People Ex Rel. Hanover National Bank v. Goldfogle , 234 N.Y. 345 ( 1922 )

Relator, a banking corporation organized under the National Bank Act of the United States, seeks to review an assessment of its capital stock for taxation for the year 1921, on the ground that taxation thereof by the state is at a greater rate than is assessed on other moneyed capital in the hands of individuals. A national bank is an agency of the national government. The state has no constitutional power to lay any tax upon it. Its shares of stock are taxable by the state only when and as Congress permits. (McCulloch v. Maryland, 4 Wheat. 316; People ex rel.Bridgeport Sav. Bank v. Feitner, 191 N.Y. 88, 92; Van Allen v. Assessors, 3 Wall. [U.S.] 573.)

Section 5214 of the Revised Statutes of the United States (U.S. Comp. St. § 9779) imposes upon national banks the obligation to pay to the treasurer of the United States certain duties "in lieu of all existing taxes," and section 5219 (U.S. Comp. St. § 9784; Barnes Fed. Code, § 9256) provides that nothing contained in the federal "National Bank Act" (13 Stat. 99) shall prevent "all the shares in any association from being included in the valuation of the personal property of the owner or holder of such shares, in assessing taxes imposed by authority of the state within which the association is located; but the legislature of each state may determine and direct the manner and place of taxing all the shares of national banking associations located within the state, subject only to the two restrictions, that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such state, and that the shares of any national banking association owned by non-residents of any state shall be taxed in the city or town where the bank is located, and not elsewhere. Nothing herein shall be construed to exempt the real property of associations from either state, county or municipal taxes, to the same extent, according to its value, as other real property is taxed." This section prescribes the full measure of the power of the state to impose taxes upon national banking associations or their shareholders. Any assessment not in conformity therewith is unauthorized and invalid. (First Nat. Bank of Gulfport v. Adams,42 Sup. Ct. 323.)

The Tax Law of the state of New York (Cons. Laws, ch. 60, § 24), enacted long before any state income tax was imposed, and repealed by chapter 603 of the Laws of 1922, provided: "In assessing the shares of stock of banks or banking associations organized under the authority of this state or the United States, the assessment and taxation shall not be at a greater rate than is made or assessed upon other moneyed capital in the hands of individual citizens of this state. * * *"

The Tax Law also provides for a tax of one per cent on the book value of shares of stock in all banks and banking associations (§ 24b) and that such tax (§ 24c) "shall be in lieu of all other taxes whatsoever for state, county or local purposes upon thesaid shares of stock, and mortgages, judgments and other choses in action and personal property held or owned by banks or banking associations the value of which enters into the value of said shares of stock shall also be exempt from all other state, county or local taxation."

This tax of one per cent is a direct tax on the shares of stock without regard to the amount of income earned thereon, whether such income has been retained as surplus or distributed as dividends.

The Personal Income Tax Law (L. 1919, ch. 627; Tax Law, § 352), adopted as part of a new program of tax reform, imposes upon every resident of the state of New York an annual tax upon his net income of from one to three per cent. Such taxes "are in addition to all other taxes imposed by law, except that money on hand or on deposit with or without interest, bonds, notes and choses in action and shares of stock in corporations other thanbanks and banking associations, owned by any individual or constituting a part of a trust or estate subject to the income tax imposed by this article, shall not after July thirty-first, nineteen hundred and nineteen, be included in the valuation of the personal property included in the assessment rolls of the several tax districts, villages, school districts and special tax districts of the state."

The statute further provides (L. 1920, ch. 647; Tax Law, § 4-a): "Notwithstanding any provision of this chapter, or of any other general, special or local law, intangible personal property, except shares of stock of banks, or banking associations, whether referred to as personal property, capital, capital stock or otherwise, after June thirtieth, nineteen hundred and twenty, shall be exempt from taxation locally for state or local purposes. This exemption shall be in addition to all other exemptions of personal property from local taxation, whether based upon the character, ownership or amount of property. The term ``intangible personal property,' as used in this section, means incorporeal property, including money, deposits in banks, shares of stock, bonds, notes, credits, evidences of an interest in property and evidences of debt."

Shares of stock in banks and banking associations, both state and national, are thus subject to a one per cent valuation tax. Certain other corporations are subject to franchise taxes, but moneyed capital in the hands of individuals is exempt from taxation locally, for state or local purposes. A long line of decisions of the Supreme Court of the United States defines the business of banking and holds that the words "moneyed capital in the hands of individual citizens" includes moneys invested in private banking houses such as J.P. Morgan Co., Kuhn Loeb Co., and others, together with investments of individuals in securities that represent money at interest and other evidences of indebtedness such as normally enter into the business of banking. The national government permits state taxation only on terms of substantial equality in law and in fact, and entire fairness and friendliness. The tax on national bank shares must not discriminate in favor of moneyed capital entering into competition with the national banks. (Evansville Bank v.Britton, 105 U.S. 322; Mercantile Bank v. New York,121 U.S. 138; Aberdeen Bank v. Chehalis Co., 166 U.S. 440;Owensboro Nat. Bk. v. Owensboro, 173 U.S. 664, 676; AmoskeagSavings Bank v. Purdy, 231 U.S. 373; Merchants National Bankof Richmond v. City of Richmond, 256 U.S. 635.) The court below has found that the competing capital in the hands of individuals, subject only to the personal property income tax, is very large. "If the principle of substantial equality of taxation under state authority, as between capital so invested and other moneyed capital in the hands of individual citizens however invested, operates to disturb the peculiar policy of some of the states in respect of revenue derived from taxation, the remedy therefor is with another department of the government, and does not belong to this court." (Boyer v. Boyer, 113 U.S. 689, 703.)

The first question is, whether the state of New York discriminates against national bank shares by imposing a tax both on the shares and the dividends, while it imposes a tax on the income only of other competing capital in the hands of private bankers and other individuals. It was held below that if the direct tax and the income tax were both imposed, the discrimination would be clear. The respondent contends, by a process of statutory construction which would exclude by implication the particular from the general, that no income tax is imposed on the dividends of bank stock. The test to be applied is not whether such dividends may lawfully be included in the income of individuals taxed by the state, but whether they are in fact so included. It is urged that the state had no power to tax such income, for the reason that section 5219 of the Revised Statutes of the United States above quoted permits a tax on valuation only, and, therefore, that it did not tax it. (Peopleex rel. Alpha P.C. Co. v. Knapp, 230 N.Y. 48.) The language of the statute suggests no such punctilious regard for those whose income is derived from dividends on national bank shares. On the contrary, it plainly includes such dividends in gross income. Gross income includes (Tax Law, § 359) income from dividends. Dividends from stock in bank corporations owned by resident taxpayers is not included in the list of exemptions.

A clear discrimination is made against resident holders of bank shares which are taxed according to their book value, who are also taxed on their income. The shares of bank stock are taxed by one method and the dividends thereon are taxed by another method. Competing moneyed capital in the hands of individuals is exempt from taxation based on valuation and is assessed by one method according to income only. The provisions of the law are explicit. The discrimination is unfortunately too clear to escape recognition. We cannot assume that any exemption of dividends on national bank shares from the provisions of the income tax was in the legislative mind. On the contrary, the report of the special joint committee on taxation and retrenchment submitted to the legislature March 1, 1922, the opinion of the attorney-general (March 31, 1920), and the practice of the income tax bureau indicate that by legislative and administrative construction a personal tax upon dividends on the shares was contemplated and collected.

The amount of such moneyed capital in the state of New York thus exempted from taxation except on income is not inconsiderable. It is relatively of much consequence. In the city of New York in the year 1921 such competing capital was nearly twice the total capital of the state and national banks. The tax on the capital stock of national banks becomes invalid when it appears that it has become discriminatory. No way of escape from such a conclusion is open except by disregarding the rule which requires us to give a plain meaning to plain words plainly used. (U.S. v. Goldenberg, 168 U.S. 95, 102; Rodgers v. U.S.,185 U.S. 83, 86.) The validity of the tax on dividends from national bank stock may be considered when it is assailed by a taxpayer in a proceeding in which it becomes necessary to decide that question.

But, assuming for the purpose of discussion only that dividends on national bank stock are exempt by implication from the income tax or that the state tax thereon is invalid and may be disregarded, the tax on bank shares is discriminatory for another reason. The state may, so long as it observes the rule of fairness and good faith, tax national bank shares by one method while it taxes competing capital by another method, without exact uniformity or equality. (Mercantile Bank v. New York, supra;People ex rel. Bridgeport Sav. Bank v. Feitner, supra.) In doubtful cases the burden may rest on the bank to establish inequality. (Bank of Commerce v. Seattle, 166 U.S. 463;First Nat. Bank of Wellington v. Chapman, 173 U.S. 205.) Yet the rule laid down for our guidance by the Supreme Court of the United States in substance requires that the shares of the bank shall be taxed only to the same extent that other moneyed capital invested in the state is taxed. (People v. Weaver,100 U.S. 539; Boyer v. Boyer, supra.) If the inequality is palpable, the state courts are without discretion. It becomes their duty to declare the right asserted under the Constitution of the United States and the statute enacted by Congress in uniformity therewith and to hold the tax invalid. (Merchants' Nat. Bank ofRichmond v. City of Richmond, supra.)

When it appears on the face of the statute that bank shares are taxed on valuation at a flat rate and that the owner of competing moneyed capital relatively material in amount is taxed on income only, the court is powerless to say that equality of taxation has been secured and injustice prevented. We are forced to compare two methods which are wholly unlike. How can equality be established or presumed as the necessary result of the taxing statutes? In a very considerable number of cases the valuation tax must inevitably be the heavier burden. It is fixed and certain. The income tax is variable and dependent on income and amount of income. It is conceivable that when returns on such capital are low, the bank stock would be taxed and the competing capital would be exempt. In no event would equality exist unless the income on competing capital were large beyond the dreams of avarice and the usual returns on investments.

The relator is entitled to the relief asked for. The orders should be reversed and the assessment vacated, with costs in all courts.

HISCOCK, Ch. J., CARDOZO, McLAUGHLIN, CRANE and ANDREWS, JJ., concur; HOGAN, J., not voting.

Ordered accordingly.