid other than real estate taxes. National banks would have no offset. "The first method of using the built-up rate concept is employed by six of the seven excise-tax States which use the built-up rates. The six are Alabama, California, Colorado, Massachusetts, Minnesota, and Missouri.15 The seventh, Oregon, uses the second method (the offset method) though it permits offsets for personal property taxes only, and even that is limited. Alabama, California, and Missouri really utilize both methods, since they apply the built-up rate to financial corporations rather than to banks only, and they permit financial corporations other than commercial banks to use as offsets the taxes they pay but commercial banks do not pay. At one time California utilized the tax offset method for all corporations other than banks but dropped it in favor of its current tax to avoid inequities See above, pp. 208 -9. Woosley, op. cit, p. 86. 7 Helmberger, op. cit., pp. 37-9. Italies and quoted footnotes are his. 15 Michigan currently taxes the shares of national banks. The Governor has recommended that the legi ture enact 'a corporate profits tax' at the rate of 5 per cent on non-financial corporations and at the of 7 percent on financial institutions. Minneapolis Sunday Tribune, Feb. 15, 1958, 51." between other corporations with different amounts of tangible personal property. Oregon, too, is backing away from the use of offsets. Until 1957, personal property taxes paid were allowed as an offset up to 50 percent of the excise tax for any corporation. Now only corporations engaged primarily in manufacturing may use personal property taxes as offsets, not all personal property taxes are eligible for use as offsets, and the offset is limited to 33.5 percent of the excise tax. In addition to this change, Oregon's new law increased the excise rate on banks to 9 percent while applying a rate of 7 percent to utilities, and a rate of 6 percent to other corporations. Thus Oregon now uses a combination of the built-up methods. The national banks have challenged the constitutionality of the law. They filed a suit on May 12, 1960.16 "The American Bankers Association has argued that Section 5219 permits a State to apply an excise tax to banks even though it applies no excise tax nor income tax to other corporations." In such a case, the only way to determine whether the rate is within the restrictions of section 5219, if indeed the tax itself is, is to compare the ratio of the excise tax to net income for national banks with the ratio of all State and local taxes paid by other corporations other than real estate taxes to other corporation net income. South Dakota has chosen to levy an excise tax on banks (and other financial corporations) without levying either an excise tax or a net income tax on nonfinancial corporations. The legality of South Dakota's bank tax and the bank taxes of all excise-tax States which utilize the built-up rate concept is questionable.” 8 Nor was the 1926 amendment specific as to what "financial corporations" were to be used as a yardstick for net income or excise taxes. This was left to the courts to decide. Did Congress intend to include building and loan associations, savings banks, mortgage houses, insurance companies, and private security underwriters? The meaning of "banks" in the laws and court decisions has been, on the whole, quite clear. The broader term, "financial corporations," has not been uniform in State laws or in decisions of the courts. Nor is the concept of "mercantile, manufacturing, and business corporations" in common use; the inclusions and exclusions often differ from State to State. In connection with the dividends tax, Welch criticized the drafters. for their reference to "domestic" and "foreign" corporations: 9 "When the dividends tax is used as a supplementary tax upon national banks, its rate is apparently limited in two ways. It may not exceed the rate imposed upon the net income from other moneyed capital, nor may it exceed the rate imposed upon dividends from other corporations. All of the dividends paid by national banks within the State may be taxed as part of the income of the individual stockholders. provided a similar tax is imposed upon dividends paid by domestic corporations. It seems that this tax may be laid upon dividend receipts of non-residents as well as residents. Dividends received by residents from national banks in other States may be taxed if dividends from foreign corporations are also taxable to residents. "16 Reported in questionnaire completed by the Oregon Tax Department, Sept. 1958, and in a letter to the writer from Donald R. Burnett of the Law Section of the Oregon State Tax Commission, dated August 2, 1960." [The Oregon rate for banks was reduced to 8 percent in 1963. The tax still applied in 1971-Ed.] "17 Welch, State Taxation of Banks, pp. 53-56 and Thornton Cooke, "Taxation: the Position of the Banks', in The Proceedings of the National Tax Association, 1930, pp. 270-283." 8 Cf. Woosley, op. cit., p. 88; Welch, op. cit., p. 61. 9 Welch, op. cit., p. 180. "This aspect of the Federal law is full of ambiguities, and without court decisions upon certain points its interpretation is highly questionable. Suppose, for example, that a corporation operating wholly within a certain State is chartered by another State. The usual practice is to tax such a corporation on its entire net income but to exempt dividends received from it by resident stockholders. Would the exemption of these dividends from a foreign corporation invalidate a tax upon dividends received by residents from national banks without the State? Our guess is that it would not, since it is customary to extend such exemptions to dividends only in the proportion that the earnings of the corporation are said to arise within the State, and it would doubtless be contended that the same provision applied to national banks. Nevertheless the choice of the words foreign' and 'domestic' by the drafters of section 5219 was unfortunate." Finally, by limiting States to a choice among four mutually exclusive options in their taxation of national banks, the statute denied them a freedom of choice which they enjoyed in the taxation of other corporations.1o Their freedom respecting banks was not greatly enlarged by provision for the secondary option of taxation of shareholders' dividends under the individual net income tax as a supplement to either basis for taxing the banks' corporate net income, since this combination was severely restricted by specifications included in the amendment. If a State chose the share tax option in taxing national banks for was restricted to this method by its constitution,, it was not permitted to include national bank dividends in the taxable income of shareholders who were subject to State income tax. States could not tax the personal property of national banks because such permission had never been extended. Other corporations, however, in most States, were taxed upon the personal property they owned. Other corporations, moreover, were subjected to a variety of other taxes that were not specifically permitted by section 5219. They often paid franchise taxes based on capital stock, often with the addition of earned surplus. In many States. their purchases and sales were taxed. Property purchased outside the State and brought into the State for productive or other purposes was often subject to State use taxes. Insurance companies generally vere subject to property and premium taxes. Most companies paid gasoline and other highway taxes. Some paid taxes on bank deposits or for recording mortgages and other documents. L. Attempts to amend section 5215: 1926-1969 1. The law and attempts at legislation. The period from 1926 to 1969 saw no legislative changes made in section 5219. After the amendment of 1926 was passed, some States desired further changes in the law, particularly in the share-tax provision. This movement lost it s force in 1935 and expired completely in 1937. A second, not too forceful drive for further changes, affecting taxes "according to or mea ured by" net income and iso bernitting the collection of ales and taxes, began in 1941 but petered out in the early 19504 O coperted movement for change réceded e 1969 amendment, I... to early efforts for change vill be semibed briefly, Deri ions and pejo, events in the State taxation of inter fate comntherce yere also it banks at this time and rie rief, con adered. A mo e 'g sp 10 Cf. Woosley, op. cit., pp. 9–0. ,, |