Case Name: I. C. Stevenson, Plaintiff, v. J. F. Metsker, as County Treasurer of Douglas County, Defendant
Court: Kansas Supreme Court
Jurisdiction: Kansas
Decision Date: 1930-03-19
Citations: 130 Kan. 251
Docket Number: No. 29,522
Parties: I. C. Stevenson, Plaintiff, v. J. F. Metsker, as County Treasurer of Douglas County, Defendant.
Judges: Johnston, C. J., Marshall, Dawson, Hutchison and Jochems, JJ., concurring.
Reporter: Kansas Reports
Volume: 130
Pages: 251–290

Head Matter:
No. 29,522.
I. C. Stevenson, Plaintiff, v. J. F. Metsker, as County Treasurer of Douglas County, Defendant.
(286 Pac. 673.)
Opinion filed March 19, 1930.
C. E. Lindley, of Lawrence, and J. G. Egan, assistant attorney-general, for the plaintiff; William A. Smith, attorney-general, of counsel.
C. B. RandaU, attorney for the State Tax Commission, for the defendant. John L. Hunt, attorney for the Kansas Bankers’ Association, as amicus curiae.

Opinion:
The opinion of the court was-delivered by
Btjrch, J.:
The action is one of mandamus commenced in this court, which has original jurisdiction in such cases. The petition was filed on March 1, 1930. The cause was advanced, and was set for hearing on March 5, on application for a peremptory writ. On March 5 the cause was submitted on oral arguments and typewritten briefs. The court conferred immediately after the arguments were concluded, and decided the writ should be denied. The decision was announced at once, and the purpose of this opinion is to state the reasons for the court's judgment.
The petition alleged, in substance, that plaintiff is the owner of real estate in the city of Lawrence, in Douglas county; that the first half of the taxes assessed against the real estate for the year 1929, at the general-property rate, was duly paid in December, 1929, and the second half of the taxes was payable on or before June 20, 1930; that on February 20 plaintiff tendered to the county treasurer of Douglas county, as full payment for the second half, a sum of money sufficient to discharge the taxes if computed at what is known as the intangible rate, which is much lower than the general-property rate, and that the tender was refused. The prayer was that a peremptory writ issue requiring the county treasurer to accept the tender and to receipt in full for the whole amount of the second half of the taxes.
Previous to 1923 sections 1 and 2 of article 11 of the state constitution, relating to finance and taxation, read as follows:
Ҥ 1. The legislature shall provide a uniform and equal rate of assessment and taxation; but [provision relating to exemption from taxation],
"§ 2. The legislature shall provide for taxing the notes and bills discounted or purchased, moneys loaned, and other property, effects, or dues of every description (without deduction) of all banks now existing, or hereafter to be created, and of all bankers; so that all property employed in banking shall always bear a burden of taxation equal to that imposed upon the property of individuals."
The legislature of 1923 submitted to the qualified electors of the state an amendment of these sections, reading as follows:
"Section 1. . . . That sections 1 and 2, article 11, be amended and combined into one section, to read as follows: Section 1. The legislature shall provide for a uniform and equal rate of assessment and taxation, except that mineral products, money, mortgages, notes and other evidence of debt may be classified and taxed uniformly as to class as the legislature shall provide. [Provision relating to exemption from taxation.]" (Laws 1923, ch. 255.)
The amendment was adopted by a vote of 250,813 for to 196,852 against. Under authority of the amendment, the legislature enacted the mortgage-registration law, the intangible-tax law, and the secured-debts law, providing for low rate of taxation on classified property, which, for convenience, will be called the intangible rate. In the case of Voran v. Wright, 129 Kan. 601, 284 Pac. 807, the court decided, in substance, that shareholders in state banks were entitled to the benefit of the intangible rate, and plaintiff's contention is based on his interpretation of the effect of that decision.
The problem for solution in Voran v. Wright involved application of the intangible rate in taxation of shares of state bank stock. The relation of the intangible rate to the general tax law of the state was not involved, and the question presented in this case was not decided. Students in accredited law schools, all of which use the case method of instruction, are taught that a court decision is not authoritative except with respect to the matter decided, and that the language of a judicial opinion is to be construed as referring to the subject under decision. In this instance the court did not put on "syllogistic seven-league boots" and leap from a particular premise to a universal conclusion which would wreck the tax system of the state and plunge the state into financial chaos.
The precise contention of plaintiff is this: A share of bank stock is not property falling within any of the classes mentioned in the amendment to the constitution. It is not a mineral product, nor money, nor mortgage, nor note, nor other evidence of debt. Therefore, a share of bank stock is simply a species of common unclassified property. Under the decision in the Voran case a share of state bank stock is to be taxed at the intangible rate. This being true, other common unclassified property, such as plaintiff's land, must be taxed at the intangible rate. Unless so taxed, land'is discriminated against, and the discrimination is unlawful under the uniform and equal-rate clause of the constitution.
By way of approach to solution of the problem, it may be observed that deductive reasoning may land us in endless difficulty. Refractory facts cannot be reconciled with the conclusions, and it becomes necessary to reexamine premises. It will be recalled that Adam Smith created a science of political economy on the premise of an economic man. The economic man is dead, and economists jest among themselves as to who killed him. When legal theory finds itself confronted with contradictory theory in the field of taxation, it may be necessary to retreat to the low and humble ground of fact, and try- to make the law conform to fact. Otherwise we might have the result of the famous fight between the gingham dog and the calico cat. Quarreling theories might eat each other up, and there would be no money to run the government. In this state the difficulty arises in the adjustment of taxation, placed in constitutional strait-jacket when life was simple, to the complexities and heterogeneities of a highly developed, progressive, industrial society.
It will be observed that section 2 of article 11 of the constitution, before it was amended, prescribed in detail a method for taxing banks. A tax law was framed according to the constitution, and state banks were organized and employed property in the business of banking. Then came the national banking system, and congress made a concession to the states relating to taxation of national banks.
The power to tax is an attribute of the state's own political sovereignty, and it has full power to tax its own people and property in its own way. In the case of Michigan Central Railroad v. Powers, 201 U. S. 245, the supreme court of the United States, speaking through Mr. Justice Brewer, said:
"We have had frequent occasion to consider questions of state taxation in the light of the federal constitution, and the scope and limits of national interference are well settled. There is no general supervision on the part of the nation over state taxation, and in respect to the latter the state has, speaking generally, the freedom of a sovereign both as to objects and methods. It was well said by Judge Wanty, delivering the opinion of the circuit court in this case:
" 'There can at this time be no question, after the frequent and uniform expressions of the federal supreme court, that it was not designed by the fourteenth amendment to the constitution to prevent a state from changing its system of taxation in all proper and reasonable ways, nor to compel the states to adopt an ironclad rule of equality, to prevent the classification of property for purposes of taxation, or the imposition of different rates upon different classes. It is enough that there is no discrimination in favor of one as against another of the same class, and the method for the assessment and collection of the tax is not inconsistent with natural justice.' " (p. 292.)
The. federal statute relating to state taxation as affecting national banking is a statute removing to a limited extent the bar to exercise of the state's power to tax a federal agency. All the property and effects of national banks, except real estate, were withheld from taxation by the state, just as public buildings of the federal government, situated within the territory comprising the state, are withheld from the state's jurisdiction to tax. That did not prevent the state from taxing its own banks according to its own constitution. The federal government had no interest in that subject. Its sole interest was, and is, to see that the limited jurisdiction conceded to the state with reference to taxation in connection with national banking is not transgressed. So far as power was concerned, the legislature of this state might have continued to tax state banks according to the explicit command of the constitution. Did the legislature do that? It did not. Why? The legislature encountered the tough economic fact that to do so would kill off state banks. They could not compete with national banks. The legislature was faced with' two necessities: necessity to observe federal law, and necessity to observe the state constitution. The situation did not admit of logical or philosophical solution; and by way of practical solution, the constitution was ignored. Section 2 of article 11 was printed in the law books until after the election in 1924, but because of dire economic consequences not foreseen or foreseeable when the constitution was framed in 1859, the section became a scrap of paper.
In due time the state's tax law was revised to equalize taxation pertaining to national banks and state banks, and in 1891 a statute intended further to accomplish that purpose was enacted. The first section began as follows:
"Stockholders in banks and banking associations and loan and investment companies organized under the laws of this state or the United States, shall be assessed and taxed on the true value of their shares of stock. . . ." (Laws 1891, ch. 84.)
Method of assessment was prescribed, and provision was made for deduction of real estate belonging in fee simple to the bank and taxation of such real estate under the general law. Provision was also made for payment of shareholders' taxes by the bank, which was given a lien on the shares. This statute was interpreted in the case of Bank v. Geary County, 102 Kan. 334, 170 Pac. 33. Confusion of theory and ambiguity of terms used in the statute were noted, and impossibility of executing the statute according to its phraseology was pointed out. As interpreted by the court, the statute became a workable tax law. Paragraphs 1 and 2 of the syllabus of the decision read as follows:
"The tax contemplated by section 11236 of the General Statutes of 1915, relating to taxation of national banks, state banks, and loan or investment •companies, is a tax on shares of stock in the hands of stockholders, and not a tax on capital stock or assets, the property of the corporation.
"Shares of stock are to be assessed at their true value, which may or may not coincide with their bookkeeping value." (p. 334.)
In the opinion emphasis was placed on the distinction between property of the bank, which was not taxed, and property of the shareholders, which was taxed, and the standard according to which stockholders were to be taxed on their property was stressed. That standard was "the true value." Elements of true value were enumerated by the court.
The statute contained an implied exemption from taxation. On the theory of distinction between property of the bank and property of the shareholder, the value of property of the bank is one economic unit, unit A. The value of all the shares is a separate and distinct economic unit, unit B. The residue of unit A, after deduct ing real estate, is not taxed. That residue is not a part of unit B, any more than Smith's property is a part of Brown's property. Early in the constitutional history of the state it was held, in accordance with the common understanding when the constitution was adopted, that the constitution prescribed a minimum exemption, which may be enlarged according to the wisdom and discretion of the legislature. Power to exempt is not, however, without limitation, and the court has frequently been confronted, in the field of taxation, with the problem, "When is far too far?" In the case of Wheeler v. Weightman, 96 Kan. 50, 149 Pac. 977, the court dealt with this problem, and held the legislature's attempt to tax mortgages at a low rate and exempt them from further taxation could not be justified under the constitution then in force. In this instance the exemption should be considered in the light of the facts.
A private banker has all his wealth invested in the banking business. He incorporates, and gives a qualifying share to each of four persons, members of his family, or relatives, or friends, to comply with the law and form a board of directors. All the funds and property go to the corporation, part as capital stock and part as assets. No new taxable value has in fact been created, except value of the privilege to use the corporate form of organization in conducting the business. This would be true if the same persons, or other persons, took of their own wealth and started a bank. This is a fundamental fact-foundation beneath the doctrine of separate interests in things the subject of corporate ownership. Therefore, the court regards the implied exemption as a mere incident to operation of a tax law framed under the constraint of economic necessity, and in view of the results, not of sufficient moment to defeat the law. Likewise, if the increment of corporate privilege were not taxed, the omission would not invalidate the whole scheme of taxation, which cannot be made perfect.
The opinion in the Geary county case was filed in January, 1918. The next legislature, which convened in January, 1919, evidently regarded the decision as too severe on shareholders, and the law was amended in a manner which relegated portions of the opinion to innocuous desuetude. The statute of 1919 was amended in 1925, and as amended will be considered later.
As stated above, the constitution was amended, and the intangible-tax laws were enacted. The legislature did not intend that these laws should apply to taxation of bank shareholders, unless attempted exclusion of shareholders from benefit of the acts should not be constitutionally permissible. But whatever the intention, whether the laws had an effect on taxation of national-bank shares depended on two things- — fact and federal law. The fact to be ascertained was whether there was moneyed capital in the hands of individual citizens of the state coming in competition with the business of national banks. The fact that such capital exists cannot be denied. What is the federal law? The tax shall not be at a greater rate than is assessed upon other moneyed capital coming into competition with the business of national banks. (U. S. Rev. Stat. 5219.) This statute looks to the tax burden placed on those who furnish the money to finance a government agency which is the ultimate subject of protection; and that burden may not be made greater than the burden on competitive moneyed capital, directly or indirectly. This was made perfectly clear by the supreme court of the United States in the case of People v. Weaver, 100 U. S. 539 (1879).
An early form of section 5219 of the Revised Statutes of the United States provided that shares of national bank stock might be included in the value of personal property of the shareholders, "subject only to the two restrictions. . . ." One of the restrictions is not material here. The other was that the taxation should not be at a greater rate than that assessed on other moneyed capital coming into competition with the business of national banks. The state of New York passed an act which permitted shares to be valued higher in proportion to their true value than competitive moneyed capital was valued. This was accomplished by permitting certain deductions by holders of competitive moneyed capital, not permitted in assessing shares of bank stock. An equal rate was then applied. The express and definite provision of the law was "shall not be at a greater rate," which was the "only" restriction. The rate was precisely the same, and, starting with the philological premise, the conclusion arrived at by faultless logic was that the federal law was observed. What did the supreme court of the United States say about it? The court penetrated through form of expression to the substance of the state's privilege to tax, and the syllabus of the opinion reads:
"The provision in sec. 5219 of the Revised Statutes of the United States, that state taxation on the shares of any national banking association shall not be at a greater rate than is assessed on other moneyed capital in the hands of individual citizens of the state, has reference to the entire process of assess :ment, and includes the valuation of the shares as well as the rate of percentage charged thereon.
"The statute of a state, therefore, which establishes a mode of assessment by which such shares are valued higher in proportion to their real value than other moneyed capital, is in conflict with that section, although no greater percentage is levied on such valuation than on that of other moneyed capital." (People v. Weaver, 100 U. S. 539.)
Applying the federal law to the facts, it is manifest that, when moneyed capital in competition with the business of a national bank is assessed at the intangible rate, the same kind of moneyed capital employed by the bank in its business and to be taken into account in fixing the tax burden cast on its shareholders must be assessed and taxed at the intangible rate.
In the Voran case the federal law was presented in such a manner that the court was obliged to discuss it. It was not regarded and could not be regarded by the court as law governing the decision. The federal statute was considered to discover what consequences resulted from it which might have a bearing on taxation of state banks under state law.
In the Voran case it appeared that more than 97 per cent of the personal property of the bank consisted of intangibles which, in the hands of others, would take the intangible rate. The shares were taxed at the general-property rate of $3.50 per $100. The shares of national banks, into the valuation of which the same kind of intangibles enter, and property of individual citizens consisting of the same kind of intangibles, pay 50 cents per $100. The combined capital, surplus and undivided profits of the state banks then in existence amounted to more than $41,000,000. The court refused to sanction a method of taxation producing such utterly indefensible discrimination, even though rejection of the method caused present financial loss to the state by reducing the amount of property taxed at the general rate. The court preferred to maintain the integrity of the constitution as amended.
Persons have interests in things, and those interests constitute the property of the possessors of the interests. The things are also called property, and, using the term in that way, the constitution permits classification of property, and not of owners of property. Property of a state bank which, if taxed to the bank as owner, would take the intangible rate is within the state's jurisdiction to tax. The legislature could not constitutionally exempt from taxation such an immense quantity of property, and does not do so. The purpose is to tax it. In devising a mode of taxation the property was exempted from taxation to the owner, the bank. Intangibles are intangibles, and the nature of the property was not changed by exempting it from taxation to the owner, the bank. The same property still lay in the bank's vault, untaxed. What mode of taxation was adopted in order to tax the exempted intangibles? Different property belonging to somebody, else is taxed. His property, whatever it is, is subject to taxation just as the bank's property is subject to taxation; and how does taxing his property subject the bank's property to taxation? The method resorted to is this: The valuation of the property of the other owner is determined by taking into account the bank's intangibles. Now this removes the exemption, and reaches intangibles for the purpose of taxation, or it does not. If it removes the exemption, intangibles are taxed, the burden of the tax falls on the shareholder, and the effect of the intangible-tax law was to discriminate outrageously between actual owners of intangibles and those who, because they bear the burden, are economically the exact equivalent of owners of intangibles.
Realizing the gravity of the question involved in the Voran case, the court invited briefs from constitutional lawyers, lawyers expert in corporation and taxation law, and all others who could aid the court. Valuable assistance was received from amici curim, as well as from counsel in the case. The cause was argued, the court reached a conclusion, and an opinion was drafted. There was great pressure on the court for announcement of its conclusion, and because of exegencies in the court's work, the draft of the opinion was filed, with full realization that it was not in final form. Filing the draft accomplished the end in view. It furnished a definite basis for further critical study of the problem by all who were interested, .and the court heard the case a second time, as it expected to do when the opinion was filed. The second argument was helpful, and among other suggestions attention was called to a statement made with only the provisos of a statute in mind, but which covered the entire act. The opinion was revised, reduced to final form, and filed. (Voran v. Wright, 129 Kan. 601, 284 Pac. 807.)
. The people themselves, by the solemn process of constitutional amendment, granted to the legislature power to provide for taxation of some classes of property of enormous value at a much lower .rate than other classes. The provision of the constitution requiring uniform and equal rate of assessment and taxation was not otherwise changed by the amendment; and so far as taxation of bank shares was affected, the new wine had to be poured into the old constitutional bottles through a federal funnel. The legislature performed its task as dexterously as it could, but some glass was broken; and the court, whose duty is to preserve and not to destroy, could save the moneys-and-credits act in part only.
The origin of this case and the question involved have been stated. The answer to the question has been indicated in the discussion of the Voran case.
There is an old philosophical premise about the essence of things. The essence of a thing is its true nature, which classifies it. Speculative reasoning from the premise led to some absurdities, but the premise may be accepted as sound. The name of a thing does not change its nature. If the taxable animal has long ears, and brays instead of neighs, its essence will not be changed by putting on it the label "a horse." In one case the court was asked to perform a feat of verbal acrobatics and call an oil refinery a branch penitentiary. (The State v. Kelly, 71 Kan. 811, 81 Pac. 450.) In taxation we penetrate to essence; and if, in final analysis, that which is assessed and taxed consists intrinsically of intangibles, the burden of taxation may not be made greater by sticking in the bark of terminology.
As indicated, the standard for valuing shares of stock assessed to stockholders, established by the statute interpreted in the Geary county case, was true value:
"The value of all tangible assets of every kind, including the value of all real estate owned, should be considered. Intangible elements of value — rights, privileges, good will, capacity and opportunity to achieve financial success, results of past business and the outlook for the future — should be considered. In a word, the entire potentiality of the corporation to profit by the exercise of its corporate franchises should be taken into account." (Bank v. Geary County, 102 Kan. 334, 343, 170 Pac. 33.)
The present statute reads as follows:
"Shares of stock issued by national banks and by state banks and savings banks, or other banking organizations, and by loan and trust companies, located in this state, shall be assessed to the individual shareholders at the-place where the particular bank or loan and trust company is located. The president, cashier or other managing officer of each and every institution of the kind named herein which has issued shares of stock shall furnish to the assessing officer, upon demand, during the month of March of each year, a list of all the shareholders and of the number of shares owned by each share holder, and the assessing officer shall list to each shareholder for taxation purposes the assessable value of such shares as hereinafter provided. To aid the assessor in fixing the value of such shares, the returning officer shall furnish to the assessor, under oath, a statement correctly showing the amounts of capital stock, surplus and undivided profits as of March, first of the current tax year. By undivided profits is meant all earnings of the institution which have not been carried to surplus or paid out in dividends under whatever account carried, whether as undivided profits, exchange, interest, stockholders' account, or other account representing interests Of the shareholders. The assessor from such statement shall base his valuation upon the capital, surplus, and undivided profits, the latter ascertained as provided herein, unless an investigation shall show incorrect returns, in which case he shall determine what returns should have been made to correspond with the facts disclosed by the investigation, and shall revise the returns and use such revised returns as the basis of the assessment; . . ." (Laws 1925, ch. 276, § 1.)
Analyzing this statute, it will be observed that provision for taxing shares of stock at their true value was stricken from the law. According to all rules for interpreting legislative action, this was done intentionally, and the assessor was required to base valuation on capital, surplus, and undivided profits. Aid to the assessor was provided for. This aid consisted in furnishing him with a list of names and a list of figures for doing a sum. Items to be included in undivided profits were specified, covering every account on the books representing "interests of shareholders." Shareholders have no property interest in undivided profits. Exchange, interest and earnings hidden from taxation in stockholders' accounts all belong to the bank. If the "return" should be incorrect, the assessor was given authority to correct it; that is, to make it show true capital, surplus, and undivided profits. The assessor was then directed to use the revised return as the basis for assessment; and he was given no authority to take into account anything but the sum of capital, surplus, and undivided profits. Perhaps experience had demonstrated it was unwise to give assessors freedom to value bank shares. If one bank does not belong to our financial group, or does not support our candidate, it may have its taxes raised. The practice in valuing bank shares corresponds to the statute, and the former method of valuing a share of stock, the individual property of the shareholder, comes near to being a Hamlet performance with Hamlet out of the cast.
The statute provides for deduction from gross valuation of capital stock, surplus and undivided profits of real estate up to a certain amount, and the real estate is taxed to the bank under the gen eral law. The assessed value, not the actual value, of the real estate is deducted. The net valuation thus ascertained is apportioned among stockholders. Getting our feet on the ground again, the law is a property-tax law. No jugglery with method of listing and valuation can change that fact. The result is, net valuation set off to stockholders finally rests on intangibles, and rests on intangibles to such an engrossing extent that, for purpose of practical administration of the law, they characterize the valuation.
After rate has been applied to assessed valuation, the bank pays the tax. The bank absorbs the tax, deducts the amount in making its federal income-tax return, and it may be difficult for the uninitiated to see how, under the statute, shareholders can be taxpayers. They do, however, pay the tax on shares of stock in a sense which fully satisfies the state and federal law. It is not necessary to demonstrate'the fact here. The important question is, What is the essence of the burden which they bear?
The books are full of cases which say that if by varying form substance may be changed, little would remain of constitutional limitations. Constitutional provisions cannot be evaded in that way. We are not to be deceived when the hand is the hairy hand of Esau, but the speaking voice is the voice of Jacob; and an intangible valuation set off to one person for payment of taxes may not be given a rate of $3.50 per $100, while persons owning intangibles pay'only 50 cents-per $100.
Since by going to the bottom of the. matter we find that the ultimate subject of taxation is intangibles, reached for taxation through shareholders, it is not material that a share of bank stock, regarded simply as a share of bank stock, is not mineral, nor money, nor mortgage, nor note, nor evidence of debt.
This disposes of the case, and disposes of the case of Malinda Cratt's v. C. J. Houston, as county treasurer of Reno county, which is of the same nature as this one, but involves tangible personal property.
The writs have been denied.
Johnston, C. J., Marshall, Dawson, Hutchison and Jochems, JJ., concurring.