Earl Warren: Michigan National Bank et al., Appellants, versus Michigan et al. Mr. Klein, had you concluded your argument?
Victor W. Klein: I should like to reserve the remaining time for rebuttal.
Earl Warren: You may -- you may. Mr. Dexter.
William David Dexter: Mr. Chief Justice, may it please the members of the Court. The essential question here involves the validity of a Michigan statute imposed upon the shares of the appellant bank. It's a 5 1/2-mill tax. It is measured by the capital account of the appellant bank that represents 4% of the appellant bank's employable assets. The trial court in response to the same kind of argument that the appellant has presented here both by brief and by oral argument, decided that the restrictions imposed on the State of Michigan to tax national bank shares had not been violated. The Supreme Court of Michigan, by a unanimous decision arrived at the same conclusion. Now, frankly, everything that the appellant has brought before this Court in argument has been answered thrice by the appellees both in the trial court, in the Supreme Court of Michigan and I believe quite comprehensively and adequately by the appellees' brief filed in this Court. I do believe, however, that it would be helpful to this Court to see the issue in this case put in a proper setting. I would then begin by informing the Court generally, of the tax picture in Michigan concerning the taxation of financial businesses. Now, prior to 1952, the State of Michigan did not impose any tax on national bank stock. It did impose a 4-mill franchise privilege fee on banks and trust companies under the General Corporation Law. This tax is measured by paid-up capital and surplus of each of these institutions. This tax, the 4-mill tax on paid-up capital and surplus, the annual franchise privilege fee in Michigan imposed on all corporations, was also paid generally by financial corporations in the State of Michigan. Also in 1952 and prior thereto, the general financial businesses in terms of their intangible properties were subject to a tax of 3.5% on the dividends paid or received by such corporations on their stock holdings. Also, there was a tax of 1/25 of 1% on various intangible properties classified as accounts receivable. In addition, under the General Intangibles Tax Act, there was imposed the tax of 40 cents per 1000 that the appellant refers to, on cash deposits in all banking and financial institutions and savings and loan share account moneys. In addition, in 1952 and prior thereto, the State of Michigan imposed on domestic savings and loan associations, a franchise fee measured by 1/4 mill of the pay -- of the savings share account and legal reserve moneys of each state institution. Now, by a series of amendments in 1954, federal savings and loan associations were subjected to the same tax. In addition, the financial businesses generally, were subject to some miscellaneous taxes to which appellant bank was not subject.
John M. Harlan II: In federal -- in federal and state loan associations are the tax comparative?
William David Dexter: Your Honor, up until -- in 1952, the State of Michigan had not imposed this 1/4 mill franchise tax, but in 1954, they did, yes. Currently now, they're on a parity. --
John M. Harlan II: A parity?
William David Dexter: I didn’t fit -- yes.
Felix Frankfurter: I didn’t find -- have you finished answering?
William David Dexter: Yes. I -- I think that I have if I've answered Your Honor's question.
Felix Frankfurter: What I want to know is whether this recital of Michigan legislation affecting various groups of financial institutions and more particularly, the taxations in which under various enactments, not now under review here, is that right?
William David Dexter: No, Your Honor. These -- these are the -- these are the --
Felix Frankfurter: No, but --
William David Dexter: -- the statute under consideration here, except in 1952, the State of Michigan removed state banks and trust companies from the 4-mill tax on the corporate privilege fee and removed the dividends and income from their stock from the 3 1/2-mill intangibles to or that the tax measured by 3.5% of income from -- income-producing intangibles, which would include the stock of the appellant bank and in lieu of these two taxes by Act 9 of the Public Acts of 1953, imposed the 5 1/2-mill tax we have before the Court, now.
Felix Frankfurter: What I -- I -- what I meant to ask requires a more detailed statement. What we have under attack -- under attack is a particular tax claimed to be discriminatory because competing state institutions are not subject to it, is that right?
William David Dexter: This is right, Your Honor.
Felix Frankfurter: Now, in order -- in dealing with the question of discrimination, there or not, did I correctly understand you to lay before the Court a system, a network of taxation to which these so called favored state institutions are subject?
William David Dexter: No, Your Honor. I meant to say that -- I was giving the Court the picture of the general treatment in Michigan --
Felix Frankfurter: I under --
William David Dexter: -- of financial institutions --
Felix Frankfurter: Yes, well --
William David Dexter: -- in 1952.
Felix Frankfurter: And so is -- and that's what my question is directed to.
William David Dexter: Yes.
Felix Frankfurter: Whether your purpose in doing so is to show starting with the assumption that in dealing -- in passing on the constitutional validity or the conflict between subjection of a federal instrumentality from which a state instrumentality is free in order to determine whether there is such a discrimination, one must take into account the whole network of taxation of the State in order to find out whether, although the federal institutions maybe subject to a tax from which a state institution is free, conversely, the state institutions maybe subject to obligations from which the federal institution is free.
William David Dexter: This is right. This Court has said in a number of decisions interpreting Section 5219, that the practical operative effect of the total tax burden on alleged competing financial institutions is the test to be employed. And I am showing not only the total financial burden tax wise by the State of Michigan, on the alleged competing institutions here, but also on the general financial businesses, because I think this is significant in relationship to this Court's repeated pronouncement that only tax discriminations intended to create or foster a hostile or unfriendly attitude for the business of national banks is prohibited.
Felix Frankfurter: But even if in fact or -- or if in fact the discrimination is worse, it's in fact, a statute is passed levying a tax upon state financial institution in competition with national banks and not levied on national institutions, this Court doesn't have to find out whether you had a sinister purpose or whether you -- whether you thought this would or would not advantage state institutions if in fact, in construing, in applying with practical financial result of legislature, we don’t have to go and to search whether the purpose was a hostile one, as against the federal banks.
William David Dexter: No, Your Honor. It's certainly is not a subjective --
Felix Frankfurter: Alright.
William David Dexter: -- test. It's an objective test and this is the kind of test that we have employed in developing our case here, that is looking to the actual realities of the taxation of the two alleged competing institutions and see exactly how in terms of competition and in terms of real discrimination in terms of this competition.
Felix Frankfurter: In -- including the total tax incidence of the State.
William David Dexter: Right or yes --
John M. Harlan II: (Inaudible)
William David Dexter: Yes.
John M. Harlan II: (Inaudible)
William David Dexter: The savings and loan associations.
John M. Harlan II: (Inaudible)
William David Dexter: Well, let me start --
Felix Frankfurter: Was reversed and the compliments --
William David Dexter: Yes. Alright the only --
Felix Frankfurter: -- compliments, so far --
William David Dexter: Yes. The only tax imposed on national banks in 1952 by the State of Michigan was the 5 1/2-mill tax imposed by an amendment of the general Intangibles Tax Law by Act 9 of the Michigan Public Acts of 1953. This tax plus the tax on the real property of the bank constituted the sole tax burden to the State of Michigan, which incidentally represented about 8/10 -- 9/10th of a mill on the total employable assets of the appellant bank, but this was their total tax burden. Now, as distinguished from that burden, the savings and loan associations pay a tax of 40 cents per 1000 on the share accounts. And also, depositors in banks paid a tax of 40 cents per 1000, but this tax was absorbed by the banks and generally is in Michigan. But in addition to the 40 cents per $1000 tax on Michigan savings and loan shares including the federal, the state savings and loans only in 1952 and both state and federal in 1954, paid a 1/4 of a mill franchise tax to the Secretary of State's office, measured by the total share account and the legal reserves of each institution. Also, the savings and loan associations in Michigan were subject to a lot of miscellaneous taxes that the national banks could not be subjected to because of the restrictions imposed on a state's power by Section 5219. This includes a personal property tax. It would --
Felix Frankfurter: Now, you've given -- you've given -- you've indicated different units of measure or different -- or different basis of the taxation as between the two classes of institution, is it not?
William David Dexter: This is true, Your Honor.
Felix Frankfurter: Now, could you translate that or equate that into more or less equivalent terms and see where you come up?
William David Dexter: Yes, I would -- I would like to do that and I think that this can be accomplished by an examination of the competitive facts and circumstances of this case. Now, appellant bank's capital account, that is the subject of this 5 1/2-mill tax we're here concerned with, represented 4% of its employable assets. In other words, it was $13,000,000 out of $306,000,000. The balance of the appellant's employable assets made -- was made up of deposit money of $283,000,000 and these moneys, $283,000,000, $157,000,000 were demand deposits, the balance were time deposits of one kind or another. Now, also in 1952, this equity capital, this capital that the appellant is talking about in reference to Section 5219 was able to command in the loan activity, a loan, approximately 12 times the assets of a dollar value of a savings and loan share account. It was able to command in the financial field, $23 to $1 of the capital account. It was able to produce in 1952 a net profit of 31.5% before federal income taxes on the total capital account of the appellant bank which translated into the original investment in the appellant bank by stock holders in 1941, amounted to several hundred percent return on the original capital investment. This can be translated also into an analogy with the facts, all the savings and loan people. The savings and loan people allegedly in competition with the business of national -- the appellant national bank in Michigan in 1952, had total share account moneys of $143,000,000, mutual moneys pooled by savers, which was less than the appellant's demand deposits on which it paid no interest. These share account moneys were able to use or able to produce only 3.3% return. Now, we simply are essentially saying that the appellant bank with the broad powers given a national bank in association, with the ability to create checkbook money, with the exclusive ability to receive deposit moneys, is in a position economically to really employ equity capital and that a -- in a dollar investment in a share of national bank stock, is an entirely different thing than a so called investment in a savings and loan share account dollar. For this reason, the only expert testimony produced in this cause, Professor Woodward, of the University of Michigan, a professor of finance and taxation said that, "If you wanted to make a competitive that economic comparison of these two institutions in a realistic manner, you had to look to what each institution had to compete with, namely so many dollars." Essentially, we say then that the appellant bank equipped with these broad powers, could employ a -- on a ratio of 23 to 1 assets, in the residential mortgage market or any other activity it sought to engage in.
Felix Frankfurter: Are you saying they're not in competition or are you saying that the national bank, the appellants here had more power for resources at their disposal in competing with?
William David Dexter: Well, I -- I think that that question really interrelated and let me say why. Tax discrimination or rate discrimination as the appellant would phrase it, under Section 5219, is only the kind of discrimination by a state that can be said to discourage an investment in a national bank stock and to that end places the business of national banks at a competitive disadvantage. And we simply say as long as savings and loan share accounts, impossibly employed in competition in the residential mortgage market admittedly with the deposit money of the appellant bank are treated equally, there really isn't any discrimination in fact and none can be read into Section 5219.
Felix Frankfurter: Well, the question is, "Are they treated equally in that effect?"
William David Dexter: What?
Felix Frankfurter: The question is, "Are they treated equally?"
William David Dexter: The competitive units, Your Honor, are treated equal.
Felix Frankfurter: That is by the State -- by the State?
William David Dexter: Yes. The bank actually, in 1952, employed its deposit money and primarily its time deposit money under the Comptroller's regulations, in a residential mortgage market. And there primarily in a field guaranteed by the Federal Government so these assets could be considered liquid by the bank. On the other hand, the savings and loan share account money was employed in the same way. Now, these have been taxed equally by the State of Michigan. Then if you step back and take the total asset -- the total asset comparison that we have used in our brief, you'll come up with equal taxation. If you took a gross income to gross income comparison, you come up with equivalent taxation. If you take the capitalization of earnings at the same rate of return, you come up with equal taxation. And we say, under these kinds of circumstances, there really isn't anything for the appellant to complain about within the purview of Section 5219.
Felix Frankfurter: Do you also -- I beg your pardon.
Hugo L. Black: I was -- I was just trying to follow up Justice Frankfurter's question because I don't quite understand yet the difference. I wonder if put this way, as I understood your adversary, he says that his bank has to pay 13 times more taxes than the building and loans, but you say that's not true. What is the basis that would bring about such a tremendous difference (Inaudible)
William David Dexter: Well, I -- I --
Hugo L. Black: I'm just relating to the same thing.
William David Dexter: I -- I know what it is and I think I can explain it. The appellant says, "Our capital is this $13,000,000 in terms of talking about rate discrimination and he compares to 5 1/2 mills on the $13,000,000 or the capital account or equity capital of the appellant bank and forgets, for purposes of the talking about discrimination, all of the deposit money that it called, borrowed capital.
Hugo L. Black: You say then that he doesn't consider his capital to be a not, is that it?
William David Dexter: We say that -- Your Honor that if you take -- really, we have a two-pronged practical argument at this level. And is simply this, that if the capital of the appellant as defined in Section 5219, is limited to equity capital, we could say, "Yes, there is a discrimination rate wise here."
Hugo L. Black: 13 -- 13 times?
William David Dexter: Well, it would not be that because he had -- they have not taken in the total tax picture.
John M. Harlan II: (Inaudible)
William David Dexter: Well, they -- they got the 8 from the -- in reference to the state associations that paid that 1/4 of a mill and he got the 13 from leaving this 1/4 of a mill out.
Felix Frankfurter: Well, it would make a difference if true, whether it's 8 or 13, would it?
William David Dexter: No, it wouldn't make any difference so we aren't -- we don't -- it maybe 6 if you actually worked it out but again, this wouldn't make any difference. Exhibit 213 shows that -- that the tax is on these institutions and compared them across the board.
Felix Frankfurter: Well, you're doing -- and will you be good enough unless you have -- have not, have you finished --
William David Dexter: Not.
Felix Frankfurter: -- in answering Justice Black?
William David Dexter: I -- yes, I haven't finished this yet, you see.
Felix Frankfurter: Well, that's what I want to know.
Hugo L. Black: (Inaudible)
William David Dexter: So that here -- at this level, you could say, "Why, yes, there are -- there is tax discrimination." And of course, at -- at this level also, you have to say that a savings share account is like an equity investment in a share of national bank stock and I think this Court is well aware of the difference between a share of stock and a deposit in a savings and loan share account that the latter is analogous to a bank deposit. But then, the appellant without tying in its discrimination argument, jumps over and talks about substantial competition. But when it talks about competition under 5219, it's talking about the employment of the deposit moneys of the bank, you see and we simply say under this kind of situation, we don't care whether you talk about the deposits being part of the capital of the bank or not.
Hugo L. Black: Just as you're saying that you --
William David Dexter: What?
Hugo L. Black: Do you say that?
William David Dexter: Which do I say?
Hugo L. Black: Yes.
William David Dexter: I think, Your Honor on --
Hugo L. Black: The deposits, do you call them capital or not (Inaudible)
William David Dexter: Under the decisions of this Court in the Clement National Bank case, I think they ruled out deposits from being the capital of the bank, but I think also, they ruled out in that case, specifically any protection over the taxation or employment of this kind of money. So that we say that -- that the capital of the bank has not been established by this in this case factually, to have been in any competition with the savings and loan businesses, but rather that they have used a portion of their time deposits. But we've backed off from this and said, "Even though this is true, let's look at the total picture of the two institutions." The practical operative effect of the Michigan's tax structure on them and see what result we reach. Now, the economic -- the money and banking professor that I referred to, refers to the appellant's comparison on economic sense as completely absurd and come to the view point of make an asset to asset comparison because he found no real foundation in economic fact to make the great comparison between a deposit in a savings and loans share account, although technically, it's a share of stock and in an equity investment in a share of national bank stock. The -- but essentially, this is our legal argument in regard to substantial competition and in regard to discrimination. I think they have to be considered together and they're considered in reference to the announced purpose of Section 5219 which is to protect national bank investors and the business of national banks from unequal and unfriendly competition.
Charles E. Whittaker: But now hasn't Congress done that, required it to be done in a particular way, namely, by limiting the rate of tax on the taxable shares of banks and not more than is levied on like shares of other moneyed capital?
William David Dexter: And of course the -- the -- this language of Congress has been subject to judicial determine -- judicial interpretation by this Court. And the first thing they had to decide was there any exception to this language? Is it a literal application? And the Court struggled for years in trying to determine what was meant by the phrase, other moneyed capital. But the Court said that it was -- that this statute was not designed to rewrite the tax structures of the State, but as said in the Tradesmen’s case by this Court as late as 1940, it was designed to subject to tax in a practical way, economic equivalence and this is the conclusion that Professor Powell reached in regard to the Section 5219 cases in his law review article, much ado about gross receipts taxes. That simply -- yes, Section 5219 has been interpreted and if you took the fact that rate was the only thing that you looked at and then you looked at the species of what we might call other moneyed capital, you come out with a mechanical kind of interpretation and discrimination. The difficulty with that argument in the instant case is that it would also bring within the purview of other moneyed capital, bank deposits which would end up with the absurd result of requiring a Michigan state bank to pay a tax of 11.5% or 125 mills on its capital account compared to a 5 1/2 mill tax on the appellant. In other words, if other moneyed capital or moneyed capital within 5219 is so constructed to bring within its purview savings and loan share accounts, it has to bring within its purview United States Government bonds, it has to bring within its purview credit unions and a lot of other favored or differently treated species of property. Now, we simply say that this Court in its wisdom recognized that a mechanical interpretation in the approach of Section 5219 was not adequate. That you had to determine what Congress intended by this provision, what it was trying to protect and then interpret and apply this language in relationship to that intent. And we say that in following -- had -- have I answered your question? In -- in following out this congressional purpose, the -- this Court long recognized that the states could exempt or they could preferentially treat some moneyed capital in the State, without violating any shared tax on national banks by Section 5219, so long as certain essential tests always laid down by this Court to protect an investor in national bank stock was meant. One of them was that it was a partial exemption only. In other words, it was permitting the states for public policy purposes, to carve out some species of property that may be characterized as moneyed capital.
Hugo L. Black: Would your (Inaudible) your argument --
William David Dexter: What? This is one of the arguments that we have, Your Honor. It is what we call the partial exemption rule, developed by a long number of decisions of this Court, applied by this Court to mutual savings banks, applied by the Sixth Circuit Court of Appeals in the Hoeing case to savings and loan associations.
Hugo L. Black: But may I -- I thought that that assumes does it not, that there is a discrimination, what did it justify in order to (Voice Overlap) --
William David Dexter: This is right.
Hugo L. Black: -- state policy.
William David Dexter: This is -- this argument is on the basis that there -- there is a discrimination. We do not concede this in any sense.
Hugo L. Black: Well, then, why does that argument apply to it? I thought --
William David Dexter: The argument would apply, only Your Honor, if you concluded that the mechanical rate comparison required -- argued by the appellant and -- and questioned by Justice Whittaker, would have to prevail. Then you move on to the question of whether -- even if there is discrimination, still, can the states exempt some moneyed capital? A relatively immaterial part maybe the total moneyed capital employed for just reason, when it's not --
John M. Harlan II: No alternative --
William David Dexter: Yes.
John M. Harlan II: -- basis of holding.
William David Dexter: Right.
John M. Harlan II: It's an alternative (Voice Overlap) --
William David Dexter: Right. This is another --
John M. Harlan II: You're (Voice Overlap) on both grounds.
William David Dexter: No, they're bow to our -- another arrow to --
John M. Harlan II: Well, your court took your --
William David Dexter: -- our bow.
John M. Harlan II: -- your state court, took both grounds.
William David Dexter: Right. I might -- I might add there that both the trial court and the Supreme Court of Michigan held that the partial exemption rule still obtain. That is that in the instant case, the State of Michigan exempted federal -- federal and state savings and loan associations for a just reason that there wasn't any evidence of any unfriendly discrimination resulting from this kind of treatment, because the two difference -- the differences in the species of property involved and the comparable taxation or economic equivalent. So they said, "On this basis, we say the appellant has not shown the tax invalid under Section 5219." And the Supreme Court also went ahead and decided the mixed question of fact in law that is substantial competition and there found because of the difference is in the institutions, the limited area of real competition that the -- the competition was too narrow and too insubstantial to be considered substantial competition under Section 5219, so this is another bow to our arrow, so to speak. There is no arrow to our bow, I should say. There is no substantial competition established.
Hugo L. Black: Do you agree that with reference to the type of competition that your adversary stated making the loan on houses, a building and some property taking more, electing interest insofar as that part shall do business is concerned that the bank have the business that the building and loan associations tried to claim?
William David Dexter: There -- no, Your Honor, there are differences. Now, it's up to this Court to say whether they are material or not. We certainly are not resting our case essentially on the fact that they are entering the residential mortgage market differently. We do say that the main area of competition is the federally sponsored competition in the F.H.A. and V.A. field and wonder whether this kind of involvement of both institutions would result in a substantial competition prohibited by Congress in another piece of legislation.
Felix Frankfurter: Is that the core of your argument? The difference in -- is that financial competitive leverage between the national bank and your -- cooperated, your local bank due to the statutory and other advantages that the national banks have by virtue of their charter.
William David Dexter: That is one of the keys, definitely. Another key that we have to our argument is simply what --
Felix Frankfurter: Isn't -- before you go to the other --
William David Dexter: Yes.
Felix Frankfurter: -- isn't, I'll come back to a prior question of mine, isn't that another way of stating that they are better equipped for the competition, not with their -- not competitors.
William David Dexter: And this is true and so that we have to drop down and try to treat [Attempt to Laughter] them on the basis of what they're able to accomplish because of the different equipment that they have. And this is what the asset for asset or the income to income comparison really tries to do. It tries to get down and measure the result of this different equipment that each institutions have.
Felix Frankfurter: Could I -- Could I -- and here you say that the decisions of this Court to which I'm not familiar -- that the decisions of this Court have taken into account the actual fact that this is a big fellow and this is a little fellow and therefore, not -- they're not within the 5209 proscription.
William David Dexter: This is true and has taken it into account in various way -- it has taken it into account in saying that only the discriminations resulting on unequal and unfriendly competition is prohibited by Section 5219.
Felix Frankfurter: Well, -- suppose that the national bank builds up strength in greater power to the accumulation of time and the goodwill, goodwill means the momentum of a going concern and it has more momentum than a little fellow. Would that not come within the condemnation of 5209, if we just -- if your state made a distinction between those -- if it made a quantitative difference?
William David Dexter: But it is not a quantitative, Your Honor. It is a qualitative. This I want to insist upon. It's the ability of the bank to carry on broad monetary powers. It's the exclusive ability of the bank to receive deposits. Actually, the savings and loan share account is analogous from an economic sense to a bank deposit.
Felix Frankfurter: Ultimately, you're saying they're not comparable, because ultimately, you're saying (Voice Overlap) --
William David Dexter: That ultimately, they're not comparable. Like the appellant said, "One thing that we say is that how can non-comparable institutions be considered to be in substantial competition within the purview of Section 5219" or as said by this Court on numerous occasions in regard to the savings bank, "How can small mutual thrift institutions operating in a narrow field of home financing and collecting thrift savings established by Congress by the Home Owners' Loan Act on the federal level about 1933." Life breathes into them by the Treasury of the United States to the -- for home own -- for home own -- the bank board system." How can these institutions created for a particular public policy narrow one in thrift savings and home financing and restricted to this purpose, really be very damaging in their operation to a -- a national bank and association. And we simply say, as far as the State is concerned, we're going to look and treat competitive and economic equivalence the same and if we do that, we don't think that we have established an unreasonable or unfriendly competition with the business of national bank or have discouraged people from investing in national bank shares.
Earl Warren: Is there any question of discrimination between national banks and your state banks in this regard?
William David Dexter: No, Your Honor. They are treated -- state banks, national banks and trust companies all three are under the same tax, the 5 1/2-mill tax. Now, state banks pay some of the miscellaneous tax that I referred to and trust companies do that national banks are immune from. And prior to 1952 and prior to this amendment, national banks were -- would escape -- were escaping taxation to the extent of the -- the general tax -- taxes imposed plus this 4 mill corporate franchise privilege thing.
Felix Frankfurter: Why are they immune, these national banks?
William David Dexter: Pardon?
Felix Frankfurter: Why are they immune?
William David Dexter: Well, the -- the State felt -- the State could not subject them to a corporate privilege tax.
Felix Frankfurter: In other words -- in other words, they enjoy a federal immunity, do they not?
William David Dexter: This is right, Your Honor.
Felix Frankfurter: But you can't -- can you bind a different qualm of enactment, reach the same dollar and cents result in taxing them in a way in which to be -- for reasons that give them immunity under the federal statutes?
William David Dexter: Your Honor --
Felix Frankfurter: You couldn't do that can you?
William David Dexter: No. The -- the --
Felix Frankfurter: You can't say they have an advantage which Congress has deem fit to give them that had called it. They -- they're immune from certainly positions of state tax.
William David Dexter: Right, right.
Felix Frankfurter: But you can't impose those statutes by some indirection, can you?
William David Dexter: No, sir, Your Honor. We --
Hugo L. Black: Could you -- stating what is remained? I -- I understood you in answer to Justice Frankfurter to say that this Court had held in several cases, the state to carry out a policy to encourage the little (Inaudible) instead of lack of (Inaudible) by making tax rates differ?
William David Dexter: This is not -- this is -- I -- I'm sorry. The -- the policy I have referred to was what is called the partial exemption rule, Your Honor. We simply mean as stated by this Court on very -- in various decisions cited and quoted at length as shown in our brief, that the State can prefer or exempt tax wise, some other moneyed capital --
Hugo L. Black: On what (Voice Overlap) --
William David Dexter: -- without or -- or for just reason and for public policy purposes, for instance, the purpose of trying to foster thrift savings and home ownership under a savings and loan set up.
Hugo L. Black: Well, has that been discussed in connection with fostering smaller institutions rather than large --
William David Dexter: No, Your Honor.
Hugo L. Black: I misunderstood.
William David Dexter: No, this is -- this is not -- had nothing to do with size --
Hugo L. Black: But I --
William David Dexter: -- but -- you mean for an example of it is was part of the first application of the partial exemption rule and the most obvious was the exemption of United States Government bonds in the hands of private individuals. This Court said, "Well obviously, Congress didn't intend because the states could not tax national bonds in the hands of private bankers or individuals to invalidate a share tax by reference to Section 5219."
Charles E. Whittaker: Was all the partial exemption tax, it really isn't a reduction in rate, but it's a -- an exemption of things.
William David Dexter: Right. For instance, put it this way, say that -- say that you have within a state, 150 competitive units or of other moneyed capital in competition with the business of banks and say that some of these were held by associations or institutions that the State wanted to favor, say there was five of them. This Court has said, "This is alright so long as it's for just cause." It is partial, it's only 5 out of the 150 and it is not -- does not result in an unfriendly or hostile discrimination against the banks which is the real crux of the meaning of Section 5219.
Earl Warren: Had your state banks challenge the -- the -- this tax as being discriminatory?
William David Dexter: No, sir, Your Honor. In fact --
Earl Warren: -- state banks that --
William David Dexter: -- the Michigan Bankers Association is solidly behind the State of Michigan in this litigation. Now --
Hugo L. Black: Who composes that -- that organization?
William David Dexter: Now, it's -- it's -- now, all of 390 banks in Michigan are also members of that.
Earl Warren: State banks? Is that --
William David Dexter: State and national banks and the Act 9 in the Michigan Public Acts of 1953 hereunder challenged, was drafted by the Taxation Committee of the Michigan Bankers Association and --
Hugo L. Black: Suppose of them both?
William David Dexter: And – what, both, representing both banks and was placed in the statute for the purpose of bringing financial institutions in Michigan, generally on the same position tax wise and competitive wise. Now, this is referred to at -- at length in our brief, the exact statement of the Bankers Association in regard to their involvement is here. I know the appellant says that he is representing a minority group, that the Bankers Association does not speak for the banks, but are -- certainly are examination of the question, would lead me as an officer of this Court to say that there has been no real concern on the -- behalf of any banks except the appellant over this tax situation. And essentially, that appellant's argument is directed to the competition referred to by the Comptroller over obtaining savings dollars. That the Court in the Hoeing case was not competition, a deposit money, within the purview of Section 5219. I think this Court might, although there is competition in the residential mortgage field, note that Congress is continually involving themselves in making available, more money for residential mortgage purposes and the record in this case shows that up to the appellant's liquidity requirements, they had this need for investment of theirs -- well filled. I'm sure also that the basic reason for Congress in enacting Section 5219, namely to prevent the discouragement of investments in national bank stocks is absent in this case. The appellant is not having any trouble of getting people to buy its stock and has never offered any for sale and it was essentially to protect the stockholder and to protect the national bank in carrying out the monetary functions of the United States Government that this Court handed down the case of McCollough versus Maryland. And it was not to concern itself with economic details of how one institution might buy against another institution where there was no allegation or no attempt to show in any way that the bank's business and its fundamental structure was in any way being impaired. This kind of statement also appears generally in the opinions of this honorable Court. I would like to move to one which may amount to possibly an illuminating part of our position and that is what Congress has actually done in reference to the taxation of these two institutions. Now, the savings and loan associations here in question, the state associations were patterned directly after the federal associations which were created in 1933 by the Congress under the Federal Home Owners' Loan Act. And in that legislation, Congress spelled out the purpose of that -- of the creation of the federal Home Owners' Loan -- creation of the federal savings and loan institutions under this statute and it there said that such associations shall loan their funds only on the security of their shares or the security of first liens upon homes or combinations of homes.
Hugo L. Black: I can't quite hear you. Could you refer me to where that is in your brief?
William David Dexter: This is page 15, Your Honor.
Hugo L. Black: Of your brief?
William David Dexter: Yes, of our brief.
Hugo L. Black: Main brief.
William David Dexter: Main brief, yes, Your Honor.
Hugo L. Black: Thank you.
William David Dexter: Well, we have only one.[Attempt to Laughter]
Hugo L. Black: I thought you had a reply brief.
William David Dexter: No, sir, Your Honor. (Voice Overlap) We have --
Felix Frankfurter: Flip the other side.
William David Dexter: Well, I will apologize for its size, but there's only one.
Hugo L. Black: That's alright.
William David Dexter: We're on pages 15 and 16,. Congress spells out generally, what they have done in reference to the creation of federal savings and loan associations. Now, the state associations in question are patterned identically after these federal associations and our statutory analysis in our brief will indicate that. But then on page 17 of our brief, Congress made it abundantly clear what it was going to require of the states in reference to the taxation of these mutual thrift institutions. It there said, "No state territorial county, municipal or local taxing authority shall impose any tax on such associations or their franchise capital reserve surplus loans or income greater than that imposed by such authority on other similar, local, mutual or cooperative thrift in home financing institutions." Now, we maintain that Congress in -- in 1933, contrary to the appellant's contention, set forth the purpose of these institutions and told the states what norm to use in taxing them. Now we simply assert that this is in pari materia legislation, it must be read in conjunction with Section 5219 and that the states only have to concern themselves in taxing mutual institutions like this, with similar mutual institutions and not with what is done with national banks. Now, it's interesting to know what Congress did in reference to providing for the taxation of both the joint land banks and the national agricultural credit associations. The taxation provisions were relative to -- those two associations is set out on page 159 of the brief. Now, there, Congress tied in to 5219 and to the taxation of national bank stocks, the taxation of the stock of joint-stock land banks and the stock of National Agricultural Credit Corporations. In other words, a stock-type institution operating in the financial field created by Congress was tied into 5219 language and test, while a mutual institution such as the savings and loan association was -- was related to an entirely different kind of test. In the treatment of the savings and loan associations under the federal income tax law, which has been a subject by the way, of much controversy between banks and savings and loan associations, Congress saw fit to treat and classify these two institutions decidedly different. In reference to the savings and loan associations, they created a bad debt reserve of 12% of the income of these institutions and also permitted the institutions to deduct their dividends to their shareholders in the same way as banks were permitted to deduct the interest paid to their depositors. Also, Congress, when it created the Federal Deposit Insurance Corporation and insured people who placed their moneys on deposit in banks against laws, also saw fit to treat by analogy, an investment or a deposit in a savings and loan share account and this was done by the Federal Savings and Loan Insurance Corporation. Congress again treat in this mutual fund of a savings and loan association that has no equity capital and has not stock, the equivalent with the bank deposit which is the kind of equation the State believes to be equitable and fair in this cause. Also, Congress, in legislating in the District of Columbia, according to the appellant's theory of equality, is now discriminating 3 to 1 against the gross income of national banking institutions in the district. And in 1923, this Statute, Section 5219 was amended by the Congress and considered in detail after this Court's decision in the Richmond case in 256 U.S. and the congressional record there shows that Congress was well aware of this Court's treatment of mutual savings banks and other mutual institutions as being without the purview of Section 5219. And that also, this Court was well aware of the fact that this Court had concluded in the Clement National Bank case that bank deposits were not within the protection of Section 5219. And thus, in the 1923 Amendment, Congress again by not making any provision to overrule the judicial pronouncement of this Court, again made it manifest and abundantly clear that they were not going to compare a savings and loan share account with a -- with a share of national bank stock for Section 5219 purposes. Admittedly, as appellant says, it is a share of stock, but a "tree" is also a tree. In the instant case, there's no equity that a person can possibly obtain by placing a dollar with a savings and loan share account. These savings and loan associations stand ready and open to accept other depositors on the same level, on the same basis as their existing depositors. If a person withdraws the money, only thing that they can withdraw under the federal statute and the Michigan statute is the dollar that they put in plus dividends paid out of current earnings.
Felix Frankfurter: Aren't you proving a little too much? What you're now -- and if I followed your argument, you now say, "These are, as a matter of categories, different institutions in the savings and loan institutions is but from its very nature outside of the restrictive provisions of 5219?" Isn't that what you are saying?
William David Dexter: This is right, Your Honor and we have said that this Court has so stated and we are saying that Congress has treated the two institutions traditionally different and that now, we're trying to bring together mechanically, by a mechanical interpretation of 5219 under the Hartford case ignoring 100 years of history in legislation of this Court.
Felix Frankfurter: The fact that Congress by legislation has treated them differently, doesn't mean that the State of Michigan or any other state can treat them different, does it?
William David Dexter: No, Your Honor, but we say that it manifest a congressional intent not because -- remember, we have here two federal institutions.
Felix Frankfurter: You say in effect, that the body of this -- this continuing body of legislation treating national banks in the conventional form and savings loan institutions so far as Congress can deal with it in the districts, as so consistently in a body of enactment, treated them differently that as a matter of law, one is to infer that 5219 impliedly represents that same by implication, that same differentiation.
William David Dexter: This is right, Your Honor. I mean, in other words, we see a consistent pattern of decisions of this Court ruling out mutual savings bank, savings deposit, savings and loan association up to the Hoeing case, up to the Shreveport case of this Court of 1933, up to the Tradesmens case by this Court in 1940, we -- and we see paralleling that a congressional enactment that would support it. And essentially then, we are saying that -- that Congress has made it clear that they do not consider a mutual institution such as they created under the Home Owners' Loan Act of 1933, comparable to a -- a savings and loan -- comparable to a national bank capital, which is protected by 5219.
Earl Warren: Mr. Dexter, I understood Mr. Klein, in his argument concerning the earlier cases to say that the character of building and loan associations had -- had changed completely in recent years and that therefore, the earlier cases do not apply, would you mind addressing yourself to that?
William David Dexter: Yes, Your Honor, I would very much like to comment on that. Number one, the associations that I have just referred to in regard to public policy, were created in 1933 by Congress and so, his assertion that there's no public policy reason for distinct treatment of these institutions is rather belied by what Congress actually did in 1933 and what kind of institution that they said they were creating under the General Welfare Clause. And also, the testimony in this cause clearly indicates that the changes that he is talking about are changes of form without substance that the -- essence of their mutuality is that they have no stock. There are a mutual concern corporation or a mutual body and that it is a vehicle created expressly by Congress and for the states for the purpose of promoting thrift savings and home ownership and there has not been in the record of this cause that would lead anyone to assume that an established public policy of 100 years should now be set aside. And I should say in this connection that there are -- were several cases in the -- in this Court involving the status of mutual savings bank under 5219 and each time the bank came before this Court, they argued that now, we have a -- institution different in character, different in scope than -- that of the other institutions that the Court ruled upon in the prior decisions. Now, I might say in closing that there is one aspect of the whole area that the appellant has failed to note, in terms of trying to possibly bring Section 5219 up to date and that is that in 1864 when the statute we're talking about was first enacted, banks' capital -- equity capital amounted to 60% of their employable assets. In 1919 and around the time of the Mercantile case --
Earl Warren: You -- you may finish that statement (Voice Overlap)
William David Dexter: In 1919 at the time of the Mercantile case, the ratio was 40 to 60 and in 1952, the capital of the bank were now talking to has a ratio of 4% to the total employable assets of that institution. I thank you very much.
Earl Warren: Mr. Klein.
Victor W. Klein: Chief Justice, may it please the Court. Within the limited few minutes I have left, I'll endeavor to answer two or three basic errors in the argument. The basic error of appellee's argument and of Professor Woodward is the appellee does not like R.S. 5219, which is a tax on shares of national banks and he only wants the comparison made not with other moneyed capital in any form, but only with institutions which have the power to take deposits and to do a general banking business, because there is no business whatsoever which may take deposits except a bank. This Court has held that other moneyed capital is not limited to banking institutions or the institutions which may take deposits, you've said it in Richmond, you've said it in Hartford and you've said it in Minnesota. And Congress, on several occasions, was asked to change the law to limit it to other banks and refused to change it. This is a tax on shares and not on all of the assets of the institution. The same argument advanced by appellee was advanced by the State of Minnesota in the Minnesota case where they too said, "Banks can do business on deposits forgetting that they had to pay those deposits, they're liabilities" and said, "Compare the tax burden not on shares or total assets deducting the deposit liability." The State of Minnesota made the same argument, but this Court said, "Oh, no, this is a share tax. You must compare the net assets after deducting liability or the capital stock." Moneyed capital therefore, can mean the investment of an individual who may not take deposits and the investment of any business, which may not take deposits. And I submit the Shreveport case, sustains our position because that case was raised on two questions and that followed Hartford shortly. Number one, the State -- the bank attacked it on the Fourteenth Amendment that savings and loan were not like banks. On the Fourteenth Amendment, there was a reasonable classification, but on the second ground of attack that it violated this revised statute, the national bank tax act, the Court did not say it was of a different character and couldn't come under R.S. 5219, no. Mr. Justice Brandeis went into the question and said, "There was no competition in fact, the banks weren't competing or the savings and loan weren't competing with the banks." He wouldn't have discussed that had he held that there were such different comparable character that they couldn't as a matter of law, compete with one another. Now, on the proposition, Mr. Justice Frankfurter said, "Little fellow versus big fellow." In this instance, there are 67 savings and loan associations and 77 national banks in Michigan and if you check the chart on page 17, you will see that those 67 savings and loan associations did a far greater residential mortgage business, then the 77 national banks, including appellant. And if Your Honors would be good enough to see what has happened on page 81 of our brief, the growth of these savings and loan associations since the change in character in 1935, has been phenomenal both in Michigan, it has gone up from 1940, from a $116,000,000 to $537,000,000, till today, it's over $1,200,000,000 and nationally, the growth has gone from $5,000,000,000 in 1940 to $63,000,000,000. So, these aren't little institutions which are helpless. They have had a phenomenal growth and their in the mortgage business has been at least three times greater than the growth of national banks. Now, this reference to Mr. Chief Justice about state banks complaining or other banks. The Michigan Banker's Association as an association did not take that position. It was a three or four-man committee. They were asked later when it came to our attention to submit it to the membership for a vote. They refused to do so. Sixty odd banks including state banks sir, attempted to file a brief amicus in this Court, protesting the position taken by this tax committee. And this tax committee on the proof of this Attorney General went to the state legislature because -- not because they thought this tax was a valid tax, they didn't want a state income tax and they preferred this to a state income tax and said, "We will assist the State to defend this tax, this tax of doubtful validity, if its validity is attacked by a national bank" and they certainly cannot bargain away the rights given to Congress. The small tax committee has no power to bargain away our rights under the law and rights of other national banks. Thank you.