On NoverDAY Proxmare expralle alotted t Proximire to.

*

i

C.

about the tires probiems raise. I Committe report wide; were dealt with. E the Committee bi. Þolort

the Senate. Senator Bennett raised a question as to whether the savings provision (section 2) would not require all States to have their legislatures meet to consider taxes imposed upon banks.16 He declared that "apparently there is at least one State in which the existing taxes on the State banks are considered to be onerous, and the national banks do not want to have that pattern of existing taxes automatically applied to them when the bill passes." He believed that national banks should not be included without specific acts by the various legislatures. After discussion it was agreed to take this up later in conference with the House committee. Senator Holland reported that Florida stood to lose $25 to $27 million a year unless remedial legislation were passed. The committee report was put into the Congressional Record. After a very brief discussion H.Ř. 7491, as amended, was then passed by the Senate and sent to a conference with the House, which appointed a conference committee on December 4.17

The conference report, submitted to the House on December 9, 1969, by Mr. Patman, pointed out that the Senate struck out all of the House-approved bill after the enacting clause and substituted a new text. The conferees agreed to a substitute for the entire Senate amendment.18

The following day Mr. Patman called up the conference report and briefly explained what the committee had done. First, the permanent amendment of section 5219 would take effect on January 1, 1972, instead of on January 1 of the first calendar year after enactment. This would give States the time needed to change their laws. Meanwhile the temporary provision would allow States to collect sales, use, and certain other taxes except on intangibles. This provision was to be effective only until January 1, 1972. Second, as to the taxation of foreign or out-of-State banks, the States were limited to sales, use, documentary stamp taxes, and licenses until January 1, 1972, when the permanent amendment would give States full authority to impose intangible property taxes and other taxes on national banks on the same basis as on State banks.1

19

Finally, Mr. Patman explained the requirement for a Federal Reserve Board study. He assured the House that the House-passed bill had prevailed and that the conferees of both houses were satisfied with the resulting bill. The House agreed to the report.20

16 This section read: "Notwithstanding any other provision of law, no tax may be imposed on any bank by or under the authority of any State legislation in effect prior to the date of enactment of this Act if such bank is not required to pay the tax prior to such date, unless the imposition of such tax on such bank is authorized by affirmative action of the State legislature after such date." Ibid., p. S35400.

17 115 C.R., p. S35398-404 (Nov. 21, 1969); ibid., p. H36928 (Dec. 4, 1969). Conferees for the Senate were Senators Sparkman, Proxmire, Williams of New Jersey, Bennett, and Tower; for the House, Representatives Patman, Barrett, Mrs. Sullivan, Reuss, Widnall, Brock, and Clawson.

18 Ibid., p. H37997; House report 91-728. The report was included in the Record, pp. H37997-98, and ordered printed, p. H38014.

commerce. Finally, the First Agricultural National Bank decision has been described; this case and a Florida documentary stamp tax case led to enactment of P.L. 91-156. Within the parameters fixed by these cases and those of the early 1930s, the decisions of the courts need to be examined. The discussion of recent decisions will be arranged topically, with emphasis determined by the importance and volume of cases decided.

1. Taxes on bank real estate. Although the right of states to tax national banks on their real estate is as old as or older than section 5219, a few cases arose in this area. Banks were subject to this tax in the same manner as other real property owners. The manner of collection was not limited by section 5219. Nor could national banks as owners escape liability to reimburse mortgagees who had paid real estate taxes for the titleholder (bank) because the property did not produce sufficient income to cover taxes. The fact of being a national bank made no difference.9

One would have thought that over the years what was real estate would have been determined so precisely that there would be no recent litigation on that subject. But since personal property of national banks could not be taxed-and almost everyone knew it-the game was played of determining how bank fixtures would be classified. Oregon held them to be personal property. Connecticut agreed. Vault doors in California were different. They were improvements to real property and not personalty.10

2. Taxes on personal property of banks. Although States never had the right to tax personal property of national banks until the adoption of P.L. 91-156 in 1969, a number of States continued to try it unsuccessfully. It made no difference either that the bank erroneously but voluntarily listed its personal property on an assessment blank. The tax was still invalid under section 5219. States could be enjoined also from attempting to enforce this illegal tax."

3. Classification of rates.-Kentucky taxed deposits in banks out-ofstate at 50 cents on $100 but taxed deposits in Kentucky banks at 10 cents per $100. The Kentucky Court of Appeals held that the lower rate applied only to deposits in banks in the State, the tax being on citizens of Kentucky. This fiscal mercantilism was sustained by the U.S. Supreme Court. It did not violate the due process, equal protection, or immunities clauses of the 14th Amendment.12

4. The share tax.-The share-tax option in section 5219 is not only the oldest but the most frequently litigated portion of the national bank tax law. This was natural in the early years. A vast body of law had been established prior to 1930-35; nevertheless the volume of

Supra, pp. 238-395, 242.

7 First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339 (1968); Dickinson v. First National Bank of Homestead. 393 U.S. 409 (1969). See above, pp. 156-59 and below, pp. 266, 308. Welch in his study, op. cit., discussed decisions of the courts through 1933. His discussion was topical whereas that by Woosley, op. cit., was largely chronological. Woosley dealt mainly with the share tax, but in a separate chapter (ch. VI) he examined "Income and Excise Taxation of Banks," op. cit., pp. 80-90. Land Title Bank and Trust Co. v. Ward. 20 F. Supp. 810 (1937).

Stephens v. Reed, 121 F. 2d 696 (1941).

10 First National Bank of Portland v. Marion County, 130 P. 2d 9, 196 Ore. 595 (1942); First National Bank and Trust Co. v. Town of West Haven, 62 A. 2d 671, 135 Conn. 191 (1948); San Diego Trust and Savings Bank v. San Diego County, 312 U.S. 679 (1940), cert. denied, 16 Cal. 2d 142, 105 P. 2d 94. Assessment in the San Diego case included elevators, marble and bronze decorations, air-conditioning systems, grill work, cages, and counters. Traube Pittman Corp. v. Los Angeles County, 29 Cal. 2d 385, 175 P. 2d 512 (1946), vault door and frame. See also Simms v. Los Angeles County, 340 U.S. 891 (1950), cert. denied, 35 Cal. 2d 303, 217 P. 2d 936 (1950). On the treatment of fixtures as real property in California assessments, cf. R. Bruce Ricks and Bruce M. Polichar, "The taxation of national banks and bank fixtures: Inequitable methods, unpredictable law," Southern California Law Review, vol. 40, no. 4, summer, 1967, pp. 669-95.

11 First National Bank and Trust Co. of Oklahoma City v. McDonald, 289 F. Supp. 493 (1968); Gully v. First National Bank, 81 F. 2d 502 (1936); Bank of California v. King County (Washington), 16 F. Supp. 976 (1936).

12 Madden, Executor v. Kentucky, by Reeves, Tax Commissioner, 309 U.S. 83 (1940).

litigation has continued, although, it seems, at a slower rate. More cases were concerned with the share tax up to 1970 than with any of the other options granted by section 5219. Even the question of the “fair market value" of shares received attention.18

14

As has been indicated previously the Supreme Court invalidated several State laws immediately after the adoption of the 1926 amendment to section 5219 because these laws treated individually-owned intangibles more favorably than national bank stock with which other investments were competitive. At the same time the Supreme Court declined to invalidate a Kentucky classification law which differentiated in favor of individually-owned intangibles because evidence in the case did not establish that these investments were in competition with the bank. In some earlier cases such competition had been inferred from allegations or, as in the Richmond case, the contention was not controverted. But with the Georgetown (Kentucky) case, the Supreme Court began to require proof of substantial competition. This rule was followed in the Shreveport case. The court indicated that national banks must prove that nonbank firms were actually competing with them. The evidence showed, moreover, that the Morris Plan, Morgan Plan, and automobile finance companies did not compete with small loan departments of national banks in that locality. The court also held that exemption of building and loan associations, industrial loan associations and mortgage companies, because of limitations on taxation of national banks, did not void taxes on other banks (State banks) accepting deposits.18

19

16

That savings and loan associations were not competitive with national banks was affirmed in Michigan National Bank v. State of Michigan. National banks in Michigan were taxed at a higher rate than Federal savings and loan associations on the paid-in value of their shares.20 The banks accepted deposits and made loans many times greater than the aggregate value of their shares, whereas savings and loan associations could accept no deposits and made loans mainly out

# Board of Supervisors of City of Frankfort v. State National Bank of Frankfort, 189 S.W. 2d 942, 300 Kentucky 420 (1945).

First National Bank of Guthrie Center v. Anderson, 269 U.S. 341 (1925); First National Bank of Hartford, v. City of Hartford. 273 T.B. 545 (1927); Minnesota v. First National Bank of St. Paul, 273 U.S. 361 (1927): Commercial National Bank of Miles v. Custer County, 273 U.S. 502 (1927).

#Georgetown National Bank v. McFarland, 273 U.S. 55% 1927).

First National Bank of Shreveport et al v. Louisiana Tax Commission et al. 289 T.S. 60 (1933). There was also a claim in this case that a small tax had been levied on the bank's furniture and fixtures. Georgetown case, supra, oted with approval.

r. The Indiana Supreme Court held that the burden of proof of competition was upon the plaintiff. Davis v. Sexton. 220 Ind. 13s. 200 N.E. 233 (1936). Moreover, no discrimination in the rate of assessment was shown, 200 N.E. at 238 In New York it was held that competition with national banks was a question of fact, which Lad to be promed at the trial or else conceded. People's National Bank and Trust Co. of White Plains v. Westchester County, 201 N. Y. 342, 155 N.E. 405 (1933). In Minnesota “discrimination must be shown in fact." Cherokee State Bank of St. Paul v. Wallace, 279 N.W. 410, 202 Minn. 582 (1935). In re National Bank of West Virginia et al at Wheeling, 73 S. E. 2d 655, 137 W. Va. 637 (1952): “taxpayers failed to carry the burden of Clearly establishing that the assessment fixed by the county court is erroneous." In First National Bank of Scottsboro v. Jonson County, 150 So. 690, 227 Ala. 445 (1933), there is dictum to the effect that "there must be to warranted discrimination and this must be made to appear from the proof.”

Union Bank and Trust Co. v. Phelps, 288 U.S. 181 (1933). Case cited also for holding that State banks can be more heavily taxed than national banks. In Flournoy v. First National Bank of Shreveport. 3 So. 2d 244, 177 La. 1007 (1941), where part of law relating to State banks was declared unconstitutional, share tar on national banks was held valid, but tax must be assessed to shareholders and is collectable from bank as agent for shareholders.

365 T5.467 (1957). Affirming 358 Mich. 611, 101 N.W. 21 245, at p. 470. In 1933, the Montana Supreme Court held in Merchants National Bank of Glendive v. Dawson County, 19 P 23 872, 93 Mont. 310 (1933) that building and loan associations did not compete with national banks. Among other things the court said: “There is nothing in the record to indicate that the business conducted by the building and loan associations lessened the opportunities of plaintiff bank to invest all the capital it desired and more” (p. 896). Even some of the loans about which the plaintiff complained were made at the instance of the bank "to ensbue debtors to discharge an obligation owing to the bank. In such a situation it would be preposterous to bold that the art of making the loans was done in competition with the business of the bank.” (Ibid.)

* The rate on national bank shares was 51⁄2 mills on the dollar; the rate on Federal savings and loan associations in addition to other taxes was 2% of a mill per $1 on paid-in value of shares. Savings and loan associations also paid a franchise tax of 4 mill per $1 on their capital and legal reserves. Cf. 365 U.S. 467, at p. 468.