Court Opinion

ID: 9851030
Source: CourtListenerOpinion
Date Created: 2023-09-24 05:06:08.843535+00
Date Added: 2024-06-11T09:20:47.512670
License: Public Domain

LAKE, J.,
dissenting:
The bonds which the plaintiff proposes to deliver to the defend*593ant state upon their respective faces. “This bond shall not be deemed to constitute a debt, liability or obligation of the State of North Carolina or of any political subdivision thereof,” and that the plaintiff, itself, “shall not be obligated to pay this bond or the interest” thereon, except from the revenues and other funds pledged for such payment.
Each bond further states, “This bond, its transfer and the income therefrom * * * shall at all times be free from taxation by the State of North Carolina or any local unit or political subdivision or other instrumentality of the State, excepting inheritance or gift taxes.”
Although the Legislature, in G.S. 116-209.13, undertook to grant such tax exemption, it is my view that the bonds, if issued, will be subject to the tax presently levied by G.S. 105-202 upon intangible personal property and to any tax hereafter lawfully levied generally upon bonds and other evidences of indebtedness, To the extent that the statute, under which these bonds are proposed to be issued, purports to grant an exemption of these bonds from the intangible property tax, it is, in my opinion, in violation of Article V, § 5, of the Constitution of North Carolina, and, therefore, is ineffective.
Article Y, § 5, of the Constitution, is entitled “Property Exempt from Taxation.” It provides:
“Property belonging to the State, counties and municipal corporations shall be exempt from taxation. The General Assembly may exempt cemeteries and property held for educational, scientific, literary, cultural, charitable or religious purposes, and, to a value not exceeding three hundred dollars ($300.00), any personal property. * * *”
This constitutional provision applies to ad valorem taxes on property only. Sykes v. Clayton, Commissioner of Revenue, 274 N.C. 398, 405, 163 S.E. 2d 775; Stedman v. Winston-Salem, 204 N.C. 203, 167 S.E. 813. As we said in the Sykes case, however, it does apply to “the taxation of real and personal property, tangible and intangible, according to the value thereof.” Thus, it applies to the intangible property tax levied by G.S. 105-202 upon bonds and other evidences of indebtedness. In Sale v. Johnson, Commissioner of Revenue, 258 N.C. 749, 129 S.E. 2d 465, Parker, J., later C.J., speaking for the Court, said, “The power to exempt, from taxation, as well as the power to tax, is an essential attribute of sovereignty.” However, the sovereign is the State, not the Legislature. The Legislature, like this Court, is subject to the restrictions placed upon it by the sovereign in the Constitution. In Rockingham County v. Elon College, 219 N.C. 342, 345, 13 S.E. 2d 618, in Hospital v. Guilford County, *594218 N.C. 673, 12 S.E. 2d 265, and in Odd Fellows v. Swain, 217 N.C. 632, 637, 9 S.E. 2d 365, this Court recognized that the Legislature has no authority to exempt from ad valorem taxation any property, except by virtue of this provision of the Constitution.
These bonds, if and when issued, will be property. They will be property of the same kind as is a note, or a bond, of an individual student, or of his parent, given to the defendant bank in consideration of a loan of money to such student or parent for use by the student in paying his expenses in attending a school or college. When issued, they will be held by the plaintiff bank, or by its transferee, for the purpose of receiving the interest due thereon, as it falls due, and receiving the principal at maturity. Use of such interest and principal, when collected, by the holder of the bond is completely unrestricted. The purpose of the bank, or of its transferee, in holding these bonds will be precisely the same as its purpose in holding any other bond or note evidencing a loan made by the bank. Consequently, the exemption of the bonds from taxation cannot be supported on the basis of the purpose for which they are to be held. It is obvious that the bonds, in the hands of the bank or of its transferee, will not constitute property held for educational, scientific, literary, cultural, charitable or religious purposes. They will be held as any other property is held for investment.
The bonds, when issued, will be the property of the bank or of its transferee, not that of the issuing Authority. Consequently, except in the unlikely event of a subsequent transfer to a municipal corporation, a county, the State, or an agency of one of these, exemption of the bonds from the intangible property tax cannot be supported on the basis of the status of the holder of the bonds.
The mandatory exemption granted by the first sentence of Article V, § 5, of the Constitution, depends upon the status of the owner of the property — the State, counties or municipal corporations. The authority conferred upon the General Assembly to exempt property owned by others is limited to property held for one or more of the specified purposes. Hospital v. Guilford County, supra; Odd Fellows v. Swain, supra. Thus, neither the mandatory exemption nor the permissive exemption granted or authorized by Article V, § 5, of the Constitution, extends to these bonds in the hands of the defendant or its transferee. It is well settled that exemptions from taxation, constitutional as well as statutory, are to be strictly construed against the claim of exemption and in favor of the taxing power. Isaacs v. Clayton, Commissioner of Revenue, 270 N.C. 424, 154 S.E. 2d 532; Yacht Co. v. High, Commissioner of Revenue, 265 N.C. 653, 144 *595S.E. 2d 821; Chemical Corp. v. Johnson, Commissioner of Revenue, 257 N.C. 666, 127 S.E. 2d 262; Benson v. Johnston County, 209 N.C. 751, 185 S.E. 6; Rich v. Doughton, 192 N.C. 604, 135 S.E. 527; R. R. v. Commissioners, 75 N.C. 474.
It has been settled by decisions of this Court that, notwithstanding Article Y, § 5, of the Constitution, the Legislature may exempt from taxation obligations of the State and those of its political subdivisions. Mecklenburg County v. Insurance Co., 210 N.C. 171, 185 S.E. 654; Pullen v. Corporation Commission, 152 N.C. 548, 68 S.E. 155. The reason for this rule is not shown in the majority opinion in either of these decisions. It is stated in the dissenting opinion of Clark, C.J., in the Pullen case and lies in the circumstance that the exemption of the State’s own obligation from taxation enables the State to obtain a lower interest rate on its indebtedness so that the effect is approximately the same as if the obligation were taxed. See also 51 Am. Jur., Taxation, § 567.
This exception to the limitation of Article V, § 5, of the Constitution, upon the power of the Legislature to exempt property from ad valorem taxation, has no application to the present case for the reason that these bonds expressly state that they are not obligations of the State or of any of its political subdivisions. Even the plaintiff Authority, itself, is not obligated to pay the principal of or the interest upon these bonds except by application of the specified revenues and other funds pledged for that purpose. Thus, the attempted exemption of these bonds from the ad valorem intangible property tax cannot be supported on the ground that it will result in a lowering of interest rates otherwise payable by the State or by one of its subdivisions.
In Webb v. Port Commission, 205 N.C. 663, 172 S.E. 377, the Port Commission of Morehead City was authorized by statute to issue bonds in order to provide funds with which to build terminals, wharves, piers, warehouses and other port facilities for general public and common carrier use. Clearly, this was a purpose for which the State, or its municipality, could have issued its own bonds pledging its general credit, which bonds could have been exempted from taxation under the decisions above cited. The statute authorizing the issuance of the bonds provided that they would be exempt from State, county and municipal taxation. The statute further provided that the bonds were payable solely from the income of the commission from wharfage fees and the like, although there was a provision for a tax upon property within the city for the purpose of supplying any deficiency of such funds if, but only if, such tax was approved by a *596vote of the people of the city. The statute authorized and contemplated the private sale of the entire bond issue to the Reconstruction Finance Corporation, an agency of the Federal Government. The commission contemplated marketing the bonds in that manner. The authority of the Port Commission to issue the bonds was attacked on the ground that the statute was a violation of Article VIII, § 1, of the Constitution of North Carolina, in that it was an attempt to create a corporation by a special act of the General Assembly. This was the basic attack though other questions were also raised, including the validity of the provision for tax exemption. Connor (George W.), J., in his opinion, stated:
“The provision in the act by which the Port Commission was created that its property and the bonds that may be issued and sold as authorized by the act shall be exempt from taxation by the State, or any of its political subdivisions, is valid. The General Assembly has the power to so provide, for the reason that the property of the Port Commission will be held, and the bonds will be issued solely for public purposes. Whatever doubt there may be as to the validity of this provision, by reason of section S of Article V of the Constitution of this State, must be, under well settled principles of constitutional construction, resolved in favor of its validity. Certainly, if the bonds are sold to an agency of the United States Government, as contemplated by the act, the provision is valid so long as the bonds are held by such agency, or by any person, firm or corporation holding the same by purchase from such agency.” (Emphasis added.)
Mr. Justice Connor cited no authority for this pronouncement. His opinion makes no reference whatever to Article V, § 5, of the Constitution. His opinion makes it clear that he regarded the bonds as exempt from taxation because they were to be issued to a Federal agency (The Reconstruction Finance Corporation). Obviously, bonds held by an agency of the United States would be exempt from State taxation. This, no doubt, explains the rather casual treatment of the tax exemption, considered without respect to the status of the holder of the bonds.
At the time the Port Commission case was decided, this was a five-judge Court. Stacy, C.J., and Brogden, J., dissented. Their opinion does not mention the matter of tax exemption. Adams, J., concurred in result on the ground that the statute did not violate Article VIII, § 1, of the Constitution, his concurring opinion making no reference to the validity of the provision for tax exemption. Clark-son, J., also concurred in a separate opinion, which contained no dis*597cussion of the tax exemption but stated that the applicability of Article' VIII, § 1, of the Constitution, was the “only serious question” and was the question which the Court, in its order setting the-case for argument, had directed counsel to argue.
Thus, the statement in the opinion of Connor, J., in the Port Commission case concerning the validity of the provision for tax exemption of revenue bonds issued by the Port Commission, cannot be deemed a clear-cut determination by this Court of the validity under Article V, § 5, of the Constitution, of a purported grant of tax exemption to revenue bonds, declaring that they are not obligations of the State or of any of its political subdivisions, which bonds are issued to and held by private investors for investment purposes only. With the utmost respect for the opinion of our distinguished predecessor upon this Court, I cannot regard his statement, unsupported by authority and not mentioning Article V, § 5, of the Constitution, as conclusive or persuasive, upon this question which is presented for the first time in the present case.
I, therefore, conclude that Article V, § 5, of the Constitution of this State, renders invalid the legislative grant of an exemption of these bonds from the intangible property tax. This provision of the Constitution has no application to an exemption of the interest payable upon these bonds from income taxation. Article V, § 3, permits the General Assembly “to classify property and other subjects for taxation,” subject only to the limitations that the power shall be exercised on a statewide basis and “in a just and equitable manner.” This section expressly empowers the General Assembly to make provision for deductions from gross income in the computation of taxable income. In the absence of a constitutional limitation upon the power of the General Assembly to exempt the interest payable upon these bonds from income taxation, the power to exempt being an essential attribute of sovereignty, as declared in Sale v. Johnson, Commissioner of Revenue, sufra, this provision in the act authorizing the issuance of the bonds here in question is within the legislative authority.
The act provides in G.S. 116-203, “There is hereby created and constituted a political subdivision of the State to be known as the ‘State Education Assistance Authority.'" ” However, in G.S. 116-209.1 it provides, “Any of the foregoing provisions of this act which shall be in conflict with the provisions hereinbelow set forth shall be repealed to the extent of such conflict.” In G.S. 116-209.12 it provides, “Bonds issued under the provisions of this act shall not be deemed to constitute a debt, liability or obligation of the State or of any *598political subdivision thereof or a pledge of the faith and credit of the State or of any such political subdivision, but shall be payable solely from the revenues and other funds provided therefor.” While somewhat confusing, the net effect of these three sections of the act is, at least, that the Authority is not to be considered a political subdivision of the State for the purpose of determining the effect and validity of these bonds.
The plaintiff contracted to deliver to the defendant bonds totally exempt from State, county and municipal taxation. The bonds the plaintiff now proposes to deliver are, in my opinion, subject to the intangible property tax now levied by the State and to such other taxes as may lawfully be levied upon intangible personal property. The variance is substantial. Since the defendant is not being tendered the bonds it contracted to purchase, it should not be compelled to receive and pay for the bonds which the plaintiff now offers to it. It is my view that the superior court erred in adjudging that the bonds, themselves, are exempt from taxation and that the defendant must accept and pay for these bonds.