Source: https://supreme.justia.com/cases/federal/us/392/339/
Timestamp: 2019-04-19 14:44:15+00:00

Document:
First Agricultural National Bank or Berkshire County v.
Massachusetts sales tax (which, by its terms, must be passed on to the purchaser) and use tax are invalid as applied to national banks, since such taxes are not among the only four specified methods of taxation in addition to taxes on real estate by which, under 12 U.S.C. § 548, Congress has permitted States to tax national banks. Pp. 392 U. S. 339-348.
___ Mass. ___, 229 N.E.2d 245, reversed.
MR JUSTICE BLACK delivered the opinion of the Court.
Supreme Judicial Court for the Commonwealth of Massachusetts held that appellant, First Agricultural National Bank of Berkshire County, was subject to Massachusetts' recently enacted sales and use taxes [Footnote 1] on purchases for its own use of tangible personal property. For reasons to be stated, we believe this decision was erroneous, and we reverse.
The decision below recognized the strong precedents against taxation, but the Massachusetts Supreme Judicial Court was of the opinion that the status of national banks has been so changed by the establishment of the Federal Reserve System [Footnote 2] that they should no longer be considered nontaxable by the States as instrumentalities of the United States. Essentially, the reasoning of the Supreme Judicial Court is that, under present-day conditions and regulations, there is no substantial difference between national banks and state banks, and the implication of this is, of course, that national banks lack any unique quality giving them the character of a federal instrumentality. Because of pertinent congressional legislation in the banking field, we find it unnecessary to reach the constitutional question of whether today national banks should be considered nontaxable as federal instrumentalities.
"If you allow the State to interfere with the proposed system [of national banks] in any way, may they not embarrass it? Where shall they stop? Where will you run a line?"
"Now, sir, every consideration, every argument which goes to sustain this great judgment [M'Culloch v. Maryland] may be employed against the proposed concession to the States of the power to tax this national institution in any particular, whether directly or indirectly."
Cong.Globe, 38th Cong., 1st Sess., 1893-1894 (1864).
"And the said associations or corporations shall severally be subject to State and municipal taxation upon their real and personal estate, the same as persons residing at their respective places of business are subject to such taxation by State laws."
Cong.Globe, 38th Cong., 1st Sess., 1392 (1864).
"If the Senator reads this bill, he will perceive that all the power of taxation upon the operations of the bank itself, all upon the circulation, all upon the deposits, all upon everything which can properly be made by a tax, is reserved to the General Government; that the States cannot touch it in any possible form; that they are limited and controlled; the simple right is given them to say that the property which their own citizens have invested in it shall contribute to State taxation precisely as other property."
Cong.Globe, 38th Cong., 1st Sess., 1895 (1864).
or their franchises. By its unambiguous provisions, the power is confined to a taxation of the shares of stock in the names of the shareholders and to an assessment of the real estate of the bank. Any state tax therefore which is in excess of and not in conformity to these requirements is void."
"There is also no doubt from the section [R.S. § 5219, 12 U.S.C. § 548] that it was intended to comprehensively control the subject with which it dealt, and thus to furnish the exclusive rule governing state taxation as to the federal agencies created as provided in the section. . . ."
"Two provisions in apparent conflict were adopted. First, the absolute exclusion of power in the States to tax the banks, the national agencies created, so as to prevent all interference with their operations, the integrity of their assets, or the administrative governmental control over their affairs. Second, preservation of the taxing power of the several States so as to prevent any impairment thereof from arising from the existence of the national agencies created, to the end that the financial resources engaged in their development might not be withdrawn from the reach of state taxation. . . ."
every available asset possessed or enjoyed by the banks would be owned by their stockholders and would be, therefore, reached by taxation of the stockholders as such. . . ."
"This section [R.S. § 5219, 12 U.S.C. § 548] shows, and the decisions under it hold, that what Congress intended was that national banks and their property should be free from taxation under state authority, other than taxes on their real property and on shares held by them in other national banks, and that all shares in such banks should be taxable to their owners, the stockholders, much as other personal property is taxable. . . ."
263 U.S. at 263 U. S. 107.
Because of § 548 and its legislative history, we are convinced that, if a change is to be made in state taxation of national banks, it must come from the Congress, which has established the present limits.
this is true, the bank cannot object if a particular vendor decides to pass the burden of the tax on to it through an increased price. But if this is not true, and if the tax is on the bank as a purchaser, then, because it is a national balk, appellant is exempt under 12 U.S.C. § 548. Because the question here is whether the tax affects federal immunity, it is clear that, for this limited purpose, we are not bound by the state court's characterization of the tax. See Society for Savings v. Bowers, 349 U. S. 143, 349 U. S. 151, and the cases cited therein. And essentially the question for us is: on whom does the incidence of the tax fall? See Kern-Limerick, Inc. v. Scurlock, 347 U. S. 110, 347 U. S. 121-122. Also see Carson v. Roane-Anderson Co., 342 U. S. 232.
"Reimbursement for the tax hereby imposed shall be paid by the purchaser to the vendor and each vendor in this commonwealth shall add to the sales price and shall collect from the purchaser the full amount of the tax imposed by this section, or an amount equal as nearly as possible or practicable to the average equivalent thereof, and such tax shall be a debt from the purchaser to the vendor, when so added to the sales price, and shall be recoverable at law in the same manner as other debts."
as unlawful advertising the holding out by any vendor that he will assume or absorb the tax on any sale that he may make. We cannot accept the reasoning of the court below that, simply because there is no sanction against a vendor who refuses to pass on the tax (assuming this is true), this means the tax is on the vendor. There can be no doubt from the clear wording of the statute that the Massachusetts Legislature intended that this sales tax be passed on to the purchaser. For our purposes, at least, that intent is controlling. And it seems clear to us that the force of the law, especially the language in subsection 3, is such that, regardless of sanctions, businessmen will attempt, in their everyday commercial affairs, to conform to its provisions as written.
For these reasons, we reverse, and hold that appellant is immune from both the Massachusetts use and sales taxes.
Acts and Resolves, 1966, c.14, §§ 1 and 2.
The Federal Reserve Act of December 23, 1913, c. 6, 38 Stat. 251, 12 U.S.C. § 221 et seq.
"The legislature of each State may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits. The several States may (1) tax said shares, or (2) include dividends derived therefrom in the taxable income of an owner or holder thereof, or (3) tax such associations on their net income, or (4) according to or measured by their net income. . . ."
"1. (a) The imposition by any State of any one of the above four forms of taxation shall be in lieu of the others. . . ."
Act of February 25, 1863, c. 58, 12 Stat. 665.
Act of February 10, 1868, c. 7, 15 Stat. 34.
Act of March 4, 1923, c. 267, 42 Stat. 1499.
Act of March 25, 1926, c. 88, 44 Stat. 223.
See Hearing on S. 2547 before the Subcommittee on Federal Reserve Matters of the Senate Committee on Banking and Currency, 81st Cong., 2d Sess., 9 (1950).
decide that constitutional question in order properly to interpret 12 U.S.C. § 548, upon which the Court bases its decision. Moreover, the refusal to decide the issue gives further life to a largely outmoded doctrine.
"[i]n cases involving constitutional issues . . . , this Court must, in order to reach sound conclusions, feel free to bring its opinions into agreement with experience and with facts newly ascertained, so that its judicial authority may . . . 'depend altogether on the force of the reasoning by which it is supported.' [Footnote 2/2]"
I think that, in light of the present functions and role of national banks, they should not in this day and age be considered constitutionally immune from nondiscriminatory state taxation, and that § 548 should not be construed as giving them a statutory immunity from the taxes here involved.
A. The starting point of the constitutional inquiry is, of course, M'Culloch v. Maryland, 4 Wheat. 316 (1819). That case involved a state statute applicable to any bank established in Maryland "without authority from the State," i.e., the Second Bank of the United States, chartered by Congress in 1816. It prohibited the circulation of notes (currency) by such a bank except on payment of a 2% stamp tax, or, alternatively, upon the payment annually to the State of $15,000. Substantial monetary penalties were provided for violations of the statute, for which the State had sued cashier M'Culloch. In a celebrated opinion, Chief Justice Marshall, a principal architect of our federalism, struck down the Maryland statute.
In Osborn v. Bank of the United States, 9 Wheat. 738 (1824), M'Culloch was applied to strike down an Ohio statute that attempted to extract an annual tax of $50,000 from each branch of a business operating in the State without its authority. The statutes found unconstitutional in both of those cases were patently discriminatory against the Second Bank of the United States (the Ohio statute specifically mentioned it), for the taxes did not apply to state-chartered banks. Chief Justice Marshall, however, did not limit his opinions in the two cases to discriminatory taxation, and they were applied by the Court in Owensboro Nat. Bank v. Owensboro, 173 U. S. 664 (1899), with little independent analysis to hold that Kentucky could not collect a nondiscriminatory franchise tax from a national bank. There was no discussion of the possible differences between federal functions performed by the kind of national bank involved there, which existed by virtue of legislation enacted in 1863 and 1864, and the quite distinct functions performed by the Second Bank of the United States involved in M'Culloch and Osborn.
"The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr.
Justice Holmes' pen: 'The power to tax is not the power to destroy while this Court sits.' [Footnote 2/3]"
Absent an examination of the differences between the bank involved in Owensboro and the Second Bank of the United States, involved in M'Culloch and Osborn, the Owensboro decision might be justified upon either of the following grounds: its alternative holding that the statute that is now § 548 constituted congressional delineation of the permissible scope of the power of the State to tax a national bank, or perhaps that the particular franchise tax was invalid as applied because it was based upon a valuation that included the national bank's required investment in nontaxable bonds of the United States. [Footnote 2/4] Or one might view Owensboro, in holding a nondiscriminatory tax invalid, as simply incorrect.
"Wise and flexible adjustment of intergovernmental tax immunity calls for political and economic considerations of the greatest difficulty and delicacy. Such complex problems are ones which Congress is best qualified to resolve."
United States v. City of Detroit, 355 U.S. at 355 U. S. 474.
character," Oklahoma Tax Comm'n v. Texas Co., 336 U. S. 342, 336 U. S. 352 (1949). The wisdom of that trend counsels, I think, a rejection of the constitutional argument in this case.
"there is no simple test for ascertaining whether an institution is so closely related to governmental activity as to become a tax-immune instrumentality,"
"have been so incorporated into the government structure as to become instrumentalities of the United States, and thus enjoy governmental immunity,"
United States v. Boyd, 378 U. S. 39, 378 U. S. 48 (1964); whether they "are arms of the Government deemed by it essential for the performance of governmental functions," and "are integral parts of [a government department and] . . . share in fulfilling the duties entrusted to it," Standard Oil Co. v. Johnson, 316 U. S. 481, 316 U. S. 485 (1942) (Army post exchanges immune); whether they have been so "assimilated by the Government as to become one of its constituent parts," United States v. Township of Muskegon, 355 U. S. 484, 355 U. S. 486 (1958), and whether the institution is regarded "virtually as an arm of the Government," Department of Employment v. United States, supra, at 385 U. S. 359-360.
governmental program, Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U. S. 95, 314 U. S. 102 (1941); whether its ownership, substantially or totally, lies in the Government, Clallam County v. United States, 263 U. S. 341, 263 U. S. 343 (1923); Railroad Co. v. Peniston, 18 Wall. at 85 U. S. 32; whether government officials handle and control its operations, Standard Oil Co. v. Johnson, supra; whether its officers or any significant portion of them are appointed by the Government, Department of Employment v. United States, supra; compare Railroad Co. v. Peniston, supra; whether the Government gives it significant financial aid, whether it is charged by law with carrying out some of the Government's international commitments, and whether it performs "functions indispensable to the workings" of a governmental unit, Department of Employment v. United States, supra, at 385 U. S. 359.
Under any of those rubrics and applying the factors listed above -- a list not intended to be exhaustive -- 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 state-chartered banks. Government officials do not run its day-to-day operations, nor does the Government have any ownership interest in a national bank.
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. It is instructive, therefore, to examine the functions performed by the national banks involved in those cases.
The Second Bank of the United States, involved in M'Culloch and Osborn, would clearly be a federal instrumentality under the Court's most recent discussion of the doctrine (Department of Employment, supra): the United States owned 20% of its capital stock (the remainder being owned by private persons); the President appointed five of its 25 directors, and the Government, as a shareholder, participated in the election of the others; the Secretary of the Treasury was required to deposit all of the public funds in the bank, unless he could give reasons to Congress why he should not do so; the bank was required to transmit funds for the United States without charge; the bank issued currency which was established as legal tender for all debts owing to the Government, and the bank clearly acted as the fiscal agent of the Government, handling its foreign exchange transactions. See P. Studenski & H. Krooss, Financial History of the United States 83-88, 103-106 (2d ed 1963); Federal Reserve System, Banking Studies 7-8, 18, 39-41 (1941).
bolster the Union's financial status, shaky because of the Civil War. Banking Studies, supra at 44-46. Most importantly, from the standpoint of analyzing the federal functions such banks served, national banks under the Civil War legislation, [Footnote 2/6] to which national banks today trace their history, had important and significant functions concerning currency. They were authorized to issue currency, printed for them by the Treasury Department, and such currency was established as legal tender for all debts owing to, or payable by, the Government. To insure the stability of the national currency by insuring the stability of the issuing banks, as well as to provide a ready market for the Government, each such national bank was required to secure its currency by depositing United States bonds with the Treasury Department. Banking Studies, supra, 14-16, 41-46; Studenski & Krooss, supra, 154-155.
branch banking, 44 Stat. 1228 (1927), as amended, 12 U.S.C. § 36(c); fiduciary powers, 76 Stat. 668 (1962), 12 U.S.C. § 92a; rate of interest on loans, 48 Stat. 191 (1933), as amended, 12 U.S.C. § 85; capitalization, 48 Stat. 185 (1933), 12 U.S.C. § 51, and interest on time and savings deposits, 44 Stat. 1232 (1927), 12 U.S.C. § 371.
J. Paris, Monetary Policies of the United States, 1932-1938, at 96 (1938).
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 U.S.C. § 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. See The Federal Reserve System: Purposes and Functions, supra, at 225-234, 274-277; Banking Studies, supra, 260-265.
"[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. [Footnote 2/8]"
immune from nondiscriminatory state taxation as federal instrumentalities. [Footnote 2/9] I might also add that I am a bit mystified that, 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 U. S. 1 (1941), but that a national bank, a private profit-making corporation, is constitutionally immune from state taxation.
The Court holds that 12 U.S.C. § 548, ante at 392 U. S. 341, n. 3, "was intended to prescribe the only ways in which the States can tax national banks." Ante at 392 U. S. 343. I would be less than candid not to acknowledge that that holding has the virtue of being supported by substantial precedent. But that seems to me to be its only virtue. That interpretation of § 548 has its judicial origin in the Owensboro case. Given the constitutional premise of Owensboro, that interpretation would be quite clearly correct. But since I reject the constitutional premise so far as national banks today are concerned, it seems to me § 548 ought to be examined freshly, for the "immunity formerly said to rest on constitutional implication [should not] . . . now be resurrected in the form of statutory implication." Oklahoma Tax Comm'n v. United States, 319 U. S. 598, 319 U. S. 604 (1943).
"This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State."
"e.g., the power to tax the real property of the banks as well as the privately owned shares -- be exercised in a nondiscriminatory fashion."
of taxation are designed to prohibit only those systems of state taxation which discriminate in practical operation against national banking associations or their shareholders as a class."
scope as § 548 as encompassing such a broad prohibitory application. It seems to me that we would do far better to recognize that the Constitution does not prohibit nondiscriminatory state taxation of national banks, and that § 548 limits only the kinds of taxes specifically set forth therein. Only in that way is Congress free to reevaluate the situation. That is, so far as construing § 548 is concerned, in practical effect, the issue is who shall bear the burden of seeking congressional action. I would put the burden where it ought to be, namely, on the private profitmaking corporation that seeks exemption from nondiscriminatory state taxation.
Finally, a major national banking policy has been to foster competitive equality of national and state banks. See, e.g., First Nat. Bank v. Walker Bank, 385 U. S. 252 (1966); Lewis v. Fidelity & Deposit Co., 292 U. S. 559 (1934). We ought, if other considerations are not decisive, to promote, rather than retard, that strong policy.
MR. JUSTICE HARLAN: In addition to the reasons given in my Brother MARSHALL's opinion, which I have joined, I would affirm the judgment below on the basis of that part of Justice Reardon's opinion for the Supreme Judicial Court of Massachusetts which upheld the application of Massachusetts' use tax to national banks. See ___ Mass. ___, 229 N.E.2d 245, 251-260.
The reductio ad absurdum in the text is, unlike most, somewhat accurate. One item upon which, appellant informed its supplier, it should not have to pay the sales tax was a wastebasket (as well as, e.g., "1 Box 5 x 7 Index Cards"). The record does not reveal the extent of appellant's liability for use taxes; appellant paid a total of $575.66 in sales taxes for the three months of the year 1966 that are specifically at issue here.
Burnet v. Coronado Oil & Gas Co., 285 U. S. 393, 285 U. S. 412-413 (1932) (dissenting opinion), quoting from Passenger Cases, 7 How. 283, 48 U. S. 470 (1849) (Taney, C.J.).
Graves v. New York ex rel. O'Keefe, 306 U. S. 466, 306 U. S. 489, 306 U. S. 490 (1939) (concurring opinion), quoting from Panhandle Oil Co. v. Knox, 277 U. S. 218, 277 U. S. 223 (1928) (dissenting opinion).
Owensboro might also be viewed simply as prohibiting a franchise tax, i.e., as holding that a State may not condition the privilege to operate within its borders granted to the bank by Congress, by exacting that kind of tax. (Such a tax is permissible under 12 U.S.C. § 548, as amended after Owensboro, see Tradesmens Nat. Bank v. Tax Comm'n, 309 U. S. 560 (1940).) The taxes in M'Culloch and Osborn, apart from their discriminatory aspects, might be similarly viewed: the Maryland tax was directly upon the bank's operations, and alternatively upon its privilege to operate within the State; the Ohio tax in Osborn was also a condition upon the bank's privilege to transact business there. While the language and holdings of later cases go well beyond that limited view, that view would seem preferable to me to interpreting those constitutional decisions as flatly prohibiting all forms of state taxation, aside from exceptions listed in M'Culloch, 4 Wheat. at 17 U. S. 436 (see infra at 392 U. S. 361).
Act of February 25, 1863, 12 Stat. 665 ("An Act to provide a national Currency . . ."); Act of June 3, 1864, 13 Stat. 99 ("An Act to provide a National Currency . . .").
See n. 5, supra; see also revenue acts, Act of March 3, 1865, §§ 6, 7, 13 Stat. 484; Act of July 13, 1866, § 9, 14 Stat. 146.
As of December 31, 1,966, membership in the Federal Reserve System was composed of 1,351 state-chartered, and 4,799 national, banks. The Federal Reserve System: Purposes and Functions, supra, at 24-25.
Accord, Indian Motorcycle Co. v. United States, 283 U. S. 570, 283 U. S. 580 (1931) (Stone, J., dissenting).
"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. . . ."
"1. (a) . . ."
"(c) In case of a tax on or according to or measured by the net 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."
"(d) In case the dividends derived from the said shares are taxed, the tax shall not be at a greater rate than is assessed upon the net income from other moneyed capital."
"2. The shares of any national banking association owned by nonresidents of any State shall be taxed by the taxing district or by the State where the association is located and not elsewhere, and such association shall make return of such shares and pay the tax thereon as agent of such nonresident shareholders."
E.g., federal intermediate credit banks, 12 U.S.C. § 1111; Federal Home Loan Bank, 12 U.S.C. § 1433; federal savings and loan associations, 12 U.S.C. § 1464(h).
E.g., Federal Deposit Insurance Corp., 12 U.S.C. § 1825. See Government Corporation Control Act of 1945, 59 Stat. 597, as amended, 31 U.S.C. § 841 et seq.

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