Court Opinion

ID: 9418747
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:37:57.846047+00
Date Added: 2024-06-11T17:22:09.406464
License: Public Domain

Mr. Justice Sutherland,
dissenting:
Mr. Justice Van Devanter, Mr. Justice Butler and I are unable to agree with the opinion -and judgment just announced:
In Miller v. Milwaukee, 272 U. S. 713, speaking through Mr. Justice Holmes, this Court said [p. 715]:
“ If the avowed purpose or self-evident operation of a statute is to follow the bonds of the United States and to make up for its inability to reach them directly by-indirectly achieving the same result, the statute must fail even if but for its purpose or special operation it would be perfectly good. Under the laws of Wisconsin the income from the United States bonds may not be the only item exempted from the income tax on corporations, but it certainly is the most conspicuous instance of exemption at the present time. A result intelligently foreseen and offering the most obvious motive for an act that will bring it about, fairly may be taken to have been a purpose of the act. On that assumption the immunity of the national bonds is too important to allow any narrowing beyond what the Acts of Congress permit. We think it would be going too far to say that they allow an intentional interference that is only prevented from being direct by the artificial distinction between a corporation and its members. A tax very well may be upheld as against any *497casual effect it may have upon the bonds of the United States when passed with a different intent and not- aimed at them, but it becomes a more serious attack upon their immunity when 'they are its obvious aim. In such a case the Court must consider the public' welfare -rather than the artifices contrived for private convenience and must look-at the facts.”
In Macallen Co. v. Massachusetts, 279 U. S. 620, the principle thus announced was applied to an act imposing a corporate excise tax affecting the state’s municipal securities in the same way as the California act affects the bonds here under consideration. These municipal securities were issued and acquired prior to the passage of the act, and when so issued and acquired were exempt from all forms of taxation by the express terms of a state statute. The situation in that respect is the same here, except that the exemption from taxation was made by the state Constitution instead of by statute. There, as here, the constitutionality of the act was challenged under the federal Constitution as impairing the obligation of contracts. We sustained the challenge, and pointed out that while a state was at liberty to impose a franchise tax upon a corporation with respect to the doing of its business, it could not tax. the income of the corporation derived from nontaxable securities. We held that the effect of the taxing act was to repeal the prior statute and impose a burden upon the securities from which, by express provision of law, they had theretofore been free. In confirmation of this conclusion the report of a special commission appointed by the legislature to investigate the subject of taxation of banking institutions was cited and quoted. That report recommended the adoption of legislation which, by means of an excise upon the doing of business, would reach income from securities then exempt from taxation, either under federal or state law. The report received the con*498sideration of the legislature, and, we thought it fair to suppose, constituted the basis for adopting the challenged act. We said (p. 633):
“ The effect of the report is that non-taxable bonds nevertheless should be subjected to the burden of the tax; and, since that could not be imposed directly, the clear intimation is that it be imposed indirectly through the medium of the so-called ‘ excise ’.”
We therefore concluded that the act manifested a change of policy adopted with the aim and for the purpose of subjecting the tax-exempt securities, pro tanto, to the burden of the tax, and, therefore, impaired “ the obligation of the statutory contract.of the state by which such bonds were made exempt from state taxation.”
In the present case the aim and purpose of the California legislature to reach the same illegal result by indirection is no less clear. Here, as in Massachusetts, the State Tax Commission investigated the subject and made a special report to the Governor for submission to the legislature. In the course of the report the commission expressed the opinion that the only practicable method of securing a substantial revenue from the banks was to tax them “ according to or measured by net income.” This was designated its “fourth method.” As distinguished from the “third method.” suggested, the commission said that such a tax “ is designed to include within the scope of its application certain types of income which may not legally be reached by a pure net income tax — such as interest on tax-exempt government bonds. . . . The third method may be discarded in favor of the fourth, because under the fourth everything can be accomplished which may be gained by proceeding under the .third, and presumably more besides, viz., the inclusion, if desired, of tax-exempt interest in the base.” ■
Later in its report, under the heading “ Importance of Including Tax-exempt Interest in Base,” the commission, *499after calling attention to the Macollen case, then pending but not decided, said:
“ In the case, of corporations other than hanks, the point is not of vital importance. But the banks hold such large quantities of these tax-exempt bonds that the effect of a decision holding that the state may not include them in the base would be very serious indeed ”
There is more in the report to like effect.
In January, 1929, the two houses of the state legislature gave public hearings on the subject. Among others, Professor Haig of Columbia University, who had served as technical advisor to the commission, appeared and made a statement, in the bourse of which, in explanation of bills then pending, he said:
“ Now, as to the definition of net income. You will find this material presented in section 6 and following. In the first place, the definition of income is broad, in one respect, in that it does attempt to include within the scope of the base used as the .measure of the tax income received from tax-exempt securities — that is, government bonds and so on. . . . Interest from tax-exempt bonds is an exceedingly important item in a tax which is applied to banks. The definition is broad, in that it does include this tax-exempt interest in the base which is used as a measure of the value of the franchise.”
The act here in question, which resulted from, and evidently was based upon, the report of the Commission and the statements of its advisor, provides in express terms:
“Sec. 6. The term ‘gross income/ as herein used, in-vcludes ... all interest received from federal, state, municipal or other bonds, . ; .
“ Sec. 7. The term ‘ net income,' as herein used, means the gross income léss the deductions allowed.” (No deduction, however, is allowed for interest received from federal, state, municipal or other tax-exempt bonds.)
*500• The foregoing is so plain that comment or elucidation would seem unnecessary. The bare recital of the facts, in our opinion, shows how unreasonable it is to hold that the aim and purpose of the legislation was not, by indirection, to impose a tax upon income derived from tax-exempt securities which, constitutionally, could not be imposed directly. To say that the effect of the tax upon the tax-exempt bonds is “ casual ” and not its “ obvious aim,” (Miller v. Milwaukee, supra), is simply to presume upon oúr credulity. We think there is no escape from the conclusion that if the Miller and Macollen cases were followed the legislation here under review would be condemned. To base a distinction of these: cases from the pending case upon differences, so lacking in substance as to be in effect no' differences at all, simply adds to the confusion already too great in this field of taxation.
The California, franchise tax, in its application to the bonds here under consideration, is peculiarly indefensible. When' these bonds were issued and acquired they were, by express constitutional provision, made “free and-exempt from taxation.” Upon the faith of that provision the bonds were bought., The fact that they were to be free from taxation must have resulted in the receipt of a larger price than otherwise would have been the case. The difference between the sum paid and what would have been paid but for the exemption was, in a very real sense, money taken from the purchaser in exchange for the tax immunity — as though future taxes had been anticipated by an immediate payment of the amount, computed on the basis of their present worth.' By every principle of fair construction, the purchaser having paid for this immunity became entitled to hold the bonds , and income therefrom free from any future taxation, the burden of which, however disguised, would fall, and was meant to fall, upon them. Otherwise the contractual ob-*501ligation is a mere sham, signifying nothing. It is not denied, .as we .understand, that if the state had laid the tax directly upon the income derived from the bonds an unconstitutional impairment of the obligation would have resulted. And, in this respect,- it is hard to see any substantial difference between a tax laid directly upon the income and one laid upon a privilege but measured by, and definitely intended to reach, such income. Undoubtedly, a state has the power to impose a franchise tax for the privilege of .doing business as a corporation • within the state and also to measure that tax by the amount of income received; .but in every case where this court has sustained the validity of such a tax, when measured in part by non-taxable income, it. has done so upon the view, implicit' or express, that the latter in fact and reality was not the subject sought to be taxed, and that any burden thereby put upon it was casual and incidental.
" A tax in form, laid upon A but measured by B at once suggests that B was in reality the thing aimed at; and if inquiry- discloses, as it does here, that such is the fact, the tax, assuming B to'be non-taxable, should not be allowed to stand in the face of the settled principle that what cannot be done directly because of constitutional restriction cannot be done indirectly by legislation designed to reach the same end. Fairbank v. United States, 181 U.S. 283, 204; 300.
' It is important for the states and their municipalities to obtain revenue; but, in doing so, it is also important that they shall not dishonor their promises. The moral duty of a state to keep its word, in spirit as well as in letter, is no less than that of an individual; and courts which condenan direct impairment by legislation of contractual obligations should not be over-ready to approve the adoption of circuitous and delusive means, which in form avoid but in fact accomplish the same unconstitutional result.