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72~oz4~ /
92d Congress ~ COMMITTEE PRINT
2d Session
STATE AND LOCAL TAXATION OF BANKS
PARTS I, II, III, AND IV
Report of a Study Under Public Laws 91-456 and 92-213
Pi~EPARED BY THE
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
COMMITTEE ON BANKING, HOUSING AND
URBAN AFFAIRS
UNITED STATES SENATE
w
JUNE 1972
Printed for the use of the Committee on Banking, Housing and
Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
79-421 0 WASHINGTON : 1972
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COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
JOHN SPARKMAN, Alabama, Chairman
WILLIAM PROXMIRE, Wisconsin JOHN TOWER, Texas
HARRISON A. WILLIAMS, JR., New Jersey WALLACE F. BENNETT, Utah
THOMAS J. McINTYRE, New Hampshire EDWARD W. BROOKE, Massachusetts
WALTER F. MONDALE, Minnesota BOB PACKWOOD, Oregon
ALAN CRANSTON, California WILLIAM V. ROTH, JR., Delaware
ADLAI E. STEVENSON III, Illinois BILL BROCK, Tennessee
DAVID H. GAMBRELL, Georgia ROBERT TAFT, JR., Ohio
DUDLEY L. O'NEAL, Jr., ~Staff Director and General Counsel
MICHAEL E. BURNS, Minority Counsel
(II)
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STATEMENT OF THE CHAIRMAN
During consideration of legislation to clarify the liability of Na-
tional banks for certain taxes (Public Law 91-156, approved Decem-
ber 24, 1969), the committee was particularly concerned about the
effect that possible increased intangible personal property taxation
of banks may have on the banking systems. The committee's concern
arose because of the uncertainty about the magnitude of the impact
of the sudden imposition of additional such taxes on banks.
Accordingly, the committee required, in section 4 of Public Law
91-156 (see p. VII), that ". . . the Board of Governors of the Federal
Reserve System shall make a study to determine the probable impact
on the banking systems and other economic effects of the changes in
existing law to be made by section 2 of this act governing income
taxes, intangible property taxes, so-called doing business taxes, and
any other similar taxes which are or may be imposed on banks. . . ."
The Board completed its study in April 1971. The study contained
three parts. Part I contained the recommendations, of the Board of
Governors. Part II contained a Federal Reserve Board staff study
covering the following subjects:
(1) The history and effects of section 5219, Revised Statutes (12
TJ.S.C. 548).
(2) The amounts of State and local taxes paid by cGmmercial banks
and potential changes in their taxes under the new legislation.
(3) The economic and legal background of the study.
(4) Views expressed by the bahkers, State tax administrators and
State bank supervisors in the course of the study.
(5) Major issues that require examination.
(6) Possible alternative methods of dealing with the issues.
Part III contained the supporting documentation in considerable
detail on the topics covered in parts I and II.
Parts I and II were subsequently included in a committee print
entitled "State and Local Taxation of Banks," which was published
by the committee in May 1971.
In November 1971, part III of the Board's study, which contained
all the appendices and supporting data surro~tnding the study were
received by the committee and in December 1971, were included in a
committee print entitled "State and Local Taxation of Banks-Ap-
pendices to a Report of a Study Under Public Law 91-156."
Congress was unable to make a detailed review of this entire matter
after receiving all of the Board's study in November 1971, and before
the permanent provisions of Public Law 91-156 were to become effec-
tive in January 1, 1972. Accordingly, the date that the permanent
(III)
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Iv
provisions of PublTc Law 91-156 were to become effective was post-
poned for 1 year, until January 1, 1973, by Public Law 91-213, ap-
proved December 22, 1971 (see p. VIII). In addition, section 4(b) of
that act required study of the probable impact on State and local
government revenues from the 1-year extension of the prohibition of
an intangible personal property tax for national banks. This addi-
tional study was to be submitted to the committee 6 months after
enactment of Public Law 92-213-by mid-June 1972.
The Board of Governors transmitted the additional study to the
committee on June 12, 1972.
For the convenience of the committee, as well as all concerned with
this matter, it was agreed that parts 1,11, and III of the original report
from the Board of Governors as well as the additional study required
by Public Law 92-213 should be printed in one volume.
This committee print then is a reprint of parts I, II, and III of the
Board's original study and the additional study described above, which
for the sake of clarity will be called part IV of this committee print.
4Li~
JOHN SPARKMAN.
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Pn~LIc LAW 91-156, 91ST CONGRESS, H.R. 7491-
DECEMBER 24, 1969
AN ACT
To clarify the liability of national banks for certain taxes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress
assemled,
§ 1. Temporary amendment of section 5219, Revised ~
Statutes States.
(a) Section 5219 Of the Revised Statutes (12 U.S.C.
548) is amended by adding at the end thereof the follow-
ing:
"5. (a) In addition to the other methods of taxation
authorized by the foregoing provisions of this section
and subject to the limitations and restrictions specifically
set forth in such provisions, a State or political subdivi-
sion thereof may impose any tax which is imposed gen-
erally on a nondiscriminatory basis throughout the jur-
isdiction of such State or political subdivision (other
than a tax on intangible personal property) on a na-
tional bank having its principal office within such State
in the same manner and to the same extent as such tax is
imposed on a bank organized and existing under the
laws of such State.
"(b) Except as otherwise herein provided, the legis-
lature of each State may impose, and may authorize any
political subdivision thereof to impose, the following
taxes on a national bank not having its principal office
located within the jurisdiction of such State, if such taxes
are imposed generally throughout such jurisdiction on a
nondiscriminatory basis:
"(1) Sales taxes and use taxes complementary
thereto upon purchases, sales, and use within such
jurisdiction.
"(2) Taxes on real property or on the occupancy
of real property located, within such jurisdiction.
"(3) Taxes (including documentary stamp
taxes) on the execution, delivery, or recordation of
documents within such jurisdiction.
"(4) Taxes on tangible personal property (not
including cash or currency) located within such
jurisdiction.
(V)
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VI
"(5) License, registration, transfer, excise, or
other fees or taxes imposed on the ownership, use, or
transfer of tangible personal property located with-
in such jurisdiction.
"(c) No sales tax or use tax complementary thereto
shall be imposed pursuant to this paragraph 5 upon pur-
chases, sales, and use within the taxing jurisdiction of
tangible personal property which is the subject matter
of a written contract of purchase entered into by a na-
tional bank prior to September 1, 1969.
"State." "(d) As used in this paragraph 5, the term `State'
means any of the several States of the United States, the
District of Columbia, the Commonwealth of Puerto
Rico, the Virgin Islands, and Guam."
Effective date. (b) The amendment made by subsection (a) of this
section shall be effective from the date of enactment of
this Act until the effective date of the amendment made
by section 2(a) of this Act.
§ 2. Permanent amendment of section 5219, Revised
Statutes
(a) Section 5219 of the Revised Statutes (12 U.S.C.
548) is amended to read:
"SEc. 5219. For the purposes of any tax law enacted
under authority of the United States or any State, a na-
tional bank shall be treated as a bank organized and ex-
isting under the laws of the State or other jurisdiction
within which its principal office is located."
Effective date. (b) The amendment made by subsection (a) becomes
effective on .Janua.ry 1, 1972.
83 Stat. 435 § 3. Saving provision
(a) Except as provided in subsection (b) of this sec-
tion, prior to January 1, 1972, no tax may be imposed
on any class of banks by or under authority of any State
legislation in effect prior to the enactment of this Act
unless
(1) the tax was imposed on that class of banks
prior to the enactment of this Act, or
(2) the imposition of the tax is authorized by af-
firmative action of the State legislature after the en-
actment of this Act.
(b) The prohibition of subsection (a) of this section
does not apply to
(1) any sales tax or use tax complementary there-
to,
(2) any tax (including a documentary stamp tax)
on the execution, delivery, or recordation of docu-
ments, or
(3) any tax on tangible personal property (not
including cash or currency), or for any license, reg-
istration, transfer, excise or other fee or tax imposed
on the ownership, use or transfer of tangible per-
sonal property,
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VII
imposed by a State which does not impose a tax, or an
increased rate of tax, in lieu thereof.
§4. Study by Board of Governors of the Federal Re-
serve System
(a) The Board of Governors of the Federal Reserve
System (hereinafter referred to as the "Board") shall
make a study to determine the probable impact on the
banking systems and other economic effects of the changes
in existing law to be made by section 2 of this Act gov-
erning income taxes, intangible property taxes, so-called
doing business taxes, and any other similar taxes which
are or may be imposed on banks. In conducting the study
the Board shall consult with the Secretary of the Treas-
ury and appropriate State banking and taxing author-
ities.
(b) The Board shall make a report of the results of
its study to the Congress not later than December 31, ~
1970. The report shall include the Board's recommenda-
tions as to what additional Federal legislation, if any,
may be needed to reconcile the promotion of the economic
efficiency of the banking systems of the Nation with the
achievement of effectiveness and local autonomy in meet-
ing the fiscal needs of the States and their political sub-
divisions.
Approved December 24, 1969.
Legislative history-House Reports: No. 91-290 (Comm. on Banking & Currency) and
No. 9i-728 (Comm. of Conference).
Senate Report No. 91-530 (Comm. on Banking & Currency).
Congressional Record, Vol. 115 (1969) : July 17-Considered and passed House. Nov. 21-
Considered and passed Senate, amended. December 10-House agreed to conference report,
December 12-Senate agreed to conference report.
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Public Law 92-213, 92nd Congress, S.J. Res. 176-December 22, 1971
JOINT RESOLUTION
To extend the authority of the Secretary of Housing and Urban Development
with respect to interest rates on insured mortgages, to extend and modify
certain provisions of the National Flood Insurance Act of 1968, and for other
purposes.
Resolved by the Senate and House of Representatives of the United States
of America in Congress assembled,
* * * * * *
EXTENSION OF DATE5 APPLICABLE TO CERTAIN PROVISIONS OF LAW RELATING TO THE
TAXATION OF NATIONAL BANK5
SEC. 4. (a) The Act entitled "An Act to clarify the liability of national banks
for certain taxes", approved December 24, 1969 (83 Stat. 434), is amended by
striking out "1972" in sections 2(b) and 3(a) and inserting in lieu thereof
"1973".
(b) The Board of Governors of the Federal Reserve System shall make a
study of the probable impact on the revenues of State and local governments
of the extension under subsection (a) of the termination date of interim
provisions regarding intangible personal property taxes of State and local govern-
ments on national banks. The Board shall report the results of its study to the
Congress not later than six months after the date of approval of this joint
resolution.
* * * * * * *
Approved December 22, 1971.
(VIII)
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CONTENTS
Page
Statement of the Chairman iii
Public Law 91-156 V
Excerpt from Public Law 92-213 viii
Letter of transmittal ix
Aknowledgments 69
PART I
Recommendations of the Board of Governors 1
PART II
Introduction 9
Statutory history (1864-1969) 10
Effects of section 5219 10
The 1969 amendment 12
Bank taxes paid in 1969 and subsequent changes 14
Information and views from State bank supervisors 19
Information and views from State tax administrators 20
Concerns expressed by bankers 22
Intangible personal property 22
Multistate jurisdiction to tax 23
Local taxation 24
Discriminatory or disproportionate burdens 24
Attributes of the financial sector and their implications for taxation 25
Role of financial institutions 25
Attributes relevant to evaluation of t~x impacts 28
Implicationsfortaxation 29
Legal setting for analysis of major issues 30
Intangibles 31
"Doing business" taxes 32
Exposure to multistate taxation 33
Discriminatory taxation of out-of-State banks 35
Interstate division of the tax base 36
Separate accounting 36
Specific allocation 37
Formula apportionment 37
The unitary concept 38
Multicorporate banking enterprises 39
Statutory limitations on taxation of interstate nonfinancial business 40
Public Law 86-272 40
Proposed interstate taxation act 40
Model State law 41
Multistate compact 42
Ad hoc committee plan 42
Potential changes in bank taxes and their impacts 42
Intangible personal property owned by banks 43
Share taxes 44
Taxes measured by net income 45
Multistate taxation... 46
Nature of interstate banking activity 46
Potential effects of nondomiciliary State taxation 48
Criteria for evaluating proposals. 49
(ix)
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x
Page
Issues and alternatives 52
Intangible property owned by banks 52
Arguments for letting the "permanent amendment" take effect
without change 53
Arguments against allowing the States to tax intangibles 54
Taxation by States other than the State of the principal office 57
"Permanent amendment" without change 60
Modified "permanent amendment" 62
Retain the interim provisions for multi-State taxation 63
Related issues 64
Discrimination 64
Local taxation 65
Interest on Federal obligations 66
Classification of coin and currency 67
Tables:
1. State and Local Tax Expenses of All Insured Commercial Banks,
by Measure of Tax and Charter Status of Bank: 1969 15
2. Percentage Distribution of State and Local Tax Expenses of All
Insured Commercial Banks, by Measure of Tax and Charter
Status of Bank: 1969 15
3. State and Local Tax Expenses of All Insured Commercial Banks in
Selected States, by Major Types of Taxes (Other Than on Real
Property) and Charter Status of Bank: 1969 17
PART III
APPENDIXES-GENERAL OUTLINE
Appendix 1-Federal Statutes Relevant to Study of State and Local
Taxation of Banks 71
Appendix 2-General Statistical Data with Respect to Commercial Banks
and Other Financial Institutions 81
Appendix 3-Survey of State and Local Tax Expenses of Insured Com-
mercial Banks, 1969 (by James B. Eckert) 89
Appendix 4-Information and Opinions on State and Local Taxation of
Banks and Other Financial Institutions, Supplied by State Tax Adminis-
trators (by Sally M. Hey) 143
Appendix 5-Responses of State Bank Supervisors to the Board's Inquiry
Concerning State Taxation of Banks (by Sally M. Hey) 199
Appendix 6-The 1-listory and Impact of Section 5219 on the Taxation of
National Banks (by Simeon E. Leland) 215
Appendix 7-Economic Impacts of Particular State and Local Taxes on
Banks, with Special Reference to Neutrality (by Carl S. Shoup) 425
Appendix 8-Treatment of Intangible Personality in the State-Local
Taxation of Banks (by Lynn A. Stiles) 463
Appendix 9-Comparing State and Local Taxation of Banks and Other
Business Enterprises (by Harvey E. Brazer and Marjorie C. Brazer) - - - 469
Appendix 10-Liability of National Banks for Generally Applicable State
and Local Taxes (by Charles F. Conlon) - 485
Appendix 11-Federal Constitutional Limitations on State Taxation of
Multistate Banks (by Jerome R. Hellerstein) 505
Appendix 12-Multiple State Taxation of National Banks: Division of Tax
Base-Income Taxes and Doing Business Taxes (by J. Nelson Young) - - 551
Appendix 13-Repeal of Restrictions on State Taxation of National Banks:
Effects on Multi-Corporate Banking Organizations (by William R.
Bollow) - 585
Appendix 14-The Question of Possible Discrimination Against Out-of-
State National Banks (by Sheldon L. Azine) 593
APPENDIXES-DETAILED OUTLINE
Appendix 1-Federal Statutes Relevant to Study of State and local Taxa-
tion of Banks:
A. Section 5219, Revised Statutes (12 U.S. Code 548), Before Amend-
ment by Public Law 91-156 71
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B. Public Law 91-156, an Act to Clarify the Liability of National
Banks for Certain Taxes:
Section 1. Temporary amendment of section 5219 72
Section 2. Permanent amendment of section 5219 72
Section 3. Saving provision 73
Section 4. Study by Board of Governors of the Federal Re-
serve System 73
C. Earlier Forms of Section 5219:
1864 73
1868 74
1923 74
1926 74
D. Federal Statutory Provisions Relating to State and Local Taxation
of Financial Institutions Other Than National Banks:
(1) Federal reserve banks 74
(2) Banking corporations authorized to do foreign banking
business 75
(3) Federal land banks and associations 75
(4) Joint-stock land banks 75
(5) Federal and joint-stock land banks 75
(6) Federal intermediate credit banks 75
(7) Central Bank for Cooperatives, Production Credit Asso-
ciations, and Banks for Cooperatives 76
(8) Federal home loan banks 76
(9) Federal savings and loan associations 76
(10) Federal National Mortgage Association 76
(11) Federal credit unions 77
(12) Federal Deposit Insurance Corporation 77
E. Exemption of Federal Government Obligations From State and
Local Taxation 77
F. State and Local Taxation of Currency 78
G. State Net Income Taxes on Income Derived From Interstate
Commerce, P.L. 86-272 78
Appendix 2-General Statistical Data with Respect to Commercial Banks
and Other Financial Institutions:
Tables in Appendix 2
Table 1. Commercial banks-number, banking offices, assets, and deposits,
by class of bank, 1968 and 1969 81
Table 2. Commercial banks-assets, liabilities, and capital accounts, 1950
to 1969 82
Table 3. Insured commercial banks-ae~ets and liabilities, States and
other areas: 1969 83
Table 4. Number of commercial banks and trust companies, by type of
bank, by States and other areas, as of Dec. 31, 1969 84
Table 5. Nu~mber of commercial banks and trust companies by deposit
size, in States and other areas, as of Dec. 31, 1969 85
Table 6. Selected income items and equity capital, insured commercial
banks by States and other areas, 1969 86
Table 7. Selected income items and equity capital of insured commercial
banks, by deposit size, totals for States and other areas, 1969 86
Table 8. Selected income items and equity capital, by type of bank,
insured commercial banks, totals for States and other areas, 1969 87
Table 9. Money supply and time deposits; 1950 to 1969 87
Table 10. Interest bearing deposits, by type: 1950 to 1969 87
Table 11. Number of banks, selected income items, and surplus accounts,
insured mutual savings banks, by States and other areas, 1969 88
Table 12. Income and franchise taxes, insured mutual savings banks, by
States and other areas, 1969 88
Appendix 3-Survey of State and Local Tax Expenses of Insured Com-
mercial Banks, 1969 (by James B. Eckert):
Summary of Survey Results 89
Need for the Survey - 92
Reporting Form and Bank Sample 92
Reporting Difficulties and Limitations of the Data 94
Patterns of Bank Taxation 95
Within-State Tax Distribution 98
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Impact of Section 5219 100
Comparisons of National and State-Chartered Banks 101
Out-of-State Taxes 105
Changes in Taxes After December 24, 1969 106
Relation of Bank Taxes to Total State-Local Tax Revenue 109
Other Relationships 112
Reporting form and instructions 112
Tables in Appendix 3
Table 1. State and local tax expenses of all insured commercial banks,
1969 95
Table 2. Percentage distribution of 1969 State and local tax expenses of
all insured commercial banks, by measure of tax and size of bank 97
Table 3. Number of States distributed by the ratio of State and local taxes
of each type to total State and local taxes on all insured commercial banks
in 1969 98
Table 4. Principal bank tax categories, by number of States, 1969 98
Table 5. Percentage of total State and local tax expenses of all insured
commercial banks accounted for by the two largest tax categories within
each State, 1969 99
Table 6. Types of bank taxes comprising 2 largest categories within each
State, 1969 100
Table 7. State and local tax expenses of all insured commercial banks in
1969, by measure of tax and charter status of bank
Table 8. Ratios of total State and local tax expenses in 1969 to selected
balance sheet and income statement aggregates for all insured commercial
banks, by charter status and size of bank 102
Table 9. State/national bank ratios for selected measures of State-local
tax expense 103
Table 10. Percentage distribution of State and local tax expenses of all
insured commercial banks in 1969, by measure of tax, charter status of
bank, and size of bank 104
Table 11. State and local tax expenses of all insured commercial banks in
1969 payable in jurisdictions outside the home State, by measure of tax
and class of bank 105
Table 12. Banks reporting information on changes in taxes between De-
cember 1969 and the survey date (December 1970), by size of bank and
charter status 107
Table 13. Estimated effects of changes between December 1969 and date of
survey in State and local taxes payable in the home State by insured
commercial banks, by measure of tax 108
Table 14. Relation of commercial bank State-local tax expenses to total tax
revenue of State and local governments, by measure of tax: Calendar
year 1969 110
Table 15. Distribution of ratios of bank taxes to total State-local tax
revenue, by region, 1969 111
Table 16. State indexes of total tax revenue compared with total State-
local taxes on insured commercial banks 112
Supplemental Tables for Appendix 3
Table A. State and local tax expenses of all insured commercial banks in
1969, by State and charter status of bank 116
Table B. Tax status of parent holding company of insured commercial
banks in 1969 118
Table C. }~ercentage distribution of the number of insured commercial
banks that prepared their 1969 consolidated report of income on a cash
and on an accrual basis, by size and charter status of bank 118
Table D. Percentage distribution of State and local tax expenses of all
insured commercial banks in 1969, by State, charter status of bank, and
measure of tax 119
Table E. Ratios of total State and local tax expenses of all insured com-
mercial banks to selected income statement and balance sheet items,
1969 123
Table F. Selected ratios relating to level of bank taxes and of total State
and local tax revenue, by State 125
Table G. State and local tax expenses of insured commercial banks, by
State, measure of tax, and charter status of bank TT~ 126
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Appendix 4-Information and Opinions on State and Local Taxation of
Banks and Other Financial Institutions, Supplied by State Tax Admin-
istrators (by Sally M. Hey):
I. Introduction 143
II. Current State Taxation of Domestic State and National Com-
mercial Banks, and Recent Changes 144
A. The Situation on November 15, 1970 144
B. Bank Tax Changes Reported between December 24, 1969
and November 15, 1970 151
III. Forthcoming Changes in State Taxes on Commercial Banks
Domiciled in the State 153
A. Extension of Taxes to National Banks 154
B. Tax Changes Affecting Both National and State Banks_ 154
IV. How States Currently Tax Out-of-State Financial Businesses_ - - 155
A. The Kinds of Taxes Levied and the Bases for Asserting
Jurisdiction to Tax Out-of-State Financial Businesses__ 155
B. Interstate Division of the Tax Base 158
C. Consolidation or Combination of Affiliated Corporatioi~
for Tax Purposes 158
V. Opinions as to Probable Tax Treatment of Out-of-State National
and State Banks under the Permanent Amendment 159
A. Extent and Certainty of Response 159
B. Patterns of Responses Nationwide 161
C. Patterns of Responses of Individual States 162
D. Intangibles Taxation 163
VI. Local Taxation and Other Matters 164
A. Local Taxation of Banks 164
B. Concluding Comments 165
Supplement A: Letter and questionnaire sent by the Board to State tax
administrators -~r--- 166
Supplement B: List of State names and abbreviations; tabulated results
of the questionnaire returns (list of tables follows) 181
Text Tables in Appendix 4
Table 1. Treatment of Bank Dividends under Individual Income Taxes,
Related to Major State Taxes on Banks as of November 15, 1970 147
Table 2. State Sales and Use Taxes Reported to be Applicable to Domestic
Commercial Banks, November 15, 1970 150
Table 3. States Reporting Documentary Taxes, Tangible Personal Property
Taxes, and Motor Vehicle Taxes Applicable to Domestic Commercial
Banks, November 15, 1970 131
Table 4. States in which Taxes have Initially Become Applicable to State
or National Banks or Both Since December 24, 1969, by Measure of Tax~ 152
Table 5. Number of States Reporting Criteria for Claiming Tax Jurisdic-
tion over Out-of-State Financial Institutions 157
Table 6. Method of Interstate Division of Tax Base by Kind of Business
and Measure of Tax 158
Table 7. Opinions of State Tax Administrators Regarding Taxation of
Out-of-State Banks after January 1, 1972, Based on Lending Activity~ - 160
Table 8. Opinions of State Tax Administrators Regarding Taxation of
Out-of-State Banks after January 1, 1972, Based on Activities Other
than Lending 161
Table 9. Probable State Taxation of Intangible Personal Property of Out-
of-State Banks after January 1, 1972 163
Table 10. States Reporting Local Taxes Applicable to Commercial Banks,
November 15, 1970 164
Supplemental tables in Appendix 4, Supplement B 1
Key table. State names and abbreviations 181
Table B-i. States reporting changes in tax treatment of commercial banks
after December 24, 1969. [1.1, 1.2, 1.3, 1.41 through 1.441 181
Table B-2. State taxes reported applicable to commercial banks, by
measure of tax and extent and timing of applicability. [1.5110 through
1.660] 182
- 1 For each table, the items tabulated from the Questionnaire for State Tax Administrators
(reproduced in Supplement A) are listed in brackets.
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XIV
Table B-3. Treatment of dividends received from commercial banks
under State individual income taxes, since December 24, 1969. [1.71,
1.72, 1.73; also 1.5121 through 1.620] 184
Table B-4. Statcs reporting review of tax laws or official tax law pro-
posals affecting commercial banks. [2.11, 2.12, 2.13, 2.21, 2.22, 2.3] 184
Table B-5. Opinions of State tax administrators regarding taxation of
out-of-state commercial banks after January 1, 1972, by type of bank
operation and measure of tax. [3.110 through 3.233] 185
Table B-6. Status of State taxation of out-of-state banks and other finan-
cial institutions as of November 15, 1970. [3.4l0through3.426] 192
Table B-7. Basis of jurisdiction for taxation of out-of-state banks and
other financial institutions, November 15, 1970. [3.43; also 3.410 through
3.426] 194
Table B-8. State practice regarding interstate division of the tax base in
taxing out-of-state banks and other financial institutions. [3.44 and to
some extent 3.45] 196
Table B-9. Method of interstate division of the tax base, by kind of busi-
ness and measure of tax. [3.451 through 3.454] 197
Table B-b. State positions on consolidation or combination of affiliated
corporations in determining the tax base. [3.51, 3.52, 3.53, 3.54] 198
Appendix 5-Responses of State Bank Supervisors to the Board's Inquiry
Concerning State Taxation of Banks (by Sally M. Hey):
I. Introduction 199
II. Questions 1 and 2 199
III. Question 3 204
IV. Question 4 209
V. Summary and Conclusions 212
Tables in Appendix 5
Table 1. Recent Changes or Developments Reported by State Banking
Supervisors which Affect State or Local Taxation of Banks 210
Table 2. Likely Future State and Local Bank Tax Developments Reported
by State Banking Supervisors 212
Appendix 6-The History and Impact of Section 5219 on the Taxation of
National Banks (by Simeon E. Leland):
I. The Evolution of Section 5219:
A. National Currency Act of February 25, 1863 215
B. National Bank Act of June 3, 1864 216
C. Tax on State bank notes: 1865 218
D. Act of February 10, 1868 218
E. Enter Section 5219: 1875 219
F. Taxation of Notes and Deposits: 1894 220
G. The Federal Reserve Act of 1913 224
H. The years of litigation: 1864-1921 229
I. The Richmond decision: 1920 265
1. The facts 265
2. Opinion of the Court 265
3. A question of procedure 267
4. Attitudes of State officials and Members of
Congress 268
5. Position of banks 269
6. Heimberger's criticism of decision 269
7. Effects of Richmond decision 271
J. The amendment of section 5219: 1923 272
1. Differences from acts of 1864 and 1868 272
2. Legislative history of 1923 amendment 274
3. Hearings on H.R. 9579 276
4. Senate action 278
5. Nature of debate 279
6. Validation controversy 282
7. Passage of amendment 282
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K. Further amendment of section 5219: 1926 283
1. Preliminary events 283
2. Eventsof 1924and 1925 285
3. Legislative history of 1926 amendment 285
4. The Guthrie Center case 286
5. Changes made by 1926*amendment 287
6. Defects of 1926 amendment 288
L. Attempts to amend section 5219: 1926-1969 291
1. The law and attempts at legislation 291
2. The share-tax push: 1927-1935 292
3. Second movement for change: 1941-1954 303
4. Banks and interstate commerce 308
5. A section 3219 for State banks: 1967 313
6. The latest change: 1968-1969 314
M. Court decisions: 1926-1970 319
1. Taxes on bank real estate 320
2. Taxes on personal property of banks 320
3. Classification of rates 320
4. The share tax 320
5. Taxes on dividends 324
6. Net income taxes 325
7. Excise taxes 325
8. Sales and use taxes 332
9. Gross receipts taxes 334
10. Other points of law 334
11. Conclusions -. 335
N. Public Law 91-156: 1969 336
1. Provisions of P.L. 91-156 337
2. Plan of discussion 337
3. Domiciliary taxation under P.L. 91-156 prior to
1972 337
4. Nondomiciliary taxation prior to 1972 338
5. Taxation under P.L. 91-156 after January 1, 1972 339
6. Federal reserve study 339
II. Conformity of Section 5219 to State Tax Systems: -
A. Periods to be considered 341
B. State taxes in 1864 342
1. Property tax and section 5219 345
2. The debate on State taxation of banks: 1864~~ 347
C. State taxes in 1922 358
1. Low-rate taxes on intangibles 362
2. Bank deposit taxes 363
3. Comprehensive classification 365
4. State income taxes 365
5. Impact on section 5219 366
6. Impact of State practices on 1926 amendment~ 368
D. State taxes in 1968-1969 368
1. Sales taxes 371
2. Extension of State income taxes 373
3. Mortgage recording and transfer taxes 374
E. State bank tax legislation 378
F. Impact of State taxes on 1969 amendment 379
III. The Impact of section 5219 on the Taxation of National Banks:
A. The background 380
B. Evolution of permissions and restrictions 382
C. Taxation of national bank real estate 384
D. The optional taxes 385
1. The share tax 385
a. Value determination 388
b. Deductions 390
c. Tax rates on shares 392
d. Burden of share taxes 393
e. Inclusion of deposits 394
f. Effects of share taxes 395
2. Net income taxes 395
a. Dividends taxed to shareholders 396
b. Direct net income tax on banks 397
3. Tax measured by all income (Excise tax) 401
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XVI
D. The optional taxes-Continued
4. The fifth option 412
a. As to domiciliary banks 412
b. As to nondomiciliary banks 413
E. Taxes prohibited prior to the 1969 amendments 414
1. Taxes on tangible personal property 414
2. Taxes on bank intangibles 414
3. Taxes on bank deposits 414
4. Gross receipts taxes 415
5. Sales and use taxes 415
F. 1970 bank tax legislation 415
G. Possibilities for the future * 418
H. Uniformity in bank taxation? 421
I. Comparative tax burdens 422
Tables in Appendix 6
1. Assessed and true value of property in the United States, 1850-1890~. 343
2. Assessed valuation or real and personal estates, 1860-1890 343
3. Rankings of selected States in estimated per-capita wealth, 1850-
1880 343
4. "Grand list" of Connecticut, 1864 344
5. State and local government taxes, by type of government and tax:
1922 359
6. Estimated true value of all taxable property, 1850-1922 360
7. State receipts from special property taxes: 1922 361
8. Low-rate taxes on intangibles: 1927 362
9. Mortgage registry taxes: 1927 363
10. Low-rate taxation of bank deposits: 1927 364
11. State income taxes collected: 1922 366
12. Tax revenue: 1966-67 370
13. Governmentalrevenue, 1966-67 371
14. Year of adoption of State general sales taxes in States that used the
tax January 1, 1970 372
15. Dates of adoption of State income taxes in States that used the tax
January 1, 1970 373
16. State and local real estate transfer taxes, January 1, 1970 375
17. Methods of taxing banks: 1934, 1958, 1969-70 379
18. Bank share taxes: 1969-70 387
19. State net income taxes on banks: 1969-70 400
20. State taxes on banks according to or measured by net income (Excise
taxes): 1969-70_ 403
20A. Treatment of interest received on governmental obligations as an
element in State and local taxes measured by net or gross income
of commercial banks, January 1, 1971 406
21. Gross income taxes on banks 416
Appendix 7-Economic Impacts of Particular State and Local Taxes on
Banks, with Special Reference to Neutrality (by Carl S. Shoup):
1. Subject and Scope of the Present Study 425
(a) Tax Impact: Neutral or Unneutral, for Banks? 425
(b) How to Distinguish the Effects of a Tax from the Effects
of the Use Made of Its Revenue 426
(c) The Three Aspects of Unneutrality Important to Banks. 426
(d) Relation between Tax Shifting and Tax Neutrality 427
(e) Supply and Demand in the Banking Industry 428
(f) Taxes Included in the Present Study 429
2. Corporation Income Tax 430
(a) Industrial Neutrality 430
(b) Geographical Neutrality 434
(c) Technical Neutrality 435
(d) Supplementary note to Section 2: Derivation of Formula
for Net Additional Burden of State Income Tax 436
3. Taxation of Bank Dividends 437
(a) Under Individual Income Taxes 437
(b) Under Corporation Income Taxes 438
4. Franchise Taxes on Capital Employed in Taxing State 438
PAGENO="0017"
XVII
5. Retail Sales Taxes and Gross Receipts Taxes .. - 443
(a) Retail Sales Taxes 443
(i) Industrial Neutrality 443
(ii) Geographical Neutrality 445
(iii) Technical Neutrality 445
(b) Gross Receipts Taxes 446
6. Taxation of Bank Assets 447
(a) Real Estate 447
(b) Tangible Personal Property 447
(c) Intangibles 447
(i) Industrial Neutrality 451
(ii) Geographical Neutrality 453
(iii) Technical Neutrality 453
7. Bank Shares Tax 453
(a) Industrial Neutrality 453
(b) Geographical Neutrality 454
(c) Technical Neutrality 455
8. Taxation of Bank Deposits 455
(a) Industrial Neutrality 456
(b) Geographical Neutrality 458
(c) Technical Neutrality 459
9. Unemployment Compensation Payroll Taxes 459
10. Other Taxes 459
11. In-Lieu Taxes and Built-Up Rates 460
12. Concluding Remarks 460
Tables in Appendix 7
1. Net Additional Burden from State Tax on Net Income of Commercial
Banks 431
2. Interest on Government Obligations and Intercorporate Dividends:
Treatment under State Corporation Income Taxes, as of November 1,
1963 432
3. Franchise Taxes Based on Capital Employed in the Taxing State, as of
October 1, 1970 439
4. Tax Rates on Intangibles in States Employing Classified Property
Taxes 448
5. Status of State-Local Taxation of Bank Deposits, as of October 1, 1970_ 456
Appendix 8-Treatment of Intangible Personalty in the State Local
Taxation of Banks (by Lynn A. Stiles):
Vulnerability of bank assets 463
Territorial confinement of banking 464
The issue of double taxation 464
Large holdings of intangibles 465
Summary and conclusions 467
Appendix 9-Comparing State and Local Taxation of Banks and Other
Business Enterprises (by Harry E. Brazer and Marjorie C. Brazer):
Introduction 469
Interpersonal comparisons 469
Bases for comparison 470
Measuring taxes paid 471
Intercorporate comparisons 472
Corporate tax incidence and tax burdens 472
Defining taxes paid by corporations 474
Bases for comparison 476
Conclusions 484
Table 1-Net income after tax per internal revenue code and per books
of account, by major selected industry 479
Appendix 10-Liability of National Banks for Generally Applicable State
and Local Taxes (by Charles F. Conlon):
Introduction 485
"Doing business" types of taxes 486
Capital stock taxes 486
Gross receipts taxes 488
Intangibles 491
79-421 0 - 72 - 2
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XVIII
Liability for taxes in two or more Statés_ ..J_ 492
Tangible property 494
Subsidiaries 495
Foreign operations 496
Intangibles 497
Capital stock and gross receipts taxes 498
Interstate commerce 498
Division of income 498
Prospects for standardization 499
Capital stock 501
Gross receipts 501
Verification of bank tax returns 502
Supplementary note: Transacting business in the State 503
Appendix 11-Federal Constitutional Limitations on State Taxation of
Multistate Banks (by Jerome R. Hellerstein):
Introduction:
Summary of Major Facts as to How Multistate Banks Operate
Outside Their Home States 505
Loans and Financing Activities 505
Services to Respondent Banks 510
Fiduciary and Related Activities 510
Underwriting and Distribution of Securities 511
Equipment Leasing 512
Credit Cards 513
Accounting, Data Processing and Miscellaneous Activities 515
Bank Affiliates 515
State Border Banks 516
Part I. Jurisdiction To Levy Income, Franchise, Capital Stock and
Other Business Taxes 516
A. The Commerce Clause: Guiding Principles 516
1. Whether banking constitutes interstate commerce 516
2. The effect of Federal legislation on the Commerce
Clause protection afforded banks 517
3. The interrelation of the subject and measure of taxes
on doing business 519
4. The power of the States to impose direct net income
taxes on income derived from an exclusively inter-
state business 520
B. The Taxability by the Debtor's State of Income Realized by
Out-of-State Corporations from Loans to Persons or Corp-
orations Domiciled within the State 522
C. The Due Process Clause: Nexus 524
1. The insurance tax cases 525
2. Equipment leases as a basis for jurisdiction to levy
income or business taxes 529
3. The exploitation of a local market as a jurisdictional
basis for imposing an income tax on an out-of-state
corporation 530
D. The Contours of "Intrastate Business", the Jurisdictional
Foundationfora.DoingBusinessTax 532
E. The Application of the Constitutional Principles to the Busi-
ness of Multistate Banks: Income and Business Taxes 534
F. The State Border Bank 538
G. Conclusions with respect to Jurisdiction to Impose Net Income
and Business Taxes on Out-of-State Banks 540
Part II. Property Taxes 541
Conclusions as to Intangible Property Taxation 545
Part III. The Power of the States To Impose Discriminatory License
or Other Doing Business Taxes on Out-of-State National Banks
Under the Permanent Provisions of P.L. 91-156 545
A. Discriminatory License Taxes on Foreign Corporations 545
B. The Effect of P.L. 91-156 on Discriminatory License Taxes
on Out-of-State National Banks 547
C. Conclusion with respect to Discriminatory Taxation of Out-
of-State Banks 550
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XIX
Appendix 12-Multiple State Taxation of National Banks: Division of
Tax Base-Income Taxes and Doing Business Taxes (by J. Nelson
Young):
Income taxes 551
Development of underlying constitutional doctrine 551
In-state business activity sufficient to support apportionment of
income from interstate business 555
Division of income-specific allocation 558
Division of income-formula method vs. separate accounting___ 559
Determining the unitary character of income of an interstate
business 561
Affiliated corporations and the unitary rule
Legislative limitations upon taxation of income derived from
interstate commerce 570
Doing business taxes 572
Capital stock taxes-principal-office State 573
Capital stock taxes-other States 573
Gross receipts taxes 576
Conclusions and summary 580
National banks engaged exclusively in "intrastate" business_ - - - 580
National banks engaged in "interstate" banking operations 581
Net income taxes 581
Capital stock taxes 583
/ Gross receipts taxes 583
Appendix 13-Repeal of Restrictions on State Taxation of National Banks:
Effects on Multi-Corporate Banking Organizations (by William R.
Bollow):
Development of multi-corporate banking organizations 585
Applicability of the unitary business concept by States seeking to
tax the income of multi-corporate banking organizations 587
Taxation of intercompany dividends 591
Appendix 14-The Question of Possible Discrimination Against Out-of-
State National Banks (by Sheldon L. Azine) 593
PART IV
Report to Congress of study by Board of Governors of Federal Reserve
System under Public Law 92-213 601
Background 602
Boundaries and format of Study 603
Current status of ad valorem taxation of intangible personal property 604
Table: Status of taxation of intangible personal property by State and local
governments and potential for taxation of bank-owned intangible prop-
erty in 1972, by State 605
Potential for taxation of bank-owned intangibles in 1972 608
Inconsistency with prevailing tax policy 609
Implementation and timing difficulties 610
Conclusions 611
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PAGENO="0021"
* STATE AND LOCAL TAXATION OF BANKS
Part!
Recommendations of the Board of Governors of the Federal Reserve System
Regarding State and Local Taxation of Banks Pursuant to Section 4 of
Public Law 91-156
Section 4(a) of Public Law 91-156 requests that the Board of Gov-
ernors of the Federal Reserve System make a study-
to determine the probable impact on the banking systems and
* other economic effects of the changes in existing law to be
* made by section 2 of this Act governing income taxes, intan-
gible property taxes, so-called doing business taxes, and any
other similar taxes which are or may be imposed on banks.
Sectioq 4(b) requests that the report of this study shall include-
the Board's recommendations as to what additional Federal
legislation, if any, may be needed to reconcile the promotion
of the economic efficiency of the banking systems of the
* Nation with the achievement of effectiveness and local auton-
omy in meeting the fiscal needs of the States and their politi-
cal subdivisions. . . -
The Board concludes that additional Federal legislation is needed
before the "permanent amendment" of section 5219 of the Revised
Statutes (12 U.S.C. 548) becomes effective on January 1, 1972. If that
provision is allowed to go into effect without revision, the changed tax
status of banks might openthe w-ay for State and local tax measures
that could impair the ability of the banking system and, possibly the
entire structure of financial intermediaries to contribute to the efficient
allocation of the Nation's credit resources. Although the precise nature
and magnitude of these impacts are not predictable, the prospect is
that they would be sufficiently detrimental to economic efficiency to
warrant Congressional action in 1971 to continue limited statutory
restraints upon the taxing authority of the States and their political
subdivisions as to national banks and to apply corresponding restraints
for other depositary institutions.
The two major areas which appear to warrant further legislation
relate to the new authority in section 2 of Public -Law 91-156 for State
and local governments to tax intangible personal property of national
banks and for States othei than the State of the principal office to levy
income or other "doing business" taxes on national banks. These are
covered in liecominendations 1. and 2. An additional problem area re-
lates to the possibility of discriminatory State and local taxes, an issue
which is covered in Recommendation 3. Two subsidiary issues-the
tax treatment of interest income on U.S. Government securities and of
cash and currency-are covered in Recommendations 4 and 5.
(1)
PAGENO="0022"
2
The issues raised by section 2 of Public Law 91-156 deal exclusively
with State and local powers to tax national banks. However, the Board
recommends that any further legislation be addressed t~o a larger group
of financial institutions. In view of the declared Congressional policy
of seekino~ equal treatment of State and national banks under State tax
laws, an~ the close competition between banks and other depositary
institutions, it would be desirable that the restrictions proposed in our
recommendations apply to all commercial banks (national and State)
and all other depositary institutions (savings banks, savings and loan
associations, and credit unions).
Insofar as they relate to national banks, the Board's proposals con-
template withdrawal of no authority to impose types of taxes that
States have possessed heretofore; they would only limit new authority
that is now scheduled to become available to States for the first time
on January 1, 1972. Under the earlier section 5219 and the interim
amendment now in force, States have not been permitted to tax in-
tangible personal property of national banks or to impose on out-of-
State national banks the taxes named in Recommendation 2.
Nor would the proposals entail any appreciable curtailment of au-
thority heretofore exercised by State and local governments with re-
spect to taxation of State-chartered banks and other depositary institu-
tions. Generally, those States that tax intangible personal property
have accorded to State-chartered banks the same exemption from this
tax that Federal law has required for national banks; and only infre-
quently have States imposed "doing business" taxes on State-chartered
banks from other States (exclusive of their subsidiaries). As to other
depositary iiistitutions, the tax policies of the several States are quite
varied, but there appears to be little direct taxation of the intangible
assets or net income of mutual savings banks, savings and loan asso-
ciations, and credit unions.
- Recommendation 1. Intanqible personal property: Continue with-
out time limit the present denial of authority for States and their sub-
divi~ior~.s to impose taxes on intanqible personal property owned by na-
tional ban1~s and extend that denial t~ zntanczb7e personal property
owned In, State ban les and other depositary institutions.
The case for prohibition of ad valorem taxation of intangible per-
sonal Property of banks and other depositary institutions, in the
Board's view, stands on firm ground in terms of both equity and eco-
nomic impact. Moreover, the potential significance of action or inac-
tion by the Congress at thi~ time is heightened by the prospect that
if the Ccpermanent amendment" of section 5919 takes effect in its pre-
sent form. States may decide, in their search for additional revenues,
to reverse the 1on~-term trend toward abandonment of this ~enern11v
undesirable form of tax. At present. taxation of intangibles yields little
revel-we to State and local governments.
With respect to the question of equity, it is widely recognized that a
general tax on intangibles would hear with considerably greater
weight on banks and other (iepositarv institutions than on nonfinancial
businesses. Virtually all the assets of such institutions are in the forni
of intangibles, whereas this class of property is much less important
for nonfinancial businesses. Depositary institutions are unable to move
their base of operations from State-to State; they are closely regulated
PAGENO="0023"
a.
and supervised, with published balance sheets; and tax assessors can-
not readily undervalue fixed claims, such as bank assel s, to the degree
that they can and generally do undervalue other types of assets. I-Tow-
ever equal the treatment provided in the tax laws, in practice deposi-
tary institutions would be at a marked disadvantage compared with
other businesses and individuals, particularly where intangibles are
blanketed into a general property tax that purports to apply the same
valuation standards and rates to real property and all varieties of
tangible and intangible personal property.
An intangibles tax applied to banks and other depositary institu-
tions would have a number of adverse economic consequences, depend-
ing in magnitude on the level and geographic coverage of the tax. In
the first instance, the principal effects would be on the functioning of
financial intermediaries in gathering savings and allocating funds for
productive investment-locally, regionally, and nationally-but ulti-
mately any impediments to this process would have a bearing on the
performance of the entire economy.
The process of financial intermediation performed by banks and
other depositary institutions is particularly vulnerable to an intangi-
bles tax since the duplication of financial assets that is inherent in the
flow of savings, first into deposits of those institutions and then into
custon~er loans, would expose savings flowing through intermediaries
to an additional layer of taxation not encountered where funds flow
directly from savers to ultimate borrowers.
* A tax. on intangible assets would tend to induce banks and other de-
positary institutions to divert funds from taxable to tax-exempt forms
of assets-that is, from the financing of consumers and businesses, par-
.ticularly local businesses, to the acquisition of Federal, State, and
local obligations. If the tax were imposed in only a few States-as
likely would be the case in the early years under the new law-inter-
state competition would severely limit the ability of the taxed insti-
tutions to recoup the tax by seeking higher rates on loans and invest-
ments or paying lower rates on deposits. The flow of savings through
banks and other depositary institutions into consumer and business
financing would tend to be diverted from the taxing States into non-
taxing States, with parallel effects on the volume of capital invest-
ment and the level of economic activity in those States. If the tax were
imposed quite generally, the effect would be to discriminate against
the process of financial intermediation performed by depositary in-
stitutions, thus tending to divert flows of savings into direct financing
through the market, with. some consequent loss in economic efficiency.
Another implicatic~n of an intangibles tax of concern to the Board
is that it would fall more heavily on member banks in the Federal Re-
serve System than on nonmember banks and thus would constitute an
additional cost of membership. The Federal Reserve Act requires that
all legal reserves of member banks be held either in the form of vault
cash or balances at the Reserve Banks-both of which are nonearning
assets-while nonmember banks generally may hold their reserves in
earning forms or in balances with other banks for which correspond-
ent banking services are received. *
While many of the arguments in support of a prohibition of an in-
tangibles tax upon depositary institutions would also support a similar
ban for other financial institutions, any attempt to determine a broader
PAGENO="0024"
4
area of application raises difficult problems in the setting of bound-
aries and the definition of the institutions to be covered. In any event,
since depositary iiistitutions account for the bulk of all intangibles
held by the financial sector, and a large part of the remainder-
namely, pension funds-would undoubtedly he exempt from. tax in
any event., a prohibition limited only to depositary institutions prob-
ably would serve effectively to protect the entire financial sector. If
the Congress wished to broaden the prohibition, it. cOUl(l do so, for
example, by extending it to cover all institutions that derive 50 per-
cent or more of their income from interest or dividends on loans and
investments.
* Recommendation ~. Taxation by States other than the~S~tate of the
principal office: Limit the circumstances in which national ban/cs,
State ban/cs. and other depositai~y in~ititutions may be subject to State
or local government taxes on or measured by net income, gross re-
ceipts, or capital stock, or to other "doing business" taxes in a State
other than. the State of the principal office, and prescribe rules for such
taxation.
As to the application of net income and "doing business" taxes in
States other than the home-office State of a bank of other depositary
:institution, the central problem relates not. to the aggregate sum of
State and local taxes that may be collected from these institutions but
rathdr to the methods for determining which States have a legal
basis for imposing taxes and for dividing any given tax base between
the home State and other States that have such claims. With the pos-
*sible interstate division of the net income or other tax base of na-
tional banks that is permitted under section 2 of Public Law 91-156
and which would also be permitted under the above recommendation,
the home Sta.te may be required to divide the tax base of its domiciliary
banks with other States. On the other hand, it may acquire jurisdic-
tion over part of the tax base of non-domiciliary banks.
With interstate division of the tax base, assurances are needed
* that the sum of the taxable base on which two or more States levy
taxes will not exceed 100 percent of the actual base. But even where
* this limit is not exceeded, serious burdens may result when two or
more States claiming jurisdiction to tax, for example, the same net
income, use different rules for interstate division of the tax base and
require different kinds of records and reports.
If interstate division of the taxable net income of banks were to
conform closely to procedures currently applied to other businesses by
most States, there would be-with present lending practices-com-
paratively little allocation or apportionment of the tax base to States
other than the honu~ State of the banks. However, if all restrictions on
taxing out-of-State institutions were removed, States could be ex-
pected to modify their allocation procedures so as to apply their levies
to an increasing proportion of the tax base of out-of-State banks. This
could involve the introduction of new division-of-base measures tail-
ored particularly t.o financial intermediaries.
The aggregate of taxes paid by any individual bank or other depos-
itary institution probably would be reduced by multiple State taxa-
tion as compared with taxation confined to the headquarters State be-
cause applicable tax rates in the home State (especially in the major
banking center States) may be higher than in other States, and some
PAGENO="0025"
5
States may not tax the out-of-State institution. However, in some in-
stances the added costs of acquiring technical competence regarding
the differing tax laws and procedures of all States where business is
done~ maintaining records needed to determine which taxes are appli-
cable and the amount of liability, and preparing and filing returns in
all affected States may be even greater than the taxes.
Important as it is to avoid overtaxation of any given tax base, it is
at least equally important, ther'~ fore, to avoid excessive compliance
costs and the erection of barriers to interstate credit flows. Such bar-
riers would be raised not only by the imposition of the tax itself but
also if there ensued uncertainty~ controversy~ and litigation of the sort
that for decades have characterized taxation of interstate mercantile
and manufacturing businesses. Uncertainties about potential tax lia-
bilities and concern about compliance burdens could become material
factors in decisions to make particular loans or investments.
The imposition of income or other "doing business" taxes on the busi-
ness done in a State by out-of-State institutions, together with the bur-
dens and costs associated with compliance with the tax laws in that
State, would tend to induce out-of-State lenders to divert credit flows
away from ~tates imposing such taxes and into States with a more
favorable tax climate or into marketable securities. Such reallocations
might be particularly marked in the case of the iarge money market
banks~ which in some cases appear to have placed half or more of their
outstanding loans with out-of-State borrowers. But many smaller in-
stitutions also handle considerable out-of-State business by virtue of
their location close to State borders, and some of these might curtail
their out-of-State lending to reduce the possibility of nondomiciliary
taxation. While the amounts withdrawn from a particular State by
any one lender might be small~ withdrawals by a large number of insti-
tutions could mount to a sizable total.
The impacts of such an exodus of funds on the economy of the af-
fected State could be substantial, particularly in States that were rap-
idly expanding and heavily dependent on outside sources of financing.
But the impacts would not be uniform; rather they would tend to
focus on intermediate sized local businesses which required outside fi-
nancing but lacked the flexibility of large national corporations to
shift their base for financing to a non-tax State or to obtain funds in
the national money or capital markets. Smaller firms and other local
borrowers, too, might be adversely affected, by having to pay higher
rates on borrowed funds than they otherwise would, due to curtailment
of supply.
The Board's recommendation on out-of-State taxation is addressed
to the problem of minimizing these barriers to interstate and interre-
gional mobility of funds while recognizing also the congressional de-
sire to minimize constraints on State taxing powers. It is intended to
forestall the development of significant impediments to such mobility
while safeguarding the authority of the States to collect taxes in cir-
cumstances where an outside bank or other depositary institution has
established a clear relationship to the taxing State or 1olitical ~ubdi-
vision through a physical presence or a pattern of sustained and sub-
stantial ol)eratiOns. If the Board's proposals are adopted, States would
not be limited in their choice of tax measures applicable to banks and
other depositary institutions (except as to intangible personal prop-
PAGENO="0026"
6
erty). But the circumstances in which these taxes would be applied to
out-of-State institutions would be clearly defined and circumscribed
and certain State procedures for applying taxes to out-of-State insti-
tutions would be standardized throughout the Nation.
The Federal statute should establish uniform criteria for determin-
ing when a State or its subdivisions may exercise jurisdiction to tax a
bank or other depositary institution which has its principal office or is
chartered in another State; principles and pi'ocedures that will govern
the interstate division of each type of applicable tax base in circum-
stances where the jurisdictional tests are met; and rules that will guide
the States in their administrative procedures, such as the application
of a unitary business concept, requirements of consolidated or corn-
biñed tax returns from related or affiliated corporations, audits of out-
of-State corporations, and other procedures. It may be desirable in
such legislation to designate a Federal administrative agency to pro-
vide interpretations and regulations.
Like the present Federal statute that applies to net income taxes on
business involving interstate sales of tangible personal property (Pub-
lic Law 86-272), the law relating to depositary institutions might pro-
vide that certain common occurrences do not, by themselves, constitute
a sufficient tconnection with the State to establish jurisdiction to tax
(e.g., mere solicitation or prospective borrowers by a depositary insti-
tution or its representatives, the loans being approved or rejected out-
side the State; the holding of security interests in property located
in a State; or enforcement of obligations in the courts of a State). In
establishing such criteria, the overriding objectives should be to avoid
creation of tax impediments to the continued free flow of credit across
State lines and unecoiiomic changes in the procedures that now gov-
ern the overwhelming bulk of interstate lending by depositary
institutions.
Any jurisdictional standards and division-of-base rules that are ap-
plied to State taxation of out-of-State depositary institutions should
be applicable to local government levies as well. In this connection, the
Congress may wish to examine whether additional restrictions would
b~ needed to avoid imposition of a variety of local levies and record-
keeping and other compliance requirements upon banks from other
parts of the same State or from other States, which would tend to dis-
courage banks and other depositary institutions from widening their
service areas.
Recommendation 3. Discriminatory `taxation: Proscribe the impo-
stion of dicrinvinatory or more onerous license, privilege, or other
similar "doing business" taxes upon out-of-state depositary institu-
tions than would be imposed upon these institutions if chartered by
the taxing State. The provision might take the forn-t of a specific limi-
tation, under which an out-of-State corporation or association could
not be required to pay a higher license, privilege, or other "doing
business" tax O'i' fee than it would pay under the same circumetances
if it were domiei7ed or chartered in the taxing State.
Because constitutional doctrines in this field are not clear, there
is at least a risk that States would have power to levy for the privilege
of doing business in a State heavier taxes on out-of-State banks and
other depositary institutions than they impose on those institutions
PAGENO="0027"
iticorporated or domiciled in the taxing States. This risk should be
eliminated by a Federal statutory provision to avoid the creation of
undesirable barriers to interstate credit operations.
In the case of ad volorem taxes, direct corporate net income taxes,
and gross income taxes, existing constitutional safeguards apparently
suffice to prevent discrimination against out-of-State institutions.
A related issue concerns possible classifications of banks for taxing
purposes that could have the effect of discriminating between national
and State banks. We assume that the principle of requiring equal treat-
ment of national and State banks, incorporated in the "permanent
amendment" of section 5219, will be retained in any further legisla-
tion and that this provision will be interpreted as prohibiting dis-
criminatory classifications. .
Another related issue is the possible discriminatory taxation of
banks or all depositary institutions as a class distinguished from other
businesses. Under the expiring provisions of section 5219, property tax
rates on national bank shares are not permitted to exceed those on
"other moneyed capital" competing with the banks, and rates of net
income taxes on national banks may not exceed those upon other finan-
cial corporations nor the highest rates upon other businesses. Decades
of litigation over these provisions suggest that, although such compar-
ative limitations do not dispel uncertainty and controversy, they may
narrow its range. The Congress might wish to consider incorporating
into the statute a declaration of policy on this question of the compara-
tive treatment of banks (or all depositary institutions) and other
businesses.
Recommendation 4. Interest on Federal obligations: Amend the
Federal public debt statutes to authorize States to include, in the meas-
ure of otherwise valid direct net income taxes, the income realized
by banks and other depositary institutions from Federal Government
obligations.
Under present law, States are permitted to include interest income
derived from Federal obligations in the tax base for a franchise or
excise tax "according to or measured by" net income, but they must
exempt such interest from the base of a direct tax on net income. The
problem is a general one that goes beyond depositary institutions.
There is no economic difference between these two types of taxes.
Apart from the treatment of tax-exempt interest, they are identical
in all essential characteristics except the circumstances in which they
may be imposed by States. Most States that tax banks with respect to
their net income use excise taxes, and the number has gradually in-
creased. Under present law, their choice among forms of taxation is
influenced by the fact that banks and other depositary institutions
have large holdings of Government obligations.
To the extent that States other than the home State are to be per-
mitted to participate in taxing net income under either the "permanent
amendment" of section 5219 or our Recommendation 9, above, they
should be authorized also to include in the base of the direct tax inter-
est income received by banks and other depositary institutions on their
holdings of Federal securities. In addition, elimination of the dis-
tinction between direct and indirect taxes on net income would give
the States considerably greater freedom in formulating tax legislation.
PAGENO="0028"
8
The change could be made in the Federal public debt law (31 U.S.C.
742) and any other relevant statutes.
Recommendation ô.-Olaxsiflcation. of coins and currency: K~tabiish,
by statute, a nationwide rule f/tat coins and paper currenci, are to be
considered intangible personal property for State and local tax
purposes.
At present, application of State and local ad valorein taxes to "cash
or currency" holdings of national banks is prevented not only by the
earlier section 5219 but also by provisions in the "temporary amend-
ment" which continue the prohibition of taxes on intangible personal
property and expressly exclude "cash or currency" from taxation as
tangible property. Without further amendment, these restrictions will
expire at the end of 1971.
Some States classify cash or currency as tangibles and others treat
them as intangibles under laws imposing taxes on personal property.
But money held by other taxpayers generally is either exempted or
not assessed. If the Congress adopts Recommendation 1, above, a con-
tinuing prohibition of taxes upon "cash or currency" or "coins and
paper currency" should be included in that amendment. But if the
`Congress prefers to permit ad valorem taxation of intangibles owned
by depositary institutions, it might consider enacting a limited exemp-
tion for reserves of these institutions that are required to be held in the
form of dep~sits or currency.
Con~cluding comrnent.-The Congress undoubtedly will wish to
make a detailed review of the proposed modifications of policy, with
the result that definitive action may not be feasible before section 2 of
Public Law 91-156 becomes effective on January 1, 1972. Unless action
on the proposals can be completed this year, the Board would rec-
ominend that the effective date of the "permanent amendment" be
postponed beyond next January 1, since some of the potential adverse
effects of the new statutory provisions in their present form might
prove difficult to remedy.
PAGENO="0029"
Part II
STAFF REPORT OF A STUDY UNDER PUBLIC LAW
91_1561
A Congressional act approved December 24, 1969, called upon the
Board of Governors of the Federal Reserve System to make a study
and submit recommendations relating to a "permanent amendment"
of section 5219, Revised Statutes (12 U.S.C. 548).2 This amendment
broadens the authority of States and their subdivisions to tax national
banks. It replaces a longstanding statutory provision which prescribed
several alternative methods of taxing national banks and prohibited
the use of other methods. The "permanent amendment," which will
iake effect January 1, 1972, unless Congress enacts further legislation,
Teads as follows:
For the purposes of any tax law enacted under authority of
the United States or any State, a national bank shall be treated
as a bank organized and existing under the laws of the State
or o1~her jurisdiction within which its principal office is
located.
The Board was directed "to determine the probable impact on the
banking systems and other economic effects of the changes in existing
law" to be made by the new provisions insofar as they govern "income
taxes, intangible property taxes, so-called doing business taxes, and
~ny other similar taxes which are or may be imposed on banks." It was
asked to recommend-
what additional Federal legislation, if any, may be needed
to reconcile the promotion of the economic efficiency of the
banking systems of the Nation with the achievement of effec-
tiveness and local autonomy in meeting the fiscal needs of the
States and their political subdivisions.
The Board's recommendations are presented in Part I. This report
(Part II), presenting results of the staff study, covers the following
subjects: the history and effects of section 5219; the amounts of State
~nd local taxes paid by commercial banks ~ and potential changes in
their taxes under the new legislation; the economic and legal back-
ground of the study; views expressed by bankers, State tax adminis-
trators, and State bank supervisors in the course of the study; major
issues that require examination; and possible alternative methods of
dealing with these issues.
1 The contributions of numerous individuals and organizations to this study are acknowl-
edged In an addendum at the end of this staff report, pp. 69-70.
2For the full text of section 5219 (before amendment) and Public Law 91-15G see
Part III, appendices 1A and lB.
Throughout this report, references to "commercial banks" include both national and
State-chartered banks. The word "State" encompasses local governments as well as State
governments unless the context indicates otherwise.
(9)
PAGENO="0030"
10
As supporting documentation for this report, papers on selected
questions have been prepared by the staff and by consultants retained
for the study. These provide considerably more detail on topics covered
in the report. The papers and related compilations and statutory pro-
visions appear in Part III.
Statutory Mstory (1864-1969)
For more than a century-since 1864, a year after passage of the
original National Bank Act-the methods by which State and local
governments might tax national banks have been specified in Fed-
erl law, section 5219 of the Revised Statutes (12 U.S.C. 548). This
law was amended only in 1868, 1923, 1926, and 196~, but it was the
subject of frequent litigation and continuing controversy between
States and banks. Under this statute, States always have been per-
mitted to tax the real property of national banks as they do that of
other owners, but State authority to apply other taxes has been nar-
rowly circumscribed.
From 1864 through 1923, States could tax (in addition to real prop-
erty) only the value of shares of capital stock of national banks lo-
cated within their borders. Beginning in 1923, a State could choose
any one of three bases. It could tax the shares, or include dividends
in the income of shareholders under an individual net income tax, or
tax the net income of the national banking association. In 1926, an-
other option was added: a State could choose, instead of the other
measures, a franchise or excise tax according to or measured by the
entire net income of the national bank. This enabled States to include
tax-exempt interest in the tax base. Moreover, States were now per-
mitted to tax national bank dividends to the stockholders under speci-
fied conditions. That is, if a State which imposed a tax on net income
or according t~ or measured by net income of national banks, also
applied such an income, franchise, or excise tax on other business
corporations and taxed the incomes of individuals, it could tax indi-
vidual shareholders on dividends they received from (1) national
banks within the State if dividends received from domestic corpora-
tions were likewise taxed, and (2) national banks located outside the
State if dividends from other foreign corporations were likewise
taxed.
In each version of this statute, limits were established to prevent
taxation of shares, dividends, or income at higher rates than were
imposed on comparable subjects of taxation.~ Whichever option a
State selected, its authority to tax national banks or their shares was
limited to banks with their principal offices within the State. The only
exception was the 1926 provision permitting taxation of resident share-
holders on dividends received from out-of-State national banks.
Effects of section 5919
The concept of Federal statutory limitations on State taxation,
devised to protect national banks as Federal instrumentalities, re-
mained intact throughout the period 18~4-1969, although in the middle
The comparative limits were expressed in several clauses, each of which acquired a
special construction In the course of judicial interpretation. For the text of the statute
and its history and interpretation, see Part III of this study, appendix i-A (12 U.S.C.
548), and appendix 6, a paper by Simeon E. Leland on "History and Influence of Section
52i9."
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11
of this period the Federal Res,erve System assumed a major l)art of
the governmental-instrumentality functions (mainly currei icy issu-
ance and fiscal agency services). Functional differences between na-
tional and State-chartered banks substantially disappeared.
Over the years, section 5219 has had a far-reaching impact on State
tax structures extending well beyond the taxation of national banks.
`Four aspects of the legislation were particularly significant:
1.' In limiting the methods by which States might tax na-
tional banks, section 5219 indirectly imposed restraints on the
taxation of State-chartered banks and, to a lesser extent, of other
financial businesses. The section 5219 restrictions* on tax rates
applicable to national banks relative to "other moneyed capital"
encouraged parallel treatment, but the desire to promote equity
and preserve competitive balance probably was another important.
consideration. In any event, differences in tax treatment of na-
tional and State banks have not been widespread or substantial.
2. The restricted range of alternatives made available to the
States in section 5219 no doubt tended to limit diversity in bank
taxation. In 1969, according to a survey conducted as part of the
Board's study, net income and share taxes on banks accounted
for 80 per cent of all commercial bank payments of State and
local taxes other than on real property, with a somewhat higher
percentage for national than for State banks. (See table 3 at
(p.17.)
3. Though each State was limited to only one tax upon national
banks in addition to that on real property, States resorted to
various formulas and procedures designed to equalize taxes of
State and national banks and of banks and other businesses.
One device was to apply a higher income-tax rate to banks than
to other businesses to compensate for the banks' exemption from
some taxes paid by other businesses. Historians of section 5219
have commented that the statute apparently interfered consider-
ably with efforts of various States to construct tax systems which
they considered fair and rational, and that the process of adjust-
ment complicated State tax structures. From the point of view
of the banking business, the statute was regarded as affording
some protection, though perhaps limited and uncertain, against
disproportionate taxation.
4. Section 5219 granted national banks immunity from taxa-
tion on any basis, other than real property, outside the State in
which the principal office is located. In practice, this protection
was carried over to State-chartered banks as well, although they
were not subject to the Federal law. Other classes of business
were not afforded this immunity but, of course, most other bus-
inesses are not subject to the kinds of regulatory limitations that
govern the location of banking offices and activities. Whether
because of section 5219, regulatory restrictions, or the limited
scope of their activities in States other than the State of domicile,
commercial banks as a class have paid only negligible amounts
of taxes outside their home States.
From time to time some States have collected from national banks
as well as State banks certain other types of taxes not specified in sec-
tion 5219, notably, taxes on sales, tangible personal property, docu-
ment ~ecordat.ioim~ and deposits. When remitted by national banks,
PAGENO="0032"
12
these taxes presumably were paid voluntarily or (in the case of sales or
deposit taxes) were legally levied upon payers other than the banks,
with the banks serving as collection agents and in practice generally
absorbing the tax. The legally permitted share taxes also were con-
sidered taxes on the shareholders, which the banks paid in their behalf.
Omission from section 5219 of intangible personal property (that
is, an ad valorem tax on intangible assets) as a permitted basis for
taxation of nationa' banks probably was not a major influence limit-
ing use of this form of tax for other taxpayers. Many States abandoned
the tax for other reasons or, if they continued it, adopted systems of
classification, special low rates, and other expedients to lighten its im-
pact. In fact, the long period of concentration on share taxation alone
(1864-1923) had lingering effects in keeping in use this selective form
of intangibles tax on bank stockholders. At the beginning of 1971,
bank shares were taxable at general property tax rates in several
States that purported to have ad valoreim taxation of intangibles
generally; and bank shares were taxable (often at special low rates) in
17 States that employed selective or classified taxes on intangibles.6
In 1962, taxed intangibles of all kinds probably yielded only about
$300 million of property tax revenues for all State and local govern-
ments ($180 million from special taxes and $120 million from general
taxes); in 1969, the yield may have reached $425 million. A sizable
proportion of this must have been taxes on bank shares and deposits.
The ag~r~gate of these taxes paid by commercial banks in 1969 was
$167 million; additional amounts may have been paid directly by
shareholders of State banks and by owners of bank deposits.~
The 1969 aimendment
In 1968, the tI.S. Supreme Court upheld the contention of a Massa-
chusetts national bank that section 5219 protected it from sales and
use taxes. In 1969, the court affirmed a decision that Florida could
not require a national bank to pay a documentary tax. These rulings
precipitated the Congressional intervention that produced Public
Law 91-156.
~ States that appear to tax Intangibles generally (subject to enumerated exemptions)
are Alabama, Alaska, Arkansas, Idaho, Tennessee, Texas, and Wyoming. Bank shares are
taxed or legally taxable in Alaska (where national bank shares are exempt because of
section 5219 but shares of State banks are not expressly exempted), Arkansas (under a
voluntary arrangement since a court decision in 1961), Tennessee, Texas, and Wyoming,
Although Arkansas law provides for local taxation of intangibles, in practj~~ the self-
assessment requirements are not enforced; a statute relating to shares of banks and life
insurance and trust companies was held Invalid in Pulaski County Board of Equalization
~. American Republic Life Insurance Company, 342 SW. 2d 660 (1961). In Illinois,
~ntanglbles, Including bank shares, were generally taxable through 1970; effective in 1971,
till personal property of Individuals Is exempt but corporations remain subject to taxation
of personal property, presumably including bank shares owned by corporate shareholders.
8 These States are Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maine,
Mississippi, Montana. Nevada, New Hampshire, New Jersey, Ohio, Pennsylvania, South
Dakota. Virginia, and W'est Virginia.
The following 7 States, with selective or classified taxes on Intangthles, do not tax bank
shares: Arizona, Iowa, Kansas, Michigan, Missouri, North Carolina, and Rhodes Island.
In 18 States and the District of Columbia, all intangibles are exempt from property taxa-
tion.
`The estimate of intangible property tax yields In 1962 Is from Dick Netzer Economies
of the Property Tax (The Brookings Institution, Studies of Government Finance, 1966),
n. 143. The sum of ~i67 million estimated foe bank share and deposits taxes paid l)y banks
fn 1969 Includes some other Items that cannot be separated Out-namely, franchise taxes
on the capital structure or banks an(l also all payments of an Indiana tax that was based
on depo~Its and share values and, for State banks, partly on gross earnings. On time deriva-
tion of estimates for taxes paid by banks In 1969, see appendix 3,
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13
This measure makes a two-step revision of section 5219. For the pe.
nod from December 24, 1969, through December 31, 1971, Public Law
91-156 added interim provisions that permit the home State to subject
a national bank to any tax that is imposed generally on a nondiscrim-
inatory basis throughout the taxing jurisdiction (other than a tax
on intangible personal property). The interim provisions also au-
thorize imposition of the following taxes on national banks that have
their principal offices outside the taxing State, if the tax is imposed
generally throughout the taxing jurisdiction on a nondiscriminatory
basis:
(1) Sales taxes and use taxes complementary thereto upon pur~
chases, sales, and use within the taxing jurisdiction.
(2) Taxes on real property or the occupancy of real property
located within the taxing jurisdiction.
(3) Taxes (including documentary stamp taxes) on the execu~
tion, delivery, or recordation of documents within the taxing
jurisdiction.
* (4) Taxes on tangible personal property (not including cash
or currency) located within the taxing jurisdiction;
(5) License, registration, transfer, excise, or other fees or taxes
imposed on the ownership, use, or transfer of tangible personal
property lo~ated within the taxing jurisdiction.
With the exception of real property taxes and certain sales taxes
on sales to banks, none of these taxes was previously applicable to
national banks either in thc4r home States or in other States.8 As to
out-of-State banks, the principal substantive change affecting real
property was a recognition of occupancy taxes; earlier law simply
disclaimed exemption of real property of national banks from taxa-
tion according to value. A State may apply its license and other taxes
under the fifth clause only in connection with the ownership, use, or
transfer of tangible personal property located within its borders.
Thus, it may not tax an out-of-State national bank on net income or
gross receipts or under an excise or other tax that does not relate specif-
ically to the presence of personal property. Taxes on intangible per-
sonal property remain on the forbidden list.
Under the 1969 amendment, certain of the newly authorized taxes,
such as sales, documentary, and tangible personal property taxes,
could be applied to national banks more or less automatically prior to
January 1, 1972. Others under certain circumstances required affirm-
ative action by the State legislature to extend them to national banks.
This requirement was designed to prevent undue burdens which might
result if additional taxes previously applicable to other businesses
were now applied automatically to national banks while all previous
taxes on national banks continued without change. As indicated ear-
lier, some States had imposed higher tax rates or made other adjust-
ments in taxes on national banks or all banks, in an effort to equalize
taxes among banks or between banks and other businesses. Affirmative
legislative action was considered desirable to avoid impairing what-
ever equality had been achieved by these earlier adjustments.
All special restrictions and the statutory designation of alternatives
will terminate at the end of 1971 if present law remains unchanged.
Thenceforth, the only restraint. expressly provided in the National
Bank Act will be the requirement, quoted at the beginning of this re-
~ The earlier law did not prevent collection of vendor-type sales taxes on sales made
to national banks by taxable suppliers (such as public utilities).
79-421 0 - 72 - 3
PAGENO="0034"
14
port, that for tax purposes "a national bank shall be treated as a bank
organized and existing under the laws of the State or other jurisdic-
tion withiii which its principal office is located."
This new provision has important implications for policy. It repre-
sents for the States a release from the constraints placed upon them
by the old language. It opens for national banks, and, in fact, for the
banking community generally, a new exposure to State and local legis-
lative aUthority. As viewed by the Senate Banking Committee, which
initiated the request for a Fedei~al Reserve study, the most serious as-
pects of the prospective exposure relate to taxation of intangible assets
owned by banks and liability for taxes imposed by more than one
State.
Enactment of Public Law 91-156 had immediate effects upon bank
taxation. The changes for natiOnal banks often carried with them simi-
lar changes for State banks and other financial institutions.
Beginning December 24, 1969, sales and use taxes applicable to pur-
chases or sales made by national banks no longer were limited to
vendor-type taxes collected from firms that made sales to the banks.
Tangible personal property of national banks could be taxed. Docu-
mentary and recordation taxes could be imposed on them. They could
be subjected to various license, registration and transfer fees, excises,
and other cl;:~rges and taxes.
Not all the SI~ates moved into these newly opened areas at once, but
enough took prompt action-either by administrative ruling or by
statutory change-to have a noticeable impact on the. tax liabilities of
banks.
Another immediate effect of Public Law 91-156 was to expose na-
tional banks to designated types of out-of-State taxes (enumerated
above) if they had tangible property or transactions outside the home
State. Data on the quantitative impact of these changes are not
available.
However, the major part of the impact of the new Federal legisla-
tion lies ahead, as States, in recasting their tax structures, use the
broader authority that-in the absence of new Congressional action-
will become available on January 1, 1972. Analysis of the legislation,
development of proposals, and completion of legislative action all take
time, and in many States this process is only getting under way or
has not begun. In some cases, there may be a tendency to defer major
action until 1972 in order to determine whether the Congress is likely
to limit the permanent authority before it goes into effect at that time.
Bank taxes paid in 1969 and subsequent changes
To establish a quantitative b~isis for this study, the Federal Reserve
System collected from national and State-chartered banks informa-
tion about their State and local tax expenses in 1969. Banks were asked
to report the amounts of their expenses for each major type of tax and
to differentiate between payments in (1) the State in which the bank
is located and (2) all other States. Where tax laws orregulations with-
in the home State had been revised to a significant degree since 1969,
respondents were asked the amount of the affected tax that would have
been paid in 1969 if the change had been in effect in that year. The
survey was conducted during December, 1970.°
~ The survey Is described and resulting data are presented in detail in appendix 3.
PAGENO="0035"
15
The aggregate of State 10 ta.xes paid by commercial banks and their
domestic subsidiaries in 1969 was $623 million, as shown in table 1,
which provides a breakdown of total tax expense by major types of
taxes. This was eight-tenths of 1 percent of all State and local govern-
ment tax revenues of $83 billion in that calendar year. (State payroll
taxes for unemployment compensation are excluded from both totals.)
TABLE 1.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS. BY MEASURE OF TAX AND
CHARTER STATUS OF BANK: 1969
(In millions of dollars)
.
Measure of tax
All banks
National
banks
Stat
e banks
Total taxes 623. 1
Real property taxes 179. 4
Total taxes other than on real property -- 43.7
Net income taxes 235. 2
Taxes on shares of bank stock or capital structure 120. 5
Bank deposits taxes 38.9
Sales and use taxes i 23.6
Gross income or receipts taxes 7. 6
Tangible personal property taxes 4.7
All other taxes i 13. 2
354. 8
268.2
112. 5
242.3
66.9
201.3
125. 6
74.9
21.3
9. 1
2. 2
1.7
7. 5
109. 5
45. 6
17. 5
14. 5
5. 4
3. 0
5. 8
I "Sales and use" taxes include and `all other' * taxes exclude some sales and use taxes paid by banks as customers of
public utilities and other suppliers of goods and services that were reported in "miscellaneous" or "other" taxes in the
survey responses.
Source: Federal Reserve Survey of State and Local Tax Expenses of Insured Commercial Banks, 1969. (See app. 3 for
details and description.) Amounts shown are estimates for all insured commercial banks in the 50 States and the District of
Columbia.
Eighty-six percent of all the bank payments were in three cate-
gories-net ~income, real property, or shares and capital structure
taxes.1'
Every State obtained a. significant amount of r~venue from the real
property tax, and this tax accounted for 29 percent of the total col-
lected from banks. (See table 2.)
TABLE 2.-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL
BANKS, BY MEASURE OF TAX AND CHARTER STATUS OF BANK: 1969
.
Measure of tax
Al
I banks
National
banks
State
banks
Total taxes
Real property taxes
Taxes other than on real property
Total taxes other than on real property
Net income taxes
Taxes on shares of bank stock or capital structure
Bank deposits taxes
Sales and use taxes
Gross income or receipts taxes
Tangible personal property taxes
All other taxes
100. 0
100. 0
100.0
28. 8
71. 2
31. 7
68. 3
25. 0
75.0
100. 0
100. 0
100. 0
53. 0
27. 2
8. 8
5.3
3. 7
1.1
2.9
53. 8
30.9
8. 8
3. 8
.9
.7
3. 1
54. 4
22.7
8.7
7. 2
2.7
1.5
2. 8
Source: Table 1.
With respect to national banks, each State was limited to one addi-
tional tax, either an income or a. shares tax. Over half the States
levied an income tax and it accounted for more than half of all taxes
°°References to "State taxes" include local Government taxes unless the context indi-
cates otherwise. Where a reference to an outside source is involved, local taxes are men-
tioned specifically to avoid ambiguity.
"The survey questionnaire called for separate reports of (el ad valorem taxes on shares
of bank stock, which are typically local p~overnnient taxes imposed as part of the property
tax, and (b) franchise or other taxes mensureil by capital structure (capital. surplus,
undivided profits, etc.3, which are typically State taxes at flat or graduated rates. How-
ever, respondent banks in ninny instances made no distinction between these taxes. To
avoid mislntepretation of responses, payments reported for the Iwo categories are merged
in the text tables and in summary tables In appendix 3.
PAGENO="0036"
16
other than those on real property. Most of the remaining States taxed
bank shares. Thus, a combination of real property plus an income or
shares tax accounted for the bulk of all taxes paid by national banks
in most States, and the same pattern generally prevailed for State
banks as well.
Ranking next in general importance for both national and State
banks were taxes on deposits, generally levied on the depositor, hence
not prohibited by section 5219 even though they were collected from
and absorbed by the bank. Appreciable added amounts were paid in
sales and use, gross income or receipts, and tangible personal property
taxes. These were legally enforceable only against State banks but in
many cases were paid also by national banks on a voluntary basis. In
some States, however, such taxes were collected only from State banks.
As a result partly of such differences, State and local taxes in the ag-
gregate were somewhat heavier for State than for national banks when
measured by various ratios, such as total tax payments to income,
assets, or equity.
Practically all State and local taxes paid by banks went to their
respective home office States, presumably reflecting in large part the
influence of section 5219 in confining national bank taxation to the
State of domicile, except for taxes on real property. Total payments
to other States were less than $1.4 million, one-fifth of 1 percent of
the total. Nearly three-fifths of the out-of-State payments were in-
come taxes. Real property taxes accounted for most of the remainder.
These out-of-State tax expenses were heavily concentrated at large
national banks and were mainly associated with the operations of sub-
sidiaries. The se~tion 5219 immunity for national banks did not ex-
tend to these affiliates.
As noted earlier, enactment of Public Law 91-156 has already
sparked. changes in State tax laws, some of them designed to take
effect in 1972. Most adjustments were increases, though there were
exceptions. Some 585 banks in 41 States reported in the survey of bank
tax expenses that if tax laws applicable to them in 1970 had been in
effect in 1969, their State and local tax expenses would have been dif-
ferent. The net overall increase estimated by these banks was 9 per-
cent. The bulk of the increase was in sales and use taxes, which P~ :hlic
Law 01-156 authorized States to apply to national banks more or less
automatically. Also important were the shares tax (New Jersey), the
gross receipts tax (WTashingt~), and tangible personal property tax
(reported by banks in about one-third of the States). The 9 percent
increase is over and above any expansion attributable to growth in the
tax base during this period of rising incomes and prices.12
Of $443.6 million of taxes other than on real property paid by all
insured commercial banks in 1969. $242.3 million was paid by na-
tional banks and $201.3 million by State banks. (See table 3.) For na-
tional banks this represented 68 percent of aggregate State and local
tax expenses, and for State banks, 75 percent (as indicated in table 2).
`~ The 585 banks that reported tax changes were one-fourth of all respondents in the
survey. The response rate for this question was much higher among larce than small banks
and was uneven within States. Banks with total deposits under $15 million were given the
option of omitting this question and under 10 peroent replied. Also, a much higher response
rate prevailed for national than State banks. as might be expected in view of the change
In Federal law. For responding national banks, the average increase in tax payments waa
12 percent, compared with 3 percent for State banks.
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17
Total taxes_
other than on,
real prop-
erty [In
State and charter thousands
status of bank of dollars[
Total 443,643
National banks 242, 340
`State banks 201, 304
New York 99,573
National banks 38, 942
State banks 60, 631
`California 45, 659
National banks 33,904
State banks 11, 756
`Ohio 34, 699
National banks 18, 041
State banks 16, 658
Pennsylvania 30, 131
National banks 17, 800
State banks 12, 331
Texas 26,448
National banks 20, 446
State banks 6, 002
Illinois 19,557
National banks 11, 175
State banks 8, 382
Michigan 18,340
National banks 9, 383
State banks - 8,957
`Massachusetts 14, 768 -
National banks 9, 198
State banks 5, 570
indiana 12, 277
National banks 6, 350
State banks 5, 928
Minnesota 11, 165
National banks 7, 043
State banks 4, 122
Missouri 10, 392
National banks 3, 587
State banks 6, 805
Total, 11 States 323, 009
National banks 175,869
State banks 147, 142
All other States 120,634
National banks 66,471
State banks 54, 162
Percentage distribution by type of tax
Taxes on
shares of
Net bank stock
income or capital
Total taxes structure
100.0 53.0 27.2
100.0 51.8 30.9
100. 0 54. 4 22. 7
100.0 91.3 (1)
100.0 98.3
100.0 86.8 (1)
100.0 93.9 (1)
100.0 94.3 (1)
100.0 92.6
100.0 (1) 10.0
100.0 (1) 8.8
100.0 11.2
100.0 .1 91.4
100 99.3
100.0 .3 80.0
100.0 . 98.0
100.0 98.9
100.0 94.8
100. 0 13. 7 76. 8
100.0 3.7 87.6
100. 0 27. 0 62. 4
100.0, 54.5 .9
100.0 54.9 .4
100.0 54.1 1.5
100.0 97.9
100.0 98.7
100.0 96.7
100.0
100.0
100.0
100.0 96.0
100.0 95.7
100.0 96.5
100.0 91.3 .7
100.0 95.8 .1
100.0 88.9 1.0
100.0 56.1 22.3
100.0 54.1 28.0
100.0 58.5 15.5
44.7 40.1
100.0 46.0 38.4
108.0 43.2 42.1
TABLE 3.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN SELECTED STATES, BY
MAJOR TYPES OF TAXES (OTHER THAN ON REAL PROPERTY) AND CHARTER STATUS OF BANK: 1969
Other
19. 8
17.3
22. 9
8.7
1.7
13.1
6. 1
5. 7
7.4
290.0
91.3
88. 8
8. 5
19:
2.0
1. 1
5.2
9.5
8.7
10.6
2 44.6
44.7
44.4
2. 1
1.3
3. 3
3100.0
100.0
100. 0
4.0
4.3
3. 5
8. 0
4. 1
10.1
21.6
17.9
26.0
15.2
15.6
14.7
I Less than 0.05 percent.
2 The major portion of this is a tax on bank deposits.
a The entire amount represents a tax based on deposits and share values and, for State banks, partly on gross
earnings.
Source: Same as table 1. States named in this table are those in which all insured commercial banks paid more than
$10 million in all State and local taxes, other than taxes on real property, in 1969. For data for other States and additional
`detail for these States, see appendix 3.
PAGENO="0038"
18
Within the nationwide total, some 73 percent of all bank tax pay-
ments other than on real property were reported by banks in Ii States
where totals exceeded $10 million for the year. In five of these States-
New York, California, Massachusetts, Minnesofit, and Missouri-
nearly all these taxes (more than 00 percent) were on a net income
base. In Pennsylvania and Texas, there was a similar heavy emphasis
on taxation of shares of stock or capital structure. The Ohio taxes
were mainly on deposits; and the Indiana payments were entirely a
combination of deposits, share values and (for State banks) gross
earnings taxes.
For the 11 States as a group, taxes measured by net income were
relatively more important, and share or capital stock taxes consider-
ably less important, than for all other States as a group.
Although the detailed analysis of the bank tax expense survey in-
cludes ratios of tax payments to selected financial measures,13 this
report does not include a comparison of tax treatment of banks with
that of other depositary institutions or other businesses. Exploration
of this area does not appear to have been contemplated by the legis-
lative history or the express language of the Congressional request for
a study o~ bank taxation. Moreover, any serious effort to make ob-
jective comparisons encounters áomplex conceptual and analytical dif-
ficulties.14 As remarked by one analyst who expored alternative
methods of testing business tax burdens, there is no "simple and ob-
jective process from which impartial and informed investigators are
bound, or even likely, to emerge with a single answer." 15
Even if the concepts were clear, the data necessary for comparisons
do not exist. The Federal Reserve survey produced information about
the tax expenses of commercial banks, but similar comprehensive data
are not available for other sectors of financial business or for business
generally.
Some of the greatest conceptual difficulties in attempts to make
interindustry comparisons arise from the multiplicity of purposes
that may be served by various taxes on business or even by various
elements of a given tax. Some taxes on business enterprise are in the
nature of charges for particular governmental services related to the
taxed transactions or rendered to the taxed business establishment,
some are charges on the enterprise for general governmental services
necessary to enable it to conduct its business, some are essentially sub-
stitutes for taxes on stockholders, and some are in the nature of in-
direct levies upon customers and suppliers of the taxed business. Dif-
ferences in the economic structure of industries further complicate tax
comparisons. The incidence of business taxes is a matter on which ana-
lysts disagree strongly.
* In the case of depositary institutions, their special economic role
as financial intermediaries (described in a later section) poses diffi-
cult questions for any effort to compare their tax burdens with those of
other industries, particularly nonfinancial industries. It may even be
true, as is sometimes suggested, that interindustry comparisons could
prove more misleading than helpful for policy determinations because
13 See appendIx 3.
~` See appendix 9, Harvey E. Brazer and Marjorie C. Brazer, "Comparing State and
Local Taxation of Banks anti Other Business Enterprises."
`~ Ronald B. Welch in "Carrier TaxatIon" (79th Congress, 1st sessIon. House Document
160, Letter from the Board of Investigation and Research . . ., Sept. 19, i944), p. 394.
PAGENO="0039"
19
they are unavoidably crude and vague, yet ascribe equalities or in-
equalities to the tax treatment of business categories that are fiuida-
mentally floflcOml)arable. Even explorations of the effects of l)a1~ticil1~tr
taxes upon particular mdustnes, in terms of their economic neutrality
or unneutrahity, generally contain a large clement of intuition, judg-
ment, and prediction.16
information and views from State ban/c supervisors.
The removal of Federal statutory restrictions on State taxation of
national banks under the "permanent amendment" of section 5219 has
implications for time competitive positions of State versus national
banks. In view of their special responsibilities relating to State-char-
tered institutions, this is an area of particular interest to State bank
supervisors. To obtain their views regarding the effects of the changes,
the possible need for further Federal legislation, the nature and tax
implications of any restrictions on out-of-State banks doing business
in their States, and recent or prospective developments of particular
significance for State and local taxation, the Federal Reserve Board
asked each State bank supervisor to provide a statement dealing with
these matter~7
The overwhelming majority of State bank supervisors indicated that
they were strongly in favor of the "permanent amendment," which
would remove restrictions on State taxation of national banks but re-
quire that they be treated the same as State banks. They generally felt
that this amendment will improve the competitive position of State-
chartered banks relative to national-chartered banks and that such
equalization is entirely warranted because of the virtually identical
functions of the two classes of institutions. Also, in view of expected
continued growth in the amount of banking business conducted across
State lines, a few supervisors felt that equality of treatment in the
taxation of out-of-State banks is essential for preservation of the
dual banking system.
Supervisors in seven States, however, held a different view.18 They
expressed particular concern about the serious economic effects on
the banking industry that might result under the "permanent amend-
ment" from interstate taxation of banks, discriminatory taxation of
banks as compared with other businesses, and the application to banks
of an intangibles tax. With respect to each of these areas, several
supervisors felt that there was a need for Federal legislation to con-
tinue limitations upon State action.
Most supervisors reported that out-of-State banks were not per-
mitted to conduct banking business within their borders, such as by
having a branch that solicits deposits, etc. 1-lowever, some States indi-
cated that out-of-State banks may qualify to conduct certain limited
kinds of banking activity in their States, such as lending or fiduciary
functions, while others indmcated that their laws enumerate certain of
these functions that are not considered doing l)usiness. In either case,
supervisors generally were of the opnuon that such activities had no
16 See appendix 7, Carl S. Shoup, "Economic Impacts of Particular State and Local
Taxes on Banks, with Special Reference to Neutrality," section headed "Concluding
remarks."
17 See appendix 5 for a detailed report on the replies from bank supervisors.
`~ The States are Florida, Georgia, Missouri, North Carolina, Oregon, Texas. and West
Virginia.
PAGENO="0040"
20
tax implications because State assertion of jurisdiction to tax would
hinge ordinarily on the existence of a branch or office within the State.
Information and views from State tax administrators
As a basis for appraising the possible impact of the "permanent
amendment" to section 5219, it was essential to have a detailed picture
of laws and practices relating to State and local taxation of banks
and information concerning the nature of prospective changes in this
area. To meet this need, inquiries were addressed to State tax admin-
istrators in all States.
The survey was made in two parts: (1) A request for a statement
indicating the nature of actions that had been taken or were con-
templated in response to section 5219 revisions, the probable trend
of developments in bank taxation under the "permanent amend'~~ent,"
and any special problems that the administrators felt should be cov-
ered in the Board's study; and (2) a questionnaire requesting detailed
information on present and prospective laws and practices affecting
banks. in the home State and out-of-State banks and other financial
institutions that have activities or property interests within the State.
The principal findings and conclusions derived from this survey are
summarized below.19
The tax structure applicable to banks, as reported by the admin-
istrators, reflects the longstanding restrictions on national bank tax-
ation contained in section 5219. Nearly all States reported that they
levy on banks an income or a shares tax; a few States levy both, with
one of these taxes applicable only to State-chartered institutions.
Thirty-four jurisdictions 20 have a tax on net income or, in most cases,
one measured by net income. The ]atter form permits inclusion in
the tax base of interest income on U.S. Government securities, a sig-
nificaiit source of bank operating revenue. Twenty-five jurisdictions 21
levied taxes based on the value of shares or capital structure.
Some tax administrators reported that. certain taxes-particularly
tangible personal property, sales and use., documentary and license
taxes-although not permissible for national banks until enactment
of the broader authority on December 24, 1969, had been collected
from those banks before that date, and indicated or implied that com-
pliance was voluntary. Since then, many States which previously had
confined these taxes to State banks have extended them to national
banks, and a few States that had exempted aTl commercial banks from
such taxes have imposed them on both classes. A few indicated that
they intended to take action in 1971 or later.
10 See appendix 4 for a detailed report.
20 The 34 States or areas are Alabama, Alaska, Arizona. California. Colorado, Connecti-
cut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine. Maryland, Massachusetts,
Michican, Minnesota, Misso:iri, Nebraska, New Hampshire, New Mexico, New York, North
Carolina, North Dakota, Oklahoma, Ore~zon, Rhode Isian(1, South Carolina, South Da-
kota, Tennessee. Utah, Vermont, wisconsin, and Puerto Rico. At present the tax applies
only to State banks in Illinois, Maine, and New Hampshire. Effective for 1971, Montana
extended a corporation license tax on net income to State and national banks.
~These faxes were reported for Arkansas (on a voluntary basis), Georgia. Illinois
(where the tax for Individual shareholders lapsed at the end of 1970), Kentucky, Louisiana,
Maine, Mississippi. Montana, Nevada, New Hampshire, New Jersey, New York (as an alter-
native minimum tax for State banks only), Ohio, Pennsylvania, Tennessee, Texas, Virginia,
West Virginia, Wyoming, and Puerto Rico (State banks only). Bank shares are taxable
also, although they were not so reported by tax administrators, in Alaska (State hank
shares only: see above, p. 12. footnote 5). Delaware, Florida, Indiana. and South Dakota.
In Delaware and South Dakota, where the banks are taxs'd on net income as Indicated in
the preceding footnote, State tax officials report that shares of both national and State
banks also are ~uhject to ad valorem taxation. In Delaware, the tax on shares is a State
tax ; In South Dakota, it is Part of the local 1)roperty tax,
PAGENO="0041"
21
In adopting these additional taxes, there appeared to be a trend to-
ward treating banks like other corporations. In addition, several
States indicated that they were eliminating compensatory higher
tax rates applicable to banks and other special arrangements such as
tax credits, which had been used to "equalize" tax treatment of State
and national banks or of banks and other businesses. However, in
other States it appears that prior to the amendment of section 5219
certain taxes had been applied to State banks alone, without any com-
pensating adjustment for the exclusion of national banks.
* A major issue relevant to an appraisal of the .prospective impact of
the "permanent amendment" concerns the extent to which the States
after January 1, 1972, are likely to assert jurisdiction to tax banking
business conducted in the State by out-of-State banks or to tax in-
tangible personal property owned by out-of-State banks. The ques-
tionnaire requested not only expressions of opinion by the adminis-
trators concerning what they might do with respect to specified types
of interstate banking activity but also information on the extent to
which various types of out-of-State financial institutions which do
business in the State (other than national banks) are already subject
to taxation in ti~eir States. The latter information, it was expected,
would provide an additional basis for inferences about prospective
future action with respect to banks.
Most administrators supplied no information with regard to taxa-
tion of intangibles, and the few who did reported mainly that they
had no tax of this type or that such taxes were not applicable to banks.
Four States indicated that after January 1, 1972, their States would
apply some form of tax on intangibles of out-of-State banks.22
With respect to taxation of out-of-State banks having State char-
ters, administrators in 31 States reported that such banks already
were subject to taxation in their States, mainly under the income
tax.23 In about half of these States, assertion of jurisdiction depends
on the existence in the State of an office, property, or personnel-tests
which would exclude most banks engaged in multistate activities,
since few would have this exposure. Where business activity was
stated as the basis for jurisdiction, it was sometimes only an ad)unct
to physical presence in the State, but in a few cases, activity or the
earning of income in the State by themselves were reported to provide
a sufficient basis.
A few States that do not now tax out-of-State banks indicated that
they would begin to do so after the expected removal, on January 1,
1972, of national bank immunity to out-of-State taxation generally.
After that date, most States would continue to assert jurisdiction if
the out-of-State bank maintained an office in the State, but several ad-
ministrators expressed the view that jurisdiction might be asserted
if lending activity is carried on, even if loans are solicited by travel-
~The four States for which these opinions were reported were Georgia (tax on long-
term notes). Michigan (deposits tax), Nebraska (tax covering income from intangibles),
and Tennessee (county tax on shares).
38The 31 States or areas, omitting those for which only property or sales taxes were
mentioned, are Alabama, Arizona. Arkansas. California. connecticut, Hawaii. ld~ho. TI-
linois, Indiana, Maine, Maryland. Massachusetts, Minnesota, Missouri. Montana. No-
braska, New Jersey, New Mexico. New York. North Carolina. North Dakota. Ohio, Orocon.
South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, West Virginia,
and Puerto Rico.
This heavy exposure of State-chartered banks to nut-of-State taxation was not con-
firmed by the data collected from the banks in the tax-expense survey. State banks re-
ported only nominal amounts of income te" payable to out-of-State jurisdictions in 1969
and most of this was attributable to operations of their subsidiaries domiciled in other
States. See p. 16 above.
PAGENO="0042"
22
ing personnel from outside the State and are subject to out-of-State
approval.24
At present, nearly all States tax at least some types of out-of-State
financial institutions that do business in the State other than national
banks. Of the 29 States that supplied information about the basis on
which jurisdiction is claimed, 16 specified that there has to be a physi-
cal.: presence in the State, such as an office, property, Or permanent
personnel, but in some States only in conjunction with transaction of
business. The others use some form of "doing business" test, but five
of these use physical presence as an alternative.25
Most States require or permit interstate division of the tax base, at
kast in certain cases. The predominant method of apportionment for
all types of financial institutions is by formula or a combination of
formula and specific allocation. In determining the tax base, consolida-
tion or combination of all affiliated corporations is required by only a
minority of the States.
* As far as local taxes applicable to banks are concerned, the survey
indicated that ad valorern taxes on property or shares are predominant.
Often the taxes are not wholly local but are administered at the State
level, with all or part of the proceeds distributed to the localities. Some
local governMents, like States, have quickly taken advantage of the
temporary amendment of section 5219 by extending tangible personal
property taxes, sales taxes, documentary taxes, and others to banks.
Concerns e~vpressed by bankers
In the course of the Board's study, staff conferred and corresponded
with representatives of many commercial banks, bankers organizations
of several States, and other financial institutions and trade associations.
Formal statements were received from several banks and associations.
In addition, the Washington office of the American Bankers Associa-
tion transmitted statements it had received from various banking
groups.
The principal concerns expressed and proposals made by banking
spokesmen in these communications may be summarized in the follow-
ing categories:
(1) Intangible personal property.
(2) Multistate jurisdiction to tax.
(3) Local taxation. ** . -
(4) Discriminatory or disproportionate burdens.
The bankers' comments are summarized below and reflected in the
discussion of "Issues and alternatives" in the final section of this
report.
(1) Intangible personal property.-Exposure to ad valorem taxa-
tion of intangible personal property will subject commercial banks
to especially heavy taxation which, in their view, would be discrimina-
tory because banks, which are closely supervised and have no freedom
to transfer their base of operations across State lines, would have
fewer opportunities for tax avoidance than other businesses.
"This was considered likely In California, Idaho, Massachusetts, Minnesota, Missouri,
Montana, and West Virginia, and, for some types of loans, in New Mexico and Puerto Rico.
~Among the 29 States that responded to this question, the following require at least
a physical presence: Alabama, Arizona, California, Georgia, Idaho, Indiana, Kentucky,
Maryland, Michigan, Minnesota, Missouri, New Mexico, Virginia \Vashingtou, Wisconsin.
and West Virginia. Either physical presence or "doing business' were reported as bases
in the District of Columbia, Illinois, Maine, New York, and North Carolina. The others,
which use some form of "doing business" test, are Hawaii, Iowa, Montana, New Jersey,
North Dakota, Oklahoma, Oregon, and South Carolina,
PAGENO="0043"
23
Some bankers urge that the prohibition of taxes on intangibles
owned by national banks, contained in the interim section 5219, be
made permanent and extended to State banks. They add that, if there
is a question about congressional authority to prevent the domiciliary
State from taxing intangible personalty of its State-chartered banks,
Congress should at least exempt national banks and express the hope
that States will accord the same treatment to State banks. Another
suggested possible solution is Federal legislation that would specify
an exclusive situs for taxation of these assets.
Special concern was expressed regarding bank-owned currency and
coin. A statute enacted in 1894 (31 U.S.C. 425) permits.State taxation
of currency and coin as "money on hand or deposit," but section 5219
prevented taxation of national bank holdings of such assets. Some
bankers propose that Congress review the policy of the 1894 act in
view of the fact that the "permanent amendment" would allow such
taxes, whether money is classified as intangible or tangible property
for tax purposes.
(2) Multistate juvisdiction to tax.-Exposure to taxation in two
or more States would confront banks with new problems relating
to allocatioi~, apportionment, or other division of the tax base between
States and the possibility of overlapping jurisdictional claims. Bank-
ers expect their compliance burdens would be greatly increased. They
foresee confusion and administrative difficulty, particularly in con-
nection with taxes on or measured by net income or the value of
capital stock or intangible property.
Several statements expressed bankers' concern over the possible
impairment of the efficient functioning of the Nation's banking sys-
tem and suggested that unrestrained State authority to tax banks
could open the way for artificial barriers that will impede the free
mobility of capital among the States.
The following excerpt from a statement submitted by the First
National City Bank of New York is representative of comments on
this issue:
If the nondomiciliary States are permitted to impose tax
on a "doing business" concept based on any slight contact
with the State, national banks will undoubtedly face double
or multi-taxes on the same income. Confronted with such
significant increases in their tax burden, national banks will
have to face the decision of whether to seek to pass the cost
on to their customers or whether competitive forces will
dictate that they curtail significantly their multistate opera-
tions.
The banking structure provides a highly efficient mecha-
nism through which savings accumulated in one part of the
country are channeled to borrowers in other parts of the
country. By means of overlines and similar arrangements,
out-of State banks are able to assist in financing projects in
States where, because of legal loan limits or other factors,
local resources are insufficient. If out-of-State banks are now
to incur additional tax liability when they participate in
such transactions, they will naturally be less eager to expand
this role. The result will be both higher interest costs for
PAGENO="0044"
24
borrowers in certain States and a lower volume of total local
financing. This will be true both for privately financed veii-
tures and for public financed ones should participation in
an underwriting syndicate be deemed to establish tax
jurisdiction.26
Different banking groups proposed further Federal statutory en-
actments along the following lines (these are alternative rather than
complementary proposals):
(a) Reinstate the prohibition on taxation of national banks
by nondomiciliary States.
(b) Prescribe allocation procedures or an apportionment for-
mula applicable to financial institutions.
(c) Make the interim provisions of section 5219 permanent.
Within any State, prohibit discrimination between national and
State banks.
(d) Continue the interim provisions long enough to permit
adequate study of interstate problems in bank taxation. These
problems are at least as complicated as those of other businesses-
and for manufacturing and mercantile businesses they have not
~been resolved in more than a decade of congressional study.
(3) Loca~ taxation.-Lifting the old section 5219 restrictions means
that local governmental bodies will have broad authority to tax na-
tional banks. Bankers expressed concern that these units of govern-
ment, which have no particular responsibility for the stability or
productivity of financial institutions or for economic policy, will be
without national guidelines that might limit their actions. Some pro-
pose that income taxation of banks be confined to the Federal and
State governments, with local governments restricted to property and
sales and use taxes applicable to all business enterprises.
(4) Discriminatory or disproportionate burclens.-Bankers foresee
considerable danger that banks will be subject to discriminatory clas-
sification for taxation in both domiciliary and other States. This
might include requirements that banks pay taxes at higher rates than
competing financial institutions and general business corporations, and
application of special taxes not imposed on other businesses. One
banking group wrote, "The clearly constitutional power to classify for
tax purposes will be a virtual license to discriminate . . . [B]anks
are highly visible and vulnerable targets for political discrimination."
A tax on gross receipts is particularly criticized as destructive of
economic efficiency in any business, and especially discriminatory
when applied to banks, on the ground that banks cannot recoup the
tax through markup adjustments. The "permanent amendment" of sec-
tion 5219 removes a provision protecting national banks against dis-
criminatory taxation compared to other financial institutions and gen-
eral business corporations. Some bankers contend that even under the
former section 5219 some Stntes have taxed banks more heavily than
other businesses.
To avoid this danger, one proposal calls for a Federal statute pro-
hibiting the imposition of higher tax rates upon national banks than
are imposed upon State banks and general business corporations or of
~ `Report on the National Bank Tax Act as directed by Congress in Public Law 91-156:
Recommendations submitted to the Board of Governors of the Federal Reserve System,"
by the First National City Bank, New York City (1970), pp. 10-11.
PAGENO="0045"
*25
additional taxes not imposed on such busin~ssc~s. The proposal in-
cludes a similar restriction to be imposed on the taxation of national
bank. stock and dividends derived therefrom.
Ati~'ributee of the financial 8ector and their implications for taxation
~n appraising the economic effects of various types of bank taxes or
changes in such taxes, it is necessary to consider not only the impacts
~ the banking system itself but also the broader ramifications for the
functioning of financial markets and the role of financial markets-
iiational, regional, and local-in the resource allocation process. A
~starting point for such an analysis is to consider possible competitive
effects of taxation among the types of institutions cOmpeting for loan
and deposit business. Many financial institutions have structural siiui-
laritjcs and are closely competitive with banks and would tend to bene-'
fit or suffer from any tax-induced diversion of business away from or
to banks. But the issues to be dealt with clearly go beyond competitive
~lations among financial institutions. In view of the strategic role of
t~h~ financial system in providing funds for the nonfinancial sector,
an~ tax that threatened the viability of the financial sector or any
thajor part of it would have adverse effects on the economy as a whole.
Role of financial institutions.-To provide capital needed for
economic ~rowth and improvements in productivity, the economic
systeni must have an efficient means for channeling savings
into real investment. A significant proportion of grass say-
lings is channeled to investment through arrangements internal
~to the individual business firm or household.. For the most part,
however, the channeling of savingsto investment is performed through
a coiñplex structure of financial markets and institutions.. People save
mainly by acquiring financial assets-partly direct acquisitions of
securities issued by borrowers, but mostly in the form of deposits and
~other claims on financial intermediaries. These savings, in turn, are
channeled by the intermediaries to borrowers who can make potentially
productive use of the funds. Over the past 5 years, for example, pri-
vate financial institutions supplied well over two-thirds of all the
funds raised by nonfinancial borrowers in credit and equity markets.
It is important to the national welfare that the mechanism of financial
intermediation operate efficiently-partly to help stimulate a high
`level of saving, but mainly to ensure that savings are channeled inta
investments of greatest productivity.
Broadly stated, the role of financial institutions is to gather sav-
ings from economic units with surpluses and lend them to those need~
ing additional funds. Most of these savings originate with individ'-
nals; while some net financial saving is generated by individual
businesses (exclusive of internal investment~, the business sector on
balance borrows more than it lends. The spectrum of institutions en-
`gaged in gathering and allocating savings is quite broad and gives
evidence of the flexibility of financial institutions in responding to~
the highly differentiated needs of both savers and borrowers.
Less than a third of the total amount of financial saving in our
economy flows into investment channels directly through the market
rather than through private financial institutions. Direct financing is.
facilitated by institutions which underwrite and distribute new
`marketable securities (e.g., investment bankers), originate, sell, and
service real estate mortgages (mortgage companies), and act as brokers
PAGENO="0046"
and dealers to facilitate transfer of ownership of securities from one
~er~on or firm to another (e.g., bond dealers and stock exchanges).
While this method of financing has advantages for certain types of
transactions, it is a costly and ineffective procedure for channeling the
bulk of individual savings into investments. This is particularly true
~or types of investments such as consumer finance, mortgage lending,
agricu~ltural credit, and small business finance, where transactions gen-
*erahlv are not large and highly specialized knowledge is needed by the
lender for efficient operation. Individual savers generally lack the
knowledge for judging investment prospects, and the amounts of their
individual contributions could not be effectively solicited by most
borrowers; transaction costs involved in market transfers are high;
markets are relatively inaccessible, for many individuals; and it is
virtually impossible to match the peculiar needs of individual bor-
rowers and lenders as regards risk, maturity, and liquidity.
Financial intermediation provides an opportunity to realize the
economies of specialization of function and of scale and the reduction
of risk through asset diversification. It is a more efficient means of
channeling savings to productive uses than is direct finance for the
large majority of savers and borrowers, whose transactions are rela-
tively small, and any significant constriction of the competitive capa-
bilities 1of intermediaries would have some adverse impact on this
group.
Financial intermediaries are of two general types. Depositary in-
stitutions are by far the most important single category. This group
consists of commercial banks, savings and loan associations, mutual
savings banks, and credit unions. At the end of 1970, they accounted
for over half of all credit market instruments held outside of the
Federal and State and local governments. Other intermediaries, whose
àperating funds are derived largely through contractual arrangements
with savers of a longer-term character and through borrowing in the
securities markets, include insurance companies, finance companies,
~nd private and public employee pension funds.
The success of the depositary institutions in attracting such a large
share of the public's savings reflects the vital economic role they play
as intermediaries in meeting the needs of both savers and borrowers.
The high degree of safety of deposits in these institutions, which is
partly the result of Federal insurance, as well as their convenience,
availability in small denominations, fixed value, and liquidity are
likely to be as important to the small saver as investment yield. Much
of th~ success of the depositary institutions, in fact, is attributable to
the fact that they have been able to satisfy borrowers' desires for
longer-term credit while at the same time satisfying the desires of
savers for highly liquid and safe savings instruments. Deposit instru-
ments tailored to the needs of large savers and businesses also are
offered by some depositary institutions, but only commercial banks
figure importantly in that market. ,
By virtue of specialization, depositary institutions have developed
~a su~stantia1 amount of expertise in the lending function. In the case
of savings and loan associations-and to a lesser extent mutual savings
banks-funds are allocated largely to long-term real estate mortgae
financing. In the case of commercial banks, financing is provided to
all* sectors of the economy-consurners, businesses, and government-
PAGENO="0047"
27
and in a wide range of maturities, sizes and types of credit accom-
modation. To a major extent, the differences in lending patterns among
these institutions reflect the differing statutory limitations placed on
their use of funds.
Within the depositary institution group, commercial banks have
Important distinguishing characteristics aside from their greater di-
versification of function and dominance in size (they account for
two-thirds of the group's total assets). Commercial banks have a
unique role in providing the bulk of the Nation's payments inechan-
ism, since they are the only private financial institutions that issue
demand deposits, which comprise the major form of money. As such,
they are closely regulated by State and Federal banking agencies,
and are profoundly influenced by the monetary policy actions of the
Federal Reserve. To contribute to the effectiveness of monetary con-
trol, banks are required to hold reserves against their deposit liabil-
ities. In the case of member banks of the Federal Reserve System,
the only permissible forms of reserves are vault cash and balances
at Federal Reserve Banks-both of which are nonearning assets. In
the case of nonmember banks, reserve requirements generally can
be met in whole or in part by earning assets, or balances at other banks
that give the holder access to certain "free" correspondent banking
services. Banks are prohibited by statute from paying interest on
demand deposits, but by offering certain free services to depositors,
they indirectly pay interest on these accounts.
Another distinguishing feature o~f commercial banks, as compared
with most other depositary institutions, is that banks are all incorpor-
ated organizations, operated with a view to returning a profit to the
stockholders; most competing institutions are mutual organizations
in which there are no stockholders apart from the depositors.
Each of the other major types of institutions performing an inter-
mediary function in our economy-insurance companies, pension
funds, and finance companies-plays a distinctive role in the inter-
mediation process. As a group, they do not compete closely with the
depositary institutions for savers' funds, but the competition in loan
markets is considerably closer. There is an area, however, in which
their asset portfolios differ: insurance companies and pension funds
place appreciable amounts of their assets in common stock-a type
of investment generally prohibited for depositary institutions.
All types of financial institutions contribute importantly to the
provision of geographic mobility to savings, moving them from local-
ities or regions where they are relatively plentiful and rates of return
are low, to areas where they are scarce and rates of return are higher.
Among depositary institutions, large commercial banks have engaged
most heavily in interregional lending; among nondepositary insti-
tutions, insurance companies, pension funds, and finance companies
also allocate funds on a nationwide basis. Traditionally, funds have
moved in large volume from the industrialized northeastern section
of the country to the rapidly developing southern and western re-
gions. But ev~en within States or regions, substantial redistribution
of funds is continuously needed to iron out. imbalances between sup-
plies of funds and the i~eds of borrowers. These flows have played a
strategic role not only in promoting overall growth in our economy
but also in contributing to a geographic pattern of development that
PAGENO="0048"
28
has tended to reflect the comparative economic advantages of each
area.
A ttr'Thutes relevant to evaluation of ta~ zmpacts.-Before turning
specifically to a. consideration of the effects of taxation of financial
institutions on the performance of their intermediary function and
on the efficiency of financial markets in channeling savings into in-
vestment, it should be noted that several attributes of the financial
system are particularly relevant to an evaluation of the potential
impacts of taxation in this sector. These may be briefly summarized
as follows:
1. Financial institutions, in contrast with other businesses, hold the
overwhelming bulk of their assets in intangible form.27
2. Financial intermediation gives rise to derivative layers of. debt
or equity instruments resting on a single layer of physical assets or
Income-generating capacity. For example, the deposit held by the
saver in a depositary institution has as its counterpart a mortgage or
bond investment or other financial instrument in which that institu-
tion has placed its funds, which in turn rests on real property or in-
come producing capacity of an assembly of tangible assets. Another
layer of tintangibles may be created where the intermediary institution
obtains additional funds by selling a repurchase contract or participa-
tion certificate against a package of its existing financial assets. Thus,
intermediation results in proliferation of the volume of intangible
~ssets outstanding in the economy.
3. Financial markets are highly integrated and interest rates in
various sectors of the market are interrelated. Thus any marked
change in one sector tends to have prompt impacts in others. This
reflects not only the substantial amount of competition that prevails
among suppliers pf funds in many sectors but also the high degree of
market knowledge and sensitivity to small differences in interest rates
and nonrate terms that exists among many market participants, par-
ticularly those engaging in relatively large transactions. Also, credit
is fluid and can move quickly, irrespective of distance. As a result, if
yields on financial assets change significantly, massive amounts of
funds can move into the areas of increasing yields-including flows
from one institution to another as well as between institutions and
market instruments.
On the borrowing side, too, competition is strong and credit terms
in various markets and areas tend to be interrelated. Over time, poten-
tial borrowers have become more highly sophisticated in seekii~g out
alternatives and comparing relative costs of borrowing. They shop
from one institution to another and also, in the case of large corpora-
tions, move freely between borrowing from an institution or from the
market and also between borrowing at short- or at intermediate- or
long-term.
4. Despite an appreciable volume of interregional credit flows, sig-
nificant geographic differences in interest rates continue. These dif-
ferences are confined mainly to types of credit extended to borrowers
with limited alternatives who are largely reliant on local or regional
sources of financing. Any impediments to free interregional mobility
of funds, particularly those affecting large institutional lenders which
are the principal providers of such mobility, will tend to place addi-
`7 For a more detailed discussion of this point, see pp. 43-44.
PAGENO="0049"
29
tional demand pressures on local sources of supply and accentuate dis-
parities in interest rates and credit availability.
5. As a result of the highly competitive character of many sectors
of the financial market, margins between interest rates paid and earned
`by financial institutions in those sectors tend to be relatively small.
Thus, there is little cushion for absorption of unusual costs or losses. In
other sectors or under certain circumstances, this would be less true,
reflecting in part the effects of ceilings on savings rates, insensitivity
of savers to interest rate differentials, and lack of effective competition
in the market.
6. The base of operations of banks and other depositary institutions
generally is confined to a particular State, county, or city, and branch-
ing across State lines is prohibited. Thus, unlike most other businesses,
they have little flexibility to take advantage of a more favorable tax
environment or to escape an unfavorable one.
Implications for taTation.-These special attributes of the financial
structure. together with other characteristics described earlier, have
several implications with respect to taxation. In exploring these, the
major focus is on the economic impacts of taxes-on credit flows,
resource allocation, and economic efficiency-rather than on the ulti-
mate incidencç~ of taxes oii customers, workers, suppliers, sharehold-
ers, and the like. Any intensive exploration of incidence would neces-
sarily encouiitei' many difficult problems of analysis and would be
inconclusive in view of the wide diversity of tax st~-uctures that exists
among the States.28
In the following analysis, each tax is considered by itself, without
reference to any accompanying repeal or modification of other taxes,
or to an existing distortion which is being offset or reinforced. Also,
for simplicity, each tax is assumed to apply only to institutions within
the State or States levying the tax.29
1. A tax levied against a single sector of the financial system would
tend in the short-run to be borne largely by the equity owners of that
sector, since any attempt to pass it on through higher charges on loans
or lower payments on savings would divert business to other sectors.
Depending on the size of the affected sector and the magnitude of the
tax, there probably would be some longer run impact on the relative
size of the various sectors, on interest rates, and on economic efficiency.
A tax on commercial banks would have greater repercussions than a
comparable one on other financial institutions, not only because of
their dominant position in the financial framework but also in view of
their relatively broad lending authority, which affects a wide spectrum
of borrowers.
* 2. A tax levied on a major part of the financial system-e.g., all
depositary institutions or all financial intermediaries-would similarly
tend over time to divert business to other sectors as efforts were made
to pass on the tax in the form of higher loan charges or lower savings
rates. Since the major alternative in this case would be direct market
financing, which involves sen oiis admi n i stra five difficulties, high traiis-
action costs, and only limited capacity to match saver and lender
terms, costs of borrowed funds would generally rise. Even though gen-
eral monetary policy wer~ used to offset the higher rates, there would
still be an accompanying loss in economic efficiency to the extent that
~ For a detailed discussion of the question of neutrality, see appendix 7. See also ap-
pendix 9, section on "intercorporate Comparhois."
~ For a discussion of the economic Impacts of multistate taxation, see pp. 46-9, below.
79-421 0 - 72 - 4
PAGENO="0050"
30
flows through intermediaries declined and direct market financing was
substituted.
8. An intangibles tax levied against all holders of financial assets
would have a iiumber of differential effects relating particularly to the
financial sector.
(a) It would have an especially heavy impact on financial in-
stitutions, since the bulk of their assets are in the form of in-
tangibles while for other businesses much smaller proportions of
their assets are 111 this form.
(b) It would impinge on the process of intermediation as dis-
tinguished from direct market financing, since the duplication of
financial assets that is inherent in the intermediation process
would expose savings flowing through intermediaries to an addi-
tional layer of taxation not encountered when the ultimate saver
places Ins funds directly at the disposal of the ultimate borrower.
(c) It would fall more heavily on Federal Reserve member
banks than on nonmembers, since member banks are required
to hold all their legal reserves in nonearning assets-vault cash or
balances at the Reserve Banks-while nonmember banks gener-
ally may hold their reserves in earning forms or in balances with
other banks for which correspondent banking services are
received.
4. A tax Jevied on financial institutions in one or a few States would
tend to divert credit flows away from potential users in those States.
Since some States generate inadequate savings to meet internal needs
and are heavily dependent on funds supplied by outside lenders, any
interruption in the flow of funds to such States could have an inhibit-
ing effect on the volume of capital investment and on the level of eco-
nomic activity in those States.
5. In the financial sector, shifts in credit flows or other adjustments
to changes in taxes could occur suddenly and in substantial magnitude.
Needs for credit among users are continuous, however, so that abrupt
shifts in credit flows could give rise to considerable difficulty for some
borrowers.
6. Because of the functional similarities among institutions engaged
in financial intermediation, the effects of a given general tax would
tend to be smilar from group to group within this sector, except for
any differences that might be associated with form of organization,
i.e., whether corporate or mutual. However, in the highly competitive
financial markets, even small differences in tax treatment may be rela-
tively important. Accordingly, there is great need for uniformity
within the financial sector.
Legal setting for analysis of major issues
This section, outlining the relevant legal setting for consideration
of the major issues presented by the permanent amendment of section
5219, is based in large part on several legal papers prepared for the
study.3° It summarizes prevailing legal doctrine as reflected in court
10 These legal studies are reported In the following appendix papers:
10. Charles F. Conlon, Liability of national banks for generally applicable State
and local taxes.
11. Jerome R. Hellerstein, Federal constitutional limitations on State taxation of
multistate banks.
12. J. Nelson Young, Multiple State taxation of national banks: Division of tax base
for Income taxes and "doing business" taxes.
13. WIlliam R. Bellow. Repeal of restri('tions on State taxation of national banks.
14. Sheldon L. Azine, The question of rnsslble discrimination against out-of-State
national banks.
PAGENO="0051"
3l~
decisions, state regulations, and practice relating to the application of
tax law in areas relevant to the Board's study-(1) taxes on intangi-
bles, (2) "doing business" taxes, (3) exposure to multistate taxation,
~4) discrimination against out-of-State banks, and (5) interstate divi-
sion of the tax base.
Intangibles.- A consequence of the termination of restrictions in
section 5219 might be the application of substantial taxes upon the
previously untaxed intangible assets of national and State banks.
Prevailing laws and practices of the several States with respect to
taxing intangible personal property generally fall into one of the
following categories:
(1) Intangibles are not subjected to property taxes.
(2) Intangibles are classified separately and taxed at an effec-
t~ve rate below that applied to other taxable property. The effec-
tive tax rate may vary for different kinds of intangibles.
* (3) Intangibles are classified separately and subject to a tax
based on a percentage yield in lieu of a tax measured by the value
of the property. In these States, intangibles that yield no income
are çaxed usually at a low effective rate, such as one-tenth of I
percent of value.
(4) Intangibles in principle are treated the same as real and
tangible personal property, all being taxed at prevailing propeity
tax rates in each taxing district, although in fact there may be
substantial differences of treatment.
In general, where intangibles are taxed at a special rate or on a
percentage of yield, the effective tax rate is usually well below three-
tenths of 1 percent of full value. Where intangibles are subject to
genei~ál property tax rates, the stated tax rates often are high (5 per-
Cent or more on assessed value) -and the taxes are relatively high
even after adjustment for prevailing fractional assessment levels. In
practice, intangibles almost never are subjected to the full force of the
general property tax rates; but in these States the owners of intangi-
bles are potentially liable for the full tax.
The major difference in practice between intangibles and other
properties under an ad valorem tax results from the fact that the
assessor cannot as readily underassess fixed-value claims, such as
bank deposits or bank assets, as he can and generally does undervalue
other types of assets.
Broad legal doctrines applicable to taxation of intangibles appear
to be as follows:
(1) Apart from Federal statutory restraints in section 5219,
* the State in which a bank maintains its principal office may,
under present Supreme Court rulings, impose an ad valorem tax
on intangibles held by the bank, such as loans, securities, credits,
and other evidences of indebtedness.
(2) Ad valorem taxes may be imposed also by the State
in which the individual debtor resides or the corporate debtor
has its commercial domicile. The State of "business situs" of in-
tangibles likewise has constitutional power to tax. Since that
would ordinarily be the State of the residence or commercial
domicile of the debtor, there would seldom be involved more than
two possible property taxes based on the same loan or other ob-
ligation.
The prevailing practice in property taxation attributes intangibles
to the domicile of the owner (the commercial domicile or principal
PAGENO="0052"
32
place of business of a corporation). Al~hough a State may validly as-
sert jurisdiction to tax intangibles owned by a corporation which it
has chartered, apparently no State does so if the principal place of
business is outside the State. Ordinarily, the State where a debtor re-
sides does not tax a nonresident owner on intangibles representing
The debt, except that Florida law provides for taxing intangibles that
~arise out of the sale, lease, or servicing of tangible personal property
in the State. Under the business situs concept, intangibles arising out
of or principally connected with a business conducted in a State are
deemed to have a situs there. However, this rule apparently is used
mainly as a. standard for assigning the value of intangibles or the in-
come from intangibles in an apportionment factor, and less often as
a jurisdictional basis for an ad i-alorem property tax 011 intangibles.
Although most States have not reached out to exercise their full
taxing power in this area, State court decisions are beginning to re-
flect the broader taxing powers which the Supreme Court has accorded
to the States in this respect. In short, it appears that the Due Process
Clause of the Federal Constitution would not bar State imposition of
property taxes on loans or credits held by out-of-State banks that
have no connection with the taxing State other than tile fact that the
debtor resides there or, in the case of a corporate debtor, has its com-
mercial domicile there.3'
"Doing business" taxes.-The "permanent am~ndment" would also
permit "doing business" taxes to be imposed for the first time on out-
of-State national banks operating across State lines. Aside from taxes
on or measured by net income, tile major "doing business" taxes of
concern to banks are (1) taxes on dr. measured by the value of issued
or authorized capital stock or the capital or property used within the
State and (2) taxes, other than retail sales taxes, imposed on or meas-
ured by gross receipts or gross income from business activities within
the State. Tile capital stock taxes-also referred to. as corporation
franchise taxes and corporation license taxes-are conceptually a tax
on property or wealth. From a legal standpoint, however, they are
applied usually in .the form of an excise that is not subject to uni-
formity requirements that might apply to a property I x. Generally,
this type of tax is imposed in connection with the privilege of doing
business as a corporation, exercising the corporate franchise, or con-
ducting business activities including the use or ownership of property
ivithin the State, or as a license to do business in corporate form.
Capital stock-type franchise taxes as actually used in various States
are of three main types:
(1) A domestic corporation is taxed on the total amount of
authorized or issued stock, and a foreign corporation on an amount
of its capital stock that is proportionate to capital employed or
business done in tile State.
(~) Domestic and foreign corporations alike are taxed on the
proportion of capital employed or business done in the State.
(3) Capital stock of a domestic corporation is subject to a tax
graduated by brackets and foreign corporations pay a low flat
fee. * .
~ For further discussion of the taxation of Intangibles, see ~ppendixes 10 and 11.
PAGENO="0053"
* 1 33
.A few States have capital stock taxes that do not fit into any of these
categories.
Gross receipts or gross income taxes may be imposed on business
generally or limited to a particular function or combination of func-
tions, e.g., manufacturing, wholesaling, or retailing. These taxes are
variously designated as license or occupation taxes, business and occu-
pation taxes, or simply gross income or gross receipts taxes. Their
legal incidence also differs from State to State: they may be imposed
with respect to the privilege of doing business or conducting business
activities, as a license tax, or simply as an excise. Only the District of
`Columbia, Indiana, and Washington (beginning in 1970) apply this
type of tax to banks.32 A few other States use the tax, but in those in-
-stances banks are either expressly exempted from a general tax or not
-among the types of business subject to a selective tax. Substantially
-similar taxes are imposed by local governments in a few States (chiefly
in Pennsylvania).
Principles regarding the interstate division and taxability of re-
* -~eipts derived from business activities in two or more States ar~ fairly
well settled in most jurisdictions that use the gross receipts tax. Pre-
sumably, these principles would be applied by additional States that
extended the~e taxes to banks.
~eneral1y, jurisdictional concepts applicable to intangible property
.~and net income taxes (discussed under the next heading) apply also
for -capital stock and gross receipts taxes. States usually exempt all'
banks from capital stock taxes or franchise taxes measured by capital
stock oi~ by assets employed in business in the State. Likewise, States
that tax gross receipts usually exempt banks. This may be simply a
ie~sult of the longstanding restrictions of section 5219 relative to tax-
.ation of national banks. However, for gross receipts taxes in particular
the policy may reflect a recognition that such taxes are not well suited
to financial institutions. A number of States have statutory provisions
specifying that the conduct of designated activities (including the
`leflding of money) by a foreign corporation or foreign lending insti-
tution is not, to be considered "doing business" within the-State and
does not require a foreign corporation to qualify under the corpora-
tion laws of the State.33
.Eceposur~ to nwltista.te ta~at~om._WThen the residual immunity of
national banks from out-of-State taxation expires at the end of this
year under Public Law 91-156,- a national bank may be subjected to
tax liability outside the State of its principal office under procedures
similar to those that apply to business corporations generally.
Current constitutional interpretations that might affect such tax-
ation may be summarized as follows.34
(1) The Commerce Clause of the Constitution permits imposition
by- a State of a direct net income tax, properly apportioned or allo-
catëd to the State, on an out-of-State corporation doing an exclusively
interstate business within its borders. However, the Commerce Clause
~ Alaska Imposes a license tax on banks measured by net income plus certain expenses.
In the Board's survey of bank tax expenses, some Alaska banks reported net income tax
payments while others listed payments under the heading of gross income taxes. The Wash-
:Ington State tax was first applicable to banks in 1970.
- ~` For a review of State laws on this subject, see appendix 10, supplementary `note
~ For an extensive treatment of this topic, see appendix 11. - - - -
PAGENO="0054"
.34
prohibits State imposition of excise taxes on the privilege of doing an.
exclusively interstate business, whether measured by net income, gross.
income, capital stock, gross receipts or otherwise.
(2) A franchise tax or other excise tax on doing business may be ap-
plied to a foreign corporation conducting within the State an intra-
state business along with its interstate business. The subject of such im-
posts is the privilege of doing intrastate business, but the tax may
nevertheless be measured by income, capital stock, gross income, gross.
receipts, or otherwise, from all aspects of the business conducted in the
State, interstate as well as intrastate. An impOrtal1t aspect of the dis-
tinction between a direct tax such as the net income tax covered in (2)
above and a franchise or excise tax covered here is that neither the in-
come from Federal securities nor the securities themselves may be
taxed directly by the States, but both are includible in the measure of'
excise taxes, including taxes on doing business.35 This difference is of'
particular significance for banks because Federal securities constitute
an appreciable part of their assets.
(3) The Due Process Clause requires, as the basis for a State to apply
income or "doing business" taxes to an out-of-State corporation that~
there be some link (nexus) in that State with the out-of-State corpora-
tion, its personnel, activities, income, receipts, or property.
(4) A review of banking activities engaged in by typical multistate
banks outsid'.~ their home States leads to the conclu~on that ordi-
narily the nexus requirements of the Due Process `Clause would be met
for application of a direct State income tax. to such banks on their
interstate activities. Moreover, it appears that multistate banks would
be held to be doing an intrastate business, and therefore subject to~
doing business taxes in States other than their home States if, as is
generally the case, they carry on lending or other activities in those
States on a more or less continuous basis are correspondents for local
banks and engage in loan participations with them, and carry on th&
miscellaneous activities in those States that are a normal part of the
business of regional and nationwide banking institutions. These di-
verse operations appear sufficient in the aggregate to meet due process
requirements for a State to assert jurisdiction even though the bank
does not maintain a permanent place of business or inventories of tan-
gible personal property, circumstances which provide fairly certain
and easily identifiable jurisdictional criteria for nonfinancial business.
corporations.
(5) Smaller "State border banks" 36 that do not engage in the mag-
nitude or variety of out-of-State business of the multistate bank
might be subject to income tax by the neighboring State with respect
to income from loans, and probably some income from credit card and
miscellaneous activities, if the bank regularly makes loans to resi-
~For national banks, the distinction between taxes "on net income" and taxes "accord-
ing to or measured by net Income" Is made in section 5219, subsection 1(c), reproduced'
in appendix 1-A. A general provision of the public debt statutes, 31 U.S.C. 742, reads as
follows:
"Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other ob-
ligations of the United States, shall he exempt from taxation by or under State or
municipal or local authority. This exemption extends to every form of taxation that would
require that either the obligations or the Interest thereon2 or both, be considered, directly
or indirectly, in the computation of the tax, except nondiscriminatory franchise or other
nonproperty taxes In lieu thereof imposed on corporations and except estate taxes or
Inheritance taxes." (R.S. 3701, as amended Sept. 22, 1959, by P.L. 86-346, Title I, see.
105(n) ; 73 Stat. 662).
~ The term "State border banks" is used here to Identify banks located relatively close
to boundaries with adjacent States, which, by virtue of their location, attract appreciable
business with out-of-State ~ustoiners. For a farther description, see pp. 47-8, below.
PAGENO="0055"
35
dents or businesses domiciled in the neighboring State, receives de-
posits and issues credit cards, provides some miscellaneous services,
and use advertising to reach into the State to solicit this business. On
the other hand, the neighboring State would not have a strong case for
imposition of a doing-business tax on such a border bank unless the
bank's activities loomed sufficiently large to link it to the neighboring
State in a manner that begins to bring the border bank into the cate-
gory of a multistate bank.
(6) Opinions of legal experts differ as to whether a bank would
be subject to a net income tax in any State where it has loan custo-
mers.37 One authority holds that both the debtor's and the creditor's
State have jurisdiction to tax the interest income. Another contends
that, though a jurisdictional claim might be supported, States do not
iii practice base jurisdiction on the residence of the borrower by it-
self or the location where the borrower expends the loan proceeds.
From a jurisdictional standpoint, this situation, it is asserted, is not
analogous to the presence of income-producing tangible property
within a State because prevailing practice is to attribute intangibles
to the business domicile of the owner. Nor is this a case where an in-
tangible acquires a business situs as that term is commonly understood.
In contrast, a bank that leases out business equipment or other tan-
~ible property within a State probably is subject to the general tax
)urisdiction of the State, although jurisdiction might not be asserted
universally on that basis. The highest courts of some States have up-
held corporate income taxes on rentals derived by an out-of-State
corporation from leased equipment used by the lessee within the tax-
ing State, but the Supreme Court has not ruled on their validity.
Discriminatory ta1ration of out-of-State bank$.-The question arises
whether, under the "permanent amendment" of section 5219, States
would be prevented by the Constitution from imposing discriminatory
license or other doing-business taxes on out-of-State banks, or levies
that are more onerous than those applied to their own State-chartered
banks and national banks with headquarters in the State.
A basic consideration is that States are empowered to impose on
foreign corporations, as a condition to the grant of a license or privi-
lege of conducting an intrastate business, annual taxes that are not
levied on domestic corporations. Or they may employ higher rates or
broader bases than those applied to domestic corporations. The theory
behind these rulings is that the States have a right to exclude foreign
corporations from conducting intrastate business within their borders;
consequently, they may exact conditions on the grant of the privilege.
The logic of this theory has been questioned. Also, it is by no means
clear that these rulings would justify the levy of a discriminatory
entry or license tax on a foreign corporation conducting a mixed inter-
state-intrastate business (such as banks usually conduct) rather than
a purely intrastate business.
Given this uncertain state of the law, there is some risk that a State
would have power to levy mo~e onerous or discriminatory taxes on
out-of-State banks (both national and State-chartered) for the priv-
ilege of doing business in the State than it imposes on banks incorpo-
rated by or domiciled in the taxing State.38
*7 See appendix 11, section I-B; and appendix 10, section on "Liability for taxes in
two or more States."
~ See appendix 11. section 111-A.
PAGENO="0056"
36
A related question raised in the course of the Board's study is
whether, under the "permanent amendment" of section 5219, States
might find it possible to impose taxes that discriminate against out-
of-State national banks as a group. The policy of equal treatment for
State and national banks is a central theme in the legislative history of
Public Law 91-156. An examination of precedents suggests that the
"permanent amendment" cannot be interpreted as sanctioning dis-
criminatory tax treatment of foreign national banks compared with
foreign State banks.39
* hiteretate diviBion of the tax base.-Since the "permanent amend-
ment" to section 5219, if it becomes effective without change, will ex-
pose individual banks to more than one State tax jurisdiction, a need
will arise for division of net income or any other applicable tax base
among the taxing States.
- The methods commonly employed by States for dividing the income
of corporations for income tax purposes are described in a report of a
Special Subcommittee of the house Judiciary Committee on State
Taxation of Interstate Commerce.~° The Congressional report gives
primary attention to taxes generally applicable to corporations engaged
in the sale of~ goods across State lines-manufacturers, wholesalers,
and retailers-and does not give special attention to taxes that are
restricted to selected businesses, such as banks and other financial insti-
tutions. However, comparable methods for division of the tax base are
used for selected businesses, and the findings of the study may be
apnlicable to the extent that common problems are encountered.4'
The standard methods are as follows:
(1) Separate accounting.-~This approach rests on "the theory that
the business of a multistate taxpayer can be divided into sepaiate com-
partments so that activities within the taxing State can be segregated
from activities elsewhere and accounted for separately. Thus, sep-
arate accounting involves identifying all items of income and costs
~vhich are related to a taxpayer's activities in the taxing State, and
constructing a Statewide net income from these items.~42 The concept
does not assume the existence of a separate corporate unit in each
State or for each type of activity.
In 1963, only five of the 38 income-tax States indicated a preference
for separate accounting, even where it is feasible. The remaining
States (with the exception of Colorado, Connecticut, and New York
~or taxes on mercantile and manufacturing corporations) permitted
separate accounting but viewed it as a special method for exceptional
cases in which the taxpayer was able to demonstrate its peculiar suit-
ability.
Among State tax administrators who responded to the question on
interstate division of the tax base in the Board's bank tax question-
naire, 8 reported that their States use separate accounting for State
banks.~' Of the 10 major banking States, New York alone reported
that it used separate accounting for state-chartered commercial and
89 ~ appendix 14 for a ioemorandum on this question, by Sheldon L. Azine. Assistant
to Counsel of the Minneapolis Federal Reserve Bank. See also appendix 11, section 111-B.
~O 88th Conj~ess, 2d sess., Report of the Special Subcommittee of the House Committee
on the Judiciary, House Report 1480, vol. 1, June 15, 1904, pp. 113-128 (hereinafter cited
as House Report 1480).
"Cf. house Report 1480, vol. 1, pp. 14-18.
`3Tbid p 115
`3Tbe~ight States reported were Alabama, Arizona, Ha~vaii, Idaho~ Indiana, New York,
North Carolina, and South Carolina.
PAGENO="0057"
37
mutual savings banks and savings and loan associations under its
franchise tax law.
(2) Specific allocation.-As an adjunct to formula apportionment,
discussed below, most States require specific allocation of particular
categories of income in their entirety-that is the attribution of these
categories wholly to the taxing State or wholly to other areas. Types
of income subject to specific allocation differ among the States; inter-
est and dividends are often included.
In 1963, among the 38 income tax States, only six did not provide
for specific allocation. Of those using this method, nine States "super-
imposed a further distinction between apportionable and allocable
income by providing for specific allocation of only those items of in-
come which were derived from transactions outside the regular course
of business; seven more allocated only those not connected with uni-
tary business operations of the taxpayer." ~ (The concept of unitary
operations is described in the next subsection.)
Responses in the survey of tax administrators indicated that, with
respect to financial institutions, specific allocation is used in numerous
States in combination with formula apportionment. For financial in-
stitutions, specific allocation alone is used currently oniy for insurance
companies ~tnd in only five States (Connecticut, Kentucky, New York,
North Dakota, and Pennsylvania).
(3) .Forn-tula apportionment.-TJnder formula apportionment, the
percentage of income to be assigned to the taxing State is typically
determined by averaging two or more ratios in which economic activi-
ties or values within a State are compared with the taxpayer's total
activities or values of the same kinds everywhere.45
The most common formula uses an average of three factors-prop-
erty, payrolls, and sales. In 1963, 26 States used this formula; four
States used a sales ratio alone; and 13 used other formulas. (The total
exceeds the number of income tax States because several States em-
ployed more than one formula.) There was considerable diversity
among States in the substance of the factors employed. For example,
there were at least a half dozen different rules for attribution of sales
to particular States, with "destination" the most prevalent.
Information from State tax administrators reported on the bank
tax questionnaire indicates that apportionment formulas alone are
used currently by 10 States for out-of-State state chartered commer-
cial banks or savings banks and by 10 States for savings and loan
associations.46 Five States report this method for credit unions; ~
three, for insurance companies; 48 and from 14 to 19, for each of vari-
ous other categories of financial business.~9 Most of these States also
require or permit other methods for division of the tax base in
particular circumstances.
A review of decisions concerned with interstate division of business
income indicates that the Supreme Court has interpreted the Corn-
`~ House Report 1480, vol. 1, p. 118.
`~ Ibid.
46 Arkansas, Connecticut, Idaho, Maine, Maryland, Massachusetts. Minnesota, and Ten-
nessee use this method for all 3 classes of out-of-State financial institutions. New Jersey re-
ported It for State-chartered coiuumerclal banks; Iowa, for savings banks; and the District
of Columbia amid Michigan for savings and loan associations.
~ Connecticut, Maryland, Massachusetts, Minnesota, and Tennessee.
46 Michigan. Minnesota, and Tennossee.
`~ States tallied for one or more other classes of business are Alabama, Arkansas, Con-
necticut, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Maine, Maryland, Massa-
chusetts. Michigan, Mimnesota, New Jersey, New York, Oklahoma, Pennsylvania. Ithode
Island, Tennessee, and Texas. Although 20 jurisdictIons are named, the nuniber did not
exceed 19 for any one class of financial business. See appendix 4.
PAGENO="0058"
38
merce and Due Process clauses of the U.S. Constitution as giving
States considerable freedom in their prescription of apportionment
formulas. The Court has approved each type of formula presented to
it, and only in rare cases has the particular application of a specific
formula been found to violate these constitutional provisions. There
have been intimations, however, that crude apportionment techniques
(such as single-factor formulas) may not meet the requirements.5°
Since national banks have not been subject to income taxes outside
the State of principal office, and there has been virtually no out-'of-
State taxation of State banks, the lack of a standard formula for divi-
sion of bank income among States has not heretofore presented an ur-
gent problem. State experience in dealing with the interstate division
of the income of financial institutions has been limited to State banks,
mutual savings banks, and nonbank financial companies. It is this ex-
perience that is reflected in the information received from State tax
administrators.
The unitary concept.-A special aspect of interstate division of the
tax base arises with the application by an increasing number of States
of a "unitary concept" of the business enterprise.
The underlying justification for applying an apportionment
forrnulft to the overall tax base of a multistate business is
that there exists a unitary enterprise being carried on in more
than one State. The formula is a device for attributing to the
taxing State its share of the overall tax measure that admit-
tedly is attributable only in part to the State. This principle
extends, at least in a good many States, both to the branches
of a single corporation and to subsidiaries and affiliated corpo-
rations that are a part of the enterprise. By applying the
typical three-factor formula, the property, receipts, and pay-
roll ratios of all branches, subsidiaries, and affiliates are taken
into account in determining apportionment ratios, which are
then applied to the tax base of the entire business.~'
The essential test of unitary business has been characterized as
"whether or not the portion of the business within the State is de-
pendent upon or contributory to the operation of the business outside
the State." 52 Under the unitary business concept, a taxing jurisdiction
in effect disregards the separate status of related business and lumps
them together as if they were one business. Although a few States per-
mit separate accounting for the activities of a unitary business within
the taxing State, a greater number require formula apportionment for
the entire enterprise.
The constitutional validity of the unitary concept appears to be
firmly established as a matter of law. Its applicability to niulticor-
porate bankiiig organizations, such as holding company systems, is
still to be determined, however.53
50For case references, see appendix 12: Jerome R. Hellerstein. Recent Developments In
State Tax Apportionment and the Circumscription of Unitary Business, National Tax
Journal. vol. XXI (Dec. 1968), P1). 487-503, esp. 495; and E. George Rudolph. State
Taxation of Interstate Business: The Unitary Concept and Affiliated Corporate Groups,
Tax Law Review. vol. 25, Jan. 1970, l)P. 171-210, at 180-84.
51 Hellerstein, ibid., p. 496.
~George T. Altman and Frank M. Keesling. Allocating of Income in State Taxation
(2d ed., 1950), p. 101, quoted in Hellerstein, be. cit. See also 88th Congress, 2d session,
House Report 1480, vol. 1, p. 167, quoted in appendix 13.
~`See appendixes 12 and 13. See also Ilelierstein, National Tax Journal, vol. XXI. cited
above; and H. George Rudolph, State Taxation of Interstate Business: The Unitary Con-
Lept and Affiliated Corporate Groups, Tax Law Review, vol. 25, January 1970, pp. 171-210.
PAGENO="0059"
.39
Of particular interest, as possible indications of policies that may
~uerge under the "permanent amendment" of section 5219, are deci-
Lions by California and Oregon State courts upholding three-factor
formulas in the case of a small loan company and a savings and loaii
association. In the California case, the court upheld the State in apply-
.ing an apportionment formula based on monthly av'rages of loans
outstanding, interest collected, and payrolls. In the Oregon case, the
taxpayer contended successfully that it was entitled to have part of its
unitary income apportioned away from the domiciliary State by use
.of a similar three-factor formula, since tI1e income was derived from
loans outside the State and the tax regulations provided for apportion-
anent of unitary income. These decisions have been termed "markedly
relevant" to the question of the unitary character of interstate banking
operations.54
* Mu7tico'rporate banking enterpthes.-A bank which is part of a
n~ulticorporate banking organization which has business transactions
in a State other than the headquarters State of the bank could be taxed
in the non-domiciliary State in a manner which takes account of all
related business activities, wherever performed. The test of a sufficient
nexus to support the jurisdictional claim of the taxing State is the
same whether the business is conducted by a single bank or a multi-
eorpora~te banking organization. A State that has jurisdiction and ap-
plies the unitary concept is likely to require consolidated or combined
returns for the related corporations and to seek apportionment of an
appropriate fraction of the entire business income of the multi-cor-
porate enterprise. .
Two types of affiliated groups may be distinguished: (i) affiliated
corporations which are engaged in the same line of business in differ-
ent geographical locations through separate corporations, and (ii) an
affiliated group which comprises several corporations each of which is
engaged in a different line of business but operates interstate either in
the same jurisdiction as its affiliates or in different jurisdictions.
* Several court decisions relati~ig to nonfinancial businesses indicate
that the unitary rule may be successfully applied by States for at least
the first type of affiliated group. It is reasonably clear that the unitary
concept does not apply to the second type.55 -
Under new regulatory legislation (the Federal Bank Holding Com-
pany Act, as amended in 1970), the future development of bank hold-
ing compal1iC~ is chiefly limited to activities which are closely related
to banking. As such companies and their subsidiaries seek to achieve
operating economies, it may be expected that their interstate activities
often will be interdependent and thus susceptible to unitary treatment.
The unitary concept has been employed in cases in which States were
permitted to tax a share of income from intangibles situated outside the
State. Since much of the income of a multi-corporate banking organi-
zation is derived from intangibles and it is the business of such enter-
prises to own and deal in intangibles, this income received by coin-
ponents of the enterprise probably would be considered the income of
a unitary business.
~ Household Fiuancc Corp. v. Franchise Tax Board, 230 Cal. App. 2d-, 41 Cal Rptr.
565 (1961) Equitable Sarings and Loan A8sn. v. State Tax Commission, 444 Pac. 2d
916 (Ore., 1968). The cases are discussed In appendix 12. See also the discussion there
of Interstate Finance Corp v. Wisconsin Departmcnt or Taxation, 28 WIs. ~d 262, 137
NW 2d 38 (1965).
~ See appendix 12, section discussing "Affiliated corporations and the unitary rule."
On multicorPorate banking enterprises generally, see appendix 13.
PAGENO="0060"
- 40
Statutory limitatione on taxation of interstate nonfinancial business
Businesses engaged in multistate activity-especially mercantile
and manufacturing companies-have encountered substantial compli-
ance burdens and overlapping tax claims as a result of complexity and
diversity in State laws and regulations with respect to assertion of
jurisdiction to tax out-of-State businesses; inclusions, exclusions, and
deductions in computing various types of taxes; and interstate divi-
sion of the bas~ for tax purposes. Considerable litigation has ensued.
Consequently, pressures have developed for a solution to the problem
through Federal or State action. The principal efforts are described.
briefly below as an indication of the kinds of problems that would
need to be resolved in multistate taxation of banks and other deposi-
~ary institutions and of alternative methods for dealing with them
that might have applicability to these institutions.
Public Law 86-1472.-The only general Federal statute that sets.
limits on State taxation of interstate commerce is Public Law 86-272,
enacted in 1959. Stimulated by a Supreme Court decision upholding:
the authority of a State to tax in certain circumstances where the
nexus tothe State was considered by the Congress to be tenuous,56 this:
law was designed to limit such tax jurisdiction of the States while the
House Committee on the Judiciary and Senate Committee on Finance-.
made a comprehensive study and the Congress considered their recoin-.
mendations, which are noted below.57 The resulting proposed legisla-
tion has not been enacted, and the limited substantive provisions of
Public Law 86-272 remain in effect.
Public Law 86-272 relates only to sales of tangible personal prop-
erty and therefore does not apply to banking or other financial oper-
ations. The act prohibits imposition by a State of a net income tax.
on income that is derived within the State by any person or corpora-
tion from interstate commerce if the business activities within the
State during the tax year were limited to the solicitation of orders.
by the seller or his representative in the State, which orders are sent
outside the State for approval or rejection and, if approved, are
filled by shipment or delivery from a point outside the State. A seller-
is not considered to have engaged in business activities witriin a State*
merely by reason of sales or solicitation of orders by independent
contractors whether or not the contractors maintain offices in thern
State, if their activities there on behalf of the seller consist solely
of making sales or soliciting orders and they conduct these activities
for more than one principal. . . -
- In the financial sector, counterparts of these activities would in-
clude loans made by a large bank to out-of-State customers that had
been negotia.ted by a traveling loan officer, subject to home-office
approval and disbursement, or made through participation with a
respondent bank that maintains more than one correspondent relation-
shi~p.
Proposed Interstate Taxation Act.-The study conducted for the-
House Committee on the Judiciary resulted in a four-volume report.,
prepared by a special subcommittee during 1961-65, concerned pri-
~ Northwestern States Porilana Cement Co. V. Miflfle8ota, 358 U.S. 450 79 8. Ct. 357
(1959).
~` The recommendations were Initially embodied in a 1)111 Introduced In the 89th Con-.
grass as H.R. 11798. Subsequent bills (such as HR. 16491-89th, HR. 2158-90th. HR..
3835-91st. H.R. 7906-91st, and related Senate bills) have been of narrower scope.
PAGENO="0061"
41
manly with interstate division of the tax base for income, sales and
use, capital stock, and gross receipts taxes.58 Bills that developed
from this study were twice passed by the House of Representatives
(m 1968 and 1969) and similar bills are pending in the 92d Congress,
all with provisions that exclude banking corporations and other
financial institutions from their coverage.
Although they differ in several respects, each of the current bills
(H.R. 1538, 2536, and 4770, and S. 317) would prescribe uniform
jurisdictional standards limiting the authority of States (a) to impose,
with respect to corporations that have a "business location" within
the State, taxes on net income, capital stock, and gross receipts
from sales of tangible personal property and (b) to require sellers to
collect sales or use taxes on interstate sales of such property. The bills
also would place a ceiling on the proportion of income or capital
attributable to a taxing jurisdiction, this ceiling to be determined in
each case by a two-factor apportionment formula (property and pay-
rolls). In addition, the bills would limit authority of States to impose
sales and use taxes affecting interstate sales of tangible personal prop-
erty. As to inqome and capital stock taxes, the House bills are limited
to corporations with an average annual income of $1 million or less;
the Senate bill would limit application of the two-factor formula for
such taxes to these corporations but its other provisions would apply
to all companies otherwise within its scope. In addition, the Senate
bill would limit the use of consolidated returns and combined reports,
thus restricting susbtantially the authority of States to apply the
unitary concept. Among related bills in earlier Congresses were
some59 that proposed a three-factor apportionment formula (prop-
~rty, payroll, and sales), as in the model State act described below.
With respect to banks, it might be noted that an apportionment
formula limited to property and payrolls, as a practical matter, would
result in virtually no allocation of tax base to States outside the
domiciliary State. Since establishment of branches in other States is
prohibited, banks conduct their out-of-State lending activities directly
from the home office, generally with traveling loan officers domiciled
in the home State negotiating the loans, or indirectly through partici-
pations with other banks.
Model State la~w.-A model law for the uniform division of income
for tax purposes (known as UDITPA) was recommended in* 1957 by
the National Conference of Commissioners on tTniform State Laws. It
ha~ been adopted in 24 States and the District of Columbia. In sev-
eral instances, the State enactment does not conform entirely to the
proposed uniform law.
1JDITPA prescribes a three-factor formula for apportioning busi-
ness income to a State, giving equal weight to property, payrolls, and
sales. Although it expressly excludes financial organizations from its
scope, a few of the definitions and rules might be adaptable to multi-
State taxation of financial institutions. For example, the act specifies
that capital gains and losses from sales of intangible personal prop-
erty are allocable to a State if the taxpayer's commercial domicile is
~ Entitled "State Taxation of Interstate Commerce," the report was published as 88th
Congress. 2d sess., House Report 1480, 2 volumes, and 8~th Congress, 1st sess., House
Reports 565 and 952.
~ For example, S. 2804 In the 91st Congress.
PAGENO="0062"
in that State. The same rule applies to interest and dividends. The
model State law does not deal with questions of jurisdiction.
MuZtistate corn~pact.-A multistate tax compact, also initiated at
the State level, has been adhered to by 21 States as regular members
and 14 as associate members but thus far has not won Congressional
approval.60 It incorporates s'ubstantially the provision of UDITPA
with respect to interstate division of income. It prOVi(les some stand-
ards for sales and use taxes, also, and is directed in part toward pro-
cedural and administrative problems in the taxation of interstate com-
merce. Like IJDITPA, the compact does not deal with jurisdictional
issues and excludes banks and other financial organizations from its
scope.
Ad Hoc Coimmittee plan.-A self-appointed volunteer group of
State tax administrators and business representatives, the Ad Hoc
Committee on Taxation of Interstate Business, has recently proposed
an alternative to UDITPA, the multistate compact, and the pending
cqngressional bills. The Multistate Tax Commission (under the com-
pact) has a drafting committee at work on revision of the proposal.
The Committee plan called for Federal legislation to be admin-
istered by the existing agency created by the multistate compact.
The proposed Federal statute would provide jurisdictional standards,
a uniform apportionment formula for income and capital stock taxes,
standards for consolidation or combination of affiliated corporations*
for income tax purposes, standards for sales and use taxes, and pro-
cedures for settling disputes. Like the other proposals, the plan does
not apply to banks and other financial institutions.61
Potentia7 change~i in ban1~ tames and their imq. acts
If removal of Federal statutory restraints is followed by generally
increased State and local taxation of banks, the rapidity and potential
limits of the increases will depend on such factors as the revenue needs
of States and their subdivisions; State constitutional restrictions on
State legislative authority (including State constitutional require-
ments of uniformity) ; the relative effectiveness of banks and other tax-
payer interests in each State in persuading legislative bodies to con-
sider their special characteristics and problems; and the degree to
which the legislature and voters of each State assess, and are con-
cerned about, the effects of additional bank taxation on the availability
of bankmg services and bank financing in their communities. These
factors are largely unmeasurahie.
* Tax administrators of 25 States 62 reported in the Board's survey
that a review of tax laws affecting banks was then under way in their
States. It can be expected that additional States will undertake such
reviews and may modify their tax laws in the light of the revised
section 5219.
60 New York State withdrew from associate membership In April 1971.
61 For background and comments, see Leonard E. Kust, "A New venture in Federalism:
Toward a Solution to Sate Taxation of Multistate Business," in The Tax Executive,
vol. 23, January. 1971, pp. 424-34. and in Tax Foundation's Tax Review vol. XXXI
December 1970, See also appendix 10, sectIon on "Prospect~ for Standardization."
62Alahama, Arizona, California, Connecticut Florida, ceorgia, Hawaii, Illinois. Indiana,
Iowa, Kansas, Michigan, Missouri, Montana. ~e~v Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Rhode Island, Texas, Virginia, West Virginia and Puerto
Rico.
PAGENO="0063"
43
Intangible personal property owned by banks.-Where it is en-
forced, a tax based on intangible property values tends to bear espe-
cially heavily on banks and other financial institutions even though the
tax law on its face applies equally to every owner of intangibles. Be-
cause of regulatory requirements for balance sheet publication, the
security holdings and loans of banks and other intermediary institu-
tions cannot be concealed and are comparatively easy to evaluate, at
least in terms of book value. This may be the case also for some intan-
gibles held by nonfinancial businesses, but it is seldom true for the
holdings of individuals. Unlike other businesses and individuals, de-
positary institutions cannot shift their base of operations or easily re-
arrange the geographic distribution of their assets, particularly on
selected assessment dates; hence they do not have means for tax avoicj-
ance that may be open to some other kinds of multistate business firms.
An intangibles tax is especially threatening to commercial banks be-
cause the overwhelming bulk of their assets is in the form of intan-
gibles-more than 96 percent on June 30, 1970 (including currency and
coin as intangibles). Loans and securities investments, the principal
outlets for commercial bank funds, accounted for 80 percent of all
bank assets qn that date. The other 16 percent were chiefly cash assets,
includino~ balances in other commercial banks and the Federal Reserve
Banks. &mmercial banks, moreover, are the largest class of institu-
tional holders of credit market debt instruments issued by the non-
financial sector. At the end of 1970, they held $431 billion or 44 percent
of the total of all such debt held by financial institutions.03
Property taxes cannot be applied to Federal Government securities
held by banks, nor can a yield tax that is imposed in lieu of a property
tax apply to income from such securities. The provision of Federal
law (31 U.S.C. 742; Public Law 86-346) requiring exemption of Fed-
eral obligations makes an exception only for nondiscriminatory fran-
chise taxes or other nonproperty taxes in lieu thereof.64 The several
States generally exempt their own obligations and those of their sub-
divisions, but they often tax those issued by other States.
Consequently, in considering the role of commercial banks as owners
of potentially taxable intangibleassets, it is necessary to exclude obliga-
tions of the U.S. Government and a good part of those of State and
local governments. But even excluding all Federal, State and local
securities, at the end of 1970 bank holdings of debt instruments issued
by the nonfinancial sector were 38 percent of the total held by financial
]nstltutions and 29 percent of the total held by everybody. Bank hold-
ings exceeded those of any other class of financial institutions and also
exceeded the aggregate debt instrument holdings of all nonfinancial
businesses.65
These data omit corporate stock. Commercial banks generally are
not permitted to invest in these securities. The market value of corpo-
rate stock outstanding December 31, 1970, was estimated at $864 bil-
lion, of which $700 billion, or 81 percent, was held by households,
personal trusts, and nonprofit organizations.66 Relatively little of this
~Adjusted to exclude debt of financial Institutions. Federal Reserve Bulletin, `March
1971. pp. A7i.1S-19.
~ For text of the law ~eo footnote 35.
~ Federal Reserve BuBetin March i971 pp. A71.15-19
~Ib1d.
PAGENO="0064"
44
is assessed for property taxation. States which impose general prop-
erty taxes or selective intangibles taxes often exempt corporate shares
either entirely (that is, as a class) or where the underlying tangible
property or the capital stock is taxed to the corporation.
Despite consistently unsatisfactory experience with intangibles
taxes generally and their declining use, the opening of a hitherto un-
tapped and high ly concentrated source for such taxes could result in
renewed interest in this type of levy. With section 5219 preventing
taxation of intangibles of national banks, the taxation of similar assets
of other depositary institutions and financial businesses probably has
been inhibited because taxes on them would be discriminatory in favor
of national banks. If the prohibition lapses under the "permanent
amendment," the entire group of institutions holding large amounts
of intangible assets could become an attractive subject for taxation in
some States.
Where intangibles are legally subjected to a general property tax,
administration of the law has been tempered in practice by tacit rec-
o~nition that a combination of (i) Federal income tax on interest or
dividends and (ii) the stated property tax rate on the asset value may
result in a. tax greater than the yield of the intangible. Another reason
for forebearance has been the difficulty and cost of enforcing the tax
on intangibles owned in modest amounts by numerous individual
owners .
Present State laws and constitutional provisions bar taxation of in-
tangibles in several States with large concentrations of banking capi-
tal and in numerous other States as well.67 In other States, special
statutory arrangements or the assessors' "custom and usage" have al-
lowed most intangibles to escape the tax or be taxed at low effective
rates. Enforcement against banks and other financial institutions,
with their concentrated holdings, would be comparatively simple and
therefore likely to result in heavier taxation of any given portfolio
of intangibles. But enforcement against financial institutions and not
against individuals would violate uniformity requirements~
Share z~axes.-The "permanent amendment" to section 5219 will per-
mit States to tax ~esident shareholders on the value of shares they
hold in out-of-State national banks. This type of assessment is difficult
to enforce, except as to the few large shareholders whose holdings
might be revealed by State examination of their Federal income tax
returns.
In States that tax the shares of banks domiciled or chartered in the
State, by applying either a general property tax or a classified or
selective property tax,68 the tax is legally on the shareholders but the
assessment is based on a return filed by the bank and the tax is collected
from the bank. Under the present section 5219, national bank shares of
nonresidents may be taxed only at the office of the bank, and shares of
resident stockholders ordinarily are taxed there. In these States, shares
in State banks also are usually taxed in the same way. States that con-
tinue to use the share tax will have no particular incentive to change
these arrangements even if they add other taxes on banks under the
"permanent amendment." .
~ States that tax Intangible personal property are named at p. 12. footnot~s 5 and 6.
~ Ibid., for States that tax bank shares.
PAGENO="0065"
45
However, the number of share-tax States has declined over the
years, as individual States have given up the taxation of intangibles
generally or have adopted other methods for taxing banks. The latest
to drop the share tax were New Mexico in 1969, Iowa in 1970. and
Illinois by a constitutional amendment effective in 1971 for personal
property owned by individuals. As indicated earlier, under the "per-
manent amendment" any revival of the intangibles tax likely would
apply to bank-owned assets. To tax the enterprise on its assets and the
stockholders on their respective shares would involve a form of mul-
tiple taxation which, as to national banks, has been prevented by
section 5219 for more than a century.
Taxes measured by `net income.-Taxes on, according to, or measured
by net income constitute the principal form of State taxes on com-
mercial banks. In the survey of tax expenses, banks in 42 States
reported paying some taxes of this kind, but in 13 States such taxes
accounted for less than 10 percent of total bank tax expenses and
were associated generally with the operations of subsidiaries. In 21
States the net income tax was more than half of all State tax expenses
of banks.69
About half of the States have special net income tax laws applicable
to banks or to financial businesses. Some of these employ so-called
"built-up" rates, higher than those applied to corporations generally,
or measui~e the tax base differently, to allow for. the fact that "ordi-
nary" corporations may be subject to other taxes under laws that are
inapplicable to national banks (and usually inapplicable to State banks
also). Several States make other adjustments in bank taxes with the
objective of seeking a net tax burden nominally equal to that accorded
other business.
The interim amendment of section 5219 reduced the reason for these
4'built-up" rates, and the "permanent amendment" appears to remove
it entirely since it imposes no restrictions on applying to banks any
taxes that apply to other businesses. In fact, some such adjustments
1have begun. For example, New York State in 1970 extended its sales
and use tax and mortgage tax to national banks; made a compensating
reduction in the rate of the State franchise tax (measured by net
income) applicable to banks; and rescinded a credit for sales tax pay-
ments that formerly applied against the franchise tax.7°
Another characteristic of net income taxes as applied to banks and
other financial businesses, less frequent in the taxation of nonfinancial
`business, is that they generally are in the form of an excise tax, which
permits inclusion of tax-exempt interest income in the tax base. The
`distinction carried in section 5219 since 1926 will lapse at the end of
1971 if the "permanent amendment" takes effect as scheduled. How-
ever, section 5219 has not been the only source of State authority to
include interest income from tax-exempt Federal government obliga-
`Lions in the franchise or excise tax base. In addition to a long line of
court decisions establishing this distinction, it has also been recognized
in the Federal 1)UbliC debt statutes, as previously mentioned.71 As to
~ The 21 States are Alabama, California, Colorado, Connecticut, Delaware, Hawaii,
Idaho, Kansas, Maryland, Massachusetts, Minnesota, Missouri, New Mexico, New York,
north Carolina, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Wisconsin. See
appendix ~ for details.
~ The New York franchise tax rate on banks and other financial Institutions was in-
creased from 6 to S percent, and the rate of alternative tax on savings banks also was
Increased, Aplil 2, 1971. as part of a general increase In business taxes,
".31 U.S.C. 742 (Public Law 86-346) ; see footnote 3~i.
79-421 0 - 72 - 5
PAGENO="0066"
46
State and local obligations, there is `no restriction in the national
Constitution or Fedeial statutes that prevents a State from taxing its
own O1)ligatiOflS or those of other States.
Unless the removal of comparative rate limitations from section
5219 opens up new questions about the scope of excise and franchise
taxes, the principal impacts of the "permanent amendment" in the
field of net income taxation appear to be the removal of restraints
upon (i) taxation outside the State of the bank's principal office and
(ii) making banks subject to the same taxes as other businesses.
Another recent Federal enactment that could have an important
effect on State taxation of banks' net income is the provision of the
rederal Tax Reform Act of 1969 establishing new, rules for bad debt
reservcs. Many States start with the provisions of Federal law ill
determining the amount of income taxable under their laws. In these
States, lower deductions for bad debt reserves under the FederaJ law
*ould mean lower deductions and higher State tax payments than
~with the earlier law. , :`
Reduction of Federal tax rates on corporate net income also has had
a reflex effect in the 11 States that permit a deduction of Federal in-
~ón~e tax payments in determining the amount of income taxable
under State law.72
These side-effects of Federal legislation, combined with changes in
the tax base reflecting such influences as inflation and shifts in mone-
tary policy, will obscure the tax-expense effects of the amendment of
section 5219 in the home-office States of the banks. But any future
faxation of the net income of out-of-State national banks will be
attributable to the change in section 5219.
AIulti$tate taxation.-In opening the door for the first time for
States to tax income earned within their borders by out-of-State na-
tional banks, the "permanent aniendment" also would createS in effect
a comparable exposure for all commercial banks. State banks, while
never declared immune by Federal law, have been largely free of such.
taxes probably under the umbrella effect of the national bank im-
munity, so removal of that immunity would affect them as well.
States that normally seek revenues aggressively from out-of-State
firms on business done within their b( de.rs might be. expected to take
advantage of their new authority to tax out-of-State national banks.
Several State tax administrators indicated in response to the Board's
survey that, if the question arose, in all likelihood their States would
cl~timn to have jurisdiction t.o tax out-of-State. banks on types of lending
typically done by banks across State lines.
~ (1) A(7t~ire of interstate bcini~in.g activity.-For purposes of evalu-
ating the potential for out-of-State taxation, two types of interstate
banking business are here distinguished: that by large multistate
banks and that by banks located near State borders.
The Nation's large financial center banks and many large regional
banks conduct a. substantial share of their business with out.-of-State
cUstomers, including many outside the. country. These interstate activi-
ties arise mainly in meeting the, banking service needs of their huge
corporate customers (e.g., deposits, loans, investment mnana~eme~t,
fiduciary, etc.). National corporations normally maintain clo~e rela-
tionships with large banks in various parts of the country where they
Alabama, Arizona, Hawaii, Kansas, Minnesota, Missouri, North Dakota Oklahoma
South Dakota, Utah, and Wise :n, In table 1 of appendix 7, these States are identified
as "double deduction" States.
PAGENO="0067"
47
do business, and many, if not most.~ of their' major banks normally
participate in ~xtending any substantial credits to such ~ corporittion.
Thus, a substantial percentage of the loans made and banking services
performed by large banks is for large corporations or their subsidiaries
with home offices or major business situs outside the hoiiie State of the
bank.
Banks also engage in appreciable out-of-State business as a result
of their widespread correspondent banking activity. An important
element in correspondent banking involves participation in making
loans to local business customers of their respondent. banks-loans that
would be small for the city bank but that exceed the amount that the
local banks desire or are legally able to make. Small banks also par-
ticipate in loans made by their large correspondents; at times, flows
upstream exceed those downstream. `
City banks render a variety of other services for their respondents,
such as check clearing, investment analysis, management advice, safe-
keeping of securities, and foreign transactions. These services usually
are paid for by the maintenance of demand deposit balances. Corre-
spondent banking relationships can be mainly regional in character
or countrywide, depending on the bank. One major New York City
bank, for example, has correspondent relationships with more than
3,500 banks located in all 50 States and the District of Columbia.
Recent data on the overall magnitude of commercial bank lending
to out-of-State customers are not available. A Federal Reserve survey
conducted in October 1955 showed that 29 percent of all member bank
business loans outstanding at that time were to borrowers in other
States. In the case of long-term loans, the ratio was 36 percent com-
pared with 25 percent for short-term loans, and, of course, the ratio
was higher at large than at small banks-44 percent at banks with
total deposits of $1 billion or more. . ,
* In view of the rise in importance of term lending since 1955, par-
ticularly at large banks, and the great importance of the Federal
funds market, the proportion of out-of-State lending undoubtedly
is substantially higher today. Such a rise also might be expected in
view of the increased competitiveness that has developed among
banks in recent years and the enhanced ability to serve nonlocal cus-
tomers that developed after 1960, when large banks in particular
began to tap the national money market for lendable funds through
issuance of negotiable certificates of deposit. At a few financial center
banks, it appears that half or more of their lending is to out-of-State
customers located in virtually every State. While the proportion of
such lending is particularly high in the case of loans to business,
these banks also make or purchase significant amounts of real estate
~nd other loans out-of-State. *
A considerably different type of out-of-State banking' activity is
conducted by many banks located close to State borders. The out-of-
State clientele of these banks probably tend to be a cioss section of
banking customers in the local area-individuals as well as businesses.
There may be some reluctance among customers to conduct their bank-
ing business across State lines, but this probably is not an appreciable
deterrent. Accordingly, in view of the advantages frequently associ-
ated with doing business with a particular bank-in terms of location,
size, quality and yariety of service, etc.-the volume of out-of-State
PAGENO="0068"
48
business done by border banks in many cases is likely to be relatively
large. The wide geographic coverage of radio, television, and printed
media advertising may attract customers from a considerable distance.
On June 30, 1968, nearly 5,600 or two-fifths of all insured commercial
banks had offices in counties bordering on other States and these
offices accounted for 47 percent of all commercial bank deposits.
(2) Potential effects of nondomicilary State taxatioi~.-Exposure
of out-of-State banking activity to taxation by the nondomicilary
States would have substantial impacts on banks, on interstate
credit flows, and on the economy. but those effects would diffe.r some-
what in the two kinds of situations described above. Large multi-
State banks would need to devote considerable accounting and
legal resourct~s to maintaining records and compiling data relating to
their operations in each State and to mastering the intricacies of the
States' differing tax laws. Differences in applicable tax rates
and forms of taxes would also be evaluated. Banks would tend to
weio~h the profitability of business done in each State against the
tax~iiability associated with that business and the additional cost of
compliance.
In States where the costs associated with the tax exceed the pros-
pective return to a bank on the credits extended (a not unlikely situ-
ation in some States) or reduce the profitability of its operations
below the level of return available elsewhere, the bank would tend to
run off its credits and redirect them into more profitable areas. Even
credits which met the after-tax profitability test might still be cut off
because the lending bank did not wish to be bothered with compliance
requirements in the taxing State. While the amounts withdrawn from
a given State by any individual bank might be small, withdrawals by
many large banks could add up in some cases to a substantial exodus
of financing. The funds withdrawn from high-tax States probably
would be reallocated mainly to loans in the home State or in other
States with a more favorable tax climate, and to investments in
securities.
Within a high-tax State, all groups in the economic community
probably would be affected by any such curtailment of credit avail-
ability, but not uniformly so. Large customers with facilities in more
than one State pi'obably could arrange to have their bank financing
flow through an organizational unit in another State where the tax
on the out-of-State lenders might be lower or otherwise more accept-
able to the lender. Other alternatives for such firms would include
financing in the capital or commercial paper markets-where the in-
vestors would be dispersed and not readily subject to taxation by
the State of the debtor. The principal impact probably would be on
medium-sized businesses, particularly those that depend to a consid-
erable degree on out-of -State sources to meet their credit needs. Their
alternative sources of financing would be narrowed and their borrow-
ing costs would rise in response to the tax cost associated with lend-
ing in their State. Small businesses, which normally are dependent
on local sources of financing, probably would be affected less than
medium-sized firms, although they too might experience some curtail-
ment in credit availability and higher borrowing costs.
To some extent, the banks within the taxino~ State might be able to
offset the funds withdrawn by out-of-State ~anks by competing for
funds in the national money market, particularly through issuance of
PAGENO="0069"
49
certificates of deposit, and using these funds to relend to local busi-
nesses. However, there would be limits to this operation, particularly
those imposed by statutory maximums on the size of loans made by
individual banks and the need of each bank to maintain liquidity,
adequate capital? and appropriate balance in the composition of its
assets and liabilities. Borrowers, too, might finds ways to avoid the
tax impact. But these adjustments would take time. Meanwhile, the
borrowers would suffer and the economy's supply of capital would
be allocated in an uneconomic way-with some areas being relatively
deprived and others having a comparative excess of credits available.
It should be noted, however, that not every tax on out-of-State
lenders would necessarily contribute to economic inefficiency. In some
circumstances, taxation of out-of-State banks might tend to equalize
the competitive situation between home-State lenders and those from
other States. In the absence of out-of-State taxation, lenders from
a low-tax State would have a competitive advantage in extending
credit in high-tax States. However, most money market banks that
engage in extensive out-of-State lending are located in industrial
States where taxes are likely to be relatively high.
With respect to the vast array of banks located close to the borders
of a neighboring State that do appreciable amounts of business with
customers domiciled in that State, there may be some question whether
the foreign taxing State would seek to enforce the tax against such
banks, particularly the smaller ones. But even if it did, the adverse
consequences might be slight unless the taxes applied to more than
100 percent of the tax base. In most cases taxes would be payable by
the bank in only two States, and after allowance for deductibility on
the Federal level (and possibly on both Federal and State levels) the
net amount of tax might be small. While this reduces potential inter-
ference with credit flows, it does not eliminate it. Some border banks
might still tend to turn down out-of-State business rather than incur
the cost and inconvenience of compliance with tax laws in another
State, thus forcing the affected customers to turn to more distant,
more costly, or otherwise less satisfactory suppliers of loans and other
banking services.
Considering the adverse effects that a tax on out-of-State banks
might have on credit flows into the taxing State and on its economy,
a question might be raised as to whether such taxes are likely to be
imposed even if the authority were provided. The pressing needs of
the States for revenue, however, may prevent adequate consideration
of the economic consequences of each new tax proposal. Once a few
States had begun to levy such taxes, this would tend to stimulate en-
actment of similar taxes in other States as well.
Criteria for evaluating proposals
In Public Law 91-156 and its legislative history, the Congress was
explicit about the purposes of its actin. As far as section 5219 is con-
cerned, the objective was to achieve equal treatment of national and
State-chartered banks under State tax laws. This was the overriding
objective.
An incidental purpose of the legislation was to "sweep away an out-
moded, confusing, and inequitable formula for State taxation of na-
tional banks, and replace it with a simple, fair, and easily understood
PAGENO="0070"
50
rule of law." (House Report 91-290. p. 1). Among other results, a
clear and simple rule would obviate frequent and costly controversy
and litigation concerned with the extent of State authority to subject
national banks to particular forms and rates of tax.
In calling upon the Board to make a study, the Jaw directs that the
report include the Board's recommendations as to what additional
Federal legislation, if any, may be needed to reconcile-
(1) The promotion of the economic efficiency of the banking
systems of the Nation; and
(2) Achievement of effectiveness and local autonomy in meet-
ing the fiscal needs of the States and their political subdivisions.
In making this request., the Congress indicated awareness that the
stated objectives might be contradictory. The House conferees noted
that some apprehension had been expressed as to whether the expanded
taxing powers might be used in a way which could impair the mobility
of capital or the economic. efficiency of the banking system.73 In effect,
the ~Board is asked to indicate whether State autonomy needs to be
limited, and if so how far and in what ways, to preserve a free flow of
capital into banking and across State lines; or, conversely, whether the
efficiency of the banking systems will be limited, and if so, how far and
in what ways, if the States are given substantial freedom to act
independently.
Several collateral considerations emerge as these alternatives are ex-
amined. For example. in seeking to preserve State autdnomy in accord-
ance with the statute. consideration needs to be given to the degree to
which diversity in the details of tax measures may create excessive
compliance burdens for banks and other taxpayers. Problems in the
division of income or any other tax base affect not oniy the relations
of taxpayers with States; they extend also to methods of avoiding con-
flicts or competition between States. Efforts to attain economic neutral-
ity in State tax systems pose questions about the practical meaning of
this concel)t and methods of comparing tax burdens of banks with
those of other industries.
In responding to the congressional call for "the Board's recom-
mendations as to what additional Federal legislation, if any, may be
needed," the Board is faced with a considerable variety of choices. It
could be argued that a need for further legislation cannot be demon-
strated until there has been actual exuerience with the new provision.
The problem here, however, is that the test of actual experience may
involve au extended period in which there would be a crystallization of
countervailing interests-a competition among various taxpayer in-
terests and between States-that could have significant impacts on the
economics of banking and, through banking~ on the national economy
as a whole. Unlike taxes on other types of business, those on national
banks have had to conform to a Federal statute-and this statute has
had an umbrella-like effect upon State taxation of State-chartered
banks and to a lesser extent upon the taxatinn of other financial inter-
mediary institutions. The test of time would involve slow and difficult
processes of adaptation-of State tax systems and adjustment of bank-
ing and other financial business practices in the light of revised taxes.
This would certainly involve a considerable burde.n on the banking and
finance industries in the form of operational adjustments and litiga-
"House Report 91-728, p. 5.
PAGENO="0071"
51
tion and it also could result in some disruption in credit markets, in-
convenience to customers, and impairment of efficiency. Some of the
changes might prove difficult or impossible to remedy even if the out-
come of future review suggested that Federal restrictions on State
action are warranted.
Heretofore, the restraints in section 5219 have all applied to the
States. The States had the burden of accepting limitations or persuad-
ing the Congress that it should relax these restraints-and they suc-
ceeded in such persuasion only in 1868, 1923, 1926, and 1969. Under the
"permanent amendment" of section 5219, the burden of acceptance or
persuasion shifts to the banking industry.
Even in the major banking States, the amount of tax revenue de-
rived from taxation of commercial banks is but a small fraction- gen-
erally 1 percent or less-of all States and local tax revenues. This may
be partly a reflection of section 5219. But even a comparatively large
increase in the levies on banks would not add significantly to aggre-
gate State and local revenues. This fact, of course, is hardly a basis
for forebearance by the States. But to some degree it strengthens the
case for deliberation in the removal of restraints on State authority.
It is often argued that the patterns of taxation applied to banks
should conform to the patterns which the several States have devel-
oped for business generally, and that special provisions should be lim-
ited to characteristics of banking that cannot be dealt with by apply-
ing procedures and principles developed for manufacturing, mercan-
tile, transportation, and other lines of economic activity.
However, an important practical distinction from other business
must be taken into account at this special juncture in the history of
bank taxation. The fact. is that commercial banks as a group have not
been exposed to all forms and measures of State taxation that applied
to other businesses and still are not subject to them despite removal
of some restrictions by the temporary amendment enacted in Decemn-
ber 1969.
The question for bank tax policy, then, and the one which the Con-
gress posed for this study, is whether all remaining inhibitions on State
action should be removed on January 1, 1972, or some restrictions
should be maintained. An earlier section of this report describes the
economic role of banks and other financial intermediaries as it relates
to State taxation.7~ The examination shows that, in view of the special
relationships of these institutions to the local economies of their States
and regions as well as the national economy, it is important that spe-
cial consideration be given to the ways in which the imposition of par-
ticular taxes may affect business decisions. The impacts cannot be con-
fined to lending institutions; repercussions will unavoidably spread
extensively, though unevenly, throughout the economy because credit
services provided by depositary institutions are basic to modern eco-
nomic activity-even to small-scale local activity.
~1a~or changes in State or ]ocal taxes affecting other kinds of enter-
priSes also may have important economic repercussions, locally, region-
ally, and even nationally. For example, chamiges in taxes based on
tangible assets or their earnmgs could infhience materially the business
decisions of in anufacturers and distributors whose efficient operations
require large inventories of materials and products or large stocks of
7' See pp. 25-SO, above.
PAGENO="0072"
52
machinery. As far as property taxation is involved, the important dif-
ference is' that the levies that are important for other businesses-those
on real estate and tangible personal property-though marred by ad~
ministrat.ive disparities and extensive maladministration, (10 not ex-
hibit such gross discriminatory impacts as characterize the taxation
of intangible property. As to other types of taxes on the enterprises-
taxes measured by net or gross income, capital structure, and various
license or privilege taxes-the financial sector is distmguished by the
high degree of competition betweei~ profit-seeking corporatrnns and
mutual associations, a type of organizational diversity that is much
less pronounced in other sectors of the economy.
The import of these differences between financial institutions and
other businesses is that a case for continued differential treatment
`under State and local tax laws may be supported not only by the
historic policy of special treatment of national banks (with its carry-
over to other financial businesses), but also by a recognition that de-
parture from this policy would open the way for tax measures that
might significantly impair the service of depositary institutions to the
economy of the Nation and of individual States or markets.
Issues and alternatives
Areas importantly affected by the prospective complete removal of
Federal statutory restrictions are (1) taxation of bank-owned intan-
gible assets through general or selective taxes on personal property, and
(2) taxation by States other than the State of the bank's principal
office. These issues are examined in this section. Also considered here
are issues involved in the possible discriminatory taxation of banks
and other financial institutions, the tax exemption of interest on Fed-
eral Government obligations, the classification of coins and currency
for tax purposes, and local taxation.
Intangible iwoperty owned by banks.-The Senate committee report
on Public Law p1-156 noted specifically that a major effect of the
amendment effective January 1, 1972, is to remove the prohibition
against the levy of intangible personal property taxes on national
banks with their principa.l offices located in the taxing States. The law
directs that the Board study shall include an examination of the im-
pacts and effects of this statutory change.
In considering policy with reference to taxation of intangibles, sev-
eral alternative courses of action appear to be open to the Congress:
(1) Permit the section 5219 "permanent amendment" to take
effect without change on the question of taxation of intangible
personal property. This would open the way to application of the
tax against bank-owned intangible assets by the home State of a
national bank and by other States where such intan~ibles have a
"business situs."
(2) Permit taxation of bank-owned intangibles of national
banks subject to Federal statutory (and possibly administrative)
constraints. These constraint.s might comprise (a) rules govern-
ing the location of intangibles for tax 1urPo~es or (b) require-
ments that, in exercising authority to tax such property, either
the home State or the State of the debtor must allow a credit for
property taxes paid in another State based on the same bank-
owned assets.
PAGENO="0073"
53
(3) Permit taxation of bank-owned intangibles of national
banks by the State of the principal oflice of the bank, and deny
authority to tax such 1)roperty owned by national banks which
have their principal offices in other States.
(4) Prohibit ally State taxation of bank-owned intangible
property of national banks.
Each of the last three alternatives is subject to various modifica-
tions, as noted in the discussion that follows.
A~rgunients for iettb~g the "permanent amendment" take effect with-
out cha~i.qe-that is, for allowing States the option of taxing intangible
personal property of banks-may be summarized as follows:
(1) The Federal Government should refrain from imposing limits
upon the authority of States to devise their individual tax systems as
long as they conform to Federal constitutional requirements. Freedom
*to be different and to experiment is a valuable attribute of our system
of dual sovereignty; this freedom should be safeguarded. The perma-
iient amendment of section 5219 is of special importance symbolically
in unshackling the States. Restoration of any part of the earlier limi-
tations would be a step backward.
* (2) Under the system of ad valorem taxation of property that is
the major source of local government revenue in the United States,
the value of the assets owned by individual enterprises generally is
used as a base for measuring their obligations to contribute to the
financing of local government. These assets are predominantly real
and tangible personal property but in more than half of the States in-
tangibles also are covered, either comprehensively or in selected classes.
A. characteristic of financial businesses, and especially of banking, is
that the largest part of the assets of each firm consists of intangibles.
Continued prohibition of the taxation of hank-owned intangibles would
exclude these assets from the base that is used to measure the banks'
obligations to pay t.axes.
(3) Where an intangibles tax is used, it helps to insure that all
owners of assets contribute to the cost of government. The taxable
situs of intangibles may be in a different jurisdiction from the tangible
property that underlies some of the intangibles. To what extent the
underlying wealth is taxed is usually uncertain. Moreover, not all in-
tangibles are representative of tangible personal or real property. In
any event, ownership of the intangibles and ownership of the under-
lying physical assets (if any) are in different taxpayers. If a State
elects to subject intangibles to taxation, the tax obligation of the
creditor to his State should not be set aside because the debtor may
also be paying taxes on the related tangible property. The creditor's
State has a right to ask that the creditor help support the government
from which it receives services; and if that State uses property values,
mcluding intangibles, as a measure of taxpayers' obligations, bank-
owned assets may properly be part of the measure.
(4) From the point of view of the taxing authority, advantages of
the intangibles tax as applied to banks are that the bulk of the assets
~re easily valued; there is little room for assessors to exercise cursory
or uninformed judgment; and concealment is less likely than with
other owners of this class of property.
(5) The property tax provides a comparatively stable base for
taxation; in jurisdictions where intangible property is an element in
PAGENO="0074"
54
this base, bank-owned intangibles would constitute a desirable com-
ponent in view of their persistent growth.
Argu'ments against allowing the States to ta~v rntangzbles of banks
may likewise be summarized:
(1) The territorial immobility of banks and the fact that they are
closely regulated probably would lead to considerably heavier taxation
of their intangibles than of similar assets of nonfinancial corporations.
Intangibles in nature and in form are mobile, and opportunities to
choose the business situs of such assets on the basis of tax considera-
tions ordinarily are available to most firms conducting dispersed op-
erations. However equal they might be under the law, in practice
banks and some other classes of financial institutions would be at a
relative disadvantage compared to firms in nonfinancial business, espe-
cially large firms, if barriers to State taxation of intangibles were
eliminated.
(2) A general tax on intangibles would have a discriminatory im-
pact against the process of intermediation as distinguished from
direct market financing, since the layering of financial assets that is
inherent in intermediation would expose savings that flow through
intermediaries to double or multiple taxation, whereas those placed
directly with borrowers would be taxed only once. Moreover, a tax on
intangible assets would be easily enforceable against institutions but
the holdings of individuals would largely escape assessment and.
taxation.
(3) Unless most intangibles are taxed practically everywhere and to
all businesses, and with substantially equal effectiveness in all juris-
dictions, the intangible personal property tax has distinctly unneutral
effects upon geographic and inter-industry movements of capital. If
the intangibles tax were imposed in only a few States, or if admini-
stration was more vigorous and effective in some States than in others,
the taxed banks' market power to recoup the tax by obtaining higher
interest rates on loans and securities would be severely limited. Bank-
ing capital would tend to migrate toward non-taxing States or low-
rate States.
(4) An intangibles tax would fall more heavily on Federal Reserve
member banks than non-member banks and would constitute an addi-
tional cost of membership. This is because member banks are required
to hold all their legal reserves in a form that earns no interest (vault
cash or balances at the Reserve banks), whereas non-member banks
generally may hold their reserves in earning forms or in balances with
other banks for which correspondent bank services are received. The
nearly universal practice of determining assessments on a single pre-
determined date each year might enable member banks to mitigate this
difference by actmg to reduce reserves on the assessment date. How-
ever, such adjustments would not remain possible if pressures to mini-
* mize market disruptions and tax avoidance impelled States to assess
on the basis of averages.
(5) Exclusion of tax-exempt obligations from the tax base means
that an intangibles tax would apply unevenly to individual banks,
rather than in a umform relationship to the volume of their intangible
assets. Moreover, a tax-induced preference for tax-exempt holdings
m]ght have incidental effects, such as a tendency to divert banks from
PAGENO="0075"
55
helping to finance the private sector since this would involve acquisi-
tion of taxable assets. If a State taxed public debt instruments issued
by other States and their subdivisions, this might narrow the market
for out-of-State obligations while strengthening the market for home-
State securities, since they are usually exempt.
(6) The possibility that intangibles might be subjected to taxation
in States other than the home State of the bank-that is, by the State
of the debtor-might create apprehensions and protective reactions
on the part of banks. For example, concern about compliance burdens
and uncertainty about potential increases in the rate or coverage of
such taxes might lead to limitation of credit operations in the foreign
taxing States; any such impediments to the interstate flow of credit
and commerce would hamper the efficient utilization of resources.
(7) Denial of authority to tax bank intangibles would not be a
major limitation on the States, or a major loss to them, for several
reasons:
(a) They never have had this authority with respect to national
banks and therefore have applied it only in rare instances to State
banks. In calling for amendment of section 5219, States did not
make a special point of this prohibition, as they did with respect
to sales, documentary, and some other types of taxes.
(b) Many States exempt all personal property or all intangibles
and the trend toward exemption is continuing. Some States exempt
designated classes of intangibles and tax selected categories at
special low rates in recognition of problems of double taxation,
the confiscatory potentials of property tax rates when related to
yields on intangibles, difficulties of enforcement and administra-
tion, and the geographic shifts of investment that might be in-
duced by full-rate taxation. It is doubtful that taxes on intangibles
other than bank deposits and shares currently contribute as much
as one-third of 1 percent of all State-local tax revenues.
(c) In any event, a significant portion of bank-held intan-
gibles is not available for State taxation because of the exclusion
of Federal government obligations from the property tax base.
On balance, it appears that the prospective removal of the prohibi-
tion on taxing intangibles owned by national banks could have substan-
tial effects, concentrated in that sector of the economy which is engaged
in the basic economic function of financial intermediation. The inter-
state flow of credit and commerce might be hindered. In practice such
a tax would be discriminatory against banks and other financial institu-
tions, however equitabl~ and even-handed the formulation of the State
tax laws.
For these reasons, the Congress may wish to limit State authority
*to levy taxes on intangible personal property of financial institutions.
Alternatives (2), (3) and (4) at the beginning of this section (pp.
52-3) provide for such limitations.
The simplest measures in terms of form and legislative procedure,
*~ould be to amend the "permanent" section 5219 before .Januarv 1,
1972, reviving without time limit the denial of authority for States to
tax national banks on their intangible personal property. Over the
years, this restriction has discouraged use of this tax for State as well
as national banks. .
PAGENO="0076"
56
Arguments advanced against taxation of intangibles of banks are
in considerable part applicable to other financial institutions and, in
some respects, to business generally or to all holders of intangibles.
Although this study is directed to State taxing policies that affect
banks, the similarities of function of banks and other financial inter-
mediaries and the competition among these groups of institutions are
of such importance that it would be advisable to extend any Federal
statutory proscription beyond national banks. A broader group might
be defined as (a) all commercial banks, State as well as national; (b)
all commercial banks and all mutual savings banks; (c) all depositary
institutions, whether stockholder-owned or mutual; or .(d) all financial
intermediaries, including insurance companies. Or the test might be
whether a corporation or association derives more than 50 percent of
its ordinary gross income from banking or the extension of credit, or
in the form of interest or dividends. Quantitative criteria of this type
are proposed in pending bills for an Interstate Taxation Act. (See pp.
40-41.)
There appear to be no constitutional inhibitions with respect to
congressional authority to intervene with respect to State taxation of
financial institutions.
Instead of continuing to withhold authority from the States to tax
intangible personal property of banks or a broader category of finan-
cial institutions, the Congress may wish to consider permitting such
taxation within boundaries set by Federal statutory guidelines. The
principal purpose of any guidelines would be to avoid double or mul-
tiple taxation of the same intangible assets. A secondary purpose
would be to establish a degree of certainty and uniformity, reducing
controversy and litigation.
A Federal statute of this kind might (1) prescribe rules for deter-
mining where intangibles may be taxed or (2) require, as a condition
of a tax on such assets, that either the domiciliary State of the taxpayer
or the nondomiciliary State give credit for intangible personal prop-
ertv taxes paid in another State based on the same assets.
In all probability, a statutory prescription of locational rules would
be the sii;tpler approach from the point of view of taxpaying banks as
well as tax administrators in State and local governments. Although
the property tax is primarily a local government tax, a Federal statute
need not resolve uncertainties about which local taxing district may
impose the tax in a particular situation; intrastate locational rules
might be left for determination by those States that employ taxes on
intangibles.
Assuming this rule-prescribing approach, different locational pre-
scriptions might he needed for specified categories of assets, such as
investment securities, loans secured principally by real property or
tangible peronal property, unsecured business loans, and other loans.
Formulation of a reasonably clear set of rules that would be generally
acceptable to both taxpayers and tax administrators would require
extensive negotiation concerned with choices among taxing jurisdic-
tions that might have competing claims to tax the same property.
A tax crediting arrangement would require similar choices~ whereby
the home State of the bank would grant credits for intangibles taxes
paid in other States or the other States would be required to credit such
taxes paid to the home State on account of the same assets.
PAGENO="0077"
57
The case for permitting States to tax bank-owned intangibles within
the limits of Federiflly prescribed locational rules, interstate credit
requirements, or exclusive home-State jurisdiction to tax (alternatives
2 and 3 aboye), rests primarily on the need to accommodate the con-
tradictory criteria specified in Public Law 91-156; Fiscal autonomy
for State and local governments on one side, and efficient operation
of the Nation's banking system 011 the other. Federal statutory loca-
tional rules or tax credit requirements (alternative 2) would restrain
States to a moderate extent while providing taxpayer institutions
with some assurance of uniform treatment in different States that
apply the tax and some protection against a multiplicity of taxes on
the same base. Limiting authority to tax intangibles to the home
State of the creditor institution (alternative 3) would impose in
principle a greater restraint upon State authority. In practice, how-
ever, this might ~ to be no greater restriction, because more than
one-third of the States do not now attempt to tax intangibles and
those that do continue for the most pai~t to rest their jurisdictional
claims on the doctrine that intangibles are subject to tax in the State
of the creditor's domicile and only exceptionally in other States.
* A prohibition of State taxes on bank-owned intangibles (alterna-
~tive 4 above) also may appear more drastic in principle than in prac-
tice, for reasons given in several of the arguments listed earlier against
State taxation of these bank-owned assets. Such considerations in-
clude the fact that States gradually are moving away from ad valorem
taxes on intangibles, and that a continued denial of authority to tax
bank-owned assets would not inflict a significant revenue loss. Argu-
ments against a Federal statutory prohibition in this field are essen-
tially those given for allowing the "permanent amendment" to take
effect without change.
A question may be raised as to the scope of a Federal statutory pro-
vision establishing restrictions or a prohibition on State taxation of
intangible assets. Should it apply to all types of intangible property
or be limited to selected types of assets? Should a restrictive provision
prescribe standards in terms of the comparative treatment of specified
intangibles of other taxpayers (as in the longstanding provisions of
section 5219 referring to "other moiieyed capital")? In view of diffi-
culties inherent in this type of tax and in the earlier provisions, selec-
tive specifications along these lines have not been examined in this
study. If the Congress considers legislation relating to taxation of
intangible roperty~ definition of tile types of intangibles and types of
business to be covered are matters to which Congressional committees
would wish to give pamtictilar attention.
Taxation by States otl~er titan the State of the principal office.-
Exposure to taxation outside the home State is a matter of concern to
banks chiefly in connection with taxes on the value of intangible per-
sonal property and taxes on or measured by net income. Aside from net
income taxes, the principal "doing business" taxes that banks may
encounter in foreign States are those measured by the value of issued
or authorized capital stock or the proportion of capital or property
used in the State. Taxes measured by gross receipts may also be in
this category, although at present they are not used extensively. Multi-
state aspects of the property tax on intangib1~s are covered in the
preceding discussion of that tax.
PAGENO="0078"
58
From the point of view of the banks, issues in this field concern the
possibility that two or more States may assert jurisdiction to tax the
same net income, using differing rules for interstate division of the
tax base and requiring different kinds of records and reports. If inter-
state division of the taxable net income of banks and other financial
institutions were to conform closely to procedures currently applied
to other businesses by most States, there would be comparatively little
allocation or apportionment of the tax base to States other than the
home States of the banks. However, States could be expected to modify
these procedures so as to apply their levies to an increasing proportion
of the tax base of out-of-State banks.
* The sum of taxes paid by any affected bank would not necessarily
be increased by multiple State taxation, as compared with taxation
confined to the headquarters State; in fact, applicable tax rates (es-
pecially for financial center banks) may be higher in the home State
than in other States, and a tax base that is divided among two or more
States often is not taxed in one or more of these States because some
States may not exercise their authority to tax the out-of-State
institution. :
There is also the problem of foreign operations. International finan-
cial activity, which is of growing importance in large banks, presents
especially complex questions associated with the division of the tax
base. These merit careful congressional examination. In a few in-
stances States now exclude the foreign income of State-chartered
banks from the State tax base; in others, they may tax an apportioned
part of the income. In the international sphere, as in interstate divi-
sion of the tax base, diversity of policy and practice is still the rule,
and there is limited experience from which to draw policy judgments.75
With respect to out-of-State taxation generally, the added costs of
maintaining records that will meet requirements of all affected States
or other jurisdictions may be substantial, and uncertainties about po-
tential tax liabilities may become an important factor in decisions to
make particular loans or investments.
Problems that might be encountered with excise or franchise taxes
based on capital structure and gross receipts taxes are analogous to
those arising for net income taxation. For this reason, multistate tax
issues are presented ordinarily in terms of the treatment of net in-
come. However, any conclusions for policy in this area would apply to
the several types of "doing business" taxes.
The interim provisions of section 5219 (effective for 1970 and 1971)
specifically authorize States to apply nondiscriminatory sales and use
taxes, tangible personal property taxes, recordation or documentary
taxes, and certain other levies to out-of-State banks. These levies are,
however, excluded from the Board's study by the language of Public
Law 91-156.
In developing the 1969 legislation, Congressional committees recog-
rnzed that problems of multistate taxation were unresolved. This, in
fact, was a reason for requesting a special study. The House commit-
tee report said flatly that its bill "does not attempt to solve the prob-
lems created by multi-State taxation of interstate business." The com-
mittee added: *
The multiple State taxation problem has been before the
Congress for some time. It is less severe in the banking indus-
~ See appendix 10, section on `Foreign operations." ~
PAGENO="0079"
59
try than it is in manufacturing and trade, because banks are
not allowed to establish branches outside .their home office
State, but with the growing mobility o~ capital and complex-
ity of the economy, there is no doubt that it is becoming a
problem for some banks. If a bill proposing a limiting for-
mula for State taxation of banks engaged in multistate
operations should be referred to this committee, it would then
have before it an appropriate vehicle tor considering whether
and how this problem should be resolved by Federal
legislation. . . .. -
~But that was not, the question posed to your committee
by. the reference to it of this bill. The question was, rather,
whether national banks should continue to enjoy a special and
.privileged position of immunity from this problem, or*
whether they should face it on the same terms as their State-
~chartered competitors. So to state the question is to answer it.
It should not be the policy of the United States Government
to treat national banks as its favored wards (House Report
91-290, p. 3). . . .; . ..-.
The Senate committee quoted statements of the General Counsel
of the Treasury and of former Chairman Martin on the complexity
of the multistate taxation issue, both recommending separate later
treatment of the issue. This committee made the following comments:
Under the circumstances, the committee believes it wise to
specify the types of taxes which can be levied on national
banks located outside the taxing State while continuing to
prohibit all other forms of such taxation, at least until the
Federal Reserve Board completes a study of the problem and
Congress has had time to review it along with all the facts.
The committee did, however, specify certain taxes [those
authorized by the interim provisions] that could be levied on
national banks located outside the taxing State. The named
taxes are those taxes which virtually everyone concerned
agreed could `be properly imposed on these banks. The im-
pact on the banking systems of the imposition of these taxes
will not be great. Their imposition will not confront the
banking systems with a quantitative and qualitative un-
known, which may or may not be the case with respect to
other forms of interstate taxation (Senate Report 91-530,
p. 4). , ` `
The statement of the Hous~ conferees on the final enactment pointed
out that under the permanent amendment, on January 1, 1972:
States will become free to impose intangible property taxes
on national banks just as they have always been free to im-
pose such taxes on State-chartered banks. Likewise, any State
will be free to impose taxes on income derived within its
borders by the operations of a bank having its principal office
in a different State, regardless of whether the foreign bank
is State or National. This has always been the law with re-
spect to State banks. Some apprehension, however, has been
expressed as to whether the expanded taxing powers might
PAGENO="0080"
60
be used in a way which could impair the mobility of capital
or the economic efficiency of the banking system. For this rea-
son, the conference substitute includes a section requiring a
study by the Federal Reserve Board
Thus, if the [Board's] report should disclose a serious
danger or deficiency in the amendment to section 5219 to take
effect in 1972, the Congress would have a full session in which
to take remedial legislative aCt.i011 (House Report 91-428,
pp. 5-6).
An earlier section of this report deals with probable economic im-
pacts of multisbite taxation upon the banking system and the na-
tional economy. Here the avenues open for congressional consideration
are discussed.
These choices, in the order of the degree of restraint they would
impose on State authority, may be characterized as follows:
(1) Permit the section 5219 "permanent amendment" to take
effect without change on the issue of taxation outside the home
State of affected banks.
(2) Permit bank taxation by States other than the home State
subject to Federal statutory (and possibly administrative) con-
straints. These constraints would consist of (a) standards for
claims of tax jurisdiction asserted by nondomiciliary States and
(b) principles to govern interstate division of the base for each
type of applicable tax. Coverage of such a statutory provision
might be extended beyond national banks to include other cate-
gories of banks and financial businesses, such as are indicated in
the discussion of intangible personal property. Also subject to
a range of choIces is the extent to which standards and rules are
to be detailed in a statute or assigned to an administrative agency
for development in regulations and interpretations.
(3) Continue the interim provisions of section 5219 as perma-
nAM provisions insofar as they permit taxation of out-of-State
national banks~ but deny authority to apply to such banks any
tax that is not specified in these provisions. A statute along these
lines should retain the language of the present "permanent amend-
ment" so as to prohibit discrimination between State and na-
tional banks.
The following pages review the foregoing proposals, giving ex-
planatory detail and noting arguments for and against each approach.
(1) "Permanent amendment" without clumge.-The prospect that
national banks may he subject to various additional taxes outside their
home States opens up for commercial banks broad and complex ad-
ministrative areas which many banks have not. previously explored.
Apart from the tax payments themselves, new burdens would be
imposed. .
(a) Compliance burdens: There is no clear standard or prescribed
procedure for determining which States (other than the home State
of the bank) have jurisdiction to tax any given enterprise or activity,
nor are there uniform methods for dividing army given tax base among
States with jurisdiction to tax. Banks, like other enterprises, will find
it necessary to maintain extensive records as a basis (i) for applying
jurisdictional tests to determine whether their activities are of a kind
or magnitude that would support a claim of jurisdiction to tax in a
PAGENO="0081"
61
particular State and, where they aie taxable in any State besides the
home State, (ii) for dividing the tax base. In many cases, the compli-
ance costs may exceed the taxes.
In the mercantile and manufacturing business, taxpayer dissatisfac-
tion over the competing jurisdictional claims of States, the diversity in
methods the States emp]oyed for determining their respective shares
of any given tax base, and compliance burdens imposed by all these
requirements brought a Congressional response in 1959. This took
the form of supposedly temporary legislation (Public Law 86-272)
imposing limited restraints upon State action.76 In the same statute,
Congress launched an intensive Congressional study that was com-
pleted in 1965. As reported in an earlier section, the resulting recom-
mendations have not been enacted. Problems to which they are ad-
dressed remain a matter of spirited controversy between taxpayer
groups and the States. Many States have joined in limited measures
intended to alleviate the difficulties. None of these measures is oriented
to problems of banks, and, in fact, financial businesses are expressly
excluded from State enactments and proposed Federal legislation on
the subject.
(b) Uncertainty, controversy, and litigation: Bankers, not surpris-
ingly, fear that their exposure to multi-State taxation will open an
era of controversy, uncertainty, and litigation comparable to that
experienced by other interstate businesses. Although exposure of banks
to these problems constitutes no discrimination against them, the costs
imposed on the national economy in the form of inhibitions upon the
interstate mobility of banking capital and activity could prove to be
disproportionate in the light of tax yields that may be anticipated.
As a minimum, vigorous efforts would be in order to spur action by
the States that would promote uniformity in the application of simi-
~ai taxes, avoid overlapping taxation and discrimination, and mini-
mize compliance burdens.
The foregoing considerations raise doubts about letting the "perma-
nent amendment" go into effect without change. Counter-arguments-
arguments for permitting it to stand without change-may be sum-
marized as follows:
(a) State autonomy: As suggested in the case of intangible prop-
erty taxation, the Federal Government should refrain from imposing
limits upon State authority to formulate and control their individual
tax systems as long as they conform to Federal constitutional `require-
ments.
(b) Comprehensive approach: To the extent that there is a signifi-
cant national need for uniformity and certainty in taxation, it should
be handled by comprehensive legislation applicable to all types of
business that cross State lines rather than by special provisions lim-
ited to selected categories of business or types of activity. (This pre-
supposes, however, that a comprehensive set of standards can be de-
vised and enacted, ~whereas congressional experience over the past
decade demonstrates that great difficulties are involved in such legis-
lative efforts, even when the unique problems of financial institutions
are left out of the proposals.)
`~ Described at p. 40, above.
79 421 0 - 72 - 6
PAGENO="0082"
62
(c) State initiatives: States have recognized a need for greater uni-
formity and certainty in the field of business taxation generally and
are taking steps to reduce the problems. With removal of restrictions
on their taxation of national banks, they may be counted on to work
out suitable solutions to the. special interstate tax problems of the
banking business.
* (2) Modified "permanent amendrnent."-The second alternative
would require a modification of the "permanent amendment." It pro-
*ceeds from assumptions that (i) the States should be free to devise
their own tax systems but at the same time (ii) interstate mobility of
credit should not be jeopardized nor should the banking system of the
Nation be subjected to diversities and uncertainties ofthe kinds that
characterize State taxation of interstate manufacturing and mercan-
tile business. States are making efforts to ameliorate interstate differ-
*-ences but the solution does not appear to be near. Many States-includ-
ing several major banking States-have not adopted either the Uni-
form Division of Income for Tax Purposes Act or the Multistate Tax
Compact. It appears prudent to suggest, therefore, that if commercial
banks are to be exposed to mu]tist~ite taxation they should be given,
from the very outset, a degree of protection in the form of a statutory
prescription of standards for determining jurisdiction to tax and prin-
ciples for dividing the tax base among States in cases where division is
required.
This approach would not limit States in their choice of tax measures
and it would allow States to assert jurisdiction to tax out-of-State
banks-but it should permit such taxation only in circumstances in
which the bank has a substantial tie to the taxing State through physi-
cal presence or a pattern of sustained and substantial operations.
The purpose~ of such provisions would be to avoid impediments to
interstate movements of credit, while safeguarding the authority of
States to impose taxes in circumstances where an outside bank estab-
lishes a clear relationship to the taxing State. An enterprise that es-
tablishes facilities or maintains staff in a State may be using govern-
mental services there to ~he same extent as a domestic competitor. In
these circumstances, imposition of State and local taxes appears to be
warranted by considerations of equity and economic neutrality. If in-
terstate branch banking were ever permitted, it would be inequitable to
withhold authority for States to tax the branches; in fact, such taxa-
*tion might be required to protect domestic banks from the competition
of banks headquartered in States with lighter taxes.
Formulation of standards concerned with jurisdiction and the di-
vision of the tax base is not, however, a simple undertaking. Moreover,
such standards-particularly those for interstate division of the tax
base-are not likely to be whoily self-executing, so that a Federal ad-
ministrative agency might be needed to provide interpretations and
regulations.7~
`~ A Federal administrative agency could interpret jurisdictional and divlslon.of.baFe
provisions and advise the Congress from time to time whether further legislation is ad-
visable. Similarly, where States apply a unitary rule to related corporations (see PP. 35-fl),
a Federal administrative body could establish consistent guidelines an(i Interpretations
based on the special characteristics of financial businesses. To avoid creating a specialized
agency for this circumscribed function, the Congress might assign responsibility to the
Internal Revenue Service, which has substantial relationships with all taxpayers and all
States; has a store of information about problems of the types to he dealt with; has ex-
perience In applying and interpreting jurisdictional and other complex rules: and would
have access, within the Treasury Department, to both the supervisory authority for na-
tional banks (the Comptroller of the currency) and the tax policy advisers in the Office
of the Secretary.
PAGENO="0083"
*63
* .A Federal statutory provision on jurisdictional standards might be-
gin by stating the general objective of policy-e.g., to limit taxation
of any given bank and its attributes (net income, capital stock, or other
measures of tax) or its activities to those States with which the out-of-
State bank has a definite and readily identifiable link through the pres-
ence of personnel, property, or substantial continuing operations. Like
Public Law 86-272, the statute might provide that. certain common
occurrences or practices do not, by themselves, provide sufficient nexus
to establish jurisdiction to tax (e.g., solicitation of prospective bor-
rowers by the bank or its representatives, the loans being approved or
rejected outside the State; the holding of security interests in property
located in a State; or enforcement of obligations in the courts of a
State).
Several States provide in their corporation laws that certain ac-
tivities, such as making designated types of loans or acquiring inter-
~sts therein, or maintaining bank accounts, or securing or collecting
debts, are not to be considered "transactions" or "doing business" in
those States. A similar list of activities might be identified in a Federal
law as transactions or operations that do not constitute a basis for a
State to assert jurisdiction to tax an out-of-State bank.
Similarly, Federal law might outline the objectives of a division-of-
base provision and provide rules for its administration. Also, it could
establish uniform standards for State applications of the unitary busi-
ness concept and State requirements of consolidated returns from re-
lated corporations.
(3) Retain the interim provisions for multistate taxation.-Sev-
~ral bank representatives have urged temporary retention of the
"interim provisions" of Public Law 91-156 that relate to taxation of
out-of-State banks. This would permit only designated types of State
taxation of nondomiciliary banks while Congress considered more ex-
tensively the multistate tax problems of financial institutions.
Others have proposed. that these provisions be made permanent,
with the addition of identical limitations on out-of-State taxation of
State-chartered as well as national banks. A nondoiniciliary State
would henceforth be permitted to impose on a national or State bank
having transactions in the State only those taxes (excluded from the
Board's study) which are enumerated in present law as permissible for
national banks during 170 and 1971. (See above, pp. 12-13.)
The objective of these proposals is to permit State taxation of out-
of-State banks in circumstances where it is clearly warranted, but to
control its variety and intensity. Those who support this alternative
contend that it will allow nondomiciliary State taxation by methods
which, though limited, are clearly defined; that it will not risk the
detrimental effects to interstate credit flows that would likely ensue
if States were free to levy income or other "doing business" taxes on
out-of-State banks without statutory restriction; and that it will not
impose burdens of compliance and uncertainty that are anticipated
if the "permanent amendment" takes effect without change.
Some proponents of this approach suggest further restrictions on
State authority, in the form of changes that would reduce banks' com-
pliance burdens in the case of sales and use and tangible personal
property taxes, particularly for equipment owned by the bank as
lessor. Failing this, they favor limitation of these taxes also to the
domiciliary State of the bank. .
PAGENO="0084"
Underlying this "interim amendment" approach is the view that,
considering the ramifications of interstate banking practice, a claim
to tax jurisdiction advanced by the State of the bank's headquarters
ordinarily has greater weight than claims made by States where its
debtors reside. if the activities of accumulating and marshalling lend-
able resources and releasing them to borrowers may be said to have
a physical situs, this is at the bank.
Contrary considerations are the contentions mentioned on pages
61-2 in behalf of the "permanent amendment": that. the Federal Gov-
ernment should not limit State taxing authority as long as States con-
form to Federal constitutional requirements; that if there is a need
for restrictive Federal rules, it is one that should be met by measures
applicable to all types of business; and that States are making prog-
ress in their efforts to solve multi-State tax problems. If it appeared
that banks were being treated as a special class of business, free of ob-
ligations for income and "doing business taxes" outside their home
States, other businesses might contend for like treatment.
The counter-argument here, however, as in the case of intangible
personal property taxation, is that the States have not had authority
heretof ore to tax out-of-State national banks and have had little occa-
sion to tax State-chartered banks from other States. Consequently, a
proposal for distinctive treatment does not contemplate an actual cur-
tailment of a previously available basis for taxation.
If major taxes may be imposed oniy by the State of a bank's home
office, banks headquartered in a State may have tax obligations differ-
ent from those of out-of-State banks that transact business in the
State. Individual out-of-State banks, free from major tax liabilities in
their customers' State, might enjoy tax advantages over local banks.
But in any particular situation the tax differential, if any, could run
in favor of local banks, since the comparison depends on the way each
bank is taxed in its home State.
Related issues.-A part from the issues of intangible property taxa-
tion and multistate taxation, and in some measure involved in tliem~
are questions of di~crimination, local taxation, interest income from
Federal Government obligations, and the classification of coins and
paper currency for tax purposes. These topics are examined below.
(1) Discriminatiün.-The possibility that banks as a class might be
subjected to systematic discrimination was advanced as an issue for the
Board's study.
\\T1iate~~er the possibilties of distinctive treatment under the "per-
manent amendment," similar opportunities existed, though in a imar-
rower mange, under the old section 5219. That provision specified that
the tax on national l)ank shares "shall not be at a. greater rate than is
assessed upon other moneyed capital in the hands of individual citi-
zens . . . . coming into competition with the business of national
banks," and excluded certain personal investments from that. concept.
Similarly, a condition attached to time use of taxes on. according to. or
measured by net income of national banks under the old section is that.
the applicable rate "shall not be higher than time rate assessed upon
other financial corporations nor higher thami the highest of the rates
assessed by the taxing State upon mercantile, manufacturing, and
business corporations." Time course of litigation interpreting these
PAGENO="0085"
(;5
provisions suggests that a statutory piesciiption of this kind may not
dispel uncertainty and controversy, but it may reduce its scope.
Basic protection against "excessive" discrimination or "unduly
burdensome" taxation is established for commercial banks~ as for other
taxpayers, in Federal constitutional provisions-clauses relating to
commerce, due pmc~, and equal protection of the laws-and similar
State constitutional provisions, including requirements of uniformity
in taxation. The history of business taxation in the. United . States
demonstrates that. within these constraints there remain broad areas
for diversity in tax treatment of different groups of taxpayers.
To the constitutional protection available to banks~ Congress has
added in the permanent amendment of section 5219 a single additional
standard, the requirement that, for taxation in either the domiciliary
State or any other State, national banks shall be subject to the same
treatment as banks chartered by the State or other jurisclic'tion within
which the principal office is located. But this requirement. would not
bar discriminatory taxation of banks generally, as a class apart from
Other businesses, and does not. reinforce the constitutional safeguards
available to other depositary institutions.
It is difficult to frame a statutory prescription for equal treatment
that adds substance to the constitutional standards of protection
against discrimination. A proposal was made by some bank representa-
tives that the Federal statute he amended further to prohibit taxes on
national banks at higher tax rates than are imposed on State banks
and general business corporations, and also to prohibit other or addi-
tional taxes than those applied to general business corporations. But
enactment of such a proposal would almost. certainly be interpreted as
sanctioning national bank taxes at rates no lower than and nominally
no different from those applied to business generally.
The problem of equal treatment is one to which former Chairman
Wm. McC. Martin. Ji~.. referred in a statement to the Senate Finance
Committee in 1969~ concerning bills that led to Public Law 91-156:
*A tax Ofl intangible personal property hits hardest those
financial institutions whose assets consist almost wholly of in-
tangibles; so a tax that appeared to be nondiscriminatory
could operate unfairly in practice if applied to banks.78
In practice, it may be necessary in the interests of equity and eco-
nomic neutrality to classify banks and other financial institutions,
particularly depositary institutions, separately from other businesses
in order that tax provisions may be adjusted to their special charac-
teri~tmcs. The possibilities of adverse classification of out-of-State de-
positary institutions for tax purposes might. be forestalled by provid-
ing in Federal law that taxes on these institutions may not exceed the
amounts they would pay under the same circumstances if they were
domiciled or chartered in the taxing State. Such a pro~sion, coupled
with the nondiscrimination provision of the "permanent amendment,"
should prevent differences in the treatment of out-of-State national
and State-chartered banks. . .
(2) Local taxation.-Fear of largely uninhibited local taxation
presents a somewhat special problem. In our Federal system the taXing
`~ 91it (`ongress, 1st sess., Senate Committee on Banking and Currency, Senate Heport
91-530, September 24. 1909, p. 55.
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66
powers of local governments are derived from their States and are
limited by State constitutions and legislation. In no event are local
governments accorded taxing authority not available constitutionally
~o the State government.79
The States differ in the extent to which they delegate taxing author-
ity to local governments. The State and local division of functions and
responsibilities differs among the States; and State and local roles
in raising revenues to finance local government likewise differ. If Fed-
eral statutory guidelines are needed, their uniform application would
require that they limit State as well as local authority. Individual
States may adopt restraints upon local government exercise of power
to tax banks and other depositary institutions, but ordinarily this
would be done in a setting that coordinates the application of t~txes
on these institutions with the administration of taxes on other busi-
nesses, as part of the broad structure of taxing authority and respon-
sibilities within the State. In defining the role of local governments in
the taxation of financial enterprises, State legislatures need to recog-
nize the special economic importance of avoiding tax impediments to
a smooth flow of credit between communities as well as between
States.
The problem of local taxation is complicated by a long record of
administrative inadequacies in all parts of the country, especially in
the application of property taxes. Some types of taxes are not eco-
nomically or administratively feasible at the local government level-
e.g., corporate net income taxes. With a State tax, the likelihood is
greater than with a local tax that the objectives of geographic and
inter-industry neutrality will be served and competent administration
will be provided.
In t.he light of these economic and administrative considerations,
restraints upon the proliferation of local taxes might appear desirable.
Restrictive guidelines might be applied to local taxation of banks or
depositary institutions if taxation of income or capital in nondorni-
ciliary States is to be permitted (as it will be if the "permanent amend-
ment." of section 5219 becomes effective without change).
With respect to taxation in the home State, it may be feasible to
formulate standards which promote uniformity and minimize com-
pliance burdens without significantly impinging on "local autonomy."
This would not protect financial institutions or other taxpayers against
excessive local taxation: but it might ameliorate, their burdens without
significantly altering Federal-State relationships.
* (3) hiterest on Federal obiigations.-Tnterest on Federal securities
is exempt from a direct tax on net income but may be included in the
measure of an excise or franchise t.ax according to or measured by net
income. This distinction was established for corporation taxation gen-
erally in Supreme Court decisions over an extended period, and for
national banks specifically by the 1926 amendment of section 5219.
Under present law, the i)iovision in section 5219 will lapse at the end
of 1971. However, the Federal public debt statute has specified since
1959 that exemption of Federal Government obligations-
7~ Of course, individual States often authorize their subdivisIons to levy local taxes
which are denied to the State government by the State constitution or statutes-par-
ticularly In States which adopt programs for the separation of Sate and local revenue
sources.
PAGENO="0087"
67
from taxation by or under State or local authority.. . extends
to every form of taxation that would require that either the
obligations or the interest thereon, or both~ be considered,
directly or indirectly, in the computation of the tax, except
nondiscriminatory franchise or other nonproperty taxes in
lieu thereof imposed on corporations and except estate taxes
or inheritance taxes.8°
The distinction is not based on economic differences between direct
and excise or franchise taxes on income, since they are identical in all
other essential characteristics except for the circumstances in which
they may be imposed by States.
Most States that tax banks with respect to their net income use ex-
cise taxes, and the number has gradually increased. But constitutional
doctrines forbid a State to levy a "doing business" tax on an out-of-
State bank that conducts only interstate business within the taxing
State. If States other than the home State are to be permitted to par-
ticipate in taxing banks' net income, as they.may do under the "perma-
nent amendment" of section 5219, a related statutory amendment may
be desirable, to authorize States to include, in the measure of otherwise
valid direct net income taxes, the income realized by banks and other
financial institutions from Federal securities.
Elimination of the distinction between direct and indirect taxes on
net income would give the States considerably greater freedom in
formulating their tax systems. The point is `particularly important
in the taxation of banks and other depositary institutions because of
their large holdings of Government obligations. However, the princi-
ple is equally applicable to other taxpayers, and the change could be
made general in application by amendment of the Federal public
debt statute (31 U.S.C. 742) and any related provisions.
This proposal does not relate to property taxation based on the value
of the securities; it assumes that the present exemption from property
taxation would continue.
(4) Classification of coins and currency.-Under the "permanent
amendment" of section 5219, paper currency and coins held by na-
tional banks will be subject to State ad valorem taxation either as
tangible or as intangible personal property.
The House conferees on Public Law 91-156 declared, with refer-
ence to the prohibition on intangible personal property taxes in the
interim amendment of section 5219: "For purposes of this provision,
of course. the term `intangible personal property' includes cash and
currency." (House Report 91-728, p. 4.) However, this is not ex-
plicitly provided in the law. The interim amendment exempts "cash
and currency" by express language excluding these assets from tangi-
bk personal property, which became taxable in 1970. This statutory
reference might be interpreted as a recognition that, in the absence
of the provision, "cash and currency" are appropriately classified as
tangibles for State tax purposes. Without further amendment, the
restrictive provisions affecting both tangibles and intangibles will
expire at the end of 1971.
Paper currency circulating in the United States is a nonrepresenta-
tive intangible (since there is no underlying tangible, such as gold
31 U.S.C. 742, quoted and cited more fully above, in footnote 35. Emphasis added.
PAGENO="0088"
68
or silver) and coins are tangibles. but some States classify all such
assets as tangibles and others classify them all as intangibles under
laws imposing taxes on personal propei'ty. In view of prevailing State
practices of exemption or nonassessment. of currency and coins of
taxpayers generally, the Congress could clarify the situation by estab-
lishing a statutory rule that both coins and currency are to be con-
sidered intangible personal property for tax purposes if States are
permitted to tax intangibles of depositary institutions. This could be
done either by explicit amendment of section 5219 with respect to na-
tional banks or, more generally, through amendment of the present
law which permits taxation of currency as money on hand or deposit
(31 U.S.C. 425).
Most U.S. paper currency is backed by obligations of the National
Government, and the remainder is an unsecured liability of the Treas-
ury. Possibly all paper currency should be treated like Federal Gov-
ernment obligations for purposes of property taxation-that is, de-
clared tax-exempt by Federal statute.
A related issue is raised in hifis introduced in the 92d Congress that
would amend section 5219 to exclude from personal property taxes
on national banks "any . . . item referred to as `Cash and Due from
Banks.' "81
If the present, temporary exemption of bank-owned intangibles were
made permanent, legislation enacting that provision could include a
requirement that coins and currency be treated as intangibles for pur-
poses of State taxation. If taxation of bank-owned intangibles is to
be permitted. however, as in the "permanent amendment" the Congress
might consider a narrower question-the possible extemption from
such taxes of all"cash" and "due from banks" of depositary institu-
tions or all reserves of these institutions which are required to be held
as demand deposits or as coins and paper currency. Such an exemption
would tacitly acknowledge that these reserves are established in re-
sponse. to statutory and regulatory requirements and earn no interest
for the institutions that own them. Although this kind of exemption
would be open to the. objection that ad valorem taxation applies in 1)1111
ciple to the value of property, whether or not. it is currently pioduc1ii~
mcome, the fact is that in the case of other intangible, property it is the
usual practice of assessors to determine valuations primarily from cur-
rent yields-and some State laws validate these practices. The effect
of such a Federal statute would be to prevent any possible discrimi-
nation in assessment of these assets to depositary institutions.
~ H.R. 4365, February 17, 1971, Mr. Harsha, and H.R. 6142, March 16, 1971, Mr. Hays,
both of Ohio.
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Acknowledgments
In preparing this study of State and local taxation of banks, the
authors received generous assistance and support from many persons
and organizations. To all of them we express sincere thanks.
The greatest burden, of course, was carried by staff of the Board of
Governors, particularly the Division of Research and Statistics, which
had responsibility for the study. J. Charles Partee, Adviser to the
Board ai~cl Director of the Division of Research and Statistics sup-
plied us with essential professional and technical assistance through-
out the project. Members of this Division who handled special assign-
mcuts are Miss Sally NI. Hey, Economist in the Government Finance
Section; Mrs. Caroline H. Cagle, Economist in the Banking Section;
and Paul Schneiderman, Economist in the Capital Markets Section.
Development of the bank sample and data handling procedures for
the survey of bank tax expenses was carried out by Robert Steinberg.
Chief of the Statistical Methodology and Procedures Section, and
Irving Gedanken, Statistician, and Erling T. Thoresen, Economist,
* Division of Research and Statistics; and data processing in that
survey, by Robert F. Taylor, Applications Analyst in the Division
of Data Processing. Tabulations for the survey of tax administrators
were planned and directed by Peter J. Feddor, Applications Analyst,
Division of Data Processing. Mrs. Arlene Lustig, Economist in the
Banking Section, Division of Research and Statistics, and Mrs. Jean
Hentzel, Associate Economist in the Chicago Federal Reserve Bank,
prepared special tabulations.
David B. Hexter, Assistant to the Board, served as senior legal
adviser, and Grasty Crews II, Adviser in the Legal Division of the
Board, also provided legal counsel and policy guidance.
Lynn A. Stiles, Vice President and Economist, Federal Reserve
Bank of Chicago, served as project consultant and a member of the
Advisory Panel for the study. Others who served as members of the
Advisory Panel are Harvey E. Brazer, Professor of Economics, Uni-
versity of Michigan; Ernest J. Brown, Tax Division, Department of
Justice (formerly Professor of Law, Harvard Law School); Murray
Drabkin, Attorney (formerly Chief Counsel of the. Special Sub-
committee on State Taxation of Interstate Commerce, House Corn-
mit tee on the Judiciary) ; Jdhn~ IQ I~ue, Professor of Economics,
University of Illinois; L. Laszlo Ecker-Racz, Consultant, former
Assistant Director of the Advisory Commission on Intergovernmental
Relations; Jerome R. Hellerstein, Professor of L ~v, New York Uni-
versity; Allen D. Manvel, Consultant, former A~sistant Director of
the Advisory Commission on Intergovernmental Relations; and Carl
S. Shoup, Professor of Economics, Columbia University. Federal
agency representatives who provided liaison with their offices and also
served as members of the Advisory Panel are John Copeland, Chief,
(69)
PAGENO="0090"
70
Excise Taxation Staff, Office of Tax Analysis, Office of the Secretary
of the Treasury; Richard Gabler, Senior Analyst, Advisory Commis-
sion on Intergovernmental Relations; Maurizio de Martino, Attorney,
Law Department, Office of the Comptroller of the Currency, Treasury
Department; and David A. Walker, Financial Economist, Federal
Deposit Insurance Corporation.
In the course of the study, assistance and information were given by
hundreds of bank officers and tax counsel and by national and State
banking organization representatives and other trade groups. Tax ad-
ministrators and State bank supervisors in every State also were
called upon for extensive help. Special acknowledgment must be ac-
corded to Charles F. Conlon, Executive Director, Federation of Tax
Administrators; Ronald B. Welch, Assistant Executive Secretary, Cal-
ifornia State Board of Equalization; Oliver Oldman, Professor of
* Law and Director, International Tax Program, Harvard Law School;
Harry P. Guenther, Executive Vice President-Economist, and Alex-
ander W. Neale, Jr., Legislative Representative, of the Conference of
State Bank Supervisors; Matthew Hale, General Counsel, American
Bankers Association; Roland IV. Blaha, Illinois State Commissioner
of Banks and Trust Companies; William G. Jlerzel, Kentucky State
Department of Revenue; Rufus T. Logan, Minnesota State Commis-
sioner of Revenue; Lloyd Slater, Director of Research (now retired),
New York State Department of Taxation and Finance.
`As a member of the Board of Governors, an expert in public finance,
* and a former State tax administrator, Governor George W. Mitchell
devoted particular attention to this `study. I-I is advice on the project
generally and his careful comments on draft materials have proved
invaluable.
Finally, we are grateful to Lester S. Jayson, Director, Congres-
sional Research Service, Library of Congress, who made arrangements
for the detail of I. M. Labovitz from the C.R.S. Senior Specialist staff
`to the Board of Governors for the period of this study.
I. M. LABOVITZ,
`Director, Bank Tace Study.'
`JA~tEs B. ECKERT,
`A88i8tant 4dviser, Division of
Research and Statistics.
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* PART III
APPENDIX 1
Federal Statutes Relevant to Study of State and Local Taxation
of Banks
A. SECTION 5219, REVISED STATUTES (12 U.S. CODE 548), BEFORE
AMENDMENT BY PUBLIC LAW 91-156, DECEMBER 24, 1969
U.S. CODE, TITLE 12
§ 548. State taxation.
The legislature of each State may determine and direct, subject to the provi-
sions of this section, the manner and place of taxing all the shares of national bank-
ing assoóiations located within its limits. The several States may (1) tax said
shares, or (2) include dividends derived therefrom in the taxable income of an
owner or holder thereof, or (3) tax such associations on their net income, or (4)
according to or measured by their net income, provided the following conditions
are complied with:
1. (a) The imposition by any State of any one of the above four forms of
taxation shall be in lieu of the others, except as hereinafter provided in sub-
division (c) of this clause.
(b) In the case of a tax on said shares the tax imposed shall not be at a
greater rate than is assessed upon other moneyed capital in the hands of
individual citizens of such State coming into competition with the business of
national banks: Provided, That bonds, notes, or other evidences of indebted-
ness in the hands of individual citizens not employed or engaged in the
banking or investment business and representing merely personal invest-
ments not made in competition with such business, shall not be deemed
moneyed capital within the meaning of this section.
(c) In case of a tax on or according to or measured by the net income of
an association, the taxing State may, except in case of a tax on net income,
include the entire net income received from all sources, but the rate shall
not be higher than the rate assessed upon other financial corporations nor
higher than the highest of the rates assessed by the taxing State upon mercan-
tile, manufacturing, and business corporations doing business within its
limits: Provided, however, That a State which imposes a tax on or according
to or measured by the net income of, or a franchise or excise tax on, financial,
mercantile, manufacturing, and business corporations organized under its
own laws or laws of other States and also imposes a tax upon the income of
individuals, may include in such individual income dividends from national
banking associations located within the State on condition that it also
includes dividends from domestic corporations and may likewise include
dividends from national banking associations located without the State on
condition that it also includes dividends from foreign corporations, but at
no higher rate than is imposed on dividends from such other corporations.
(d) In case the dividends derived from the said shares are taxed, the tax
shall not be at a greater rate than is assessed upon the net income from other
moneyed capital.
2. The shares of any national banking association owned by nonresidents
of any State shall be taxed by the taxing district or by the State where the
association is located and not elsewhere; and such association shall make
return of such shares and pay the tax thereon as agent of such nonresident
shareholders.
(71)
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72'
3. Nothing herein shall be construed to exempt the real property of associa-
tions from taxation in any State or in any subdivision thereof, to the same
extent, according to its value, as other real property is taxed.
4. The provisions of section 5219 of the Revised Statutes of the United
States as in force prior to March 25, 1926, shall not prevent the legalizing,
ratifyng, or confirming by the States of any tax heretofore paid, levied, or
assessed upon the shares of national banks, or the collecting thereof, to the
extent that such tax would he valid under said section.
(R. S. § 5219; Mar. 4, 1923, ch. 267, 42 Stat. 1499; Mar. 25, 1926, oh. 88, 44
Stat. 223.)
DERIVATION; NATIONAL BANK Aer
Section derIved from act June 3, 1864, ch. 106, 41, 13 Stat. 111, whIch was the National Bank Act, and
act Feb. 10, 1868, ch. 7, 15 Stat. 34. See section 38 of this title.
REFERENCES IN TEXT
Section 5219 of the Revised Statutes, referred to In clause 4, is Incorporated in this section.
AMENDMENTS
1926-Act Mar. 25, 1926, among other changes Inserted "on their net Income" In ci. (3) of opening par.,
and added ci. (4) thereto, and inserted proviso in subsec. 1(c).
B. PUBLIC LAW 91-156, APPROVED DECEMBER 24, 1969 (91sT
CONGRESS, H. R. 7491; 83 STAT. 434-5), AN ACT TO CLARIFY THE
LIABILITY OF NATIONAL BANKS FOR CERTAIN TAXES
Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled,
§ 1. Temporary amendment of section 5219, Revised Statutes
(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended by adding
at the end thereof the following:
"5. (a) In addition to the other methods of taxation authorized by the foregoing
provisions of this section and subject to the limitations and restrictions specifically
set forth in such provisions, a State or political subdivision thereof may impose
any tax which is imposed generally on a nondiscriminatory basis throughout
the jurisdiction of such State or political subdivision (other than a tax on intan-
gible personal property) on a national bank having its principal office within
such State in the same manner and to the same extent as such tax is imposed on
a bank organized and existing under the laws of such State.
"(b) Except as otherwise herein provided, the legislature of each State may
impose, and may authorize any political subdivision thereof to impose, the fol-
lowing taxes on *a national bank not having its principal office located within
the jurisdiction of such State, if such taxes are imposed generally throughout
such jurisdiction on a nondiscriminatory basis:
"(1) Sales taxes and use taxes complementary thereto upon purchases,
sales, and use within such jurisdiction.
"(2) Taxes on real property or on the occupancy of real property located
within such jurisdiction.
"(3) Taxes (including documentary stamp taxes) on the execution, delivery,
or recordation of documents within such jurisdiction.
"(4) Taxes on tangible personal property (not including cash or currency)
located within such jurisdiction.
"(5) License, registration, transfer, excise, or other fees or taxes imposed
on the ownership, use, or transfer of tangible personal property located
within such jurisdiction.
"(c) No sales tax or use tax complementary thereto shall be imposed pursuant
to this paragraph 5 upon purchases, sales, and use within the taxing jurisdiction
of tangible personal property which is the subject matter of a written contract
of purchase entered into by a national bank prior to September 1, 1969.
"(d) As used in this paragraph 5, the term `State' means any of the several
States of the United States the District of Columbia, the Commonwealth of
Puerto Rico, the Virgin Islands, and Guam."
(b) The amendment made by subsection (a) of this section shall be effective
from the date of enactment of this Act until the effective date of the amendment
made by section 2(a) of this Act.
§ 2. Permanent amendment of section 5219, Revised Statutes
(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read:
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73
"SEC. 5219. For the purposes of any tax law enacted under authority of the
United States or any State, a national bank shall be treated as a bank organized
and existing under the laws of the State or other jurisdiction within which its
principal office is located."
(b) The amendment made by subsection (a) becomes effective on January 1,
1972.
§ 3. Saving provision
(a) Except as provided in subsection (b) of this section, prior to January 1, 1972,
no tax may be imposed on any class of banks by or under authority of any State
legislation in effect prior to the enactment of this Act unless
(1) the tax was imposed on that class of banks prior to the enactment of
this Act, or
(2) the imposition of the tax is authorized by affirmative action of the
State legislature after the enactment of this Act.
(b) The prohibition of subsection (a) of this section does not apply to
(1) any sales tax or use tax complementary thereto,
(2) any tax (including a documentary stamp tax) on the execution,
delivery, or recordation of documents, or
(3) any tax on tangible personal property (not including cash or currency),
or for any license, registration, transfer, excise or other fee or tax imposed
on the ownership, use or transfer of tangible personal property,
imposed by a State which does not impose a tax, or an increased rate tax, in
lieu thereof.
§ 4. Study by Board of Governors of the Federal Reserve System
(a) The Board of Governors of the Federal Reserve System (hereinafter re-
ferred to as the "Board") shall make a study to determine the probable impact
on the banking systems and other economic effects of the changes in existing law
to be made by section 2 of this Act governing income taxes, intangible property
taxes, so-called doing business taxes, and any other similar taxes which are or may
be imposed on banks. In conducting the study the Board shall consult with the
Secretary of I Treasury and appropriate State banking and taxing authorities.
(b) The Board shall make a report of the results of its study to the Congress not
later than December 31, 1970. The report shall include the Board's recommenda-
tions as to what additional Federal legislation, if any, may be needed to reconcile
the promotion of the economic efficiency of the banking systems of the Nation
with the achievement of effectiveness and local autonomy in meeting the fisca
needs of the States and their political subdivisions.
Approved December 24, 1969.
LEGISLATiVE HISTORY
House Reports: No. 91-290 (Committee on Banking and Currency) and No. 91-723 (Committee of
Conference).
Senate Report No. 91-530 (Committee on Banking and Currency).
Congressional Record, vol. 115 (1969):
July 17: Considered and passed House.
Nov. 21: Considered and passed Senate, amended.
Dec. 10: House agreed to conference report.
Dec. 12: Senate agreed to conference report.
* 0. EARLIER FORMS OF SECTION 5219, REVISED STATUTES
1864
Provided, That nothing in this act shall be construed to prevent all the shares in
any of the said associations, held by any person or body corporate, from being
indluded in the valuation of the personal property of such person or corporation in
the assessment of taxes imposed by or under state authority at the place where
such bank is located, and not elsewhere, but not at a greater rate than is assessed
upon other moneyed capital in the hands of individual citizens of such state:
Provided, further, That the tax so imposed under the laws of any state upon the
shares of any of the associations authorized by this act shall not exceed the rate
imposed upon the shares in any of the banks organized under authority of the state
where such association is located: Provided, also, That nothing in this act shall
exempt the real estate of associations from either state, county, or municipal
taxes to the same extent, according to its value, as other real estate is taxed. (Act
June 3, 1864. C. 106, Sec. 41; 13 Stat. L. 112.)
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74
1868
Be it enacted by the Senate and house of Representatives of the United States of
America in congress assembled, That the words "place where the bank is located,
and not elsewhere," in section forty-one of the "act to provide a national cur-
rency," approved June third, eighteen hundred and sixty-four, shall be construed
and held to mean the State within which the hank is located; and the legislature of
each State may determine and direct the manner and place of taxing all the
shares of national banks located within said State, subject to the restriction 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 provided always, That
the shares of any national bank owned by non-residents of any State shall be
taxed in the city or town where said bank is located, and not elsewhere. (Act
Feb 10, 1868. C. 7; 15 Stat. L. 34.)
1923
SEC. 5219. The legislature of each State may determine and direct, subject to
the provisions of this section, the manner and place of taxing all the shares of
national banking associations located within its limits. The several States n'iay tax
said shares, or include dividends derived therefrom in the taxable income of an
owner or holder thereof, or tax the income of such associations, provided the
following conditions are complied with:
1. (a) The imposition by said State of any one of the above three forms of
taxation shall be in lieu of the others.
(b) In the case of a tax on said shares the tax imposed shall not be at a greater
rate than is assessed upon other moneyed capital in the hands of individual
citizens of such State coming into competition with the business of national
banks: Provided, That bonds, notes, or other evidences of indebtedness in the
1~ands of individual citizens not employed or engaged in the banking or investment
business and representing merely personal investments not made in competition
with such business, shall not be deemed moneyed capital within the meanim: of
this section.
(c) In case of a tax on the net income of an association, the rate shall not be
higher than the rate assessed upon other financial corporations nor higher than the
highest of the rates assessed by the taxing State upon the net income of mercantile,
manufacturing, and business corporations doing business within its limits.
(d) In case the dividends derived from the said shares are taxed, the tax shall
not be at a greater rate than is assessed upon the net income from other moneyed
eapital.
2. The shares or net income as above provided of any national banking associa-
tion owned by nonresidents of any State, or the dividends on such shares owned by
such nonresidents, shall be taxed in the taxing district where the association is
`ocated and not elsewhere; and such associations shall make return of such income,
and pay the tax thereon as agent of such nonresident shareholders.
3. Nothing herein, shall be construed to exempt the real property of associa-
tions from taxation in any State or in any subdivision thereof, to the same extent,
according to its value, as other real property is taxed.
4. The provisions of section 5219 of the Revised Statutes of the United States
as heretofore in force shall not prevent the legalizing, ratifying, or confirming by
the States of any tax heretofore paid, levied, or assessed upon the shares of na-
tional banks, or the collecting thereof, to the extent that such tax would be valid
under said section. (Act Mar. 4, 1923. C. 267; 42 Stat. L. 1499.)
1926
(For the text of section 5219 as amended in 1926, see 12 U.S. Code 548, as repro.
duced above, p. 1, under the heading, "A. Section 5219, Revised Statutes (12 U.S.
Code 548), before amendment by Public Law 9 1-156, December 24, 1969.")
D. FEDERAL STATUTORY PROVISIONS RELATING TO STATE AND LOCAL
TAXATION OF FINANCIAL INSTITUTIONS OTHER THAN NATIONAL BANKS
EXCERPTS FROM U.S. CODE, TITLE 12
(1) Federal reserve banks, 12 U.S.C. 531:
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75
Exemption from taxation.
Federal reserve banks, including the capital stock and surplus therein and the
income derived therefrom, shall be exempt from Federal, State, and local taxation,
~except taxes upon real estate. (J)ec. 23, 1913, cli. 6, § 7, 38 Stat. 258; Mar. 3, 1919,
~ch. 101, § 1, 40 Stat. 1314.)
CODIFICATION
Section is comprised of third pai. of SectiOn 7 of act. 1)ec. 23, 11113. First and second pars. of section 7 are
classified to sections 289 and 290 of tills title, respectively.
(2) Banking corporations authorized to (10 foreign banking business,
12 U.s.c. 627 (Edge Act corporations):
State taxation.
Any corporation organized under the provisions of sections 611-631 of this
title shall be subject to tax by the State within which its home Office is located in
the same manner and to the same extent as other corporations organized under the
laws of that State which are transacting a similar character of business. The shares
~of stock in such corporation shall also be subject to tax as the personal property
*of the owners or holders thereof in the same manner and to the same extent as the
shares of stock in simnilar State corporations. (Dec. 23, 1913, ch. 6, § 25 (a), as
added Dec. 24, 1919, ch. 18, 41 Stat. 378.)
CODIFICATION
Section is a part of section 25 (a), which was added to act Dec. 23, 1913, ch. 6 by act Dec. 24, 1919.
(3) Federal land banks and associations, 12 U.S.a. 931: Mortgages
and bonds as instrumentalities of Government:
Every Federal land bank and every Federal land bank association, including
the capital and reserve or surplus therein and the income derived therefrom,
shall be exempt from Federal, State, municipal, and local taxation, except taxes
upon real estate held, purchased, or taken by said bank or association under the
provisions of sections 761 and 781 of this title. First mortgages executed to Federal
land banks, or to joint stock land banks, and farm loan bonds issued under the
provisions of this chapter, shall be de~mmed and held to be instrumentalities of
the Government of the United States, and as such they and the income derived
therefrom shall be exempt from Federal, State, municipal, and local taxation.
(July 17, 1916, oh. 245, title I, § 26, 39 Stat. 380; Aug. 18, 1959, Pub. L. 86-168,
title I, § 104(h), 73 Stat. 387.)
(4) Joint-stock land banks, 12 u.s.c. 932: Limitations on State
taxation of shareholders:
Nothing in sections 93 1-933 of this title shall prevent the shares in any joint-
~stock land bank 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 bank is located; but such assessment and taxation shall be
in manner and subject to tile conditions and limitations contained in section 548 of
*this title with reference to the shares of national banking associations. (July 17,
1916, ch. 245, title I, § 26, 39 Stat. 380.)
(5) Federal and joint-stock land banks, 12 u.s.c. 933: Real property
*not exempt:
Nothing in sections 93 1-933 of this title shall be construed to exempt the real
property of Federal and joint-stock land banks and Federal land bank associa-
tions from either State, county, or municipal taxes, to the same extent, according
It' ~s value, as other real property is taxed. (July 17, 1916, ch. 245, title I, § 26,
39 Stat. 380; Aug. 18, 1959, Pub. L. 86-168, title I, § 104(h), 73 Stat. 387.)
(6) Federal intermediate credit banks, 12 u.s.c. 1111: Tax
exemption:
The privileges of tax exemption accorded under section 931 of this title shall
apply also to each Federal intermediate credit bank, including its capital, reserve,
or surplus, and the income derived therefrom, am1d the debentures issued under
this subchapter shall be deemed and held to be instrumentalities of the Govern-
ment and shall enjoy the same tax exemptions as are accorded farm-loan bonds
PAGENO="0096"
76
in said section. (July 17, 1916, ch. 245, title II, § 210, as added Mar. 4, 1923, ch.
252, title I, § 2, 42 Stat. 1459.) -
(7) Central Bank for Cooperatives, Production Credit Associations,
and Banks for Cooperatives, 12 U.S.C. 1 138c: Tax exemption:
The Central Bank for Cooperatives, and Production Credit Association, and
Banks for Cooperatives, organized under this chapter, and their obligations,
shall be deemed to be instrumentalities of the United States, and as such, any
and all notes, debentures, bonds, and other such obligations issued by such banks,
or associations shall be exempt both as to principal and interest from all taxation
(except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by
the United States or by any State, Territorial, or local taxing authority. Such
banks, and associations, their property, their franchises, capital, reserves, surplus,
and other funds, and their income shall be exempt from all taxation now or here-
after imposed by the United States or by any State, Territorial, or local taxing
authority; except that any real property and any tangible personal property
of such banks, association, and, corporations shall be subject to Federal, State,
Territorial, and local taxation to the same extent as other similar property is
taxed. The exemption provided herein shall not apply with respect to any produc-
tion credit association or its property or income after the class A stock held in
it by the Governor has been retired, or with respect to any bank for cooperatives
or its property or income after the stock held in it by the United States has been
retired. (June 16, 1933, ch. 98, title VI, § 63, 48 Stat. 267; Aug. 11, 1955, ch.
785, title II, § 205, 69 Stat. 663; July 26, 1956, ch. 741, title I, § 105 (o), 70
Stat. 666.)
(8) Federal home loan banks, 12 U.S.C. 1433: Exemption from
taxation, except as to real property:
Any and all notes, debentures, bonds, and other such obligations issued by
any bank, and consolidated Federal Home Loan Bank bonds and debentures,
shall be exempt both as to principal and interest from all taxation (except sur-
taxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United
States, by any Territory, dependency, or possession thereof, or by any State,
county, municipality, or local taxing authority. The bank, including its fran-
chise, its capital, reserves, and surplus, its advances, and its income, shall be
exempt from all taxation now or hereafter imposed by the United States, by
any Territory, dependency, or possession thereof, or by any State, county,
municipality, or local taxing authority; except that in 1 any real property of the
bank shall be subject to State, Territorial, county, municipal, or local taxation
to the same extent according to its value as other real property is taxed. The
notes, debentures, and bonds issued by any bank, with unearned coupons attached,
shall be accepted at par by such bank in payment of or as a credit against the
obligation of any home-owner debtor of such bank. (July 22, 1932, ch. 522,
§ 13, 47 Stat. 735; May 28, 1935, ch. 150, § 8, 49 Stat. 295.)
(9) Federal savings and loan associations, 12 U.S.C. 1464 (h):
No State, county, municipal, or local taxing authority shall impose any tax on
such associations or their franchise, capital, reserves, surplus, loans, or income
greater than that imposed by such authority on other similar local mutual or
cooperative thrift and home financing institutions. (June 13, 1933, ch. 64, sec.
5, 48 Stat. 132; as amended Oct. 16, 1962 by P.L. 87-834, sec. 6(e) (1), 76 Stat.
984.)
(10) Federal National Mortgage Association, 12 U.S.C. 1723a(c):
Exemption from taxation:
(1) The Association, including its franchise, capital, reserves, surplus, mortgages
or other security holdings, and income shall be exempt from all taxation now or
hereafter imposed by the United States, by any territory, dependency, or possession
thereof, or by any State, county, municipality, or local taxing authority, except
that any real property of the Association shall be subject to State, territorial,
county, municipal, or local taxation to the same extent according to its value as
other real property is taxed.
`So in original. .
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77
(2) The corporation, including its franchise, capital, reserves, surplus, mortgages
or other security holdings, and income, shall be exempt from all taxation now or
hereafter imposed by any State, territory, possession, Commonwealth, or depend-
ency of the United States, or by the District of Columbia, or by any county,
municipality, or local taxing authority, except that any real property of the corpor-
ation shall be subject to State, territorial, county, municipal, or local taxation to
the same extent as other real property is taxed. (June 27, 1934, ch. 847, title III,
sec. 309(c) as added Aug. 2, 1954, ch. 649, title II, sec. 201, 68 Stat. 620, and
amended June 30, 1961, P. L. 87-70, title VI, sec. 603(e), 75 Stat. 177, and Aug. 1,
1968, P.L. 90-448, title VIII, sec. 802(aa) (1) - (4).)
* (11) Federal credit unions, 12 U.s.c. 1768:
The Federal credit unions organized hereunder, their property,their franchises,
capital, reserves, surpluses, and other funds, and their income shall be exempt
from all taxation now or hereafter imposed by the United States or by any State,
Territorial, or local taxing authority; except that any real property and any
tangible personal property of such Federal credit unions shall be subject to Federal,
State, Territorial, and local taxation to the same extent as other similar property
is taxed. Nothing herein contained shall prevent holdings in any Federal credit
union organized hereunder from being included in the valuation of the personal
property of the owners or holders thereof in assessing taxes imposed by authority
of the State or political subdivision thereof in which the Federal credit union is
located; but the duty or burden of collecting or enforcing the payment of such a
tax shall not be imposed upon any such Federal credit union and the tax shall not
exceed the rate of taxes imposed upon holdings in domestic credit unions. (June 26,
1934, ch. 750, § 23, formerly § 18, 48 Stat. 1222; Dec. 6, 1937, ch. 3, § 4, 51 Stat.
4, renumbered and amended Sept. 22, 1959, Pub. L. 86-354, § 1, 73 Stat. 637).
(12) Federal Deposit Insurance Corporation, 12 U.S.C. 1825:
Tax exemption of notes, debentures, bonds, and other obligations:
All notes, debentures, bonds, or other such obligations issued by the Corpora-
tion shall be exempt, both as to principal and interest, from all taxation (except
estate and inheritance taxes) now or hereafter imposed by the United States, by
any Territory, dependency, or possession thereof, or by any State, county,
municipality, or local taxing authority: Provided, That interest upon or any
income from any such obligations and gain from the sale or other disposition of
such obligations shall not have any exemption, as such, and loss from the sale or
other disposition of such obligations shall not have any special treatment, as such,
under the Internal Revenue Code, or laws amendatory or supplementary thereto.
The Corporation, including its franchise, its capital, reserves, and surplus, and its
income, shall be exempt from all taxation now or hereafter imposed by the United
States, by any Territory; dependency, or possession thereof, or by any State,
county, municipality, or local taxing authority, except that any real property of the
Corporation shall be subject to State, Territorial, county, municipal, or local
taxation to the same extent according to its value as other real property is taxed.
(Sept. 21, 1950, ch. 967, §2 [15], 64 Stat. 890.)
E. EXEMPTION OF FEDERAL GOVERNMENT OBLIGATIONS FROM STATE
AND LOCAL TAXATION, 31 U.S. CODE 742
Except as otherwise provided by law, all stocks, bonds, Treasury notes, and
other obligations of the United States, shall be exempt from taxation by or under
State or municipal or local authority. This exemption extends to every form of
taxation that would require that either the obligations or the interest thereon, or
both, be considered, directly or indirectly, in the computation of the tax, except
nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on
corporations and except estate taxes or inheritance taxes. (R.S. § 3701; Sept. 22,
1959, Pub. L. 86-346, title I, § 105 (a), 73 Stat. 622.)
* DERIVATION
Acts Feb. 25, 1862, cli. 33, 2, 12 Stat. 346; Mar. 3, 1863, ch. 73. § 1, 12 Stat. 710; Mar. 3, 1864, cli. 17, § 1,
13 Stat. 13; June 30, 1864, cli. 172, 1, 13 Stat. 218; Jan. ~, 1865, ch. 22, § 1, 13 Stat. 425; Mar. 3, 1865, ch. 77,
~ 2, 13 Stat. 469; July 14, 1870, ch. 256, § 1, 10 Stat. 272.
* AMENDMENTS
1959-Pub. L. 86-346 added second sentence.
79-421 0 - 72 - 7
PAGENO="0098"
78
F. STATE AND LOCAL TAXATION OF CURRENCY, 31 ILS. CODE 425
AND 426
§ 425. State taxation.
Circulating notes of national banking associations and United States legal
tender notes and other notes and certificates of the United States payable on
demand and circulating or intended to circulate as ôurrency and gold, silver, or
other coin shall be subject to taxation as money on hand or on deposit under the
laws of any State or Territory: Provided, That any such taxation shall be exercised
in the same manner and at the same rate that any such State or Territory shall
tax money or currency circulating as money within its jurisdictiOn. (Aug. 13, 1894,
ch. 281, § 1, 28 Stat. 278.)
§ 426. Same: national banks not affected.
The provisions of section 425 of this title shall not be deemed or held to change
existing laws in respect of the taxation of national banking associations. (Aug. 13~
1894, ch. 281, § 2, 28 Stat. 278.)
G. STATE NET INCOME TAXES ON INCOME DERIVED FROM INTERSTATE
COMMERCE, PUBLIC LAW 86-272, 15 U.S. CODE 381-384
Chapter 1OB.-STATE TAXATION OF INCOME FROM INTERSTATE
COMMERCE
Sec.
381. Imposition of net income tax.
(a) Minimun~ standards.
~b) Domestic corporations; persons domiciled in or residents of a State.
~c) Sales or solicitation of orders for sales by independent contractors.
(d) Definitions.
882. Assessment of net income taxes; limitation; collection.
383. 1)efinition.
384. Separability provision.
~ 381. Imposition of net income tax.
(a) Minimum standards.
No State, or political subdivision thereof, shall have power to impose, for any
taxable year ending after September 14, 1959, a net income tax on the income
derived within such State by any person from interstate commerce if the only
business activities within such State by or on behalf of such person during such
taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such
State for sales of tangible personal property, which orders are sent outside
the State for approval or rejection, and, if approved, are filled by shipment or
delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in
such State in the name of or for the benefit of a ProsPective customer of such
person, if orders by such customer to such person to enable such customer to flu
orders resulting from such solicitation are orders described in paragraph (1).
(b) Domestic corporations; persons domiciled in or residents of a State.
The provisions of subsection (a) of this section shall not apply to the imposition
of a net income tax by any State, or political subdivision thereof, with respect
to-
(1) any corporation which is incorporated under the laws of such State; or
(2) any individual who, under the laws of such SVate, is domiciled iii, or a
resident of, such State.~
(c) Sales of solicitation of orders for sales by independent contractors.
For purposes of subsection (a) of this section, a person shall not be considered to
have engaged in business activities within a State during any taxable year merely
by reason of sales in such State, or the solicitation of orders for sales in such
State, of tangible personal property on behalf of such person by one or more inde-
pendent contractors, or by reason of the maintenance, of an office in such State
by one or more independent contractors whose activities on behalf of such person
in such State consist solely of making sales, or soliciting orders for sales, or 1
tangible personal property.
I [So In U.S. Code. Should read "of", as, enacted in original P.L. 86-272.]
PAGENO="0099"
-79
(d) Definitions.
For purposes of this section-
(1) the term "independent contractor" means a commission agent, broker,
or other independent contractor who is engaged in selling, or soliciting orders
for the sale of, tangible personal property for more than one principal and
who holds himself out as such in the regular course of his business activities;
and
(2) the term "representative" does not include an independent contractor.
(Pub. L. 86-272, title I, § 101, Sept. 14, 1959, 73 Stat. 555.)
STUDY AND REPORT BY CONGRESSIONAL COMMITTEES OF STATE TAXATION FROM `INTEP~TATE COMMERCS~
Title II of Pub. L. 86-272, as amended by Pub. L. 87-17, Apr. 7, 1961, 75 Stat. 41; Pub. L. 87-435, Apr. 21,
1962, 76 Stat. 55; Pub. L. 88-42, June 21, 1963, 77 Stat. 67; Pub. L. 88-286, Mar. 18, 1964, 78 Stat. 166, provided
that:
"SEC. 201. The Committee on the Judiciary of the house of Representatives and the Committee on Fi-
nance of the United States Senate, acting separately or jointly, or both, or any duly authorized subcommittee
thereof, shall make full and complete studies of all matters pertaining to the taxation of interstate commerce
by the States, territories, and possessions of the United States, the District of Columbia, and the Common-
wealth of Puerto Rico. or any political or taxing subdivision of tile foregoing.
"SEC. 202. The Committees shall report to their respective houses the results of such studies, together with
their proposals for legislation on or before June 30, 196,5."
§ 382. Assessment of net income taxes; limitations; collection.
(a) No State, or political subdivision thereof, shall have power to assess,
after September 14, 1959, any net income tax which was imposed by such State
or political subdivision, as the case may be, for any taxable year ending on or-
before such date, on the income derived within such State by any person from
interstate commerce, if the imposition of such tax for a taxable year ending after
such date is prohibited by section 381 of this title.
(b) The provisions of subsection (a) of this section shall not be construed-
* (1) to invalidate the collection, on or before September 14, 1959, of any
net income tax imposed for a taxable year ending on or before such date, or
(2) to prohibit the collection, after September 14, 1959, of any net income
tax which was assessed on or before such date for a taxable year ending on
or before such date.
(Pub. L. 86-272, title I, § 102, Sept. 14, 1959, 73 Stat. 556.)
§ 383. Definition.
For purposes oi~his chapter, the term "net income tax" means any tax imposed
on, or measured by, net income. (Pub. L. 86-272, title I, § 103, Sept. 14, 1959,
73 Stat. 556.)
§ 384. Separability provision.
If any provision of this chapter or the application of such provision to any
person oi~ circumstance is held invalid, the remainder of this chapter or the
application of such provision to persons or circumstances other than those to
which it is held invalid, shall not be affected thereby. (Pub. L. 86-272, title I,.
§ 104, Sept. 14, 1959, 73 Stat. 556.)
[So in U.S. Code. Should read "of".]
PAGENO="0100"
PAGENO="0101"
APPENDIX 2
General Statistical Data With Respect to Commercial Banks and
Other Financial Institutions
TABLE 1.-COMMERCIAL BANKS-NUMBER, BANKING OFFICES, ASSETS, AND DEPOSITS, BY CLASS OF BANK,
1968 AND 1969
fMoney figures in billions of dollars. As of December 31J
Banking
Banks offices Assets Demand deposits Time deposits
Class of bank 1968 1969 1968 1969 1968 1969 1968 1969 1968 1969
All banks 13,679 13,662 32,692 33,870 501.9 531.8 229.7 241.1 205.6 195.6
National 4, 716 4,668 15, 701 16, 396 296. 6 313.9 134.6 141. 1 123. 3 115. 2
State member 1,262 1,201 4, 828 4,679 116.9 119.2 57.1 58. 6 41.3 35.8
Insured nonmember 7, 504 7, 595 11,920 12, 552 84.6 94. 5 36.2 39. 5 40. 2 43. 9
Noninsured 197 197 243 243 3.8 4.2 1.7 1.9 .8 .7
Source: Board of Governors of the Federal Reserve System; Federal Reserve Bulletin. Reproduced from U.S. Department
of Commerce, Bureau of the Census, Statistical Abstract of the United States, 1970, p. 442, table 652,
(81)
PAGENO="0102"
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PAGENO="0103"
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PAGENO="0104"
Totat:S0States and District of Columbia
Total:States and other areas I
Alabama -
Alaska
Arizona
Arkansas
California
Colorado -
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota_
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other areas I
14
3
261 5
363 10
18 -
667 3
285 3
558 10
430 1
260 5
181 1
20 3
74 1
302 2
207 1
38 2
168 9
6 2
84 1
130
224 4
628 9
41
17 1
130
64 1
114
479 4
30
(2) 11
.84
TABLE 4.-NUMBER OF COMMERCiAL BANKS AND TRUST COMPANIES, BY TYPE OF BANK, BY STATES AND OTHER
AREAS. AS OF DEC. 31, 1969
Insured commercial
.
State Total
National
banks
Noninsured
banks and
trust
companies
State
-
4,674 8,790 197
4,683 8,790 208
88 180
5 4 - - 1
4 8 .
68 178 3
68 80 7
120 103 44
27 32 3
13661
13,681
268
10
12
249
155
267
62
19
14
475
433
11
26
1,088
410
668
603
345
231
44
122
161
332
724
181
668
136
442
7~
228
64
320
109
169
521
426
51
492
13
105
163
305
1,166
51
44
233
92
195
604
70
20
5
11
209
60
7
8
418
122
* 100
172
80
49
21
47
86
98'
197
38
97
48
126
50
137
33
173
23
42
217
218
11
31~
20
33
77
529
10
26
103
27
81
121
40
9
70 5
232 2
524 3
143
564 7
87 1
311 5
4
23 3
89 2
31
122 25
85 1
124 3
I States and other areas include 50 States, District of Columbia, and `Other areas": Guam, Puerto Rico, Virgin Islands.
2 In Hawaii and in "other areas" there is no breakdown between State and national banks; this makes the totals in these
columns vary slightly from those in table 2.
Source: Federal Deposit Insurance Corporation, Federal Reserve Board, and Comptroller of the Currency, `1969 Report
of Income; Assets and Liabilities, Commercial and Mutual Savings Banks," pp. 36-101.
PAGENO="0105"
85
TABLE 5.-NUMBER OF COMMERCIAL BANKS AND TRUST COMPANIES BY DEPOSIT SIZE, IN STATES AND OTHER
AREAS, AS OF DEC. 31, 1969
Insured
Deposit size Total Total
commercial banks Noninsured
banks and trust
National State companies
Less than $1,000,000 348 231 21 210 117
$1,000,000 to $2,000,000 1, 066 1, 051 120 931 15
$2,000,000 to $5,000,000 3, 516 3,494 758 2,736 22
$5,000,000 to $10,000,000 3,448 3,434 1,184 2,250 14
$10,000,000 to $25,000,000 3, 194 3, 180 1, 403 1, 777 14
$25,000,000 to $50,000,000 1, 104 1, 096 584 512 8
$50,000,dOO to $100,000,000 484 476 272 204 8
$100,000,000to $500,000,000 413 403 253 150 10
$500,000,000 to $1,000,000,000 59 59 43 16
$1,000,000,000 or more 49 49 31 18
Total 13,681 13,473 4,669 8,804 208
Source: Federal Deposit Insurance Corporation, Annual Report 1969, table 104.
TABLE 6.-SELECTED INCOME ITEMS AND EQUITY CAPITAL, INSURED COMMERICAL BANKS BY STATES AND OTHER
AREAS, 1969
LThousands of dollarsj
Total Net Equity
operating operating Net income capital 3
State income income' after taxes 2 Dec. 31, 1969
Total:
50 States and District of Columbia 30,691,979 6, 714, 511 4,318, 952 37, 940, 503
States and other areas 4 30,806,805 6, 730,014 4,334, 567 38, 116, 222
Alabama 299, 262 73,374 50,201 414,776
Alaska 33, 86X1 5,761 4, 314 32,306
Arizona 231,199 38,748 26,395 183,909
Arkansas 169,812 36,904 26,405 245, 701
Califprnia 3,426,053 594,964 386,896 3, 172,701
Colorado 295,387 61,555 37, 953 340,352
Connecticut 352,369 84,633 49,643 402,679
Delaware 85,282 29,123 16,260 124, 204
District of Columbia 182,236 52,608 29,503 232, 752
Florida 813,590 188,093 130,850 963,140
Georgia 546,053 118,274 71,197 605,292
Hawaii 110,704 21,961 14,818 125,792
Idaho 85,579 20, 348 11,549 90,049
Illinois 2,214,506 488,410 321,460 2,984,560
Indiana 639,838 140,153 93,854 775,930
Iowa 376,198 82,346 60,568 548,127
Kansas 296,414 76,473 53,457 459,561
Kentucky 295,933 78,794 53,632 428,495
Louisiana 379,854 86, 137 61,838 525,951
Maine 83, 779 17, 116 12,694 108, 220
Maryland 322,662 90,472 51,259 458,251
Massachusetts 796,075 183,872 108,113 997,173
Michigan 1,328,034 244,468 168, 585 1,320,373
Minnesota 566,807 115, 721 73, 749 655,297
Mississippi 191,087 48,222 33,187 235,163
Missouri 705,048 185,738 120,080 1,014,514
Montana 98,390 18,526 13,546 113,928
Nebraska 214,083 50,526 34,998 299,988
Nevada 73,965 15,899 9,193 76,115
New Hampshire 60,386 15, 129 9,532 90,696
New Jersey 870,567 208,267 149, 773 1,138,014
New Mexico 89, 617 19,641 13, 598 105 036
New York 5,940,833 1,289,303 738,074 7,472 539
North Carolina 476,600 96, 747 62,028 515,010
North Dakota 85, 331 17, 232 12,135 126,084
Ohio 1,333,065 321,418 206,839 1,878,741
Oklahoma 325,008 77,732 54,772 470, 039
Oregoi~ 279,174 47,549 30,970 276,294
Pennsylvania 1,819,301 443, 866 296, 2~0 2, 533 335
Rhode Island 117,274 27,847 16,812 159,216
South Carolina 151,043 41,085 26,638 199 830
South Dakota 93,475 20,328 13, 095 117,624
See footnotes at end of table, p.86.
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86
TABLE6.-SELECTED INCOME ITEMS AND EQUITY CAPITAL, INSURED COMMERICAL BANKS BY STATES AND OTHER
AREAS, 1969-Continued
- fi'housands of dollarsi
Total Net Equity
operating operating Net income capital 3
* State income income 1 after taxes 2 Dec. 31, 1969
Tennessee 433, 282 94, 124 65, 427 591 980
Texas -- 1, 549, 721 356, 422 237, 209 2, 049, 295
Utah 123,324 29,691 14,784 137,014
* Vermont 52, 142 9, 928 6,799 63, 759
Virginia 518,333 108,703 74,533 621,049
Washington 398, 178 79, 021 52, 546 - 437, 631
West Virginia 154, 430 38, 838 26, 584 - 266, 242
Wisconsin 558, 657 112, 547 76, 854 688,933
Wyoming 48,179 9,874 6,786 67,243
Other areas4 114,826 15,503 15,615 175,719
1 This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating
expenses include interest on capital notes and debentures and provision for loan losses.
3 Net income is income after securities gains or lcsses, extraordinary charges or credits, taxes, and other adjustments.
3 This item is for all commercial banks and trust companies, including noninsured.
4 in this table, States and other areas include 50 States, District of Columbia, Puerto Rico, and Virgin Islands.
Source: Federal Deposit Insurance Corporation, Federal Reserve Board, and Comptroller of the Currency, 1969 Report
of income; Assets and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969. pp. 114-121 and 36-101.
TABLE 7.-SELECTED INCOME ITEMS AND EQUITY CAPITAL OF INSURED COMMERCIAL BANKS, BY DEPOSIT SIZE,
TOTALS FOR STATES AND OTHER AREAS, 1969
. tin thousands of dollarsj
Total operat-
Deposit size ing income
Net operating
income 1
Net income
after taxes 2
Equity capital
Dec. 31, 1969 3
Lessthan$1,000,060 10,203 2,216 1,738 118,327
$1,000,000 to $2,000,000 101,380 23,546 18, 194 225,906
$2,000,000 to $5,000,000 759,260 167, 971 124, 877 1, 292, 125
$5,000,000 to $10,000,000 1, 595,039 350, 133 251, 303 2, 250, 111
$10,000,000 to $25,000,000 3, 199, 271 697, 397 492, 366 4, 134, 141
$25,000,000 to $50,000,000 2, 522, 591 555, 134 375, 434 3, 234, 873
$50,000,000 to $100,000,000 2, 223, 385 469, 069 319, 968 2, 723, 245
$100,000,000 to $500,000,000 5, 851, 279 1, 343, 029 867, 610 7, 196, 046
$500,000,000 to $1,000,000,000 2, 966, 656 689, 751 435, 655 3, 543, 878
$1,000,600,000 or more 11, 565, 453 2, 433, 043 1, 449, 023 13, 397, 557
TotaI~ 30, 794, 517 6, 731, 289 4, 336,16838,116,209
O This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating
expenses include interest on capital notes and debentures and provision for loan losses.
2 Net income is income after securities gains or losses, extraordinary charges or credits, taxes, and otheradjustments.
S This item is for all commercial banks and trust companies, including noninsured.
income items are for banks operating throughout the year; consequently totals in this table differ slightly from those
In table 6.
Sources: Federal Deposit Insurance Corporation, Annual Report 1069, table 116; Federal Deposit Insurance Corporation,
Federal Reserve Bnard and Comptroller of the Currency, 1969 Report of Inccrne; Assets and Liabilities, Commercial and
Mutual Savings Banks, Dec. 31, 1969. pp. 108-109.
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87
TABLE 8.-SELECTED INCOME ITEMS AND EQUITY CAPITAL; BY TYPE OF BANK, INSUREi7 COMMERCIAL BANKS,
TOTALS FOR STATES AND OTHER AREAS, 1969
tIn thousands of dollarsj
Total Net Net income Equity
operating operating after capital &
Type of bank income income I taxes 2 Dec. 31, 1969
National 18,221,202 3,915,203 2,534,279 22,134,459
State member Federal Reserve System 6,777, 750 1, 552, 624 916, 455 8, 146, 053
Nonmember Federal Reserve System 5, 808, 033 1, 262, 187 883, 833 7, 835, 710
Total 30, 806, 805 6,730, 014 4, 334, 567 38, 116, 222
Operating throughout year 30,794, 517 6,731, 289 4,336, 168 (4)
I This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating
expenses include interest on capital notes and debentures and provision for loan losses.
Net income is income after securities gains or losses, extraordinary charges or credits, taxes, and other adjustments.
3 This item is for all commercial banks and trust companies, including noninsured; total differs by 12 from total in table
7 from earlier publication.
4 Not available.
Source: Federal Deposit Insurance Corporation, Annual Report, 1969, tables 106, 115.
TABLE 9.-MONEY SUPPLY AND TIME DEPOSITS: 1950 TO 1969
fin billions of dollars. As of December, seasonally adjusted. Averages of daily figuresj
Item 1950 1955 1960 1965 1966 `1967 1968 1969
Total - 152.9 185. 2 214. 0 313. 4 328. 9 365. 4 399.7 393. 7
Moneysupply 116.2 135.2 141.1 `166.7 170.4 181.7 194.8 199.6
Currency I 25. 0 27. 8 28. 9 36. 3 38. 3 40. 4 43. 4 45. 9
Demand deposits 2 91. 2 107.4 112. 1 130. 4 132. 1 141. 3 151. 4 153.7
Time deposits, adjusted 3 36.7 50.0 72.9 146.7 158.5 183.7 204.9 194. 1
I Currency outside Treasury, Federal Reserve System, and vaults of all commercial banks.
Demand deposits at all commercial banks other than those due to domestic commercial banks and U.S. Government,
less cash items in process of collection and Federal Reserve float, plus foreign demand balances of Federal Reserve banks.
a Time deposits at all commercial banks other than those due to domestic comrercial banks and U.S. Government.
Source: Board of Governors of the Federal Reserve System: Federal Reserve Bulletin.
Reproduced from U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the U.S., 1970, p. 450,
table 668.
TABLE 10.-INTEREST BEARING DEPOSITS, BY TYPE: 1950 TO 1969
tIn millions of dollars. As of December, not seasonally adjustedj
Type , 1950 1955 1960 1965 1967 1968 1969
Total 71,304 112, 373 175, 518 317, 296 377, 753 411, 503 408, 628
-
Commercial bank time deposits I
36, 403 49, 602 72, 052 145, 247 182, 036 203, 086 192, 373
Mutual savings banks deposits 20, 025 28, 182 36, 343 52, 443 60, 121 64, 507 67, 086
Savings and loan shares 13,992 32, 142 62, 142 110,385 124, 493 131, 618 135, 489
Creditunion shares 884 2,447 4,981 9,221 11,103 12,292 13,680
I Time deposits at all commercial banks other than those due to domestic commercial banks and U.S. Government.
Averages of daily figures. Effective June 9, 1966. balances accumulated for payment of personal loans were reclassified
for reserve purposes and are excluded from time deposits reported by member banks.
Source: Board of Governors Of the Federal Reserve System, unpublished data: National Association of Mutual Savings
Banks, New York. N.Y., National Fact Book: Mutual Savings Banking; Federal Home Loan Bank Coard, Savings and Home
Financing Source Book; and Dept. of Health, Education, and Welfare, Social Security Administreztion, Federal Credit Union
Program.
Reproduced from U.S. Department of Commerce, Bureau of the Census, Statisticat Abstract of the U.S., 1970, p. 450
table 670.
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Total: States and other areas
Connecticut
Indiana
Maine
Maryland
Massachusetts
New Hampshire -
New Jersey
New York -
Pennsylvania
Rhode Island
Vermont
Washington
Wisconsin
Other States or areas
88
I Insured mutual savings banks only; the total including noninsured mutual savings banks Is 497 banks.
This is net current operating income after income and franchise taxes. It does not include nonrecurring items, realized
profit or loss, or transfers from valuation adjustment provisions.
This category comprises Alaska, Delaware, Minnesota, Ohio, Oregon, and Puerto Rico.
Source: Federal Deposit Insurance Corporation, Federal Reserve Board, Comptroller of the Currency, 1969 Report of
Income; Assets and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969, pp. 122-123, 104-105.
TABLE 12.-INCOME AND FRANCHISE TAXES, INSURED MUTUAL SAVINGS BANKS, BY STATES AND OTHER AREAS,
1969
(In thousands of dollarsj
All States and areas
Connecticut
Indiana -
Maine
Maryland
Massachusetts
New Hampshire
New Jersey
New York -
Pennsylvania
Rhode Island
Vermont
Washington
Wisconsin
Other States and areas I
61,874 14,302 47,572
9,492 915 8,577
174 174 0
334 321 12
1,044 745 299
1,590 86 1,504
843 360 483
1,837 1,837 0
42,239 7,447 34,792
1,077 271 806
1,222 329 894
183 166 18
1,552 1,551 1
18 14 4
269 87 182
TABLE 11.-NUMBER OF BANKS, SELECTED INCOME ITEMS, AND SURPLUS ACCOUNTS, INSURED
MUTUAL SAVINGS BANKS, BY STATES AND OTHER AREAS, 1969
(Thousands
of dollarsj
.
.
States
.
Number of
banks~
Dec. 31, 1969
Total
current
operating
income
Net
current
operating
income
Net
current
operating
income
after taxes2
Surplus
accounts
total
Dec. 31, 1969
331 3, 581, 559 3, 139,408 3, 077, 535 4, 697, 716
69 309,840 264,802 255,310 454,734
4 6,655 4,993 4,820 8,391
31 50,975 43, 713 43,379 83,433
5 50,300 41,334 40,290 72,343
8 112,949 99,898 98,308 159,115
31 71,584 61,644 60,801 110,748
21 155,997 132,525 130,688 197,967
122 2,389,429 2,121,494 2,079,255 3,027,354
7 205,769 177,283 176,206 298,375
7 66,103 54,711 53,488 87,985
6 16,498 14,351 14,168 19,366
9 80,868 68,274 66,722 92,671
3 2,083 `1,616 1,598 3,244
8 62,510 52,771 52,502 81,990
.
~
.
States
.
.
.
~
Franchise
and
income taxes
.
~
.
Total
.
rederal
Income
taxes
State
franchise
and income
taxes
.1 Included are Alaska, Delaware, Minnesota, Ohio, Oregon, and Puerto Rico.
Source: Federal Deposit Insurance Corporation, Federal Reserve Board, Comptroller of the Currency, 1969 Report of
Income; Asseta and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969, pp. 122-123.
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APPENDIX 3
Survey of State and Local Tax Expenses of Insured Commercial
Banks, 1969
JAMES B. ECKERT*
Associate Adviser, Division of Research and Statistics
As part of its study of State and local taxation of banks pursuant
to Public Law 91-156, the Board of Governors of the Federal Reserve
System in cooperation with the Federal Reserve Banks conducted
a survey of State and local tax expenses of insured commercial banks
for the year 1969. The major purpose of the survey was to obtain inf or-
mation on the amounts of maj or types of State and local taxes paid by
national and State chartered banks in the various States in 1969-the
year preceding the amendment of section 5219, Revised Statutes,
which substantially broadened the powers of the States to tax national
banks.1 Respondents were requested to report their tax expenses
showing separately the amounts of State and local government taxes
paid (1) within the home State of the bank and (2) in all other States.
Where tax laws or regulations within the home State of the bank had
been revised to a significant degree subsequent to the amendment of
section 5219, respondents were also asked to estimate what each
affected tax would have totaled in 1969 if the revision had been
applicable during that year.
Sammary of Survey Results
Insured commercial banks are estimated to have paid $623 million
in taxes (other than payroll taxes) to State and local governments on
their 1969 operations.2 This accounted for three-fourths of one per-
cent of total State-local tax revenue for that year.
The 1969 structure of State-local taxes~ on banks, as might be ex-
pecte(l, reflected the limitations imposed on the States by section 5219
before the liberalizing changes introduced by Public Law 91-156. This
is indicated not only by the choice of major types of taxes that States
apply to banks, but also by the relative treatment accorded national
versus State-chartered banks and the limited extent to which banks
pay taxes in non-domiciliary States. Relevant data are summarized
below.
(1.) Types of taxes. Eighty-six per cent of all State-local taxes paid
by banks for 1969 were in three categories-taxes on net income, real
property, and shares or capital structure. These also were the only
types of taxes that States were authorized to levy against national
*The author is indebted to Caroline H. Cagle, Economist In the Banking Section of the Board's Divi-
sion of Research and Statistics, and to Allen D. Manvel, Consultant and former Assistant Director of the
Advisory Commission on Intergovernmental Relations, for valuable assistance in carrying out the analysis
presented in this appendix.
Public taw 91-156 was approved Dec. 24, 1969.
2 The Survey covered State-local tax expenses incurred by banks on their own operations and those of
cates a more limited meaning.
(89)
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banks during that year under the provisions of section 5219 .(prior to
the December amendment), and each State was limited to a choice of
either an income or a shares tax in addition to a tax on real property.
The largest revenue-producer among taxes levied upon banks by
State and local governments was the tax on net income. In most States
this took the form of an excise tax measured by net income, a form that
permitted inclusion in the tax base of interest on TJ.S. Government
securities-which is exempt from taxation under a direct income tax.
This type of tax accounted for $235 million or roughly 38 1)eI'cent of
all 1969 State-local taxes on banks. In 21 States, it comprised more
than half of all bank taxes, and in 8 additional States; between 10
and 50 percent of the total. Even in the over-all revenue picture of
the States, the tax on net income of banks loomed important, since it
accoimted for nearly 7 percent of all 1969 State-local revenue from
corporation income taxes ($3.5 billion).
Second in importance for banks is the real property tax, which
totaled $179 million in 1969 and accounted for 29 percent of all State-
local bank taxes in that year. This is a relatively significant ta* for
banks in every State, although its percentage share of total bank taxes
varies widely among the States, from a low of 12 percent in Louisiana
and Ohio to 75 percent in Florida. In 7 States, half or more of bank
taxes were collected in this form.
Taxes levied on bank share~ or capital structui e, the least important
of the major State-local bank taxes, accounted for close to one-fifth
of the total, or $121 million. In 9 States, however, the proportion was
half or more and in 8 additional States, between a fifth and a half.
This form of tax, which has declined sharply in relative inWortance in
recent decades, probably owes its continued significant role in bank
taxation to section 5219.
The remaining 14 percent of bank taxes for 1969 was distributed
among a variety of levies. The major one, accounting for over two-
fifths of the residual (6 percent of all State-local taxes on banks) was
a tax on bank deposits, which generally is levied on the depositor
but collected from and absorbed by the bank. This tax was dominant
in Ohio and relatively important in only two additional States-
Michigan and Rhode Island. Other taxes making up the residual
included the tangible personal property tax (dominant in Arkansas),
the gross receipts tax (dominant in the District of Columbia), general
sales and use taxes, which were reported by banks in nearly all States
but were an important component of bank taxes only in the State of
Washington, and a variety of miscellaneous imposts, such as auto
license, documentary taxes, fees, etc.
(2) National versus State-chartered banks. National banks accounted
for 57 percent of total State-local tax expense of all insured commercial
banks in 1969-a slightly smaller percentage than the national bank
share of the banking universe as measured by total assets or income.
Accordingly, national banks as a group show somewhat lower ratios
of tax expense to assets, net income before taxes, and other bases,
than State-chartered banks as a group.
In most States, national and State chart cued banks were taxed about
the same. This included a number ;[ States where the State levied
types of taxes not authorized for national banks by section 5219-
mainly tangible personal propei ty and sales and use taxes-which
some, if not all, the national banks paid voluntarily. In several other
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91
States, however, taxes not permissible for national banks were ~pplie.d
only to State-chartered banks, without any offsetting adjustment to
equalize burden. While section 5219 restrictions account in part for the
higher tax ratios for State than national banks, structural and other
differences between national and State-chartered banks also were
contributing factors.
(3) Home-State versus o'ut-of-State taxes. Practically all 1969 State-
local taxes of banks were paid to governments in their respective
home-office States. Total payments to out-of-State jurisdictions
amounted to less than $1.4 million, or 2/10 of 1 percent of all State-local
bank taxes. Nearly three-fifths of the out-of-State payments were net
income taxes, while real l)roPertY taxes accounted for most of the
remainder. Moreover, the bulk of these payments were reported by
banks in 4 States-California, Illinois, Massachusetts, and New
York-and represented in large part taxes paid by separately incor-
porated out-of-State subsidiaries of large banks. In 30 States, the
sums reported as paid to other States were $1,000 or less, and in most
of these States, banks reported no such taxes. Under section 5219,
prior to the 1969 amendment, taxes other than real property taxes
could be collected from national banks only by the State in which the
bank was located, thus accounting for the negligible amounts reported.
* While State-chartered banks enjoyed no such immunity in law, their
out-of-State taxes totaled oily $218,000 in 1969, less than one-fifth
the amount reported for national banks.
(4) Uhanges in taxes. The December 1969 amendment of section
5219 opened the door for States to apply additional types of taxes
to national banks withjn their borders, other than an intangibles tax.
In response to the request for information relating to tax law changes,
585 banks located in 41 States supplied estimates of what their 1969
taxes would have been if the changes had been in effect that year.3
* The net result of changes reported by these banks would be to raise
their total tax expense for 1969 by 9 percent and the 1969 total for all
banks in the sample by 5~ percent. Three-fifths of the increase was in
sales and use taxes, which were already on the statute books in most
States and readily could he made applicable to banks or extended to
national banks in cases where State banks were already covered. Most
of the remainder was in shares, gross receil)ts, and tangible personal
property taxes. Because these increases in other taxes would have
affected deductions or credits under the net income tax, a considerable
number of respondents reported that their income taxes for 1969 would
have declined, afl(l these declines more than offset by a small margin
the increases in net income taxes reported by other banks.
Information supplied in response to this question is suggestive of
the kinds of changes that have been occurring under the "interim
amendment" to section 5219, but it does not fully measure the
expected impact of the interim changes since many States had not
yet acted under their enlarged authority and, in some cases, respon~
dent banks were not yet aware of changes in taxes that had occurred
or were imminent. No attempt, of course, was made in this survey
to deal with the additional changes that might occur in response to
the "permanent amendment" to section 5219.
$ Respondents with total deposits under ~15 million were given the option of not filling In this part of the
questionnaire.
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92
Need for the Survey
The purpose of the survey was to provide a quantitative foundation
for the study of bank taxation which the Congress had requested.
Detailed information about the magnitudes involved in State-local
taxation of banks was needed in three major areas: (1) Data showing
the types and amounts of taxes paid by national and State-chartered
banks in the various States were needed as a basis for examining the
effects of section 5219 on State tax structures-including any differ-
ences in the treatment of national versus State-chartered banks-and
for evaluating the prospective impact of the changes in section 5219
enacted in December 1969. (2) Information on the amounts of taxes'
paid outside the State of domicile by type of tax and charter-class
of bank was required for study of the interstate aspects of the "perma-
nent amendment" to section 5219. (3) Information also wasrequired
as to the nature and quantitative effect of changes in State and local
taxes that had been introduced subsequent to December 24, 1969,
under the broader authority to tax national banks authorized at that
time.
Detailed investigation of potential data sources led to the conclusion
that the only feasible way to obtain the necessary information was
through a special survey of commercial banks. Statistics of this type
had not hitherto been compiled by any Government agency. An
effort was made to collect the data directly from the States in a
survey of State tax administrators being conducted in connection with
the study, but early replies to this survey showed that State govern-
ments generally did not have detailed summaries of tax receipts from
commercial banks and could not readily prepare them. While much of
the needed information on State-local tax expense is regularly reported
by banks in the deductions schedule of their Federal income tax
returns, tabulation of data from these returns for either 1969 or another
recent year proved infeasible, mainly due to variations in the manner
of reporting such taxes and the physical impossibility of locating and
processing the returns for any sizable pre-selected sample of indi-
vidual banks within the time available.4 Thus, it became apparent
that a special survey was required if the specific data needs for the
study were to be met, and that the results of the survey might also
provide valuable benchmark information that could serve a wide
range of other potential research needs.
Reporting Form and Ban/c Sample
The major foc.us of the reporting form (which is reproduced at
pp. 112-115) was to obtain information on the dollar amounts of major
types of State-local tax expense incurred by banks for the calendar
year 1969-the last year preceding amendment of section 5219 and
the last full year before the study began. All types of State and local
taxes allowable as deductions for Federal income tax purposes were to
be reported (except State J)ayrOll taxes for unemployment compensa-
tion and disability insurance). The amounts of the various taxes to
be reported were those reflected in the bank's 1969 "Consolidated
Report of Income" that had been filed with the Federal bank super-
4The only pertinent tax information separately reported `by banks in the "Consolidated Report of In-
come" is the amount of "PrOvision for State and local income taxes." TI'fese data are summarized for each
State for the calendar year 1969 in the volume, "1969 Report of Income; Assets and Liabilities-Commercial
and Mutual Savin s Banks. December 31 1969" ublished b the Federal Deposit Insurance Corporation,
a pp. 114-12 . ee comment be ow in footnote 8 at p. 96.
PAGENO="0113"
93
visory authority. In addition to nine major types of taxes speCifie(1
on the questionnaire, space was provided for reporting any miscella-
neous types of taxes that had been shown as deductions on the Federal
tax return but which did not fit the designated categories, and
estimates for any taxes not shown as deductible taxes on the Federal
return but included in other relevant expense accounts as operating
expenses. These latter would include general sales taxes, selective
taxes oil utility billings, and other known taxes paid in the price of
goods or services purchased by the reporting bank.
For each category of taxes, respondents were asked to show sep-
arately the amounts paid within the home State of the bank and to all
other States, identifying these States if this information was readily
available. In addition, where home State taxes had been significantly
affected by changes in tax law or regulation since 1969, respondents
were asked to estimate for each affected category what their 1969 taxes
would have been had the change been effective throughout that year.
To provide checks on the basis and comparability of reporting, re-
spondents also were asked to indicate whether the income statement
for 1969 had been prepared primarily on a cash or accrual basis and
whether or not a J);rent holding company had incurred tax liabilities
for 1969 in addition to those shown in the report, and to provide
selected information relating to their 1969 Federal income tax returns.
In the course of its formulation, the reporting form was subjected
~ to extensive review by the technical staffs of the Board of Governors
of the Federal Reserve System, the Federal Reserve Banks, Federal
Deposit Insurance Corporation, and the Comptroller of the Currency,
as well as the Conference of State Bank Supervisors, the American
Bankers Association, a group of commercial bank tax officers and
comptrollers, several State tax administrators, and a number of
independent tax consultants.
The survey was directed to a probability sample of 2,250 insured
commercial banks out of a universe numbering close to 13,500. The
sample was designed to provide reliable estimates of the amounts of
the principal types of State and local taxes paid in each State by
national and by State-chartered banks separately. Selection of the
sample was on the basis of probability I)roportionate to size, with
size measured by the bank's gross operating income in 1969.
As in the banking universe, a little over one-third of the banks in
the sample had national charters and the remainder were State-
chartered. Tile sample of national banks accounted for about 75 per-
cent of the gross operating income of all national banks in 1969 and
that of State banks for nearly 65 percent of the gross operating income
of all insured State banks.
Since the purpose of the survey was to determine tax expenses for
the year 1969, the sample banks were selected from the bank universe
as it existed on December 31, 1969. Sample banks that had merged
or changed their status after that date were requested to supply data
for the particular unit as it existed in 1969. In a few instances where
a bank chosen in the initial sample was unable to supply tile requested
information, a substitute bank was selected.
The survey was conducted by mailed questionnaire distributed
through the Federal Reserve Banks during the latter part of December
1970. Usable reports were received from a total of 2,222 banks, or
about 99 percent of the total sample.
79-421 0 - 72 - 8
PAGENO="0114"
94
Reporting Difficulties and Limitations of the Data
Tax expenses shown in the tables represent in every case the total
for all insured commercial banks, estimated on the basis of survey
responses, except that amounts derived from column C of the ques-
tionnaire (tax changes) represent actual responses, without adjust-
ment to magnitudes that would represent the entire commercial
banking universe.
Statistics derived from a survey on a sample basis are necessarily
subject to some margin of error. However, in view of the relatively
large sample and the virtually complete response, the resulting esti-
mates of the U.S. totals for major categories of taxes are believed
to be highly reliable. Within individual States, where greater varia-
bility is inevitable, the estimates appear to fall within acceptable
tolerances.
The data were collected from respondents through the regional
Federal Reserve Banks, where they were reviewed and edited before
being forwarded to the Board for computer processing. Since the
pattern of response within most States was fairly consistent, major
errors and abnormalities for the most part were discernible and nec-
essary corrections were worked out through telephone communication
with the respondent.
Although information requested in the survey generally was readily
available at the banks, difficulties were encountered by some respond-
ents in determining which taxes to report and in selecting the appro-
priate category in which to report them. One major problem area
was the distinction between a tax on bank shares, which in most
States is a local ad valorem tax on shareholders hut is paid and
absorbed by the bank, and a tax on capital structure, which generally
is a direct tax levied by the State government on the bank itself
and is measured by a specified concept of capital. In view of wide-
spread failure of respondents to distinguish these categories, the
reported payments have been combined for analytical purposes.
Problems in reporting also arose where the legality of a tax was in
question and the respondent bank had paid the tax under protest and
then filed a claim for refund. Except where the refund had been
received, the tax was considered as having been paid and the respond-
ent was asked to report it. In other cases involving taxes of question-
able applicability, respondents encountered no particular difficulty
but a mjxed reporting pattern emerged, since some banks had paid
the tax while others had not.
Another part of the questionnaire wi~ich was troublesome for some
respondents was column C, which called for reporting revised 1969
estimates for any taxes which had been subject to change by law or
regulation since the December 1969 amendment to section 5219. In
recognition of the difficulties that smaller banks, especially, might
encounter in preparing these estimates, banks with total deposits of
less than $15 million were advised that they need not fill in this part
of the questionnaire. Some of them chose to respond to it, and their
replies are included in the statistics.
Taxes whose legality was being questioned also gave rise to report-
ing l)roblems in this part of the survey. One type of situation involved
sales and use taxes that had been collected from nationa.l banks with-
out statutory authority for all or part of 1969 and for which the bank
PAGENO="0115"
95
had filed for refund. Where a refund had been received, respondents
were requested to report no 1969 tax in column A but to show iii
column C what the tax would have been if legally applicable. Where
the tax had been paid in 1969 but no refund had been requested or
received, the amount paid was to be reported in column A and no
entry shown in column C. A similar problem given parallel treatment
arose in one large city, where the authority of the city to collect a
vault tax and a business occupancy tax was contested by some banks,
which refused to pay the tax while others paid without protest.
Patterns of Bank Taxation
Total State and local tax expense for all insured commercial banks
in 1969 is estimated at $623 million, as shown in table 1.° This total
includes all separately identifiable State and local taxes of banks and
their domestic subsidiaries for that year except State payroll taxes
for financing unemployment compensation and disability insurance.
TABLE 1.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS, 1969
[Amounts in thousands of dollars]
Percentage
Measure of tax Amount of tax distribution
Total 623, 052 100.0
Net income 235, 160 37.7
Real property 179,409 28.8
Shares or capital structure 120, 510 19.3
Bank deposits 38,865 6.2
General sales and use 10,938 1.8
Gross income or gross receipts 7, 575 1. 2
Tangible personal property 4, 745 .8
Documentary taxes -- 597 . 1
Miscellaneous deductible -
11,971 1.9
407
2, 190
536
8,838
13, 282 2.1
12,272
920
90
23, 617 3.8
2,877,432
1, 250, 785
1 Of this total, $8,274 thousand was reported by banks in Indiana and consisted almost entirely of a combination of that
State's taxes based on deposits and share values (net of gross income tax credit for State banks).
Taxes not shown as deductible taxes on Federal income tax returns but included in the relevant category of other
expenses, such as selective taxes on utility billings or known taxes included in the cost of purchased goods and services.
To some extent, the reported data probably understate the total
State and local tax expense associated with domestic commercial
banking activity for calendar 1969.6 Two possible sources of such
understatement are suggested by the responses.
(1) Survey data show that over 800 banks were affiliated with a
parent company that incurred tax liabilities on 1969 operations in
For the distribution of this total by Staten and charter-classes of banks, see table A at the end of this
appendix. A detailed breakdown of each State total by type of tax and class of bank appears in table G below.
pp. 126-142.
6 See below, p. 106, footnote 12, for a possible source of slight overstatement of taxes on domestic operations.
Sales and use
Occupancy
License and privilege
Other1
Other2
Sales and use
Real estate
Other
Memoranda:
General sales and use taxes (including amounts reported under miscellaneous
and other)
Taxable income for Federal income tax purposes
Federal income tax
PAGENO="0116"
96
addition to those reported on the survey for the bank itself (see
table B). In many cases, these taxes were associated with activities
closely interrelated with those of the subsidiary bank or banks,
particularly the tax liabilities incurred by most registered bank hold-
ing companies and the larger one-bank holding companies that
recently had been created. However, the amounts of such bank-related
taxes generally were small compared with the total of State and local
taxes paid by the subsidiary banks.
(2) Survey data also show that the income statements which pro-
vided the base for derivation of the tax expenses reported on the
survey had been prepared mainly on a cash rather than accrual basis
by a substantial proportion of smaller banks-85 percent in the case
of banks with total deposits under $15 million and 43 percent for
those with deposits of $15-$100 million (table C, p. 118) .~ With cash
accounting, tax expenses would reflect a lag between tax accruals and
payments, and given the uptrend in earnings, property values and
other bases for taxation prevailing at that time, reported tax expense
for 1969 would be less than the amount of tax accruing on 1969 opera-
tions. This may have been true in part even for net income taxes, which
were especially affected in 1969 by large capital losses. Although all
banks were asked to report such taxes for 1969 on a current basis, this
was a transition year for a major revision in requirements for income
reporting to Federal supervisory authorities, and it is possible that
some banks were not able to complete the changeover.
The distribution of bank tax expense by type of tax is heavily
concentrated, with taxes on net income, real property, and bank
shares accounting for 86 percent of the total. The most important
of these is the tax on net income which totaled $235 million in 1969
and accounted for 38 percent of the total.8 But taxes on real property
and on shares or capital structure also were important; they amounted
to $179 million and $121 million, respectively, or 29 and 19 percent
of the total. Nearly half of the $88 million remainder was in the tax
on bank deposits; the rest was distributed mainly among five
categories-sales and use, gross receipts, tangible personal property,
miscellaneous deductible, and other.
Under "miscellaneous," respondents were requested to report
identifiable amounts of taxes that were deductible on line 17 of IRS
Form 1120 in calculating Federal income tax and that did not fit into
any of the other categories on the survey reporting form. About two-
thirds of the amounts reported in this category consisted of the com-
bination deposits and shares tax levied in Indiana. Small amounts of
selective sales and use, occupancy, and license or privilege taxes also
were reported in this category.
Under "other taxes," respondents were asked to report any signi-
ficant amounts of taxes that were not shown as deductible taxes in
Most banks in the $15-$100 million deposit group that reported mainly on a cash basis probably fell in
the lower part of this size range, since every bank with total resources of $50 million or more at the end of
1968 was required to prepare its 1969 "Consolidated Report of Income" on the basis of accrual accounting.
However, certain exceptions were permitted--for reporting trust department income and reporting particu-
lar accounts where the results would not be significantly different.
8 The estimates of net income taxes derived from the bank tax expense survey ($125.6 million for national
banks and $109.5 million for State-chartered banks or a total of $235.2 million) are somewhat higher than
the "provision for State and local income taxes" reported by banks on their "Consolidated Report of In-
come" ($116.0 million for national banks and $101.8 million for State-chartered banks, or a total of $217.8
million). See Annual Report of the Federal Deposit Insurance Corporation 1969, p. 280. These differences
probably reflect mainly the reporting of final data on the tax survey, which was conducted late in 1970 after
tax returns for 1969 had been filed, whereas the amounts of taxes reported on income statements, which had
to be submitted early in the year, in many cases were preliminary estimates.
PAGENO="0117"
97
calculatin~ Federal income tax liability but were included with other
expenses. ~early all the amounts reported were sales and use taxes.
If sales and use taxes reported in the "miscellaneous" and "other"
categories are combined with those separately reported, the total
of such taxes rises to $23.6 million or nearly 4 1)ercellt of total bank
tax expense. Excluding sales and use taxes, the combined total of
residual categories falls to 2 l)ercemlt of all taxes, illstea(l of 4 percent.
The concentration of bank taxes in the net income, real property,
and shares or capital structure categories was evident in all size-
classes of banks (table 2). However, the relative shares accounted
for by each tax category at the largest banks (total del)osits of $500
million and over) differed markedly from the relative shares of these
taxes at banks in the smaller size groups. The tax on net income was
much more important for the largest banks than for others, while the
shares tax was much less important.
TABLE 2.-PERCENTAGE DISTRIBUTION OF 1969 STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL
BANKS, BY MEASURE OF TAX AND SIZE OF BANK
Measure of tax All
banks
Size of bank (t
otal deposits
in millions
of dollars)
Under 15
15-100
100-500
500 and over
Total
Net income
rReal property
Shares or capital structure
Bank deposits
General sales and use
Gross income or gross receipts
Tangible personal property
Documentary taxes
Miscellaneous deductible
Other
100.0
100.0
100.0
100.0
100. 0
37.7
28.8
19.3
6. 2
1. 8
1. 2
.8
. 1
1.9
2.1
31.1
25.2
30.2
5. 0
1. 8
1. 6
1.9
.3
2. 2
.8
22.0
31.8
28.0
8. 5
1.2
1.8
1.4
. 2
3. 5
1.6
28.1
29.6
23.1
9. 5
2.3
1. 2
.9
. 1
2. 1
3.2
50.3
28.0
11.3
4. 2
1.8
.9
.1
(`
1.
2.3
Less than 0.05 percent.
.
To a considerable extent, these differences reflect the locational
distribution of large banks m dative to the varying tax structures of
the States. The largest banks tend to be concentrated in States
placing heavy reliance on a net income tax, particularly New York
and California. These two States alone accounted for nearly three-fifths
of the $235 million total of bank income taxes reported for the country
as a whole. States placing heavy reliance on shares taxes, on the other
hand, tend to be in nonindustrial areas, where relatively small banks
predominate. An additional actor contributing to lower shares tax
ratios for large banks is a tendency for high-value properties to be
assessed at lower ratios of value than those of lesser value. While large
banks also operate with thinner capital cushions than smaller banks,
the effect of this difference would be slight.
Another significant tax structure difference related to bank size is
the smaller importance of certain minor taxes at large than at smaller
banks. The maui taxes showing this difference were those on tangible
personal property, gross receipts, and documents-types of taxes not
authorized by section 5219 for application to national banks before
December 1969. Since national banks account for the bulk of the
resources of all banks in tile largest size grotips, their exemption from
these 1)articula1~ tyI)eS of taxes would tend to lower the i~atios.
PAGENO="0118"
98
Within-Slate Tax Di.stribvtion
As might be expected, the within-State tax pattern in most. cases
showed much greater concentration on a few individual types of taxes
than is evident in the aggregate data. In 41 States, over half of all
bank taxes was accounted for by a single type of tax. This is in(licated
by the data in table 3, where States have been grouped according to
the percentage of total commercial bank State-local taxes in the State
that is accounted for by each ty~)e of tax. (See also table D for specific
percentages for the several States.) The income tax accounted for
over half of the total in 21 States and it was the largest category in
3 additional States (see table 4). In all, some net income tax was re-
ported by banks in 42 States~ although in 13 this tax amounted to
less than 10 percent of the total. Small amounts were reported in
several States which did not levy an income tax on banks; these were
in large part associated with subsidiaries subject to the regular
corporation net income tax.
TABLE 3.-NUMBER OF STATES DISTRIBUTED BY THE RATIO OF STATE AND LOCAL TAXES OF EACH TYPE TO
TOTAL STATE AND LOCAL TAXES ON ALL INSURED COMMERCIAL BANKS IN 1969
,
Percent of total State and local taxes on banks
Over 0
but
90 70 50 40 30 20 10
less
.
and to to to to to to
than
Measure of tax
Total' over 90 70 50 40 30 20
10
0
Netincome.
51 6 15 3 3 1 1
13
9
Real property
Shares or capital structure. - -
Bank deposits
51 2 5 10 11 15 8
51 5 4 5 2 1 2
51 1 2
16
13
16
35
General sales and use
51 1
47
3
Gross income or gross re-
ceipts
Tangible personal property_
Documentary taxes
Miscellaneous deductible
.
51 1 1
51 1 1
51
51 2 1
.
11
40
28
49
38
9
23
1
Other
51 1
46
4
Net income plus real property.
Shares plus real property
51 21 8 3 7 3 4 5
51 12 5 5 5 8 12 4
`Includes District of Columbia but excludes Virgin Islands.
2 Indiana tax, combining taxes based on deposits and share values (net of gross income tax credit for State banks).
TABLE 4.-PRINCIPAL BANK TAX CATEGORIES, BY NUMBER OF STATES, 1969
Measure of tax: Number
Net income 24
Real property 9
Shares or capital structure 14
Bank deposits 1
Gross income or gross receipts
Tangibte personal property 1
Miscellaneous deductible 1 1
Total' 51
I Indiana tax combining taxes based on deposits and share values (net of gross income tax credit for State banks).
`Includes District of Columbia but excludes Virgin Islands.
Taxes on shares or capital were the second most important category
of taxes as measured by the number of States where this was the
dominant tax on banks. These taxes accounted for over half of all
bank taxes in 9 States and were the largest single category in 5 ad-
ditional ones. While some of these taxes were rej)orted for 35 States,
the amounts exceeded $20,000 in only 24.
The real property tax is the only tax applied to banks in all juris-
dictions and was relatively important in most States. WThile in only 7
PAGENO="0119"
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States was this tax more important for banks than all other taxes
combined, it accounted for 20-50 percent of total tax expense in 36
additional States.
Other taxes were the major category of bank tax expense in only four
jurisdictions: tangible personal propert (Arkansas), bank deposits
(Ohio), gross receipts (District of Columbia), and a combination
deposits and shares tax (Indiana). Of these, the most extensively used
was that on tangible personal property, with some amounts reported
in 42 States, but for only 2 of these (lid the share of total taxes on banks
exceed 10 percent. Bank deposit taxes, which generally are levied upon
depositors but are collected from and absorbed by banks, were reported
in 16 States, but their share exceeded 10 percent of all bank taxes in
only 3 States. Gross receipts taxes, which were reported by banks in
12 States and the District of Columbia, accounted for more than 10
percent of the total in only 2 jurisdictions.9
Next to that on real l)roperty, the general sales and use tax was
the most widely applied, with payments reported in all but 3 States.
However, the share for this tax (excluding amounts reported under
"miscellaneous" and "other") exceeded 5 percent of all bank taxes in
only 4 jurisdictions, and in 19 States it was less than 1 percent. Docu-
mentary taxes, while reported in about half the States, accounted for
as much as 1 percent of total bank tax expense in only 3 States.
The high degree of within-State concentration on certain types of
taxes is particularly evident in data on the percentage of total bank
taxes accounted for by the two principal taxes in each State. In all but
5 States, these two categories accounted for more than 80 l)erCeflt of
total taxes, and in 34, their share exceeded 90 percent (table 5). The
combination of net income and real property ap~)eared in over half
the States, and shares and real property was the leading combination
in nearly all remaining States. In 21 States, the combination of net
income and real property tax provided more than 90 l)ercent of all
bank taxes at the State-local level. The tax on real property was one
of the two most important taxes on banks in every State except Micli-
igan and Indiana.
TABLE 5-PERCENTAGE OF TOTAL STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS
ACCOUNTED FOR BY THE 2 LARGEST TAX CATEGORIES WITHIN EACH STATE, 1969
Number
Percent of total taxes: of States
Under 70 2
70to80 3
80to85 4
85to90 8
* 90to95 21
95to100 - 13
Total' 51
I Includes District of Columbia but excludes Virgin Islands.
While nearly all bank taxes in most States were in two major cate-
gories, banks in every State reported small amounts of tax expense
in several additional categories. In most States, some taxes were re-
porte(l in 6 or more categories, including "miscellaneous" and "other".
However, in all but 2 or 3 categories, the amounts generally were
quite small, and probably include taxes on subsidiaries, isolated local
1)lst,-Ictof Columbia (73 per cent) and Indiana (23 per cent). Two a(lditinnal St~ite~ where some banks
reported significant amounts of these taxes appear tn represent n,isclassllicalion-Alaska (5 per cent.). where
a tax called a gross receipts tax is applied, in the case of banks, to a net iiicome base, and Ilawaii (2~ per
cent.), whore a tax called a general excise tax and sometimes referred to as a gross income tax, is in the form
of a sales lox. Only negligil)le amounts \\`ere reported iii most of the remaining S Slates and some of these
taxes also might have represented misclassiticatio,, of sales taxes or possibly Were taxes on subsidiaries.
PAGENO="0120"
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levies, taxes paid to out-of-State jurisdictions, and possibly some
mislabeling in the responses or misclassification.
Impact of Section 5219
The concentration of taxes indicated in the preceding review
developed mainly as a result of the restrictions on State powers to
tax national banks imposed by the Congress in section 5219 of the
Revised Statutes. Prior to Deceniber 1969, the States were permitted
use of only two basic methods of taxing national banks, apart from
taxation of their real property, a.n(l each State could select only one
of these-either a tax on the value of the bank's shares or a tax
on its net income, including an* excise tax according to or measured
by net income.'0
Over the years, States have levied additional kinds of taxes on busi-
nesses generally, such as taxes on tangible personal I)roPertY, gross
receipts, and sales, and in some cases the taxes have been extended to
banks, including national banks, even though ti~ey were not specifi-
cally authorized by section 5219. Often through negotiation or com-
mon consent, national banks agreed to pay these taxes voluntarily.
In several instances, these agreements were l)ubliCiZed and applieti
over long periods. In other instances, taxes not authorized by section
5219 were levied on State banks only. Taxes on bank deposits also
have been levied in some instances, with the legal incidence on the
depositors so that the tax was not subject to the constraints in section
5219. Banks usually absorbed such taxes, rather than try to pass
them on to the depositor, owing to fears of losing deposits to banks
in neighboring jurisdictions where similar taxes might not apply. Also,
as indicated above, subsidiaries of banks sometimes were liable for
types of taxes not applicable to the banks. For all these reasons, the
pattern of reported bank taxes in most States includes relatively
small amounts of various types of taxes not specifically authorized by
section 5219.
TABLE 6.-TYPES OF BANK TAXES COMPRISING 2 LARGEST CATEGORIES WITHIN EACH STATE, 1969
Number
of States
Categories:
Net income plus real property
Shares or capital plus real property
Tangible personal property pius real property
Bank deposits plus real property
Gross receipts plus real property.
Sales and use plus real property
Net income plus bask deposits
Miscellaneous deductible 1 plus gross receipts
27
18
1
I
1
1
I
1
Total°
51
I Indiana tax combining taxes based on deposits and share values (net of gross income tax credit for State banks).
2 Includes District of Columbia but excludes Virgin Islands.
States generally tended to apply the same basic tax structure to
their State-chartered banks as they did to national banks, owing to
the close competitive relationship between the tw-o groups of banking
institutions, equity considerations, and provisions of section 5219
designed to prevent (liscrimmnation. Where certain types of taxes
were levied against State banks and other businesses that (lid not
10 A dividend tax also could 1)1- used in combinatIon With a tax on net Income hut since this is a tax upon
shareholders rather than the banks, it is not considered here an alternative tax on banks.
PAGENO="0121"
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apply to national banks, higher rates or other special provisions were
in some instances applied to national banks as a device to equalize
burdens. Data relating to the distribution of taxes between national
and State banks are examined in the following section.
Comparisons of National and State-Chartered Ban/cs
State and local taxes of national banks were $355 million in 1969,
or 57 percent of the total for all insured banks (table 7). There were
significant differences between National and State-chartered banks
in the relative importance of certain types of taxes. In particular,
real property and shares taxes were much more important for National
than State-chartered banks, while net income taxes were less impor-
tant. In the aggregate, these three major types of taxes specifically
authorized by section 5219 made up more than 88 percent of all
State-local tax expense of national banks, compared with 83 percent
for State banks. The differences in percentage share for the three
undoubtedly reflect in part differences in relative importance of
national and State banks in the various States, which have a wide
diversity of tax structures and rates. While the deposits tax was about
equally important for both groups, the tangible personal property,
gross receipts, and sales tax all showed appreciably higher (though
still nominal) ratios for State-chartered than national banks. In
each of these categories, State banks accounted for about two-thirds
of the all-bank total.
TABLE 7-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY MEASUREOFTAX
AND CHARTER STATUS OF BANK
[Amountsin thousands of dollarsi
Amount of tax
National Percentage distribution
as percent
Measure of tax All banks National State of total National State
Total 623, 052 354, 822 268, 231 56. 9 100. 0 100. 0
Net income 235, 160 125,644 109,515 53.4354 408
Real property 179,409 112,482 66,927 62.7 31.7 25.0
Shares or capital structure___- - 120. 510 74, 877 45, 633 62. 1 21. 1 17.0
Bank deposts 38,865 21,343 17,522 54.9 6.0 6.5
General sales and use 10,938 4,088 6,851 37.4 1.2 2.6
Gross income or gross receipts 7,575 2,211 5,364 29.2 .6 2.0
Tangible personal property 4, 745 1, 719 3, 026 36. 2 . 5 1. 1
Documentary taxes 597 341 256 57.1 .1 .1
Miscellaneous deductible I 11,971 7, 166 4 805 59.9 2.0 1.8
Other2 13. 282 4.949 8,332 37.3 1.4 3.1
I Includes sales and use taxes of 3407 thousand, of which $303 thousand was at national banks and $104 Ihousand at
State banks. (See table 1, above.)
2 Includes sales and use taxes of $12,272 thousand, of which $4,689 thousand was at national banks and $7,583 thousand
at State banks. (See table 1, above.)
The survey data indicate that in a substantial number of States,
certain of these taxes were reported only by State-chartered banks or
the relative importance of the tax was. much larger for State than for
national banks. (See table D, p. 119.) Taxes on tangible personal prop-
erty and sales taxes were the most frequent examples of this. In over
one-third of the 34 States in which State banks reported paying a par-
ticular tax and national banks did not, the amounts were relatively
small-aggregating 1 percent or less of total tax payments of State
banks in* those States. States in which State-chartered banks paid
relatively significant amounts of taxes not reported by national banks
included Alabama, Alaska, Arizona, Hawaii, Idaho, Indiana, Maine,
PAGENO="0122"
102
Nevada, Pennsylvania, Rhode Island, Utah, West Virginia and
Wyoming.
In some cases, the selective imposition of taxes on State banks that
did not appiy to national banks appears to have resulted in a tax
burden on State-cliartei'ed banks commensurately higher than that. on
national banks. in other cases, the States have made compensating
adjustments, iflClU(liflg differential rates or permitting one type of tax
to be used as an offset against another.
The over-all data suggest, however, that State-chartered banks were
taxed somewhat more heavily than national banks in 1969, as shown
by the ratios of total State and local taxes to various balance sheet
and income statement measures (table 8). For example, the ratios for
State banks exceeded those for national banks by one-half of 1 per-
centage pomt on net income before taxes and nearly 1 percentage
point on net income after taxes. Differences were ~)roportioflately
greater when taxes are measured in relation to total assets and equity
capital.
State banks ratio divided by national banks ratio
Size of bank (total deposits in millions o~ dollars):
Less than 15:
All banks
National
State .. - -.
State banks ratio divided by national banks
ratio - -
l5to 100:
All banks - - -
National
State
State banks ratio divided by national banks =
ratio
100 to 500:
All banks
National
State
State banks ratio divided by national banks =
ratio
SOC and over:
All banks
National.
State
8.64 14.50
8.40 13.99
9.04 15.35
108 110
9.14 15.85
8.73 14.68
9.96 18.48
.13 1.76
.12 1.67
.14 1.92
117 115
.12 1.77
.11 1.64
.13 2.04
TABLE 8.-RATIOS OF TOTAL STATE AND LOCAL TAX EXPENSES IN 1969 TO SELECTED BALANCE SHEEt AND
INCOME STATEMENT AGGREGATES FOR ALL INSURED COMMERCIAL BANKS, BY CHARTER STATUS AND SIZE
OF BANK
.
Ratio (in percent) of
tax expenses to-
Net income
,
before all
State and
Class and
.
size of
bank
.
local taxev,
Federal
income taxes,
and securities
gains or
losses
Net income
after taxes
and securities
gains or
losses
Totzl
assets
Equity
capital
All banks
National
State
8.81 14.51 .12
8.61 14.16
9.10 15.00
1.67
.11 1.61
.13 1.77
106 106 118 110
7.84
11.46
.11
1.32
7.88
11.77
.10
1.24
7.82
11.32
.11
1.36
99
96
110
110
8.88 13.91 .12 1.64
8.78 13.92
9.03 13.90
103 100
.12 1.60
.12 l.69
100 116
State banks ratio divided by national banks
ratio
114 126
118 124
PAGENO="0123"
103
The general level of the several ratios for both National and State
banks varied widely from State to State, as did the relationships be-
tween ratios for these two groups. (See table E, p. 1123.) In fact, with
respect to the ratio of State-local taxes to net income after taxes, the
national bank ratio was higher than the State-bank ratio in over
half the States, while for all other measures the State-bank ratios were
higher in a majority or close to a majority of the States.
Table 9 provides a frequency distribution of States that compares
the national and State bank ratios of State and local taxes to net
income before taxes with ratios for taxes-to-equity capital. This
table indicates that the States differ considerably in these relation-
ships. It illustrates also the tendency for State bank ratios to be
higher than national bank ratios. The ratios for the two charter
groups are within 20 percent of equality for both the tax/income and
tax/equity measures in nearly half the States (24), but there are 10
States for which both ratios are higher by 20 percent or more for
State than for national banks and only 3 States where both ratios
for State banks are below those for national banks by 20 percent
or more.
TABLE 9.-STATE/NATIONAL BANK RATIOS FOR SELECTED MEASURES OF STATE-LOCAL TAX EXPENSE
[Number of States[
Ratio of State-local tax ex-
pense to net income before
taxes-State banks as per-
cent of national banks
Ratio of State-local tax expense to equity capital-State banks as percent of national banks
-
All 130 or 120 to 110 to 90 to 80 to 70 to Less than
States more 129 119 109 89 79 70
All States
130 or more
51 8 6 5 13 9 4 6
5 . 3 2
120to129
8 5 2 1
110 to 119
5 1 2 1 1
90 to 109
20 2 1 10 3 4
80to89
8 2 4 2
70 to 79
Less than 70
2 1 1
3 1 2
In many cases, there was no readily discernible relationship be-
tween the relative percentage for National and State banks within a
State and the presence or absence of special taxes on State banks In
that State. This J)robably means that the effects of the tax differences
were outweighed by differences in characteristics of National and
State banks within the various States, including their size distribution,
type of business, branching status, and other factors.
The higher over-all tax ratios for State than for national banks
appear to be attributable mainly to differences at the larger banks.
For banks with total deposits under $100 million, for example, the
ratios of State and local taxes to the various measures in table 8 show
no marked or consistent differences, with the ratios for State banks
being somewhat higher than those for national banks in 4 cases and
the same or lower in 4. However, a widening spread of State-bank
ratios above those for national banks emerges as the size of bank
increases. For banks in the largest size class (total deposits of $500
million and over), the differences are marked-for example, the ratios
for National and State banks are 14.68 and 18.48 percent, respectively,
for net income after taxes and 1.64 and 2.04 percent, respectively, for
equity capital.
PAGENO="0124"
104
While the survey data alone do not provide an explanation for these
charter-status differences tirnong large banks, the data on the relative
importance of various types of taxes at large national and State banks
suggest one possible influence. With respect to tangible person~~l ProP-
erty, sales, and the miscellaiieous-other categories (which are in large
part sales taxes)-types of taxes that were not legally enforceable
against national banks in 1969-large national banks showed much
smaller relative shares than large State banks. At smaller banks, on
the other hand, the differences were less marked (table 10). The
minimal amounts of these taxes reported by large national banks may
reflect in part greater awareness of the law exempting them from cci'-
tam taxes (particularly following the~ 1968 Supreme Court decision
rejecting the sales tax for n~ttional banks"), greater concern about
stockholder suits in case unauthorized taxes were paid voluntarily, or
less willingness to P~Y such taxes as a consideration for gaining State
deposits where this might be a factor. In a few jurisdictions, large
national banks refused to pay sales taxes whereas smaller national
banks in many cases paid those taxes as did the State-chartered banks.
TABLE 10-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL
BANKS IN 1969, BY MEASURE OF TAX. CHARTER STATUS OF BANK, AND SIZE OF BANK
Size of b
Measureof tax All banks Underl5
ank (total depo
sits in millions
of dollars)
l5tolOO
100to500
500and over
NATIONAL BANKS
Total 100.0 100.0 100.0 100.0
Net income 35.4 26.5 19. 0 24.5 46.6
Real property 31.7 30.6 33.8 31.8 31.0
Shares or capital structure 21. 1 32. 3 30. 0 27. 2 14. 2
Bank deposits 6.0 4.3 9.2 8. 2 4.3
General sales and use 1. 2 1. 2 .9 1. 6 1. 1
~1ossjncomeorgrO5S receipts - .6 .1 *5 8 .6
Tangible personal property . 5 1. 2 1. 2 . 6 .
Documentary taxes . 1 .6 . 2 . 1 (`)
Miscellaneous deductible 2.0 2.4 4.3 3.0 .8
Other 1.4 .7 .9 2.3 1.3
STATE BANKS
Total 100.0 100.0 100.0 100.0 100.0
Net income 40. 8 33.3 25. 2 33. 6 57.0
Real property 25. 0 22. 7 29. 6 26. 3 22.7
Shares or capital structure 17. 0 29. 1 25. 9 16. 8 6. 2
Bank deposits 6.5 5.3 7.7 11.5 4.2
General sales and use 2.6 2. 1 1. 6 3.4 3. 0
Gross income or gross receipts 2. 0 2. 4 3. 2 1. 6 1.3
Tangible personal property 1. 1 2. 2 1. 7 1. 5 . 2
Documentary taxes . 1 . 1 . 2 . i
Miscellaneous deductible 1.8 2. 1 2.7 .8 1. ~
Other 3.1 .9 2.3 4.5 4.0
I Less than 0.05 percent.
At both national and State-chartered banks, the tax ratios in table
8 varied directly with bank size, but the spreads between the ratios
for the smallest and the largest size classes were wider for State than
for national banks for the reasons indicated above. The ratio of taxes
to net income before taxes for State and national banks combined was
9.14 at the largest banks, about one-sixth above the smallest-bank
ratio, while the ratio of taxes to equity capital, at 1.77, was about one-
II First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339 (lOtS).
PAGENO="0125"
105
third higher. Most of the size-of-bank variation in the ratios was
between banks in the smallest size class (total deposits under $15 mil-
lion) and those in the next larger group (total deposits of $15 to $100
million), although three of the four ratios tended to rise further as
bank size increased.
This tendency for tax ratios to vary with bank size reflects a number
of factors, including (1) the understatement of tax expense on 1969
operations for smaller banks owing to widespread reporting of such
expense by the these banks on a cash rather than accrual basis (as
discussed in paragraph (~) on page 96 above); (2) the concentration
of smaller banks in smaller communities and in less industrialized
States, where tax levels tend to be lower than in urban areas and indus-
trialized States where most large banks are located; (3) the more
favorable treatment accorded smaller institutions in many State and
local tax laws or in their administration; and~ (4), with respect to the
equity capital ratio, the larger relative capital positions among banks
in the smallest size group as compared with those of larger size.
Out-of-State Taxes
Banks paid only nominal amounts of taxes to State and local govern-
ments outside their home States in 1969. Such taxes aniounted to less
than $1.4 million for all insured, commercial banks, only about two-
tenths of 1 percent of all their State-local taxes, as summarized in
table 11.
This proportion was less than 1 percent for banks located in every
State except Illinois (1.4 pei'cent), and less than one-half of 1 percent in
all but three other States (California, Massachusetts, and Missouri).
No out-of-State taxes were reported by banks in 11 States and only
nominal amounts were reported in 10 other States.
TABLE 11.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969 PAYABLE IN JURIS-
DICTIONS OUTSIDE THE HOME STATE, BY MEASURE OF TAX AND CLASS OF BANK
[Amounts in thousands of dollarsj
Percentage distribution of
Out-of-State
taxes as
Measure of tax
A
All
banks
mount of tax
National State
amount
-
All
banks National State
Percent of total
for all banks
National State
percent of
total State
and local
taxes
Total
1,373
1,155 218
100.0 100.0 100.0
84.1 15.9
0.2
Net income
Real property
Shares or capital structure
Bank deposits
General sales and use
786
385
8
3
58
657 130
323 61
6 2
3
55 3
57. 3 56.9 59. 5
28. 0 28. 0 28. 2
. 6 . 5 1. 1
.2 .3
4. 2 4. 7 1. 4
83. 5 16. 5
83. 9 15. 9
75. 0 25. 0
100.0
94. 8 5. 2
. 3
. 2
(1)
(1)
. 5
Gross income or gross
receipts
Tangible personal property
Documentary taxes
Miscellaneous deductible~
1
22
1
27
1
21
1
19 8
. 1 . 1
1. 6 1. 9 . 1
. 1 - 3
2. 0 1. 7 3. 8
100. 0
100. 0
100. 0
70. 4 29. 6
(1)
. 5
. 2
. 2
Other
81
69 12
5.9 6. 0 5. 6
85. 2 14. 8
. 6
1 Less than 0.05 percent.
Note: Detail may not add to totals because of rounding.
This minimal volume of out-of-State taxes for banks is in marked
contrast with other industries similarly engaged to an appreciable
extent in interstate activities, which pay substantial amounts of
out-of-State taxes. The special position of banks again appears attrib-
PAGENO="0126"
106
utable at least in part to the restrictions on Stale powers to tax
national banks contained in section 5219. Prior to the 1969 amend-
ments, this statute confined authority to tax national banks to the
State in which the principal office of the bank was located, excej)t for
taxes on real property. As in the case of the other restrictions in this
law, the immunity to out-of-State taxation appears to have carried
over to State-chartered banks, although legally they could be taxed
by any States in which they transact business It is also possible,
however, that the manner in which State banks operate in foreign
States, which generally involves no physical presence, does not often
bring them within the taxing jurisdiction of those States.
Notwithstanding their statutory immunity, national banks ac-
counted for 84 percent of all out-of-State taxes reported by banks for
1969. These payments were heavily concentrated at large banks, and
were mainly associated with the operations of subsidiaries, which are
not covered by the statutory immunity of the banl~s. Other sources of
out-of-State tax liability included taxes on foreclosed property, in a
few instances on out-of-State branches and respresenta.tive offices, and
on purchases of goods and services in other States.
The major form of tax paid to out-of-State jurisdictions was the
income tax, nearly three-fifths of the total. Real property taxes ran
second at 28 percent, and sales taxes a distant third at 4 Pe1~ceflt.
Banks with total deposits of $500 million or more accounted for all
the out-of-State income tax, about three-fourths of the real property
tax, and about 85 percent of the sales tax. Thus, to the extent smaller
banks paid out-of-State taxes, they were mainly real pro~)erty or
"other" taxes (mainly sales and use taxes).
* Only 227 banks are estimated to have incurred out-of-State tax
* liability for 1969, about two-thirds of them with. liabilities in only one
foreign State. The average number of States per respondent was just
under two. Payments in appreciable numbers of States were reported
only by a few large money-market banks. The affected States for most
respondents were adjoining, or nearby States. Where a more distant
State was involved, the State mentioned most often was New York,
and in several of these cases, the tax was associated with a bank's
Edge Act subsidiary.'2
Banks paying out-of-State taxes were distributed over 39 States and
the District of Columbia. The maximum number of banks in any Stat.e
that is estimated to have paid out-of-State taxes is 20-the total from
Florida.
Changes in Taxes after December ~4, 1969
To provide information on the extent to w'hch bank taxes had been
affected by the enactment of Public Law 9 1-156 respondents were
asked to report information concerning any significant change (ex-
clusive of a change solely in rate) in State and local taxes that lied been
12 As part, of a major revision in the report of income required by Federal bank supervisory authorit,es
beginning with the year 1959, all banks Were required to prepare a conoohdated statement on an item by
Item ha.cis for the hank and its domestic subsidiaries. For purposes of this statenient. the instructions speci-
fied that Edge Act Corporations, which engage primarily in international business, are not domestic cub-
sidieries, but ncf income remitted to the bank by these corporations continued to he included under "other
operating income." This resulted in some ambiguity concerning the treatment of taxes paid by these cor-
porations in the tax expense survey, which requested reporting of the amounts of1911i) State and local tax
expense "reflected" in the bank's "Consolidated Report ~ Income" filed with the Federal hank supervisory
authority for that year. Some l)anks interpreted their Edge Act Sut)SidiarieS as being "reflected" in their
reports of income and therefore reported taxes for those subsidiaries in the tax expense survey hut others
apparently did not.
PAGENO="0127"
107
made since the effective (late of that legislation.'3 For each tax so af-.
fected, banks were asked to furnish an estimate of what their 1969 tax
expense W0U1(l have been on the assumption that the change was ef-
fective thioughout 1969. Thus any inctease due to expansion in the
tax base as a result of rising income and prices was to be excluded from
the calculations.
Only 585 respondents-about one-fourth of all banks in the sample-
submitted information relating to tax changes. In no event would a
100 percent response rate have been expected since in many jurisdic-
tions there were no tax changes to report.
Since the amendment of section 5219 applied specifically to national
banks, they were_more frequently affected by tax changes than State
banks, and 44 percent of all national banks in the sample subniitted
estimates compared with 16 l)erCeflt of the State banks (table 12).
The response rate for both charter groups varied directly with size of
bank, ranging from 34 PerCent for banks with total deposits of $15-100
million to 65 percent for the largest size group (total deposits of $500
million or more). Although the smallest banks (those with total de-
posits under $15 million) were given the 01)tioll of not responding to
this question, information was received from nearly 10 percent of all
sample banks in this category.
TABLE 12-BANKS REPORTING INFORMATION ON CHANGES IN TAXES BETWEEN DECEMBER 1969 AND
THE SURVEY DATE (DECEMBER 1970), BY SIZE OF BANK AND CHARTER STATUS
.
Size of bank (total deposits, in millions of dollars)
Number of
banks in
sample
Banks reporting tax changes as a perc
sample banks in each group
ent of
Total National
~-
State
All size groups
Less than 15
15 to 100
100 to 500
500 and over
2,222
1,040
805
273
104
26. 3 43. 7
9.0 15.6
33.8 45.9
55. 7 72. 8
65.4 75.0
15.6
6.6
24.8
30.6
43.8
The lower response rate at smaller banks may have been attributable
in part to the difficulties of re-estimating taxes, but lack of specific
information concerning the nature of tax actions tl1at had been
taken in their States, ~)artidular1y actions with a. deferred effective
date, probably was a more important consideration. Also, as noted
earlier, the smaller national banks to a much greater extent than the
large ones I1ad been making voluntary p~ ments of types of taxes
that were legally applicable only to State banks. The imj)act of
statutory changes therefore was relatively less for the smaller national
banks than for the large ones.
The 585 banks submitting tax-change information were located
in 41 States. In 5 of these, however, there were only one or two
responses, suggesting that the relevant tax change might have been
confined to a single local community. In 10 of the remaining 36
States, half or more of all sample banks reported, and in 13 additional
States, where tax action apl)arefltly had been confined to national
banks since no State banks reported, close to half or more of all
national banks in those States responded.
!3 The "temporary amendment" authorized State and local governments to impose on itational banks
within the State any generally applicable and non-discriminatory tax (except an intangibles tax) in the
same manner and to the same extent as the tax was applied to State banks in that St~tp. As of Jimuarv 1,
~1972 the intangibles tax restriction will be removed under the present language of the "permanent
amendment."
PAGENO="0128"
108
Most of the reported changes related to tax increases, particularly
the imposition of taxes previously not. applied to banks, or at least
not to national banks, because of section 5219. In nearly all the 41
States, the sales tax was reported, and in a substantial number,
also the tangible. persoiial property tax and various miscellaneous
taxes (mainly occupancy, service, and license and privilege taxes).
In addition, the gross receil)ts tax was reported by banks in WTashing_
ton, and the documentary ta~x by banks in Alabama and Florida.
Although the survey of tax administrators indicated that several
other States had adopted a documentary tax or extended it to national
banks subsequent to December 24, 1969, no bank in any of these
additional States reported the change (possibly because the tax is
passed on to the customer and not absorbed by the bank).
TABLE 13.-ESTIMATED EFFECTS OF CHANGES BETWEEN DECEMBER 1969 AND DATE OF SURVEY IN STATE AND
LOCAL TAXES PAYABLE IN THE HOME STATE BY INSURED COMMERCIAL BANKS, BY MEASURE OF TAX
lAmounts in
thousands of do
liars; respondent banks onlyj
Measure of tax
Number
of banks
reporting
change
Amount of tax f
or 1969
Net change
Percenfage
Amount distribution
-
Actual Revised
Net income
Real property .
Tangible personal property
Shares or capital structure
Gross income or receipts
Sales and u
Documentary
Mfsce!Ianeous
Total reporting
Memoranda:
National banks -
State banks
All banks reporting
122
7
155
88
32
406
8
44
84,677 84, 421
125 136
95 2,789
4,439 7, 631
1 3134
523 14, 412
15 47
45 434
-256 -1. 1
11 (2)
2,694 11.7
3, 192 13. 8
3,133 13.6
13, 8~9 60. 2
33
389 1. 7
.
3 585
4 256, 078 4 279. 164
23, 086 100. 0
372
213
169, 845 190, 420
86,232 88,745
20, 575 12. 1
2,511 2.9
585
256, 078 279, 164
23, 0869.0
I The amounts shown in these columns for each category of taxes cover only those individual taxes that were affected
significantly by changes in statute or regufat'on between December 1969 and the survey date (December 1970). lr. the
"Revised" column are respondents' estimates of what their 1969 tax expense for the designated tax would have been if
the revision had been in effect throughout thet year.
Less than 0.G5 percent.
a This total ix not the sum of the number of banks that reported changes for individual taxes, since some banks renorted
chanc'es in more than one tsx.
These totals represent aggregate Stnte and local taxes of the 585 respondents that reported changes in individual
taxes, including categories of taxes that had not changed. The "Revised" total indicates what total State and !oca! taxes
for those banks would have been in 1969 after allowing for the reported changes.
Decreases in selected taxes also were reported in a few States.
These OCCUr1'e(I mainly where one tax was substituted for another
or where the introduction of new taxes was associated with or re-
sulted in some reduction in another tax, such as by raising the total of
allowable tax deductions used in calculating taxable income under the
income tax.
The net effect øf all the changes repol'te(l by the 585 respondents.
was an increase in their total State and local taxes of 9 l)erceflt (table
13). As might be CXpecte(I, in view of the Federal statutory change
for national banks, these banks showed a much larger rise than
State banks-12 percent as compared with 3 percent.
PAGENO="0129"
109
Three-fifths of the total increase of $23 million was for sales and
use taxes, which reflected the aggregate of small increases in a large
number of States. Ti next largest increases were in shares or Cfl1)ital
structure and gross receipts taxes, which rose by a little over $3
million each. Both of these were concentrated, with the gross receipts
tax accounted for entirely by the State of Washington and the shares
tax mainly reflecting the net of a $3.7 million increase in New Jersey
(where the share tax rate was doubled and the structure changed)'4
and a $634 thousand decrease in Iowa, which replaced its shares tax
mainly with an income tax. Increases in taxes on tangible pei'soiml
property were reported in about two-fifths of the 41 States and the
increases totaled $2.7 million, or about 12 percent of the total. The
net income tax shows a small net decline, as increases in States which
had introduced this tax (Iowa and New Hampshire) or extended its
coverage to national banks (Tennessee) were more than offset by
declines associated with increased deductions for other taxes or, in the
case of New York, a reduction in the income tax rate accompanied by
elimination of a sales tax credit against th~ income tax.'5
Relation of Bank Taxes to Total State-Local Tax Revenue
`The $623 million of State and local tax expenses of commercial
banks in 19G0 amounted to about three-fourths of one percent of
the $83 billicn total of State-local revenue that year, as shown in
table 14. (Bof Ii these amounts are exclusive of State payroll taxes
for financing unemployment compensation and disability insurance.)
Banks' share of total taxes on business was 1.1 percent, but the
proportion varied considerably by type of tax. Owing in part to
limitations imposed by section 5219, the States placed considerable
reliance on the net income tax in taxing banks; l)ayrne1~ts by com-
mercial banks were nearly 7 percent of total State-local revenue from
the corporation income tax. Taxes IMtid by banks on their property
or on shares and deposits exceeded 13% percent of all business taxes on
property. But other taxes derived from banks, such as sales and use and
gross income or gross receipts taxes-types of taxes which section 5219
made inapplicable to national ban ks-were of negligible importance
as sources of State-local revenues.
14 The tax was changed from a county tax to a tax that is split between the State and the county at the
same time that the rate was raised from ~ to 13'~j per cent.
15 The small net increase reported for real property taxes may have included some changes resulting from
new assessments or higher levies, even though time survey instructions were intended to exclude this kind
of change.
79-421 0 - 72 - 9
PAGENO="0130"
110
TABLE 14.-RELATION OF COMMERCIAL BANK STATE-LOCAL TAX EXPENSES TO TOTAL TAX REVENUE OF STATE
AND LOCAL GOVERNMENTS, BY MEASURE OF TAX: CALENDAR YEAR 1969
[Amounts in millions of dollars[
Measure of tax
Tax expense
of commercial
banks
State-local tax
revenue
---
Bank tax expense as a
percent of total State-local
tax revenue
--------------
Total Business
Total
Business
All taxes
623.1
82,826
57,471
.75 1.08
Net income
Property value
Other
235.2
13435
44.4
13,476
31,956
37,394
3,483
19,402
34,586
1.75 6.75
1.07 1.77
.12 .13
I Comprises taxes on real property, tangible personal property, shares, capital structure, and deposits.
Source: Data on bank taxes were compiled from the Federal Reserve survey. The estimate of total State and local tax
revenue for calendar 1969 is from Bureau of the Census, Quarterly Summary of State and Local Tax Revenue, October-
December 1969. The estimates of total business taxes and the breakdowns of total and business taxes were derived from
the Bureau of the Census total of all State-local tax revenue and from data in the Survey of Current Business, July 1970,
table 3.3 at p. 30, as follows: Business taxes total equals the census total of State-local revenue less the Commerce total
of personal tax receipts (exclusive of $7,546 million nontaxes but inclusive of homeowners property taxes classified under
"business" property tax in the Commerce table totaling $11,479 million, according to breakdown supplied by the Office of
Business Economics); net income taxes (Commerce); property value taxes (Commerce; adjusted as noted above); other
taxes (residual after deducting net income and property value taxes as derived above from total for all taxes). Included in
other business taxes are $25,100 million of general and selective sales and use taxes; the entire amount of such taxes is
assigned to the business sector in the Commerce breakdown although a substantial proportion of these taxes is levied on
and collected from individual consumers.
Bank taxes in 1969 ranged from less than 0.4 percent of total
State-local tax revenue in seven States to more than 1.3 percent in
three State.s and between 1.0 and 1.3 percent in five.10 (See p. 125,
table F, column (b).) There were significant regional differences in
the general level of the ratios, ranging from a low median level of .53
in the South to .90 in the Northeast (table 15). However, within each
region, the range of ratios was quite wide.
These marked variations in the bank share of total tax revenue
arise not only from diffeiences in the economies of the States and in
theii practices concerning the taxation of banks, but also from differ-
ences in the intensity of their over-all tax effort and in the makeup
of their tax structures. For example, the bank tax proportion is likely
to be less in a State that relies very heavily upon consumption taxes
(which add to the State-local revenue total but have little impact on
banks) than in a State which makes significant use of corporation
income taxation.
16 States with bank taxes accounting for less than 0.4 percent of total State-local tax revenue were Alaska,
Arizona, Florida, Nebraska, New Hampshire, South Carolina and Washington. Thoce in the 1.0-1.3 pci-
cent range were Connecticut, District of Columbia, Minnesota, New York and Ohio; and those with higher
percentages were Louisiana, Montana and Texas.
In this and subsequent comparisons that deal with individual States, bank tax amounts for calendar
1969 are related to total State-local tax revenue for "fiscal 1958-69-that is, for fiscal years ending in June
1969 or within the preceding 11 months. Because of the strong upward trend in State-local taxes, this results
in some overstatement of the bank shares of total taxes. Calendar-year tax totals are not reported for the
individual States.
PAGENO="0131"
11'l
TABLE 15.-DISTRIBUTION OF RATIOS OF BANK TAXES TO TOTAL STATE-LOCAL TAX REVENUE,
BY REGION, 19691
[Number of States]
Bank taxes as a percent of
total State-local tax revenue
U.S. total Northeast North central South West
All States
130 or more
1.00 to 1.29
0.90 to 0.99
0.70 to 0.89
0.60 to 0.69
0.50 to 0.59
0.40 to 0.49
0.30 to 0.39
Median ratio
51 9 12 17 13
3 2 1
5 2 2 1
5 3 2
5 1 3 1
7 3 1 3
11 2 2 4 3
8 1 1 4 2
7 1 1 2 4
.590 .903 .668 .531 .590
I Bank taxes for calendar 1969 are related to tax revenue of the individual States for "fiscal 1968-69-i.e., for fiscal
years ending in June 1969 or within the preceding 11 months.
Source: Table F below, p. 125.
Further background on these relationships is provided by a recent
research study of the Advisory Commission on Intergovernmental
Relations, which includes State-by-State estimates of "relative tax
effort." 17 These estimates express the percentage relationship of
actual State-local tax revenue in each State to the potential tax yield
of that State if national average rates for each kind of tax were applied
to the various tax bases of the State. The resulting ratios can be
compared with various ratios relating to the general level of bank
taxes-for example, the percentage of the national average of a State's
ratio of bank taxes to net income before taxes, to equity capital, etc.
Comparisons of this type show that there is a general tendency for
State ratios of the level of bank taxation, so derived, to vary directly
with over-all indexes of State-local tax effort developed by the
Advisory Commission, whether "effort" is considered from the stand-
point of all State-local taxes or only "business" taxes. For example, in
the 17 States with the highest indexes of over-all effort on business
taxes, the ratios of bank taxes to net income before taxes averaged
110 percent of the national average compared with 74 percent for
the 17 States with the lowest effort indexes (table 16). Similar relation-
ships exist if the level of bank taxes is measured in rd ation to net
income after taxes or to equity capital. However, within each of the
various effort groupings of States, a considerable range exists in the
1-evel of bank taxation and in many cases, the bank tax index for indi-
vidual States also differs materially from either of the broader tax
effort indexes used for this comparison. Such disparities are to be
expected, however, not only because of the wide State-to-State
differences in the bank tax ratios, discussed earlier, but also because
of the many and varied factors affecting tax-effort ratios, including
differences in the relative use of grants-in-aid, nontax sources of
revenue, borrowing, etc.
17 Advisory Commission on Intergovernmental Relations, Measuring the Fiscal Capacity and Effort of
State and Local Areas, Washington, D.C., March 1971, report M-5S. See columns (c) and (d) of table F,
below, p. 125.
PAGENO="0132"
112
TABLE 16.-STATE INDEXES OF TOTAL TAX REVENUE COMPARED WITH TOTAL STATE-LOCAL TAXES ON INSURED
COMMERCIAL BANKS
Tax effort group
Index of overall
Range
tax effort
Average
Index of State-local taxes
on banks, 19691
Range Average
All State-local taxes, 1968-69:
l7high-effortStates
17 medium-effort States
.
101-139
88-100
111
94
63-144 101
51-168 88
17 low-effortStates
71-87
81
41-164 78
State-local `business" taxes, 1966-67:2
l7high-effortStates
17 medium-effort States
108-149
86-107
124
94
65-168 110
41-156 83
17 low-effortStates
45-85
71
44-117 74
I As indicated by the ratio of bank State-local tax expense to net income before taxes in each State expressed as a
percentage of the national average for that ratio,
2 Comprising corporation taxes, severance taxes, and local property taxes on business property.
Source: Table F below, p. 125.
Other Relationships
A question of considerable interest and importance that arises in
connection with a detailed study of the tax status of any industry is
how the tax burden of that industry compares with that in competing
industries and with business generally. This question is a matter of
special interest in the case of banking because of the long-standing
limitations placed on State and local taxation of national banks by
section 5219 and the efforts of the various States to seek accommoda-
tion to those limitations while preserving an equitable balance in the
treatment of banks and other businesses with their often dissimilar
tax structures.
However, no effort has been made in this report to develop inter-
industry comparisons of this character. As pointed out in another paper
prepared in connection with the over-all study, serious conceptual and
analytical difficulties would be encountered in developing an appro-
priate framework for making such comparisons.18 Moreover, even
though the data needed for making such comparisons were obtained
for banks for the year 1969 in the tax expense survey, comparable
data are not available for other industries, including those closely
competitive with banking for which comparisons would be most
relevant.
REPORTING FORM AND INSTRUCTIONS
Confidential (FR 741). 0MB No. 55S70005
Approval Expires March 31, 1971
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
SURVEY OF STATE AND LOCAL TAX EXPENSES OF INSURED COMMERCIAL BANKS,
1969
INSTRUCTIONS
Please supply the information requested below relating to State and local tax
expense incurred by your bank for the calendar year 1969.
Part I.
The amounts of taxes reported should be those reflected in your bank's "Con-
solidated Report of Income" filed with the Federal bank supervisory authority for
that year. The kinds of taxes to be reported are those State and local taxes that are
deductible on line 17 of IRS Form 1120 in calculating Federal income tax. Exclude
4° See appendix 9 below, 1)1). 469-484.
PAGENO="0133"
113
State payroll taxes (for unemployment cornl)(~nsation, etc.). Report total State
and local tax expense for your home State in Column A and for all other States
combined in Colunin 13.
Column C is intended to measure the impact of signilicant recent changes in
State-local taxation of commercial banks since the Federal statute governing State
taxation of national l)anks was amended 1)eceniber 24, 1969. If your hank ex-
perienced such changes affecting any type of home-State tax for 1970, please re-
compute or estimate what your 1DGD tax expense would hame been on the assumption
that the change was effective throughout 1969. Include instances where (by
statute, regulation, or administrative ruling) a former tax has been dropped, a tax
not previously applicable has been imposed, or a tax has been broadened. 1)o not
include estimates based on a change simply in the rate of tax (such as a change in
the ad valorein rate on real property or the net income tax rate). If the amount of
tax expense for item 1 (tax on net income) would have been affected by changes in
other taxes-i.e., through changes in deductions or credits-please estimate the
revised amount for this item giving effect to the changes in other taxes as well as
any changes in law, regulations, or rulings governing this tax. In Column C, dis-
regard changes under $100 or 5 percent of the affected tax expense. Leave Column
C blank for any item for which a revised estimate is not reported. Banks with
total deposits of less than $15 million need not fill in this column.
Part II.
Please report in item 1 any State and local tax expense not covered in Part I and
in item 2 the names of States other than your home State in which taxes were paid.
Items 3 through 5 provide supplementary information needed to identify the
basis of reporting.
Please return the filled-out form to the Federal Reserve Bank of -
by December 30, 1970.
PAGENO="0134"
114
part I. -- 1969 State anti Local. Taxes (See instructions on page 1).
1. Net income tax. State-local taxes upon, measured
by, or according to. net income, including any
"excise" or "franchise" taxes of ~this nature.
2. Real property
3. Tangihle personal property
4. Bank deposits
5. Shares of bank stock
6. Taxes measured by capital structure
(capital. surplus, undividtd profits,.etc.).
7. Gross income or gross receipts
8. General sales and use taxes
~. Documentary taxes (real estate transfer, security
transfer, mortgage taxes, etc.)
10. Niscellanecus. Identifiable amounts of State-
.ocal taxes not included above (e.g., motor
vehicle licenses, selective taxes on utility
billings, etc.). Omit State payroll taxes.
Specify t~'pes:
xxx
xxx
`(xx
State and local tax
Estimate
at
Basis or type of tax
expense
Within
home State
Col. A
1969
In other
States
Col. B
revised 1969
amounts for
home State
Col. C
~umit eta.) (omit cts
S
(Omit cts.)
$
11. Total, items 1-10
12. Other taxes. Totals reported in Part II, item 1
13. Total. State and~local ta,tes (sum of items 11 an
12). . . -
ME~1ORANDUN: If column C is not applicable, check here
PAGENO="0135"
115
Part II. Supplementary Information (Please complete all, questions):
1. If your bank incurred significant State and local tax expenses in 1969 (for
example, more than 5 per cent of amounts in Part I, line 11) that were not
specifically theme as deductible taxes but were included in other expenses in
your Federal income tax mince and therefore are not included in Part I above
(e.g. , general sales taxes or selective taxes on utility billings that were not
separated from other expenses), plemse specify these taxes and estimate approxi-
mate amounts for 1969. Omit State payroll taxes. (Add pages if more space is
needed.)
Check here if item I is not applicable
Amount of tax, 196') (omit cents)
Typo of tax Within l,o~e State 1 In other Stato.~
~,________
$________
Total of above items
2. Please name the "other States" for which you.report tax amounts in Part I,
Column B. If information is readily available, indicate type of tax applicable
for each State. (Add pages if more space is needed.) Check here if item 2
if not applicable ~/
3. The 1969 "Consolidated Report of Income" for your hank (as filed with the Federal
bank supervisory authority) was prepared primarily on: cash basis ~ accrual basis c
`4. A parent holding company of this bank did did not ~ incur State-local tax
liabilities in 1969 in addition to those shown in this report.
Check here ji item 4 is not applicable
5. Selected items from your Federal income-tax return for 1969:
(a) Taxable income reported for Federal income-tax purposes (IRS Form 1120, line 30).
$____________________ Bank only Consolidated basis
(b) Total Federal tax for 1969 (IRS Form 1120, line 31): $_________________________
6. Comrsen~g (add pages if more space is needed) ________________________________________
Name and address of bank: _________________________________________________________________
Name, title, and telephone number of individual to whore queries concerning this survey
may be directed:
Date of response: - 197_.
PAGENO="0136"
116
c~iciC5 c~cr~-~
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PAGENO="0137"
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117
bO
PAGENO="0138"
118
TABLE B-TAX STATUS OF PARENT HOLDING COMPANY OF INSURED COMMERCIAL BANKS IN 1969
INumber of banksj
Tax status of holding company and size of bank (total deposts in millions National
of dollars) All banks banks State banks
Holding company incurred additional State-local tax liability, total' 826 311 515
Under 15 390 53 337
l5to 100 293 164 129
100 to 500 93 61 32
500 and over 50 33 17
Holding company incurred no additional Slate-local tax liability, total ~ 1, 014 385 - 629
Under 15 628 182 446
15 to 100 -- 315 154 161
lOOto 500 61 42 19
500 and over 10 7 3
Banks with no parent holding company 11,626 3, 974 7,652
Under 15 8,982 - 2,589 6,393
l5to 100 2,364 1,206 1,158
100 to 500 234 146 88
500 and over 46 33 13
I Because some holding companies control two or more subsidiary banks, the number of banks exrt~ds the number of
holding companies.
TABLE C.-PERCENTAGE DISTRIBUTION OF THE NUMBER OF INSURED COMMERCIAL BANKS THAT PREPARED
THEIR 1969 CONSOLIDATED REPORTS OF INCOME ON A CASH AND ON AN ACCRUAL BASIS, BY SIZE AND
CHARTER STATUS OF BANK
Percent of total number of banks within each group
Size of bank (total Cash basis Accrual basis
deposits in millions Number -__________
of dollars) of banks Total National State Total National State
All banks 13,465 73.0 61.6 79.0 27.0 38.4 21.0
Under 15 10, 000 - 85. 1 80. 8 86.8 14.9 - 19.2 13.2
15 to 100 2,971 42.9 37. 1 49. 0 57. 1 62.9 51.0
100 to 500 388 9.8 10. 8 7.9 90.2 89.2 92. 1
500 and over 106 3.8 4. 1 3. 0 96. 2 95.9 97.0
PAGENO="0139"
TABLE D.-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY STATE, CHARTER STATUS OF BANK, AND MEASURE OF TAX
(The sum of entries on each line is 100.0; any discrepancies result from rounding)
Total 37.7
National banks 35. 4
State banks 40. 8
Alabama 78. 1
National banks 79. 8
State banks 74. 9
Alaska 20.6
National banks 23. 4
State banks 5. 1
Arizona 33.4
National banks 35. 8
State banks 29. 2
Arkansas . 1
National banks . 1
State banks
California 63. 9
National banks 63. 6
State banks 65. 1
Colorado 58. 4
National banks 57. 3
State banks 61. 5
Connecticut 72.0
National banks 66. 9
State banks 76. 5
Delaware 55. 5
National banks 21. 2
State banks 55. 9
District of Columbia
National banks
State banks
Florida
National banks
State banks
Georgia . 2
National banks (1)
State banks . 3
See footnotes at end of table, p. 122.
28.8 0.8 6.2 19.3 1.2 1.8 0.1
31.7 .5 6.0 21.1 .6 1.2 .1
25.0 1.1 6.5 17.0 2.0 2.6 .1
13.9 .4 .6 1.9 .2 (1)
14.6
12.8 1.2 1.5 5.2 .7 .1
65.3 3.9 5.3
70.3 1.1
37.3 25.7 29.0
21.3 17.6 .4
33.9 28.1
21.1 17.5 .4
19.9 72.8 7.1
19.3 71.2 9.3
21.1 76.5 2.2
74.5 .6 .8 13.1
78.7 .6 .9 8.7
67.4 .6 .7 20.5
31.0 .1 68.1
40.9 58.9
20.9 .3 77.5
1.9 2.1
2.0 1.4
1.8 3.1
3.5 1.4
4.5 1.1
1.6 2.1
.2
.2
.3
Net
State income
Real
property
Tangible
personal
property
Bank
deposits
Shares and
capital
structure
Gross
income or
receipts
General
sales
and use Documentary Miscellaneous Other
1.9
2. 1
1.0
2.7
4.3
2.8 .3
4.1 .2
1.4 .5
.4 2.5
.2 3.0
1.8
1 7.2
.5 19.1
56.4
59.6
51. 1
30.5 58.1 5.7 .7 1.9
32.7 49.6 11.1 .6 1.6
28.2 67.0 .8 2.1
31.9 .2 (1) (1) .1 .1 (1) 3.7 c~
32.6 .1 (1) (1) (1) 3.7
29.7 .4 .1 .5 .2 .1 3.9
40.2 .2 .1 .7 (1) .5 (1)
41.3 .2 .7 .5 (1)
37.0 .1 .2~ .6 (1) .6 (1)
22.6 2.6 1.1 (1) (1) 1.7
30.8 .1 (1) 2.1
15.1 4.9 2.2 (1) 1.3
5.2
16.8
5.0
1.3 1.3 3.0 5.0
2.1 .2 3.9 4.9
1.1 3.2 1.5 5.2
.2 .1 .2 .1
.2 (1) .1
2 .i .4 .3
PAGENO="0140"
TABLE D.-PERCENTAGE DISTRI BUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY STATE, CHARTER STATUS OF BANK, AND MEASURE OF TAX-Con.
State
Tangible Shares and Gross General
Net Real personal Bank capital income or sales
income property property deposits structure receipts and use Documentary Miscellaneous Other
Hawaii 54.9
National banks 67.4
State banks 54.6
Idaho 69.2
National banks 71.9
State banks 61. 4
Illinois 8.8
National banks 2. 4
State banks 17.2
Indiana
National banks
Statebanks
Iowa .6
National banks 1.7
State banks
Kansas 53.9
National banks 49. 5
State banks 58. 8
K~tucky
National banks
State banks
Louisiana .1
National banks . 1
State banks
Maine 5.8
National banks .4
State banks 9.9
Maryland 72.0
National banks 71.6
State banks 72.3
Massachusetts 64. 7
National banks 65.4
State banks 63.7
Michigan 39.4
National banks 38. 4
State banks 40. 6
Minnesota 68.8
National banks 64.8
Stata banks 77.0
31.0 .3 2.4 9.4 .1
22.5 9.8
31.2 2.5 9.7 .1
26.8 1.9 .1 1.3
26.1 1.4
28.6 7.1 .3 .9
36.1 .4 49.0 1.6 .2
35.8 (1) 56.3 .7 .3
36.6 .8 39.5 2.7 .1
22.6 .1 23.3 1.4 .1
27.9 (1) .1 1.2
16.0 .1 52.2 1.7 .1
45.1 .7 49.0 3.1
553 (1) 40.8 1.6
39.9 1.1 53.2 3.8
40.1 1.2 . 2.9 (1)
45.3 .1 2.9
34.2 2.5 2.9 .1
18.5 .1 .7 74.5 1.4 (1)
17.8 (1) .7 76.1 1.3 (1)
19.0 .1 .7 73.3 1.5 (1)
12.2 .1 87.2 .3
15.0 .1 84.6 .1
8.8 .1 90.5 .4
46.6 1.1 2.3 36.0
53.1 .3 42.8
41.6 1.7 4.1 30.8
2.8 .1
1.2 .2
4.0 (1)
.9 (1)
.3 (1)
1.3 (1)
33.9 .1 (1) .5
33.7 .2 .1 .4
34.2 .1 .6 (1)
27.7 .1 29.7 .6 .4 .1
30.1 30.1 .2 .2
25.1 .3 29.3 1.1 .7 .1
28.3 (1) 1.7 (1)
32.3 1.8 (1)
20.2 .1 1.5
1.0 .9
1.1 .9
.7 .2
.4 .2
1.4 .3
.4 3.5
.5 4.1
.3 2.8
52.2 .4
70.7 .1
29.0 .8
.4 1.2
.2 .4
.5 1.6
.2 1.6 ~
.3 1.8
.1 1.4
.2 4.7
.3 3.8
.1 5.3
(1)
.2 .1
.2 5.1
.1 1.9
.2 7.5
.3 1.2
.1 1.6
.4 .9
.1 .7
.1 .2
.1 1.5
.1 1.8
.1 1.0
.1 2.8
.3 .9
.2 .9
.3 .9
25.6
26.4
25.0
PAGENO="0141"
M~ssiss~pp~ 1.9 40.1
National banks 50.5
State banks 3. 6 30. 7
Missouri - 74.7 18.2
National banks 73. 1 23. 7
Statebanks 75.6 15.0
Montana 21.6
National bank 27. 2
State banks 16. 5
Nebraska 41.0 51.4
National banks 30. 7 63. 8
State banks 53. 9 35. 8
Nevada
National banks ~ -
State banks
New Hampshire 3.4
National banks 1.0
State banks 9.0
New Jersey. .1
National banks .2
State banks
New Mexico 65. 6
National banks 68.9
State banks 55. 3
New York 68.6
National banks 68. 7
Stote banks 68. 5
North Carolina 63. 0
National banks 69. 1
State banks 50. 3
North Dakota 50. 8
National banks 45.6
State banks 57.5
Ohio (1)
National banks (1)
State banks
Oklahoma 70.9
National banks 70. 9
State banks 70. 5
Oregon 63.4
National banks 64. 5
State banks 58.4
Pennsylvania 1
Nat.onal banks... --
State banks . 3
See footnotes at end dftàble, p"122.
4.7
2.1
8.0
43.3 .4 1.7
35.5
59.4 1.3 5.3
70.1 6.0
72.4 3.9
65.0 10.7
.4 10.1
.2 18.6
.6 2.5
.2 2.9
.2 1.5
.2 4.8
.5 1.8
.4 1.7
.7 2.4 i-~
3.0 (1) 1.6 1.9
.7 (1) .3 .1
4.6 (1) 2.6 3.2
1.0 .3 .9
.4 .3
2.1 .4 2.7
.1 42.4 2.7
2.0 26.2 . 2.5
2.6 .3 56.9 2.9
1.?
1.6
.6 .4
(1) (1)
.9 .6
5.0 73.1.
2.2 70.2
7.5 75.6
2.4
3.7
.7 2.1
.4 2.6
.9 1.8
.3 .1
.2 .2
.3 (1) .8 1.8
.1 (1) 1.1 2.2
.5 .5 1.3
.2
2:1 .7
52.0 1.4
64. 1
26.9 4.3
20.4 .1
22.6 .1
15.3.
51.5 43.4 2.0
51.6 45.3 1.3
51.3 40.8 2.9
29.0 .3 .9 (1) 1.8 (1)
26.9 (1) 2.1 (1)
35.5 1.4 3.6 .2 .9
24.9 (1)
30.2
21.1 (1)
30.4 4.2 .3
29.0 .8 .4
33.2 11.2 (1)
45.6 1.3 1.1 .1
53.7 (1)
35.1 2.9 2.6 .1
12.0 (1) 76.0 8.8 .9 .1
13.9 78.2 7.6 (1) .1
9.8 (1) 73.5 10.1 1.9 .1
23.9 .2 .1
24.0 .1 .1
22.9 .3 .1
35.4 (1) .2 (1) .3 .7
34.8 (1) .7.
38.5 .1 1.0 (1) 1.7 .3
22.4 70.9 1.4 .9 .1 (1) 4.0
23.4 76.1 .1 .3 .1 (1)
20.9 63.3 3.5 1.8 .2 (1) 10.1
.5 *7.
.6 .1
.3 1.5
(1) 2.3
(1) .2
(1) 4.6
1.5 3.0 .4 .2
1.2 3.2 .4
2.6 1.9 .6 1.1
PAGENO="0142"
Rhode Island. 47.8
National banks 47.7.
State banks 48.9
South. Carolina 65. 5
National banks 61.6
State banks 71. 9
South Dakota 43.1
National banks 43.4
State banks 54.9
Tennessee - 17.2
National banks.. 3. 1
State banks 38.3
Texas
National banks
State banks
Utah 72.4
National banks 83.9
State banks 51.3
Vermont - - 38. 3
National banks 41.3
State banks 34.8
Virginia 3.0
National banks 4.6
State banks . 1
Washington
National banks
State banks
West Virginia f_i
National banks .1
State banks .
Wisconsin 58.6
National banks 55.2
State banks 61.0
Wyoming
National banks
State banks
I Less than 0.05 percent.
25.9 .2
26.2 .2
16.4 1.4
17.1 2.3
18.8 2.8
14.3 1.4
45.6 .5
52.5 .9 .2
35.7 (1) 1.3
30.5 11.3 .5 31.3
35.4 6.3 45.0
23.0 18.8 1.3 10.8
.5 63.2
34.6 .3 64.7
38.5 1.4 58.3
21.7 2.8 (I) .3
15.3 .1 .5
33.5 7.7 (1) .1
53.2 5.7 1.4
55.5 2.9
50.4 9.0 3.1
24.1 * (1) 69.8 (1)
25.1 .1 66.7 .1
22.5 75.2
48.7 8.0 ...._..._.. .1 (1
48.5 7.1
50.0 14.4 .7 (1)
43.7 5.0 .1 44.8 .8
47.6 4.2 .2 45.0 1.1
39.1 6.1 44.5 .4
38.4 .2 (I
42.2 (1
35.7 .3
17.8
15.4
23.3
6.8
3.8
13.8
.4
.3
5.9
9.1 2.2
8.7 2.6
9.9 1.4
(I)
4.6 (1)
4.8 .1
5.6 .2
3.7 (1)
.1 .1
.1 .1
.2 (1)
1.0 (1)
(1)
2.7 .1
.1 (1)
.3 (1)
.3 (1)
.3
33.7 .2
36.6 .2
13.3
TABLE
D.-PERCENTAGE DISTRIBUTION
OF STATE AND LOCAL
TAX EXPENSES
OF ALL INSURED
COMMERCIAL
BANKS IN
1969,
BYSTATE,CHARTERSTATIJS
OF BANK,
AND MEASURE
OF TAX-Con,
State
`
Net
income
Real
property
TangIble
personal
property
Bank
deposits
Shares and
capital
structure
Gross
Income or
receIpts
General
sales
and use
Documentary
*
Miscellaneous
.
.
Other
25.0 (1)
25.6
4.0 1.1
.7
.1 22.4
.3 3.6
.2 5.3
.5 .8
.2 2.0
.2 1.2
.3 3.2
1.3 3.0
.2 4.3
3.0 1.1
.4 .2
.2 .1
1.2 .5
.3 1.5 -
.2
.6 4.1
.1 1.1
.1 .2
.2 2.3
.8 2.0
1.0 2.2
.5 ` 1.5
.7 8.6
.2 7.4
4.3 ` 17.4
1.3 1.2
1.6 (I
.9 2.
.2 2.0
.1 2.1
.2 1.9
.7 1.0
.7
.7 3.3
3.0
(1)
6.5
.6 (1)
.4 (I)
72.8 .9 (1)
80.1
56.0 2.9 (1)
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PAGENO="0162"
TABLE 0.-STATE AND LOCAL TAX EXPENSES OF INSURED COMMERCIAL BANKS, BY STATE, MEASURE OF TAX, AND CHARTER STATUS OF BANK-Continued
WYOMiNG
Net income
Real property -
Tangible personal property
Bank deposits -
Shares or capital structure -
Gross income or receipts
General sales and use
Documentary
Miscellaneous deductible
Other
Total -
Note: Details may not add to totals because of rounding.
(In
thousands of dollarsj
All banks
Within
Measure of tax Total home State
National banks
State banks
In other Within
States Total home State
In other
States
Within
Total home State
In other
States
O 0 0 0 0 0 0 0 0.
121 121 0 73 73 0 48 48 0
46 46 0 18 18 0 29 29 0
O 0 0 0 0 0 0 0 0
495 495 0 379 379 0 116 116 0
0 0 0 0 0 0 0 0 0
6 6 0 0 0 0 6 6 0
0 0 0 0 0 0 0 0 0
5 5 0 3 3 0 1 1 0
7 7 0 0 0 0 7 7 0
680 680 0 473 473 0 207 207
0
PAGENO="0163"
APPENDIX 4
Information and Opinions on State and Local Taxation of Banks
and Other Financial Institutions, Supplied by State Tax
Administrators
SALLY M. HEY
Economist, Government Finance Section, Division of Research and Statistics,
Board of Governors of the Federal Reserve System
I. INTRODUCTION
Public Law 91-156 directed the Board of Governors of the Federal
Reserve System to study and make recommendations to the Congress
regarding how to "reconcile the promotion of the economic efficiency
of the banking systems of the Nation with the achievement of effec-
tiveness and local autonomy in meeting the fiscal needs of the States
and their political subdivisions." Consequently, the Board was
concerned with the present and prospective systems of State and
local taxes applicable to commercial banks and also with effects of
taxes on the economic efficiency of the banking and financial sector
of the economy. Concern with banking efficiency was focused on the
following two aspects: (1) limitations upon interstate banking
business and their resulting tax consequences, and any distorting
effects caused by multistate taxation, and (2) tax discrimination
involving Static banks, all commercial banks, or financial institutions
generally, especially with regard to intangibles taxes.
In accordance with the directive to the Board, in P. L. 91-156,
to "consult with * * * appropriate State * * * taxing authorities,"
the Board on November 13, 1970, sent letters, questionnaires, and
copies of section 5219 and of P. L. 91-156 to the appropriate State
tax administrator or administrators in each of the fifty States and in
the District of Columbia, Puerto Rico and the Virgin Islands. The
tax administrators were asked to fill out a questionnaire and to send
letters and materials supplementing the questionnaire answers and
raising any other matters relating to State and local taxation of banks
which the State tax officials might wish to bring to the attention of the
Board. The questionnaire covered all forms of State and local taxes
but did not ask for detail about real property taxes. The letter and
Questionnaire sent by the Board are reproduced in Supplement A,
at pp. 166-180.
Replies were received from forty-nine States and from the District
of Columbia and Puerto Rico, but the completeness of the responses
was very uneven. No reply was received from Vermont or the Virgin
Islands, while questionnaires were not returned by the major taxing
agencies in Colorado, Louisiana, or New Hampshire.
Fairly complete information was received on State taxes applicable
to banks on November 15, 1970, and there was some information on
(143)
PAGENO="0164"
144
changes in taxes applicable to banks that had been made since Decem-
ber 24, 1969. Some iniormation alsQ was provided on the nature of any
compensatory rates or other adjustments designed to equalize tax
treatment of State and national banks or of banks and other businesses,
and any changes in such treatment. There also was some information,
necessarily somewhat tentative and sometimes vague, on anticipated
tax changes affecting banks. Regarding present and prospective taxa-
tion of out-of-State banks, the information received was even less
certain. Although related information was solicited (questionnaire
items 3.110 through 3.233), it was not possible to determine clearly
those activities by out-of-State banks which are (a) allowed and not a
basis for taxation, (b) allowed and a basis for taxation, (c) not allowed,
and (d) actually engaged in. Also, it turned out to be difficult in
many cases to interpret the significance for bank taxation of replies
concerning tax treatment of nonbanking out-of-State financial busi-
nesses and of affiliated corporations. Finally, information on intangibles
taxation, on local taxation, and on amounts of revenue involved was
quite scanty.
The detailed tabulations of the questionnaire responses are in
supplement B, pp. 181-198. The gist of the replies is found in the text
of this appendix and tables which accompany the text. Information
supplied in letters or in supplementary materials is also summarized in
the text, along with references to charges which have occurred since the
tax administrators' responses were received. In States in which replies
were received from more than one agency, or in which supplemental
tax information was received from the banking supervisor, the re-
sponses were combined and coordinated before being tabulated. In a
few instances the information received from State tax administrators
was not consistent with information received from other sources.
Where it seemed apparent or was later verified that the inquiries on
the questionnaire had been misinterpreted, corrections have been
made and noted; otherwise this report simply presents the data and
opinions that were sent by the tax administrators.
II. CURRENT STATE TAXATION OF DOMESTIC STATE AND NATIONAL
COMMERCIAL BANKS, AND RECENT CHANGES
A. THE SITUATION ON NOVEMBER 15, 1970
The structure of State and local taxes applicable to banks domiciled
in the State clearly reflects the Federal statutory limitations on State
and local taxation of banks with national charters. Until December 24,
1969, section 5219 of the Revised Statutes permitted States to apply
to national banks, in addition to real property taxes, only the follow-
ing taxes: (1) a tax on bank shares, (2) a tax on bank dividends as
part of an individual income tax, if dividends of other domestic cor-
porations were also included, (3) a tax on net income, or (4) a tax
according to or measured by net income. Furthermore, again only
until December 24, 1969, the first, third, and fourth types of tax were
mutually exclusive, while national bank dividends could be included in
individual taxable income if the third or fourth types of bank tax were
imposed but not if bank shares were taxed. (For a summary of the
1969 "temporary" and "permanent" amendments, see part II, pp.
12-13 of this publication.)
PAGENO="0165"
145
In table 1, the State treatment of banks under the tax measures
listed above as of November 15, 1970, is summarized, except for real
property taxes. More detail is available in supplement tables B-2
and B-3, where it can be seen that some of the taxes were in force
prior to December 24, 1969, while others came into effect oniy after
that date. Taxes which have been repealed since December .24, .1969,
were not reported on the quebtionnaire and in tabulations from the
questionnaire, nor were rate changes or other modifications of existing
taxes, although such supplementary information was supplied in some
cases.
In many States, income or shares taxes on banks are in lieu of other
kinds of taxes which could not legally be imposed on national banks
before December 24, 1969; the in-lieu taxes typically are on banks
only (as in the case of taxes on shares of banks but not of other busi-
nesses) or at a higher rate or on a more comprehensive base for banks
than for other businesses. In some States, all commercial banks domi-
ciled in the State have been taxed in the same way, often with the sort
of compensatory tax treatment just mentioned, intended to, equalize
tax burdens on banks ~ ith those on other businesses In other States,
State banks have been taxed differently from national banks but
subject (in some but not all instances) to special offsetting arrange-
ments such as tax credits.
The predominance among States of bank taxes on or according to or
measured by net income can he seen in Table 1 and in greater detail in
table 13-2 in supplement B, p. 182. The significance. of a tax according
to or measured by net income (an excise or franchise tax) is that income
from government securities may be included in the measure of the tax
base although it would be exempt from taxation under a direct tax
on net income.' In some States banks have been subjected to higher
rates than other corporations to compensate for bank exemption from
other taxes which nonbanks have to pay or to compensate for exclu-
sion of interest on government securities under a direct tax on net
income. Where the questionnaire responses explicitly confirmed that
one or the other special kind of treatment of banks is in effect, the
fact is footnoted in supplement table B-2.
Nine States or areas tax banks on or according to net income and
also tax bank shares, but in most of these jurisdictions only State
banks are subject to both kinds of taxes. Maine and New Hampshire
subject only State banks to taxes based on income, and only State
banks are subject to the shares tax in Puerto Rico and to an alternative
tax based on capital value in New York. Bank shares are taxable to
the shareholders under property taxes in Alaska (presumably for
State bank shares only) and South Dakota. Illinois is in the process
of shifting from a shares to an income tax, Tennessee extended the
income tax to national banks only after the enactment of P.L. 91-156,
and Delaware apparently applies both kinds of taxes to all banks,
levying a very low rate on income.
Kansas reported a "tax measured by income from intangibles"
(item 1.540 in the questionnaire), which appears to be a tax measured
by net income and is included as such in the'tabulations.
Domestic bamic ~lividends are taxable under individual income taxes in
at least 32 jurisdictions, according to the questionnaire replies (see
1 For further discussion `of this point, see below, appendix 6, at pp. 401-409, and appen-
dix 11, at P. 532.
PAGENO="0166"
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listings in table 1). In 4 of these States (Georgia, Illinois, Maine, and
West Virginia) oniy dividends of domestic State banks are taxable.
Only 4 States (Delaware, Indiana, Mississippi, and Montana) report
taxing both shares and dividends of national banks; the Mississippi
response noted explicitly that dividends became taxable only in 1970.
PAGENO="0167"
TABLE 1.-TREATMENT OF BANK DIVIDENDS UNDER INDIVIDUAL INCOME TAXES, RELATED TO MAjOR SlAtE tAXES ON bANKS, NOVEMBER 15, 19701
The major State taxes on domestic
(State and national) banks States
States which have individual income tax
Including dividends of
Including dividends of domestic domestic State banks
national and State banks only Other
States which have no individual
income tax or did not reply to
the questions
Tax on or measured by or accord- ALAB, ALASKA,2 ARIZ, CALIF, ALAB, ALASKA, ARIZ, CALIF, DEL, ILL and ME(2) ND uOKL,INH,?and COLO, CT, SD, and VT (4).
ing to net income. COLO, CT, DEL, HAW, ID, ILL,3 HAW, ID, IA, KANS,a MD, MASS, 1'ENN.'s(4).
IA, KANS, ME,~ MD, MASS, MICH, MICH, MINN, MO, NEBR, NM, NY,
MINN, MO, NEBR, NH,~ NM, NY, NC, ORE, RI, SC, UT, WISC, and
NC, ND, OKL, ORE, RI, SC, SD, PR.(24)
TENN, UT, VT, WISC, and PR.(34).
Tax on bank shares and/or tax ALASKA,8 ARK,' DEL, FLA, GA, ILL,3 ALASKA, DEL, ND, MISS, MONT, GA, ILL, ME and WV(4).... NH,~ TENN, 2 and VA 7(3) ARK FLA, KY, LA, NEV, NJ,
measured by capital structure. IND,10 KY, LA, ME, MISS15, MONT'8, NY and PR.(7) oti, PA, SD, TEX and WYO.
NEV, NH, NJ, NY,~ OH'1, PA, SD,8 (11).
TENN, TEX, VA, WV, WYO, and
PR.4(25).
Other DC,'~ IND,iO and WASH'4(3) DC and IND1O(2) WASH.(1).
1 Notice that States which occur more than once under the 1st column heading are also repeated I Banks are paying this tax under a voluntary agreement at present.
in the columns to the right (these States or areas are Alaska, Delaware, Maine, New Hampshire, 10 Indiana imposes a gross income tax on State banks only; dividends became taxable after Dec.
New York, South Dakota, Tennessee, and Puerto Rico). 31, 1969; shares are taxable to individuals under tangible property tax.
2 Alaska banks pay both a bank excise tax, based on net income, and the gross receipts or business ii Ohio also reports municipal income taxes applicable to banks in many municipalities.
license tax, which is based on net income in the case of banks. ~ Dividends of all out-of-State banks seem to be taxable (the response was hard to interpret).
3 Income tax is effectively on State banks only, until Jan. 1, 1972; bank shares tax lapsed at end of 13 District of Columbia imposes a gross earnings tax, is not bound by section 5219.
1970 except for shares held by corporations. . 14 Washington imposed a gross income tax on banks after Dec. 24, 1969.
4 Tax is only on State banks; New York tax is on capital structure and is an alternative to the net 12 This is apparently a local tax; bank dividends became taxable starting Jan. 1, 1970.
income tax, if larger. i~ Montana has also extended its business license (net income) tax to banks, starting in 1971.
I Bank dividends became taxable in Kansas starting July 1 1970. .
6 Bank dividends are not taxable in these States. NOTE: For key to 2-letter abbreviations of State names, see below, p. 181.
7 Only dividends of out-of-State State banks are taxable.
8 Not reported in questionnaire, but shares in State banks are presumably taxable in Alaska, and
all bank shares are legally taxable in South Dakota.
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Twenty-five States or areas are tabulated as having a tax on bank
shares or a tax measured by capital structure or both. It appears, from
supplementary materials sent by the tax administrators or from other
sources of information, tha.t bank shares are taxable under a selective
or classified property tax in 17 of these States;2 in some of these
States, there is a separate statute on bank shares taxation. Bank shares
are taxable at general property tax rates under general property
taxes in another 7 States or areas.3 Arkansas is included in this group
because the tax is being paid under a voluntary arrangement despite
an adverse State Supreme Court ruling in 1961. In Illinois, which
also is counted among the 7 States, a 1970 constitutional change
abolished ad valQrem taxation of personal property to individuals,
effective January 1, 1971, and a further constitutional revision pro-
vides for termination of all personal property taxation before 1979;
in the meantime, hank shares hel.d by corporations presumably remain
taxable. The 25th area is New York State, where there is no intangible
property taxation, but State banks are subject to an alternative tax
on capital value previously mentioned.
From table B-2 it can be seen that some respondents reported the
shares tax under questionnaire item 1.5121 (Intangible property:
Shares of bank stock), whereas others reported item 1.620 (Tax
measured by capital structure [capital, surplus, undivided profits]),.
even when the name of the tax was given as bank shares tax or tax.
on shares of bank stock. Ohio, Tennessee and Wyoming reported.
both bank shares taxes and taxes based on capital value.4 The legal
distinction between a shares tax and a tax on capital structure is.
spelled out by Charles F. Conlon in appendix 10 (p. 416). The tax
administrators' responses may not all reflect this distinction.
One characteristic of taxes on bank shares is that the tax is legally
on the shareholder rather than on the ba.nk but the assessment is
usually based on a return filed by the bank with the tax then collected
from the bank on behalf of the shareholders. Another characteristic
is that share taxes ordinarily are part of the local property tax~
whereas taxes measured by capital structure are State levies at flat-
and usually low-rates on nominal values.
Of the remaining 27 States or areas, which were not taxing bank
shares or capital values in November 1970, 18 do not tax any intangible
property or, in some cases, do not tax either tangible or intangible
1)ersoflal property.5 There is some taxation of intangibles in the other
9 States.6 A tax measured by income from intangibles in lieu of property
tax (questionnaire item 1.540) was also cited on the returns from
Kansas (where the tax was called a privilege tax), Minnesota (bank
excise tax) ,~ and Puerto Rico (personal property tax).
2 Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maine, Mississippi, Montana, Nevada,
New Hampshire, New Jersey, Ohio. Pennsylvania, South Dakota, Virginia, and West Virginia. The rates
are different from those levied on other taxable property except in Louisiana, Mississippi, and Nevada.
Alaska, Arkansas, Illinois. Tennessee, Texas, Wyoming and (for State bank shares only) Puerto Rico.
Ohio and Wyoming reported that the shares were taxable to the shareholders rather than to the banks;
Tennessee reported that the tax on shares is completely local.
6 California, Colorado, Connecticut, District of Columbia, Hawaii, Maryland, Massachusetts, Minnesota,
- Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Vermont, Washington,
and Wisconsin. The reference at p. 12, In. 6 of pt TI, staff report on "State and Local Taxation of Banks"
to 18 States and the District of Columbia includes New York, which has already been covered in this text.
`Alabama, Arizona, Idaho, Iowa, Kansas, Michigan~iissouri, North Carolina, and Rhode Islan~I.
7 The Minnesota bank excise tax was entered under both item 1.530 (net income) and item 1.540, because
it is explicitly in lieu of property taxes except those on real property; the base is broader than income from
intangibles alone.
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* Although the net worth of banks, or part of it, is the basis for taxes
on banks or bank shareholders in some States, as explained above,
intangibles taxes ~n bank assets have been effectively inhibited by the
section 5219 prohil)ition on taxation of intangible assets of national
banks, ~vhicli is still iii force under the temporary amendment (section
1 of P.L. 91-156). ~fhe 9 States 8 which had entries for item 1.5123, tax
on baiilc assets or any category thereof, explained them as real property
taxes; Puerto Rico also reported an unspecified bank assets tax
app~icable to State banks only.
As for intangibles taxes relating to bank liabilities, a tax on "bank
deposits taxable to depositor an(i collected from bank" was reported by
the tax administrators in only 6 States.9 Such a tax would be an
intangible l)rol)ert.Y tax bitt not on the banks themselves, and could
therefore be considered outside the scope of section 5219. In Rhode
Island, national banks were paying on a voluntary basis. From other
sources on bank tax law it appears that bank del)osits are taxable
but with the tax payable by the depositor in 7 States,'° and they
also do not appear to be exempt from property taxation in another
11 States,11 although little or no revenue may be actually collected
from this base in some of these States. Banks in several other States
not mentioned here reported small amounts paid as deposits taxes, as
noted in appendix 3.
Other types of State and local taxes also are levied against banks,
ftlthough they tend to be of lesser revenue importance thaim the net
income and shares taxes. In some cases, these other taxes were
eXten(led to banks or to national banks only after the easing of Federal
restrictions: since December 24, 1969, under the temporary amend-
ment (section 1 of P. Ti. 9 1-156), States have been permitted to levy on
national banks (lorniciled in the State not only taxes on real property,
net income, dividends, capital value, and deposits, bitt also any other
taxes except a. tax on intangible bank assets, so long as the tax is
general throughout the taxing j uris(l ict ion, nondiscriminatory, and
* equally applicable to domestic State-chartered banks. In addition,
section 1 of P. L. 91-156 gave a list of taxes which a State could
impose on out-of-State national banks after December 24, 1969.
In many instances, however, respondents rel)Ort.ed that both State and
* national banks had been ~)a.ying sales taxes, documentary taxes,
tangible 1)ersollal property taxes and other such taxes prior to Dec.em-
bem' 24, 1969. Where it was explained that. such taxes were being paid
voluntarily or tha.t they were being disputed, the fact has been
noted in the supplementary tabulations.
The question of State sales and nse taxes was a major factor leading
to the change in the banking-tax statute. Such taxes are widespread:
43 States or areas (tabulated in table 2 and in more detail in supple-
ment table B-2) report sales or use taxes presently applicable to
banks. The questionnaire inquiry was made in terms of vendor,
vendee, or "other forms" of sales tax. This (listiliction has been (Iropped
from the tabulation, however, because some States have hybrid
vendor-vendee sales taxes while in other States the intended impact
*~ Calif~ruia, Connecticut, Florida, Georgia, Louisiana, Maine, North Dakota, Texas, and Wyoming.
Indiana, Kentucky, Michigai, North Carolina, Ohio, and Rhode Island,
IC Arkansas, Florida, Illinois (deposits of corporations only), Missouri, Pennsylvania, South Dakota
(deposits drawing Interest), and Tennessee.
"Alaska, ~7ona, Georgia, Iowa, Kansas, Montana, New Jersey, Texas, virginia, West Virginia, and
Wyoming.
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of the law is ambiguous.12 Items 1.551 and 1.553 on the questionnaire
(vendor and vendee taxes respectively on sales to banks) were com-
bined as sales tax on sales to banks, while item 1.552 (vendor tax on
sales by banks) and one entry under item 1.554 (other forms of sales
tax) were classified as sales tax on sales by banks. Several States'3
also reported sales or use taxes on motor vehicles separately.
TABLE 2.-STATE SALES AND USE TAXES REPORTED TO BE APPLICABLE TO DOMESTIC COMMERCIAL BANKS,
NOV. 15, 1970
Type of tax
State
Sales tax on sales to banks (43)
~
Sales tax on sales by banks (32)
`
Use tax (an out-of-State purchases by
banks) (40).
ALAB, ARIZ, ARK, CALIF, COL,' CT, DC, FLA, GA, HAW,2 ID, ILL, ND,
IA, KAN, KY, LA, ME, MD, MASS, MICH, MINN, MISS, MO NEBR, NEV
NJ, NY, NC, OH, OKL, PA, RI, SC, SD,TENN, TEX, UT, VT, 1 VA, WASH
WISC, and WYO.
ALAB, ARIZ, ARK, COL,' CT, DC, FLA GA, ID, ILL, IND, IA, KAN, KY, ME,
MD, MASS, MICH, MINN, MO, NEBII, NEV, NY, NC, OKL, RI SD, TENN,
TEX, UT, VA, and WISC.
ALAB, ARIZ, ARK, COL,' CT, DC, FLA, HAW,2 ID, ILL, IND, IA, KAN, KY,
LA ME, MD, MASS, MICH, MINN, MISS, MO, NEBR, NEV NJ NY, NC,
OH, OKL, PA, RI, SC, SD, TENN, TEX, UT, VA, WASH, WISC, and WYO.
I Information is from banking supervisor, not from questionnaire.
2 Tax is still on State-chartered banks only.
Gross income taxes applicable to banks are rare, being used only in.
the District of Columbia (which was never bound by section 5219),
in Indiana (applied as a credit against property taxes on shares, and
applicable to State banks only), and in Washington (since the passage
of P.L. 91-156). A proposal to subject West Virginia State and national
banks to a gross income tax was turned down in 1970 (but the business
and occupation tax was extended to banks and financial businesses in
1971). The only other gross receipts entries (item 1.520) appeared tct
be sales taxes and were tabulated as such.'4
Documentary taxes applicable to banks are common, being reported
by 32 States, the District of Columbia and Puerto Rico (table 3). Real
estate transfer taxes are the most common type reported, and accord-
ing to the questionnaire responses (see table B-2) such taxes were
quite common even before passage of P.L. 91-156; they seem typically
to be considered taxes on the borrower rather than on the banks.
12 For example, California is currently involved in litigation over whether the sales tax is a vendor or a
vendee tax.
13 This was reported under item 1.554 by Oklahoma, under Item 1.630 by Iowa and Texas, and under iteni
1.640 by Virginia.
14 These entries were for Arkansas and Hawaii; the tax in Hawaii is called the general excise tax. The
Alaska business license tax is also on gross receipts, but for banks the tax base is measured by net income
plus certain expenses. On the West Virginia tax, see below, appendix 7, p. 446, footnote 21.
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TABLE 3.-STATES REPORTING DOCUMENTARY TAXES, TANGIBLE PERSONAL PROPERTY TAXES, AND MOTOR
VEHICLES TAXES APPLICABLE TO DOMESTIC COMMERCIAL BANKS, NOV. 15. 1970
Type of tax
State
.
Documentary taxes (34)1
Tangible personal property taxes(24)~.
Motor vehicle taxes or fees(32)6
ALAB, ARK,2 CT, DC, FLA, GA, HAW,' ILL, IA, KAN, KY,4 ME,' MD, MASS,
MICH, MINN, MO, NEB, NEV, NJ, NY, NC,'4 OH, OKL,PA,RI,SC,'SD,
TENN, VA, WASH, WV, WISC, and PR.
ALAB, ARIZ, ARK, COL, CT, FLA, ID, lLL,~ IA, KAN, KY, LA, MASS, MISS,
MONT, NEB, NEV, OH, RI, TEN N, UT, WASH, WYO, and PR.'
ALAB, ARIZ, ARK, CT, DEL, DC, FLA, HAW, ID, IA, KAN, KY, LA, ME, MD,
MASS, MICH, MINN, NEB, NEV, NJ, NM, NC, OKL ORE PA, RI, SD
TENN, TEX, UT, VA, WASH, and WYO.
I This category includes entries from items 1.570, 1,580, 1,590, and 1.610 on the questionnaire.
S Presently being contested.
$ Applicable to State banks only.
4 Local tax.
Reported for national banks only.
This category includes not only entries from item 1.630 on the questionnaire but also entries from item 1.640 which
were identifiable as motor vehicle fees, and it does not include entries identified as a motor vehicle sales or use tax
Tangible personal property taxes applicable to State and national
banks were reported by 23 States and (for State banks only) Puerto
Rico, as shown in table 3. Although it was not permissible for States or
localities to levy such a tax on national banks prior to December 24,
1969, 9 States 15 reported that this was done (table B-2). The banks
may have been paying the rehttively minor amounts of personal
property tax without complaint; other possibilities are that the re-
spondents may have listed the answers in the wrong columns or that
the answers might have referred to real instead of to personal property
taxes. Responses for 3 States were in fact referring to real property
taxes, and these States were not listed in the tabulation.1°
klotor vehicle taxes or fees were similarly widespread (see table 3)
and probably small in amount. Only small fees were reported in some
States (Florida, Idaho, Louisiana, Maryland, North Carolina, Oregon).
In others, both fees and ad valorem taxes were involved (District of
Columbia, Kansas, Maine, Massachusetts, Washington), and in the
rest of the States tabulated, the precise type of fee or tax was not
ascertained.
Other taxes reported applicable to both State and national banks in
November 1970, besides real prO~)erty taxes, were license or franchise
taxes (Delaware, Iowa, Virginia, Wyoming), tax on "dividends" paid
on deposits (New Hampshire), various excises (Oklahoma), and local
utility taxes (Virginia). License or franchise taxes or fees applicable to,
State banks only were reported by Idaho, Kentucky, Minnesota,
Oregon, and Tennessee.
B. BANK TAX CHANGES REPORTED BETWEEN DECEMBER 24, 1969, AND
NOVEMBER 15, 1970
Table 4 summarizes the reported instances of taxes which have been
newly imposed on or extended, to domestic State or national banks since
December 24, 1969. The levying of sales and use taxes on banks 17 was
clearly the most common such change, and in many cases this did not
require legislative action but was accomplished through administrative
fiction. As a result, States which impose sales or use taxes on banks now
impose them equally on State and national banks except in Hawaii,
11 Alabama, Arkansas, Massachusetts, Mississippi, Montana, Nevada, Tennessee, Washington, and
Wyo~nlng. .
1nIt,dlana,.New Hampshire, and Oregon. .
17111 California, aiid possibly iii some other States. applicability of sales taxes to banks is still disputed.
PAGENO="0172"
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where the one national bank (lomiclle(l in that State is still exempt
from this tax. Docunienta.ry taxes, tangible l)ersoltal propert taxes,
and motor vehicle fees or taxes were also a~)plied to banks in a number
of States after December 24, 1909, often without the iieed for legis-
lative action.
TABLE 4.-STATES IN WHICH TAXES HAVE INITIALLY BECOME APPLICABLE TO STATE OR NATIONAL BANKS
OR BOTH SINCE DEC. 24, 1969, BY MEASURE OF TAX
.-
Measure of tax To n
Initially applicable since Dec. 24, 1969
ational banks
To both State and national banks
Net income taxes TENN (1) IA, MONT,1 NH.' (3)
Taxation of dividends ND (1) KAN, MISS. (2)
Tax measured by capital TENN (1) (0)
structure.
SaIestaxonsaIestobanks.~. ARIZ, CT, ID, IND,IA, ME, MASS, MISS, MO, NEB, ALAB,COLO,~FLA,GA,LA,
NEV, NY, NC, OH, OKL, PA, RI, SD, UT, VT,3 and MD, TEX. (7)
WYO. (21)
Sales tax on sales by banks.... ARIZ, ILL, KY, ME, MICH, MO, WISC (7) ALAB, COLO,' FLA, MD. (4)
Use tax (on out-of-State ARIL, CT, ID, ILL, IND, IA, KY, ME, MASS, MICil, ALAB,COLO,3 FLA, LA, MD,
purchases). MISS, tviO, N[B, p4EV, NY, NC, OH, OKL, PA, RI, SD, TEX. (6)
UT,WISC,WYO. (24)
Gross income taxes (0) WASH, WV.4 (2)
Documentarytaxes ARK, ILL,IA, NEB, NY,OH,OKL (7) ALAB,FLA,GA,KY.' (4)
Tangible personal property CT, ID, ILL,' KAN, NEff, RI, UT (7) ARIZ, COLO, FLA, IA, KY, LA,
taxes. 011. (7)
Motor vehicle fees or taxes 6 KY, tIEB (2) (0)
1 Business license tax was applied to banks effective January 1, 1971 (from later information than the questionnaire).
2Thjs is on State banks only.
`Information is from banking supervisor, not questionnaire.
4 Passed in 1971 (from later information than tHe questionnaire).
ulhjs is a local tax.
°Does not include sales or use taxes on motor vehicles.
Changes involving income or shares taxes were less common and
usually involved legislation. The "saving provision" of P. L. 91-150
stated that affirmative legislative action would be i'equired for the
imposition of taxes on banks which were not 1)reviously irnJ)osed on
any banks, except for sales and use taxes, documentary-type taxes, or
taxes relating to tangible property.
Taxes on or according to net income were levied on banks (State,
national, or both) in iowa, Montana (1971), New Hampshire and
Tennessee. Tile gross income tax was extended to banks in Washington
(1970) and WTest Virginia (1971). in Arizona and in Colorado, special
bank taxes measured by net income were replaced by the regular
corporate income tax. in Iowa, the newly imfl1)OSCd taxes on net income
and on tangible I)ersonal ~)ropeity of banks replaced taxes on bank
shares and on monies and credits.
Much of the income-tax activity since the end of 1969 seems to be
part of a longer-run trend toward extension of income taxation. Income
taxes were enacted in illinois and Maine in 1969, and income taxation
of banks replaced taxes on bank shares or capital stock jU: Maryland in
1968 and in New Mexico in 1969. In Tennessee however, tile franchise
tax based oil capital stock value was extended to national banks in
addition to the income tax, in 1970. -
Time respoiises of the tax administrators, supplemented by informa-
tion supplied by tile banking sttpervisors, showed that there were also
rate changes or other modifications of major batik taxes in some States
in recent years. Time corporate iiiconie tax rate was raised and some
exemption of interest was deleted in Delaw'are. In Kansas, tile batik
income tax mate was cliang&, effective after December 31, 1970, to a
PAGENO="0173"
153
normal and surtax schedule. New York repealed the sales tax credit
and lowered the rate for bank income tax when national banks became
subject to sales taxes. The North Carolina excise (net incoi~e) tax
rate was raised in 1969, and in Puerto Rico the rate was increased and
other changes were made in the corporate income tax in mid-1970. As
for shares or capital structure taxes, the Louisiana rate is in the process
of being gradually reduced, the New Jersey rate was doubled and the
proceeds divided evenly between the State and the counties, and in
1971 the Pennsylvania rate was increased. Other changes noted are the
exemption of all personal property from taxation in North Dakota in
1969 and the exemption of personal property of individuals under a
constitutional amendment adopted in Illinois in 1970.
There were also reports of some attempted changes in bank tax
treatment which did not become effective. In Georgia, a bill to subject
banks to net income taxes (in addition to the shares tax) was not en-
acted. A Wisconsin bill to repeal the exemption of commercial banks
from tangible property taxation was not passed. In North Dakota an
additional net income (privilege) tax on banks had been enacted to be
effective in 1970, but was then not imposed because section 5219 had
been amended in the meantime. In Washington, voters rejected a 1970
constitutional amendment which would have allowed net income
taxes, and the Wyoming legislature in 1971 failed to replace taxation
of bank shares based on par value with a proposed tax based on "total
resources."
in supplement table B-i, p. iSi, there is a listing of 36 States which
reported recent or anticipated changes in the tax treatment of com-
mercial banks, including out-of-State banks. In about half the States,
legislative action was cited. Twenty-nine States (named in one or both
of the first two columns of table B-4, p. i84) reported formal or in-
~forma1 review of tax laws affecting banks or official tax proposals, and
only 2 respondents (Connecticut and North C1arolina) specified that the
review was not prompted by P.L. 91-156. in 6 instances the review
or proposals concerned national banks only.
Five respondents (from Illinois, New York, Ohio, Tennessee and
Puerto Rico) reported recent tax changes which affect out-of-State
banks.
A tendency to try to equalize tax treatment of national relative to
State banks and of banks relative to other businesses has been quite
clear in the reported restructuring of bank taxes in 1970, in the
extension of taxes to national banks, and in the cases in which taxes
were extended to both State and national banks from which both had
previously been exempted.
III. FORTHCOMING CHANGES IN STATE TAXES ON COMMERCIAIJ
BANKS DOMICILED IN THE STATE
Given the complexity of the current bank-tax systems in many
States, with various compensatory provisions and the like embodied
in statutes, it is understandable that there might be delays in revising
the laws in the light of the amendments to section 5219 even if this
seemed clearly desirable. Furthermore, State legislatures may be wait-
ing to see if further changes will be made in that section. Eighteen
States, as seen in supplement table B-4 at p. i84, reported that. further
review of the tax laws affecting banks is likely.
PAGENO="0174"
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A. EXTENSION OF TAXES TO NATIONAL BANKS
Most of the remaining discrepancies between State tax treatment
of State and of national banks are scheduled to be eliminated in 1971
or 1972. These changes in many instances are already provided for in
laws or would require only administrative action. Illinois, Maine, and
New Hampshire expect to extend income-measure taxes to national
banks in 1972. In Indiana the legislature has been asked to extend
the gross income tax to national banks. Hawaii expects to extend
sales and use taxes to national banks in 1972 or possibly in 1971.
Ohio reports that the corporate franchise tax, a tax measured by
capital structure, is expected to be extended to national banks on or
after January 1, 1972. Puerto Rico reported that taxes on tangible
personal property, on bank shares, and on intangible bank assets
(under the property tax) would be extended to national banks in
1972. Legislation will be proposed in Rhode Island to extend the
bank deposits tax to national banks, which are paying it on a voluntary
basis. Arkansas also anticipated legislation applying a corporate
franchise or privilege tax (questionnaire item 1.650) to State banks
in 1971 and to national banks in 1972.
B. TAX CHANGES AFFECTING BOTH NATIONAL AND STATE BANKS
Likely tax changes affecting all commercial banks are less certain
than those affecting only national banks. Only one change (Alabama)
was reported in the questionnaire sections tabulated in table B-2,
while the others were mentioned in letters.
Alabama reported that a corporate franchise tax (item 1.650) will be
levied on commercial ba~ks in 1972. Louisiana and Maine, both share-
tax States, reported that bank dividends will become taxable to in-
dividuals in 1972. In Florida, it was expected that the 1971 legislature
might extend the capital stock tax to banks; a corporate income tax
might be proposed, but this would require a constitutional amend-
ment. Bank assets would become subject to Florida intangibles taxa-
tion in 1972. In Missouri, banks will become subject to the regular
corporate income tax rather than the special bank tax, starting in
1972.
Except for some of the tax changes mentioned in the preceding para-
graph, future tax changes affecting banks are quite uncertain. A pend-
ing bill in California would relieve banks of the special bank tax and
would subject them to city license taxes, local tangible personal prop-
erty taxes (not on cash or currency), State and local sales and use
taxes, documentary taxes, and motor vehicle license fees. In West
Virginia, a successful attempt has been made in 1971 to subject banks
to the gross income tax; legislation may also be proposed to subject
banks to sales and use taxes. Extension of sales and use taxes to banks
will also be proposed in North Dakota.
Extension of tangible personal property taxes is being considered
in several States. Among the States which tax banks according to net
income, Michigan and North Carolina, as well as California, may de-
cide to levy tangible property taxes on banks. Maine, which is starting
to impose income taxation on banks, may also apply tangible property
taxes to banks if the bank shares tax is repealed as planned. Louisiana,
a shares tax state, is considering tangible personal property taxes on
banks as well.
PAGENO="0175"
155
New Jersey may switch from bank-stock taxation to a net income tax
on banks or to a choice of net income or net worth taxation. New York
already subjects State banks to the larger of either an income-measure
or a capital stock tax and might extend this to national banks. It might
be that, with the expansion of international and interstate operations,
more tax base would be allocable to the home State under a net worth
than under a net income tax.
Illinois is the only State which reported that consideration might be
given to a new intangible property tax which would apply to bank
assets. The local bank shares tax, imposed legally on the shareholders,
lapsed for individually-held shares on January 1, 1971, because with
a change in the State constitution ad valorem personal property
taxation of individuals is now forbidden. However, the new State
constitution, approved December 15, 1970, may preclude adoption
of a tax based on the value of bank-owned intangibles. In Kansas,
banks have been exempted from the shares tax because the State
imposes on banks a tax measured by income and because an intangibles
rate on bank stock was considered an infringement of section 5219.
The Kansas respondent reported that after January 1, 1972, Kansas
might reinstate the shares tax on banks.
Later information than the questionnaires 18 indicates that in addi-
tion to proposals for rate increases and other changes in existing taxes,
there is pending legislation for a bank tax measured by income in
Wyoming, for sales and use taxes in New Hampshire, and for docu-
mentary taxes in Arkansas, Missouri, North Dakota, and Texas.
Repeal of personal property taxes is under consideration in Iowa
and Wisconsin, repeal of local income taxes in New York, and repeal
of the intangible property tax in Indiana.
IV. How STATES CURRENTLY TAX OUT-OF-STATE FINANCIAL
BUSINESSES
A. THE KINDS OF TAXES LEVIED AND THE BASES FOR ASSERTING JURIS-
DICTION TO TAX OUT-OF-STATE FINANCIAL BUSINESSES
Taxation by a State of national banks not domiciled in the State is
severely restricted, even under the currently-applicable provisions of
P. L. 91-156. Only five itemized tax categories (sales and use taxes,
real property taxes, doci~imentary taxes, tangible personal property
taxes, and license fees and certain other charges related to the owner-
ship, use, or transfer of tangible personal property) may be levied
prior to 1972 against nondomiciliary national banks. Under the
"permanent amendment" of section 5219, however, States would be
free to tax out-of-State national banks in the same way that they tax
out-of-State State banks. The kinds of taxes that the States have now,
and the ways in which these taxes ar~ levied against out-of-State
financial businesses, can shed some light on the probable post-amend-
ment tax treatment of out-of-State banks which carry on business in
some way in a State.
Forty-five States and areas 19 responded to the questions on taxa-
tion of out-of-State financial businesses. A few mentioned sales and
`~ Commerce Clearing House reports.
1~ That Is, all except Alaska, Colorado, Delaware, Louisiana, Nevada, New Hampshire, and Vermont.
PAGENO="0176"
156
use taxes,2° real or tangible personal property taxes, 21 and annual
license or privilege fees, 22 but for the most part the answers concerned
the kinds of taxes which cannot now be levied on nondomiciliary
national banks. The discussion below is restricted to such taxes.
The tax administrators were asked, in questionnaire section 3.41,
Whether various listed categories of "out-of-State financial institutions
(other than national banks) that do business in your State [arej now
subject (November 15, 1970) to taxation in your State," and under
what types of taxes. The answers respecting out-of-State State-
chartered commercial banks (item 3.411) were somewhat inconclu-
sive. For some States, respondents affirmed that such banks "that
do business" would be subject to taxation although it appears that in
fact out-of-State banks are prohibited by State law from engaging in
the sorts of activity which would constitute doing business in that
State or being taxable in that State. In other States, there are no out-
of-State State banks which presently engage in activity that would
involve taxable status there, although such activity would be per-
missible.
In 31 States or areas, out-of-State banks "that do business" in the
State were reported to be subject to taxation under income, stock,
assets or intangibles taxes, although the extent of actual taxation in-
volved is uncertain. Net income taxation was by far the predominant
method under which such banks are taxable and was reported by 24
States plus Puerto Rico, as can be seen in supplement tabie B-6 at p.
192. Indiana and Washington subject noiidomiciliary State bmiks to a
gross income tax. Taxes on capital stock were reported by 6 States
(Massachusetts, Montana, New Jersey, Ohio, Tennessee, and West
Virginia). Idaho and Montana reported using a tax measured by value
of assets used in the State, while Missouri and North Carolina reported
intangibles taxes and Indiana reported a bank deposits tax applicable
to out-of-State State banks.
Very similar situations were reported for out-of-State mutual savings
banks and savings and loan associations, as can be seen in table B-6.
Fewer States (22) report taxing out-of-State credit unions, but again
the frequency distribution of the various types of taxes is similar.
Between 41 and 45 of the 45 respondents reported taxing each of the
other types of out-of-State financial institutions named in the ques-
tionnaire. Net income is by far the most common tax measure em-
ployed except in the case of out-of-State insurance companies (items
3.421 and 3.422 on the questionnaire), which are generally taxed under
gross income or premiums taxes. Some States levy more than one type
of tax on out-of-State financial businesses, from among the types of
taxes under consideration, and a system of alternative taxes is em-
ployed in at least 2 States.
Criteria for asserting tax jurisdiction over out-of-State financial busi-
nesses were reported for some of the States,23 as tabulated in table 5 and
in supplement table B-7, p. 194, but the information received was not
complete. The first two columns in table B-7 compare the number of
"Hawaii, Idaho, Maryland, Minnesota, Nebraska, Texas, and Washington.
21 District of Columbia, Florida, Kansas, Mississippi, Montana, Ohio, and Wyoming.
22 District of Columbia, Kansas, Mississippi, North Carolina, and Virginia.
23 No information on jurisdictional criteria, or nothing specific, was received from the following 18 States
or areas: Alaska, Arkansas, Colorado, Delaware, Louisiana, Massachusetts, Mississippi, Nebraska, Nevada,
New Hampshire, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Wyoming,
and Puerto Rico.
PAGENO="0177"
157
States in which out-of-State financial companies are reportedly subject
to tax and the number of States for which the jurisdictional basis or
bases were specified. In a few States tax jurisdiction may be claimed on
more than one basis, such as either a localized office or localized trans-
actions.
TABLE 5.-NUMBER OF STATES REPORTING CRITERIA FOR CLAIMING TAX JURISDICTION OVER OUT-OF-STATE
FINANCIAL INSTITUTIONS 1
.
Kind of business and measure of tax
Bas
is of jurisdiction
In-State
office,
property or
personnel
Business Location of
activity risk, or
or "doing income from
business' in-State
in State sources
Not or gross income taxes:
State banks
13
7 3
Savings banks
Saving and loan associations
Credit unions
11
12
10
7 2
9 2
6 2
Finance and loan companies
Factors
19
17
13 4
13 4
Leasing companies
Insurance companies
Mortage companies, securities brokers, investment companies
Taxes on capital stock, assets, intangibles, or sales:
State banks
Savings banks
Savings and loan associations
Credit unions
Finance and loan companies
Factors
Leasing companies
Insurance companies
Mortgage companies, etc
16
7
18
5 .
4
9
7
12
9
11
- -2
11
12 4
12 7
14 4
4
4
4
4
6 2
6 2
6 2
2 1
8 2
I A State may use more than 1 basis of jurisdiction in a given situation and may therefore be tallied more than once on a
single line.
Where the criterion cited was simply doing business or engaging in
localized transactions, the meaning of the response was uncertain,
since the definition of "doing business" (as a legal concept) varies
greatly from State to State. For example, it may refer to any activity
carried on wholly within the State, to certain types of activity only, or
to situations such as the Ownership of capital or property in the
State.
In most cases, the tax administrators reported that jurisdiction
would be claimed only if the out-of-State company maintained a
physical presence in the State, such as an office, property, or personnel.
[his was less true of the major banking States than of others. The basis
for claiming tax jurisdiction also varies somewhat with the type of tax
involved.
To date, activity by banks across State lines has been somewhat
inhibited by prohibitions against branching and other special restric-
tion on banks, as well as by the complications and uncertainties in-
volved in multistate taxation. Banks are likely to become increasingly
involved with interstate business activity and with affiliates which are
in interstate business, as a result of trends such as the growth in large
banks, the spread of bank holding companies, and the diversification
of activities engaged in by banks and their affiliates. Current State
practice regarding interstate division of the tax base of out-of-State
businesses and the tax treatment of affiliated corporations is covered
in sections B and C, which follow. -
79-421 0 - 72 - 12
PAGENO="0178"
158
B. INTERSTATE DIVISION OF THE TAX BASE
Twenty-three States or other jurisdictions which tax out-of-State
financial institutions reported that they require or permit interstate
division of the tax base generally. Another 15 States reported that they
do permit or require such tax base division, but not for all types of
businesses and circumstances or for all tax measures applicable to the
out-of-State financial businesses. Six States replied that interstate
division of the tax base is not permitted or required. The replies are
tabulated in supplemental table B-8, p. 196.
Where interstate division of the tax base is allowed, the method of
division used is tabulated in supplemental table B -9 and summarized
in table 6. Apportionment by formula, or a combination of formula
apportionment and specific allocation, is the predominant method used
for all types of financial businesses and measures of tax, with the excep-
tion of premiums taxes on insurance companies. Specific allocation by
itself is not used by any of the major banking States except when taxing
insurance companies. Separate accounting is likewise reported by none
of the major banking States, except that in New York the Tax Com-
mission typically prescribes separate accounting for State-chartered
commercial and mutual savings banks and for savings and loan associa-
tions.
TABLE 6.-METHOD OF INTERSTATE DIVISION OF THE TAX BASE, BY KIND OF BUSINESS AND MEASURE OF TAX
Measure of tax
and kind of
business
Separate
accounting
Apportionment by
formula
Specific alloca-
tion
More than 1
method
Net income, singly or
with other measures:
Commercial banks, ALAB, ARIZ, ARK, CT, DC, ID, IOWA, (0). CALIF, ILL, MONT,NEB,
savings banks, savings HAW, NY, OKL, ME, MD, MASS, NM, ND, ORE, SD,
and loans, credit SC. (6) MINN, TENN. (10) UT, WIS, PR. (11)
unions.
Insurance companies (0) MINN, TENN (2) (0) ILL, NEB, SD, PR (4)
Other financial busi- ALAB, ARIZ, ALAB, ARK, CT, DC, (0). CALIF, ILL, KY, MONT,
nesses'. HAW, OKL.(4) HAW, ID, IND, IOWA, NEB, NM, NC, ND,
ME, MD, MASS, ORE, SC, SD, UT, VA,
MICH, MINN, NJ, NY, WIS, PR.(15)
0 KL, PA, RI TEN N. (19)
Premiums or gross in-
come:
Commercial banks, IND (1) (0) (0). WASH. (1)
savings banks,
savings and loans,
credit unions.
Insurance companies~ HAW, IND, UT, MICH (1) CT, KY, NY, ND, WASH. (1)
WIS. (4) PA. (5)
Other financial busi. IND (1) (0) (0) WASH. (1)
esses.
Nonincome measures:
Commercial banks, ID, NC (2) NJ, MICH (2) ID (1) 01-I. (1)
savings banks, savings
and loans, credit
unions.1
Insurance companies' ID, NC (2) (0) ID (1) (0).
Other financial busi- ID, HAW, NC (3). NJ, TEX (2) 10(1) OH. (1)
nesses.1
1 Some States may be tallied more than once in a row; for detail, see table 6-9 at p. 197, below.
C. CONSOLIDATION OR COMBINATION OF AFFILIATED CORPORATIONS FOR
TAX PURPOSES
The practice of. consolidating or combining data for affiliated ocr-
porations (the "unitary concept") for tax purposes applies with
PAGENO="0179"
159
greatest frequency in net income taxation, although it may be em-
ployed in the assessment of other types of taxes. Tax administrators'
responses indicate that a requirement of consolidation or combination
in the taxation of financial businesses often applies only in certain
cases or at the discretion of the appropriate official.
The responses received are tabulated in supplemental table B-b, p.
197. Of 26 States or areas for which responses were given on the ques-
tion of consolidation (section 3.5 of the questionnaire), 5 States re-
ported with no qualification that such consolidation is required, and
another 16 areas indicated in explanatory comments that consolidation
may be required in certain cases. It appeared from the responses that
required tax consolidation would depend not on the type of business
involved but on whether a group of affiliated corporations constitutes a
"unitary business operation" under the State's criteria; respondents
from several States explained that it would depend on whether the tax
commissioner decides that consolidation is necessary to avoid excessive
attribution of income to other jurisdictions for tax purposes.24
Four States replied that consolidation or combination of affiliates,
although not necessarily required, may be permitted in some cases.
Two of these States were responding with regard to taxes other than
income taxes, and whether consolidation is permitted depends on the
type of tax.25 In retrospect, it appears that the question was ambiguous,
making it difficult to interpret these negative replies. It is possible
that in some of these States consolidation is permitted or even required
in particular circumstances but is not universally required. Other
responses may mean that consolidation is not permitted at all.
Only 5 areas (Connecticut, District of Columbia, Maryland,
Mississippi, and New Jersey) reported explicitly that tax consolidation
is not permitted or that there are no provisions for such consolidation.
There is no clear pattern in the responses from the major banking
States. Of the 10 major banking States in terms of total operating
income, only California and Massachusetts reported that consolidation
for tax purposes is required in some or all cases. In New York, Florida
and Ohio, consolidation is permitted in some instances. New Jersey
reported that consolidation is neither required nor permitted, and the
other major banking States 26 simply reported that it is not required.
V. OPINIONS AS TO PROBABLE TAX TREATMENT OF OUT-OF-STATE
NATIONAL AND STATE BANKS UNDER THE PERMANENT AMENDMENT
A. EXTENT AND CERTAINTY OF RESPONSE
The State tax administrators were asked to give their opinions as to
situations in which, in the absence of Federal statutory restrictions
after January 1, 1972, their States would be likely to assert jurisdiction
to tax commercial banks domiciled in other States. A~ variety of
business activity situations were postulated, and the respondents
were asked to specify the tax measures to which their answers referred.
The questionnaire stressed that the responses would be considered not
as formal, binding interpretations or commitments, but rather as
24 For discussion of the unitary concept and the tax treatment of multicorporate banking enterprises,
see appendices 12 and 13, at pp. 551-592, be'ow.
25 In Florida, affiliated corporations may choose consolidation for purposes of the intangible property
tax: in Ohio, they may choose it for purposes of the franchise (capital stock) tax but not the personal prop-
erty or dealers-in-intangibles taxes.
26 Illinois, Pennsylvania, Texas, and Michigan.
PAGENO="0180"
F- F-
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-~ -4~5
- ~~;2- 2
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-4
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-4
-4
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C,
-40
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74
0
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-4
9
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CD 4~
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PAGENO="0181"
161
TABLE 8.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE BANKS
AFTER JAN. 1, 1972, BASED ON ACTIVITIES OTHER THAN LENDING
Numberof Numberof
States which Number of States which
would assert States wouldnotassert
Type of activity jurisdiction uncertain jurisdiction
Soliciting deposits:
By advertising 5 39
Through visiting officials 4 6 34
Through local representatives 12 8 24
Issuing credit cards:
From outside the State, for residents to use in State 4 10 30
From outside State, for residents to use in or out of State 2 10 32
From outside State, for nonresidents to use in State 6 7 31
From within the State 19 12 15
Underwriting municipal securities 3 8 33
Dealing in securities:
Through an in-State office 1 31 3 8
Through visiting officials 11 7 26
Through an out-of-State office 4 4 36
Conducting trust business:
For in-State beneficiaries 5 9 30
Involving in-State real or tangible personal property 11 7 27
Leasing equipment for use in State 2 31 5 10
Selling accounting or data processing services:
Through out-of-State office 2 4 8 33
Through in-State office 432 2 9
Through subsidiary or affiliate in State 3 12 8 22
1 Includes Maryland personal property tax.
2 Answer is for sales or use tax only, in 4 States.
Answer is for sales or use tax only, in 1 State.
4 Answer is for sales or use tax only, in 3 States.
Responses to section 3.1, concerning taxes based on income, capital
stock or assets, were received from 45 States or areas.27 Twenty_two
answered specifically with reference to income taxes or income taxes
along with other taxes.28 Another 14 apparently were answering also
with reference to income taxation, although this was not specifically
stated. Some responses referred to taxes based on capital stock, assets,
or intangibles. In a few instances, answers referred to sales and use
taxes or to tangible personal property taxes.
There was practically no response to the separate section (section
3.3) dealing with taxation of intangibles. Thirty-seven States or areas
did not respond in any manner to this part of the questionnaire. In-
tangibles taxation is discussed below, in section D, after two sections
dealing with jurisdiction to impose other taxes.
B. PATTERNS OF RESPONSES NATIONWIDE
The responses of the tax administrators regarding probable assertion
of jurisdiction to levy income, capital stock or assets taxes are listed
in supplemental table B-5, p. 185. and tallied in briefer form in tables
7 and 8. In general, the responses indicate that jurisdiction to tax an
out-of-State bank would very likely be asserted if the bank maintains
an office in the State. In a minority of States, however, officials thought
they might assert jurisdiction as long as financial activity was carried
on in the State without the need for approval from an out-of-State
source, even if the activity were carried on by a bank official who was
only temporarily in the State.
The most commonly citGd instances in which the respondents expect
that the State would assert jurisdiction for income, stock, or assets
2, Those not responding were Colorado, Delaware, Louisiana, New Hampshire, Vermont and the Virgin
Islands; Alaska and Kansas stated simply that no foreign banks are allowed to do business.
~ Reference was to gross Income taxes, in the cases of Indiana, Washington, and West Virginia.
PAGENO="0182"
162
taxes were the following: (1) dealing in securities through an in-State
office, (2) making loans through the bank's own office in the State,
subject to out-of-State approval, (3) selling accounting or data process-
ing services through an office in the State, and (4) leasing equipment
for use in the State.
The States were divided on whether they might assert jurisdiction
in cases of (1) binding loan commitments made by visiting bank
officials, (2) loans made by an in-State affiliate or subsidiary subject
to out-of-State approval, (3) issuance of credit cards within the State,
and (4) selling accounting or data processing services through an in-
State affiliate or subsidiary.
C. PATTERNS OF RESPONSES OF INDIVIDUAL STATES
Where there was no distinct consensus among the States (i.e., in the
four instances listed in the preceding paragraph), individual States
tended to fall consistently on one or the other side of the split. Of the
45 States and areas responding, 20 held the same opinion for all of the
4 situations above to which they responded, and another 13 held the
same opinion in 3 out of the 4 situations.
It does not appear, from the questionnaire responses, that the
permanent amendment of section 5219 will have much effect on
whether a State taxes out-of-State commercial banks, although pre-
sumably taxation will be extended to national as well as State-
chartered banks. Thirty-one States responded (in item 3.411 in the
questionnaire. shown in table B-6, p. 192) that out-of-State banks that
do business in the State are presently taxable.29 Thirty-five respondents
reported (in questionnaire items 3.110 through 3,233, table B-5) that
they might tax foreign banks under the permanent amendment.3° Three
of these States reported probable changes in the laws under which they
would tax foreign banks: Montana and New Jersey expect net income
taxes to be passed, and West Virginia reported that it expected to apply
the gross receipts tax, which has since been extended to banks.
Nine States. (Florida, Pennsylvania, and 7 other States) reported
that they do not tax out-of-State banks now (except perhaps under
property taxes) and do not expect to in the future, while another 2 do
not tax them now and are uncertain about the future.
The responses to the questions concerning probable future taxation
of out-of-State banks were consistent with the reported current treat-
ment not only of foreign State banks but also of other out-of-State
financial institutions. For example, 39 States or areas reported that
out-of-State leasing companies are now subject to State net or gross
income taxation (item 3.4 19 of the questionnaire). Twenty-eight of~
these States reported that out-of-State banks which lease equipment
for use in the State (questionnaire item 3.220) probably would or might
be subject to income taxation. As for dealing in securities, 40 States or
areas reported that they now tax out-of-State security brokers or
dealers (questionnaire item 3.424) under net or gross income taxes.
29 Plus Texas (which reported only sales and use taxes on foreign State banks), Wyoming (which reported
ad valorem [apparently real property] taxes only), and Florida and Mississippi (property taxes).
35 This covers the 1 listed in table B-S with the addition of the District of Columbia (for activities other
than lending, taking deposits, and doing trust business), Georgia, Michigan, Mississippi, and Texas, and
minus New York. New York would tax out-of-State banks only if they accepted deposits within the State,
hut does not permit this activity.
PAGENO="0183"
163
Thirty-one of these States probably would or might subject out-of-
State banks to income taxation if they deal in securities in the State
through an in-State office (item 3.181), though only 16 reported that
they would or might assert jurisdiction for income taxes if the trans-
actions were made by visiting officials with no permanent in-State
office (item 3.182).
D. INTANGIBLES TAXATION
Very little information was received in response to the specific
question (section 3.3 of the questionnaire) regarding the likelihood that
the States would subject intangible personal property of out-of-State
banks to taxation in the absence of Federal statutory restrictions.
Responses to section 3.3 of the questionnaire are summarized in
table 9. Only Georgia replied that any intangible assets of out-of-State
banks (the banks' long-term notes) would probably be subject to
taxation. Of the five States that mentioned intangibles taxes currently
applicable to out-of-State financial institutions,3' only Michigan re-
ported that they would probably be applicable to out-of-State banks
after January 1, 1972, and this response referred to deposits taxes paid
on behalf of the depositors. In Florida and Missouri taxation would
depend on whether the out-of-State bank was engaged in activity
which would constitute doing business, but out-of-State banks are
forbidden to "do business" in Florida. In North Carolina, the out-of-
State bank would not be subject to the intangibles tax as long as it
was subject to an excise tax. There was no answer to the question from
Indiana, which also has an intangibles tax.
TABLE 9.-PROBABLE STATE TAXATION OF INTANGIBLE PERSONAL PROPERTY OF OUT-OF-STATE BANKS AFTER
JAN. 1, 1972
Yes, in at least some
situations (4)
Uncertain in any
situations (4)
No (8)
No answer (37)
GA, MICH,' NEB,2 and
TN 3.
ARK, ILL, IOWA,and
MO.
ARIZ, FLA, MINN,
NJ, NC, ND,
OKL,and WASH
ALAB, ALASKA, CALIF, COLO, CT, DEL, DC,
HAW, ID, IND, KANS, KY, LA, ME, MD, MASS,
MISS, MONT, NEV, N.H, N.M, N.Y, OHIO,
ORE, PA, RI, SC, SD, TEX UTAH, VT, VA,
WV, WIS, WYO, PUERTO RIáO, AND VIRGIN
ISL
1 Refers to deposits tax, paid on behalf of depositor.
2 Refers to tax covering income from intangibles.
Refers to county shares tax.
Some respondents did mention recent or likely changes in the taxa-
tion of intangibles. Illinois, it was indicated, might conceivably enact a
tax on bank-owned intangibles after January 1, 1972, to replace the
now-unconstitutional shares tax on shares held by individuals, and
Iowa repealed its intangibles tax on monies and credits in 1970. Ne-
braska repealed its intangible property tax in 1967, although there
has been some discussion of reenacting it.
Many States do not now have any ad valorem taxation of intan-
gibles,32 or they have only a share-value tax on banks, and even States
which do not explicitly exempt intangibles sometimes fail to enforce
the intangibles part of the property tax. Four States specified that
other bank taxes are in lieu of intangibles taxes (Kansas, Minnesota,
North Carolina and Ohio), and Alabama stated that banks are exempt
31 Florida, Indiana, Michigan, Missouri, and North Carolina; see tables B-6 and B-7,
pp. 192-195, below.
~° See section lI-A, pp. 144-449 above, concerning taxes on bank shares and bank deposits.
PAGENO="0184"
164
from property taxes on cash and evidences of debt. Tax administrators
in some of the other States and areas may have ignored intangibles
taxation because their States do not now have such taxes or because
banks are now exempt. Unfortunately, the responses throw little light
on whether the States would be likely to impose intangibles taxes
upon bank-owned assets after national bank immunity terminates
under the "permanent amendment" of section 5219.
VI. LOCAL TAXATION AND OTHER MATTERS
A. LOCAL TAXATION OF BANKS
Information from the State tax administrators on types of local
taxes applicable to banks was incomplete. Some respondents mentioned
local real property taxes, while others apparently limited their answers
to local taxes on banks other than real property taxes. Also, the situa-
tion was complicated by the fact that there ar~ different opinions as to
what properly can be called a local tax. There are many instances of
taxes the proceeds of which go wholly or in part to counties, municipal-
ities, or other local units, but which are administered by the State
government. Some respondents mentioned such taxes, while others
may have left out similar taxes. Finally, some respondents failed to
answer part 4 of the questionnaire at all. The answers received are
tabulated in table 10. It should be remembered that even if a local
tax applies to banks in a State, this may be true only in some counties
or municipalities and not in others. The District of Columbia is not
included in table 10.
TABLE 10.-STATES REPORTING LOCAL TAXES APPLICABLE TO COMMERCIAL BANKS, NOV. 15, 1970 1
Property taxes
-
Shares taxes or
taxes based
on capital
structure(11)
Income
taxes(5)
Sales
taxes(10)
Other
taxes (7)
-
Real prop-
erty only (15)
Real and
personal(6)
Not sped-
fied(4)
CALIF, IND, ME,
MICH, MINN
MISS, MO,
MONT, NJ, NY,
* NC, ND, OKL,
SC,andVA.
ARIZ, ARK,
ILL, KY,
MONT,
and NEV.
CT, ID,
IOWA,
and
WYO.
~
GA, ILL, KY,
LA, ME,
MISS, MONT,
NH, NJ,
TENN, and
VA.
MO, NY, ND,
OHIO, and
WASH.'
ALAB, ARIZ,
ARK, NEB,
NC, OKL, SD,
TEX, UT, and
WASH.
KY,' MD,' MO,'
NEB,~ NH,'
ORE,' and
VA."
lDistrict of Columbia is not included in the tabulation.
Transfer or recordation taxes.
$ Intangibles tax.
Motor vehicle tax.
I Gross income tax.
`lax on dividends paid.
`Payroll and license taxes.
I Utility taxes.
The kinds of local taxes applicable to banks reflect the limitatiotis
on local taxing authority and the practical constraints on local taxing.
Consequently, the major local taxes applicable to commercial
banks are ad valorem taxes on real property. Often personal prop-
erty is not taxed locally, either because there are no tangible personal
property taxes on banks or because such taxation is at the State level.
Of 25 States for which the respondents mentioned municipal or county
property taxation of banks, 15 specified real property taxes only, while
only 6 mentioned specifically that both real and personal property of
banks were taxable, as tallied in table 10.
PAGENO="0185"
165
The most important type of local tax on banks aside from property
taxes is the ban/c shares tax or a tax based on capital structure, which
was reported for 11 States. In 7 of these States,33 these taxes are com-
pletely local or else are State-administered with all the proceeds dis-
tributed to localities. Kentucky, Louisiana, Ne~v Jersey, and Virginia
report both State and local bank shares taxes or else shared taxes on
bank shares.34 In Illinois, since November 3, 1970, the tax is effective
on shares held by corporations only.
Local income taxes applicable to banks are not common. In New
York, the tax is imposed only in New York City, and the tax tabulated
for North Dakota is a State-administered privilege tax that is distrib-
uted to the localities. Some Ohio municipalities levy an income tax
although the response did not specifically state that the tax is appli-
cable to banks. Local income taxes may become more common; re-
spondents from Kansas, North Dakota, and Oregon mentioned that
such taxes are now authorized. However, responde~its from Alabama
and Nevada mentioned specifically that localities are not authorized
to levy income taxes. Michigan has a local income tax from which
banks are excluded. The trend in State taxation away from ad valorem
taxes to income-based taxes is likely to mean a shift away from local
taxes to State taxes,35 perhaps with tax sharing features.
Local sales taxes which are now applicable to banks were reported in
10 States: in Utah and Washington (and possibly in other States
as well) such taxes are administered by the State on behalf of the
localities.
Seven States reported a variety of other local taxes applicable to
banks, as recorded in table 10. In at least one case (Maryland) the
recordation tax is collected at the State level and paid over to the local
units.. All the taxes applicable to banks in the District of Columbia
could be considered local taxes, too.
Respondents from Kansas, Nevada, North Dakota, and Oregon
mentioned that local governments are now authorized to levy taxes
other than those which are now imposed. In California, several pro-
posals to remove the in-lieu provision of the State bank tax law were
defeated in 1970 but may be offered again; such a change would enable
localities to impose on banks such taxes as license taxes, tangible
personal property taxes, sales taxes, documentary taxes, and motor
vehicle taxes.
B. CONCLUDING COMMENTS
It is clear from the responses submitted by the State tax adminis-
trators that the States and localities have generally been extending
and modifying the taxes applicable to banks since the easing of restric-
tions on taxation of national banks. The tendency has been for banks
to be taxed more like other business corporations, although little was
said in the responses concerning the economic consequences for bank-
ing. The revision of State taxes has been more difficult in some States
and for some kinds of taxes than for others, depending on the State
laws involved and the degree of specification in State constitutions.
At the very least, however, the amendment of section 5219 has reduced
the likelihood of disputes over whether a tax applies to the bank as a
`3 Georgia, Illinois, Maine, Mississippi, Montana, New Hampshire, and Tennessee.
`~ In Virginia, a local tax on bank shares is an offset tax, creditable against the State tax on bank shares.
*3This was mentioned in connection with the possible repeal of bank stock taxes in Georgia and Maine.
PAGENO="0186"
166
corporate entity or to some other party such as shareholder, depositor,
or supplier.
All the bank-tax changes which have occurred or are likely to occur
are not attributable to P.L. 91-156, of course. For example, changes
in State constitutions in Illinois and Nebraska have necessitated
changes in bank taxes, and respondentsfrom Connecticut and North
Carolina stated that the tax law review efforts in those States were not
prompted by P.L. 91-156. S
Concerning the permanent amendment of P.L. 91-156, the major
areas affected would be intangibles taxation and multistate taxation.
The lack of response on the matter of intangibles taxation may be
partly because of the way the questionnaire was set up and partly
because taxation of intangible property is considered very unlikely in
most States. S
Responses concerning the multistate taxa~ion of banks cannot help
but be highly conjectural. In the past such taxation was limited not
merely by statutory r trictions but also by restraints which many
banks imposed on their activities across State lines. Such activity is
becoming increasingly important, however, despite State restrictions
on "doing business" and prohibitions upon interstate branching. Re-
flecting the State-level concern with multistate taxation, the respon-
dent from Iowa suggested that the Board's study might include guide-
lines for allocating net income of nondomiciliary banks which do
business in the State and of nonbanking subsidiaries of domestic
banks which do business both in and out of the State.
Existing State practice regarding jurisdiction to tax out-of-State
firms may not provide a very firm guide to future practice where
banks are involved. Not only are changes in practices likely, reflecting
the unique restrictions on bank branching, but the whole matter of
uniformity and coordination of multistate taxation is a matter of cur-
rent concern in Congress, the States, and business. Despite such un-
certainties, the information and opinions supplied by the State tax
administrators have been of great value in the Board's examination of
the likely impacts of the "permanent amendment" of section 5219 of
the Revised Statutes.
SUPPLEMENT A
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM,
Washington, D.C., November 13, 1970.
Letter sent to State tax administrators.
By direction of the Congress, the Board of Governors of the Federal Reserve
System is making a study of State and local taxes on banks. This study is required
by Section 4 of Public Law 9 1-156, and the Board, in conducting the study, is di-
rected to consult with "appropriate State banking and taxing authorities." A copy
of P.L. 9 1-156 is enclosed.
This legislation amends a provision popularly known as Section 5219 of the Re-
vised Statutes (12 USC 548-also enclosed) which prescribes methods by which
the several States may tax national banks. The act makes a temporary amendment,
effective through December 31, 1971, an,d a permanent amendment which will
become effective January 1, 1972, unless the Congress enacts further changes.
As part of the study, we need information and advice from you about present
and prospective taxes applicable to banks in your State. This should be provided
in two steps:
(1) A letter from you at the earliest possible date advising us whether
action has been taken or is contemplated for the near future that would affect
State and local taxes paid by commercial banks-particularly taxes on in-
tangible personal property, net income, gross receipts, and capital stock.
PAGENO="0187"
167
Other matters that we would like to have covered in your letter are indicated
below.
(2) A response by December 10, 1970 (or as much sooner as is feasible), to
the enclosed questionnaire calling for more detailed information. The deadline
for submission of our report to the Congress has been set at March 31, 1971;
and unless we have your reply to the questionnaire by December 10, it may
not be possible to reflect this information adequately in the report.
The information you supply in these two communications will be an important
element in the formulation of our findings and recommendations.
In your initial letter, we would appreciate, in addition to the above information
on specific tax action, an expression of your views on the following:
What you foresee as the probable trend of developments in bank taxation
in your State if the "permanent amendment" of Section 5219 becomes effec-
tive January 1, 1972, without further change.
Whether there are relevant special problems in your State that ought to be
examined in the course of our investigation.
Any other major issues you consider pertinent to our study.
The questionnaire is designed to supplement your initial reply, giving us more
detailed information on a number of points. It inquires about present and prospec-
`tive laws and practices affecting taxes on commercial banks and other financial
institutions-those for which yours is the home-State and also those out-of-State
banks that may have activities or property interests in your State.
We are supplying three copies of the questionnaire-one to be returned to us,
one for your files, and one for use in drafting replies or, if necessary in referring
questions to another office.
The questionnaire was prepared with advice from several State tax officials,
outside tax experts, representatives of the Federation of Tax Administrators and
the National Association of Supervisors of State Banks, and representatives of
several Federal Government agencies. It covers the following major subjects:
1. Existing statutes governing State and local taxation of banks,
2. Future action,
3. Interstate aspects of bank taxation,
4. Local taxation of banks,
5. Revenue from taxes on banks,
6. Comments on other issues.
The questionnaire includes a request that you give us your comments on issues
that you consider pertinent or on special problems in your State. In replying to that
part of the inquiry, you may wish to amplify the observations in your initial
letter. In any case, we urge that you reply fully to all parts of the detailed
questionnaire.
Very truly yours,
ROBERT C. HOLLAND, Secretary.
PAGENO="0188"
168
O.M.B. 11°. 55S70004
Approval Expires March 31, 1971
STATE AND LOCAL TAXATION OF CO~9ORCIAL BANKS
Questionnaire for State Tax Administrators
Study by the Board of Governors of the Federal Reserve System under Public Law 91-156, December 24, 1969.
The Board of Governors of the Federal Reserve System is engaged in a study of State and local
taxation of banks, as required by law.
THIS QUESTIONNAIRE IS ADDRESSED TO YOU IN ORDER THAT WE MAY HAVE AUTHORITATIVE INFORMATION
FROM YOUR STATE FOR USE IN THIS STUDY. PLEASE REPLY BEFORE DECENDER 10, 1970.
Longstanding Federal statutory limitations on the authority of States to tax national banks are
generally removed by P.L. 91-156 (enclosed). Section 2 of that law amends section 5219 of the Revised Statutes
(12 USC 548, also enclosed) to read as follows:
For the ~,urposes of any tax law enacted under authority of the United States or any State,
a national bank shall be treated as a bank organized and existing under the laws of the
State or other jurisdiction within which its principal office is located.
This new provision will become effective January 1, 1972, unless Congress takes further action.
Until 1972, earlierprovistons of section 5219 will continue in effect, with enlarged taxing
authority available to States under a new clause 5 added to section 5219 by P.L. 91-156, section 1, and saving
provisions in section 3.
the Board of Governors of the Federal Reserve System is directed by the Act (section 4 of P.L. 91-156)
xake a study to determine the probable impact on the banking systems and other economic
effects of the changes in existing law to be made by section 2 of this Act governing income
taxes, intangible property taxes, so-called doing business taxes, and other similar taxes
which are or may be imposed on banks. In conducting the study the Board shall consult with
the Secretary of the Treasury and appropriate State banking and taxing authorities.
The Board is to report.the results of its~study to the Congress and to include in the report --
The Board's recommendations as to what additional Federal legislation, if any, may be
needed to reconcile the promotion of the economic efficiency of the banking systems of
the Nation with the achievement of effectiveness and local autonomy in meeting the fiscal
needs of the Staten and their political subdivisions.
Your full and prompt response to our questions will be greatly appreciated. Please attach copies
of statutes, reports, legislative bills, tables, and othur documents that will amplify or clarify your
answers to the questions. (See NOTE, page 10.)
If you find it necessary to refer parts of this questionnaire to another office, please request that
a prompt response be sent directly to us -- and please indicate in your own response to us the name of the
individual and office from shon further information I'an been requested.
* Questions of interpretation and procehre may be discussed with us by telephone or letter. ~
telephone, please call Mr. I. N. Labovltz, ares tode 202 - 737-1100, extension 3363.
A postage-prepaid envelope is enclosed for your return of the completed questionnaire with attach-
ments and supplements. Extra copies of the questionnaire are enclosed for your files or for use, if necessary,
in referring questions to another office.
* We thank you for your cooperation.
PAGENO="0189"
169
piesosyjilin the fol low~ggg~ces:
State ________________________________________________ Date of response ______________________-
Respondent:
Name and title of respondent: _____________________________________________________________________________
Name of agency or office: _________________________________________________________________________________
Addrass:
Name and title of individual to whom queries may be directed: __________________________________________
Telephone number (include area code): ________________________________________________________________
1. EXISTING STATUTES
This section relates to taxation of commercial banks under present laws of your State. Please che:
spplicsble spaces or fill in blank lines. If an answer is in doubt, please explain in an attachment. Plea~.
mark each attachment witis the identifying number of the question (or questions) to which it relates and chc~;.
the appropriate box in the column at farthest right to show that you are providing supplementary materials f~.
that question.
Supplem.
material
Yea No encloe(.
1.1 Temporary amendment of sec. 5219, R.S.: Assuming no further legislative action
by your State, are thero any tax laws of your State rhat became applicable to
national banks on or after December 24, 1969 (the date of FL. 91-156) or that
will become applicable to national banks under the interim provisions of
P.L. 91-156, sees. 1 and 3?
(Examples: A general sales tax; a document recordation tax; taxes
on tangible personal property.)
1.2 Permanent amendment of sec. 5219, R,S.: Assuming no further legislative action,
will any tax law of your State become applicable to national banks on or after
January 1, 1972, that has not heretofore been applicable to them because of
restrictions imposed by soc. 5219 or generally attributable to sec. 5219?
(Examples: A state law that exempts national banks by specific
reference to sec. 5219 and provides for lapse of the exemption
when sec. 5219 is modified; a State law that carries a general
exemption or disclaimer which has been interpreted to exclude
national banks from the particular tax.)
1.3 Legislation since Dec. 24, 1969: If you answered Yes to either or both 1.1
and 1.2, and if your answer is based on an existing law (or laws) which was
enacted or amended in relevant respects since December 24, 1969, please identify
this law (or laws) here or in an attachment:
1.4 Changes affecting State banks and out-of-State banks: Does any State law
referred to in 1.3 above (or any other law enacted or amended since December 24,
1969) make a change in the taxation of --
1.41 State banks as well as national banks? ("State banks" are commercial
banks chartered by your State.) ~ ~
1.42 State banks only? . . . . .
PAGENO="0190"
170
1.43 ~.t-of-State banks? (I.e., national bank with principal office in another
State; State bank chartered by another State.) c: i:~
1.44 If you answered Yes to 1.41. 1.42, or 1.43, please identify this law or
lava:
1.5 Taxes currently applicable to commercial banks: Please check boxes to indicate
taxes that apply currently (November 15, 1970) or will later become applicable
under present law to national and State coonnercial banks.
Where applicable, please indicate on "Name of tax" line the designation that is
uaad in your State to identify this tax and enter a brief citation to the statute.
In supplying supplementary materials, please include the applicable rate or rate
schedule for each tax checked. -
"National bank" here means a national bank with its principal office in your
State. "State bank" here means a cononercial bank chartered by your State. For
the periods before January 1, 1972, include (and designate) voluntary payments
by national banks of taxes not authorized under section 5219. (Several of the
boxes provided below relate to such taxes.)
Initially applied Initially applicable on nitially applicable
Pleasure or kind of tax before or after Dcc. 24, 1969, on or after Supplet-~
and its name in your State, Dec. 24, 1969 but before Jan.l, 1972, Jan. 1, 1972, matcria~s
with statutory citation sndeipresent law under present ~ enclosed
National State National ~ State National State
banks banks banks I banks banks banks
1.51 Property values:
1.5110 Tangible pornonal property:
1.5111 Under general property tax ~ E~J c:J c:~ E~1
1.5112 Under classified property
tax (Name of tax): E~J c~J E:J E~J
1.5120 Intangible property:
1.3121' Shares of bank stock
(Name of tax): _________
1.5122 Bank'ascetc or any cate-
gory thereof (Name of
tax): ___________________
1.5123 Bask depooits taxable to
depositor and collected
from bank (Name of tax):
1.520 Cross income or' receipts:
(Name of tax): * * E~J
1.530 Net~in~omn: Tax on, or mea-
sured by. or according to
net income (Name of tax):
1.540 Tax measured by income from
intanflibles in lieu of -
property tax (Name of tax):
PAGENO="0191"
171
3.
1.
EXISTING STATUTES -- 1.5 Taxes
currently applicable to commercial banks -- continued
..
Neasure or kind of tax
and its name in your State,
vith statutory citation
nitially applied Initially applicable onjlnitially applicablel
before or after Dec. 24, 1969. on or after ISupplee.
Dec. 24, 1969 but before Jan.1. 1972, iso. 1, 1972 materials
under preoent law ~ under present law enclosed
National State National State National State
banks ~J banks banks banks L banks J banks
1.550 Sales tax:
1.551 Vendor tax on sales to banks
1.552 Vendor tax on sales ~ banks
1.553 Vendee tax on sales to banks
1.554 Other forms of sales tax
(Name of tax): _________
1.560 ~x (on out-of-State pur __ ___-
1.570 Real est:te transfer tax
1,580 )brtRaRe tax (Name of tax): - CJ i~
1.590 Security transfer tax (Name of
1.610 Other documentary taxes (Name
1.620 Tax measured by capital strue
turejcspital, surplus, un
divided profits) (Name of _____ _____ _____
1.630 )ttor vehicle tax or fee (Name
1,640 Other license * registration, c~j ~
transfer, excise, fee, or
tax on ownership, use, or
transfer of tangible per-
sonal property (Name of tax):
1.650 7~anchise, license, or priv- (~ [~J CJ C
flege tax not included above
(Name and nature of tax):
1.660 ~y~pplicsble tax not in- _____
eluded above (Name and
nature of tax): __________
PAGENO="0192"
172
4,
1. EXISTING STATUTES -- continued
1.7 Dividends on ,~fonal and State bank shar: If your State imposes an income tax on individuals, please
check boxes tc~ show the treatment of dividends received from commercial banks:
National Stats Supplem.
bank bank materials
dividends dividends enclosed
1,71 Bank dividends are included in taxable income of individuals
1.72 Bank dividends are not included in taxable income of individuals
1.73 Other provisions (please specify) ___________________________________
2. P%fl1JRE ACTION
This section relates to possible or prospective action in your State in view of the permanent emend-
sent of sec. 5219, R.S. * enacted in P.L. 91-156. sec. 2. Please reply by checking applicable boxes and adding
explanatory comments to the extent required. If an answer is in doubt, please explain in an attachment. Where
answer is Yes, see NOTE on page 10.
Supplem..
~ateria1s
Yes No enclosed
2.1 Review of tax laws. -. Has the amendment of sec. 5219 prompted a review of tax
laws of your State with a view to changes that might affect taxation of --
2.11 National banks?
2,12 State banks?
(The question refers to any such review by administrative
officials or bodies; legislative committees, councils, or
commissions; and any unofficial studies.)
2.13 Nature of review, if any _______________________________________
2.2 Official proposals. -- In your State, have there been any official proposals
(sincd enactment of P.L, 91-156) for further legislation to change State or
local tax laws or rates that would affect -- -
2.21 National banks?
2.22 State banks?
- ("Official proposals" here means proposals by the Governor, tax
board or commission or administrator, revenue or budget officer,
legislative councils or committees, revenue or budgetary cam-
missions, individual legislators, and other public bodies, offices,
or officers.)
2.3 Possible further review. -- Do present tax laws of your State provide
exemptions or limitations, particularly applicable to national banks, which
exemptions or limitations nay be subject to re-examination in light of the
amendment of sec. 5219'
3.. INTERSTATE ASPECTS OF BANK TAXATION
This section relates to the possibility that States may impose taxes on out-of-State commercial
banks that were not permitted as to national banks under section 5219, KS., before amendment by P.L. 91-156.
Questions 3.1 and 3.3 relate to circumstances in which States might assert jurisdiction to tax. Questions
3.4 and 3.5 relate in part to measurement of the tax base subject to the tax imposed by your State or its
subdivisions.
"Out-of-State bank" means a national bank with its principal office in another State or
a State bank chartered in another State. Assume the bank has no office in your State
unless the contrary is specified.
PAGENO="0193"
- Uncer- Supplem.
Yes tam No Name of tax; citation; conesenta materials
enclosed
3.110 The bank makes loans to customers in
your State (residents or businesses)
secured by real or tangible personal
property located inyour State. These
loans are negotiated --
3.111 by bank officers uho make binding
comnitments during visits to your
State
3.112 by bank officers who visit your State
for this purpose, but each loan is
subject to approval outside your
State
3.113 by a loan correspondent in your State
but subject to approval outside
your State
3.114 through the bank's own office in your
State (e.g., a loan production
office) but subject to approval
outside your State
3.115 through an affiliate or subsidiary
corporation office in your State
but subject to approval outside
your State
3.116 outside your State
3.120 The bank makes loans to customers in
your State (residents or businesses)
secured by real or tangible personal
property located outside your State.
These loans are negotiated --
3.121 by bank officers who make binding
commitments duriog visits to
your State El El EJ
3422 by bank officers who visit your State
for this purpose, but each loan is
subject to approval outside your
State El El
173
Your answers to these questions will not be construed as formal, binding interpretations.
or connnitments. Rather, they will be considered informal expressions of opinion, based
on your knowledge of practices, procedures, and rules applied by taxing authorities of
your State in the taxation of businesses other than commercial banks in circumstances in
which two or moth States might be able to assert jurisdiction.
3.1 Jurisdiction to impose a tax based on gross or net income or receipts, capital stock, or assets used. --
Judging from present practice in the taxation of interstate busineases and other relevant facts, isit
youc opinion that after January 1, 1972 -- in the absence of Federal statutory restrictions -- your
State would assert jurisdiction to tax an out-of-State bank that conducts within your State any of the
operations spehified below? Please consider this question with reference to any or all of the follow-
ing taxes that may be used in your State:
Taxes on gross or net income or receipts (or measured by or according to gross or
net income or receipts);
Taxes measured by capital stock or by assets used in the State.
Please reply by cheCking applicable boxes below. If you answer Yes or Uncertain, please specify
the tax (or taxes) to whi..h your answer refers and enter brief statutory citations. Add necessary
comments here or in an attachment.
Situation
79-421 0 - 72 - 13
PAGENO="0194"
* 3, INTERSTATE ASPECTS OF BANK TAXATION -- 3.1 Jurisdiction to impose a tax based on
~~s4t~1 sink no en~etn used -- continued
3.123 by a loan torrespondent in your State
but subject to approval outside
your State EJ El El
3.124 through the banks own office in your
State but subject to approval out-
aide your State EJ EJ 1~I
3.125 through an affiliate or subsidiary
corporation office in your State
but subject to approval outside
your State
3.126 outside your State
3.130 The bank makes loans to customers in
your State (residents or businesses)
secured by collateral in the form of
intangible personal property held at
the bank's principal office. These
loans are negotiated --
3.131 by bank officers who make binding
cousnitments during visits to
your State El El El
3.132 by bank officers who visit your State
for this purpose, but each loan is
subject to approval outside your
State El El El
3.133 by a loan cnrrespondcnt in your State
but subject to approval outside
your Store EJ El El
3.134 through the bank's own office in your
State but subject to approval out-
side your State El El El
3.135 through an affiliate or subsidiary
corporation office in your State
but sUbject to approval outside
your State . . El
3.136 outside your State U L_.J
3.143 The bank makes unsecured loans to
customers in your State (residents or
businesses). These loans are
negotiated --
3.141 by bank officers who make binding
cotnrntttrents during visits to
your i~tate El U El
3.142 by bank officers who visit your State
for this purpose, but each loan is
subject to approval outside your
State - El El El
3.143 by a loan correspondent in your State
but subject to approval outside
your State El El El -
3.144 through the bank's own office in your
State but subject to approval out-
aide your State El E~l El -
3.145 through an affiliate or subsidiary
corporation office in your State
but subject to approval outside
your State - El El
3.146 outside your State El U]
174
- Uncer- Supplens.
Situation Yea tam No Name of tax; citation; cotmnenta ~
R
El
El
El
H.
U]
U]
El
El
El
El
PAGENO="0195"
3.150
The bank participates in a syndicate to
underwrite aecurities of a municipal
borrower in your State :~ c:j cj
3.160 The bank issues credit cards from an
office outside your State that may be
used --
3.161 only in your State by residents of
your State
3.162 in your State and other States by
resident! of your State
3.163 in your State by nouresidents
3.170 The bank issues credit cards through
an office or an agent bank or an asso-
ciate bank in your State to residents
of your State which they nay use --
3.171 only in your State
3.172 in your State and other States ..
The bank deals in securities in your
State --
through its own office in your
State .~ EJ EJ cj
through officials who visit your
State for such transactions . . . . E:J t:~ EJ
through its office outside your
State .. U [:1 U
3.190 The bank conducts trust business --
3.191 for beneficiaries rcsident in your
State c:i c:i ci -
3.192 involving administration of real or
tangible personal property in your
State U U U:
The bask solicits depof its --
by advertising is media puhltshed
and distributed in your State
through bank officials who visit
your.Stste for this purpose .
through a representative stationed
in your State
3.220 The bank owns equipment which it leases
to others for use in your State . . . UJ i:j c:~
3.230 The bank sells accounting or data
processing services to a business in
your State
3.231 from its office outside your State
3.232 through its own office in your State
3.233 through an affiliate or subsidiary
corporation office in your State
175
3. INTERSTATE ASPECTS OF BAtE TAXATION -- 3.1 Jurisdiction to inpose a tax based on
or reeeisrs ramital utmek ousots ,on1 -- continued
.
Situation
hinter-
tam No
* Suppleru.
Name of tax; citation; conssentsj matertals
6.
U
H
3.180
3.181
~.182
3.183
- 3.210
3.211
3.212
3.213
EJUJ~
UL~JUJ
__ U
- cJ
U
___ U
___ U
__ U
PAGENO="0196"
3. INTERSTATE ASPECTS OF BANK TAXATION -. continued
3.3 Jurisdiction to tax intangible personal property.
Is it your opinion that after January 1, 1972 -- in the absence of Federal statutory restrictions -.
your State would assert jurisdiction to tax intanRible personal prope~ry of an out-of-State coennercial
bank conducting within your State one or more of the operations specified in question 3.1 above?
Ex~ple: The bank holds a note secured by real property in your State. Make no entries
if the answer is No for all situations numbered 3.110 through 3.233 that involve intangible
personal property. For any case where the answer is Yes or UncertaiU. please identify the
situation by using situation numbers (3.110 through 3.233) from question 3.1 and specify
the tax (or taxes) to which your answer refers.
If possible, please specify any additional circumstances that might determine whether your
State would claim jurisdiction to tax in a particular situation.
7~t
/
uation
(ref
erenee number)
yes
OD
c~
DD
DD
DEJ
~D
cJc
Name of tax;
citation
; coosnenta
~materials
D
D
c:
~
~-D
.
.
.
.
;
3.4 Financial businesses other than national banks. -.
3.41 Are out~of-State financial institutions (other than national banks) that do business in your State new
subject (November 15, 1970) to taxation in your State on one or more of the bases ("measures") named
below?
Please reply by checking applicable Yes or No boxes below. Use line 3.410 below if the same
answer covers every kind of business named and all types of tames listed. Where you answer
~gg, please specify the measure of the tax (by entering in the "Measure" column one or more
applicable references from the list below). Also give the name used in your State for this
tax and a brief statutory citation, For some types of business, you may need to designate
two or more taxes. Add necessary connnests here or in an attachment.
the these reference letters
in_"measure"_column ______________
A to mean
S to mean
Ctomean
0 to mean
B to mean
Ftomean.
176
$easure of tax
Net income or receipts
Cross income or receipts
Capital stock
Value of assets used in State
Value of intangible personal property
Other measure or tax base
Supplein.
Bind of business Yes No Measure Name of tax; citation; cotmoents materials
enclosed
3,410 All kinds of business named below ~ -
3.411 State banks (commercial) DD - __________________________________ D
PAGENO="0197"
177
Sled of business
Yes No
Measure
Name of tax;
citation;
.
comments
Supplem.
materials
enclosed
3.412 Motual savings banks
3.413 Savings and loan associations
3.414 Credit unions
3.415'Sales finance companies
3.416 Small loan companies
3.417 Commercial finance companies .
3.418 Factors
3.419 Leasing companies
3.421 Life insurance companies
3.422 Fire;ndc:sualty insurance
.3.423 Mortgage companies
3.424 Security brokers and dealers .
3.425 Investment companies
3.426 Small businesu Inveatment
. . EJEJ
. .
. .
EJEJ
. .
CJCJ
-
-
-..
-
-
-
.
t:J
EJ
cj
c~
fJ
J
~
t:i
~j
0
c:i
0
EJ
~
-
.
3. INTERSTATE ASPECTS -. 3.4 Financial buoineones other than notional banks -. continued
3.43 For instances in which your reply to question 3.41 is Yes, please specify the tests or criteria that
are used to determine whether the particular organization or company is taxable in your State.
For these out-of-State financial institutions, a claim of jurisdiction to tax night be based on
localized operations (ouch as a small loan company office) or various situati ens analogous to
those numbered 3.110 to 3.233 above. Answers night be along the followinglines:
3.411.. ,Measure A, excise (income) tax, Code sec. 64-463: Loans secured by real propçrty
in State.
3.423.. .Measure E, intangible property tax, Comp.Stat.l20-72(a): Loan office and commercial
situs of intangibles in State.
Supplementary
materials enclosed. .
3.44 In inotaices in which your reply to question 3.41 is Yes, does your itate permit or require inter-
state division of the tax base?
Oseck applicable box: Yes . No . ~ Yes, for some, No for others. .
PAGENO="0198"
178
3.45 If you answered question 3.44 with Yes or Yes for some, No for others, please indicot.
interstate division of the tax base by filling in the form below:
Measure of tax Kind of business
Neth d f di (enter capital (enter numerical symbols
0 V S 0 letter references question 3.41. E.g., for
free ques. 3.41) banks (commercial)" onto
3.451 Separate accounting _______________ ________________________
3.452 Apportionment by formula
3.453 Specific allocation
3.454 Combination of specific allocation
and formula apportionment _______________ _______________________
3.5 Treatment of affiliated
3.51 In taxing affiliated corporations, does your State require that operations of such of.
tions be consolidated or combined ir, determining the tax base?
Yes , . . No . . . £
3.52 Does this rulmor requirement apply when one or more of the affiliated corporations a'
of the kinds of business named in question 3.41?
Yes . . . No . . .
3.53 If you answered Yes to question 3.52, please specify the kinds of business by usinc;
from question 3.41 and the kind (measure) of tax by using reference letters from qut
Kind of business Measure of tax -
(numerical symbols from question 3.41) (letter references from quo..
3.54 What criteria are used in your State to determine whether to require combination or
operations of affiliated corporations? ______________________________________________
3.55 Please check this box if you are enclosing supplementary materials about the treousor
corporations
3. INTERSTATF. ASPECTS -- continued
35 Other aspects or problems. --
Please use this space or enclosures to comment on any other interstate aspects of baoo
on special problems in your State that are not covered in preceding replies.
Please check this box if you are enclosing supplementary materials about these r~
aspects or problems
PAGENO="0199"
4. LOCAL TAXATION OF BANKS
4.10 We need information about present and potential local government taxes applicable to cossnercial banks
in your State. This includes not only taxes especially applicable to banks, but also general taxes
(for example, a local income tax) that may have been extended to banks under interim provisions of
see. 5219, R.S., or may be extended to banks following removal of restrictions in that section.
4.11 Please report briefly any such local taxes in your State, either on this page or in an enclosure.
4.12 If your office cannot supply information along these lines, is there another State office which should
be able to supply it? If so, please provide a specific referral (including telephone number).
4.13 If there is no central source for this information in your State, will you please name the finance or
tax officials in three or four major financial cities or counties in your State, so that we may inquire
directly?
Please check this box
if you enclose supple-
mentary materials for
Enter replies to questions 4.11, 4.12, or 4.13 below: question 4.10 . . . .
5. REVENUE FROM BANK TAXES
3.1 State revenue. --
Please complete the table below (to the extent feasible) to show the amount of State tax revenues
collected from coomercial banks in the latest fiscal year for which you have data. If you can subdivide
amounts between State and national banks, please do so. tksit real property and payroll taxes.
Please check this box if you enclose
supplementary materials for question 5.1 [J
Type of bank affected Total State government taxes
Measure or kind of tax (check box) from banks (in thousands):
and its none in your State State Natl. Both Fiscal year ended 19
5.11 Tax on net income (tax measured by, according
to, or on net income):
Name of tax: -
5.12 Tax on gross income or receipts:
Name of tax:
179
D~EJ
D
PAGENO="0200"
Measure or kind of tax
~nd jts name in your State
180
5.13 Tax on value of capital stock:
Name of tax: _____________________________
5.14 Tax on value of shares:
Nameof tax: ______________________
5.15 Other taxes applicable to banks (specify tax):
Typ. of bank affected
(check box)
State Natl, Both
EEJEJ
EJ~
D
JJ E
Total State government taxes
from banks (in.thousands):
Fiscal year ended 19
S. 19
Total of reported taxes .
10.
6. ~O*~NTS ON OTHER ISSUES
We invite your conments on other issues that you consider pertinent to our study under P.1. 91-156. or
on relevant special problems in your State that are not covered in this questionnaire.
- If you are supplying an enclosure with such coesuents, please mark it "Question 6" and
check this box
7. NOTE
cJ
With your response, pleGse supply explanatory memoranda, statutes, bills, regulations, reports, tabula-
tions, manuals, or other documents that will rmplify your replies. We request especially with reference
to questions 1, 2, and 3 that you give information such as the following, to the extent applicable:
.whether taxes referred to, either enacted or proposed, are for State or local government purposes;
the basis (or measure) for each tax;
.estimates of the magnitude of the taxable base -- or recent actual data;
.applicable or proposed tax rates;
.actual or expected revenue yields or effects;
,,interrelations between taxes (for example, that a particular tax is credited against another tax -
or in lieu of it);
.jurisdictional or other rules for deciding when the tax applies; . -
.rules or procedures for determining the interstate or interlocal division of the taxable base or
payment of each taxpayer.
PAGENO="0201"
181
SUPPLEMENT B
State names and abbreviations.
Table B-i: States Reporting Changes in Tax Treatment of Commercial Banks
after December 24, 1969 [1.1, 1.2, 1.3, 1.41 through 1.44].
Table B-2: State Taxes Reported Applicable to Commercial Banks on November
15, 1970, by Measure of Tax and Extent and Timing of Applicability [1.5110
through 1.660].
Table B-3: Treatment of Dividends Received from Commercial Banks Under
State Individual Income Taxes, Since December 24, 1969. [1.71, 1.72, 1.73;
also 1.5121 through 1.620].
Table B-4: States Reporting Review of Tax Laws or Official Tax Law Proposals
Affecting Commercial Banks. [2.11, 2.12, 2.13, 2.21, 2.22, 2.3].
Table B-5: Opinions of State Tax Administrators Regarding Taxation of Out of
St,ate Commercial Banks after January 1, 1972, by Type of Bank Operation
and Measure of Tax [3.110 thrOugh 3.233].
Table B-6: Status of State Taxation of Out-of-State Banks and Other Financial
Institutions as of November 15, 1970 [3.410 through 3.426].
Table B-7: Basis of Jurisdiction for Taxation of Out-of-State Banks and Other
Financial Institutions, November 15, 1970 [3.43; also 3.410 through 3.426].
Table B-8: State Practice Regarding Inti~~~tate Division of the Tax Base in
Taxing Out-of-State Banks and Other Financial Institutions [3.44 and to some
extent 3.45].
Table B-9: Method of Interstate Division of the Tax Base, by Kind of Business
and Measure of Tax [3.451 through 3.454].
Table B-i0: State Positions on Consolidation or Combination of Affiliated Corpo-
rations in Deteiinining the Tax Base [3.51, 3.52, 3.53, 3.54].
STATE NAMES AND ABBREVIATIONS I
Alabama AL
Alaska AK
Arizona AZ
Arkansas AR
California CA
Colorado CO
Connecticut CT
Delaware DE
District of Columbia DC
Florida FL
Georgia GA
Hawaii HI
Idaho ID
Illinois IL
Indiana IN
Iowa IA
Kansas KS
Kentucky KY
Louisiana LA
Maine ME
Maryland MD
Massachusetts MA
Michigan Ml
Minnesota MN
Mississippi MS,
Missouri MO
Montana MT
Nebraska NE
Nevada NV
New ljampshire NH
New Jersey NJ
New Mexico NM
New York NY
North Carolina NC
North Dakota ND
Ohio OH
Oklahoma OK
Oregon OR
Pennsylvania PA
Rhode Island RI
South Carolina SC
South Dakota SD
Tennessee TN
Texas TX
Utah UT
Vermont VT
Virginia VA
Washington WA
West Virginia WV
Wisconsin WI
Wyoming WY
Puerto Rico PR
Virgin Islands VI
I Federal Information Processing Standards (FIPS).
TABLE B-1.--STATES REPORTING CHANGES IN TAX TREATMENT OF COMMERCIAL BANKS AFTER
DEC. 24, 1969
Changes affecting domestic national and/or State banks
after Dec. 24, 1969
.
Changes affecting national
banks, expected after Jan. 1,
1972 (9)1
Changes affecting out-of-
State banks (5)
Enactment or amendment of No legislative change
legislation cited (19) needed, or non cited (17)
,
AZ, AR, IL, IA, KS, ME, MD, AL, CO, CT, FL, GA, ID,
MI, NE, NH, NJ, NY, OH, OK, IN, KY, MA, MS, MO,
PA, TN, TX, WA, and PR(19). NC, RI, UT, VA, WI, and
WY(17).
AL,' FL,' IL, KS 2 ME,
MO,2 NH, OH, and RI.
(9).
11, NY, OH, TN, and PR.
(5).
.
`This listing, from item 1.2 on the questionnaire, does not include all the possible changes mentioned in the text.
`Changes will affect both State and National banks.
Note: For key to 2-letter abbreviations of State names, see preceding table.
`For each table, the items tabulated from the Questionnaire for State Tax Administrators (reproduced in
Supplement A) are listed in square brackets.
PAGENO="0202"
TABLE 8-2.-STATE TAXES REPORTED APPLICABLE TO COMMERCIAL BANKS, BY MEASURE OF TAX AND EXTENT AND TIMING OF APPLICABIUTY
Applicable prior to Dec. 24,1969, and still in force Applicable starting after Dec. 24,1969, but before Forthcoming after
Nov. 15,1970 Jan. 1, 1972 Jan.1, 1972
Measure of tax (with corresponding State and national Extended to national State and national National State and
questionnaire number) banks State banks only banks banks banks national
Income:
1.53OTaxon,ormeasuredby,oraccordingto, A1,12AK,1 AZ'CA, 2 IL,7ME,TN,and PR~ TN IA,' MT,4and NHS IL,~ME,and
net income. CO." CT, D~, HI,' ID, NH.
KS'MD'MA Ml MNI
MO12NEINM1NY1
NC1ND,100K1OR1RI
SC,i SD,' UT, VT,'4
WI,' and PR.
1.520 Gross income or receipts DC IN WA -
Items of net worth, assets or deposits:
1.5121 Shares of bank stock ` ARE,' DE,~ FL 11,0 a in IN,4 PR PR
KY, ME, M1, NV, NH,
OH,iO TN,o TX, and WY."
1.620 Tax measured by capital structure GA," IA," MS.' NJ," NY,12 OH, and TN TN OH
(capital, surplus, undivided profits). PA, `I VA," WV, and
1.5122 Banks assets or category thereof 12 PR - PR
1.5123 Bank deposits taxable to depositor and IN, KY Ml, NC, OH,
collected from bank 4, and ltI `3. S.,
Tangible property:
1.5111. 1.5112 Tangible personal property..... AL, AR MA, MS, MI, CT ID; IL,° KS, NE, CT, ID, 11,0 KS, NE, AZ, CO, FL, IA, KY, PR
NV, 1'N, WA, and WY. lII, UT, and PR. RI, and UT . LA and OH.
1.630 Motor vehicle tax or fee ii -- AL, AZ, AR, CT, DE, DC, KY and NE KY and NE
FL, HI, ID, KS, LA,
ME, MD, MA, MI, MN,
NV, NJ, NM, NC, OK,
OR, PA, RI. SD, TN,
UT, VA, W;~, and WY.
Sales and use:
1.551, 1.553 Sales tax on sales to banks AR,'~ CA,'~ DC, IL, KS,'~ AZ, CT HI, ID, IN, IA, AZ, CT, ID, IN, IA, ME, AL, CO 4 FL, GA, LA, MD,
KY, MI, MN, MS." NJ,1~ ME, h~A, MS, MO, NE, MA, MS, MO, NE, NV and ix.
SC,'? TN, VA,'7 WA,~? and NV, NY, NC, OH, OK, NY, NC, OH, OK, PA.
WI. PA, RI, SD UT, VT,~ and RI, SD, UT, VT,4 and WY.
WY.
1.552 Sales tax on sales by banks AR,'~ CT, DC, GA, ID, IN, AZ, IL, KY, ME, MI, MO, AZ, IL KY, ME, MI, MO, AL, CO,~ FL, and MD...~
IA, KS,'~ MA, MN, NE, and WI. and WI. S
NV, NY, NC, OK, RI,
S SD, TN, TX, UT, and
VA.*7 S
PAGENO="0203"
1.560 Use tax (on out-of-State purchases)-.. AR,'° DC, KS,17 MN, NJ,17 AZ, CT, HI, ID, IL, IN, AZ, CT, ID, IL, IN, IA, AL CO,~ FL, LA, MD, and
SC,i7 TN, VA,'7 and WA.i7 IA, KY, ME, MA, MI. KY, ME, MA, MI, MS, 1'X.
MS, MO, NE, NV, NY, MO, NE, NV, NY, NC,
NC, OH, OK, PA, RI, OH, OK, PA, RI, SD,
SD, UT, WI, and WY. UT, WI, and WY.
Transfers:
1.570 Real estate transfer tax CT, DC, KY,° MD, MA, Ml, AR,'~ HI, IL, IA, ME, NY, AR,'~ IL, IA, NY, OH, and AL, FL, and GA
MN, NV, NJ, PA, RI, SD, NC,~ OH, and OK. OK.
TN, WA. WV, WI,and
PR.
1.580 Mortgage tax KS, MN, OK, and TN NY NY AL, and FL
1.590 Security transfer tax.. NY FL
1.610 Other documentary taxes MD,° MN, MO, 5C18 VA, NE, and TN NE
and WA.
Other:
1.650 Franchise, license or privilege tax not DE, IA, VA, and WY ID, MN, and OR AR " AR 19 AL.
included above.
1.640, 1.660 Any applicable tax not included NH, OK, and VA° KY, and TN
above (excluding real property)'°.
1 Tax was reported to be a special bank or financial institutions excise tax, or at a special rate. 14 From other sources it appears that bank deposits are also taxable but payable by the depositor
2 Change in rate or replacement by ordinary income tax is likely, in Arkansas, Florida, Illinois (deposits of corporations only), Missouri, Pennsylvania, South Dakota
3 Tax was changed from special to regular income tax since Dec. 24, 1969. (deposits drawing interest), and Tennessee, and they do not appear to be exempt in Alaska, Arizona,
4 Information is from sources other than questionnaire. Georgia, Iowa, Kansas, Montana, New Jersey, Texas, Virginia, West Virginia, or Wyoming.
3 Tax was reported as item 1.540 "Tax measured by income from intangibles in lieu of property 13 National banks are paying this tax voluntarily.
tax." 16 This category does not include some reported sales or use taxes on motor vehicles (Iowa, Texas);
0 Tax is completely local; timing of Kentucky real estate transfer tax not given, some respondents specified that the tax was a license tax or fee rather than an ad valorem tax (An.
7 National banks are included in the class of taxpayers, but with a tax base of zero until Jan. 1, 1972. zona, Florida, Idaho, Louisiana, Maryland, North Carolina, Oregon, Utah) or a license tax or fee in
8 Applicable to State banks only. addition to an ad valorem tax (District of Columbia, Kansas, Maine, Massachusetts, Washington).
This tax was recently repealed in Iowa and New Mexico; under a constitutional amendment, the 17 Tax was disputed (California, New Jersey, Virginia), paid voluntarily (Arkansas, South Carolina,
Illinois tax will be dropped in 1971 except for shares held by corporations; banks are paying the tax Washington), or enforced by nondeposit of State moneys (Kansas).
in Arkansas on a voluntary basis; shares are also apparently taxible under property taxes in Alaska 18 Reported for national banks only.
(State bank shares only) and South Dakota. 10 This assumes an expected change in the law in 1971, and would be only on State banks until 1972.
10 Tax is legally on stockholder, not on the bank. 20 Miscellaneous taxes reported: tax on dividends paid on deposits (New Hampshire), taxes on
11 Tax is called a bank share or bank stock tax. cigarettes, fuel,alcohol, and motor boats (Oklahoma), local utility taxes (Virginia), corporate organi-
12 Tax is alternative to net income tax if larger, and only State banks are subject to the alternative. zation tax (Kentucky), and State banking fee for supervision (Tennessee).
13 Tax was reported by California Connecticut Florida, Georgia, Maine, North Dakota, Texas and - - 181
Wyoming,butwasapparentlyon real property and was therefore not tabulated. Note: For key to 2-letter abbreviations of State names, see a ovo, p. -
PAGENO="0204"
TABLE B-3.-TREATMENT OF DIVIDENDS RECEIVED FROM COMMERCIAL BANKS UNDER STATE INDIVIDUAL INCOME TAXES, SINCE DEC. 24, 1969, BY MAJOR STATE TAXES ON BANKS
Tax on, measured by, or according to net
income of banks Tax on bank shares or capital structure 1 Tax on gross income or receipts
Treatment of bank dividends on Nov. 15, 1970, Total State and
and changes in dividend treatment or number of State banks State banks national State banks
bank taxes since Dec. 24, 1969 States State and national banks only State and national banks only banks ohly
Situation on Nov 15, 1970:
Individual income tax which includes all domestic 28 AL, AK, AZ, CA, DE, HI, ID, IA, None DE, IN, MS, and MT (4) AK, NY, and DC (1) IN. (1)
bank dividends KS, MD, MA, MI, MN, MO, PR (3).
NE, NM, NY, NC, OR, RI, SC,
UT, WI, PR. (24)
Includes domestic State bank dividends only 4 None IL and ME(2) GA, IL, ME, and WV (4) None None None.
Includes out.of.State bank dividends only 3 TN (1) NH (1) NH, TN and VA (3) None None None.
Does not include any bank dividends 2 ND and OK (2) None None None None None
No individual income tax, or no answer to the 15 CD, CT, SD, and VT (4) None AR, FL KY, LA, NV NJ, OH, None WA (1) None.
question PA, SD, TX, and ~Y (11).
Changes reported between Dcc. 24, 1969, and Jan. 1,
1972: Bank dividends taxable:
Jan. 1, 1970 2 None None MS (1) None None IN 2(1)
July 1, 1970 1 KS (1) None None None None None.
1 New York tax is an alternative to the income tax; in Arkansas, tax is being paid voluntarily. 2 National bank dividends were included in taxable income of individuals starting Jan. 1, 1970,
Note: For key to 2-letter abbreviations of State names, see above, p. 111 State bank dividends had already been taxable.
TABLE B-4.-STATES REPORTING REVIEW OF TAX LAWS OR OFFICIAL TAX LAW PROPOSALS AFFECTING COMMERCIAL BANKS
Review of tax laws Official proposals Further review likely
AL. AZ, CA, CT,1 FL. GA, HI,2 IL,3 lN,~ IA, KS, Ml, MO, MT. NJ, NM, NY, NC,1 ND, OH, Rl,2 CA, GA, Hl,2 IN, IA, KS, ME, MA, MI, NJ, AR, CA, GA, HI, KS, MA, MI, MO, NJ, NM, NC, OH, OK, OR,
TX,2 VA, WV, WY,~ and PR2(26). NC,4 ND, OH,2 WV, and Wl(15). RI, TN, VA, and WV (18),
1 Tax law review is underway but was not prompted by Public Law 91-156. 2 Review took place in 1969.
2 Concerns national banks only. 4 Proposals expected by end of 1970.
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
PAGENO="0205"
TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFFER JAN. 1, 1972,
BY TYPE OF BANK OPERATION AND MEASURE OF TAX
Type of bank operation (with corresponding
questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdicl.ien2 Uncertain
3.110
The bank makes loans to customers in your State (residents
or businesses) secured by real or tangible personal property
located in your State. These loans are negotiated-
3111 By bank officers who make binding commitments during visits
to your State:
Net income AL, CA, ID, IL, ME, MA, MN, MD, Mf, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, MI, ND, OR, RI (4).
NJ, NN, NC, SC, PR (15). OK, PA, SD, TN, U F, VA, WI (17).
Gross income WV (1) WA (1) IN (1).
Other measures3 GA, ID, MA (3) DC, FL, MS, TN, TX, WA, WY (7) MI, NE (2).
3.112 By bank officers who visit your State for this purpose, but
each loan is subject to approval outside your State:
Net income CA, ID, MA, MN, MO, MT, NM, PR (8) AL,AZ, AR, Cr, DC, GA, HI, IA, IL, KY, ME, NJ, OR, RI (3).
MD, Ml, NE, NY, NC, ND, OK, PA, SC,
SD, TN, UT, VA, WI (25). (0).
Gross income WV (1) IN, WA (2) (0).
Other measures3 GA, ID, MA (3) DC, FL, MI, MS, TN, TX, WY (7) NV (1).
3.113 By a loan correspondent in yourState butsubject to approval
outside your State:
Net income MO MT, NM PR (4) AL, AZ, CA, CT, DC, GA, HI, IA, KY, ME, AR, ID, IL, MI, MN, NJ, ND, RI, SD.
MD, MA, NE, NY, NC, OK, OR, PA, SC, (9).
TN, UT, VA, WI (23).
Gross income WV (1) IN (1) WA (1).
Other measures 3 GA (1) DC, FL, MA, MS, TN, TX, WY (7) ID, MI, NV (3).
3.114 Through the bank's own office in your State (e.g., a loan pro-
duction office) but subject to approval outside your State:
Net income AL, AZ, CA, CT, GA, ID, IL, ME, MD, MA, AR, DC, HI, IA, KY, NY, PA, VA (8) WI, RI (2).
MI, MN, MO, MT, NE, NJ, NM, NC, ND,
OR SC SD TN UT PR(25).
Gross income IN, WV (2) (0) (0).
Other measures 3 GA, ID, MA, MI, MS TN, TX (7) DC, FL, WY (3) NV (1).
3.115 Through an affiliate or subsidiary corporation office in your
State but subject to approval outside your State:
Net income AZ, AR, ME, MD, MA, MN, MO, OR, SD, AL, CA, CT, DC, GA, Hi, ID, IA, KY, NJ, IL, MI, MT, NE, NM, ND, RI (7).
PR (10). NY, NC, PA, SC, TN, UT, VA, WI (18).
Gross income IN, WV (2) WA(1) (0).
Other measures GA, MA, MS, TX (4) DC, FL, ID, TN, WY (5) MI, NV (2).
3.116 Outside your State:
Net income MO, PR (2) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IA, IL, NM, RI (2).
KY, ME, MD, MA, MI, MN, MT, NE, NJ,
NY, NC, ND, OK, OR, PA, SC, SD, TN,
UT, VA, WI (32).
Gross income (0) WA (1) IN, WV (2).
Other measures3 - GA (1) DC, FL, ID, MA, MI, MS, TN, TX, WY (9).... NV (1).
See footnotes at end of table, p. 191.
PAGENO="0206"
TABLE B-5.-OP1NIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFTER JAN. 1, 1972,
BY TYPE OF BANK OPERATION AND MEASURE OF TAX `-Continued
Type of bank operation (with corresponding
questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdiction2 Uncertain
3.120 The bank makes loans to customers in your State (residents
or businesses) secured by real or tangible personal property
located outside your State. These loans are negotiated-
3.121 By bank officers who make binding commitments during visits
to your State:
Net income AL, CA ID, IL, ME, MA, MN, MT, NE, NJ, AZ, AR, CT DC, GA, HI, IA, KY, MD, MO, MI, NM, ND OR RI, PR (6)
NC, ~C (12). NY, OK, ~A, SD, TN, UT, VA, WI (18).
Gross income WV (1) WA (1) IN (1)
Other measures a ID, MA (2) DC, FL, MS, TN, TX, WY (6) MI, NV (2).
3.122 By bank officers who visit your State for this purpose, but
each loan is subject to approval outside your State:
Net income CA, ID, MA, MN, MT(5) AL, AZ, AR, CT, GA, HI, IL, IA, KY, ME, NJ, NM, OR, RI(4).
MD, Ml, MO, NE, NY, NC, ND, OK, PA,
SC, SD, TN, UT, VA, WI, PR (26).
Gross Income. WV (1) IN, WA (2) (0).
Other measures' ID, MA (2) DC, FL, Ml, MS, TN, TX, WY (7) NV (1),
3.123 By a loan correspondent in your State but subject to approval
outside your State:
Net income MT (1) AL, AZ, AR, CA, CT, DC, GA, HI, IA, KY, ID, IL, MI, MN, NJ, NM, RI, SD, PR (9),
ME, MD, MA, MO, NE, NY, NC, ND, OK,
OR, PA, SC, TN, UT, VA, WI (26).
Gross income WV (1) IN (I) -- WA (1).
Other measures0 (0) DC, FL, MA, MS, TN, TX, WY (7) ID, Ml, NV (3).
3.124 Through the bank's own office In your State but subject to
approval outside your State:
Net income AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, MO, NY, PA, VA (8) NM, RI, WI (3),
MA, MI, MN, MI, NE, NJ, NC, ND, OR,
SC, SD, TN, UT, PR (24).
Gross income IN, WA (2) (0) (0).
Other measures3 ID, MA, MI, MS, TN, TX (6) DC, FL, WY (3) NV (1).
3. 125 Through an affiliate or subsidiary corporation office In your
State but subject to approval outsIde your State:
Net income AZ, AR, ME, MD, MA, MN, OR, SD (8) AL, CA, CT, DC, GA, HI, ID, IA, KY, MO, IL, MI, MI, NE, NM, ND, RI, PR (8).
NJ, NY, NC, PA, SC, TN, UT, VA, WI (19).
Gross income IN, WV (2) WA (I) - (0).
Other measures3 MA, MS, TX (3) DC, FL, ID, TN, WY (5)~ MI, NV (2).
3 126 Outside your State:
Net income (0) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, RI (2).
KY, ME, MD, MA, MI, MN, MO, MI, NE,
NJ, NY, NC, ND, OK, OR, PA, SC, SD, TN,
UT, VA, WI, PR (34).
Gross Income (0) IN, WA, WV (3) (0).
Other measures° (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9)~_ NV (1).
PAGENO="0207"
3. 130 The bank makes loans to customers in your State (residents
or businesses) secured by collateral in the form of intangible
personal property held at the bank's principal office. These
loans are negotiated-
3. 131 By bank officerswho make bindingcommitments during visits
to your State:
Net income AL, CA, ID, IL, ME, MA, MN, MO, MT, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, Ml, NM, ND, OR, RI, PR (6).
NJ, NC, SC (13). OK, PA, SD, TN, UT, VA, WI (17).
Gross income WV (1) WA (1) IN (1).
Other measures3 ID, MA (2) DC, FL, MS, TN, TX, WY (6) MI, NV (2).
3.132 By bank officers who visit your State for this purpose, but
each loan is subject to approval outside your State:
Net income CA, ID, MA, MO, MT (5) AL, AZ, AR, CT, DC, GA, HI, IL, IA, KY, MN, NJ, NM, OR, RI (5).
ME, MD, MI, NE, NY, NC, ND, OK, PA,
SC, SD, TN, UT, VA, WI, PR (26).
Gross income WV (1) IN, WA (2) (0).
Other measures3 ID, MA (2) DC, FL, MI, MS, TN, TX, WY (7) NV (1).
3.133 By a loan correspondent in your State but subject to approval
outside your State:
Netincome MO,MT(2) AL,AZ, CA, CT, DC, GA, HI, IA, KY, ME, AR,ID,IL,MI,MN,NJ,NM,RI,SD,PR(10).
MD, MA, NE, NY, NC, ND, OK, OR, PA,
SC, TN, UT, VA, WI (24).
Gross income WV (1) IN (1) WA (1).
Other measures 3 (0) DC, FL, MA, MS, TN, TX, WY (7) ID, MI, NV (3).
3. 134 Through the bank's own office in your State but subject to
approval outside your State: -
Netincome AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, NY, PA, VA (7) NM, RI, WI (3%
MA, Ml, MN, MO, MT, NE, NJ, NC, ND,
OR, SC, SD, TN, UT, PR (25).
Gross income IN, WA (2) (0) (0).
Other measures3 ID, MA, Ml, MS, TN, TX (6)_ DC, FL, WY (3) NV (1).
3. 135 Through an affiliate or subsidiary corporation office in your
State but subject to approval outside your State:
Net income AZ, AR, ME, MD, MA, MN, MO, OR, SD(9)~ AL,CA, CT, DC, GA, HI, ID, IA, KY, NJ, NY, IL, MI, MT, NE, NM, ND, RI, PR (8).
NC, PA, SC, TN, UT, VA, WI (18).
Gross income IN, WV (2) WA (1) (0).
Other measures3 MA, MS TX (3) DC, FL, ID, TN, WY (5) MI, NV (2).
3. 136 Outside your State
Net income MO (1) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, RI (2).
KY, ME, MD, MA, MI, MN, MT, NE, NJ,
NY, NC, ND, OK OR, PA, SC, SD, TN,
UT VA, WI, RPd3).
Gross income (0) IN, V/A, WV (3) (0).
Other measures° (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9) NV (1).
See footnotes at end of table, p. 191.
PAGENO="0208"
TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL~BANKS AFTER JAN. 1,~1972,
BY TYPE OF BANK OPERATION AND MEASURE OF TAX I_~Continued
Type of bank operation (with corresponding
questionnaire number) and measure of tax2 Would assert
.
jurisdiction Would not assert Jurisdic
.
tion 2 Uncertain
3.140 The bank makes unsecured loans to customers In your State
(residents or businesses). These loans are negotiated-
3.141 By bank officers who make binding commitments during
visits to your State:
Net income AL. CA, ID, IL, ME, MA, MN, MO, MI, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, MI, MN, ND. OR, RI, PR(6),
NJ, NC, SC(13). OK, PA, SD, TN, UT, VA, Wl(17).
Gross income WV(1) WA(1) IN(1),
Other measures3 ID, Ma(2) DC, FL, MS, TN, TX, WY(6) MI, NV(2).
3.142 By bank officers who visit your State for this purpose, but -
each loan is subject to approval outside your State:
Net income CA, ID, MA, MN, MO, MT(6) AL, AZ, AR, CT, DC, GA, HI, IL, A, KY. ME, NJ, NM, OR, RI(4)
MD, Ml, NE, NY, NC, ND, OK, PA, SC, SD,
TN, UT, VA, WI, PR(26).
Gross income WV(1) IN, WA(2) (0).
Other measures3 ID, MA(2) DC, FL, Ml, MS, TN, TX, WY(7) NV(1),
3.143 By a loan correspondent in your State but subject to approval
outside your State:
Net income MO, 7T(2) AL,AZ, AR, CA, CT, DC, GA, HI, IA, KY, ME, ID, IL, MN, NJ, NM RI, SD, PR(8)
MD, MA, NE, NY, NC, ND, OK, OR, PA,
SC, TN, UT VA, Wl(25).
Gross income WV(1) IN(1) WA(1),
Other measureo~ (0) DC, FL, MA, MS, TN, TX, WY(7) ID, MI, NV(3)
3.144 Through the bank's own office in your State but subject to
approval outside your State:
Net income AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, NY, PA, VA(7) NM, RI, Wt(3)..
MA, MI, MN, MO, MT, NE, NJ, NC, ND,
OR, SC, SD, TN, UT, PR(25).
Gross income IN, WA(2) (0) (0).
Other measures a ID, MI, MA, MS, TN, TX(6) DC, FL, WY(3) NV(1).
3.145 Through an affiliate or subsidiary corporation office in your
State but subject to approval outisde your State:
Net income AZ, ME, MD, MA, MN, OR, SD(7) AL, CA, CT, DC, GA, HI, ID, IA, KY, MO, AR, IL, MI, MT, NE, NM f~D RI PR(9)
NJ, NY, NC, PA, SC, TN, UT VA WI(19).
Gross income IN, WV(2) WA(1) (0).
Other measures3 MA, MS, TX(3) DC, FL, ID, TN, WY(S) Ml, NV(2).
3.146 Outside your State:
Net income NE(1) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, Rl(2).
KY, ME, MD, MA, MI, MN, MO, MT, NJ,
NY, NC, ND, OK, OR, PA, SC, SD, TN,
UT, VA, WI, PR(33),
Gross income (0) IN, WA, WV(3) (0).
Other measures 3 (0) DC, FL, ID, MI, MA, MS, TN, TX, WY(9) - NV(1),
PAGENO="0209"
3. 150 The bank participates in a syndicate to underwrite securities
of a municipal borrower in your State:
Net income MA, NE, SD(3) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IA, KY, IL, MN, NM, ND, Rl(5).
ME, MD, MI, MO, MT, NJ, NY, NC, OK,
OR, PA, SC, TN, UT, VA, WI, PR(28).
Gross income (0) WA(1) IN, WV(2).
Other measures3 MA(1) DC, FL, ID, MI, MS, TN, TX, WY(S) NV(1).
0
3. 160 The bank issues credit cards from an office outside your State
that may be used-
3. 161 Only in your State by residents of your State:
Net income ID, MO, PR(3) AL,AZ,AR,CA,CT,DC,GA,HI,lA,KY,MA, IL, ME, MD, NE, NJ, NM, RI, TN.(8)
MI, MN, MT, NY, NC, ND, OK, OR, PA,
SC, SD, UT, VA, Wl(25).
Gross income WV(1) IN(1) WA(1).
Other measures3 ID(1) DC, FL, MI, MA, MS, TX, WY(7) NV, TN(2).
3. 162 In your State and other States by residents of your State:
Net income MO, PR(2) AL,AZ,AR,CA,CT,DC,GA,HI,IA,KY,ME, ID, IL, MD, NE, NJ, NM, Rl(7)
MA, MI, MN, MT, NY, NC, ND, OK, OR,
PA, SC, SD, TN, UT, VA, Wl(27).
Gross income (0) IN(1) WA,WV(2).
Other measures3 (0) DC, FL, MI, MA, MS, TN, TX, WY(8) ID. NV(2).
3. 163 In your State by nonresidents:
Net income - AL, AZ, AR, CA, DC, ID, MO, PR(8) CT, ME, GA, HI, IA, KY, MA, MI, MN, MT, IL, MD, NE, NM, RI(5).
NJ, NY, NC, ND, OK, ME, OR, PA, SC,
SD, TN, UT, VA, WI(23).
Gross income (0) IN, WA(2) WV(1).
Other measures (0) DC, FL, ID, MA, MI, MS, TN, TX, WY(6) - (0).
3. 170 The bank issues credit cards through an office or an agent
bank or an associated bank in your State to residents of
your State which they may use:4
3.171 Only inyourState:
Net income AL,AZ,CA,CT,DC,GA,ME,MA,MN,MO, HI,IA,KY,NY,NC OK PA UT,VA WI(10) AR ID IL MD MI MT NM ND RI SD(lO).
NE, NJ, OR, SC, TN, PR(16).
Gross income (0) IN,WV(2) WA(1).
Other measures3 DC,MA,TN,TX(4) FL,MS,WY(3) ID,MI,NV(3).
3.172 In your State and other States:
Net income AL, AZ, CA, CT, DC, GA, ME, MA, MN, MO HI, IA, KY, NY, NC,OK, PA, UT, VA, WI(10) AR, ID, IL, MD, MI, MT, NM ND, RI RI,SD
NE, NJ, OR,SC, TN, PR(16). (10).
Gross income (0) IN,WV(0) WA(1).
Other measures3 DC, MA,TN(3) FL, MS WY(3) ID, MI, NV(3). ___________
See footnotes at end of table, p. 191.
PAGENO="0210"
TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFTER JAN. 1, 1912,
BY TYPE OF BANK OPERATION AND MEASURE OF TAX 1_Continued
Type of bank operation (with corresponding
questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdiction 2 Uncertain
3.180
3.181
3.182
3.183
The bank deals in securities in your State:3
Through its own office in your State:
Net income AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, ME, IA, KY, NY, PA, VA(5) NM, RI(2).
MA, Ml, MN, MO, MI, NE NJ, NC, ND,
OR, SC,SD, TN, UT,W1 P11(27),
Gross income IN, WA(2) (0) (0).
Other measures3 DC, ID, MD, MA, MI, MS,TN(7) FL,TX,WY(3) NV(1),
Through officials who visit your State for such transactions:
Net income CA, CT, DC, MA, MN, MO, MT, NE, NC, PR AL,AZ,GA,HI, IL,IA, KY,ME MD, NY, OK, AR, MI, NJ, NM, ND Rl(6).
(10). OR PA, SC, SD, TN, UT, vA, Wl(19).
Gross income WV(1) -- -- IN, VIA(2) (0).
Other measures3 DC, MA(2) FL, ID, MS, TN, TX, WY(6) MI, NV(2).
Through its office outside your State:
Net income DC, MN, MO, PR(4) AL, AZ, AR, CA, CT, GA, HI, ID, IL, IA, KY, NM, Rl(2),
ME, MD, MA, Ml, MI, NE, NJ NY, NC
ND, OK,OR, PA,SC, SD, TN, UI, VA,WI
(30)
Gross income (0) IN,WA(2) WV(1),
Other measures2 DC(1) FL, ID, MA, MI, MS,TN,TX,WY(8) NV(1).
.
.
3.190
The bank conducts trust business-
3.191
.
3.192
For beneficiaries resident in your State:
Net income AL, MO, MI, SC (4) AZ, AR, CA, CT, DC, GA, HI, IA, KY, ME, ID, NE, NJ, NM, ND, RI, PR (7).
MD, MA, MI, MN, NY NC, OK OR PA,
SD TN, UT, VA, WI (~5).
Gross income IN(1) WAd) WV(1).
Othermeasures3 (0) DC, FL,MA, Ml, MS,TN,TX,WY(8) ID, NV(2).
Involving admiiistration of rea I or tangible personal property
in your State:
Net income AL, CT, ID, IL, MN, MO, MI, NE, ND, AZ, AR, CA, DC, GA, HI, IA, KY, MD MA, ME, MI, NJ, NM, RI. (5).
PR (10). NY, NC, OK, OR, PA, SC, SD, TN, U'F, VA
WI, PR(22).
Gross income. IN(1) WA(1) WV(1).
Other measures 3 10(1) DC, FL, MA, MS, TN, TX, WY (7) Ml, NV. (2).
*
3.210 The bank solicits deposits-
3.211 By advertking in media published and distributed In your
State:
Net income (0) AL, AZ AR, CA, CT, DC, GA, HI, ID, IL, IA, NE, NM, RI (3)
KY, f~1E, MD, MA, MI, MN, MO, MT, NJ
NY, NC, ND, OK, OR, PA, SC, SD, TN,
UT, VA, WI, PR(33).
PAGENO="0211"
Gross income (0) IN, WA (2) WV(1).
Other measures3 (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9).. NV (1).
3. 212 Through bank officials who visit your State for this purpose:
~ - AL, AZ, AR, CT, DC, GA, HI, ID, IL, IS, MI,NM,ND,RI(4).
KY, ME, MD, MO, MT, NJ, NY, NC, OK,
OR, PA, SC, SD, TN, UT, VA, WI, PR.(28)
Gross income ~(O) IN, WA(2) WV(1).
Other measures 3 MA (1) DC, FL, ID, MS, TN, TX, WY (7) MI, NV (2).
3. 213 Through a representative stationed in your State:
Net income AZ, AR, CA, CT, MA, Ml, MN, MO, NE, NJ, AL, DC, GA, HI, ID, IA, KY, ME, MD, MT, IL, NM, ND, RI, TN (5).
OR, SC (12). NY, NC,OK, PA,SD, UT, VA, WI, PR(19).
Gross income (0) WA(1) IN,WV(2).
Other measures 3 MA, MI(2) DC, FL, ID, MS, TX, WY (6) NV, TN (2).
3.220 The bank owns equipment which it leases to others for use in
your State:
Net income AL `AZ, AR, CA, CT, GA, HI, IL, ME, MD, MA, DC, IA, KY, MI, NY, PA, SC, VA (8) NM, ND, RI (3).
MI, MN MO, NE, NJ, NC, OR, SD, TN,
UT,WI PR(23).
Gross income WA, WV~2) IN (1) (0).
Othermeasures° DC,ID MD,MA,MI,MS,NV,OK,TN,WA, FL,TX(2) CO,MD(2).
WY ~11).
3. 230 The bank sells accounting or data processing services to a
business in your State:
3. 231' From its office outside your State:
Net income DC, MO, SD(3) AL, AZ, AR~CA, CT,GA, HI,IL,IA, KY, ME, MI, NE, NM, RI, PR(S).
MA, MN, MI, NJ, NY, NC, ND, OK, OR
PA, SC, TN, UT, VA, WI (26).
Gross income (0) IN,WA(2) WV(1).
Other measures6 DC, MD, SD (3) FL, ID, MA, MS, TN, TX~ WY (7) MI, NV(2).
3. 232 Through its own office in your State:
Net income AL, AZ, AR, CA, CT, HIlL, ME, MA, Ml, MN, GA, IA, KY, NY, PA, VA (6) RI (1).
MO, MI, NE, NJ, NM, NC, ND, OR, SC,
SD,TN UT,Wl, PR(25).
Gross income IN,WA,*V(3) (0) (0).
Other measures6 DC, ID, MD, MA, MI, SD, TN, TX (8) FL, MS, WY (3) NV (1).
3. 233 Through an affiliate or subsidiary corporation office in your
State:
Netincome AZ,ME,MA,MN,MO,NE,OR,SD(8) AL,AR,CA,CT GAHI, IA, KY, NJ, NY, IL,MI,MT,NM,ND,RI,PR(7).
NC, PA, SC, Tk, UT, VA, WI (17).
Gross income IN,WV(2) WA(1) (0)
Other measures6 DC, MA, SD, TX (4) FL, ID, MS, TN, WY(S) MI, NV (2).
1 Forty-four States or areas are included in table B-5, and some are tabulated for more than Ohio has capital stock taxes (dealers-in-intangibles tax and franchise tax); did not respond on grounds
one measure of tax for a given type of operation. that the types of problems listed have not arisen.
2 Measure of tax in some cases was not clear from the questionnaire responses, especially when 4 Answers for Georgia are only if there is an office in the State; for DC, only if not subject to gross
the response was that the State would not assert jurisdiction; New Jersey response assumes passage earnings tax.
of an income tax. Answers for DC are only if not subject to gross earnings tax.
3 Other measures of tax are capital stock value (FL, MA, MS, TN), value of assets (ID, TX), intan- 0 Answers are for sales and use taxes in DC, ID, MD, SD, and, for 3.220, in NV, OK, WA, and WY.
gibles (FL GA MI TN) fees or tangible personal property (DC MD), and unspecified (NV WY) -
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
PAGENO="0212"
TABLE 8-6.-STATUS OF STATE TAXATION OF OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS AS OF NOV. 15, 1970
3.418 Factors
3.419 Leasing companies
3.421, 3.422 Life, fire and
casualty insurance compa-
nies.2
IN and WA (2) MA, MT, NJ OH
TN,and ~V(65.
IN and WA (2) MA, MT, OH, TN,
and WV (5).
IN,TN,andWA(3). MA,MT NC OH,
and ~V(5~.
IN, WA, and WV
(3).
IN, NM, WA, and
WV (4).
IN, MS, NM, WA,
and WV (5).
MA, OH, and TN
(3).
FL, MI, MS. NJ,
OH, PA, SC, and
TN(8).
ID and MT(2)... IN, MO, and
NC (3).
ID,IA,and MT IN and MO(2).~.
(3).
ID, IA, MO
and MT ~4).
ID, IA, KY, and
MT (4).
ID, IA, KY,
MA, MT, OK,
and TX (7).
ID, IA, KY,
MA, MT. OK,
and TX (7).
ID, IA, KY,
MA, MT,
and OK(6).
ID, IA, KY, MA,
MT, OK, and
TX(7).
ID, KY, MA,
MI, OK, and
TX (6).
ID and MT (2).. FL, MO, and
NC(3).
FL, ID, MD MN, MS, NE. TX,
and WY~8).
FL, ID, MD, MN, MS, NE, TX,
and WY (8).
DC FL, ID, ND, MN, MS, NE,
1'X, VA, and WY(10).
FL, ID, MD, MN, NE, TX, VA,
and WY (8).
DC, FL, ID, KS, MD, MN,
MS, NE, NC, TX, and WY (11).
DC, FL, ID, KS, MD, MN, MS~
NE, NC, TX, and WY(11).
DC, FL, HI, ID, KS, MD, MN,
MS. NE, NC, TX, VA; and
WY (13).
DC, FL, HI, ID, MD, MN, NE,
NC, TX, and WY (10).
DC, FL, HI, ID, KS, MD, MN,
NE, NC, OH,TX, WA, and
WY (13).
FL, KS, MS. NE, TX, and
WY(6).
Kind of business
(with corresponding
questionnaire number) Net Income or receipts 1
Measure of tax
Gross income
or premiums3
Capital stock3
-
Value of assets
used in State Intangibles4 Others
3.411 State banks (commerclal) AL, AZ, AR, CA, CT, HI, ID, IL, ME, MD, MA MN, MO,
NE, NM, NY, NC, ND, OR, SC, SD, TN, ut, WI, and
PR (25).
3.412 Mutual savings banks._ - AL, A~, AR, CA, CT, HI, ID, IL, IA, ME, MD MA, MN
MO, NE, NM, NY, NC, OR, SC, SD, TN, ui, WI, anc~
PR (25).
3.413 Savings and loan associa- AL, AZ, AR, CA, CT, HI, ID, IL, ME, MD, MA, MN, MO,
tions. MT, NE, MN, NY, NC, ND, OK, OR, SC, SD, UT, and
WI (25).
3.414 Credit unions AL, AZ, CA, IL, KY, MD, MA, MN, MO, MT, NM, OK,
OR,SD,TN and WI (16).
3.415 Sales finance companies AL, AZ, AR, óA, CT, DC, GA, HI, ID, IL, IN, IA, KS,
KY, ME, MD, MA, MI, MN, MS, MO, MT, NE NM,
NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, UI2, VA,
WI,and PR(38).
3.416 Smallloan companies. AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KS,
KY, ME, MD, MA, MI, MN, MS, MO, MT, NE NM,
NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, uY, VA,
WI,and PR(38).
3.417 Commercial finance AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KS,
companies. KY, ME, MD, MA, MI, MN, MS. MO, MT NE, NM,
NY, NC, ND, OK, OR, PA, RI, SC, SD, T1~I, UT, VA,
WI,and PR(38).
AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KY,
ME, MD, MA, MI, MN, MS, MO, MI, NE, NY, NC, ND.
OK, OR, PA, RI,SC, SD, TN, UT, and PR (34).
AL, AZ, AR, CA, CT, DC, GA, HI, IL, IN, IA, KS, KY,
ME, MA, MI, MN, MS, MO, MT. NE, NJ, NY, NC, ND,
OK, OR, PA, RI, SC, SD, TN, UT, WI, and PR (36).
IL, MN, MS. NE, SD, and PR (6)
IN and WV (2)
IN, WA, and WV
(3).
IN, MI, MO,
and NC (4).
IN, MO, and
NC(3).
FL, MI, MO,
and NC(4).
FL, MI, MO,
and NC (4).
FL, MI, MO,
and NC (4).
FL, MI, and
NC(3).
FL, Ml, and
NC(3).
FL MI, MS. NJ,
oH, PA, SC, and
TN(8).
IN WA,andWV FL,MI,MS,NJ,
OH, PA, SC, and
TN (8).
FL, MI, MS, NJ, OH,
PA, SC, and TN
(8).
FL, MI, MS, NJ, OH,
PA, SC, and TN
(8).
AL, CA, CT, FL, GA, MS (1)
HI, ID, IN, IA, KS,
KY, ME, MA, MI,
MO, MT, NJ, NM,
NY, NC, ND, OH,
OK, OR, PA, RI,
SC, TN, TX, UT,
VA, WA, WV, and
WI (34).
3.423 Mortgage companies~ AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, IN, WA, and WV FL, MA, MI, MS, ID, IA, KY, MT, FL, MI, MO,
ME, MD, MA, MI, MN, MS. MO, MT, NE, NJ, NM, (3). NJ, OH, PA, SC, OK, and TX and NC (4).
NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, UT, VA, and TN (9). (6).
WI and PR (38),
DC FL, ID, MD, MN, NE, NC,
I2X, and WY (9).
PAGENO="0213"
3.424 Security brokers and AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, ME, IN, MA, NM, WA, FL, MA, MI, MS ID, KY, MY, FL, MI, and DC, FL, HI, ID, MD, MN, NE,
dealers. MA, MI, MN, MD, MT, NE, NJ, NY, NC, ND, OK, and WV (5). NJ, DH, PA, SC, and OK (4). NC (3). NC, TX, VA, and WY (11).
DR, PA, RISC, SD, TN, UT, WA, WI, and PR (36). and TN (9).
3.425 Investment companies.. AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, ME, IN, MA, WA, sod FL, MA, MI, MS, ID, KY, MT, FL, MI, MD, DC, FL, HI, MD, MN, NE,
MI, MN, MS, MD, MI, NE, NJ, NM, NY, NC, ND, OK, WV (4). NJ, DH, PA, SC, OK, and TX and NC (4). NC, TX, and WY (10).
OR, PA, RI, SC, SD, TN, UT, VA, sod WI (35). and TN (9). (5).
3.426 Small business invest- AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KY, MA, IN, MA, WA, and FL, MA, MI, MS ID, MY, MT, FL, MI, and DC, FL, HI, ID, MD, MN, NE,
ment companies. MI, MN, MS, MD, MT, NE, NJ, NM, NY, NC, ND, DK, WV(4). NJ, DH, PA, SC, DK, and TX NC (3). NC, TX, VA, and WY (11).
OR, PA, RI, SC, SD, TN, Ui, VA, WI, and PR (35). and TN (9). (5).
1 The New York tax in the largest of a tax on net income, a tax on capital stock, or a minimum tax.
In the case of insurance companies, premiums taxes are listed under gross income taxes escept
that premiums taxes in Minnesota and Nebraska were reported as net income taxes; for North
Carolina fire and casualty companies (3.422), the tax is the larger of gross premiums or net income
taxes.
The Tennessee tax is a franchise tax based either on capital stock or on tangible personal property.
4 Indiana has a bank deposits tax; the other States listed have intangibles taxes.
a Sales and use taxes were reported by Hawaii, Idaho, Maryland, Minnesota, Nebraska, Texas, and,
for leasing companies, Washington. Property or ad valorem taxes were reported by District of Colum-
bia, Florida, Kansas (except fur finance and loan companies), Mississippi (for banks and savings and
loans), Ohio and Wynming;.Muntana taxes, reported as assets taxes, are also en tangible property.
The ether taxes are all privilege, license, or franchise taxes.
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
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TABLE 3-7.-BASIS OF JUR1SDICTIO~1 FOR TAXATION OF OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS NOVEMBER 15; 1970
No. of
Measure of tax and kind of business I Levying taxa
States'
Basis of jurisdiction
Citing basis tn-State offl *
ce prope
Business activity, or doing business" in
rty or personnel State
Intangibles located in.
or income from sources
in State
Net or gross income taxes:
3.411 state banks 27 19 AL, AZ, CA, ID, IN, IL, ME, MD, MN, NM, IL, ME, NJ, NY ND OR and SC (7) AZ MO and NC (3).
NC, WA, and WI (13).
3.412 mutual savings banks 27 17 AL, AZ, ID, IN, IL ME MD MN NM WA CA IL ME NY ND OR and SC (7) AZ and MO (2).
and WI (11). -
3.413 savings and loan associations 28 20 AL, AZ, ID IN, IL, ME MD MN NM NC CA IL ME MT NY ND OK OR and SC(9) AZ and MO (2).
WA, and WI (12).
3.414 credit unions 18 16 AL, AZ, IL KY IN MD MN NM WV and CA IL MT ND OK and OR(6) AZ and MO (2)
WI (10). `````` `````
3.415, 3.416, 3.417 loan and finance companies...._ 40 28 AL, AZ, DC, GA ID IL IN KY, ME, MD, CA, GA, IL IA, ME, MT NJ NY NC ND AZ DC MO and NC (4).
MI, MN, NM, NY, NC, VA, WA, WV, and OK, OR, and SC (13).
WI (19).
3.418 factors 37 26 AL, AZ, DC, GA, ID, IL, IN, KY, ME, MD, CA, GA, HI, IL, ME, MI, NJ, NY NC ND AZ DC MO and NC(4).
Ml, MN, NM, NY, NC, WA, and WI (17). OK, OR, and SC (13).
3.419 leasing companies 39 25 AL, AZ, DC, GA, ID, IL, IN, KY, ME, Ml, CA, GA, HI, IL, ME, MI, NJ, NC, ND, OK, AZ, DC MO, and NC (4)
MN, NM, NC, WA, WV, and WI (16). OR, and SC (12).
3.421, 3.422 insurance companies 41 23 IL, GA, MI, MN, NM, WA, and WV (7) CA, FL, GA, HI, IL, IN, NC, ND, OH, OK, CT, FL, MO, NJ, NY, VA,
SC, and TX (12). and WI (7).
3.423to3.426mortgageandlnvestmentcompanies, 41 28,,,,,,.,,...,_ AL, AZ, DC, GA, ID, IL, KY, ME, MD,~ MI, CA, GA, HI, IL, IN, ME,' MI, NJ, NY, NC, AZ, DC, MO, and NC (4).
securities dealers. MN, NM, NY, NC, VA, WA, WV, and ND, OK, OR, and SC (14).
Capital stock taxes: WI (18).
3.411 to 3.413 banks and savings and loans 7 3 NC, WV, and OH (3) (0) (0).
3.414 credit unions 3 1 OH (1) (0) - (0).
All other except Insurance companies 8 3 FL,' OH, and Mi (3) SC (1) FL' (1).
Tax on value of assets used in State:
3.411 to 3.413 banks and savings and loans 3 2 ID and MI 6(2) (0) (0).
3.414 credit unions 3 2 ID and KY (2) (0) (0).
All other except insurance companies 6 4 lD,~ TX, and KY (3) TX `and OK' (2) (0).
Intangibles taxes:
3.411 to 3.413 banks and savings and loans 4 4 Ml `and NC 10(2) IN and MO (2) (0).
3.414 credit unions 3 3 NC (1) IN and MO (2) (0).
All other except insurance companies 4 3 Ml and NC (2) MO" (1) (0).
3.421, 3.422 insurance companies 3 3 NC (1) FL and MO (2). FL and NC (2).
License and franchise taxes:
3.411 to 3.414 banks, savings and loans, credIt 3 1 VA (1) (0) (0).
3415 to 3417 loan and finance companies 4 3 KS, NC, and VA (3) NC (1) NC (1).
3.418 factors 3 2 MC (1) NC and TX (2) MC (1),
3.419 leasing companies 3 2 KS and NC (2) NC (1) NC (1),
3.421, 3.422 insurance companies 2 (0) (0) (0).
3,423 to 3.426 mortgage and investment companies, 3 3 . NC and VA~2(2) NC and TX"(2) NC (1).
securities brokers,
PAGENO="0215"
1 Numbers refer to questionnaire items.
2 Some States are tabulated in more than I column; 34 States are included in the table.
States levying taxes on out-of-State financial institutions are listed in table B-6.
4 Refers to mortgage companies only.
a Excludes securities brokers and small businesses investment companies.
Refers to savings and loans companies only.
7 Refers to insurance companies as well.
8 Excludes leasing companies.
Sales and use taxes:
3.411 to 3.414 banks, savings and loans, credit 5 2 ID and TX (2) ID and TX (2) (0),
unions.
3.415 to 3.417 loan and finance companies 6 3 DC, ID, and TX (3) ID and TX (2) (0).
3.418 factors 7 3 DC and ID (2) HI and ID (2) (0).
All other except insurance companies 7 4 DC, ID, and TX (3) Hl,'4 ID, and TX (3) (0).
Excludes securities brokers.
10 Excludes mutual savings banks.
U Excludes factors and leasing companies.
12 Excludes mortgage companies and small business investment companies.
13 Refers to securities brokers only.
14 Excludes mortgage companies.
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
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TABLE B-8.---STATE PRACTICE REGARDING INTERSTATE DIVISION OF THE TAX BASE IN TAXING OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS
Interstate division of tax base permitted or required, for taxed businesses
Measure of tax In all cases 1 In some cases but not in others 1 In no cases No answer
Net income, or that plus other tax meas- AZ, CT, DC, HI, ID, IL, MD, MN, MT, AL, CA, GA, IA, KY, ME, MA, NY,2 NC, MS and MO (2)
ures. NE, NM, ND, OK, OR, RI, SC, SD, PA, TN, UT and VA (13).
WI and PR (19).
Other tax measures IN, NJ, OH and WA (4) MI and TX (2) FL, KS, WV and WY (4)
Total (23). (15). (6). AK, AR, CO, DE, LA, NV, NH, VT and,
VI(9).
1 Some respondents specified that their answers were only for incorporated enterprises. 2Allocation permitted where a corporation has a regular place of business outside the State.
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
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TABLE B-9.-METHOD OF INTERSTATE DIVISION OF THE TAX BASE, BY KIND OF BUSINESS AND MEASURE OF TAX'
Method of interstate tax
Kind of business (with corresponding
questionnaire number) Separate accounting Apportionment by formula Sped
base
division
fic allocations Formula plus specific allocation
3,411-State banks (commercial). AL, AZ, HI, ID,2 IN,3 NY,~ NC,2SC (8)_~. AR, CT, ID, ME, MD, MA,4 MN, NJ,2 ID' (1) CA,7 IL, NE,' NM, OH,~ OR, SD,' UT,
TN 4 (9). WA,~ WI, PR (11).
3.412-Mutual savings banks. AL, AZ, HI, ID,2 IN,' NY4(6) AR, CT, ID, IA, ME, MD, MA,~ MN, ID `(1) CA,' IL, NE,8 NM, OH,2 OR, SD,8 UT.
TN 4 (9). WA,3 WI, PR (11).
3.413-Savings and loan associations_~_ AL, AZ, HI, 1D2, IN°, NY,~ NC,~ AR, CT,D C, ID, ME, MD, MA,e MI,2 ID `(1) CA,' IL, MT, NE,8 NM, ND, OH,2 OR,
OK (8). MN, TN~ (10). SD,8 UT, WA,3 WI (12).
3.414-Credit unions AL, AZ, ID,2 IN,3 NC,e OK 8(6) CT, MD, MA,~ MN, TD4(5) ID `(1) CA,' IL, KY,~ MT, NM, OH,2 OR, SD,8
ID'(l) CA7IL~KY4MT NE'NM NC4ND,
- - OH,2 OR, SC,~ SD,' UT, VA, WA,3 WI,
PR (17).
ID'(l) CA'IL KY4MT NE'NM NC4ND
OH,2 OR, SC,4SD,"UT, VA, WA,a
WI, PR(17).
ID'(l) CA'IL KY4MT NE8NM NC~ND
-- - OH,2 OR, SC,4SD,~ UT, VA, WA,~
WI, PR (17).
ID'(l) CA'IL KY4MT NE$NC4ND OH°
OR,SD,' UT, WA 3(12).
IDs(1) CA' IL KY~ MT NE8 NC~ ND
OH,2 OR, SC,4SD,8 UT, WA,~
WI, PR (15).
CT, ID,' KY,' NY, ND, PA (6) -- IL, NE,' SD,' WA,~ PR (5).
ID `(1) CA,' IL, KY,~ MT, NE,' NM, NC,~
ND, OH,~ OR, SC,~ SD,8 UT, VA,
WA,3 WI, PR (17).
ID `(1) CA,' IL, KY,~ MT, NE,8 NC,~ ND, OH,~
OR, SC, 4 SD,' UT, VA, WA,~ WI,
PR (16).
ID `(1) CA,' IL, KY,4 MT, NE,' NM, NC,~
ND, OH,2 OR, SC,4SD,' UT, VA,
WA,3 WI (16).
ID 5(1) CA,' IL, KY,4 MT, NE,' NM, NC,~ ND,
OH,2 OR, SC,~ SD,' UT, VA, WA,2
WI (17).
3.415-Sales finance companies AL,AZ, HI, lD,~ IN,~ NC,2 OKO(7) AR, CT, DC,ID, IN, IA, ME, MD, MA,~
MI,4 MN, NJ,~ NY,4 OK,4 PA,~
RI, TN,4TX2(18).
3.416-Small loan companies AL, AZ, HI, ID,~ IN,~ NC,2 OK 0(7) AR, CT, DC, ID, IN, IA, ME, MD,
MA4MI4MN NJ'NY4OK~PA~
RI, `TN,4 TX 2(18).
3.417-Commercial finance companies~. AL, AZ, HI, ID,~ IN,' NC,~ OK 0(7) AR, CT, DC, ID, IN, IA, ME, MD, MA,4
MI,~ MN, NJ,~ NY,~ OK,4 PA,~ RI,
TN,~ TX 3(18).
3.418-Factors AL,AZ, HI,' lD,'IN,~ NC,2OK,°(7) AR, CT, DC,HI, ID, IN, IA, ME, MD,
MA,4M1,4MN, NJ,2NY,4OK,~PA,~
RI, TN 4(18).
3.419-Leasing companies AZ, HI,' ID,2 IN,3 NC,~ OK 6(6) AL, AR, CT, DC, HI, ID, IN, IA, ME,
MA4MI4MN NJ4NY4OK4
PA,~ RI, TN, 4 TX,2 (19).
3.421, 3.422-Life, fire and causalty in- HI,3 ID,2 IN,3 NC,~ UT,3 Wl3 (6) Ml,~ MN, TN~ (3)
surance companies.
3.423-Mortgage companies AZ, HI, ID,2 IN,3 NC,~ OK6 (6). AL, AR, DC, ID, IA, ME, MD, MA ~,
M14 MN NY~ OK~ PA~ RI,TN~
TX2 (16).
3.424-Security brokers and dealers AZ, HI,' ID,2 lN,3 NC,2 OK6 (6). AL, AR, DC, HI, ID, IA, MA,~ Ml,~
MN, NY,~ OK, PA,~ RI, TN (14).
3.425-Investment companies AZ, HI,' lD,2 lN,3 NC,2OKe(6) AL, AR, DC, HI, ID, IA, ME, MI,~ MN,
NY,4 OK,~ PA,~ RI, TN,d TX' (15).
3.426-Small business investment com- AZ, HI,' ID,~ IN,2 NC,2 OKO (6) AL, AR, DC, HI, ID, IA, MA,4 MI,~ MN,
panies NY,4 OK,4 PA,~ RI, TN,4 TX2 (15).
Measure of tax for which interstate tax base division reported is solely net income unless other-
wise footnoted.
Nonincome measure of tax is used: Capital stock (NJ, OH), value of assets used in state (ID, MI,
TX) or value of intangible personal property (NC, MI).
2 Measure of tax is gross income or receipts (IN, WA), or premiums in cases of insurance companies.
4 State employs both (or alternatively) net income measure and the following: Capitalstock (NY,
MA, MI, NJ. PA, SC), value of assets (KY, OK), value of intangible property (MI), or franchise or
other (NY, TN, NC).
o Refers to sales and use taxes.
Separate accounting is used when income is not considered part of unitary business income;
otherwise, apportionment by formula is used.
Specific allocation is used for nonbusiness income; apportionment by formula, for business
income.
S Separate accounting, apportionment by formula, and specific allocation are all used.
Note: For key to 2.Ietter abbreviations of State names, see above, p. 181.
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198
TABLE B-1O.---STATE POSITIONS ON CONSOLIDATION OR COMBINATION OF AFFILIATED CORPORATIONS IN
DETERMINING THE TAX BASE
Reported position
(and number of States) State
Required (5)' AR, CA, KY, NE, and OR.
Not required:
Mayberequiredincertaincases(16) AZ, GA, HI, ID, IA, MA, MN, MT, NC, ND, OK, SC,SD, UT, VA, and Pi.
May be permitted in certain cases (4) FL,2 ME, NY, and OH.2
Not permitted (5) CT, DC, MD, MS and NJ.
Reported simply as notrequired (16)_ AL, DE, IL, IN, KS, MI, MO, NM, PA, RI, TN, TX, WA, WV, WI, and WY.
*No~answer (6) AK, CO, LA, NY, NH, and VT.
Does not appI~ to insurance companies, except in Nebraska.
2 Refers to nonincome taxes.
Note: For key to 2-letter abbreviations of State names, see above, p. 181.
PAGENO="0219"
APPENDIX 5
Responses of State Bank Supervisors to the Board's Inquiry
Concerning State Taxation of Banks
SALLY M. HEY
Economist, Government Finance Section, Division of Research and Statistics,
Board of Governors of the Federal Reserve System
I. INTRODUCTION
In November 1970, the Board of Governors of the Federal Reserve
System sent a letter to the supervisors of State banks in each of the
fifty States and in Puerto Rico and the Virgin Islands. The super-
visors were asked to reply by letter to four questions concerning State
and local taxation of commercial banks. The answers received are
summarized in this appendix.1
Because Public Law 91-156 specified that the Board, in conducting
its study, should consult with State banking authorities, copies of this
law, the earlier section 5219 of the Revised Statutes, and the detailed
questionnaire which had been addressed to State taxing authorities also
were sent to the bank supervisors in order to inform them about the new
law and the study. Responses to the questionnaires were not expected.
For several States, however, completed or partially completed ques-
tionnaires were returned in addition to the letters requested.2 These
and other supplementary materials transmitted by some of the re-
spondents have proven very helpful in the Board's study.
The letters and materials which were received are not reproduced
here, since many of the individual responses are so similar that full
quotation would be repetitious. Where elaborated or unusual u.nswers
were received, however, they are quoted in parts II and III of this
appendix or summarized in tables in part IV.
Respondents for the most part limited their concern to the position
of State-chartered banks vis-a-vis national banks and supported the
"permanent amendment" of section 5219. The responses, or the gist of
them, are presented below, question by question, and some general
comments and conclusions appear in part V.
II. QUESTIONS 1 AND 2
(1) Do you regard the "permanent amendment" of section 5219 (in sec. 2 of P1,.
91-156) as improving the competitive position of State banks relative to national banks?
If so, please explain.
1 AnsWers ~vere eventually receive(l from all supervisors except in the Virgin Islands. The assistance of
Mr. Alexander \V. Neale, Jr., Legislative Representative of the National Association of Supervisors of
State Banks (now the Conference of State llaiik Supervisors) ifl ex~~eclitirig replies is appreciated.
2 Responses to the tax administrators questionnaires Were received from bankinç' 5111)ervisOrs in Minne-
sota, Missouri, New II smI)Shire, New Mexico, Pennsylvania; additional materials Were received from super-
visors in Arkansas, Maryland, Massachusetts, New York, North carolina, Oregon, \Vashington, and Puerto
Rico.
(199)
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200
(2) When the present limits in section 5219 are terminated January 1, 1972, will
there be a need for other Federal legislation that would restrict States in their taxation
of commercial banks or financial institutions generally? If so, what type of action or
provision do you think is needed?
Questions 1 and 2 concern the desirability of having the second sec-
tion of P.L. 91-156 go into effect on January 1, 1972, in its present
form. This section is as follows:
SEC. 2. Permanent amendment of section 5219, Revised Statutes.
(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read:
"SEC. 5219. For the purposes of any tax law enacted under authority of the United
States or any State, a national bank shall be treated as a bank organized and existing
under the laws of the State or other jurisdiction within which its principal office is
located."
(b) The amendment made by subsection (a) becomes effective on January 1, 1972.
The first section of P.L. 91-156, to be in effect from approval of the
law on December 24, 1969, until January 1, 1972, is referred to as the
"temporary amendment." Briefly, this section of the law allows the
States and their pOlitical subdivisions to extend to national banks
domiciled within the State any tax except a tax on intangible property
as long as it is imposed generally on a nondiscriminatory basis and is
the same on State-chartered banks. Regarding taxation of national
banks domiciled in other States, the States and localities are em-
powered under the temporary amendment to impose sales and use
taxes, real property taxes, transfer and documentary taxes, tangible
personal property taxes, and fees or taxes on the ownership, use or
transfer of real property.
Overwhelmingly, the response of the banking supervisors was that
the permanent amendment will indeed improve the competitive
position of State-chartered relative to national-chartered banks, that
such equalization is entirely warranted because of the identical
functions of State and national banks, and that there is no need or
justification for any Federal statutory restrictions on State authority
to tax banks and other financial institutions other than the require-
ment that State and national banks domiciled in the same State be
treated equally.
In the following 44 States or areas the State bank supervisors
supported the "permanent amendment" as it stands.
Alabama Louisiana* Ohio
Alaska Maine3 Oklahoma
Arizona Maryland Pennsylvania'
Arkansas' Massachusetts Rhode Island
California3 Michigan3 South Carolina
Colorado Minnesota South Dakota
Connecticut Mississippi Tennessee
Delaware Montana3 Utah
Hawaii Nebraska3 Vermont
Idaho Nevada Virginia
Illinois 3 New hampshire Washington
Indiana New Jersey Wisconsin
Iowa' New Mexico Wyoming3
Kansas 8 New York Puerto Rico
Kentucky North Dakota
The reasons given for supporting the amendment varied, however.
For 20 of the States not quoted in the following discussion, the
respondents answered simply "yes" to question 1 and "no" to question
~All or part of the answers to questions 1 and 2 are quoted in the discussion below.
PAGENO="0221"
201
2, or else they did not amplify their answers appreciably beyond the
general opifliofls stated above.4
In five of the 44 States (California, Iowa, Michigan, Nebraska and
New York) the respondents expanded their affirmative answers to
question 1 by explaining that tax equality between State and national
banks would require the permanent rather than just the temporary
amendment of section 5219, because of the interstate aspects of banking
activity and taxation. These answers, or excerpts from them, follow:
California: 1. . . . When State and national banks domiciled in California
transact business in other States, they are, depending upon the State involved,
sometimes sub~ect to differences in taxation, and where such differences exist,
they usually favor national banks over State banks. The "permanent amendment"
of Revised Statutes Section 5219 will pave the way for elimination of such differ-
ences, and for this reason we believe that the "permanent amendment" will
improve the competitive position of State banks relative to national banks.
Iowa: (1). . . . It is my opinion that in the future we will see a continuing
growth in the amount of business conducted by banks across State lines and we
must have tax equalization in order to continue the dual banking system.
Michigan: (1) .. . The permanent amendment will improve further the compu
tive position of State banks by removing the tax immunity which national banks
have but State banks do not have when they do business across State lines. This
advantage will become more important in the future as more banks become in-
volved in interstate business. The permanent amendment therefore is necessary
to achieve full competitive equality.
Nebraska: (1) .. . Yes, we feel that the final enactment of section 2 of the Act in
its present form is necessary to equalize the competitive position of State banks
relative to national banks. Particularly is this true with respect to removing the
tax immunity which national banks have, but State banks do not have when they
do business across State lines. Such preferential treatment if continued could well
become a compelling factor in whether a State bank might convert to a national
charter.
New York: The "permanent amendment" to section 5219 of the Revised Sta-
tutes, which becomes effective January 1, 1972, will establish competitive equality
between the national and State banks insofar as interstate taxation is concerned.
The presently effective "temporary amendment" to section 5219, while a sub-
stantial improvement over prior law, does not achieve equality. The temporary
amendment, among other things, permits a State to levy certain specified taxes on
national banks whose principal office is outside the taxing State if those taxes are
imposed generally throughout the State on a nondiscriminatory basis. National
banks, unlike their State-chartered counterp~rts, remain immune from all taxes
other than those few specified. . . . The "permanent amendment", by treating
national and State banks exactly the same for interstate taxing purposes, would
rectify this situation. This is especially important in view of the likelihood that
banks will, in the future, conduct an increasing amount of their business across
State lines.
Many respondents, however, in discussing the competitive positions.
of State versus national banks, seemed to be referring at least in part
to inequalities of State tax treatment between State and national
banks which have been eliminated, or which could be eliminated by
State action, under the temporary amendment of section 5219 (i.e.,
section 1 of P. L. 91-156). That is, they seem to be saying that the
provisions of the temporary amendment represent a major step
toward equal treatment, and consequently they al)pea.r to be approv-
ing changes effected by the provisions in section 1 of P. L. 91-156
more than they are supporting the "permanent amendment" per se.
This was true for example of the Vermont reply and also the replies
excerpted below.
`In addition, the Wisconsin reply simply said that the questions were "answered In the negative," with.
no explanation.
PAGENO="0222"
.202
Hawaii: 1. National banks are presently exempted from the Hawaii General
Excise Tax and the Use Tax while State banks are not exempted. It appears that
the "permanent amendment" of section 5219 will improve the competitive
position of State banks only very slightly.
Maine: 1. Yes. Prior to amendment of section 5219, State chartered financial
institutions were subject to State sales tax. National banks had an unfair advan-
tage and the equalization of taxation should be permanent.
Massachusetts: 1. The "permanent amendment" . . . removes what hereto-
fore has been a discriminatory restriction on the ability of a state to tax national
banks . . . Of particular interest in this connection in Massachusetts is the
case of First Agricultural National Bank of Berkshire County v. State Tax
Commission .
Ohio: (1) In my opinion, the "permanent amendment" of section 5219 (in sec.
2 of P. L. 91-156) definitely improves the competitive position of State banks
relative to natio~ial banks. Prior to the adoption of this amendment, national
banks in the State of Ohio were exempt from the 4 percent sales tax . . . The
same situation existed regarding the franchise tax
The replies from several States focused on bank taxes in the partic-
ular State, rather than on general issues in State taxation of banks.
01 those that supported the "permanent amendment" in unchanged
form, two respondents (from Arkansas and Montana, quoted below)
felt that the "permanent amendment" would be useful in equalizing
the competitive Position of State and national banks, but respondents
from Colorado, Louisana, Mississippi, New Mexico, Rhode Island,
and Puerto Rico seemed to imply that it was redundant for that
purpose. The Arkansas respondent was unusual in mentioning the
matter of equality betweeii banks and other businesses:
Arkansas: . . . It is hoped that the next Legislature, convening in January,
1971, will work out some formula for taxation that complies with the federal
statutes and with Arkansas constitutional restrictions.
I think the "permanent amendment" of section 5219 will improve the com-
petitive position of State banks, relative to national banks; but still, in Arkansas,
we are confronted with an internal problem. Any system devised for taxing
banks here must not discriminate against the present methods of taxing ordinary
business corporations.
Montana: (1) Because our 1967 Legislature finally achieved substantial
equality in taxation between national and state banks in Montana, the "permanent
amendment" of section 5219 would not materially improve the competitive
position of State banks under the laws of Montana as they now stand; however,
should ow Legislature ever impose a tax on State banks which prior to the
amendmen. of section 5219 could not have been imposed on national banks, the
permanent amendment would be of material benefit in retaining tax equality.
What the 44 respondents agreed on was that other Federal restric-
tions on State taxation after January 1, 1972, would not be needed.
Several respondents suggested that State legislatures are competent
to determine taxes, and some expressed this view even more strongly,
as seen below:
Illinois: (2) . . . It is our feeling that economic conditions and the responsive-
ness of the various taxing bodies to public opinion will very effectively insure
against any taxing abuses.
Kansas: . . . It is my opinion . . . that sufficient safeguards are provided
when the provisions of section 5219 are terminated on January 1, 1972
New Jersey: . . . [C]onsidering the various forms of taxation and the many
different rates levied by the fifty States, it would seem to be an enormous task
to enact Federal legislation which would not be unduly restrictive to some, while
allowing others to avoid their fair share of the cost of local government.
Ohio: (2) I do not believe that any need will exist after January 1, 1972, for
additional federal legislation to restrict States in their taxation of commercial
banks or financial institutions. I believe that adequate supervision of these
institutions exist so that there is no need for the historic animosities and distrust
of bankers and financiers which was so prevalent in this country in the 19th
PAGENO="0223"
203
century. I believe that State legislators and executives are sufficiently cognizant
of the importance of strong banks and other financial institutions and that
sufficiently adequate supervision exists so that the unscrupulous can be controlled
through other means than taxation.
Pennsylvania: Certainly, the financial segment of the business world should be
subject to sharing the tax load just as any other type of business is. Sufficient
checks and reins exist to prohibit discriminatory taxation of banks.
* Wyoming: State legislatures are competent to judicially deteiinine the needs
and responsibilities of their respective constituents. Banks, collectively, are just
another segment of the commercial world and have the responsibility individually
and through the several State banking associations to prove that they are con-
tributing their fair share to the public interest and are taxed accordingly.5
Although a large majority favored the pennanent amendment of
section 5219 with n~ restrictions or modifications, there was (IiSseflt,
quite strong in some cases, from seven States. Respondents from
Georgia and Oregon warned in general of the ominous implications
of pressures for increased State and local revenues, while those from
Florida., Missouri, North Carolina, Texas, and West Virginia suggested
need for safeguards against (a) intangibles taxation, (b) undue
taxation of interstate activities, and (c) discriminatory taxation of
banks relative to other corporations. Excerpts from these replies are
presented below:
Florida: (1) We do not regard the permanent amendment of section 5219 as
improving the competitive position of State banks. Florida statutes have and
continue to provide that State banks have the same immunity from State and
local taxation that national banks have from time to time under the laws of the
United States.
(2) We consider that the congress acted in the best interests of the States in
enacting the "temporary provisions" of section 5219 and would recommend that
the permanent amendment retain the exemption on intangible personal property.
This office and the Florida Bankers Association were actively concerned with
this particular legislation because of certain court actions initiated in Florida and
our position and our reasoning was clearly presented during 1969. We continue
to feel that States should have primary taxing authority over banks domiciled
in their jurisdictions, but need not have total taxing authority.
Georgia: 1. The State of Georgia has maintained in all their taxation programs
an equal position between state banks and national banks. Section 5219 was used
as a cornerstone in the imposition of State taxes. So, the permanent amendment
will add additional tax burdens on both State banks and national banks.
2. In my opinion, Federal legislation is needed to repeal the permanent amend-
ment of Section 5219. I believe that the banks can live with the temporary amend-
ment imposing sales and use taxes on banks. The remaining provisions under
Section 5219 will remain in force and thereby restrict States in their further
taxation of commercial banks.
Missouri: (2) It would be advisable to provide a restriction against State-
imposed intangible taxes on both State and national banks. Under current ~`ndi-
tions, most State governments are desperate for additional sources of revenue.
Bank accounting is not understood by most legislators. Bank income often
appears to be an attractive target for additional taxation. It is possible that the
* imposition of heavier taxes on banks than those imposed upon other business and
financial corporations could lead to unsound banking practices, or could even
endanger the banks' solvency.
North Carolina (from a memorandum of the North Carolina Bankers Associa-
tion transmitted with the response of the Bank Commissioner): . . . The "per-
manent amendment" of Section 5219 is not necessary to achieve equality of taxa-
tion between state and national banks in North Carolina.
The interstate taxation of banks, particularly on a bank's income, would
disrupt the free-flow of capital throughout the nation and undoubtedly have an
adverse effect on the economic efficiency of the banking systems of the nation.
Ho~vevtr, this respondent later mentioned a "very inequitable situation" regarding shares taxation of
newer relative to older banks.
PAGENO="0224"
204 ~
Since banks are restricted (except for loan production offices) from interstate
branching or operations, they should be protected from interstate taxation.
The "permanent amendment" of section 5219 removes the protective provi-
sions of discriminatory taxation of national banks and indirectly exposes State
banks to the same possible discriminatory taxation. The economic role of the
banking industry has been badly misunderstood by some in recent years and the
possibility of discriminatory taxation in such a climate is certainly a reality.
Banks have little opportunity to shift their tax burden or their taxable situs.
Serious economic effects on the banking industry would result from interstate
taxation of banks, discriminatory taxation of banks, and the application of in-
tangible tax laws to banks. Both State and national banks need protection from
the possible serious economic implications in these areas and Federal legislative
action to restore these protective provisions to section 5219 would be advisable.
With some clarification of the terms "rate," "rates" and "nondiscriminatory,"
the adoption of the "temporary amendment" or some modification thereof, as
the "permanent amendment," would seem to accomplish these objectives.
Oregon: (1) . . . it is my understanding that the tax differential in Oregon is
very little, if any, at this time. However, the Oregon Legislature will doubtless
be searching for new revenue sources. If both national and State-chartered banks
are treated equally, the former would not gain an advantage over the latter at
some future date, at least as far as taxation is concerned.
(2) It all depends upon the financial needs of the States during the coming
years. If limits are not placed on taxing powers, it is quite possible, and probable,
that banks will be a source of additional revenue.
Texas: (2) In my judgment, there is a need for a provision in the Federal
statute prohibiting any State from imposing any tax or use of any method of taxa-
tion applicable to banks or the shareholders of banks which differs from taxes or
methods of taxation applicable to an ordinary business corporation or the share-
holders of an ordinary business corporation.
Banks, and banks only, are singled out for special treatment [under shares
taxation]...
In order to facilitate the payment of dividends and transfer of shares, most, if
not all, Texas banks actually pay the taxes on shares on behalf of their share-
holders. . . . As a result bank shares are the only class of shares of corporate stock
which reach the tax rolls with any degree of uniformity or regularity.
There are other reasons for a provision in the Federal statutes like the one sug-
gested above. Banks are tied to their domicile, whereas the ordinary business
corporation can move to another jurisdiction to avoid onerous tax treatment. The
State constitutional requirement that taxes be equal and uniform sounds good,
but the problems of proving alleged tax discrimination are often so burdensome
and expensive that they become prohibitive, especially to a small bank.
West Virginia: (1) . . our State Legislature has been reluctant to impose taxes
exclusively on State banks. The State, as a whole, has suffered more than the
State banks. The amendment will, no doubt, result in new taxation for both State
and national banks.
(2) Yes, there could very well be a need for some type of restrictive legislation
to prevent legislatures from imposing crippling taxation on financial institutions.
I would suggest legislation that would prohibit taxation of financial institutions
unless the tax applies equitably to all corporations.
III. QUESTION 3
(3) With special reference to interstate business, does your State permit banks
chartered by other States to qualify to do business in your State? If so, please describe
any special limitations on this privilege not applicable to other types of foreign business
corporations and indicate whether or not they have particular significance for State
or local taxation of out-of-State banks.
Question 3, On interstate banking activity, involves three separate
matters. First, there is the question of the extent to which the various
* States allow State-chartered banks domiciled in other States to
* engage in activity in the State, and how this differs from the situation
of other businesses. A second aspect is the extent to which such
activity foi~ma11y constitutes "doing business" in the State, requiring
permission from the State. Thirdly, there is the question whether and
PAGENO="0225"
205
to what extent such activity could provide the State with a basis for
claiming taxing jurisdiction over the non-domiciliary bank.
The respondents in general did not make a clear distinction among
these aspects, and the responses were hard to interpret in some
instances. The predominant view, however, seemed to be that in most
States non-domiciliary State banks are not permitted to engage in
activities of the sort that would be considered "doing business" in a
legal sense in that State and that such interstate banking activity as
occurs does not have any taxing implications worth mentioning.
Respondents from the 16 States listed below answered the question
in the negative or stated that banks chartered by other States cannot
do business in the State, without giving any further elaboration.6 It
might be that out-of-State banks can carry on certain types of activity
in these States but that this does not legally constitute doing business;
the "doin~ business" question is discussed in greater detail below and
in appendixes 10 and 12. Appendix 10 includes a supplementary note
summarizing State laws on this subject.
Arizona New Hampshire
Arkansas New Mexico
Connecticut Oklahoma
Idaho Rhode Island
Louisiana7 South Dakota
- Maine Tennessee
Maryland Virginia
Minnesota Wisconsin
A State would probably assert jurisdiction to tax an out-of-State
bank if the bank maintained an office, branch, or other place of
business within the State. The 9 respondents quoted below explained
that maintaining an office is not permitted; the implication, where it
is not explicitly stated, is that out-of-State banks are therefore not
subject to any significant taxation, although they may engage in
some activities that do not involve the maintenance ol~ a place of
business in the State.
Florida: Florida statutes do not describe methods by which out-of-State banks
may qualify to do business in Florida and such banks are expressly prohibited
from establishing offices in Florida. Since physical situs is normally determinative
of taxable situs of real and tangible personal property, and of the appropriate
jurisdiction for recordation of lien thereon requiring payment of recording fees or
taxes, we find no particular significance for local taxation.
Georgia: The State of Georgia prohibits statewide banking and for that reason
would not permit banks chartered in other States to do business in Georgia through
the use of production loan offices or branches.
Kansas: . . . the anti-branching and anti-holding company statutes in this
State prohibit a bank chartered in another State from establishing a branch or
facility, or a holding coml)any chartered in another State from establishing a
branch or facility, or a holding company chartered in another State from acquiring
ownership of a bank in this State.
Kentucky: (3) The State of Kentucky does not permit State or national banks
domiciled in other States to have offices within Kentucky.
Mississippi: (3) No. Banks chartered by other States may not have branches in
Mississippi. They may conduct correspondent l)an king business or make loans,
but they would not be subject to Mississippi taxation.
South Carolina: 3. Banks chartered in another State cannot establish branches in
South Carolina. They can, however, do business across State lines such as make
loans, accept deposit accounts, etc., and [a bank] does not have to qualify to do this.
In addition, the respondent from Alabama d~d not reply to this question.
The Louisiana response was that `(i) Out-of-state banks are not permitted to be chartered in Louisiana."
79-421 0 - 72 - 15
PAGENO="0226"
~o6
Texas: 8 Texas is a non-branching State. Art. 16, section 16 of the Texas Con-
stitution applies to State and national banks doing business in Texas, and provides
in part: "Such body corporate shall not be authorized to engage in business at
more than one place which shall be designated in its charter. No foreign corporation,
other than the national banks of the United Stktes, shall be permitted to exercise
banking or discounting privileges in this State."
Vermont: Several out-of-state banks are registered with the Secretary of State
to conduct business in Vermont, but we are informed that there is no differential
in treatment of out-of-state banks and other foreign corporations. We should
point out that none of the banks so registered have offices in Vermont and, to the
best of our knowledge, are not subject to fees or taxes beyond that required for
registration as a foreign corporation. Collaterally, no Vermont banks operate
branches outside of the State.
Most respondents answered question 3 by specifying certain types
of transactions or activities in which an out-of-State bank could engage
but which presumably would not be considered the "doing of busi-
ness", and would not establish taxable status for the out-of-State
bank. Sc ~ie States allow no banking activity by out-of-State banks
except where every phase of the transaction takes place outside the
State, while other States allow out-of-State banks to engage in varying
types of activity in the State without taxing consequences even when
the activity occurs on a regular and substantial basis. Nebraska and
Nevada typify the former approach:
Nebraska: (3) Any business conducted by banks chartered by other States
must originate at that hank; this would not prevent Nebraska residents from
doing business at such banks.
Nev~ada: (3) No, we do not qualify foreign banks to operate in Nevada[;] how-
ever, it is a known fact that loans and other transactions are made across State
lines.
Respondents from the fo]lowing 9 States clearly indicated that the
limited activities allowed do not have taxing significance, except for
"grandfather clause" branches in Washington:
Hawaii: (3) Banks chartered by other States upon receiving a certificate from
the Director of Regulatory Agencies may he permitted to engage in limited bank-
ing business in the State. Such banks are limited to the business of making and
collecting loans, buying and selling, paring and collecting bills of exchange,
issuing letters of credit, receiving money for transmission and transmitting the
same by draft, check, cable, or otherwise. Taxation of out-of-State banks doing
this type of business is of no particular significance.
Indiana: . . . (3) Indiana does permit State banks chartered in other States
to qualify to do business in Indiana. This authority to do business is given with
certain qualifications and restrictions. The restriction with regard to intangible
personal property is such that State and local taxation of out of state banks would
be insignificant.
Iowa: (3) The State of Iowa does not have provisions for qualifying out-of-
state banks in Iowa. Out-of-state banks do not file tax returns with the State
Department of Revenue on the business that may have been conducted with Iowa
companies, corporations, or other firms. Fiduciary relationships have been handled
on a reciprocal basis .
Montana: (3) Montana ~ioes permit banks chartered in other States to qualify
to do business in Montana to a very limited degree. Out-of-state banks are per-
mitted to lend money to borrowers residing in Montana and to administer trusts
involving Montana residents and Montana real property. We can see no partic-
ular significance that this limited privilege might have for Montana's taxation
of out-of-state banks.
Ohio: (3) Ohio does not permit any banking by any corporation which is not
incorporated under the laws of the State of Ohio or of the United States. The only
exception is for "foreign" banks which qualify to do a trust business. There is no
significance so far as taxation is concerned
$ This Is Irons tin' reply sent by counsel for the l)epartment of Banking. The banking comrni'sioner's
letter (whieli was the sourie quoted in part 11, ahove) sai(l only, "Texas does not permit banks rha:tered
by other States to qualify to do business in our State."
PAGENO="0227"
207
Pennsylvania: (3) Pennsylvania law permits out-of-state banks to qualify to
do business in the Commonwealth if there is a reciprocal agreement . . . Penn-
sylvania does not tax out-of-state banks for their limited activities in the
Commonwealth.
Washington: . . . The answer in general is "no". . . . Banks chartered in other
States may not conduct a general banking business or accept deposits in this State.
(With two exceptions which conic under the Grandfather Clause. . .) . . . Summary
to question 3 may be stated that there is no indication of particular significance
for State or local taxation of out-of-State banks.
West Virginia: (3) West Virginia Code 31A-2--5(f) provides: "nothing contained
in this code shall authorize any person to engage in the banking business in this
State except corporations chartered to conduct a banking business under the laws
of West Virginia and which hold a license or certificate to do so issued under this
section, or associations authorized to conduct a banking business in West Virginia
under the laws of the United States and having their principal place of business in
this State." However, West Virginia Code 31-1-79(a) provides that foreign
corporations acquiring secured loans on real or personal property and some related
activities in this State are not considered doing business. I do not believe that this
would be an area of particular significance for State or local taxation of out-of-
state banks.
Wyoming: (3) Wyoming does not authorize branch banking and has found little
need to qualify banks chartered by other States to do business in this State. We
interpose no restrictions on foreclosure actions by out-of-state banks desiring to
redeem collateral and require only the employment of a Wyoming attorney by
out-of-state banks acting in behalf of estates. To the best of my knowledge, no
out-of-state bank has been inconvenienced by these limitations. Taxation of
foreign banks is limited to propeirty owned.
In a similar vein, the restricted activities permitted out-of-State
banks in Colorado, Illinois and North Dakota probably involve no
taxing consequences, while the extent and tax consequences of per-
mitted activity by out-of-state banks in Delaware and Utah are
unclear from the replies received. Responses from these five states
are as follows:
Colorado: (3) . . . the implications of the Colorado Corporation Code in con-
junction with the Colorado Banking Code is such that qualification is not coun-
tenanced . . . This is not to say that foreign banks do not engage in certain
types of transactions in Colorado in the same manner as occur in other States.
We do not consider this a problem
Delaware: (3) No . . . "No bank or trust company . . . shall transact any
business in this State or open a place of business in this State without having
first secured from the State Bank Commissioner a certificate . . ."
Illinois: (3) The State of Illinois does not permit banks chartered by other
States to qualify to do business within Illinois.
A possible exception to this would be that we do have a reciprocal law in
connection with corporate fiduciaries.
North Dakota: (3) State law only provides that foreign banks or trust companies
may serve in fiduciary capacity in State.
Utah: (3) Utah law (Section 7-3-4, Utah Code Annotated 1953, as amended)
forbids any foreign corporation from conducting a banking business in this State
until it has first complied with the laws of this State relating to banks and with
other laws of this State relating to foreign corporations. I do not believe this
provision has any significance for State or local taxation of out-of-state banks.
Such banks would be taxed as any other foreign corporation operating within
the State.
Among the nine jurisdictions remaining, the extent of taxation of
out-of-State banks was unknown to the respondents from Alaska,
* Massachusetts, and New Jersey. No out-of-State State-chartered
banks are presently doing business in North Carolina or Puerto Rico,
although this is apparently permissible and might involve taxable
status. Under certain conditions, out-of-State banks could be taxable
in California, Michigan, New York (Edge Act subsidiaries), and
Oregon. The responses from these States were lengthier and more
specific than from most other States.
PAGENO="0228"
208
Alaska: (3) Yes, banks chartered by other States are permitted to qualify
to do business in Alaska under the provisions of our Model Foreign Bank Loan
Act. This Act enables foreign or out-of-state banks to make and purchase loans
in this State, and the question has arisen as to whether the income derived from
these activities was taxable by the State. It appears that the permanent amend-
ment would clarify this situation.
California: (3) . . . even when a foreign banking corporation has complied
with the California Corporations Code and obtained consent of the Superintendent
of Banks, it may conduct only such business as permitted under the California
Financial Code, and a bank incorporated under the laws of another State would
not be permitted to accept deposits in California. (California Financial Code
Section 1756(b)).
There are two important exceptions to the rule that a foreign banking corpora-
tion must obtain a certificate of qualification from the Secretary of State and the
consent of the Superintendent of Banks before engaging in the banking business
in California. First, a foreign banking corporation may acquire loans secured by
real or personal property located within this State, so lpng as it carries on such
activities from outside California. (California Corporations Code Section 6450
et. seq.) Second, a foreign banking corporation may make loans in this State
secured by real property located in California, so long as it does not maintain an
office in this State. (California Financial Code Section 1757). The second exception
is an exception only from the requirements of the California Financial Code.
The first exception, however, applies not only to the California Financial Code but
also to the California Corporations Code and the California Revenue and
Taxation Code, which contains the tax laws of this State.
Massachusetts: (3) Under section 45A of Chapter 167 of the General Laws,
* . . national banks and State-chartered commercial banks having their principal
places of business in other States may, with the permission of the Board of Bank
incorporation, exercise fiduciary powers in Massachusetts. This section refers to
the taxation of such banks.9 This office has not had occasion to deal with problems
which might arise relative to the extent of such taxation.
Michigan: (3) Banks from other States can establish "loan production offices"
in Michigan.
A foreign banking corporation can be admitted to do business in ?~1ichigan
under the General Corporation Act under a restricted certificate of admission.
Such certificate would permit only business of a non-banking type which a
corporation formed under the Michigan General Corporation Act could conduct.
New Jersey: In regard to interstate business, "foreign banks" must qualify
to do certain fiduciary business in New Jersey. At the present time there are
forty-four out-of-State banks who have requested and received this authority.
The volume of business they are doing and the profit derived therefrom is
unknown; consequently, the significance for State or local taxation is a matter
~or conjecture. These banks do, of course, pa~ qualifying and annual renewal
fees to the Department of Banking for the right to do fiduciary business in
New Jersey.
New York: (3) New York State does permit banks chartered by other States
to qualify to do business in New York. At present, the only foreign banking
corporations qualified to conduct a banking business in New York are agencies
and branches of foreign banks domiciled outside the United States. In addition,
Edge Act subsidiaries of foreign banks domiciled in States other than New York
operate in New York under the supervision of the Federal Reserve Board.
* There are numerous special limitations on the privilege of doing business in
New York which are applicable to banks but not to other types of foreign business
corporations. For example, a foreign bank must keep at least $100,000 of specified
assets on deposit in the State at all times. Our reciprocity provision constitutes
another special limitation
North Garolina: 10 * * there are no out-of-state banks doing business in North
Carolina at this time; therefore, the question of taxing them is not pertinent .
The out-of-State bank would probably be considered to be a lending agency sub-
ject to the income tax rather than a bank subject to the excise tax . . . [and]
might also be subject to the corporation franchise tax.
The law cited, which ~vas included with the reply, states in Part ths~ "Any such banking association
or corporation hoidine a certificate as aforesaid and appoitited a fiduciary snail lie subject to the provisions
of general law with rsnect to tile llp~)0itittfltnt 01 agitits by foreign iidieiaries and to tile same taxes, olli-
ations and pciiaitis. wilt respect to its activities a~ such iniucuity and the property heid by it in its fidtm-
ciaty capacity, us like ussociutittlis or corporutioiis having their priIiliiiui oiiicc in hits cOmfllliOIi\VCUliIi
10 Tnis quotation is from tile letter Written by tile i)epartment of Tax Research.
PAGENO="0229"
209
Oregon: (3) Oregon's laws do not permit banks chartered by other States to
qualify to do business in Oregon, with minor exceptions. Banks chartered in other
States which have a trust department can qualify to do a limited trust business
in Oregon under the terms set forth in ORS 713.010(2); ORS 713.010(4) also gives
out-of-state banks some latitude as it allows such banks to loan money in Oregon
on mortgage security. These banks may "not accept deposits or receive from
citizens or residents of this State property or money in trust on deposit or for
investment." 11
Puerto Rico: . . . our banking law provides for the authorization of banks
chartered in other states to do busihess in Puerto Rico. However, in practice,
arid as a matter of public policy, for many years no State bank from another State
has been authorized to do business in the Commonwealth of Puerto Rico, and no
additional national or foreign banks have been authorized to open branches within
our bounds.
It is interesting to compare the State banking supervisors' answers
to question 3 with the replies to a similar question asked of State tax
administrators. Item number 3.411 of the questionnaire sent to tax
administrators asked whether out-of-State State-chartered coinmercitil
banks "that do business in your State" are "now subject (No-
vember 15, 1970) to taxation in your State". In 26 States 12 and Puerto
Rico such banks reportedly are subject to State net or gross income
taxes and in some cases to other taxes as well, while in another four
States 13 they reportedly are subject to taxes based on the value of
capital stock. In many of these States, however, no banks chartered
by other States actually "do business"-in some instances because
only banking activity that does not legally constitute "doing business"
is allowe'd-so that the banking supervisors were correct in saying
that banking activity by State banks from other States does not have
any particular significance for State taxation. It appears from the
banking supervisors' letters that the major banking States 14 differ
considerably in the kinds of activity that are permitted for out-of-State
banks without establishing taxability and in the kinds of activity
that are permitted at all.
In summary, there appears to be considerable variability among the
fifty States in the extent to which banking activity is carried on from
across State lines and in the tax treatment of out-of-State banks. For
State-chartered banks, at least, interstate banking activity seems to
be tailored to the States involved and the types of activities in such a
way that little or no taxing liability is involved outside the domiciliary
State.
IV. QuEsTIoN 4
(4) In the laws, regulations, or supervisory practice affecting commercial banking
in your State, or in bank operations, have there been recent changes or developments
of particular significance for State or local taxation? Do you foresee developments of
this kind over the next few years? If so, please describe any of these changes that have
particular signiflcan~;e for State or local taxation.
In its final question to the banking supervisors, the Board sought
information on both recent and foreseeable developments which
Ii ORS 71 `.010 also provides, in subsection (1). that "Except as provided in snl)eeCt ion (4) of this sc~tion,
every foreign bank or tr~~st company doing business in this State is subject to all the provisions of the bank
Act to the same extent as banks, bankers or trust companies organize(l or doing business under or by virtue
of the laws of this Slate."
12 Alabama, Arii,o~ia, Arkansas, California, Connecticut, ltawaii, Idaho, Illinois, Indiana, Maine, Mary-
land, Massachusetts, Minnesota, Missouri, Nebraska, New Mexico, New York, North Carolina, North
Dakota, Oregon, South Carolina, South l)akota, Tennecsee, L'tah, Washington, and Wisconsin.
13 Montana, New Jecsey, Ohio, and \\ est Virginia.
14 The top 10, in terms of total issa operating income, are New York, California, Illinois, Pennsylvania,
Texas, Ohio, Michigan, New Jersey, Florida, and Massachusetts.
PAGENO="0230"
210
might influence the type, amount, or consequences of State and
local taxes applicable to banks. The answers received by no means
cover all the changes which have taken place, but they do give
considerable insight into why certain changes occurred and why
certain others are expected.
Twenty-two States did not report any recent or foreseeable changes
affecting bank taxation. Some of these States had in fact had some
tax changes, but the respondents apparently did not consider them
to be particularly significant or else they were limiting their answers
to banking regulations and practices rather than to changes in the
taxing laws or in the applicability of taxes to banks. The 22 States
are as follows:
Alabama
Arizona
1\'Iississippi
Nebraska
South Carolina 15
South Dakota
Connecticut
Nevada
Utah
Kansas
Kentucky
Massachusetts
Michigan
Minnesota 15
New Hampshire
New Mexico
Oregon
Pennsylvania
Rhode Island
Washington
West Virginia
Wisconsin
Respondents from 20 States reported instances of recent changes
in taxes affecting banks, or of recent developments affecting banking.
The items reported are summarized in table 1. Some of these items
are not especially new, but were mentioned because they have a
bearing on recent or expected developments. Additional information
from State tax administrators on recent changes in tax laws or regu-
lations affecting banks is included in brackets.
TABLE 1.-RECENT CHANGES OR DEVELOPMENTS REPORTED BY STATE BANKING SUPERVISORS
WHICH AFFECT STATE OR LOCAL TAXATION OF BANKS 1
Category of change, and State Comments
Regular corporate income tax replaced special bank income tax for State and
national banks, 1970.
Corporate income tax rate was raised and some exemption of interest wan
deleted.
Income tax was enacted, 1969.
Franchise tax was enacted, 1969, [replacing bank shares tax and] increasing
taxes paid by banks by up to $2,000,000.
Income tax was imposed, effective July 1, 1969.
Franchise tax on financial institutions replaced capital stock tax, July 1, 1968.
(See table 2.)
Excise tax rate was raised, 1969.
Rate was increased and other changes made in corporate income tax.
[Also, income tax was extended to banks in New Hampshire (State banks only), New Mexico (replacing shares tax,
1969), Tennessee (national banks), and Washington (gross income tax), and modifications were made in Arizona, Kansas,
and New York.]
Taxes on value of shares or capital structure:
Arkansas Shares tax was held unconstitutional in 1961 ("in practical effect * * * an
assessment of intangible properties and * * * a gross discrimination
against banks * * *") but is being paid under 1969 voluntary formula.
Louisiana Rate is being gradually reduced starting 4 years ago.
New Jersey Rate was doubled, tax is now distributed half to State and half to counties.
- [Also, shares tax on shares held by individuals lapsed in Illinois (1971, constitutional change), franchise tax was extended
to national banks in Tennessee after Dec. 24, 1969, and rate was raised in Pennsylvania (1971).]
Income taxes:
Colorado
Delaware
Illinois
Iowa
Maine
Maryland
Montana
North Carolina
Puerto Rico
See footnotes at end of table, p. 211.
15 South Cafolina did, however, mention existing bank taxes, and both Minnesota and South Carolina
mentioned the pressures for additional revenue at the State and local levels.
PAGENO="0231"
211
TABLE 1.-RECENT CHANGES OR DEVELOPMENTS REPORTED BY STATE BANKING SUPERVISORS WHICH
AFFECT STATE OR LOCAL TAXATION OF BANKS-Continued
Category of change, and State Comment
Sales and use taxes:
Arkansas State and national banks paid s.nles and use taxes, starting in 1969. under
voluntary agreement.
California Test case pending on sales tax on national bank purchases prior to Dec. 24,
1969.
Colorado State and local sales and use taxes were extended to State and national banks,
1970.
Maryland State banks were exempted from sales tax (like national banks), July 1, 1968;
[banks became liable to the tax alter Dec. 24, 1969j.
North Carolina 2 Sales, use taxes were extended to purchases by national banks after Dec. 24,
1969.
Texas Banks became subject to sales tax, through comptroller's ruling.
Vermont National banks became subject to sales tax on equipment purchases, after
Dec. 24, 1969.
Wyoming National banks are now paying sales tax and are collecting it on their sales.
[Sales and use taxes were also extended to national banks since Dec. 24, 1969, in Arizona, Connecticut, Idaho, Illinois,
Indiana, Iowa, Kentucky, Maine, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New York, Ohio,
Oklahoma, Pennsylvania, Rhode Island, South Dakota, Utah, and Wisconsin, and to both State and national banks in Ala-
bama, Florida, Georgia, and Louisiana.J
Other taxes:
Arkansas Court held stamp tax on real estate transfers unconstitutional, 1970; it is
still being paid, proceeds being held in suspense.
Colorado Tangible personal property tax was extended to State and national banks,
1970.
Florida "In 1970 the Florida Legislature broadened the assessment base for State
banks and authorized retention of the full amount for operation of the
Division of Banking."
[Tangible ~ersonal property taxes were also extended to banks since Dec. 24, 1969 in Arizona, Florida, Iowa, Kentucky,
Louisiana, and Ohio, and to national banks in Connecticut, Idaho, Illinois, Kansas, Nebraska, Rhode Island, and Utah.
Documentary taxes were entended to banks since Dec. 24. 1969, in Alabama, Florida, Georgia, and Kentucky, and to national
banks in Illinois, Iowa, Nebraska, New York, Ohio, and Oktahoma.J
Equalization of tax treatment of State and
national banks:
Arkansas 1967 statute gave State banks the same tax status as national banks.
Montana 1967. State banks were exempted from corporation license (net income)
taxes, because national banks were exempt.
Texas 4 ... 1963 law equalized tax treatment of State and national banks, resulted in
State bank exemption from franchise tax.
Virginia 1968 law placed State and national banks on equal footing for taxation.
[Equalized treatment of State and national banks, as a policy or in practice, was also mentioned or implied by the bank-
ing superintendents of California, Colorado, Florida, Georgia, Louisiana, Maryland, Mississippi, New Mexico, Rhode Island,
and, since February 1970, Tennessee.J
Other developments:
Idaho 2 Law provides for no deposit of State moneys after Jan. 1, 1970, in any banks
failing to pay all State and local taxes.
Indiana State banks were recently authorized to lease personal property.
New Jersey Banking has expanded rapidly since the acceptance on July 17, 1969, of be-
yond-county branching and of statewide holding companies.
New York International banking activities have been expanding substantially.
1 Information in brackets covers other changes reported by State tax administrators which were not mentioned by the
bank supervisors.
2 Information is from memorandum of North Carolina Bankers' Association, lorwarded by banking superintendent, and
from tax research department letter.
3 Information is from banking commissioner's letter.
4 Information is from department of banking counsel letter.
5 Includes corporate inceme or franchise taxes, sales and use taxes on purchases of tangible personal property, and real
and personal property taxes on property owned or leased.
Likely future developments were reported by 10 of the States
which had reporte(1 recent changes 1111(1 also by 9 States which ic-
ported no i'ecent changes. In some instances, the future changes
mentioned were very specific. and were anticipated with confidence.
In other cases, the developments foreseen w'ere rather vague and
were said to be desire(I or feared rathet' than eXI)ected. The repoi'ted
future devehopments ale summarized in table 2.
PAGENO="0232"
212
TABLE 2.-LIKELY FUTURE STATE AND LOCAL BANK TAX DEVELOPMENTS REPORTED
BY STATE BANKING SUPERVISORS'
Category of change, and State Comment
Income taxes:
Alaska Rate increase of business license tax on financial institutions, proposed in
1968, is likely to be reconsidered in next 3 to 5 years.
Delaware - Further rate increase is possible.
Florida General corporate income tax may be considered, 1971.
Montana "Almost certain" that corporation license tax will be extended to banks, 1971;
[and this has occurredj.
New York Taxable base (income attributable to operations in the State) will probably
lag behind bank profits as international operations expand,
Ohio Corporate franch ise tax rate on banks may be raised to that on other corpora-
tions.
Texas Comotroller may rule franchise tax applicable to banks after Jan. 1, 1972, in
addition to bank stock tax.
[Net income taxes will be extended to national banks after Jan. 1, 1972, in Illinois, Maine, and New Hampshire. Bank
taxes more like those on other businesses are likely in Alabama, California, and Missouri. Income tax laws are pending in
Indiana (gross income tax on national banks), Iowa (adjusted gross income tax), West Virginia (extension of gross income
tax to banks), and Wyoming (bank asset tax measured by income).J
Taxes on value of shares or capital structure:
Florida Capital stock tax, on all corporations, is likely to be considered, 1971.
North Carolina Banks might become subject to franchise tax on capital used in State and to
intangibles tax, but both are unlikely.
Wyoming Bank shares tax may be replaced in 1971 biennial legislature by a "more
equitable excise tax on total resources"; [the 1971 legislature, however,
adjourned without passing this legistatiooJ.
[Tax may be extended to national banks after Jan. 1, 1972, in Ohio and Puerto Rico, replaced by a net income tax in
New Jersey, replaced by tangible property tax in Maine.l
Other specified taxes:
Hawaii General excise (sates) tax and use tax may be extended to national banks.
Indiana Bank exemption from tangible personal property tax may be reviewed, because
of leasing authorization (see table 1).
North Carolina 3 Banks may become subject to tangible personal property tax under State-local
* property taxes, following amendment of the excise tax.
[Sales taxes may be enacted in New Hampshire, extended to banks in North Dakota. Repeal of personal property tax is
pending in Wisconsin and is recommended in Iowa. Real estate transfer taxes are pending in Arkansas, Missouri, North
Dakota, and Texas. Indiana may repeal its intangibles tax effective July 1, 1972.1
Unspecified tax changes:
California Manner and extent of State and local taxation of banks are under consideration.
Georgia Tax changes under permaoent amendment, involoing redactions of compen-
satory rates, could appear to reduce bank taxes, thus "open the door for
flagrant discrimination among the various Ststes in the taxing of financial
institutions as against other business corporations."
Missouri Complete bank tax review resulting in increased taxation of both State and
national banks is probable.
North Dakota Tax bill affecting banks is being presented.
Oklahoma "Tax reform will be an issue in the 1971 legislative session."
Other banking developments:
Tennessee "Some though[t[ should perhaps be given to some moans-through taxation
or otherwise-to further discourage holding company acquisitions and hype-
thecated ownership."
Vermont Prohibition against holding companies may be dropped, 1971.
I Information in brackets covers other likely developments reported by tax administrators or in Commerce Clearing
House reports. In addition, svidespread rate increases are reported as likely.
2 The North Carolina Bankers' Association reports that this "could conceivably" hapsen, but the department of tax
research letter reports that there is "no movement to remove the exemption of banks from the franchise tax" and that
"there is considerable sentiment for repealing the [intangibles[ tax entirely."
3 According to the letter from department of tax research, "Such property is now exempt under an `in-lieu' provision
in the bank excise tax law."
V. SUMMARY AND CONCLUSIONS
(1) State banking snpervisors strongly support FL. 91-156 as it stands
The response from the supervisors of State banks was strongly in
favor of 1)erlnanently amending section 5219 of the Revised Statutes
in the form provided in section 2 of F.L. 91-156. Support for the
permanent, amendment conic fi'owi supervisors Ilk a large number of
PAGENO="0233"
213
States, including New York, California,16 and indeed all of the larger
banking States eXCCJ)t Florida, Texas, and Missouri.
For the most part, the respondents focused their answers on the
position of State banks relative to national banks, although topic
(2) below shows that some went beyond this consideration. This
concern with State banks vis-a-vis national banks is understandable,
given the tenor of P.L1. 91-156, the commitment of State bank super-
visors to the dual banking system, and the wording of the Board's
letter. A general commitment to State and local taxing automony
was also evident in the supervisors' letters, and it is significant on
this point that the Congressional directive to the Board, in section 4
of P.L. 91-156, mentions "the achievement of . . . local autoinony
in meeting the fiscal needs of the States and their political subdivi-
sions." Most respondents seemed to feel that as long as the law
required equal treatment of State and national banks, that would
be a sufficient safeguard against abuse of State or local taxing po~vers.
(~) There is some reason to expect heavier taxation of banks relative
to other businesses
Many of the respondents 17 mentioned that their States are already
treating State and national banks equally for tax purposes, whether
required to by State law or simply as a matter of practice. This has
meant that State-chartered banks have been granted the same tax
exemptions as national banks, or else that they have special tax
credits or other arrangements, but often this has not resulted in
light taxation of banks but has been offset by in-lieu taxation of
banks. Three States reported legal conflicts or the payment of taxes
by banks on a "voluntary" basis.18
The sketchy information on the bank tax situation provided in
response to question 4 and to the other questions indicates that the
level of bank taxation has been increasing while the temporary ar-
rangements of Public Law 9 1-156 have been in effect and that further
increases are anticipated when the permanent amendment of section
5219 goes into effect. Recent or expected tax rate increases were
reported in several States,'9 while additional taxes of minor revenue
importance have been applied to banks in various States. There is
also a noticeable trend toward changing tax structures to eliminate
special treatment of banks.
It is difficult to say to what extent banks will be simply I)ayrng
more taxes, in the same way that other State and local taxpayers
are facing increased tax burdens, or to what extent the tax increase
on banks will outstrip that faced by other businesses. Furthermore,
there is no satisfactory measure of the relative tax burdens on banks
and other businesses.
Most of the banking superintendents who discussed this aspect
expressed concern that the States and localities would, intentionally
or not, proceed to overtax banks relative to other businesses under
the permanent amendment. The pressure for increased State and
local revenues is indisputable, and Public Law 91-156 mentions
as an explicit goal "effectiveness. . . in meeting the fiscal needs
16 The superintendent of banks in California supported the permanent amendment. The California
Bankers' Association on the other han(1, \V(nt on recOr(I as favoring continuation of the "interim" provisions
because of fears regarding intangibles taxation and multistate taxation.
17 Arkansas, California, Colorado, Florida, Georgia, Louisiana, Maryland, Mississippi, Montana New
Mexico, Rhode Island, Texas, and Virginia.
18 Arkansas, California, and South Carolina.
it Louisiana was the only State reporting a reduction in tax rates affecting banks.
PAGENO="0234"
214
of the States and their political subdivisions." In addition, Public
Law 9 1-156 eases restrictions on State and local taxation that apply
specifically to banks. Misunderstanding regarding the taxable capacity
of banks 20 or regarding the elimination of compensatory or in-lieu
bank taxes 21 could, under the circumstances, result in discriminatory
taxation of banks. Respondents from three States 22 expressed a
fear of serious economic results, and it was further pointed out in
the letter from Texas that even apparently even-handed tax treat-
ment might prove especially hard on banks
Since most of the respondents were in favor of the permanent
amendment section of P.L. 91-156, little was said about the possibly
undesirable consequences of subjecting banks and other financial
institutions to intangibles taxation, but this is the area in which the
uneven impact of taxes between financial and non-financial businesses
might be most serious. Replies from Florida and Missouri urged
statutory restrictions against intangibles taxation applicable to banks,
and the North Carolina memorandum cited it as a possible source of
serious economic distortion.
(3) Interstate aspects of bank taxation will be of increasing importance
Despite restrictions against branching beyond State lines or even
within some States, there has been considerable expansion of banking
activity across State lines in recent years, and more is expected.
Except as provided in the interim arrangements, national banks are
currently immune to taxation by nondomiciiary States even where
their operations provide a strong basis for a claim to taxing jurisdiction.
State-chartered banks do not share this immunity. This situation was
cited as a reason for supporting the easing of restrictions on national
bank taxation in section 2 of P.L. 9 1-156, in letters from California,
Iowa, Michigan, Nebraska, and New York.23 Only the North Carolina
response considered unfettered multistate taxation of banks to be a
serious prospect.
Many factors influence the extent of banking activity in a State in
which out-of-State banks are involved: the attractiveness of oppor-
tunities for financial transactions in the State, the types of activity
involving out-of-State banks which are tolerated in the State, and
the tax consequences of the various sorts of activity possible in the
State. No comprehensive information on these points can be derived
from the letters of the banking supervisors, but it seems clear that
States differ considerably in their posture toward out-of-State banks.
Finally, there are considerable differences among States regarding
banking operations and the taxation of banks. Coordination of State
taxing policies has become a matter of considerable interest, and this
aspect may gain in importance with the expansion of interstate
banking activity and the easing of restrictions on the taxation of
nondomiciliary national banks. This is, however, a separate question
that was not covered in the inquiry to State bank supervisors.
20 This was pointed out as a possibility by respondents from Missouri and North Carolina.
21 This was stressed by the Georgia superintendent.
22 Missouri, North Carolina, West Virginia.
23 The same point was also made in a statement by Frank Wille, which was i_Juded with the New York
return. This statement was published in "Taxes on National Banks," Hearing before the Senate Commit-
tee on Banking and Currency, 91st Congress, 1st session, on S. 2065, and H.R. 7491 (September 24, 1969),
pp. 52-57.
PAGENO="0235"
APPENDIX 6
The History and Impact of Section 5219 on the Taxation of*
National Banks
SIMEON E. LELAND,,
Professor of Economics and Dean Emeritus of the College of Arts and Sciences
of Northwestern University *
I. THE EVOLUTION OF SECTION 5219
Conflicts between, the States and the Federal Government over
State and local taxation of national banks are as old as the national
banking system itself. Sometimes the issues were hot; at other times
they were quiescent; now and then they smoldered and it tool~ very
little in the way of legislation or administrative practice to revive
them. Moreover, through the mainstream of the history of the nation,
State banks have always competed with banks chartered by the
Federal Government. Even before the national banking system was
created, State banks were jealous of their powers, privileges, and
prestige. The populace took sides, too, as if it were in a struggle of the
underprivileged against the privileged. State legislatures responded
to these pressures, as did tax collectors when they could.
A. National Currency Act of February 25, 1863
The national banking system owes its origin to the national currency
act approved February 25, 1863.' One purpose of the act was to pro-
vide for a stable currency while another was to assure a market for
sale of the bonds issued by the Federal Government.2 The banking
associations provided for by this act could issue circulating notes equal
to 90 percent of the market v~ilue of the bonds deposited with the
U.S. Treasury. A limit of $300 million was fixed for the notes, to be
apportioned among the States according to population. Supervisory
responsibility was given to a bureau of currency in the Treasury.
Nothing was said in the Act of 1863 about taxation of national
banks or their shares. "This aspect of the matter was apparently not
~ ACKNOWLEDGEMENTS: In the preparation of this history my obligations for assistance are too numerous
to acknowledge adequateIy.~I am especially indebted, to Mr. Robert \V. Baumgartner, head of the Docu-
snents Room in the Northwestern University Library, and his assistants-Mr. Wilfred Danielson, Mrs.
Anne Hubbard, and Miss Gail Porter~-for help in locating fugitive documents and for making other source
material available to me. To the Traffic Institute of Northwestern, and to Mrs. Alice Gibbs, Librarian, I
owe thanks not only for access to court decisions but for help in locating them. Mr. Charles F. Conlon,
Executive Director of the Federation of Tax Administrators, gave similar aid and discussed with me numer-
ous points made in this study. Mr. Lynn A. Stiles, Vice President of the Federal Reserve Bank of Chicago,
helped me throughout the study, and in addition made both books and staff available to me. My greatest
debt Is to Miss Judith A. Cunningham, of the Research Department of the Federal Reserve Bank of
Chicago, who not only typed most of the manuscript but compiled the list of cases on which "Recent Court
Decisions: 1926-1970" is based. My wife and family cheerfully accepted, too, months of neglect while this
history was being written. None of these people can be blamed for the errors of commission or omission in
the following pages. They are my responsibility. For them I am deeply apologetic. I hope they are not too
numerous.
SISIEON E. LELAND.
1 12 U.S. Statutes at Large (Boston, Little, Brown & Co., 1865, edited by George P. Sanger), 37th Con-
gress, 3d session ch. LVIII, pp. 665ff.
Cf. Davis Rich Dewey, Financial History of the United States (New York: Loogmans Green & Co.
7th ed., 1920), pp. 310-11, 320-28.
(215)
PAGENO="0236"
.216
considered important at that time, and no reference was made to it
in the House." ~ Nevertheless, shares were assessed in some States,
such as Ohio and Maine,4 especially since the Act of 1863 did not
prohibit such taxation.
B. National Bank Act of Ju~ne 3, 1864
Organization of national banks proceeded slowly. So did the issuance
of circulating notes. The original act was therefore replaced by the
law of June 3, 1864,~ which made numerous changes in the details of
banking and made it easier for State banks to convert to the national
system. Likewise provision w~s made for State and local taxation of
national banks. "For in the few months which had already elapsed
since the introduction of the system there had arisen a clamor that
the banks were evading taxation altogether, inasmuch as there was
some question whether States under the decision of McCulloch v.
Maryland (1819) would have the right to tax." 6 Here is where section
5219 began (although under a different name and number).
The power of States to tax national banks was contained in "An
Act to provide a national currency secured by a pledge of United
States bonds, and to provide for the circulation and redemption
thereof." As the title indicates, the primary concern of the act and of
Secretary of the Treasury Chase was to provide a national currency
and a market for U.S. bonds. Interesting as is this phase of the history
of the national banking system, it has been amply covered many
times.7 So have the origins of State taxing powers over national banks
been reviewed.8 The tax provisions of the Act of 1864 were as follows:
~Har1ey L. Lutz, The Evolution of Section 5219, United States Revised Statutes," Bulletin of the
National Tax Association, vol. XIH, no. 7, p. 206 (April 1928).
4 Ronald B. Welch, State and Local Taxation of Banks in the United States, Special Report of the New
York State Tax Commission, no. 7, Albany, N.Y., 1934, pp. 14-15, citing E. L. Bogart, Financial History
of Ohio, University of Illinois Studies in the Social Sciences, vol. 1, pp. 297-98 (1912), and Stetson vs. City
of Bangor, 56 Me. 274 (1868).
I Laws of the United States, Acts and Resolutions of the First Session of the Thirty-Eighth Congress,
Washington, 1864, Public No. 85, pp. 106-124; 13 Stat. 106.
Dewey, on. cit., p. 327. Cf., also: "On all sides during the debate on the first bill the exemption of the
banks from State and local taxation had been taken for granted, on the imposing but reaUy ineffective
ground that the bank's capital would be invested in United States bonds. So far did the shadow cast by
McCulloch v. Maryland reach!" Lutz, bc. cit., p. 206.
Albert S. Bolles, The Financial History of the United States from 1861 to 1885, New York: D. Appleton
and Company, 1886, pp. 197-226, 381-72; Andrew McFarland Davis, The Origin of the National Banking
System, Publications of National Monetary Commission, vol. v, no. 1. 2 parts, Senate document 582, 618t
Congress, 2d Session, Washington, 1910, 213 pp.; Dewey, op. cit., chs. XIII and XVI; Leonard C. Ilalder-
man, National and State Banks: A Study of their Origins, Boston: Houghton Muffin Co., 1931, 178 pp.;
John Jay Knox, History of Banking in the United States, New York: B. Rhodes and Company, 1900,
880 pp.; Alexander Dana Noyes, History of National Bank Currency, Publications of National Monetary
Commission, vol. v, no. 2, Senate document 572, 61st Congress, 2d Session, Washington, 1910; Oliver 34. `V.
Sprague, History of Crises Under the National Banking System. National Monetary Commission Publica-
tions, vol. v, no. 3, Washington, 1910; W'illiam Walker Swanson, The Establishment of the National Banking
System, Kingston: The Jackson Press, 1910, 117 pp.; Dwight B. Waldo, A Sketch of the Origin, Establish-
ment, and Working of the National Banking System, with special reference to issues, in Publications of the
Michigan Political Science Assodation, vol. 1 (1893) pp. 23-39.
$ Lutz, bc. cit., pp. 206-10. traces the 1864 law, with various amendments, as it progressed through the
House and Senate. On the history of taxation of national banks, see especially Lewis H. Kimmel, The
Taxation of National Banks, National Industrial Conference Board, Inc., New York, 1934; Welch, op. cit.;
John B. \Voosley State Taxation of National Banks, Chapel Iii!!, University of North Carolina Press. 1935,
especially ch. I and II; John D. Jielinherger, State and Local Taxation of Banks, Ph.D. thesis, University
of Minnesota. December 15. 1960, 163 pp. and appendix. See also George Bryan, "State Taxation of National
Banks," Yale Law Journol, vol. 24, pp. 149-61 (1914-15); Samuel B. Chase, Jr., "State Taxation of Banks."
Law and Contenv)orary Prohlem~. Duke University School of Law, vol. 32, no. 1. pp. 149-67 (Winter 1967);
Fred R. Fairchild. "Stats and Lo~al Taxation of Banks," American Economic Review, vol. 6, pp. 851-868
(1916); Robert Murray Ilatz. "Should flanks Be Taxed and How?" Proceedings of the National Tax Asso-
ciation, 1929, pp. 385-3Sti. Thomas J. lloltlysh, "Tax Immunity and Taxation of National Banks: One Hun-
dred and Fifty Years after MeCulboch v. Maryland," University of Illinois Law Forum, vol. 1969, No. 2,
1970, pp. 2~4-47; WalterW. Law, Jr.. "The Taxation of Banks," Proceedings of National Tax Association,
1923, pp. 202-12, Thomas B. Paton, "State Taxation of Banks." Proceedings of National Tax Association,
1913, pp. 315-39; Paten, "The. Effect of Decisions of the United States Supreme Court in the Case of the
Merchants' National Bank," ibid., 1921. pp. 388-92; Martin Saxe, "Taxation of Banks in the State of New
York," it)id., pp. 401-12: Saxe. "Stale Taxation of Banks" in Current Problems in Public Finance, Com-
merce Clearing House, New York, 1933, pp. 207-12.
PAGENO="0237"
217
"SEC. 41. And be it further enacted, * * * Provided, That nothing in this~
act shall be construed to prevent all the shares in any of the said
associations, held by any person or body corporate, from being in-
cluded in the valuation of the personal property of such person or
corporation in the assessment of taxes imposed by or under State
authority, at the place where such bank is located, and not elsewhere,
but not at a greater rate than is assessed upon other moneyed capital
in the hands of individual citizens of such State: Provided further,
That the tax so imposed under the laws of any State upon the shares of
any of the associations authorized by this act shall not exceed the rate
imposed upon the shares in any of the banks organized under authority
of the State where such association is located: Provided also, That
nothing in this act shall exempt the real estate of associations from
either State, county, or municipal taxes to the same extent, according
to its value, as other real estate is taxed."
Since the question later arose as to whether the national banks were
"instrumentalities" of the U.S. Government, it is important to note
that several important functions were given the national banks. The
Secretary of the Treasury was empowered to designate them as "de-
positories of public money, except receipts from customs." They
might also "be employed as financial agents of the government; and
they shall perform all such reasonable duties, as depositories of pub-
lic money and financial agents of the government, as may be required
of them." To insure prompt payment of public money deposited with
*them and to assure the faithful performance of their duties as finan-
cial agents, the Secretary of the Treasury was to require such security
as the deposit of "United States bonds and otherwise." As deposi-
tories they also had to accept at par all national currency hills "by
whatever association issued." ~
As indicated in the quotation above, Congress specifically conferred
(or recognized) the right of the States (1) to tax the shares of stock
in national banks, as personal property, to persons or corporations at
the place where the bank was located (and not elsewhere) at a rate
no greater than was applied to shares of State banks, and (2) to tax
real estate of national banks to the same extent, according to its
value, as other real estate was taxed. Local governments also were
permitted to tax bank real estate situated in their jurisdictions. These
enumerated provisions correspond with practices then prevalent in
the States.'° Some of them taxed shares of stock as personal property,
although the personal property tax was a badly administered tax
everywhere and never had been made to work uniformly or equitably.
All the States and localities imposed taxes on real estate where it was
located. In essence, therefore, the taxes provided for in the Act of
1864 were usual and customary. Nor were the States forced to develop
new tax devices to reach the national banks. What was intended was
the equal taxation of State and national banks. Or, stated another
way, taxes on national banks were not to be at a greater rate than
taxes on State banks. Congress sought to prevent State tax discrimi-
nation against national banks or in favor of State banks, since it
wanted to encourage the chartering of additional national banks. As
it was, State banks then greatly outnumbered national banks. The
State tax provisions in the Act of 1864 were liberal and fair, so far as
Act of June 3, 1804, bc. cit., sec. 4~.
10 Jfl later pages the State tax systems about .1860, 1922, anti 1969 are briefly describeti.
Infra, pp. 341-347, 358-379.
PAGENO="0238"
218
the intentions of Congress were involved.'1 There seems to be no ques-
tion that Congress could have exempted national banks from all
taxation had it chosen to do so.
C. Tax on State bank notes, 1865
The Act of 1864, although it was a great improvement over the
national bank act of 1863, did not restrict the circulation of issues by
State banks. Accordingly, in the Act of March 3, 1865, Congress im-
posed a tax of 10 percent beginning July 1, 1866, on all State bank
issues.'2 This tax effectively stopped all such issues.'3 It created much
resentment among the States.'4
While the Act of 1865 provided a prohibitive tax on the circulation
of State bank notes,'5 it did not directly affect or relate to the taxation
of national banks by the States. it provided an impetus to the forma-
tion of new national banks, giving the States more national banks to
tax.'6 Although this act said nothing about how these banks were to be
taxed by the States, it had a significant indirect effect. it added to the
resentment against national banks, particularly in the West, where
greater quantities of currency were needed. it was also regarded by
many as an encroachment on States rights, it was a greater handicap
to State banks than anything in the national bank act. Mr. Justice
Nelson concluded his dissenting opinion in Veazie Bank v. Fenno with
these words: `~
* The purpose [of the law] is scarcely concealed, in the opinion of the court,
namely: to encourage national banks. It is sufficient to add, that the burden of the
tax, while it has encouraged these banks, has proved fatal to those of the States;
and if we are at liberty to judge of the purpose of an act, from the consequences
that have followed, it is not, perhaps, going too far to say that these consequences
were intended.
Bitterness over this interference may have played a part in the
attempts of States to extract increasing sums from the taxation of
the rival national banks. Bolles described the law as "giving the State
banks another strong boost out of existence." 18
D. Act of February 10, 1868
The Congress in 1868 made a slight modification in the bank tax
provision of the Act of 1864 concerning the place where national bank
shares were to be taxed. It authorized the legislature of each State to
I' Cf., Leland, The Classified Property Tax In the United States, Houghton Miffiin Co., Boston, 1928,
p. 204.
U 13 Stat. at L., 469. at p. 484 (38th Congress, 2d session). The title of the Act was, "An Act to amend an
Actentitled, `An Act to provide Internal Revenue to support the Government, to pay Interest on the Public
Debt, and for other Purposes, approvedJune thirtieth, eighteen hundred and sixty-four.'" The taxing provi.
sion was as follows: "Sec. 6. And be it furl her enacted, `That every national banking association, State bank,
or State banking association, shall pay a tax of 10 per centum on the amount of notes of any State bank or
State banking association, paid out by them after the first day of July. eighteen hundred and sixty-six.'"
For an Interesting discussion, see Judge Thomas M. Cooley, "Federal Taxation of State Bank Currency,"
Publications of Michigan Political Science Association, no. 1, pp. 40-56 (1893).
13 This tax was upheld in Veazie Bank v. Fenno, 8 Wall. (75 U.S.) 533 (1869). In reviewing the legislative
history of the Act, ChIef Justice Chase pointed out that under the Act of February 25, 1863, a tax of 2 percent
annually was imposed on circulation but that soon after, under the Act of March 3, 1863, 12 Stat. at L., p.
712, a lighter tax "of 1 percent annually was imposed on the circulation of State banks, In certain proportions
to their capital and of 2 percent on the excess; and the tax on the national associations was reduced to the
same rates." (At p. 538.) He mentioned also that under the Act of June 30, 1864, the rate of tax was continued
at 1 percent and that the shareholders of the national banks were subjected to taxation by the States on their
Ihares. Ibid. He also pointed out that at first (in 1863) "Congress was inclined to discriminate for, rather
than against, the circulation of State banks; but that when the country had been sufficiently furnished with
a national currency. . . the discrimination was turned, and very decidedly turned, in the opposite direc-
tion." Ibid., p. 539.
14 Cf. Chcrles S. Tlppetts, State Banks and the Federal Reserve System (New York: Van Nostrand Co.,
1929), pp. 7-8.
15 For example, one bank in Arkansas had to pay $160,000. Statement by Mr. Stevenson, Congressional
Record, House, vol.64, pp. 955-6 (Dec. 17, 1922), hereafter abbreviated 64 C.R., pp. H95.5-6 (Dec. 17, 1922).
~ On November 15 1864, only 584 national banks had been organized; by October 1, 1865, 1,566 associations
had been organized. bavis, op. cit., p. 103.
~ 8 Wall. (75 U.S.), at p. 490.
It Albert S. Boles, op. cit., p. 228.
PAGENO="0239"
219
determine and direct the manner and place of taxing all the shares of
national banks located within the State, except that shares owned by
non-residents of the State could be taxed only in the city or town
where the bank was located.'2
E. Enter Section 5219: 1875
A codification of United States statutes as they existed on December
1, 1873, was printed in 1875.20 It included the Act of June 3, 1864, as
amended in 1868, covering State taxation of national banks. Here for
the first time the relevant provisions of these acts became Section
5219.21 Even though in later codifications this section came to be known
as title 12, Section 548,22 the designation of 5219 has stuck with the
provision, and generally in the literature, whenever State taxation of
national banks is discussed, reference is made to the provisions of
section 5219.
In the codification of 1873 a few minor changes in words were made,
compared with texts of the Act of 1864 as amended in 1868. These
changes appear to be textual or literary rather than substantive.23
A change in the words governing the place where national bank
shares were taxable has already been noted. Of this change, Welch
has said: 24
"The amendment [of 1868], as both houses were repeatedly assured
by the chairmen of the reporting committees, involved a single change.
l'Act of February 10, 1868; 15 Stat. at L., 34; ch vii. For the text of the act, see section C in appendix 1,
at p. 4 above.
0 Revised Statutes of the United States, Passed at the First Session of the Forty-Third Congress, 1873-74,
with an Appendix Containing "An Act to Correct Errors and Supply Omissions," Government Printing
Office, Washington, 1875. (Since the codification was of statutes as they existed in December 1, 1873, that
date may be used as a reference as well as the publication date, 1875.)
21 Ibid., title LXII ch. 3, sec. 5219, p. 1015. The origin of section 5219 has frequently been given as 1878
where sec. 5219 also appears. Second Edition, Revised Statutes of the United States, passed at the Forty-
Third Congress, 1873-74; with an appendix; Government Printing Office, Washington, 1878; title LXII,
cli. 8, sec. 5219, p. 1009. Cf. Saxe, "State Taxation of Banks," in Current Problems In Public Finance, Com-
merce Clearing House, Chicago, 1933, p 207.
~` As for example In the U.S. Code, 1940 ed., title 12, cli. 4, section 548, at p. 838, or United States Code,
1904 edition, Supplement v, U.S. Government Printing Office, Washington, 1970, title 12, ch. 4, sec. 548,
at p. 673.
23 The wording of sec. 5219 is identical in the Revised Statutes printed in 1875 and 1878. Differences from
the 1864 and 1868 version are as follows:
Line of sec.
5219 in 1873
Words substituted in
Revised
Words in acts of 1864 and 1868
1873 Revised Statutes
Statutes
"in this act"
"shall be construed to"
"herein"
omitted
1
1
"of the said"
omitted
1
"associations"
"association"
1-2
"held by any person or body corporate"
"of such person or corporation"
"in the assessment of taxes"
"imposed by or under state authority"
"at the place where the bank is located,"
"but"
omitted
"of the owner or holder of such shares"
"in assessing taxes"
"imposed by authority of the state"
"within which the association is located;"
"and"
2
3
3
3-4
4
4
"said"
"the"
7
"subject to the restriction"
"And provided always"
"national bank"
"said bank"
"subject only to the two restrictions"
omitted
"banking association"
"the bank"
7
9
10
11
"Provided also that"
omitted
12
"nothing in this act"
"shall exempt"
"real estate"
"real estate"
"nothing herein"
"shall be construed to exempt"
"real property"
"real property"
12
12
12-13
14
`Welch, op. cit., p. 16, citing Packard v. The City of Lowiston, 55 Me. 456 (1867) and Austin v. Board of
Aldermen of the City of Boston, 96 Mass 359 (1867).
PAGENO="0240"
220
Instead of requiring that all shares be taxed `at the place where such
bank is located,' the place at which shares of resident stockholders
were to be taxed was left to the discretion of the State. The interpre-
tation of this phrase in the earlier act had already been called into
question in two of the New England States where it was customary to
tax i_personal property at the residence of the owner."
Welch called attention also to the fact that the second of two earlier
separate limitations upon the magnitude of a tax on shares was not
included in the revision of 1875. In the Act of June 3, 1864, that limi-
tation was as follows:
"Provided further, that the tax so imposed under the laws of any
State upon the shares of any of the associations authorized by this
act shall not exceed the rate imposed upon the shares in any bank
organized under the authority of the State where such association is
located."
Welch commented that, "no mention having been made in the act
of 1868 of the second limitation, it was deleted in the Revised
Statutes." ~
But the Revised Statutes did state another limitation exactly as
it had appeared in the Act of February 10, 1868, "That the shares of
any national bank owned by nonresidents of any State shall be taxed
in the city or town where said bank is located and not elsewhere."
It would seem that Congress intended this to be substituted for the
proviso set forth in the Act of June 3, 1864. The codifiers so inter-
preted the 1868 amendment.
F. Taxation of notes and deposits: 1894
* On August 13, 1894 Congress passed an act providing for the taxa-
tion of bank notes, U.S. circulating notes, coins, and bank deposits
by States at the same rate as other money within the State.25 This act
has been almost uniformly ignored, or passed over, in writings on the
taxation of national banks by States, perhaps for the reason that the
act specified that its provisions were not to be "deemed or held to
change existing laws in respect to the taxation of national banking
associations." However, Ronald Welch, in his State and Local Taxa-
tion of Banks in the United States, not only discussed the law but also
printed it with other federal acts pertaining to section 5219.27
Despite the disclaimer that the act was not to affect section 5219,
Congressional consent to State taxation of money and deposits to
individual owners was the same type of action as the permission given
m the Act of 1864 for States to tax bank shares to the owner, except
that shares were to be taxed "at the place where such bank is located."
Since most intangibles then and since have been taxed where the owner
is domiciled, the amendment of 1868 provided that for resident
stockholders "the place" could be anywhere within the State as would
be determined by State law. Thus, for stockholders living within the
State where the bank was located, the situs of taxation might be
either within the jurisdiction where the bank was located or the place
where the stockholder lived and paid property taxes.
"Ibid. Cf. Woosley, op. cit., p. 17. Saxe, bc. cit. in Current Problems in Public Finance, p.. 207, says
that the reference to State banks was eliminated "for the reason that shares in State banks constituted
`other rnonied capital' and further, to leave the States free to tax their own banks by whatever method
they saw fit."
"Act of August 13, 1894, ch. 281, sees. 1,2; 28 Stat. at Large, 278; reproduced above in appendix 1-F, p. 8.
~ Welch, op. cit., pp. 115 and 222-23.
PAGENO="0241"
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The law with respect to the taxation of bank shares was the subject
of continuing litigation over the meaning of "other moneyed capital"
and the taxation of intangibles "in the hands of individual citizens
of such State." 28 No such cases seem to have arisen in connection
with the taxation of money, circulating notes, or bank deposits seeking
the invalidation of taxes on national banks. Where owners of intangi-
bles were taxed at lower rates than national banks, the differential,
as in the Richmond case,2° was fatal, but the cases did not arise
specifically as to bank deposits, even though the individuals whose
activities were held to be "in competition with national banks" may
have had money on hand or in bank deposits.
At the tir~e the Act of 1894 was passed, several States, among them
Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode
Island, and Vermont, were taxing bank deposits, usually savings
deposits, to the bank. ].n Pennsylvania all money was taxed to indi-
viduals. Later as the movement to adopt low-rate taxes on intangibles
spread, special bank deposit taxes were widely adopted.3° A discussion
of these taxes, interesting as they are, will not be carried further be-
cause it would lead away from developments under section 5219.
A parallel between State taxes on bank shares and bank deposits is
further seen in the application of collection-at-the-source to both
taxes. To help make the share tax effective, the Act of 1864 required
each bank to keep a list of stockholders "in the office where its business
is transacted" open to the inspection of shareholders, creditors, "and
the officers authorized to assess taxes under State authority." 31 The
lists were also to be transmitted to the Comptroller of the Currency.
These provisions made the share tax "the most effectively enforced of
all personal property taxes." 32 But as long as all property under the
general property tax was treated uniformly under the law, discrimina-
tion which resulted from poor administration did not, at first, invali-
date taxes on national banks to which similar tax rates were applied.
However, later decisions of the courts invalidated even general
property taxes on national banks where substantial discrimination was
shown to exist in fact.
In some States, particularly in New England, where special taxes
were placed on deposits (usually savings), the tax was generally
levied on the banks. In other States, deposits, like money, were listed
for taxation by individuals. The self-assessed taxes proved to be
defective-like other personal property assessments. Hence collection
of such taxes from the banks as agents of depositors, with rights of
reimbursement, began to develop. The tax was legally assessed against
the depositor but was paid for him by the bank. By 1930, 11 States
were collecting their low-rate taxes on deposits at the source.33
In 1942, 19 States and the District of Columbia did not impose ad
valorem taxes on bank deposits.34 In 22 States, depositors had to report
for taxation the amount of their deposits, and pay taxes on them. In
Georgia the banks could report the tax if authorized by the depositors;
28 For further discussion, see infra, pp. 165-89, 195-202, 216-17, 251-52, 311, 323-25.
29 Discussed below, pp. 245-246, 265-272.
30 Cf. Leland, op. cit., pp. 216-21; Welch, op. cit., pp. 117-21, 125-32.
31 Section 40, quoted in Woosley, op. cit., pp. 11-12.
32 Ibid., p. 12.
`~ Cf. Welch, op. cit., pp. 126-30.
~ Details in this paragraph are based upon "State ad valorem taxation of bank deposits." Survey made
by Legal Department of American Bankers Association, as of January 1, 1942 (mimeo., 14 pages).
79-421 0 - 72 - 16
PAGENO="0242"
222
in Indiana the bank could elect to pay the tax but if it did the tax
could not be charged against the depositors. In many places no effort
was made to assess deposits. It was said that taxes on deposits could
not be imposed on national banks because of section 5219; therefore
assessments were made in the names of depositors. In Ohio, the taxes
were assessed in the name of the bank but the bank was given a lien
for reimbursement. In Kentucky, no State deposits taxes were paid*.
by banks, but out-of-State deposits were reported and the taxes
paid by the depositors. North Carolina followed the same policy. In
practice, many banks assumed and paid the tax for depositors, as in
Ohio and Illinois. Competition for deposits led many banks to absorb
the deposit taxes, regardless of. law, as a matter of good business.
However much the taxes on deposits may have figured in the
development of State taxation devices, they were not the primary
concern of Congress. Indeed, deposit taxes were not even mentioned
in debates reported in the Congressional Record when the taxation
of notes and deposits was being considered. Nor had they been men-
tioned in Congress in connection with the Acts of 1864, 1865, or 1868,
"yet such a tax would be as effective in destroying these important
functions as was the Federal tax upon the circulation of State banks
in destroying their note issues".35 The law of 1894 was dii ected primarily at
permitting the taxation of U.S. notes (greenbacks) and bank notes,
which had been made legal tender and were intended to circulate as
money. Non-circulating bonds, obligations of the U.S., were recog-
nized as non-taxable. But the general practice among the States had
been~to tax bank notes and greenbacks as money subject to assessment
to individuals, as other personal property.36 Considerable furor had
been caused by a decision of the Mississippi Supreme Court in 1876,
which held that national bank notes were obligations of the United
States and therefore not taxable by States and local governments.37
It was reported in Congress that Mississippi was the only State which
adhered to this opinion.38 Nevertheless the decision in Mississippi and
the use of greenbacks and bank notes as devices to avoid State and
local property taxes created much concern for remedial legislation
among State taxing officials and members of Congress.
The State Tax Board of indiana petitioned Congress to act. When
H.R. 4326 in the 53d Congress was being debated in the House, Mr.
Cooper of indiana said:
"~ * * in Indiana * * * we have yet found ourselves wholly unable
to secure honest returns of money on hand or on deposit without
the assistance of Congressional action."
The use of greenbacks for tax avoidance loomed large in the debates
on H. R. 4326. Nor were these practices limited to greenbacks; they
could be (and were) facilitated by the use of U.S. bonds.40 (And it
should be added that Federal tax-exempt securities were so used in
many general property tax States and have doubtless continued to be
so used until the present time.) How the system worked was clearly
11 Welch, op. cit., p. 315.
2626 C.R., p. 117140 (July 5, 1894).
27 1. R. Home, Tax Collector v. 1. & T. Green, 52 tfiss. 452 (1876).
~ Statement of Mr. Cox, 26 CR., p. H7143 (July 5, 1804).
$6 Ibid., pp. 117177 (July 6, 1894).
4° See ibid.. pp. 117141, 7146, 7151, and ef. statement of Mr. McCall, ibid., July 6, 1894, p. H7176. H.R. 4320
was signed by the President on August 16, 1894.
PAGENO="0243"
223
stated by Mr. Hall (Mo.), citing a Leavenworth case with this state-
ment of facts: 41
"A man with a little over $19,000 in currency in one of the banks
the day before the assessors came made his check out for his $19,000,
and asks that it be paid him in greenbacks. It is handed to him, and
he puts it in an envelope and makes a special deposit of the same. The
assessor comes the next day and the- holder of the $19,000 of green-
backs says, `1 have no money that is subject to State or municipal
taxation.' This is simply used as a cloak, a stalking horse, a shield to
cover the men who desire to make fraudulent returns of their property
for assessment purposes; and the Government of the United States,
by letting this law remain on the statute books, becomes part iceps
criminis to that proceeding.
0 6 .0
"He reconverted them the second day afterward."
After some discussion, Mr. Hall added: 42
"These Treasury notes are now used by the trust companies of the
United States and are used by unscrupulous men of all kinds and
classes to shield themselves from taxation by making a return similar
to the Leavenworth man to whom I have referred. We cannot afford
to lay down such precedents."
In its decision on the Leavenworth case, the Supreme Court said:
"U.S. notes are exempt from taxation by or under State or municipal
authority; but a court of equity will not knowingly use its extra-
ordinary powers to promote any such scheme as this plaintiff devised
to escape his proportional share of burdens of taxation." -
But bona fide transactions involving the conversion of notes or
bonds have been held to be legal 44-a cover which amply protected
tax avoidance maneuvers in many States for many years.
Those who opposed the adoption of a law to permit State taxation
of Treasury notes because they facilitated tax dodging had a good
answer to the arguments of the proponents. Mr. Johnson (md.)
remarked: ~
"Why, sir if the mere fact that governmental powers are used by
dishonest men for improper purposes be a reason for surrendering
those powers or cedings them away, you will soon emasculate the
General Government and leave it stripped of every attribute of sov-
ereignty; for I know of no particular power which cannot be made
the subject of abuse by bad and unscrupulous men."
The fact that greenbacks (Treasury notes) had been issued as tax
exempt and that this "obligation" was now being repudiated bothered
many members of Congress, especially in the Senate. It was argued
that the issue of notes created a contract with those who accepted and
held them. Some thought that the issuance amounted oniy to coining
money. Others thought since the good faith of the nation was at stake
if the notes were to be taxed, they should be called and reissued as
taxable notes.46 Proponents of the bill could see little difference
41 26 CR., 117141 (July 5, 1894). The case referred to Is Mitchell v. Board of Commissioners of Leavenworth
County, Kansas, 91 Sup. Ct. 206 (1875). Similar instances were cited by Mr. Powers; ibid, p. 117151, and by
Mr. Connors (111.) p. 117180 (July 7, 1894) Fraudulent use of notes was referred to In the Senate by Sen.
Purple, p. S8209 (Aug. 4, 1894).
42 Ibid., p. 117141. (July 5, 1894).
4291 Sup. Ct. 206, at p. 208.
~` Cf. Stlllwell v. Corwtn, 55 md. 433 (1876).
4' 26 CR., p. 117145 (July 1. 1894).
~ Act of March 3, 1863. 26 CR. (July 6, 1894), p. 117151; (July 5, 1894) pp. 117151, 7170, 7171, 7172, 7177,
7178, 7179, 7180. But It was not a contract In perpetuity; Mr. Turple, p. S8209 (Aug. 4, 1894).
PAGENO="0244"
224
between greenbacks, bank notes, gold and silver coin, and even
horses and cattle as personal property taxable to the holders.47 More-
over, one form of circulating notes or legal tender could easily be
exchanged for another and then spent for any kind of taxable property.
Senator Kyle (Miss.) remarked,48
"Why * * * is there any equity or justice in exempting my
property from taxation because I have greenbacks or Treasury
notes . . . [but taxing] my neighbor's property because it happens
to be invested in gold or silver or national bank notes?"
Nor was the issue of Federal vs. State authority overlooked.
Mr. McCall thought national sovereignty was being surrendered by
giving States and municipalities the right to tax greenbacks.49 But
Mr. Cooper thought that the "States were capable of self government"
and "ought to be allowed to do some self government in the matter of
collecting taxes." ~° The issue of taxing greenbacks and bonds had
even been made a political issue in campaigns in Ohio, Illinois, and
"in all our northern States." 51
The debates, like others on section 5219, evidenced much confusion
and frequent digressions. Members of Congress were not always clear
whether the taxes they were considering were to be upon the banks
or upon individuals, as stockholders. Instrumentalities, agencies, and
government property also were drawn into the debate. On the whole,
more concern and discussion revolved around the taxation of green-
backs than over the taxation of national bank notes. Even the cost to
the States of the exemption of notes got short shrift.52
In due course H.R. 4326 became the Act of August 13, 1894
(reproduced in appendix 1-F above).
Two things were made perfectly clear by this act: (1) That States
were not permitted to impose discriminatory taxes on circulating
notes or currency, be they greenbacks or national bank notes; and (2)
that the new law did not change existing law (section 5219) regula-
ting taxation of national banks.
G. The Federal Reserve Act of 1913
Although the Federal Reserve Act, adopted in 1913,M did not
change a single word, jot, or tittle of section 5219, it so changed the
functions and positions of national banks as to undermine their status
as "instrumentalities" of the United States government. As
"instrumentalities," national banks long enjoyed a preferred position
with tax immunities under the decisions of the Supreme Court.
However, since the creation of the Federal Reserve System their role
in the scheme of things governmental has so changed that it is believed
to be only a matter of time until national banks are no longer regarded
as federal "instrumentalities."
~ Mr. Hepburn, ibid., p. 117181 (July 6, 1894). On coining money, Mr. Northway: Let the government re-
deem them and `let the tax be levied on what is u cd to accompii3h that redemption." Ibid., p. 117175. Mr.
McCall expressed the same view, ibid., p. H7l76. Mr. liublick concurred, ibid., p. H7177. Ibid., pp. 117143,
7144, 7150 (horses and cattle) (July 5, 1894). Difference between notes and gold and silver coin is for the
Senate to determine; Mr. Sherman, p. S8145 (Aug. 3, 1894). Free coinage advocates added an amendment
assec. 3 and 4; presented by Sen. Stewart (Nevada), p. S8147 (Aug. 3, 1894).
`3 IbId. p. 117180, July 7, 1894.
`3Ibid., p. 117176, July 6, 1894. See also pp. 117146-49, 7170.
"Ibid., p. H7146, July 5, 1894.
~1 Mr. Northway, Ibid., p. 117175, July 6, 1894; Mr. Grosvenor, p. H7l78.
"Mr. Cooper; ". . . in most of the cities and towns of this country, including county and State taxation,
the rate of taxation is at least 2)~ percent . . . . We are therefore payIng 23-i percent on these notes by
exempting them from taxation." Ibid., p. 117173. The total issue of greenbacks was said to be $346,381,016,
with $268,772,371 In circulation-Mr. Hulick, Ibid., p. 117177. But Mr. McC 11 pointed out that if all the
States taxed greenbacks the yield would be very small. Ibid.. p. H7176. Beyond this little was said as to the
cost of such exemption to the States.
`3Act of December 23, 1013 (12 U.S. Code ch. 3).
PAGENO="0245"
225
In the economic history of the nation the establishment of the
Federal Reserve System ranks as one of the most important steps
taken by the United States government-along with creation of the
national banking system in 1863. The Federal Reserve System was
imposed upon the national banking structure, not only without
upsetting that established system but making it stronger and more
efficient. The new arrangement was tested immediately by the
financial exigencies of World War I. It is doubtful if that war could
have been financed successfully without it.
Perhaps the most significant thing about the Federal Reserve Sys-
tem was that it provided a currency designed to be responsive to the
needs of trade, which supplemented and eventually superseded the
earlier inelastic system of national bank notes. Initially, this new
currency was secured by commercial collateral, such as notes, drafts,
bills of exchange, and acceptances, but later gold and direct obliga-
tions of the United States also were made eligible. It had long been
apparent that the national bank notes, backed by bank-purchased
portfolios of selected Government obligations deposited with the
Secretary of the Treasury, did not satisfy the currency needs of the
growing economy of the country. The supply of notes had proved to be
perversely elastic.~ It was often excessive when the need was least;
when expansion of the money supply was needed the banks were often
in no_position to provide it. The panic of 1907 clearly demonstrated
this. Even the retirement of U.S. bonds by the Treasury reduced the
money supply. This inelasticity was recognized before the Federal
Reserve System was created, and was one of the effective forces for its
establishment.54
Under the Federal Reserve Act the new asset currency-Federal
Reserve notes-began to supplant national bank notes. by 1935 the
latter were completely retired. Thus the national banks were deprived
of their function of supplying a large part of the necessary money sup-
ply. Nevertheless, with the growing acceptance of checks and drafts as
the customary mode of settling commercial transactions, the role of
national banks in supporting the money supply (defined to include
demand deposits as well as currency) continued important. Deposit
creation, too, has been made more efficient, more responsive to business
needs, and given both direction and control by the Federal Reserve.
This, however, is not the place to discuss the operations of that system.
It is enough to indicate that the traditional role of the national banking
system in providing a nationally uniform currency has been superseded.
The Federal Reserve banks were made depositaries for Treasury
and other U.S. funds, a function formerly performed by the national
banks. They took over also the fiscal agency functions-the sale,
issuance, retirement, and exchange of various Federal bonds, notes,
bills, etc., which, expecially during World War II, was a large scale
operation. The Federal Reserve banks also buy and sell bankers
acceptances. They perform a clearing function for checks drawn
against banks that remit at par. They fix rates of interest member
banks may pay on time deposits, and do various other things not
only for national banks but also for other member banks.
I he Federal Reserve System is completely integrated into the
banking system of the country. All national banks were required to
N See Alexander Dana i'~oyes, history of the National Bank Currency, National Monetary Commission,
Senate Document No. 572, 61st Congress, 2nd sessIon, Washington, D.C., 1910, pp. 9-20.
PAGENO="0246"
226
subscribe and pay into the system a small part of their capital; State
banks also were permitted to join. Both are functioning "member"
banks and the stockholders of the System, which is under the direction
of a federally-appointed Board of Governors.
As is indicated in subsequent pages, when the 1923 and 1926
amendments to section 5219 were being considered, it was frequently
argued, in and outside Congress, that tampering with these provisions
might injure the national banks and through them undermine the
Federal Reserve System. There was little substance i11 such talk.
Neither the banks nor the Federal Reserve System were in any real
danger.
An interesting feature of the Federal Reserve Act was a provision
permitting States and localities to tax Federal Reserve Bank real
estate.M This was in recognition of the fact that the exemption of
Federal Reserve Bank buildings and land would cast a burden upon
taxpayers in the communities where the banks were located, whereas
the benefits of the System would extend throughout the country. In
other respects the banks were to be exempt from taxation by Federal,
State, and local governments.
With the advent of the Federal Reserve System and changes made
over time in the powers and functions of national banks, it was natural
that the immunities of the national banks as "instrumentalities of the
United States" should be questioned. The issue came to a head in
First Agricultural National Bank v. State Tax Commission when the
Supreme Judicial Court of Massachusetts sustained the Massachusetts
sales and use taxes on purchases of tangible personal property by
national banks.56 The Massachusetts court held that national banks
were not "instrumentalities" of the United States government and
hence were not entitled to immunity from sales and use taxes. This
decision was promptly reversed by the United States Supreme Court,
June 18, 1968.~~ The majority opinion by Justice Black held that,
since sales and use taxes were not listed among the permitted state
taxes on national banks in section 5219, such taxes were void. Justice
Black found it unnecessary to decide whether national banks were
Federal "instrumentalities": 58
"The decision below recognized the strong precedents against taxa-
tion, but the Massachusetts Supreme Judicial Court was of the opinion
that the status of national banks has been so changed by the establish-
ment of the Federal Reserve System that they should no longer be
considered nontaxable by the States as instumentalities of the United
States. Essentially the reasoning of the Supreme Judicial Court is that
under present-day conditions and regulations there is no substantial
difference between national banks and State banks; and the implication
of this is, of course, that national banks lack any unique quality giving
them the character of a Federal instrumentality. Because of pertinent
congressional legislation in the banking field, we find it unnecessary
to reach the constitutional question of whether today national banks
should be considered nontaxable as Federal instrumentalities."
*5 Act of December 23, 1913, sec. 12 U.S.C. 531. See appendix 1-D(1), p. 5, above, for the text.
*5353 Massachusetts 172, 229 N.E. 2nd 245 (1967). See discussion in Thomas J. lioldych, "Tax Immunity
andTaxation of National Banks: One Hundred and Fifty Years After McCulloch v. Maryland," Uni-
versity of Illinois Law Forum, vol. 1969 no. 2 (1970), pp. 224-47.
*7 First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339, 20 L.
Ed. 2d 1138, 88 S. Ct. 2173 (1968).
~Ibid., p. 341.
PAGENO="0247"
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However the dissenting opinion, written by Justice Thurgood
Marshall and joined in by Justices Harlan and Stewart met the
"instrumentality" issue head on-contending that national banks
should no longer be treated as Federal "instrumentalities."59 Observing
that decisions of. the Court tended toward restricting "the scope of
immunity [from taxes] of I)l~ivate persons seeking to clothe themselves
with governmental character," Mr. Justice Marshall suggested that
the wisdom of that trend counseled a rejection of the constitutional
argument in the Agricultural Bank case. The Court at its last term had
declared that "there is no simple test" for ascertaining whether an
institution is a tax-immune instrumentality and, over the years, had
applied different formulations of "the controlling test" in different
cases, using various specific factors and characteristics to determine
the status of specific institutions. His opinion then continued:
"Under any of those rubrics and applying the factors listed above-
a national bank cannot be considered a tax-immune Federal
instrumentality. It is a privately owned corporation existing for the
private profit of its shareholders. It performs no significant Federal
governmental function that is not performed equally by State-
chartered banks. Government officials do not run its day-to-day
operations nor does the Government have any ownership interest in a
national bank.
"Appellant points to two factors as leading to the conclusion that
national banks are Federal instrumentalities: that they `owe their
very existence to congressional legislation,' and that they are subject
to extensive Federal regulation. But the fact that institutions `owe
their existence to,' i.e., are chartered by, the Government, has been
definitely rejected as a basis alone for determining they should be tax
immune
"Similarly, a whole host of businesses and institutions are subject to
e:tensive Federal regulation and tha~t has never been thought to bring
them within the scope of the `Federal instrumentalities' doctrine. The
plain fact is that one could hold that national banks have a constitu-
tional tax-immune status today only by mechanically applying the
three seminal cases of M'Culloch, Osborn, and Owensboro."
Having referred to "three seminal cases," Mr. Justice Marshall
examined the functions performed by national banks involved in those
cases. He pointed out that the Second Bank of the United States,
involved in McCulloch and Osborn, was partly owned by the United
States; was directed by a Board that included Presidential appointees;
was the designated depositary for all Government funds, subject only
to snecial exceptions; issued legal tender currency; transmitted funds
for the Government without charge; and acted as fiscal agent of the
Government. "Even the national bank involved in O~vensboro," the
opinion continued, "might warrant tax-immune status were it in
existence today." This bank, established under the National Currency
Acts of 1863 and 1864, had an important currency-issuing function.
All of this, said the Justice, was radically changed with the passage
of the Federal Reserve Act of 1913 and by subsequent developments
with respect both to the Federal Reserve System and to national
banks:
"To capsulize those developments greatly, suffice it to say that the
Federal Reserve. Banks (and System) are now the monetary and fiscal
&~ Ibid., pp. 352-59. Footnob's in quotations that follow are from the opinion, numbered as in the opinion.
PAGENO="0248"
228
agents of the United States. 12 USC 391. By 1935, the power of
national banks to issue currency had ceased and now Federal Reserve
banks are the only banking institutions that can do so. . . . The
diminished importance of national banks as Federal functionaries was
compensated for by the enactment of legislation designed to make
them more competitive with State banks, e.g., branch banking,
44 Stat 1228 (1927), as amended, 12 USC 36(c); fiduciary powers,
76 Stat 668 (1962), 12 USC 92a; rate of interest on loans, 48 Stat 191
(1933), as amended, 12 USC 51; and interest on time and savings
deposits, 44 Stat 1232 (1927), 12 USC 371.
"To be sure, the Federal Reserve System could not function without
national banks, which are required to be members therein, 12 USC
222, and in that sense they are part and parcel of the establishment
and effectuation of the national fiscal and monetary policies. But,
in my view, that does not make them sufficiently quasi-public to
enjoy the tax-immune status of Federal instrumentalities. If that
alone were enough, then it would seem that State banks which elect
to join the Federal Reserve System should also be tax-immune
Federal instrumentalities.7
"In any event, there is little difference today between a national
bank and its State-chartered competitor: the ownership, control and
capital source of each is private; each exists for private profit. More
importantly, neither may issue legal tender.
"Today the national banks perform no significant fiscal services
to the Federal Government not performed by their State competitors.
Any federally insured bank, State or national, may be a government
depository. 12 USC 265. The principal checking accounts of the
Government are carried today, not by national banks, but by the
Federal Reserve banks. `When a new issue of government securities
is offered, the Federal Reserve banks receive the applications of
purchasers. When government securities are to be redeemed or ex-
changed, the transactions are handled by the Federal Reserve banks.
Those banks administer for the Treasury the tax and loan deposit
accounts of the banks in their respective districts.
"In Graves v. New York ex rel. O'Keefe, 306 US, at 483, 83 L Ed
at 935, 120 ALR 1466, Mr. Justice Stone wrote for the Court:
"`[T}he implied immunity of one government and its agencies from
taxation by the other should, as a principle of constitutional construc-
tion, be narrowly restricted. For the expansion of the immunity of
the one government correspondingly curtails the sovereign power of
the other to tax, and where that immunity is invoked by the private
citizen it tends to operate for his benefit at the expense of the taxing
government and without corresponding benefit to the government
in whose name the immunity is claimed.'8 That is precisely the situation
here; I would heed those words and hold that national banks, today,
are not immune from nondiscriminatory State taxation as Federal
instrumentalities.9 I might also add that I am a bit mystified that
"As of December 31, 1966, membership in the Federal Reserve System was composed of 1,351 State-
chartered, and 4,799 national, banks. The Federal Reserve System: Purposes and Functions, [5th rev. ed.
1967), . . . at 24-25."
8 "Accord, Indian Motorcycle Co. v. United States, 283 US 570, 580, 75 L Ed 1277, 1283, 51 5 Ct 601 (1931)
(Stone, 3., dissenting)."
8 "Compare the rejection of a national bank's contention that it, as a Federal instrumentality, should be
exempt from the Federal labor laws, NLRB v. Bank of America, 130 F2d 624, (CA 9th Cir. 1942) (footnote
omitted):
It is a privately owned corporation, privately managed and operated in the interest of its stockholders.
The United States did not create it, but has merely enabled it to be created
PAGENO="0249"
229
under the Court's decisions in this field the Federal Government in
practical effect must pay a State tax in dealing with its contractors
(who pass the tax on to the Government), see, e.g., Alabama v. King
& Boozer, 314 US 1, 86 L. ed. 3, 62 S. Ct. 43, 140 A.L.R. 615 (1941),
but that a national bank, a private profit-making corporation, is
constitutionally immune from State taxation."
Should the reasoning of Justice Marshall be supported by a majority
of the Justices of the Supreme Court, the Federal Reserve Act will
no longer affect the taxable status of nationmil banks one way or the
other. When the permanent section 5219 goes into effect in 1972, as
provided in P.L. 91-156, national banks can be taxed the same as
State banks under nondiscriminatory laws. Thus, Congress has re-
moved the shield national banks have enjoyed as "instrumentalities"
of the United States. It would seem that Congress recognized the
changed status of national banks under the Federal Reserve Act
whereas the majority of the Supreme Court had not. Will the courts
also recognize that national banks are no longer Federal "instrumen-
talities," and, if so, when?
H. The years of litigation: 1864-1921
The histbry of Section 5219 cannot be confined to a review of legisla-
tion, no niatter how detailed it may be. The provisions may seem clear
to the reader but until the courts have interpreted the various words
and phrases their meaning in the statutes will lack certainty. After the
courts have spoken the States must conform. An understanding of
Section 5219, therefore, requires careful study of decisions of the
Supreme Court and State courts.
From its adoption in 1864 until the enactment of the amendment of
1923, the courts were busy interpreting the provisions of Section 5219.
Over fifty-five such cases came before the Supreme Court, fourteen
were heard by lower Federal courts, and more than fifteen decisions
were rendered by State courts.6° The litigation of this period and up to
the early 1930s, was carefully described by John B. Woosley in his
State Taxation of Banks and by Ronald B. Welch in his State and
Local Taxation of Banks in the United States,6' volumes frequently
quoted and cited in this study. The discussion by Welch is largely
topical, so that decisions are considered in the substantive areas to
which they apply. Woosley's discussion of court decisions is mainly
historical and for the most part deals with the State taxation of shares
of national bank stock. Since States could tax national banks only on
their shares and real estate from 1864 to 1923, Woosley's chapter III,
"The Interpretation of Section 5219 by the United States Supreme
Court," is an invaluable reference and a work of genuine authority.
In the short time available for this study, it seems better to incorpo-
rate Woosley's discussion of the decisions of the courts from 1864 up
to the time of the 1923 amendment than to review these decisions
again and write another account of their meaning and significance.62
`° Count based on Welch, op. cit., pp. 238-40, and Hearings before the Committee on Banking and Cur.
rency of the House of Representatives, 61st Congress, 2nd Session, on II. R. 7752 (11. R. 12490), part I, May 9,
1930, pp. 162-63. The lists were obviously incomplete as to cases before lower Federal courts and State courts.
(I Woosley, op. cit., was published in 1935 and covers court decisions through 1932. Welch, op. cit., was
published as Special Report of the State Tax Commission, No. 7,by the State of New York, J. B. Lyon Co.,
Printers, Albany, 1934, and deals with decisions as late as 1933.
(2 incorporation of \Voosley's painstaking work in this report gives the writer real pleasure because Woosley
made his study at the University of Chicago in 1931, as a doctoral dissertation under my direction. It was
later revised for publication. John B. Woosley was not only my student but a valued friend. Reproduction
here of this part of his 1)00k recognizes, in part, hi3 valuable contribution to the literature on bank taxation.
Accordingly, his text is incorporated with grateful acknowledgment.
PAGENO="0250"
230
The incorporation of Woosicy's chapter in full results in some duplica-
tion of discussion of such decisions as the Richmond case and the
Guthrie Center case which arose before and after the 1923 amendment
of section 5219. This will serve not only to indicate how different
scholars view these events but also to emphasize the work of the
courts and the confusion created by some of the decisions.
PAGENO="0251"
231
[The text reproduced here (with i.vritten permission from the publisher, The University
of North Carolina Press) is chapter III of the monograph, State Taxation of Banks
(1935) by John B. Woosley, late professor of economics, the University of North
Carolina.]
ChAPTER 111
* HE INTERPRETATION OF SECTION 5219 BY THE
UNITED STATES SUPREME COURT
P1~I-IE perusal of the few lines which comprise Section 5219
I does not reveal clearly the scope of this law. A careful sur-
vey of the numerous relevant decisions of the Supreme Court of
the United States alone demonstrates its ramifications.
Certain powers the states' clearly do not have. The states
cannot tax any property of the bank other than its real property,2
save only the investment in shares of other national banks. Nor
could a license or franchise tax be levied against a national bank
until the amendment of 1926 so provided.3 Exemption of the
assets of the banks, other than the real property, extends likewise
to insolvent banks in the hands of receivers,4 but the shares of
such insolvent banks, if of any value, are taxable. While thc
shares are taxable, the capital may not be assessed.5 Assessment
of shares in solido is not permissible if operating as a tax on the
bank.6 Finally, states cannot tax the shares of state banks owned
by national banks, but they may tax the shares of national banks
~ Defined to include territories. Talbott v. Silver Bow County, 139
U. S.438 (1891).
Bradley v. The People, 4 Wall 459 (1866); Rosenblatt v. Johnston,
104 U. S. 462 (1881); Oweusboro National Bank v. Owensboro, 173 U. S.
664 (1899); Third National Bank of Louisville v. Stone, 174 U. S. 432
(1899); Home Savings Bank v. Des Moines, 205 U. S. 503 (1907); Bank
of California v. Richardson, 248 U. 5. 476 (1919); First National Bank
of Gulf port v. Adams, 258 U. S. 362 (1922).
Oweusboro National Bank v. Owensboro, 173 II. S. 664 (1899). See
chap. 6, infra, for franchise tax as authorized in 1926.
`Roscnblatt v. Johnston, 104 U. S. 462 (1881).
~ National Bank v. Commonwealth, 9 Wall 353 (1869); Aberdeen Bank
v. Chchalis County, 166 U. S. 440 (1897); Third National Bank of St.
Louis v. Stone, 174 U. S. 432 (1899).
°Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897).
PAGENO="0252"
*232
owned by another national bank.7 However, the taxable value of
such national bank shares, so held, may be deducted from the
value of the bank's own shares.8 The theory underlying these
limitations on the state taxing power is that the federal govern-
ment in its own sphere possesses sovereign powers and its agencies,
in this instance national banks, are immune from the potentially
destructive taxation of the states.°
The positive, taxing powers of the states with respect to na-
tional banks also are limited. Both by statutory enactment and
by judicial interpretation the real estate owned by national banks
is taxable to the bank in the same degree that other real estate is
taxed.1° Whether or not "real property" in Section 5219 includes
the furniture and fixtures of a bank has not as yet been adjudi-
cated' by the United State~ Supreme Court. Since the term "real
property" was substituted for "real estate" in the revision of
federal laws in 1878, it is reasonable to assume that no change in
meaning was contemplated. Both the practice of assessing officers
and the decisions of state courts vary on this issue.
In addition to the real property of national banks, national
bank shares are taxable to the stockholder. In determining the
basis for the taxation of such shares, the court, from the begin-
ning, took the position anticipated by Senator Johnson and others
in the debate on the bill ;h1 namely, that the interest of the stock-
holder and that of the corporation are separate and distinct prop-
erties. Therefore, a tax on the shares is not a tax on the capital
of the bank.'2 Consequently, the stockholder may be taxed on
the full value, and not merely a fractional part, of his interest
Bank of Redemption v. Boston, 125 U. S. 60 (1888); Bank of Cal-
ifornia v. Richardson, 248 U. S. 476 (1919).
~ Bank of California v. Richardson, 248 U. S. 476 (1919).
C McCulloch v. State of Maryland, 4 Wheaton 316 (1819).
~ Owcnsboro National Bank v. Owensboro, 173 U. S. 664 (1899).
See chap. 2, supra.
`~ Van Allen v. The Assessors, 3 Wall 573 (1865).
PAGENO="0253"
233
therein. The court has consistently followed18 its rulings in this
respect with but one exception.14
The practical significance of this principle is far reaching. The
occasion for the enunciation of the rule arose out of the efforts
of banks to deduct from the value of the shares the amount of
their holdings of tax exempt government securities, their argu-
ment being that to tax the full value of the shares was in effect
the forbidden taxation'5 of the securities themselves. The court
denied the validity of this contention in the Van Allen case. In
view of the large holdings of government securities by national
banks the permission of such deductions would nullify all share
taxes.16 For similar reasons, the Federal Reserve Bank stock
owned by national banks may not be deducted from the shares of
national banks.'7 But, as previously indicated, the taxable value
of shares of national bank stock held by another national bank is
deductible.18
The principle of the taxation of the full value of the stock-
holder's interest early led the court to the conclusion that the
People v. Commissioners, 4 Wall 244 (1866); National Bank v. Corn-
,nouweaUh, 9 Wall 353 (1869); Evansville Bank v. Briton, 105 U. S. 322
(1881); Bank of Commerce v. Tennessee, 161 U. S. 134 (1896); New
Orleans v. Citi.ren.s Bank, 167 U. S. 371 (1897); Owen.sboro National
Bank v. Ozc~cnsboro, 173 U. S. 664 (1899); Cleveland Trust Company v.
Lander, 184 U. S. 111 (1902); Home Savings Bank v. Des Moines, 205
U. S. 503 (1907); Peoples National Bank of Kingfisher v. Board of EquaL-
izaiwn, 260 U. S. 702 (1922); Des Moines National Bank v. Fairweai her,
263 U. S. 103 (1923).
Bank of California v. Richardson, 248 U. S. 476 (1919). Within
five years the court reaffirmed and has since maintained its original posi-
tion. See Des Moines National Bank v. Fairweather, 263 U. S. 103
(1923).
Weston v. City Council of Charleston, 2 Peters 449 (1829); The
Banks v. The Mayor, 7 Wall 16 (1868); Banks v. Supervisors, 7 Wall
26 (1868).
~° The book value of national bank shares on June 30, 1931, was $3,625,-
131,000 and these banks held $4,253,488,000 of exempt government securi-
ties.
17Des Moines National Bank v. Fairweat her, 263 U. S. 103 (1923).
Bank of California v. Richardson, 248 U. S. 476 (1919).
PAGENO="0254"
234
shares were taxable above par value.'9 This principle further
implies that the states are not required by the federal statute to
allow a bank to deduct the value of its real property from the
value of its shares, though such is the common practice.2° Irre-
spective of the property in which the share capital is invested, the
full value of the shares is subject to taxation if the states so
require.
How may the state reach such shares? Intangibles have a
way of disappearing on the day of assessment.2' Protection
against such evasion by national bank stockholders is assured
through assessment and collection at the source. Section forty
of the National Bank Act provided that every bank shall keep a
stockholders' list which shall be open to the assessing officers dur-
ing business hours. Assessment at the source being made possible
by statutory provision, judicial interpretation sanctioned collection
at the source.22 Accordingly, the bank may be used as an agent
of the stockholder to collect the tax and may reimburse itself from
the dividends or other income to be distributed to the shareholder,
and may bring suit in behalf of the stockholder.23 These superior
administrative features insured the effective taxation of national
bank shares in practically all the states in marked contrast to the
evasion of a large proportion of other intangibles when subjected
to the general property levy.24
Hepburn v. The School Directors, 23 Wall 480 (1874); People v.
The Commissioners, 94 U. S. 415 (1876).
Commercial Bank v. Chambers, 182 U. S. 556 (1901); Amoskeag
Saztings Bank v. Purdy, 231 U. S. 373 (1913)..
Leland, op. cit., pp. 27-30, 131.
~ National Bank v. Commonwealth, 9 Wall 353 (1869); Lionberger v.
Rouse, 9 Wall 468 (1869); Tappan v. Merchants' National Bank, 19 Wall
490 (1873); Waite v. Dowley, 94 U. S. 527 (1876); Citizens National
Bank v. Commonwealth of Kentucky, 217 U. S. 443 (1910).
Cummings v. National Bank, 101 U. S. 153 (1879); Hills v.
change Bank, 105 U. S. 319 (1881); Citizens National Bank v. Common-
wealth, 217 U. S. 443 (1910).
a~ Leland, op. cii., pp. 411 if.
PAGENO="0255"
235
Another question of administrative procedure is that of tax
situs. Section 5219 prescribes that the national bank shares held
by non-residents shall be taxed at the sit us of the bank. The fact
that the shares of a national bank are held by a national bank
situated in another state does not preclude their taxation by the
state in which the bank is situated.26 While the rule of business
.situs applies to the shares held by non-residents, the state may
assess the shares of residents at their domicile or at the location
of the bank.2°
Though the states were restricted until 1923 to the taxation of
the real property and the shares, they could impose a tax on the
savings deposits in a national bank to the depositor, and the bank,
if it so agrees, could pay the tax thereon.27 While in legal con-
templation such a tax is a levy on the depositor, it often falls on
the bank. The successful use of this method28 of indirect taxation
of banks by certain states in New England gives rise to some
wonder that other states have not resorted to similar impositions.
Ohio and Indiana adopted this device in 1931 and 1933, respec-
tively.2°
The specific limitations on the state taxation of national bank
shares is really the heart of the present problem. The original
ad of 1864 provided two limitations, (1) the rate on other mon-
eyed capital and (2) the tax burden on state banks. The Amend-
ment of 1868 drop~ed the latter limit and left the shares of
national banks to be taxed as the legislature of each state might
determine, save only (1) that non-resident shares must be taxed
at the situs of the bank, if taxed at all, and (2) "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."
~ Bank of Redemption v. Boston, 125 U. S. 60 (1888).
~ Tappan v. Merchants NationaL Bank, 19 Wall 490 (1873).
IT Clement NationaL Bank v. State of Vermont, 231 U. S. 120 (1913).
~ Leland, op. cit., pp. 218 if.
Laws of Ohio, 1931, p. 722 as amended by Laws of Ohio, 1933, S. B.
No.30; Acts, Indiana, 1933, chap. 83.
PAGENO="0256"
236
The purpose of Congress in providing these limits on the state
taxation of national banks was, in the opinion of the court, to
prevent the states from favoring competitors of national banks
and thus discriminating against them.3° With respect to the "rate
of taxation" the court has held that the phrase refers to the rate
on taxable moneyed capital ;81 hence the exemption of certain
properties,82 such as that of schools, churches, and charitable in-
stitutions and municipal bonds,83 does not affect the rate on
national bank shares.
The rate of taxation, moreover, includes the entire process of
valuation and assessment.34 Discriminations may arise as a re-
sult of different rules of valuation quite as effectively as by using
different percentages in computing the taxes on fixed valuations.
Since the restriction in Section 5219 does not require that the
state shall apply the same mode of taxation to national bank shares
that it applies to other property provided no injustice, inequality,
or unfriendly discrimination arises therefrom,85 the rate of tax-
ation must refer to "the actual incidence and practical burden of
the tax upon the tax payer."36 Little effort has been made to
inquire into the incidence of taxation either on banks or com-
peting moneyed capital in the cases presented to the court. For
Lionberger v. Roi&ce, 9 Wall 468 (1869); Adams v. Nashville, 95
U. S. 19 (1877) ; Boyer v. Boyer, 113 U. S. 689 (1885); Mercantile Bank
v. New York, 121 U. S. 138 (1887); First National Bank of Garnett v.
Ayers, 160 U. S. 660 (1896); First National Bank of Wellington v. Chap-
man, 173 U. 5. 205 (1899); Anioskeag Bank v. Purdy, 231 U. S. 373
(1913); Bank of California v. Richardson, 248 U. S. 476 (1919); Des
Moines v. Fairweather, 263, U. S. 103 (1923); First National Bank of
Guthrie Center v. Anderson, 269 U. S. 341 (1926).
`~People v. The Commissioner, 4 Wall 244 (1866).
~Adams v. Nashville, 95 U. 5. 19 (1877).
Boyer v. Boyer, 113 U. S. 689 (1885); Des Moines National Bank v.
Fairweather, 263 U. S. 103 (1923).
`~People v. Weaver, 100 U. S. 539 (1879).
"Covington v. First ,National Bank of Covington, 198 U. S. 100
(1905) ; Amnoskeag Savings Bank v. Purdy, 231 U. S. 373 (1913).
`~ Amoskeag Savm~gs Bank y Purdy, 231 U. S. 373, 386 (1913).
PAGENO="0257"
237
the most part it has been merely an issue of impact. The court
has been concerned only with the effective rate on these shares.
What inequalities constitute discrimination? Exact niatheniat-
ical equality of burden is not required.37 Some differences in the
rates of taxation are not discriminatory within the meaning of the
restriction. The fact that two state banks operating in Missouri
were exempted, by virtue of charter rights, from all taxation save
only 1 per cent on their paid-in capital, while national bank shares
were subject to a rate of 2 per cent did not constitute a discrim-
ination, as the state of Missouri had complied to the extent of its
ability with the requirements of the federal statute.38 Again, the
assessment of bank shares at market while bonds and mortgages
were assessed at par or nominal value did not constitute a discrim-
*ination.8° The fact that national banks may not deduct from the
value of their shares the amount of their capital invested in real
property situated outside the state does not produce a discrimina-
tion against the bank,4° though the court later suggested that it
might be argued that such ~ cle~uction was within the intent of
Section 5219.~' Nor does the deduction of the debts of unincor-
porated bankers from their credits constitute a discrimination
against national banks ;42 and, similarly, the deduction of tax ex-
empt bonds from the assets of private bankers is not violative of
the rule of substantial equality.43 The state can exempt moneyed
Lionberger v. Rouse, 9 Wall 468 (1869); Tappan v. Merchants' Na-
tional Bank, 19 Wall 490 (1873); National Bank v. Kimball, 103 U. S.
732 (1880); J3oyer v. Boyer, 113 U. S. 689 (1885); Davenport Bank v.
Davenport, 123 U. S. 83 (1887); First National Bank of Wellington v.
Chapman, 173 U. 5. 205 (1899) ; First National Bank of Guthrie Center v.
Anderson, 269 U. S. 341 (1926).
Lionberger y. Rouse, 9 WaIl 468 (1869).
`Hepburn v. The School Directors, 23 Wall 480 (1874).
~ Commercial Bank v. Chambers, 182 U. S. 556 (1901).
~First National Bank v. Albright, 208 U. S. 548 (1908).
~ First National Bank of Wellington v. Chapman~ 173 U. S. 205
(1899).
~ Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923).
79-421 0 - 72 - 17
PAGENO="0258"
238
capital, such as deposits in savings banks or funds of charitable
institutions, if such exemption is for reasons of public policy
without producing thereby a discrimination against national bank
shares.44
In regard to the competitive status of savings banks, the court
has varied in its position. In the three earlier cases45 involving
such banks the position assumed was that deposits of savings
banks were not in rear competition with national banks. In
Aberdeeuv. CheliaUs County, they were recognized as belonging
to the genus of competing moneyed capital, but the fact that the
exemption from taxation was for reasons of public policy, and
not as an unfriendly discrimination against national banks, pre-
vented such exemption from invalidating the taxes on national
bank shares.4°
The rule of equality of treatment, it is to be noted, applies as
between national bank stockholders and holders of other moneyed
capital. DiScrimination as between shareholders of the same na-
tional bank, or as between stockholders of different national
banks are not prohibited by the court.47 The fact that the shares
owned by non-residents may be taxed only at the situs of the na-
tional bank, while the shares owned by residents may be taxed
either there or at the domicile of the owner makes equality of tax
burden as between shareholders of the same institution contingent
upon the administrative policies of the states.
~ Aberdeen Bank v. ChehaUs County, 166 U. S. 440 (1897); Mercan..
tile Bank v. Ne~ York, 121 U. S. 138 (1887); Davenport Bank v. Daven-
tort Board of EquaUzation~ 123 U. S. 83 (1887); Bank of Redemption v.
Boston, 125 U. S. 60 (1888).
~Mercantile Bank v. New York, 121 U. S. 138 (1887); Davenport
Bank v. Davenport Board of Equo~iization, 123 U. 5. 83 (1887); Bank of
Redemption v. Boston, 125 U. S. 60 (1888).
~ Aberdeen v. Cheha1is County, 166 U. 5. 440 (1897).
")~ferchants' and Manufacturers' Bank v. Pennsylvania, 167 U. S. 461
(1897); Covington v. Coiington First National Bank, 185 U. S. 270
(1902); Citizens National Bank v. Cor,nnonwealth of Kentucky, 217 U. S.
443 (1910); Anioskeag Savings Bank v. Purdy, 231 U. S. 373 (1913).
PAGENO="0259"
239
One other type of innocuous inequality should l)e noted. In
Hepburn v. Tue School Directors the court held that a partial e.t-
cm/'f ion of other moneyed capital did not constitute a discrimina-
tion against national bank shares. In that case all mortgages,
judgments, recognizances, and moneys owing upon articles of
agreement for the sale of real estate were exempt from the tax-
ation. In spite of these facts~ the court held that there might be
some moneyed capital in the community which was taxed, and
hence no discrimination existed against national banks.48
In a number of cases the court has found actual discrimina-
tions. Before these discriminations can be intelligently analyzed
it is essential first to examine the interpretations of the courts as
to what constitutes "other moneyed capital in the hands of indi-
vidual citizens." Several considerations compel a careful canvass
of the court's interpretation of this phrase. The charges of gross
judicial inconsistency have been so general as to cause the court
to take notice thereof and to affirm its own consistei~icy.~° Again,
it has been urged that the phrase has no meaning in either law or
economics. "It is a sack, a catch-all phrase which will hold as
much or as little as the courts choose to empty into it."6° Finally,
the multitude of suits in state and federal courts involving dis-
criminations of this type emphasize the necessity of finding out, if
possible, what the court conceives such property to be.
The court in defining the limits of the disputed phrase has
resorted to the usual methods of exclusion and inclusion. Certain
investments, the value of which is expressed in terms of money,
are outside the category of moneyed capital. For reasons of pub-
lie policy, as already indicated, bonds issued under state authority
and deposits in savings banks are excluded from the list of other
moneyed capital. Nor was the stock of insurance companies in-
~Hcpburn v. The School Directors, 23 Wall 480 (1874).
`~ First National Bank of Guthrie Center v. Anderson, 269 U. S. 341
(1926).
Lutz, "Evolution of Section 5219," Bul. N. T. A. XIII, 212.
PAGENO="0260"
240
cluded within its scope.51 Likewise, railroad shares, investments
in manufacturing and mining compahies or "any other corporation
of that description" are excluded.52 Investments in telephone
companies, as well as wharf53 and gas companies,54 are not com-
petitive with national banks, and their exemption does not invali-
date the tax on national bank shares.
Though the court experienced little difficulty in ruling these
investments outside moneyed capital, it found itself in great
straits when the issue of investments in trtist companies was pre-
sented for adjudication. In the first consideration of this issue
the court, after recounting the powers conferred on trust com-
panies by the New York law, expressed the view that such institu-
tions were not banks, and then further alleged that the evidence
presented did not prove the rate on trust companies to be in fact
lower than that imposed on banks.55
The issue was rais~d again in Jcnkfns v. Neff. Here it was
contended that the conditions were different from those obtaining
in Mercantile Bank v. New York since an amendment to the New
York law had increased the powers of trust companies to such an
extent as to bring them into competition with national banks. But
the court, though admitting that the trust companies come into
"limited competition" with national banks, did not find any inten-
tion on the part of the state to discriminate against national
banks.~ In a later casey however, the court recognized trust corn-
~` People v. The Cornmissioncrs, 4 Wall 244 (1866); Mercantile Bank
v. New York, 121 U. S. 138 (1887); Bank of Redcmption v. Boston, 125
U. S. 60 (1888); Aberdeen Bank v. Chehali.c County, 166 U. S. 440
(1897).
Mercantile Bank v. New York, 121 U. S. 138 (1887); Taibot v. Sit-
ver Bow County, 139 U. S. 438 (1891).
~ Bank of Redemption V. Boston, 125 U. S: 60 (1888).
"Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897).
"Mercantile Bank v. New York, 121 U. S. 138 (1887).
"Jenkins v. Neff, 186 U. S. 230 (1q02).
PAGENO="0261"
241
pany shares as Competitive moneyed capital.67 But the issue of
discrimination was not raised in that instance. Thus, the status
of investments in trust companies in relation to Section 5219 is
not certain. It is difficult to see how the courts fairly can exclude
them from this category since national banks have been given
power to engage in extensive trust operations,58 and these ex~
panded powers would apparently broaden, as in the analogous
case of real estate mortgages,59 the limits of other moneyed capital.
The first case which called forth a positive definition of other
moneyed capital was Hepburn v. The School Directors, in which
the court said:
We cannot concede that money at interest is the only moneyed
capital included in that term as here used by Congress. The words
are "other moneyed capital." That. certainly makes stock in these
banks moneyed capital, and securities might be included in that
descriptive term.6°
This broad definition would include, inferentially, practically all
securities since both stock and bands ~were enumerated by the
court. Seven years later further content was given to the concept
when the court held that credits, rights, demands, and money at
interest, as used in the Indiana statute, were moneyed capital..°1
In this case the court distinguished moneyed capital from the
category of personal property.
In 1885 the court was forced to adjudicate a second case from
Pennsylvania in which railroad securities, shares of certain cor~
porations, mortgages, judgments, recognizances, corporate bonds,
and moneys due on contracts for the sale of real estate were
exempted from local taxes. The amounts of involved properties
~ Amosleeag v. Purdy, 231 U. S. 373 (1913).
United States Statutes at Large, XLIV, 1224-30.
First National Bank of Guthrie Center v. Anderson, 269 U. S. 341
(1926).
~` Hepburn v. The School Directors, 23 Wall 480, 484 (1874).
~ Evanwilk Bank v. Britton, 105 U. S. 322 (1881).
PAGENO="0262"
242
`were admittedly large, and state banks were subject to the same
local tax as was imposed on national bank shares. The court con~
cluded that the amount of other moneyed capital so exempt was
substantial and gave the sought~for relief.02 Relative to the claim
of the counsel that equality of taxation as between state and na~
tional bank shares was all that the federal statute required, the
court observed:
If by this language it is meant that an illegal discrimination against
capital invested in national bank shares cannot exist where no higher
rate or heavier burden of taxation is imposed upon them.than upon
capital invested in state bank shares, or in state savings institutions,
we have to* say that such is not a proper construction of the act of
Congress. Capital invested in national bank shares was intended to
be placed upon the sarnc footing of s'u-bstantial equality in respect of
taxation by State authority, as the State establishes for other moneyed
capital in the hands of individual citizen.s, however invested, whether
in State bank shares or otherwise.°3
The court in this case took cognizance of the effect of the
Amendment of 1868 to Section 5219 as requiring equality of
treatment not only as between national banks and state banks, but
giso between national banks and moneyed capital not invested in
state bank shares.
The success of the attorneys for the bank in Boyer v. Boyer
led them to other fields of conquest. They turned to New York
City where the bankers, taking comfort from this decision, ap.
pointed a committee to consider the advisability of a suit to pre~
vent the collection of bank taxes.°4 This committee reported that,
in view of the fact that there was estimated moneyed capita! in
the hands of individual citizens in the state of New York to the
amount of at least $1,778 millions of which not more than $262
millions was taxed, the banks of New York would have a better*
~Boyerv. Boyer, 113 U. S. 689 (1885).
°` Ibid., p. 702. Italics by the writer.
"Bankers Magazine, XL, 68.
PAGENO="0263"
`243
case thaii in foyer v. J?oyer. It consequently rcconuncndcd that
joint suit be undertaken, and that the counsel employed in foyer
v. Boycr be engaged upon a retainer fee of $100 from each bank
and acontingent fee not to exceed 10 per cent of the one year's
saving in tax.65 *
The result was the presentation of the issues ~in Mercan-'
tile Bank v. New York. Since the court, in its previous definition
of other moneyed capital, had emphasized the amount of such
`privileged moneyed capital, the strategy of the counsel for the
banks was to storm the judicial fortress with quantitative data.
It was alleged that under the New York laws there was the mate-
rial exemption of other moneyed capital of the following species
and amounts: corporate shares, other than those of banks, trust
and insurance companies, totalling $755,018,892; trust and insur-
ance company shares of $32,018,900; and shares of life insurance
companies of $3,540,000, which companies in turn owned mort-
gages, bonds, and stock of $195,257,305; savings banks and de-
posits therein of $437,107,501, with an accumulated surplus of
$68,669,000; certain municipal bonds of New York City totalling
$13,467,000; and shares of stocks of foreign corporations in the
hands of their holders equalling $250,000,000.66 Obviously, if
the court was to rely solely on the quantity test, the facts seem to
favor the banks.
But the court found no discrimination existed against national
bank shares and, in so doing, evolved a further definition of other
moneyed capital. Since the purpose of Congress was to prevent
unequal and unfriendly competition with national banks by favor-'
itism shown competing moneyed ~capital, "The true test of the
distinction. . . can only be found in the nature of the business in
which the corporation is engaged."°T And what is the business.
of banking? To this the court replied,
Ibid.
°~ Mercantile Bank v. New York, 121 U. S. 138 (1887).
Ibid., p. 154. Italics by the,writer.
PAGENO="0264"
244
The business of banking as defined by law and custom, consists
in the issue of notes payable on demand; intended to circulate as
money where the banks are `banks of issue; in receiving deposits pay-
able on demand; in discounting commercial paper; making loans of
money on collateral security; buying and selling bills of exchange;
negotiating loans, and dealing in negotiable securities issued by the
government, state and national, and municipal and other corporations.
These are the operations in which the capital invested in national
banks is employed, and it is the nature of that employment which
constitutes it in the eye of this statute "moneyed capital." Corpora-
tions and individuals carrying on these operations do come into com-
petition with the business of national banks, and capital in the hands
of individuals thus employed is what is intended to be described by
the act of Congress.°8
So it is not the form of the investment nor the fact that a
corporation may have a large part of its capital invested in securi-~
ties, payable in money, which distinguishes such funds as "other
moneyed capital." It is, rather, the nature of the business and
the character of its operations which determine its status. Hence
shares of railroad, mining, insurance, and other like corporations
are outside the scope of the category, for such companies are not
engaged in the business of banking, nor do they participate in the
operations which banks perform. As to what is included in the
concept the court said,
The terms of the act of Congress . . . include shares of stock or
other interests owned by individuals in all enterprises in which the
capital employed in carrying on its business is money, where the ob-
ject of the business is the making of profit by its use as money. The
moneyed capital thus employed is invested for that purpose in secur-
ities by way of loan, discount, or otherwise, which are from time to
time, according to the rules of the business reduced again to money
and reinvested. It includes money in the hands of individuals em-
ployed in similar way, invested in loans, or in securities for the pay-
ment of money, either as an investment of a permanent character, or
temporarily with a view to sale or repayment and reinvestment. In
~` Ibid., p. 156.
PAGENO="0265"
245
this way moneyed capital in the hands of individuals is distinguished
from what is known generally as personal property.°°
In this epochal decision the first vital distinction between mon-
eyed capital and investments valued in terms of money is drawn.
It is the competitive employment of funds by individuals and
corporations in those operations and transactions characteristic of
the business of banking. Such moneys, so used in discounts,
loans, and investments of the types in which national banks en-
gage, are moneyed capital in the hands of individual citizens. In
ruling that only competitive moneyed capital was within the mean-
ing of Section 5219 the court made new law.7° The definition
evolved in this decision has been repeatedly affirmed.71
Moneyed capital was again sharply defined in 1921 in Mer-
chants' National Bank of Richmond v. City of Richmond. This
case involved the validity of a state law taxing bank shares at 35
cents per $100 and a city ordinance imposing a tax on them of
$1.40 per $100, while bonds, notes and other evidences of indebt-
edness were taxed at a combined rate of 95 cents per $100. The
counsel for the City of Richmond rested his case on the ill-founded
contention that Section 5219 required only equality of tax treat-
Ibid., p. 157.
~ T. R. Powell, "Indirect Encroachment on Federal Authority by the
Taxing Powers of the States," Harvard Law Review, XXXI, 353.
`1Davenport Bank v. Davenport Board of Equalization, 123 U. S. 83
(1887); Palmer v. McMahon, 133 U. S. 661 (1890); Talbott v. Silver
Bow County, 139 U. S. 438 (1891); First National Bank of Garneil v.
Ayers, 160 U. S. 660 (1896); Aberdeen Bank v. ChehaUs County, 166
U. S. 440 (1897); First National Bank of Wellington v. Chapman, 173
U. S. 205 (1899); Jenkins v. Neff, 186 U. S. 230 (1902); Ainoskeag Sav-
ings Bank v. Purdy, 231 U. S. 373 (1913); Merchants' National Bank of
Richmond v. Richmond, 256 U. S. 635 (1921); Des Moines Bank v. Fair-
weat her, 263 U. 5. 103 (1923); First National Bank of Guthrie Center v.
Anderson, 269 U. S. 341 (1926); First National Bank of Hartford, Wis-
consin, v. C~ity of Hartford, 273 U. S. 548 (1927); Minnesota v. First
National Bank of St. Paul, 273 U. S. 561 (1927); Georgetown National
Bank v. McFarknd, 273 U. S. 567 (1927); Montana National Bank of
Billings v. Yellowstone County, 276 U. S. 499 (1928).
PAGENO="0266"
246
inent as between national and state banks. But the court called
attention to its interpretation of the effcct of the Amendment of
1868 as stated in Boycr v. Boycr, and redefined moneyed capital as
including:
not only moneys invested in private banking, properly so-called,
but investments of individuals in securities that represent money at
interest and other evidences of indebtedness such as normally enter
into the business of banking.72
This decision raised protests and charges of inconsistency, but no
change in position is apparent in this highly dramatized case.7&
* In a later case74 the court enumerated explicitly real estate
mortgages as competitive moneyed capital, the court taking judicial
notice of the amendment to the National Bank Act which author-
.ized national banks to lend on real estate mortgages. However,
in a more recent decision in which a tendency to narrow the basis
for bank tax invalidities was in evidence, the court was not con~
vinced that the mere ownership of real estate mortgages by na~
tional banks proved that they brined money on real estate as such
mortgages may have been taken to secure other loans.76
The significance of the court's interpretation of other mon-V
eyed capital can best be gathered from an examination of the
cases in which discriminations against national bank shares were
found to exist. Most of these discriminations involve the mon-
eyed capital limit on state taxation. However, some involve only
discrimination as between state and national banks. Thus a tax
~ Merchants' National Bank of Richmond v. City of Richmond, 256.
U. S. 635, 639 (1921).
For the political significance and results of the decision see chaps..
4.5, infra,~
"First National Bank of Guthrie Center v. Anderson, 269 U. S. 341
(1926). Compare with Aberdeen v. C'Jiehaiis County, 166 U. S. 440~
(1897) in which the court had enumerated "investments in mortgages" as
being excluded from other moneyed capital.
~G First National Bank of Shreveport v. Louisiana Ta: Commission,.
289 U. S. 60 (1933). * . * .
PAGENO="0267"
247
on the c~pital of state banks, which permits a deduction of the
tax exempt securities held by them, while national bank shares are
fully taxed to the holder, constitutes a discrimination against such
shares and invalidates the tax thereon.7° As previously observed,
the deduction of the tax exempt bonds of an unincorporated pri-
vate banker from his assets does not constitute a discrimination,
the theory being that such bonds are represented by deposits rather
than the invested capital of the banker.77
A second fertile source of discriminations has been the deduc-
tion of debts from the credits of a tax payer, a practice rather
generally permitted by state laws. Do such deductions constitute
a discrimination against the holders of national bank stock? The
answer of the court has not been an unequivocal affirmative. In
People v. Weaver,78 the court held that the New York law, which
refused to permit a stockholder of a national bank the privilege
of deducting his debts from the v~Uue of his bank shares, was in
conflict with Section 5219. Other cases support this general posi-
tion~ but there are qualifications of note. Deductions of debts
by private, unincorporated bankers are not a discrimination as the
net assets of the banker are still taxed and the deductions do not
prevent substantial equality with bank shares.8° Nor was the
deduction of debts from credits, unknown in amount, held to be
a violation of Section 5219 as the court was unable to say
whether the inequality was substantial.8' Again, the fact that the
Van Allen v. The Assessors, 3 Wall 573 (1865); Bradley v. The
People, 4 Wall 459 (1866); Montana National Bank of Bitlings v. Yel-
lowstone County, 276 U. S. 499 (1928).
"Des Moines National Bank v. Fairweat her, 263 U. S. 103 (1923).
"People v. Weaver, 100 U. S. 539 (1879).
"Supervisors v. Stanley, 105 U. S. 305 (1881); Hills v. Exchange
Bank, 105 U. 5. 319 (1881); Evansville Bank y. Britton, 105 U. S. 322
(1881); Boyer v. Boyer, 113 U. 5. 689 (1885); Wliitbcck v. Mercantile
National Bank of Cleveland, 127 U. S. 193 (1888); Lander v. Mercantile
Bank, 186 U. 5. 458 (1902).
~ Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923).
National Bank of WeUington v. Chapman, 173 U. S. 205 (1899).
PAGENO="0268"
248
* law in Kansas permitted some debts to be deducted from some
credits, while there was a large and important class of moneyed
capital from which debts were not deductible, did not establish, in
the absence of positive proof, the existence of a discrimination
against holders of national bank shares who were not permitted
such deductions.82 The fact that the Supreme Court of Kansas
had previously ruled that bank shares were not credits within the
mçaning of the Kansas statute received judicial cognizance in the
decision. A New York law which imposed a tax of 1.0 per cent
on national bank shares, with no deductions of debts allowed
therefrom, while other personal property was taxed at general
property rates of 1.6 per cent, with allowances for debts, was
held `valid in the absence of proof showing actual discrimination.83
Finally, the court held that the Utah Supreme Court, in refusing
to permit debt deductions from bank shares, was not `in violation
of Section 5219 since the local court had held that shares of stock
were not credits within the meaning of the term in that state.84
Consequently, the refusal of the state to permit shareholders of
national banks to deduct their debts from the value of these shares,
while permitting individuals to deduct such obligations from their
credits, may not produce discriminations against such shares, the
issue being contingent upon the legal status of such credits and
shares in the individual state. That credits are, for the most part,
moneyed capital in the hands of individual citizens can scarcely
be doubted. In those cases, therefore, where the court has mod-
ified its position as to the effect of such deductions on the tax on
national bank shares, either legal categories have failed to coincide
with financial realities or proof of substantial inequalities has been
lacking.
The absence or presence of discrimination, in the final analysis,
~First National Bank of Garnett v. Ayers, 160 U. S. 660 (1896); see
also First National Bank of Wellington v. Chapman, 173 U. S. 205 (1899).
~ZAtnoskeag Sa?fings Bank v. Purdy, 231 U. S. 373 (1913).
`~C~ommerciaiBankv. Chambers, 182 U. S. 556 (1901).
PAGENO="0269"
249
turns on the question of the relative amount of competitive mon-
eyed capital which is accorded a privileged tax position by the
state. In Hepburn v. The School Directors, the amount of cx-
enipt moneyed capital was not material,85 while in Boyer v. Boyer,
a case involving a similar legal situation, the court held that a
discrimination existed since the amount involved was admittedly
large. The rule of substantial competition has been consistently
affirmed in the later cases coming before the court.8° But simple
averment of competition is not sufficient to establish discrimina-
tion. The competition of other moneyed capital must be shown
and the moneyed capital identified.87
As indicative of what inequalities have constituted discrimina-*
tions, the following instances may be cited. In Whitbeck v.
Mercantile National Bank of Cleveland88 the court held that the
equalized assessment of the shares of this bank at 65 per cent of
their value, while other moneyed capital was assessed at 60 per
cent fri that county and in twelve other counties, constituted a
See also Adams v. Nashville, 92 U. S. 19 (1877); Evansville Bank
v. Britton, 105 U. S. 322 (1881).
Boyer v. Boycr, 113 U. S. 689 (1885); Mercantile Bank v. New
York, 121 U. S. 138 (1887); Bank of Redemption v. Boston, 125 U. S. 60
(1888); Davenport Bank v. Davenport Board of Equalization, 123 U. S.
83 (1887); Whitbeck v. Mercantile National Bank of Cleveland, 127 U. S.
193 (1888); First National Bank of Garnett v. Ayers, 160 U. S. 660
(1896); Bank of Commerce v. Seattle, 166 U. S. 463 (1897); First Nag-
tional Bank of Wellington v. Chapman, 173 U. S. 205 (1899); Jenkins v.
Neff, 176 U. S. 230 (1902); Clement National Bank v. State of Vermont,
231 U. S. 120 (1913); Merchants' National Bank of Richmond v. Rich-
inond, 256 U. S. 635 (1921); First National Bank of Guthrie Center v.
Anderson, 269 U. S. 341 (1926); First National Bank of Hartford v.
Hartford, 273 U. S. 548 (1927); Georgetown National Bank v. Mc-
Fczrland, 273 U. S. 568 (1927); Minnesota v. First National Bank of St.
Paul, 273 U. S. 561 (1927).
~ Hills v. Exchange Bank, 105 U. 5. 319 (1881); Aberdeen v. Chehalis
County, 166 U. S. 440 (1897); Bank of Commerce v. Seattle, 166 U. S.
463 (1897); Commercial Bank v. Chambers, 182 U. S. 556 (1901);
Ainoskeag Savings Bank v. Purdy, 231 U. S. 373 (1913).
~ Whit beck v. Mercantile Bank of Clevekind, 127 U. S. 193 (1888).
PAGENO="0270"
250
discrimination against the bank. But in Albuquerque Bank v.
Perea.,8° the fact that the bank was assessed at 85 per cent of its
full value and other property at 70 per cent did not constitute a
discrimination when this did not come from any design or system-
atic effort on the part of county officials.°° In San Francisco Bank
v. Dodge, the court held that the assessment of state banks on
their property and franchise did not take into account all the in-
tangible elements of value and was therefore discriminatory
against national banks whose shares were assessed at market.°1
The court has not established rnany objective standard indic-
ative of what amounts of moneyed capital constitute substantial
competition, but has followed the practice of deciding in each mdi-
vidual case whether the competition, as shown, possessed the
requisite degree of substantiality to be violative of Section 5219.
In the Richmond case the existence of tax privileged bonds,
notes, and other evidences of indebtedness amounting to $6,250,-
000 as compared to national bank shares with an aggregate value
of $8,000,000 constituted substantial competition and therefore
was discriminatory. Again, the fact that there were moneys and
credits in Guthrie County amounting to approximately $5,000,000,
which were taxed at the rate of five mills, while the total value of
state and national bank shares taxed at general property rates in
the county ~did not exceed $316,852 constituted a discrimination.92
Perhaps the most significant comparison which may be made is
Albuquerque Bank v. Pcrca, 147 U. S. 87 (1892). Compare with the
ruling in Supervisors v. Stanly, 105 U. S. 305 (1881), where the court
stated that if "it can be proved that the assessors habitually and intention-
ally, or by some rule prescribed by themselves, or by some one whom they
were bound to obey, assessed the shares of the national banks higher in
proportion to their actual value than other moneyed capital generally, then
there is ground for recovery."
`°Albuquerque Bank v. Perea, 147 U. S. 87 (1892).
°~ San Francisco Bank v. Dodge, 197 U. S. 70 (1905).
First National Bank of Guthrie Center v. Anderson, 269 U. S. 341
(1926).
PAGENO="0271"
251
that of the Wisconsin03 and Minnesota94. decisions with the
Georgetown Bank case,°5 all of which werc delivered on the same
day. Data in the Wisconsin case showed that real estate firms
operating in the vicinity of the plaintiff's bank loaned annually
between $250,000 to $300,000; that various individuals, partner-
ships, and corporations were engaged in buying and selling notes,
bonds and mortgages in that area; and that other firms located in
Chicago and Milwaukee were similarly engaged, one of these firms
having sold a portion of some $25,000,000 of bonds and securities
in that locality. Such a situation constituted substantial cornpe-
tition, and since these items were exempt from property taxation
and bank shares were taxed at the full property rate, a discrimina-
tion existed.
In the Minnesota case moneys and credits were listed for tax-
ation to the amounts of $830,000,000 in the county, and $400,-
000,000 in the city, where the bank was situated. Individuals had
returned for taxation in Ramsey County promissory notes total-
ling $2,480,446 and bonds amounting to $7,595,975. Further-
more, note brokers operating in the state loaned funds amounting
to $100,000,000. Cattle loan brokers also handled $22,000,000
of cattle loan paper, $13,000,000 of which was sold to banks, cor-
porations, and firms in the state. It was further shown that
national banks in Minnesota had invested in real estate mortgages
to the amount of $19,000,000, in United States bonds, $41,000,-
000, and in other securities, $33,800,000. Since intangibles, other
than tax exempt bonds, were taxed at a three mill rate and bank
shares at the full property rate, and since the evidence convinced
the court of substantial competition, a discrimination existed
against national bank shares.
A contrary decision was rendered, however, in the George-
First National Bank of Hartford, Wiscon~sin, v. City of Hartford,
273 U. S. 548 (1927).
"Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927).
"Georgetown National Bank v. McFarland, 273 U. S. 568 (1927).
PAGENO="0272"
252
town Bank case. The facts here alleged were that there were 205
individual citizens in Scott County who had invested over
$1,060,000 in mortgages and purchase money notes, at least half
of this amount being in the hands of money lenders. Two wit-
nesses professed to know ten parties who loaned $122,300 to
twenty-six borrowers in the county on notes of bankabl&grade. It
was further averred that national banks in the county had invested
over $800,000 in real estate mortgages. But the court held that
evidence was not conclusive of discrimination.96 The extremely
able brief presented by the defendant-in-error no doubt played an
important role in this decision, though it is patent that the factual
evidence submitted was not as imposing as in the two preceding
cases. It does compare favorably with the data presented in
Fjrs: National Bank of Guthrie Center v. Anderson.97
Not only has the court refused to establish objective criteria
of substantial competition, but it has also been hesitant to indicate
the exact area of compct~tion.V8 It is not necessary in establishing
the fact of competition to
show that national banks and competing investors solicit the same cus-
tomers for the same loans or investments. It is enough as stated if
both engage in seeking and securing in the same locality capital in..
vestments of the class now under consideration which are substantial
in amount.
Competition may exist between other moneyed capital and capital
invested in national banks, serious in character and therefore well
within the purpose of Section 5219, even though the competition be
with some but not all phases of the business of national banks.°9
The court in this case expressed alarm for the safety of na-
tional banks when subjected to the competition from tax-favored
Georgetown National Bank v. McFarkznd, 273 Ti. S. 570 (1927).
VT First National Bank of Guthrie Center v. Anderson, 269 U. S. 341
(1926).
~ Whit beck v. Mercantile National Bank, 127 U. S. 193 (1888).
First National Bank of Hartford, Wisconsin, v. City of Hartford,
273 U. S. 548, 559,557 (1927).
PAGENO="0273"
253
specialized financial institutions. But, recently, the court, with a
change in personnel, viewed the situation more realistically and
discovered no discrimination in the Louisiana law which did not
tax building and loan associations, auto-finance companies, Morris
Plan and Morgan Plan banks, real estate mortgage, investments,
and bond brokers on a parity with national banks.'°° Here the
court referred to the basic differences between national banks
which operate largely with deposits, and financial institutions
which make loans mainly from funds secured otherwise than by
deposits. Emphasis was also accorded the fact that some of the
institutions handle unbankable paper. The fact that industrial,
railroad, and public utility bonds were by law assessed at 10 per
cent of market value did not establish a discrimination against
bank shares in this instance. It is submitted that the court was
here concerned not only with the way in which allegedly com-
peting funds were being employed, but it properly took cognizance
of "the character of those who compete" as well as the essential
nature of the banking process. While shades of distinction, thus
* closely drawn, are easily subject to over-emphasis, one can but
conclude that there is in this pronouncement a much clearer
analysis of the issues involved and a much more realistically
defensible position assumed. Who can deny that deposit banking
and specialized financial institutions, while unquestionably com-
petitive in certain areas of their operations, are, however, sub~~
stantially different in their financial functions?
The existence of substantial competition, in the final analysis,
is a matter of subjective determination by the court in each case,
in the establishment of which both the facts presented and the
relative skill of the counsels play an important role. That the
court gives careful consideration to the factual evidence cannot
be questioned, but it is also true that the absence of objective
First National Bank of Shreveport v. Louisiana Ta: Commission,
289 U. S. 60 (1933). * *
72-421 0 - 72 - 18
PAGENO="0274"
254
standards of substantial competition forces the court not infre-
quently to such general defenses as "the evidence as a whole" or
"the spirit of the law" or "the intent to discriminate." In other
cases instances of actual competition are cited and analyzed.
Such a policy makes the status of national bank taxation un-
certain and unpredictable. It is not unique in the realm of law
as its counterpart may be found in the law of criminal conspiracy,
secondary boycotts, sympathetic strikes, and picketing. To an
~extent such a condition is irremediable, but the court has at times
complicated the bank tax situation by adopting a conception of
competition which, when viewed from the standpoint of economic
reality, approaches the realm of absurdity. How, for example,
could the operations of individual investors be declared to be corn-
petitive with the business of national banks when the court had
so much trouble in determining the status of trust companies, or
~whcn insurance companies, which hold millions of dollars of
securities of the types banks l)Uy, are excluded from the realm of
competition? How real is the competition of individuals in their
investment operations with national banks, when these operators
do not have to solicit the same customers? It is illuminating to
compare the court's former conception with that of the Federal
Reserve Board which is required, under the Clayton Act, to de-
termine when two national banks are in substantial competition
in order to prevent interlocking directorates. The board says:
In general .. . two banks. . . would be deemed to be in substantial
competition . . . if the business engaged in by such banks under
natural and normal conditions conflicts or interferes, or if the cessa-
tion of competition between the two would be injurious to customers
or would-be customers, or would result in appreciably lessening the
volume of business or kinds of business of either institution. . .
Two banks engaged in the same character of business . . . would be
in substantial competition if their fields of activity extended over the
* same geographical territory. . . . Again, if they conducted their opera-
tions in the same place, but because of their comparatively small size
PAGENO="0275"
255
in relation to the total banking opportunities of the locality, and be-
cause of the fact that they did not deal with the same class of custom-
crs . . . they would not necessarily be deemed in substantial com-
petition. Or, if their operations were conducted in the same locality,
but the character of business engaged in differs fundamentally (for
example, where one does only an essentially commercial banking busi-
ness, while the other does only an essentially trust-company or fidu-
ciary business), such banks need not be regarded as in substantial
competition.10'
In the Louisiana case the court has more nearly approached
the above interpretation. It remains to be seen whether this posi-
tion will be maintained.
It may also be suggested that the court might examine the
fiscal effects of low rates on competing intangibles in the deter-
mination of discriminations against bank~ as the circuit court did
in National Bank v. Balthnore.102 .Where the assessment of in-
tangibles at low millage rates results in increased revenues from
this source by eliciting larger aggregate assessments, other tax
payers, including national banks, are benefited rather thin prej-
udiced. Such a position would take cognizance of financial real-
ities as well as legal categories. So long as the court looks only
to the latter, and the states are forced to tax intangibles at general
property rates in order to validate share taxation of national
banks, these intangibles will indubitably be driven to cover.
Experience at this point is conclusive. Immediately following
the Richmond decision a number of states, among them New
York and Iowa, sought to circumvent the effect of this decision
by classing competing moneyed capital with bank shares for tax
purposes while other intangibles were either taxable at low rates
201 Federal Reserve Bulletin, II, 390 if. For an excellent discussion of
this consideration, see Lutz, "Evolution of Section 5219," Bul., N. T. A.
XIII, 260 if.
National Bank of Baltimore v. Mayor of Baltimore, 100 Fed. 23
(1900).
PAGENO="0276"
256
or exempt from property levies.103 In such cases it was left to
the tax officials to ferret out the competing moneyed capital. The
* administration of the law in New York resulted in appeals to the
state courts to identify the other moneyed capital. The decisions
were not satisfactory to the national banks and the issue was car-
ried to the federal court, the banks contending that the tax officials,
acting under the interpretations of the New York court, had not
in fact assessed taxable competing moneyed capital. A very ex-
haustive brief showing the existence of such non-assessed capital
led to a decision favorable to the banks in the lower courts which
was sustained by the United States Supreme Court in a mem-
orandum decision.104 Thus, the position was taken that competing
moneyed capital, when legally taxable at the rate applied to na-
* tional bank shares, must in fact, be so assessed or the bank tax is
null in toto.
A somewhat similar case, arising in Iowa, was also favorable
to the banks. In this instance competing moneyed capital was tax-
able at general property rates, `a«= were also bank shares, but the
assessor had wrongfully listed the competing moneyed capital as
moneys and credits, taxable at five mills. The Iowa court held
that the act of the assessor was usurpative and without the author-
ity of the state and hence did not create a discrimination. The
United States Supreme Court reversed the Iowa court.105 With
respect to the state bank involved, in this case, the discrimination
rested wholly on the equal protection clause of the Fourteenth
Amendment in so far as any federal right was involved. The
counsel for the bank in Union Bank and Trust Company v.
Phelps, in a later case from Alabama, relied heavily on the above
See chap. 5, infra~.
Keating ci ai. v. The Public National. Bank, 284 U. S. 578 (1931).
For the nature of the evidence see, Brief for Appdllee, Keating v. Public
National Bank.
~ Iowa-Des Moines NationaL Bank v. Bennett et ai., 284 U. S. 239
(1931).
PAGENO="0277"
257.
decision in seeking to nullify the share taxes on state banks fol-
lowing the invalidity of the same on national banks, but the court
held that the classification of state banks for tax purposes was, in
this instance, valid.'06
In view of these decisions, it would appear that to validate the
share tax on national banks, the competing moneyed capital, when
legally taxable at the rate applied to such shares, must in fact be
so taxed. It is not certain, however, that state banks can success-
fully invoke the protection of the federal statute in such situations
in the light of Union Bank and Trust Company v. Phelps. Since
human ingenuity has as yet failed to devise any method by which
* . competing moneyed capital can be fully assessed, it is obvious that
national banks, and perhaps state banks as well, may completely
annul their share taxes by a clever assembling of data showing a
substantial volume of undertaxed or non-assessed competing mon-
eyed capital even if, legally, such capital is taxable at the rate
applicable to bank shares. . .
Discriminations against national bank shares are not restricted
merely to the privileged treatment of state banks and moneyed
capital. In those states in which the several constitutions require
the uniform taxation of all property, discriminations against banks
may arise as a result of the undertaxation of other property. In
Cummings v. National Bank'°T the court held that the assessment
of real estate at one-third its value constituted a violation of the
uniformity provision of the Ohio constitution, and the banks by
paying taxes on one-third of the value of their shares had fulfilled
their tax liabilities. * ..
The effect of discriminations on the status of the state law
presents another interesting problem. If the discrimination is
against a particular class of national bank shareholders rather
~ Bank and Trust Company v. Phelps, 288 U. S. 181 (1933).
See chap. 9, infra. *
Cummings v. National Bank, 101 U. S. 153 (1879).
PAGENO="0278"
258
than against all stockholders, the law is not wholly invalid. State
statutes which did not permit the deduction of debts from national
bank shares, while permitting such deductions from ~thcr credits,
were voidable only to the shareholders who had legally established
such debts and merely to the extent of the assessed value of their
shares which were offset by these obligations.108 Discriminations
against all stockholders of the same national bank, occasioned by
the assessment of the shares at a higher percentage of their value
than other assessed personal property, did not invalidate the assess-
ment in toto but only that amount which was in excess of ti
percentage applied to other property.'°°
When the discrimination against national bank shares arose
from the imposition of different nominal rates of taxation c'n
such shares and other moneyed capital, the court has not been. so
meticulous. The taxation of bonds and other evidences of debt
in Virginia at a combined state and municipal rate of 95 cents per
$100, while bank shares were taxed at a combined rate of $1.75,
constituted an obvious discrimination which invalidated the state
law and city ordinance imposing the tax in so far as national bank
shares were concerned.~° In like manner, the taxation of in-
tangibles in Iowafl' at five mills and in Minnesota~'2 at three
mills per dollar, when national bank shares were taxed at the
general property rate, rendered the assessment of national bank
shares completely void. In these later cases the position of the
court has been that the statutes themselves were in conflict with
Section 5219 and therefore void as to such shares, since a dis-
People v. Weaver, 100 U. S. 539 (1879); Supervisors v. Stanly, 105
U. S. 305 (1881); Hills v. Exchange Bank, 105 U. S. 319 (1881); Evans-
ville Bank v. Britton, 105 U. 5. 322 (1881); Whitbeck v. Mercantile Na-
tional Bank, 127 U. S. 193 (1888).
~DO Whit beck v. Mercantile National Bank, 127 U. S. 193 (1888).
~`°Merchants' National Bank v. Richmond, 256 U. S. 635 (1921).
First National Bank of Guthrie Center v. Anderson, 269 11. S. 341
(1926).
Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927).
PAGENO="0279"
259
criminatk~n was iml)licit Ofl the face of the statute. For similar
reasons the taxation of national bank shares at general property
rates was invalid in Wisconsin when other moneyed capital, ex-
empt. from property taxation, was taxed on the income there-.
from.118
In opposition to this view it may be suggested that, in so
ruling, the court may have disregarded the principle that the rate
of taxation has reference to the tax burden on such banks and
other moneyed capital, in which case only the excess of the tax
on bank shares was invalid. The Supreme Court of Massachusetts
took this position, the court holding that the taxation of bank
shares at the rate of $28.48 per $1000, when Only the income
from intangibles was taxed at 6 per cent, did not entirely inval-.
idate the tax on national bank shares.~4 But in this issue the
Supreme Court of Massachusetts is not supreme. .
There remains yet to be cOnsidered the court's interpretation
of. the constitutional status of Section 5219. It will be recalled
that' the court in McCuioch v. Maryland took the position that
Maryland had original power to tax the interest of its citizens in
the Second United States Bank. It will also be remembered that
Congress, in its debate on the tax provisions of the National Bank
Act, discussed the constitutionality of the issue at considerable
length, and its final solution was in line with the dicta of the
court.115 The position of the court and the attitude of Congress
point to the conclusion that the taxation of bank shares was a
power resident in the sovereignty of the states.
If this position had been maintained by the court in its later
decisions, many problems, which became the source of great vex-
ation to tax officials and the court itself, might easily have been
avoided. Instead, it resorted to inconsistent interpretations of the
First Nationat Bank of Hartford, Wisconsin, v. Hartford, 273 U. S.
548 (1927). . . . .
~"Centrai Nationai Bank v. Lynn, 156 N. E. 42 (1927).
336 See chap. 2, supra~ . .
PAGENO="0280"
260
nature and source of the power which thc states exerci'sed in the
taxation of national bank shares.11°
In Van Allen v. The Assessors, the court recognized the orig-
inal power of taxation vested in the states, but asserted that Con-
gress and the states had concurrent powers over certain subjects,
and by virtue of the paramount authority of Congress it could
permit or exclude the state from the exercise of such concurrent
power. State taxation of the means and instruments of the fed-
eral government fell into this category.117
The extent to which federal agencies are subject to taxation
by the state is indicated in a later decision in which the court, in
discussing the proposition that the power to tax may be the power
to destroy, observes:
The principle we are discussing has its limitation, a limitation
growing out of the necessity on which the principle itself is founded.
Thai lhnitatio-n is, thai the. agencies of ~the Federal government are
only escmptcd~ from Statc legislation, so far as thai legislation may
interfere with, or im~a.ir their efficiency in performing the functions
by which they arc designed to serve that government. Any other rule
would convert a principle founded alone in the necessity of exercising
the legitimate powers, into an unauthorized and unjustifiable invasion
of the rights of the States.118
Applying this general principle in 1876 to a Vermont law
which required national banks to provide assessing officers with
certain pertinent data, the court held that such a provision was
not an infringement of the functions of these federal agencies.
The position of the court is stated as follows:
We have more than cince held in this Court that the national
banks organized under the Acts of Congress are subject to State
U' See A. 3. Schweppe, "State Taxation of National Bank Stock," Mm-.
4zesota Law Review, VI, 219 if.; Henry Rottschaefer, "State Taxation of
National Bank Shares," Minnesota Law Review, VII, 357 if.; R. 3. Tray-
nor, "National Bank Taxation," California Law Review, xvii, 83 if.
U' Van Allen v. The Assessors, 3 Wall 573 (1865).
`~National Bank v. Commonwealth, 9 Wall 353, 362 (1869). Italics
by the writer.
PAGENO="0281"
261
legislation, exccpt where such lcgisThtio-n is in conflict with some act
of Congress, or where it tends to impair or destroy the utility of
:uch banks, as agents or instrumentalities of the United States, or
interferes with the purposes of their creation."119
It would appear, therefore, that the states may tax national
bank shares, by virtue of their original power of taxation, only to
the extent that Congress and the court hold such taxation to be
free from any essential impairment of the functions which these
banks were designed to perform.
1~'rorn the theory that the states had original power to tax na-
tional bank shares, the court shifted to the view that the power
of the states to tax national banks was the result of a direct grant
by Congress. The distance between these opinions was not nego-
tiated in one leap. The court in Farmers' and Mechanics National
Bank v. Dearing,12° in discussing the constitutionality of Section
5219, classified the powers of government as follows: (1) those
belonging exclusively to the states; (2) those belonging exclu-
sively to the national government; (3) those which may be exer-
cised concurrently and independently by both; and (4) those which
may be exercised by the states but only with the consent, express
or implied, of Congress. The power of the states to tax national
banks, continued the court, belongs to the last named, and when-
ever the will of the nation intervenes exclusively in this class of
cases, the authority of the state retires and lies in abeyance until
a proper occasion for its exercise shall recur, the federal law
being supreme. State taxation of national banks is exercised,
therefore, solely by consent of Congress.
This, however, does not represent the final position of the
court. Just four years later the court held that the power of state
taxation of national banks arises solely from Section 5219, which
~ Waite v. Dowley, 94 U. S. 527, 532-33 (1876). Italics by the writer.
Farmers' and Mechanics National Bank v. Dearing, 91 U. S. 29
(1875).
PAGENO="0282"
262
provision was necessary to authorize the states to impose any tax
~whatsoevcr on these bank shares. The court said:
As Con grcss was con fcrring a powcr on the States which they
would not othcrwisc have had, to tax these shares, it undertook to
impose a restriction on the exercise of that power, manifestly designed
to prevent taxation which should discriminate against this class of
property as compared with other moneyed capital.12'
By judicial fiat the power of the state to tax national bank
shares is thus conferred by Congress on the states; without such a
direct grant the states would be impotent. How far this decision
may be harmonized with the dictum of the Van Allen case in
which it was stated that the states were not capable of receiving
such a grant of authority, even if Congress had the power to
confer it, which in the mind of the court it did not have, is not
clear to the layman.
However, the solution of this judicial skein is no more difficult
than the position next taken in Talbott v. Silver Bow County,122
in which case the court stated that national bank shares were tax-
able by states solely by the, consent of Congress, and then pro-
ceeded to justify this position upon the dicta of Chief Justice
Marshall in McCulloch v. Maryland, and Osborn v. Bank of the
United States, using the distinguished Justice's logic, but over-
looking entirely the qualifications there made relating to the tax-
ation of real estate and the interest of the citizens of the state in
the federal bank. The court here contends that the state taxation
of national banks, their property, assets, or franchise rests solely
upon the permissive legislation of Congress. This position it has
maintained in its later decisions.123
People v. Weaver, 100 U. S. 539, 543 (1879). Italics by the writer.
~ Taibott v. Silver Bow County, 139 U. S. 438 (1891).
`~ Qwcnsboro National Bank v. Oweusboro, 173 U. S. 664 (1899);
Home Savings Bank v. City of Des Moines, 205 U. S. 503 (1907); Bank
of california v. Richardson, 248 U. S. 476 (1919); Des Moines National
Bank v. Fairwcathcr, 263 U. S. 103 (1923); First National Bank of
Gulhrie Center v. Anderson, 269 U.S. 341 (1926).
PAGENO="0283"
263
As the later position of the court is inconsistent with its for-
nier attitude, the probable interpretation which it would now make
if it were confronted with a case turning solely upon the consti-
tutionality of the national bank share tax is of course a matter of
conjecture. It has. been suggested that the court might revert to
the original position taken in McCulloch v. Maryland. There are
reasons to believe otherwise. Since the issue of the taxation of
federal agencies is not covered by an express provision in the fed-
eral Constitution, the doctrine of immunity from taxation was
first enunciated by the court as a reasonable hypothesis to meet a
concrete situation. The court does not, however, consider itself
the sole arbiter of the extent to which the federal government may
waive immunity from the state taxation of its agencies. It has
held that Congress may exercise, within certain limits, its dis-
cretion in such matters. Evidence of this fact is seen in the posi-
tion of the court with respect to tl~e taxation of obligations of the *
federal government, payable upon demand. In 1868 the court
held that United States notes, payable upon demand and re~eiv-
able for all public dues, though they were intended by Congress
to circulate as money, were, nevertheless, obligations of the fed-
eral government and exempt from state taxation.124 In this case
the court said:
We think it clearly within the discretion of Congress to determine
whether, in view of the circumstances attending the issue of the
notes, their usefulness, as a means of carrying on the government,
would be enhanced by exemption from taxation; and within fe con-
stitutional power of Congress, having resolved the question of use-
fulness affirmatively, to provide law for such exemption.125
Congress, in 1894, authorized the state taxation of national
bank notes, and other notes and certificates of the federal govern-
ment, payable upon demand, subject to the restriction that the rate
Bank v. Supervisors, 7 Wall 26 (1868).
~zbid.; pp. 30 if.
PAGENO="0284"
264
and manner of taxation should be the same as for other money.'2°
The waiving of this exemption from taxation by Congress re~
ceived judicial cognizance in Hibc'rnia Savings Society v. San
Francisco in a case involving the liability to state taxation of
checks drawn by the Treasurer of the United States and payable
upon demand within four months. The checks were the property
of the bank, having been drawn in payment of the interest on
United States securities held by the bank. The court held these
checks to be taxable despite the tact that they were obligations of
the United States which were not intended to circulate as money.
The court cited the federal statute of 1894, and said:
* Although the checks in question were not intended to circulate as
money, and therefore do not fall within the letter of the statute, the
reasqns that apply to that class of obligations we think apply with
equal force to checks intended for immediate payment, though not
intended to circulate as money.121
It is conceivable, therefore, that the court would recognize as
valid the proper exercise of the discretion of Congress on the
matter of waiving, or removing the waiver of, immunity of na~
tional banks from state taxation, so long as such taxation does not
hinder them in the efficient exercise of their proper powers and
does not prevent them from discharging their functions as federal
agencies. If this view be correct, the conclusion is reached that
Congress has the constitutional power to determine the manner
and extent of the taxation of national banks within the limits of
the theory of national sovereignty.'28
United States Statutes at Large, XXVIII, 278.
Hibernict Savings Society v. San Francisco, 200 U. S. 310, 316
(1906).
An interesting parallel case arose in Australia in which the court
there held that the Commonwealth may authorize state taxation of federal
salaries previou~y held~ invalid without such authority. See Chaplin v.
Commissioner, 12 Comm. Law Rep. 375 (Australia, 1911).
PAGENO="0285"
265
I. Tile Richmond Decision: 19~3O
While the national banks were busy litigating discrimination against
them under State laws `-few, if any, of which were intended to dis-
criminate-the States also were busy trying to improve their tax
systems.2 The general property tax, long the chief support for both
State and local governments, was proving to be as defective in opera-
tion as it was in theory. Among reforms espoused at this time were the
separation of the sources of State and local revenues and the adoption
of classified property taxes, particularly low-rate taxes on intangibles.
Under both types of reform, discriminations in fact and in law were
produced against national banks. Perhaps it would be more correct
to say that discriminations against banks were "continued," for under
the general property tax they had been the victim of discriminatory
assessments. The inability of the States to reach intangibles, primarily
of individuals, had led many, including bankers, to champion the
adoption of low-rate taxes on intangibles.3 States that employed them
were able to collect greater revenues under the moderate rate than
had previously been collected under the high rates applied to real
estate. `When these low-rate taxes were not extended to bank stock,
charges of discrimination under section 5219 began to be heard. The
issue came to a head in the famous Richmond Case-Merchants'
National Bank of Richmond v. City of Richmond-decided June 6,
1921.~
* 1. The facts.-This case involved both the separation of the sources
of State and local revenues, and the application of the principle of
classification to intangibles. The taxes involved in the dispute were
local taxes levied by the City of Richmond. Under a 1915 law, the
State of Virginia levied a tax of 35 cents per $100 of valuation on State
and national bank stocks and permitted its charter cities to levy an
additional tax of $1.40 on bank stock. Other intangibles were taxed at
a State rate of 65 cents, to which cities were allowed to add a tax of 30
cents. The combined rates were, thus, $1.75 per $100 on bank stocks
(State and national) and 95 cents on individually owned intangibles.
It was said that the banks paid the State tax but protested the local
levy.5
The Merchants' National Bank took the City to court, contending
that both the law of the Commonwealth and the ordinance of Rich-
mond violated section 5219. In the Hustings Court of the city the
bank won; the case was then taken to the State Supreme Court. The
Virginia Supreme Court upheld the law and the ordinance, because
there was no discrimination between national and State banks.6 The
case was then taken to the United States Supreme Court which re-
versed the decision. The opinion of the Court was delivered by Justice
Pitney; Justice Brandeis dissented but did not write an opinion.
2. Opinion of the Court.-The Supreme Court opinion noted that
the bank's petition alleged, and the evidence showed without a
dispute, that State and city taxes at the $1.75 rate were imposed
I Cf. the preceding section.
2 Changes in State tax systems are discussed elsewhere in this report. See infia, at pp. 271-272, "Effects of
Richmond decision."
See Leland, op. cit., pp. 179ff.
256 U.S. 635. It was long thought that mortgage recording taxes were not affected by section 5219, but
see Dickinson v. First National Bank of Homestead, 393 U.S. 409 (1969). See infra, p. 308.
5 See I. Vaughan Gary in Proceedings of the National Tax A.ssociation, 1921, p. 397; George Bryan, ibid.,
p. 414; Virginia Acts, 1915. ch. 117, p. 160, cited by the Court, p. 637.
6 124 Va. 522, 98 SE. 643 (1919).
PAGENO="0286"
266
upon national and State bank stocks in an aggregate value of
$14,000,000 or more, while taxes at a lower aggregate rate ($.95)
were imposed upon bonds, notes and other evidences of indebtedness
aggregating $6,250,000. Mr. Pitney continued:
* "It is to be inferred that a substantial part of this aggregate was
in the hands of individual taxpayers; the precise amount does not
appear. It also was shown without dispute that moneyed capital in
the hands of individuals, invested in bonds, notes, and other evidences
of indebtedness, comes into competition with the national banks in
the loan market." ~
The opinion pointed out that these facts and the competitive
* character of the investments were alleged by the plaintiff; they were
not controverted by the counsel for the City of Richmond; and this
evidence was not reviewed by the State courts-
. doubtless because, under their respective views of the
applicable law the facts referred to were immaterial. But this omission
does not relieve us of the duty of examining the evidence for the
~purpose of determining what facts reasonably might be, and presum-
ably would be, found therefrom by the State court, if plaintiff in
error's contention upon the questions of Federal law should be sus-
tained, and the facts thereby shown to be material.
"The [State] Supreme Court of Appeals entertained the view that
the purpose of section 5219, Rev. Stat., was confined to the prevention
of discrimination by the States in favor of State banking associations
as against national banking associations, and that since none such is
shown here, there was no repugnance to the Federal statute. This
however is too narrow a view of section 5219. It traces its origin to
section 41 of the Act of June 3, 1864, chap. 106, 13 Stat. 99, 111, 112,
in which, besides the restrictions that State taxation of the shares
of national banking associations should not be at a greater rate than
is assessei upon other moneyed capital in the hands of individual
citizens of such State, there was an express proviso that the tax should
not exceed the rate imposed upon the shares of State banks. But this
was modified by Act of February 10, 1868, chap. 7, 15 Stat. 34, in a
manner which as was pointed out in Boyer v. Boyer, 113 U.S. 689,
691, 692, 28 L. ed. 1089, 1090, 5 Sup. Ct. Rep. 706, precluded the
possibility of an interpretation permitting the States, while imposing
the same taxation upon national bank shares as upon shares in State
banks, to discriminate against national banks in favor of moneyed
capitLi not invested in State bank stock. `At any rate,' said the court,
`the acts of Congress do not now permit any such discrimination.'
In the amended form the provision was carried into the Revised
Statutes as section 5219, which prescribes that State taxation of
shaves in the national banks `shall not be at a greater rate than is
assessed upon other moneyed capital in the hands of citizens of such
State.' *
"By repeated decisions of this court, dealing with the restrictions
here imposed, it has become established that while the words `moneyed
capital in the hands of individual citizens' do not include shares of
stock in corporations that do not enter into competition with national
7 256 U.S. 635, p. 638. * * . * *
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267
banks, they do include something besides shares in banking corpora-
tions and others that enter into direct competition with those banks.
They include not only moneys invested in private banking, properly
so called, but investments of individuals in securities that represent
money at interest and other evidences of indebtedness such as normally
enter into the business of banking." 8
The opinion cited a decision in 1882 in which a deduction of indebt-
edness granted to individuals but denied national banks had
invalidated taxes on the national banks; and another in 1887 in which
the court had declared:
"The terms of the Act of Congress, therefore, include shares of
stock or other interests owned by individuals in which the capital
employed in carrying on its business is money, where the object of
the business is the making of profit by its use as money. * * * It
includes money in the hande of individuals employed in a similar way,
invested in loans, or in securities for the payment of money, either as an
investment of a permanent character, or temporarily, with a view to sale
or repayment and reinvestment." °
Mr. Justice Pitney reiterated other decisions, to the effect that
"the rule of construction thus laid down had since been consistently
adhered to. No decision of this court to which our attention is called
has qualified that rule, or construed section 5219 as leaving out of
consideration the rate of State taxation imposed upon moneyed
capital in the hands of individual citizens invested in loans or securities
for the payment of money ~ such moneyed capital comes
mto competition with that of national banks." 10
The court concluded its opinion with these words:
"In the present case, there is a clear showing of such competition,
relatively material in amount, and it follows that, upon the undisputed
facts, the ordinance and statute under which the stock of the plain-
tiff in error was assessed, as construed and applied, exceeded the limit
prescribed by sect~on 5219, Rev. Stat., and hence that the tax is
invalid." ~
3. A question of procedure.-The national banks had won another
case. The decision was criticized in congressional and professional dis-
cussions, partly on grounds that attorneys for the City of Richmond
had made an inadequate presentation. The city based its case on
absence of discrimination between State and national banks and saw
no need to introduce evidence that might controvert the bank's
allegation that individually-owned intangibles were in competition
lIbid., pp. 638-9.
IbId., pp. 639-640, cIting Evansville National Bank v. Brltton, 105 U.S. 322 (1882); MercantIle Bank v.
New York, 121 U.S. 138 (1887), quoting p. 157. Italics in Court'; opinion.
10256 U.S. 635, p. 641, citing Amo;keag Saving; Bank v. Purdy, 231 U.S. 373, 390-91; and First National
Bank of Wellington v. Chapman, 173 U.S. 205, 219.
11 266 U.S. 635, p. 641.
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268
with national banks. in congressional debates it was pointed out that
* the burden of proving such competition was upon the banks.'2
4. Attitudes of State officials and Members of Congress.-The de-
cision in the Richmond case came as a surprise to many State tax
officials, "like a bolt from a clear sky." Some professed that it gave
the share tax provision of section 5219 a different meaning from that
which they had ascribed to it. It "broadened the meanmg of `other
moneyed capital'." `3 A committee of the National Tax Association
declared that the decision had had "a disturbing effect" in some 20
States and probably would be "a controlling deterrent" in other
States which might wish to adopt "more modern and intelligent
methods of compelling intangible personal property to bear its just
share of the tax burden." 14
For 25 years before the decision, many persons believed that
"other moneyed capital" meant only shares in State banks. Senator
Kellogg thought that the Supreme Court in the Richmond case had
misunderstood the act. Mr. Mills told the House that the decision
changed the interpretation of the law. Moreover, it was argued, the
competition of individuals with banks was negligible.'5
Mr. Oscar Leser, member of the Maryland Tax Commission, in the
hearings in 1922 on proposed amendments, used much stronger lan-
guage concerning competition to national banks from private invest-.
12 Cf. Senator Glass in 64 CR, pp. S1453, 1460 (Jan. 1, 1923); Senator Kellogg, ibid., p. S1459; Senator
Pepper, ibid., p. S1463; Mr. Wingo, ibid., P. 11302; Mr. Stevenson, ibid., P. 114789, citing Boyer v. Boyer,
113 U.S. 689, and Bank v. Chalmers, 182 U.S. 560. See the discussion in Proceedings of the National Tax
Association, 1921, Pp. 381-426. One of the participants in that discussion was Judge Oscar Lesser, tax com-
missioner of Maryland, who subsequently testified in congressional hearings on proposed amendments to
sectIon 5219 that the Merchants' National Bank testimony as to the competitive character of individuals'
moneyed capital was considered inconclusive by the trial court and Irrevelant by the State Supreme Court of
Appeals but was accepted as relevant and undisputed by the U.S. Supreme Court. 67th Congress, Com-
mittee on Banking and Currency, State ~Faxation of National Banks, Hearings on HR. 9579 (1922, 2 parts),
p. 101 (hereafter referred to as Hearings, H.R. 9579 (1922)). However, Mr. Justice Pitney noted that neithe~
of the State courts passed on this evidence or made findings of fact thereon (cf. the text reference, supra, to
the opinion of the Court). Cf. Welch, op. cit., p. 36.
The only defense of the counsel of the City of Richmond that the writer has found came from Martin Saxe,
a New York lawyer with long experience in bank tax problems. He argued that the city had no need to
prove that bonds, notes, and other evidences of indebtedness owned by individuals did not, in fact, come
Into substantial competition with banks because such proof would have contravened the interpretation of
section 5219 handed down by the Supreme Court 40 years earlier In Boyer v. Boyer, 113 U.S. 689 (1885),
a decision which the State court disregarded. Cf. Proceedings of the National Tax Association, 1923, PP.
183-230, 361-2, 370-402; comments of Mr. Sara at pp. 215-216.
In the later similar case of First National Bank of Guthrie Center v. Anderson, 269 U.S. 341 (1926)
discussed below, the Supreme Court declared that the Richmond decision had not enlarged the prior
meaning of section 5219 but had adopted prior decisions. The opinion added that the Richmond case was
unusual in one respect-the narrow scope of the defense. "If the outcome was open to criticism, it was not
because any enlarged meaning was attributed to the term, `other moneyed capital,' but because the facts
bearing on the question of competition were not sufficiently brought out at the trial and shown in the record."
(269 U.S., at p. 349.)
P Samuel Lord, Minnesota tax commissioner, In Proceedings of the National Tax AssocIation, 1922, p.
250; Walter W. Law, Jr., ibid., 1923, p. 203; Helmberger, op. cit., pp. 25, 106. Evidently, some State officials
knew what section 5219 meant or were aware that it might be invoked to prevent special treatment of bank
shares. Professor C. J. Bullock, who at the time was the chief advocate of the classified property tax and of
low-rate taxes on intangibles, was of the opinion that the 3-mill tax in Massachusetts might make trouble
for the State with its banks. His doubts apparently were made known for the first time in 1921. Proceedings
of the National Tax Association, 1921, p. 395. Indiana in 1919 considered a plan to assess intangibles at 25
percent, while other property would have to be assessed at full value. Bankers informed the legislature that
if such a law were enacted, banks also would have to be assessed at 25 percent. This killed the proposal.
Philip Zoercher in Ibid., 1922, p. 371.
14 Ibid., p.346.
11 Cf. Senator Kellogg in 64 CR, p. S849 (December 22, 1922), citing Aberdeen Bank v. Chehalis County,
166 U.S. 440, 458 (1897); National Bank of Wellington v. Chapman, 173 U.S. 205 (1899); and ibid., pp. 81459,
81460 (January 9, 1923). Also Senator Glass in 64 CR, p. S1458 (January 1, 1923); Mr. Mills in Ibid., p. H4785
(February 27, 1923).
Representative Volstead, commenting on the Richmond case In the House of Representatives January 14,
1923 saId:
"i'o insist that a promissory note must be taxed at the same rate as a share in a national bank cannot be
defended. Bank stock represents a share in a growing business that has a franchise and a goodwill of great
value, neither of which receives any substantial consideration in estimating the value of bank stock for tax-
ation purposes. That value is usually assessed upon the book value of its assets. A bank earns nearly all of
Its dividends not on its own money but upon the money of its depositors, still it pays no tax upon such
deposits. (Bank of Redemption v. Boston, 125 U.S. 60)." 62 CR, p. 118739 (January 14, 1922).
PAGENO="0289"
269
inents: it "is all moonshine and humbug; . . . there is no real com-
petition from this source and no real discrimination." 16
5. Position of banks.-Opinions to the contrary were expressed by
counsel for the banks and some members of Congress. Mr. Thomas B.
Paton of the American Bankers Association pointed out to delegates
attending the National Tax Association Conference in 1921 that the
Richmond Case merely followed previous decisions of the Supreme
Court. Mr. Saxe, not only a bank attorney but also a former president
of the New York Tax Commission, was of the same opinion. Mr.
E. E. Colladay, an attorney of Washington, D.C., told the 1922
National Tax Conference: "The Supreme Court of the United States
in 1885 decided exactly as it did in 1921 on this question." Congress-
man Otis T. Wingo of Arkansas told the House of Representatives
that the Richmond decision was not a departure from previous
holdhgs which had been repeatedly affirmed, nor was the blame on
Congress for a supposed change in the Federal rule. "if anybody has
been bamboozled it is the legislature and the courts" (of New York
where the controversy was particularly intense). 11
6. Heimberger's criticism of decision.-A different line of criticism of
the Richmond decision is found in Helmberger's study of State and
Local Taxation of Banks, completed in 1960. it is based upon the
nature of the share tax and differences in assessment methods.
Heimberger points, out that in the beginning Congress intended the
share tax to be on individuals, or at least never made clear what it
did intend. The States, however, considered it to be a tax on the banks.
Its levy and collection had been limited to the location of the bank,
and no deductions from share value had been required. The tax, more-
over, was collected from the banks and could be offset by them against
dividends or billed to the shareholders. When the Federal income tax
became effective, State taxes paid upon shares were allowed as a
deduction from bank income. The fiction of assessing the tax in the
name of the stockholders was followed by many States, although
nearly all required the banks to pay the tax. Hence it was still possible
to regard the tax as on shareholders or on the banks.
Heimberger's analysis of the case is as follows:
"If one views the share tax as a tax on shareholders, the logic of the
position of the banks and of the United States Supreme Court was
unassailable, since neither the bank's stockholders nor the holders of
other intangibles were allowed a deduction for debt. This logic was
unassailable, that is, provided the holders of the other intangibles
were competing with the banks. Many State tax officials and legis-
lators, while agreeing that the rate on bank shares was higher than
that on other intangibles, denied that these other intangibles were
competing moneyed capital. They argued that only State banks were
m competition with national banks. Their position is unconvincing.
Surely non-bank financers of real estate buyers, consumers, and even
other businesses were in competition with banks. The Court so held,
finding that it was only necessary to establish that such competing
capital was significant in amount and taxed at lower rates than bank
shares to invalidate the tax on the latter.
"Hearings on HR. 9579 (1922), p. 101. See also Leser in Proceedings of the National Tax Association,
1923, p. 219, and Mr. Sattc'~ lee's comment that Leser's "humbug" was "rather mild than otherwise" (ibid.,
p. 380).
"64 C.R., p. H1659 (Jan. 12, 1923).
79-421 0 - 72 - 19
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"In the Richmond case, the bankers merely alleged that such com-
peting capital existed and was significant in amount. The defense,
the City of Richmond, made no denial of the bankers' allegation,
holding that it was irrelevant since national bank shares were taxed
at the same rate as State bank shares, which was all that was necessary
to validate the tax. The defense was not based on fact but on prece-'
dent. The identification of `other moneyed capital' of section 5219
with State bank shares was so general and had held sway so long that
the defense was not bothered by facts. Incidentally, had the defense
taken the trouble to investigate share tax litigation thoroughly, it
would have found instances in which capital apart from State bank
shares had been included in other moneyed capital by some courts.'8
The identification of other moneyed capital with State bank shares
simply could not have stood indefinitely. The basic trouble was the
attempt to levy a constant tax under an invariant section 5219 in
a changing world. The amount of moneyed capital outside of banks
had been increasing relative to the amount of bank capital. As banks
and other lenders developed, they competed with each other more
~iud more. These were economic facts which simply could not be
denied forever. The surprising thing about a `Richmond' decision is
that it came so late. One might view the delay as (1) a result of the
fact that States did not tax banks nearly as heavily as section 5219
permitted, since they allowed deductions from share value without.
being required to do so, or (2) a reflection of bankers' respect for
tradition, which equated other moneyed capital with State bank
shares, or both.
"Despite the above, the writer is not in accord with the Richmond
decision. The, acceptance of the decision as rendered hinges on one's
acceptance of the share tax as a tax on shareholders. It is difficult to
understand how one can maintain that the share tax is not a tax on
banks, m view Qf the fact that [it} is collected from banks and deducted
from the banks' net income for income tax purposes.
"If one views the tax as a tax on banks, the logic of the decision
evaporates. [The basic assessed valuations to which Richmond applied
tax rates of $1.75 per $100 for bank shares and $0.95 for other moneyed
capital were not comparable valuations, because there were significant
differences in the extent to which debts might be deducted in valuing
these assets.] . . . . [If] the debts of the holders of such other moneyed
capital were sufficient to bring their burden to $1.75 as properly
measured for comparative purposes, then there was no discrimination
against the bank and the Richmond decision was a mistake. It is
entirely possible that the Merchants' National Bank's tax burden was
smaller rather than larger than the legal burden on other moneyed
capital outside of banks. According to Judge Oscar Leser, Commis-
sioner of Taxation in Maryland and long time student of bank taxes,
the American Bankers Association makes an absurd comparison of a
tax on bank shares (net worth) with a tax on other moneyed capital
(gross assets) ~19 The Court and the defendant as well as the plaintiff
appeared to look only at rates while ignoring the base. It should be
noted, however, that in all probability, except for an `honest' fringe,
1$ Citing "Taxation of Banks," a discussion in Proceedings of National Tax Association, 1921, pp. 381-397.
1~ Citin~ "Report of the Committee of the National Tax Association upon Proposed Changes in U.S.R.S.
Sec. 5219,' In the Proceedings of the National Tax Association, 1943, pp. 33-34.
PAGENO="0291"
271
holders of other moneyed capital simply evaded the tax. This appears
also to have been overlooked." 20
7. Effects of Richmond decision.-The first effect of the Richmond
decision in Virginia was confusion. The Virginia Bankers Association
agreed to discourage attempts throughout the State on the part of
other banks to invoke the protection of section 5219. The banks urged
the legislature to adopt a tax of $.55 per $100 on intangibles individ-
ually-owned and promised to pay double that rate on bank shares.
Such a law was passed in 1922; had the banks broken this agreement,
the protection of section 5219 could have been invoked again. Pay-
ment under this voluntary agreement was labeled by Senator Kellogg
as "the Chinese method of taxation." 21
Most other States were affected directly or indirectly by the Rich-
mond decision. In the States with low-rate taxes on intangibles the
decision meant that (1) the low-rate taxes would have to be abandoned
or (2) taxes on bank stock would have to be reduced to the rates on
individually owned intangibles, or (3) bank stock would have to be
exempted, leaving national banks taxable only on their real estate. 22
Abandonment of low-rate taxes or of more complex classifications
meant a return to the general property tax, which, it had long been
demonstrated, could not be enforced as to personal property. Even
this course would not. have assured the validity of national bank
taxes. While there were no outright discriminations in the wording of
the statutes of which banks could complain, actual assessments often
did discriminate against them. Burden of proof of this rested upon
the banks but such proof had been adduced in many of the litigated
cases. And if local officials were not successful in putting on assess-
ment rolls substantial amounts of individually owned intangibles,
section 5219 could be invoked where those intangibles could be proved
to be competitive. Either way the national banks were in a position to
contest taxes on their shares. Thus, those who thought that general
property tax States were not affected-and many State officials were
of this opinion-were not fully informed about the decisions of the
courts. Few people, too, favored discrimination against other property
for the benefit of banks Previously a few States-Delaware, Penn-
sylvania and New Jersey-had passed laws differentiating in favor of
bartks.23
The low-rate taxes in about 20 States were immediately in jeopardy
with the announcement of the Richmond decision. In Minnesota the
banks were able to get the fractional assessments on banks reduced
from 40 percent of true value to 333~ percent by litigation, agreements,
and legislation. In 1931, the percentage applied to banks was further
reduced to 25 percent. In Montana where banks were assessed at 40
percent prior to 1929, the assessment fraction was reduced to 7 per-
cent for two years by judicial action. In Iowa, bank taxes were re-
duced to 5 mills per dollar-the level for personal intangibles. In
Rhode Island, all banks in the State were able to get off with taxes
`°Helmberger, op. cit., pp. 106-9; cf. IbId., pp. 24-5.
~1 Gary, in Proceedings of the National Tax Association, 1921, pp. 399-400. See Leland, op. cit., P. 209.
Cf. remarks of Senator Kellogg, 64 CR, p. S849 (l)eceinber 22, 1922). He thought this agreement did not
indicate any real competition between banks and Individually owned intangibles. Heimberger, op. cit.,
p. 110. suggested also that bankers might have wanted the $.55 rate on their own (non.bank) intangibles.
~` Discussion based on Leland, op. cit., pp. 203-211.
23 Cf. Zoercher In Proceedings of the National Tax Association, 1922, p. 372; Leland, op. cit., p. 206.
PAGENO="0292"
~272
of only $3,000 or $4,000, except on real estate, and were strong enough
to prevent any change in the law.24
Problems were created also in States having personal and corporate
income taxes.25 Until 1923 income taxes were not a permitted option
under section 5219. In New York, with the adoption of the income
tax, personal property including: intangibles had been exempted from
taxation. This exemption invalidated New York's 1 percent tax on
national bank stock. Between June 6, 1921 and February 8, 1922, at
least 100 legal actions contesting bank taxes had been started in New
York. It was estimated that New York would have to refund no less
than $18,000,000 in back taxes with interest, so that governments
were losing $6,000,000 yearly "from some of the most prosperous
corporations in the State." This meant a 5-point increase "in our tax
rate, and ultimately a 20-point increase." In Massachusetts there
were 40 similar suits, four of which involved refunds of $2,500,000.26
An unknown number of suits were started also in North Dakota
and South Dakota. There is little doubt that the Richmond decision
spawned an increase in tax litigation by national banks.
The conflict between States and banks did not end here. There
was also retaliatory action and legislation to be taken into account.
In Maryland banks could not secure refunds unless the contested
taxes had been paid under duress. Judge Leser said none of the banks
could meet this condition; they had cheerfully paid the tax. A few
States even passed laws saying that public funds could not be de-
posited in banks that had not paid the taxes levied against them.27
It is no wonder, then, that the Richmond case stimulated amend-
ment of section 5219, accomplished in 1923. That the amendment
did not overcome the Richmond decision was not clear until ~.926.
J. The amendment of section 5219: 1923
1. Di,fferences from cuts of 1864 and 1868.-The second amendment
of section 5219 was approved by the President March 4, 1923. Its
provisions are reproduced in appendix i-C, above.
The amendment of 1868 related only to the place at which national
bank shares were to be taxed. Under the Act of 1864, shares were to be
taxed at the location of the bank, but the 1868 amendment declared
that "the place where the bank is located" meant "the State within
which the bank is located," and the legisle~tures of the States were to
determine "the manner and place" of taxing such shares within each
State. This was to enable some States to continue taxing resident
taxpayers on their shares at their domicile rather than at the place
where the bank was located.28 But so far as nonresidents were con-
cerned the 1868 amendment provided that their shares were to be
taxed "in the city or town where said bank is located and not else-
UCI. Sen. Kellogg. 64 CR, p. 5849 (Dec. 22, 1922); Mr. Mills, Ibid., p. H1539 (Jan. 10, 1923). For lists of
States affected, see Proceedings of National Tax AssocIation, 1922, pp. 344-46; Leland, op. cit., p. 210. On
Minnesota and Montana, cf. Welch. op. cit., p. 96; Helmberger, op. cit.. p. 113. Iowa: Discussion of Messrs.
Dickinson and Mills In 64 CR, p. 111540 (Jan. 10, 1923). Rhode Island: Leser In National Tax Association,
Ibid., p. 377.
~` These came Into focus in connection with the 1926 amendment, discussed below.
`7Cf. Sen. Shortrldge. 64CR, p. S847 (Dec.22, 1922); Rep. Mills, 64CR. p. 111540 (Jan. 10, 1923). HearIngs
on H.R. 9579 (1922), p. 203. For the country as a whole, up to the time of the Richmond decIsion, 36 cases
Involving section 5219 reportedly had been carried to the Supreme Court and all hut 10 of these were said
to have been decided against the banks (Wall In Ibid., p. 204). As to Massachusetts, cf. Woosley, op. cit.,
p. 54.
`7Proceedings of the National Tax AssociatIon, 1921, p. 416. As to public deposits, Cf. a Minnesota law of
1927; Leland, op. cit., p. 214n.
"See also supra pp. 147, 148.
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where." 29 The substance of the Act of 1868 was incorporated in the 1923.
amendment.
The proviso that shares could not be taxed "at a greater rate than
is assessed upon other moneyed capital in the hands of individual
citizens of such State," as contained in the Act of 1864, was repeated
in the Act of 1868. The 1923 amendment, however, said that shares
shall not be taxed "at a greater rate than is assessed upon other
moneyed capital in the hands of individual citizens of such State
coming into competition with the business of national banks." 30 And
with intent to clear up dilemmas created by the Richmond case,3' a
new proviso was added:
"Provided, That bonds, notes or other evidences of indebtedness in
the hands of individual citizens not employed or engaged in the bank-
ing or investment business and representing merely personal invest-
ments not made in competition with such business, shall not be deemed
moneyed capital within the meaning of this section."
Whether this proviso merely put the Richmond decision into
statute law, as some contended, will be considered in detail later.32
The last phrase indicates that the most that could be said about indi-
vidually-owned intangibles was that their ownership created a pre-
sumption (always rebuttable) that individually-owned intangibles
were not in competition with the business of banking. Evidence, of
course, might prove otherwise, or competition might be conceded by
counsel, in which case the share-tax option in the 1923 amendment had
not effectively corrected the situation brought about by the Richmond
decision. To this extent, it was as if the provisions of the Act of 1864, as
amended in 1868, remained in effect.33
The provisions of the Act of 1923 with respect to the taxation of
real estate differed only in words, not in meaning or intent, from those
in the Act of 1864. The real estate of a national bank has always been
taxed like real estate belonging to other taxpayers at the place and
within the political subJivisions where it is situated.34
The taxes on real estate and bank shares were the only State taxes
on national banks permitted under the Act of 1864, but the Act of 1923
added an income tax option. A tax on the net income of a national bank
was not to be at a higher rate "than the rate assessed upon other
financial corporations nor higher than the highest of the rates assessed
by the taxing State upon the net income of mercantile, manufacturing,
and business corporations doing business within its limits." This was
more specific than the share tax and provided a basis against which
bank taxes could be measured.
The Act of 1923 also permitted the inclusion of dividends in the
taxable income of share owners or holders. But the tax was "not to be
at a greater rate than is assessed upon the net income from other
moneyed capital." This proviso was as vague as the "other moneyed
~This provision was Introduced by the words, as if for emphasis: "And provided always."
~ italics added.
"See supra, pp. P8-203.
` See infra. pp. 214-17, Mr. Newton made this latter allegatfod. 64 C.R., p. 114799 (February 27, 1923).
U One state official described the 1023 amendment as an "enforced treaty." Gary, "State Taxation of
Banks in the Light of the Recent Amendment of section 5219, Revised Statutes," Proceedings of National
Tax AssocIation, 1923, p. 183.
~4 The wording of these Acts regarding taxation of national bank real estate is as follows:
1864: ". . . nothing in this act shall exempt the real estate of associations from either State, county
or municipal taxes tu the same extent, according to Its value, as other real estate is taxed."
1986: "Nothing herein shall be construed to exempt the real property of associations from taxation
In any State or in any subdivision thereof, to the extent, according to Its value, as other real property
Is taxed."
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capital" share-tax limit in the Act of 1864; and less specific than the
proviso governing share taxes in preceding sections of the Act of 1923.
Up to this time many had believed that States had a sovereign right
to tax national bank dividends to individuals along with other non-
exempt income accruing to them, although the share tax and the tax
on bank real estate were the only methods specified in section 5219.
When personal income taxes came to be adopted by the States,
following the example of Wisconsin in 1911, dividends from national
bank shares were included along with other dividends and earned
income as taxable income to which the specified rates were applied.
Missouri, New York, and Virginia applied their taxes to dividend-
income received from national banks. But in the aftermath of the
Richmond case, the Supreme Court ruled in 1923 that such taxation
was not permitted. Congress had not given its specific permission to
States to tax national bank dividends to resident stockholders and
until it did such taxes were void. Permission was then given in the
1923 amendment.35
The States thus were allowed an entirely new alternative to the
share tax. However, each State could select only one method of taxing
national banks (aside from taxes on their real property). Each could
elect to tax (1) the~hares, (2) the net income of the bank, or (3) the
dividends received by the owners or holders of the bank's stock. Any
one of these "three forms of taxation shall be in lieu of the others."
And in the case of nonresident owners or shareholders, these taxes (or
the tax) were to be levied "in the taxing district where the association
is located and not elsewhere," upon return made by the bank as agent
of the nonresident shareholders.
Finally, the Act of 1923 included a validation provision permitting
States to legalize or confirm taxes on national banks which had been
collected previously but were illegal under decisions in the Richmond
and similar cases.
2. Legislative history of 1923 amendment-The Supreme Court
handed down its decision on the Richmond Case on June 6, 1921. Less
than a month later, Senator Nelson at the request of Mr. Samuel
Lord, Chairman of the Minnesota Tax Commission, introduced a bill
(S. 2200) to amend section 5219. This was referred to the Committee
on Banking and Currency and by it to a subcommittee under the
chaIrmanship of Senator Newberry. This subcommittee requested
"the thoughtful consideration of the American Bankers' Association
of this bill and their comments thereon." On August 1, 1921, Mr.
Volstead (Minn.) introduced in the House an almost identical bill
(H.R. 8015) which was referred to the Committee on Banking and
Currency. On October 20, 1921, Mr. Mills (New York) introduced
another bill (H.R. 8784) to amend section 5219 and it too was referred
to the House Committee on Banking and Currency. This bill provided
for the taxation of national banks on the basis of income, as well as
property and shares. None of these bills was ever reported out by the
Committee.36
"People ex rel. Hanover National Bank v. Goldfogle, 118 Misc. Rep. 79 (1922), 137 N.E.611 (1922), 261
U.S. 620 (1923). In the Hanover case, the Supreme Court declined to review a decision adverse to the State
of New York. Cf. Welch, op. cit., p. 177.
8~ The Richmond case is discussed in the preceding section. On the introduction of the several bills, cf.
61 C.R., pp. S3300 (July 1, 1921), 4504 (Aug. 1, 1921), and 6557 (Oct. 20, 1921). Cf. also Hearings, H.R. 9579
(1922), p. 218.
PAGENO="0295"
275
On December 15, 1921, Representative McFadden, Chairman of the
House Committee on Banking and Currency, at the request of mem-
bers of the National Tax Association, introduced H.R. 9579, which had
been drafted by them in accordance with a resolution adopted by the
Association at Bretton Woods, N.H., on September 16, 1921.~~ This
bill also was referred to the Committee on Banking and Currency and
was the subject of hearings held during January and February 1922.
- The bill would have authorized the legislature of each State to pro-
vide for taxation of real property therein of any national banking asso-
èiation located therein in the same manner and at the same rate as
other real Property in the same taxing district was taxed; and also to
provide for the taxation of either the income or the shares of such an
association, subject to the restrictions that whichever of these classes
was chosen, the rate of tax was to be no greater than the lowest uniform
rate or graduated rates imposed in respect of that class on State-
chartered banks, banking associations, or trust companies doing a
banking business, other than savings banks or similar non-stock mu-
tual corporations. If the shares were taxed, any shares owned by non-
residents of the State were to be taxed in the taxing district where the
association was located and not elsewhere. If the State provided for the
taxation of individual incomes, tile legislature might include as a part
of taxable income the income from the shares of national banking
associations; but only if the income from the shares of State-chartered
banks, banking associations, and trust companies doing a banking
business also was so included.
H.R. 9579 provided further that any share tax previously paid,
levied, or assessed was "legalized, ratified, and confirmed" as of the
date of its imposition if the tax was in accord with other provisions
of the bill.
However, on June 7, 1922, Mr. McFadden, on behalf of the House
Committee on Banking and Currency, introduced H.R. 11939, which
had been unanimously agreed to by the Committee and its subcom-
mittee.38 This subsequently became the bill which, with amendments,
was carried to final passage. Mr. McFadden reported back H.R. 11939
without amendment the next day (Report No. 1078). This bill kept
the share tax and added net income as an alternative for taxing
national banks. The validation provision legalized the levy or reten-
tion of only those taxes which could be levied under H.R. 11939. The
bill was called up and passed in the House on June 14. On June 15, the
bill was referred to the Senate Committee on Banking and Currency.39
H.R. 11939, as passed by the House, read as follows:
"Be it enacted, etc., That section 5219 of the Revised Statutes of
the,United States be. and the same is hereby, amended so as to read
as follows:
~ The conference resolution was as follows:
"Be it resolved, That in the opinion of this conference, section 5219 of the United States Revised Statutes
should be so amended as to permit the States to tax national banks or the shares thereof or the income there-
from, according to such systems as they may consider desirable, provided that such taxation shall not be at a
greater rate nor impose a heavier burden than is assessed or imposed upon capital invested in general banking
business and the income derived therefrom." Proceedings of National Tax Association, 1921. p. 497.
On December i2-14, 1921, officials from 16 States met in Washington. at the invitation of Mr. Samuel Lord,
Chairman of the Minnesota Tax Commission, and drafted an amendment and a lengthy resolution. This
group appeared before the Committee on Banking and Currency and actively sponsored the amendment.
For an account of these activities see Lord, "Presidential Address," Proceedings of National Tax Associa-
tion, 1922. pp. 242-60 esn. 251ff. See also Hearings, HR. 9579 (19221, p.3; 62 CR., p. 11433 (Dec. 15, 1921).
862 CR., p. 118368 (June 7, 1922). On the Senate side, Senator Wadsworth introduced S. 2903 on January
4, 1922. This bill, like others, was referred to the Committee on Banking and Currency and was not heard
of thereafter. 62 C.R., p. S748 (Jan. 4, 1922). On Juno 8, Senator Kellogg introduced S. 3695.
3$ 62 C.R., pp. S8399 and 118437 (Juno 8, 1922), 118720-8736 and 8738 (June 14), and 118748 (June 18). The
text of the bill is from ibid., p. 118720. -
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"`SEC. 5219. That nothing herein shall prevent all the shares in any
association from being included in the valuation of the personal prop-
erty 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 to the following restrictions:
"`1. (a) That the tax imposed shall not be at a greater rate than is
assessed upon other moneyed capital in the hands of the individual
citizens of such State coming into competition with the business of
national banks.
"`(b) That in any State where a tax in lieu of a property tax is
assessed upon the net income derived from such other moneyed capital,
such State may, in~ lieu of a tax on the shares, impose upon the bank
an income tax, assessed upon the net income of the bank, but such
tax shall not be at a greater rate than is assessed on the net income of
such other moneyed capital.
"`2. That the shares of any national banking association, owned by
nonresidents 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.
"`3. That the provisions of section 5219 of the Revised Statutes of
the United States as heretofore in force shall not prevent the legalizing,
ratifying, or confirming by the States of any tax heretofore paid,
levied, or assessed upon the shares of national banks, or the collecting
thereof, to the extent that such tax has been or is in accord with the
provisions of paragraph 1 of this section: Provided, That this shall not
apply to taxes attempted to be levied before January 1, 1917.'"
3. Hearings on H.R. 9579.-The House Committee on Banking
and Currency held hearings on H.R. 9579 on January 26 and 27 and on
February 7-9, 1922. The hearings in January were devoted primarily
to the proponents of the bill-the State tax officials; the February
hearings to the opposition-the bankers.4° Twelve representatives of
the States, mainly tax commissioners, testified. They stressed the
financial chaos produced by the Richmond decision, which required
refunds of millions of dollars in State and local taxes. They were
certain that intangibles in the hands of individuals did not compete
with banks. Such competition had been erroneously conceded by
counsel for the city of Richmond in the bank tax case, but the tax
officials believed such competition was not a fact generally or in
Virginia in particular. They pointed to the added revenues which had
been collected by the States from low-rate taxes on intangibles, a
reform which many bankers had worked for, and which had been the
basis for voiding State taxes on national banks in States where classi-
fied property taxes had been adopted. They emphasized changes which
had taken place both in State tax systems and in the nature of the
national banking system since States were given specific authority to
tax national banks in 1864. They were sure that legislatures could be
trusted not to discriminate against national banks. Consequently
section 5219 was no longer needed. The point of view was well cx-
40 Sec Hearings, H.R. 9579 (1922), pt. 1, PP. 3-108, 223-45. Only a brief summary of the tax officials' well-
known position is given here. They also presented a brief, pp. 245-62. For the bankers' views, see Ibid.,
pt. II, pp. 111-223; also pp. 38-44, 46-56, 66-80, 108.
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pressed by Mr. Thomas E. Lyons, Chairman of the Wisconsin Tax
Commission, as follows:4'
* "What we, * * * who desire an amendment of 5219, are demanding
is * * to restore to the States the power to tax national banks as they
see fit, providing they do not discriminate against those banks, in
favor of other classes of property."
* The position of the bankers, as expressed in discussions with the
State officials and in the hearings was equally clear, They did not want
a change in section 5219.42 If State laws were out of harmony with this,
as interpreted in the Richmond decision, let the States change them.43
They were satisfied with the share tax option as it was. They would
even favor an amendment fixing the maximum rate at which the
shares of national banks could be taxed. They were willing, if necessary,
to concede an amendment to § 5219 to permit States to adopt an
income tax.44 The advantages to private bankers, particularly as they
existed in New York and Boston, should be removed.45 At all costs the
national banks had to be protected, especially to prevent the Federal
Reserve System from being undermined by the exodus of national
banks to State systems-a move that would be fostered by excessive
taxation and the lure of the more liberal powers granted to State
banks.4° The banks also feared that changes in section 5219 might
establish in the tax laws a separate classification for national banks
and thus make it easy for them to be singled out for discriminatory
taxation.47 In short, the typical banker's attitude was that the less
change in section 5219, the better.
"in Proceedings of National Tax Association, 1922, p. 369. His testimony at the hearings was of similar
Import. Hearings, H.R. 9579 (1922), pp. 57-66.
42 Their position is shown in the following quotations from Hearings, HR. 9579. at the pages indIcated:
Mr. Sands: "Our position is that 5219 remains as it is, but if it is amended it should only be amended to the
extent of income tax" (p. 114).
Mr. McAdams: I believe it is fundamental that this section should remain unchanged" (p. 119).
Mr. Divet: ~ * * the bankers' association are opposed to any change in the principle that Is involved in
eection 5219" (p. 123).
Mr. Favinger: "We are amply protected by section 5219. Add to it, if you will, the income tax clause, but
that is all; do not change the principle involved" (p. 139).
Mr. Helm: "I am opposed to it [the McFadden bill] because it gives us no basis for protection and com.
parison, if you are left solely with the State banks, because the legis~lature has shown its willingness, where
classification is possible, to classify State banks, leaving the title companies and others outside of that class"
(p. 157). V
Mr. Freeman: " * ~ frankly say that the present method of taxation Is satisfactory to the banks of
New ~ersey" (p. 170).
Mr. Garm: `~. . . we would like to see 5219 maintained or the principle maintained; or if it is necessary to
make some amendments to accommodate the States that have different systems of taxation, an income or
classified-property tax, then we would favor the amendment allowing bank shares to be taxed on their
income."
The Chairman then asked: "But so far as your own State is concerned, since the Richmond decision you
are perfectly satisfied to let it remain where It is?" V
Mr. Garm: "Yes sir, it makes no difference to us at all. There is no justification on that score and it will not
make any difference either to the State or national banks" (pp. 185-6).
Mr. Paton: " * we object to any amendment to 5219, on the ground that it is needed for the protection
of the national banks; that there is no demand for it from the tax commissioners of a large majority of the
States, and that in the few States where their classified systems are out of harmony with 5219 it should be
incumbent upon those States to amend their tax laws rather than to seek the amendment of the long-standing
Federal protective laws" (p. 207).
43 Of similar, though opposite, import was the expression by Oscar Leser, Maryland tax commissioner, in
an early comment on the Richmond decision: If the banks prevail, impose a tax on deposits. Proceedings of
the National Tax Association, 1921, p. 416.
44 Ibid. p. 424 (Thomas B. Paton of New York). As to an income tax, see statement of Mr. Favinger,
quoted above in footncte 42.
43 " * they are all using part of their moneyed capital in the hands of individuals, and those various
concerns are getting the same kind of money from the same kind of transactions." Mr. Favinger, Hearings,
ILR. 9579 (1922), p. 132.
"Hearings, H.R. 9579. E.g., Mr. McAdams, pp. 118-19; Dupuis, pp. 142-44; Adams, p. 147; Freeman,
pp. 170-1. Woosley, op. cit., p. 57, points out that only 7 percent of the State banks had joined the Federal
Reserve System, whereas national banks were required to be members. lie also made this comment: "While
the services performed by the Federal Reserve System cannot be minimized, it Is a mistaken conception of
membership to regard it as a claim for a tax preferred position" (ibid).
`7 Cf. also: "If banks * * * are put in a boat by themselves, and the State also is allowed to tax them as they
please, there is danger that they may be taxed more highly than they should." Paton, Proceedings of
National Tax Association, 1921, p. 425.
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:S. 3695, introduced by Senator Kellogg, was said to have been
drafted by tax officials interested in amending section 5219.~~ This bill
proposed to limit the share tax to the rate "assessed upon other
moneyed capital employed in the business of banking" rather than
that applied to intangibles in the hands of individual citizens. Where
the income tax alternative was used, the tax upon the bank "shall not
be at a greater rate than is assessed upon the net incomes of such other
moneyed capital." The bill also would permit the validation of share
taxes already imposed, provided such taxes were not greater than
those upon State banks and trust companies.49
* 4. Senate action.-Little progress was being made in advancing any
of the bills in the Senate. On December 22, 1922, Senator Kellogg
threatened to move that the subcommittee be discharged if his bill
was not reported immediately. He was of the opinion that States
should not be able to discriminate in favor of State banks and trust
companies and other moneyed capital which came into competition
with national banks, but to say that banks shall not be taxed more than
individuals on their intangibles was "an absurdity in legislation." He
also inserted into the Record a letter from the First National Bank of
Minneapolis indicating that they would be satisfied if State and na-
tional banks were treated alike." ~°
Shortly thereafter, on January 4, 1923, Senator Pepper submitted
a report of the Committee on Banking and Currency on HR. 11939,
with an amendment in the nature of a substitute. In his summary of
the bill he pointed out that the current interpretation of section 5219
by the courts "furnished a poor basis upon which to build the tax laws
of the States in the future." He told the Senate that the Kellogg bill
would end all discrimination among banks-national and State banks,
and trust companies and private banks. The bill sponsored by the
Committee went further and proposed not only "that the rate of
taxation applied to national bank shares shall not be higher than the
rate applied by the State to capital engaged in the banking business
in the State, but that it shall not be higher than the average of the
rates applied by the State to shares in business, manufacturing and
commercial corporations." The matter of averaging and the computa-
tion of such averages came up for considerable discussion in the de-
bate.86 Senator Pepper explained that H.R. 11939 provided not only
4162 C.R., p. S8399 (lime 8, 1922); Woosley, op. cit., p. 58; Proceedings of the National Tax Association,
1922 p. 253.
~~Fhe bill is reprinted in ibid., p. 254.
1064 C.R. pp. 5846, 847, 850 (December 22, 1922). Van Aistine in Proceedings of National Tax Associa.
tion, 1922, p. 383, saw no reason "banks should have a special law protecting them against higher taxation
than the average of other classes of property, any more than the manufacturer, the butcher or the broker."
Ii 64 0.11.. p. 51218 (Senate report 986; January 4, 1923): p. 51455 (January 9, 1921). Senator Glass thought
that 11939 did the same thing. Ibid., p. 51458. Senator Kellogg said it this way: "All moneyed capital engaged
In banking must be taxed at the same rate at which bank stock is taxed and at which bank capital is taxed."
Ibid., p. 81463.
Sen. McCormick asked how the averaging would work. To this Sen. Pepper replied: "It is extremely
difficult to answer the question of the Senator, for the reason that the several States have divergent practices
in ragard to the taxation of the other forms of corporate activities. In some States no tax at all is imposed
on capital Invested in manufacturing It is, therefore, provided in the measure reported by the Committee
that In case a State does not tax any or all corporations other than banks, the average of the rates ceases to
be the limit, and the only limit left is the one suggested by the Senator from Minnesota." 64 CR., p. 51455.
* * * * * * *
Son. Lenroot asked: "110w was the average to be determined without valuing every share of stock in the
State?" (p. S1456).
Son. Pepper: "It is a mere mathematical calculation to ascertain in any given State what is the average
of the rates in force within that State applicable to corporations of the classes specified."
Still not satisfied, Sen. Lenroot wanted to know if the local rates used in the computation would be the
rates In the current or the preceding year, since the bill was silent on that subject. Sen. Pepper thought it
would be "the last average ascertainable under the last pre-existing State legislation." ibid., p. S1456.
But averaging was no problem for Sen. Kellogg, "it is not difficult to find the average rate imposed in the
State. It is done every day by tax commissions." Sen. Pepper agreed. Ibid., p. S1455.
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for the taxation of shares but "also the case in which the State may
desire to tax the income of a national bank and the case in which the
State may desire to include dividends upon shares in national banks
in the taxable income of the citizens, the provision being that any one
of those forms of taxation of national banks shall be in lieu of the
others." The "in-lieu" feature was a new addition to the provisos in
section 5219 but it was not followed up by the Senate. The bill was
debated on January 9, 22, and 23, 1923.52
On January 10, 1923, Senator Calder submitted an amendment to
section 5219 which was ordered printed. On January 16, in the House,
Mr. MacGregor favored a study of the Senate bill, so that when the
Senate passed it the House could "act speedily." He informed the
House that the Senate bill was a vast improvement over the House
bill.53
* In the Senate, H.R. 11939 was amended to provide that "the rate
applied by said taxing district to the shares in banking associations
shall not exceed the average of the rates applied by it to the shares
of such other corporations or to the shares of such of them as are
taxed therein," the "other corporations" being mercantile, manu-
facturing and business concerns. A validation provision covering
both State and municipal taxes was approved. The bill was passed
January 23, 1923, with 50 yeas, 18 nays, and 28 Senators not votmg.54
Disagreements between the House and Senate had to be composed.
Conferees were appointed. But almost a month later it was reported
in the House that the conferees could not agree. They had met with
State officials and bankers' representatives over more than a year in
an attempt to develop a workable plan for State taxation of national
banks. They had agreed on practically everything except what should
be (lone about the share tax option. And it was now only four days
before final adjournment of the 67th Congress. Mr. McFadden
moved that the House recede and concur in the Senate amendments
except for the validation provision. Thereupon, some parliamentary
maneuvers took place to assure the House that the validation pro-
visions would be voted upon separately; and each side was given an
hour to debate its case.55
5. Nature of debate.-Perhaps at this point it would be well to
indicate the nature of the debate in Congress on amendment of
section 5219, without observing the actual sequence of remarks in
either house, or confining the discussion to the debate on a single day.
The debates, as is to be expected, were mostly a restatement of the
testimony and positions taken by the two sides in the hearings sum-
marized above. Proponents were sure that individual deposits did not
constitute "other moneyed capital" coming in competition with na-
tional banks, as had been held in the Richmond ease. Both Senator
Glass and Mr. Mills disputed any supposition that individuals' bank
deposits were in competition with the business of the banks. Mr. Wingo
said that deposits were not involved in section 5219.~° The benefits
to the States of low-rate taxes on intangibles were repeatedly cited
but the opposition contended that these laws were based only on
$2 Ibid., p. S1456.
1364 C.R., p. 31563 (January 10, 1923), and p. H1843 (January 16, 1923).
* $4 Ibid., pp. S2219, 2224 (January 23, 1923). Cf. ibid., pp. S2172, 2173 (January 22).
U Conferees were appointed January 26, 1923. For the House, conferees were Messrs. McFadden, Dale,
end Wingo; and for the Senate, Senators McLean, Pepper, and Fletcher. 64 C.R., pp. 112504, S2472 (January
26, 1923), and pp. H4779-4783 (February 27, 1923).
E~ ibid., pp. S1458, 1450, 1460, 114800-i. The 1891 act was not meationei in either the hearings or the de.
bates. * *. *
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expediency.57 The same could not be said of the income tax, an oytion
not permitted until after adoption of the 1923 amendment. New I ork,
however, had adopted a personal income tax and exempted personal
property, tangible and intangible, in the hands of individuals. This
exemption invalidated taxes on national banks because of the restric-
tions imposed by section 5219. Under a ruling of the State attorney
general, bank dividends were included in the net income taxable to
mdividuals and partnerships. New York also retained the share tax
on national banks, capitalizing income to arrive at the value of shares.58
Since private banks in New York were partnerships, they were exempt
on personalty but taxed on income at not over 3 percent. Although the
Massachusetts law was different from that of New York, it too taxed
private banks at lower rates than national banks. Such discriminations
were referred to again and again during the debates.159 Nothing else
received quite as much attention. Regardless of the reason many
reprded the situation as "scandalous." 60 Fears were expressed that
this competition would drive State and national banks out of existence.
Aiid tO preserve the Federal Reserve System, national banks ne~eUed
Federal protection.6'
This last argument was answered, first, by those who trusted State
legislatures to act fairly: 62 and second, by those who thought that the
banks desired either to escape taxation or to maintain a preferential
status.65 On the other hand, it was frequently pointed out that many
bankers voluntarily paid the taxes assessed against them and willmgly
worked out compromises with State officials. No evidence was offered
to show that national banks were discriminated against in comparison
with general business, mercantile or manufacturing corporations.
There was no agreement either on the yardstick by which national
bank taxes were to be measured. Some supported the bankers' con-
tention that equal taxation of "individually-owned intangibles coming
into competition with banks or the business of banking" was proper.64
This was the position of the Supreme Court in the Richmond case.
~7 `There Is "no morality in intangible property tax favoritism." Mr. Wingo, 65 C.R., p. H1542. As to the
smture of intangibles and taxes upon them, see Leland, op. cit., pp. ii7ff.
~ Welch, op. cit., p. 40; 64 CR., p. Hl541.
~ Cf. Sen. Kellogg, ibid., p. S1463, Mr. Mills also pointed out that before the New York income tax was
adopted, ~&-7 million had been collected; afterwards collections were $35 million. Ibid., p. H4785.
In New York an institution like Kuhn, Loeb & Co. will pay $60,000; on the same basis a bank like the Han.
over National will pay $240,000. Mr. Jones (Texas) 64 CR. H1542. Mr. Garner asked, should national banks
pay more than 3. P. Morgan & Co? No, said Mr. Mills; Ibid., p. H1540. The New York law exempts "from
~Ikc taxes such poor taxpayers as 3. P. Morgan & Co., Kuhn, Loeb & Co. and other poor concerns engaged
In the banking business." Sen. Shortrldge, ibid.. p. S847. In Massachusetts national banks paid $2,999,000 in
taxes, but if taxed as were Lee Higginson & Co., Kidder, Peabody & Co., and other international bankers,
their tax would have been $490,000. Mr. Stevenson, ibid., p. H954 and cf. p. H4788. For other references to
taxes on private bankers, cf. ibid., pp. Hl545, 1546, 1659, 1842, 4803.
~ Mr. Mills in ibid., p. H1540. Mr. Wlngo agreed but added that It was not the fault of Congress. Ibid., p.
111659. Senator Glass thought the national banks had a real grievance. Ibid., pp. S1458, 1459. One writer,
however, thought that private banks were hardly competitive, "for very few private banks have a capital
sufficiently large to enable them to organize under the national-bank act." George E. Barnett, State Banks
and Trust Companies since the Passage of the National Bank Act, 61st Congress, 3d session, Senate docu-
ment 659, p. 205. He indicated that In large cities they were a'Ijuocts to brokerage businesses; in small com-
munities, chiefly In agricultural sections, they furnished credit. Ibid., p. 206.
"Mr. Wingo In 64 C.R., p. Hl542.
62 Sen. Smith wanted to know if there was any evidence before the Committee "to show that in any of the
States, to any extent, there was any discriminatory legislation for or against capital engaged in banking as
distinguished from capital engaged In other industries?" Sen. Pepper: " * * ~ cannot say there was *
because no witnesses were examined in the ordinary way, although representatives of a great many points of
view were given * * ; butt * * in North Dakota there was legislation of such a sort as to give pause to the
question of whether or not there might be such hostile legislation as I have referred to." Ibid., p. Sl457.
LNorth Dakota had a comprehensive classification system, including low rates on individually-owned in-
tangibles.) Also Mr. MacGregor in House, ibId., pp. 111842-3.
U The ` whole proposition seems to be that the banks desire to escape taxation." Mr. McGregor, 64 C.R.,
p. 111842. There followed a satirical characterization of bankers. Mr. Mills said, "national banks are great,
strong, prosperous corporations, and such a tax is wholly inadequate." State banks and other corporations
paid higher rates. Ibid., p. H1540.
~4 E.g., Sen. Walsh, 64 C.R., p. Sl463. He would put all property in the same class. Mr. Webber, a banker,
expressed a contrary view In the Hearings, H. R. 9579: "~ * * the gentleman from Arkansas to whom I
sold a mortgage for $20,000. He Is not in competition with the national bank" (p. 179).
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Others, as has been indicated, opposed this point of view. Many
wanted State and national banks taxed alike.65 Others wanted all
financial institutions included-some aiming especially at the private
banks.as And still others thought banks should be treated like other
businesses.67 This point of view prevailed, for the Senate Committee
recommended, as explained by Senator Pepper, that the rate upon
national bank shares "shall iiot be greater than the rate applied * * *
to any money engaged in the banking business, * * * superseding
[sic; `superimposing'?] a further safeguard by providing that if a State
taxes manufacturing, business, or commercial corporations at a rate
or at a series of rates of which the average is lower than the rate
applied to bank capital * * * that the the lower average rate applied
by the State to other corporations shall be the limit of the exercise
of its taxing power." 68
Suppose, however, asked Mr. Mills, New York wanted to encourage*
manufacturing in the State and sought to stimulate such investments
by adopting a very low tax rate on manufacturing-lower than on
other corporations-would not that policy invalidate national bank
taxes? Mr. McFadden thought not, so long as banks and financial
corporations were taxed alike. Mr. Wingo disagreed. Suppose, said Mr.
Mills, a State did not tax manufacturing corporations under its income
tax, would that invalidate national bank taxes? "No," replied Mr.
McFadden, "because they are to be taxed at the same rate as other
moneyed capital in the hands of citizens or financial institutions corn-.
ing into competition with them are taxed." 60
Although this discussion did not raise the issue, some members held
the belief that section 5219 legislation amounted to the coercion of the
States as to taxing powers. This was vehemently denied by Mr. WTingo:
Let the states "clean their own house and quit quarreling with Con-
gress." 70 This view was expressed by an editorial in The New York
World (January 12, 1923), twice reprinted in the Congressional
Record.7' A point made by Helmberger in his State and Local Taxation
of Banks is worth noting in this connection: Though the States chafed
at Federal restrictions, few taxed national banks as heavily as section
5219 permitted.72
The provision in the proposed 1923 amendment giving States a
choice of three methods of taxing national banks was questioned by
Senator Trammel. To this Senator Kellogg replied that it restricted
States "to only one at the same time." However, to Senator Trammel
this meant that all States would have to conform. "Under the decision
of the Supreme Court," they would have to anyway, added Sen. Pep-
per.73 Thus, the consideration of alternatives or of complete freedom to
tax banks did not get far.
`"Cf. Mr. Wingo, 64 CR. p. 111512, including private banks; Williamson, Ibid., p. 114793. However, Sen.
Pepper was of the opinion that if the rate was limited to what the State does to State banks and trust corn.
panles, "we would be segregating bank capital, as such, as an object of hostile taxation." 11.11. 11939, he
said, was an attempt to guard against that danger. Ibid., p. S1456.
~ Sen. Kellogg, ibid., p. S1455; Mr. Mills, ibid., p. 111510; Mr. Wingo, Ibid., pp. H1542, 4803. At the Hear.
Ings, H.R. 9579, Mr. Favinger, an American Bankers' Association representative, had said as to private
bankers, "Those gentlemen are bankers; they call themselves `bankers,' and they do a banking business"
(p. 134).
~` Sen. Kellogg, 64 C.R., p. S1459 (January 9, 1923);
`~ IbId., pp. 81455-6 (January 9, 1923).
"Ibid., p. H4797.
70 Cf. Mr. Stevenson, ibid., p. 11954; Son. Swanson, Ibid., p. S2175; Mr. Wingo, Ibid., p. 111542. Also of;
to same effect, pp. 111541, 111(359.
71 IbId., pp. 81622, 111660; favorably referred to by Mr. Wlngo, p. 111(350.
?2Helmberger op. cit., pp. 19-20.
78 64 CR., p. ~1461.
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* An interesting point was raised by one member in each House,
but was immediately passed over. Mr. Stafford contended that
shares owned by nonresidents would not be taxed under the income
tax. Mr. Wingo pointed out that they could only be taxed at the
location of the bank, and read into the Record the proposed section
5219 as agreed to by the conferees.74 Other corporate intangibles
or income from them are taxed at the owner's domicile (unless the
business situs is different), but this treatment could not be applied
to national bank shares under section 5219. In the Senate, Senator
Smith observed that collection of the share tax at the location of
the bank deprived the county where the shareholder lived of tax
revenues from such shares. Senator Kellogg's reply was, "that has
always been the law for taxing national banks."75 So not much more
attention was given to this, although the Senate did discuss the
income tax on nonresidents.
6. Validation controversy.-Although the question of validating
previously levied State taxes on national banks involved a transitory
problem, the debate which it engendered-particularly in the House-
was as heated and almost as extensive as the discussion of other
aspects of the proposed amendments to section 5219. Validation was
also among the last of the disagreements to be settled between the
House and Senate. In the end, the House prevailed.76
Several members were doubtful that Congress had power to validate
the State taxes. Senator Kellogg contended that the Congress should
give its consent to validation of the taxes by the States themselves.
He presented a legal brief in support of this position. The Senate was
concerned also with the morality and wisdom of validation. Some
members thought this action would constitute a legislative veto
of a judicial decision. On the other hand, Senator Johnson pleaded
that anything that could be done to correct the situation should be
done. In the end, affirmative action was taken.77
Validation was especially important to Massachusetts, New York,
and North Dakota., with their income and low-rate taxes on in-
tangibles. It was estimated that Massachusetts would lose $12 million
unless State taxes previously levied were made valid, and New
York from $17 to $20 million.78
7. Passage of amendment.-On February 27, 1923, the House
receded from its disagreement to the Senate amendment relative to
validation and concurred therein with 220 yeas, 85 nays, and 122
not voting. Mr. Mills remonstrated that the matter before the House
had been seen by only three members, and that after having been
before the House for two years it had to be passed in an hour's time.
Mr. Wingo pointed out, however, that the Conference Committees
had agreed on all of the section 5219 amendment, except the share
tax provision. This remained in dispute. He told the House that the
Senate proposal would continue the "special privilege" of lesser
taxation of private bankers in some States, whereas the House pro-
posal would protect national banks against discrimination in favor of
private bankers. The State could tax national banks without limit
- ~4 IbId., pp. 114800, 4801.
"Ibid., pp. S2172-3.
"Cf. Ibid., pp. 112504 (Jan. 26, 1923), S4959-60 (March 1), 115556 (March 3).
7' Ibid., pp. S846, SS47, S819-50 (December 22, 1922), S2220-23 (January 23, 1923), 112504-5 (January 26),
H4782-95 (February 27).
71 IbId., pp. S2220, S2221, 4788.
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"just so it imposes the same burden on competing capital employed
in private banking."79
The first paragraph after the enacting clause of the House and
Senate versions differed only slightly in phrasing. But, subdivision 1(b)
relating to the basis for taxing shares of stock of national banks
differed materially, as may be seen from the following quotations: 80
House version of paragraph 1(b): "In the case of a tax on said shares.
the tax imposed shall not be at a greater rate than is assessed upon
other moneyed capital in the hands of individual citizens of such State
coming into competition with the business qf national banks: Provided,
that bonds, notes. or other evidences of indebtedness in the hands of
individual citizens not employed or engaged in the banking or invest-
ment business and representing merely personal investments not made
in competition with such business shall not be deemed moneyed capital
within the meaning `of this section."
Senate version of paragraph 1(b): "In the case of a tax imposed by a.
State or any agency thereof on said shares the rate of taxation shall
not be higher than the rate applicable to other moneyed capital
employed in the business of banking within the taxing State: Provided,
that whenever by any taxing district the shares in mercantile, manu-
facturing or business corporations doing business therein are taxed the
rate applied by said taxing district to the shares in banking associa-
tions shall not exceed the average of the rates applied by it to the shares
of such other corporations or to the shares of such of them as are
taxed therein."
On March 1, 1923, Senator McLean submitted the conference report
on H.R. 11939; and the Senate agreed to it, accepting the House
amendment. Senator Kellogg explained that unless the Senate adopted
the House version there would be no law at all. The Senate had also
provided in the real estate tax provision that if bank real estate
taxed, that assessment had to be deducted from the bank's capital
before the shares could be taxed. The House struck out that proviso
"because some States tax the real estate and then they tax the stock
at a rate sufficiently lower to make it up." There were also differences
in the validation provisions.8'
K. Further amendment of section 5219: 1926'
1. Preliminary events.-In spite of the protracted congressionat
consideration of the 1923 amendment of section 5219, complaints
~ For the vote, cf 64 CR., pp. H4794-5. Mr. Mills' protest appears at p. 114800:
"How in the name of commonsense can we discuss a technical amendment which not only undertakes
to limit States as to the taxation of national banks, but has literally tied up that limitation with every form.
of taxation that I can think of, except public service corporations?"
For Mr. Wingo's remarks, cf ibid., pp. 114801-2.
Six months later Mr. Mills still felt the same way: "Insofar as the House of Representatives is concerned,
the measure that became law was substituted for the measure that had been considered for 2 years, at the
last moment. It was not in printed form before the Members of the House; there were only two typewritten
copies in the House at the time and the members had to vote, after simply hearing the law read-and you
gentlemen know how well you can understand a tax law if a clerk reads it from the desk. Some of the gen-
tlemen were so interested in preventing a proper understanding, that one of them who had a typewritten
copy denied me the use of it!" Proceedings of National Tax Association, 1923, p. 375.
80 Texts from 64 CR., p. S4959 (March 1, 1923). See also the discussion by Mr. Wingo, ibid., pp. H48O1-~
(February 27). Italics in the House version are his.
~ il)id.. pp. S4959-60 (March 1, 1923).
Cf. Woosley's caustic summary (op. cit., p. 61):
"The Senate. . . found itself in the position of having to take the House bill or nothing at all. If the House
had really desired to amend Section 5219 in such a way as to eliminate purely private investments from the
limit on national bank taxation and at the same time insure the equal taxation of private and incorporated
banks, it is difficult to understand the objections to the Senate compromise. It would have excluded private
investments from the measure of national bank taxation; the House provision succeeded admirably in keep-
ing them within that limit . . . the general counsel of the American Bankers Association was able to report
that the amended law `is virtually the bill advocated by the Special Committee on Taxation of the American
Bankers Association.'
On the other side, it may be remarked that the proviso in the Senate version of paragraph 1(b) was am-
biguous and would have invited litigation.
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against it arose almost as soon as it became effective. The outcries of
State tax officials probably reached their height at the annual con-
ference of the National Tax Association, at White Sulphur Springs,
West Virginia, in late September, 1923.
It was contended that the 1923 amendment did not change the share
tax at all but put into the statute the rule pronounced in the Richmond
decision, even though it was, the supposed intention of Congress to
correct the resulting uncertainty. The wording of the 1923 amendment
was criticized as not clear. In the "other moneyed capital" clause, the
words "in competition with the business of national banks" were likely
to cause as much difference of opinion as the words "other moneyed
capital." They would certainly open the door to further litigation.82
Officials of States utilizing corporate and personal income taxes,
such as New York and Massachusetts, were particularly critical of
the 1923 amendment. It did not allow them to tax the banks on net
income and then include bank dividends in the taxable income of
individual shareowners-as was done in the case of other corporations.
A similar point was made by one who said the amendment "m~akes it
impossible to tax the national banks * * * as farmers are taxed," by
which he meant that farmers were taxed on their property and again
on their incomes.85 This was prevented by the requirement in the
amended section 5219 that each State choose a single method (in
addition to the real property tax) for taxing national banks. This
limitation of the choices within each State was a phase of the con-
troversy that had received scant attention in the Congress. In short,
the 1923 amendment was not what the State officials "had requested
nor was it what they desired." ~
Several delegates at the 1923 National Tax conference were on the
other side. One thought the 1923 amendment was "a very fair piece
of legislation for the present." Another thought that, considering the
times, legislatures could not be trusted to tax banks fairly. One of the
New York delegates thought the amendment was acceptable to neither
the States nor the banks.85
When it came to making specific recommendations about changes
in the 1923 amendment, a considerable controversy arose (expressed
largely in procedural arguments) over a proposed conference resolu-
tion on the subject. Tjme resolution that was finally adopted asked
that section 5219 be amended so as "to permit the States to tax
national banks without any limitations other than those prescribed
in the Fourteenth Amendment." 86
During debate on this resolution at the tax conference, outright
repeal of section 5219 was advocated by a State tax official. But if
that were done, others observed, the States might not be able to tax
national banks at all; some form of congressional authorization was
- ~ Proceedings of the National Tax AssociatIon, 1923, pp. 182-231, 366-402. Gary, at p. 191; Law, p. 211;
Thomas, p. 218; King, p. 222; Satterlee, p. 226; Lord, pp. 385-7, 392-3.
`3 King, In Ibid., p. 221; Satterlee, p. 226; McKenzie, p. 377. Martin Saxe, New York attorney representing
various banks, said (ibid., p.216): `Without doubt, section 5219 as amended is not perfect. There is sound
reason why, in the Income tax states, they should have the right to tax dividends of stockholders as personal
Income if they also * * * tax the dividends of stockholders of corporations as personal income, and 1 think
this would be conceded."
S~ Gary, Ibid., p. 155. Mr. Gary, counsel to the Virginia State tax board, acknowledged that the amendment
"did, however,. . . far surpass what they [the State officials] had reasons to hope for throughout the entire
conflict.
"Powell, Ibid., p. 213; B1odg~tt, ibId., pp. 3S9-90; Law (New York State senator), Ibid., p. 212. Cf. Bryan,
attorney for the Virginia Bankers Association, Ibid., p. 218.
$`For the text of the resolution, cf. IbId., pp. 361-2. The vote was 70 to 12 (IbId., pp. 401-2).
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required. Moreover, eliminatioii of section 5219 would not stop liti-
gation-"we'd still have plenty of litigation." 87
2. Events of 1924 and 1925.-After the 1923 tax conference, agita-
tion for further amendment of section 5219 quieted considerably, al-
though individual State officials continued to work for change. No
bills to amend the section were introduced in the first or second ses-
sions of the 68th Congress.88 Nor is there any record of discussion or
presentation of resolutions on bank taxation at the National Tax
Association conference in St. Louis, Missouri, in September, 1924.
However, at the next conference, in New Orleans, Louisiana, in mid-
November, 1925, a resolution was adopted without discussion, creating
a committee of the Association to "confer with similar committees of
such other organizations as may be interested"-the American Bankers
Association-"to the end that suitable amendments may be made,"
etc., to section 5219.89
This was just what happened. An agreed amendment was the
result.°° its progress through Congress was rapid. -.
3. Legislative history of 1926 amendinent.-On March 3, 1926, identi-
cal bills to amend section 5219 were introduced in the Congress. Mr.
McFadden introduced H.R. 9958, and Senator Pep~er introduced
S. 3377. The bills were referred to the respective Committees on
Banking and Currency. Mr. McFadden explained to the House:
before 1 introduced this bill I saw to it that it was approved by
the American Bankers Association special tax committee; it was
approved by the National Tax Association; and the heads of the State
tax departments of both New York and Massachusetts appeared
before the House Banking and Currency Committees and approved of
this legislation."
He also read telegrams from Governors Al Smith (New York) and
Alvin Fuller (Massachusetts) urging adoption of the amendment.9'
The purpose of the bill, Mr. McFadden explained, was-
to enable States that have adopted income-tax methods to
abandon the ad valorem taxation of the shares of national banks and
apply income-tax methods to national banking associations within
their limits, without thereby favoring national banks and their stock-
holders, as compared with other corporations generally and their
stockholders. In other words, to make it possible for income-tax
States to tax national banking associations and their shareholders on
a complete taxing panty with other corporations and their stock-
holders." 92
The bill proposed no change in the Federal statutory provisioii
relating to ad valorem taxation of shares in national banks, despite
earlier contentions by State tax officials critical of the Richmond
decision and the 1923 amendment and a fresh reaffirmation of the
Richmond (lecision by the Supreme Court in January, 1926.~~ These
officials contended that section 5219, as judicially interpreted, was a
major deterrent to State efforts to develop and use classified property
taxes in place of general property taxes on intangibles.
$7 Cf. ibid., pp. 212-13, Celsus P. Link (Colorado T.tx Commission) and II. M. Powell; p. 219, Laser; p.
220, llough; p. 228, Bryan.
U First session, December 3, 1923 to June 7, 1924; second sessIon, December 1, 1924 to March 4, 1925. No
bills li3tcd in Congressional Record Index.
$9 Proceedings of National Tax Asscelation, 192.5. p. 3.57.
~ Committees met in New York, January 22-23, 1926. Proceedings of National Tax Assceistlon, 1926,
p. 283.
"67 CR., p. 116084 (March 23, 1926).
" Ibid., PP. 116032-3.
~ Cf. the next subsection, dls7ussing the Quthrlo Center case.
79-421 0 - 72 - 20
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Debate was brief and perfunctory. The Senate approved the bill
on March 18. `rue House acted a few days later, and the new law was
signed by the President on March 25, 1926.~~
The text of the 1926 law is reproduced in appendix 1-A of this
report,95 where it is identified as section 548 of title 12 of the U.S.
Code before amendment by Public Law 91-156, December 24, 1969.
There were no further changes in section 5219 during 1926-1969,
although proposals for amendment w~re offered from time to time.
These are reviewed in a later section.
4. The Gut hrie Center ca~e.-As the committees of the National
Tax Association and American Bankers Association were arranging to
confer about amendment of section 5219, the United States Supreme
Court announced another decision declaring void a tax on national
bank shares-in this instance, an Iowa tax levied in 1920.
In the case of First National Bank of Guthrie Center v. Anderson,
County Auditor,96 the Court concluded, on the basis of facts alleged by
the plaintiff bank, that individually-owned intangible property, "con-
sisting chiefly of notes, mortgages, and money loaned at interest," was
"moneyed capital . . . in competition with the business of the.bank."
These moneys and credits were taxed at a rate substantially lower than
that applied to bank s1~ares. Accordingly, there was "serious discrimi-
nation" and the tax was void.
The bank alleged that all bank stock (of State and national banks)
in the county was assessed at $316,850 and taxed at a rate of 143.5
mills on the dollar; and that the assessment of "notes, mortgages and
other evidences of money loaned and put out at interest by individual
citizens of the county," although not precisely known to the plaintiff,
was believed to exceed $5 million and was subject to a tax rate of 5
mills on the dollar.
Though the tax in question was levied for 1920, the Supreme Court
commented on the 1923 amendment of the share tax provision of
section 5219, in view of a contention by the defendants that this was
intended as a legislative interpretation of the restriction imposed by
the Richmond and earlier decisions-and that the congressional pro-
ceedings that led to its adoption would show this. The opinion does
not indicate that the Court examined the legislative record to ascertain
the intent of Congress in approving the 1923 amendment, but it in-
eludes the following comment:
"But assuming that this is true the situation is not changed; for the
reenactment did no more than put into express words that which,
according to repeated decisions of this Court, was implied before. In
Mercantile National Bank vs. New York, . . . it was distinctly held
that the words `other moneyed capital' must be taken as iinpliedly
limited to capital employed in substantial competition with the busi-
ness of national banks. In later cases that definition was accepted and
given effect as if written into the restriction. It, of course, would ex-
clude bonds, notes or other evidences of indebtedness when held merely
as personal investn1ents by individual citizens not engaged in the bank-
ing or investment business, for capital represented by this class of
investments is not employed in substantial competition with the busi-
~Cf. 67 CR., p. 115442 (March 11, 1926), S5446 (March 12), S5760-62 (March 17, including a reprint of
House report 526 on H.R. 9958), S5822-23 (March 18), HGOSO-89 (March 23), S6124, S6150, and 116209 (March
24), and S6217 (March 25). Cf. Welch, op. cit., pp. 48-50; Woosley, op. cit., pp. 62-5.
`I Supra, p. 1
$6 269 U.S. 341 (1926).
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ness of national banks. Thus, in legal contemplation and practical
effect the restriction was the same before the enactment as after. What
bearing a different legislative interl)retatlon might have on the tax
already levied, as here, need not be considered."
The defendants pointed out that the allegation of $5 million of other
moneyed capital, or any portion of it, "does not of itself say" that it
"was employed in competition with the bank." They argued that "the
petition falls short of showing a discrimination in favor of a relatively
substantial amount of moneyed ~apital so employed." The Court
rejected this argument, declaring that this allegation was so related to
the others that to be rightly understood it had to be read with them;
that it was in accord with the theory underlying the other allegations;
and that it served, with them, "to show a serious discrimination agamst
the bank's shares and in favor of a relatively substantial amount of
competing moneyed cal)ital." 98
In this case, as in the Richmond case, where the evidence also was
not controverted, the existence of competition was inferred from the
law as adjudicated earlier and from the plaintiff's allegations, rather
than from demonstrated facts. In the Court's view, for share-tax
purposes, individually-ow-ned intangibles were in competition with
national banks unless otherwise proved.99
5. Changes made by 1926 amendment.-The major change made by
the 1926 amendment from that of 1923 was the addition of a fourth
option under which States could apply to national banks a tax "ac-
cording to or measured by their net income." The tax base could
include all income, even that derived from hitherto tax-exempt
securities.100 But the excise tax was subject to the following proviso:
"(c) In case of a tax on or according to or measured by the net
income of an. association, the taxing State may, except in case of a
tax on net income, include the entire net income received from all
sources, but the rate shall not be higher than the rate assessed upon
other financial corporations nor higher than the highest of the rates
assessed by the taxing State upon mercantile, manufacturing, and
business corporations doing business within its limits: Provided,
however, That a State which imposes a tax on or according to or
measured by the net income of, or a franchise or excise tax on, financial,
mercantile, manufacturing, and business corporations organized under
its own laws or laws of other States and also imposes a tax upon the
income of individuals, may include in such individual income dividends
from national banking associations located within the State on con-
dition that it also includes dividends from domestic corporations
and may likewise include dividends from national banking associations
located without the State on condition that it also includes dividends
from foreign corporations, but at no higher rate than is imposed on
dividends from such other corporations."
If a State imposed a general income tax on other corporations, it
could not tax national banks at a rate higher than it applied~ to finan-
cial corporations or than the highest of the rates assessed upon mercan-
tile,_manufacturing, and business corporations. The amendment thus
`~ 269 U.S. 341, at 319, 350. The Mercantile National Bank v. New York, 121 U.S. 138, here cited by the
Court, was decided in 1887, 36 years before the 1923 amendment.
`~ 269 U.S. 311, at 351, 352.
" Ibid. Cf. Woosley, op. cit., p. 64.
100 This was In accordance with the decision in Flint v. Stone Tracy Company, 220 U.S. 107 (1911). Cf.
Welch, op. (it., PP. 49-~0.
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cover~d the situation in New York with its general corporate income
tax and that in Massachusetts with its selective rates.
National bank dividends could be included in the taxable income
of resident stockholding taxpayers, provided dividends of other
corporations were similarly treated. If dividends from out-of-state
corporations were included in personal taxable incomes of residents,
dividends from out-of-state national banks could also be included.
If personal taxpaying capacity is to be measured, it is important
that income from all possible sources be included in the taxable
income of the individual. If tax rates are progressive, the inclusion
of all such income in the base is doubly important.
As noted earlier, the 1923 provision relating to the taxation of
shares was not changed. However, in order "to make it clear, that the
phrase `taxing district' [in which banks were located and where
shares owned by nonresidents could be taxed] should not be construed
so narrowly as to prevent State administration," the phrase was
made to read "shall be taxed by the taxing district or by the State
where the association is located and not elsewhere." 1
The 1926 amendment, like those preceding it, made no change in
the provision governing State or local taxation of bank-owned real
property according to its value (paragTaph 3).
The earlier validating provision was modified to permit States to
legalize, ratify, or confirm taxes paid, levied, or assessed before
March 25, 1926, upon the shares of national banks, if the tax would
be valid under the amended law (paragraph 4).
6. Defects of 1926 amendm.ent.-The 1926 Amendment of section
5219 was in no sense a comprehensive solution of State problems in
taxmg national banks.2 It was no solution at all of share tax problems,
especially in light of the Supreme Court decision in the Guthrie
Center case.3 Nor did it permit States to tax personal property, tangi-
ble or intangible, of national banks. Many States tax the furniture and
fixtures of State-chartered banks and trust companies. Some national
banks may even voluntarily pay such taxes. Helmberger said about
the 1926 amendment:
* * * Section 5219 seems to require discrimination' in favor of
national banks (and to encourage such discrimination in favor o State
banks) only insofar as: (1) the tangible personalty of national banks
may not be taxed, and (2) most States levy many different business
taxes on other corporations-taxes which cannot be applied to na-
tional banks. If a State has or chooses to adopt the excise tax on banks,
a `corporate income tax, and a personal income tax which includes
dividends generally in its base, and, if it chooses to abolish the other
business taxes, the only remaining discrimination would lie in the fact
that national banks' tangible personalty could not be taxed. All of the
above, except the exemption of bank tangible personalty, are included
in the recommendations of the Committee [of the National Tax
Association] `on a Model System of State and Local Taxation."
The limiting proviso in the 1926 amendment relative to "a tax on or
according to or measured by" net income was vague. When it said
I The reference is to paragraph 2 of the "conditions" set forth In section 5219. The change was made at
the suggestion of the National Tax Association committee. See their report in Proceedings of the National
Tax Association, 1926, p. 286.
2 Cf. ibid., p. 287.
~ See above, pp. 286-287.
4 Helmberger, op. cit., p. 122.
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that "the rate shall not be higher" than the highest of the rates assessed
by the taxing State on financial, mercantile, manufacturing, and
business corporations, it did not indicate whether the comparison
was to be in terms of stated tax rates or actual (effective) tax burdens.
Nor did it specify how comparisons were to be made, whether by
averages of various types, single instances, or otherwise. It is not a
simple matter to make comparisons on the basis of averages, as had
been indicated to the Senate in 1923 by Senators Kellogg and Pepper
and other proponents of an amendment to limit ad valorem rates on
bank shares.5 Comparisons of effective rates or burdens require
"elaborate statistical analyses of the tax burdens on other corpora-
tions. . . ., unless such corporations are subject to the same type and
rate of taxation as is applied to banks." ~
Most of those who have had occasion to compare bank taxes with
other taxes have used statistical measures of burden-ratios of one kind
or another. Writing in 1960, Helmberger noted that seven States then
equated "rate" with "burden," and he commented as follows: ~
"Since these other corporations pay taxes other than the excise
and real estate taxes, the overall burden (measured by net income)
on them would be higher than that imposed on national banks if all
corporations paid the same excise rate as such. The seven States have
chosen in effect to interpret the excise rate on other corporations to
mean the ratio to their net income of all State and local taxes paid by
them other than real estate taxes. It is their view, for example, that an
8 percent excise tax on national banks accompanying a 5 percent
excise tax on other corporations is within section 5219-provided
that~ these other corporations paid taxes, other than the excise tax as
such and real estate tax, equal to 3 percent or more of their net
income. Excise rates on national banks are said to be `built-up' if
those rates exceed the excise rate as such applied to other corpora-
tions. The built-up concept can be utilized in two ways: (1) Applying
the built-up rate to banks only, leaving the old (and lower) rate in
effect on other corporations to compensate for the fact that the latter
pay other taxes to which national banks cannot be made subject,
and (2) Applying the built-up rate to all corporations alike but per-
mitting the offset of State and local taxes paid other than real estate
taxes. National banks would have no offset.
"The first method of using the built-up rate concept is employed
by six of the seven excise-tax States which use the built-up rates. The
six are Alabama, California, Colorado, Massachusetts, Minnesota,
and Missouri.15 The seventh, Oregon, uses the second method (the
offset method) though it permits offsets for personal property taxes
only, and even that is limited. Alabama, California, and Missouri
really utilize both methods, since they apply the built-up rate to
financial corporations rather than to banks only, and they permit
financial corporations other than commercial banks to use as offsets
the taxes they pay but commercial banks do not pay. At one time
California utilized the tax offset method for all corporations other
than banks but dropped it in favor of its current tax to avoid inequities
`See above, pp. 278-279.
6 Woosley, op. cit , p. 86.
7 Helmberger, op. cit., pp. 37-9. italics and quoted footnotes are his.
"13 Michigan currently taxes the shares of national banks. The Governor has recommended that thelegisla-
ture enact `a corporate proSts tax' at the rate of 5 per cent on non-financial corporations and at the rate
of 7 percent on financial institutions. Minneapolis Sunday Tribune, Feb. 15, 1958, 5B."
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1~etween other corporations with different amounts of tangible per-
sonal property. Oregon, too, is backing away from the use of offsets.
tlntil 1957, personal property taxes paid were allowed as an offset
up to 50 percent of the excise tax for any corporation. Now only
corporations engaged primarily in manufacturing may use personal
property taxes as offsets, not all personal property taxes are eligible
for use as offsets, and the offset is limited to 33.5 percent of the excise
tax. In addition to this change, Oregon's new law increased the excise
rate on banks to 9 percent while applying a rate of 7 percent to util-
ities, and a rate of 6 percent to other corporations. Thus Oregon now
uses a combination of the built-up methods. The national banks have
challenged the constitutionality of the law. They filed a suit on
May 12, 1960.16
"The American Bankers Association has argued that Section 5219
permits a State to apply an excise tax to banks even though it applies
no excise tax nor income tax to other corporations.11 In such a case, the
only way to determine whether the rate is within the restrictions of
section 5219, if indeed the tax itself is, is to compare the ratio of the
excise tax to net income for national banks with the ratio of all State
and local taxes paid by other corporations other than real estate taxes to
other corporation net income. South Dakota ha's chosen to levy an
excise tax on banks (and other financial corporations) without levying
either an excise tax or a net income tax on nonfinancial corporations.
The legality of South Dakota's bank tax and the bank taxes of all
excise-tax States which utilize the built-up rate concept is question-
able."
Nor was the 1926 amendment specific as to what "financial cor-
porations" were to be used as a yardstick for net income or excise
taxes.8 This was left to the courts to decide. Did Congress intend to
include building and loan associations, savings banks, mortgage
houses, insurance companies, and private security underwriters?
The meaning of "banks" in the laws and court decisions has been, on
the whole, quite clear. The broader term, "financial corporations," has
not been uniform in State laws or in decisions of the courts. Nor is
the concept of "mercantile, manufacturing, and business corporations"
in common use; the inclusions and exclusions often differ from State to
State.
In connection with the dividends tax, Welch criticized the drafters
for their reference to "domestic" and "foreign" corporations:9
"When the dividends tax is used as a supplementary tax upon
national banks, its rate is apparently limited in two ways. It may not
exceed the rate imposed Ul)Ofl the net income from other moneyed
capital, nor may it exceed the rate imposed upon dividends from other
corporations. All of the dividends paid by national banks within the
State may be taxed as part of the income of the individual stockholders
provided a similar tax is imposed upon dividends paid by domestic
corporations. It seems that this tax may be laid upon dividend re-
ceipts of non-residents as well as residents. Dividends, received by
residents from national banks in other States may be taxed if dividends
from foreign corporations are also taxable to residents.
"16 Reported in questionnaire completed by the Oregon Tax Department, Sept. 1958, and in aletterto
the writer from Donald Ii. Burnett of the Law Section of the Oregon State Tax commission, dated August
2, i960." [The Oregon rate for banks was reduced to 8 percent in 1963. The tax still applied in 1971-Ed.]
"17 Welch, State Taxation of Banks, pp. 53-56 and Thornton Cooke, `Taxation: the Position of the Banks',
In The Proceedings of the National Tax AssociatIon, 1930, pp. 270-283."
$ Cf. Woosley, 01). cIt., p. 88; Welch, op. cit., p. 61.
Welch, op. cit., p. 180.
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"This aspect of the Federal law is full of ambiguities, and without
court decisions upon certain points its interpretation is highly ques-
tionable. Suppose, for example, that a corporation operating wholly
within a certain State is chartered by another State. The usual practice
is to tax such a corporation on its entire net income but to exempt
dividends received from it by resident stockholders. Would the exemp-
tion of these dividends from a foreign corporation invalidate a tax
upon dividends received by residents from national banks without the
State? Our guess is that it would not, since it is customary to extend
such exeml)tions to dividends only in the proportion that the earnings
of the corporation are said to arise within the State, and it would
doubtless be contended that the same provision applied to national
banks. Nevertheless the choice of the words `foreign' and `domestic'
by the drafters of section 5219 was unfortunate."
Finally, by limiting States to a choice among four mutually exclusive
options in their taxation of national banks, the statute denied them a
freedom of choice which they enjoyed in the taxation of other corpora-
tjOfls.b0 Their freedom respecting banks was not greatly enlarged by pro-
vision for the secondary option of taxation of shareholders' dividends
under the individual net income tax as a supplement to either basis
for taxing the banks' corporate net income, since this combination
was severely restricted by specifications included in the amendment.
If a State chose the share tax option in taxing national banks (or
was restricted to this method by its constitution), it was not permitted
to include national bank dividends in the taxable income of share-
holders who were subject to State income tax. States could not tax the
personal property of national banks because such permission had never
been extended. Other corporations, however, in most States, were
taxed upon the personal property they owned.
Other corporations, moreover, were subjected to a variety of other
taxes that were not specifically permitted by section 5219. `rliey often
paid franchise taxes based on capital stock, often with the addition
of earned surplus. In many States, their purchases and sales were
taxed. Property purchased outside the State and brought into the
Statc for productive or other purposes was often subject to State use
taxes. Insurance companies generally were subject to property and
premium taxes. Most companies paid gasoline and other highway
taxes. Some paid taxes on bank deposits or for recording mortgages
and other documents.
L. Attempts to amend section 5219: 1926-1969
1. The law and attempts at legislation.-The period from 1926 to
1969 saw no legislative changes made in section 5219. After the amend-
ment of 1926 was passed, some States desired further changes in the
law, particularly in the share-tax provision. This movement lost its
force in 1935 and expired completely in 1937. A second, not too forceful
drive for further changes, affecting taxes "according to or measured
by" net income and also permitting the collection of sales and use
taxes, began in 1941 but petered out in the early 1950s. No concerted
movement for change preceded the 1969 amendment. The two early
efforts for change will be described briefly. Decisions and legislative
events in the State taxation of interstate commnr~rce were also affecting
banks at this time and will be briefly considered. A move to apply the
10 Cl. Woosley, op. cit., pp. 89-90.
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292
protection of section 5219 to State banks was attempted. And finally,
events leading up to P.L. 91-156 will be described.
Even though the statute was not changed by Congress during 1926-
69, the Supreme Court was quite busy. It handed down a number of
far-reaching decisions directly affecting the taxation of national banks
under section 5219 and others with indirect effects related to the use of
sales and use taxes, income taxes, and the doing of interstate business.
No attempt will be made to present a chronological or complete
account of these decisions. Rather, in the next section they are dis-
cussed to~)ically in relation to the share tax, income taxes, and the
sales tax. Nor will a review of alicases be attempted.'1 Both time and
space dictate concentration on the major decisions.
2. The share-tax push: 1927-1935.-The 1926 amendment was
bitterly received in many quarters-it had done nothing to change or
improve the share-tax option to which many States were tied by
constitutions or legislative choice. Hardly had the new provisions
taken effect, when a movement to change the share-tax option began.
The mainspring for the push came from Minnesota.
In 1927 the legislature of that State created a Special Tax Commis-
sion on State Taxation of National Banks. It took the Commission
no time at all to decide that a State could do little or nothing to
improve the situation; what was required was cooperation with other
States to secure afurther amendment of section 5219.12 A Minnesota
mortgage recording tax of 3 mills on the dollar had caused invalidation
of national bank taxes in that State. The Commission and other State
officials were reluctant to reduce the rate on bank shares to 3 mills.
Use of the excise option would have required a State constitutional
amendment.'3
Accordingly, the Commission set to work to enlist the support of
other States in a further amendment of section 5219. At the National
Tax Association conference in Toronto, Canada, in October 1927, the
Commission chairman, State Senator George H. Sullivan, asked those
interested in the bank tax situation to meet for a discussion. Repre-
sentatives of 36 States attended. They adopted a resolution which
recommended that section 5219 be amended as follows:
"In thecase of a tax on said shares, the tax imposed shall not be at a
greater rate than is assessed upon other moneyed capital used or
employed in the business of banking."
A committee was appointed to represent all the States in pushing
this amendment.14
Soon afterward, the Special Tax Commission of Minnesota arranged
with Congressmen from the State to introduce the proposed amend-
ment in Congress. On December 12, 1927, Senator Norbeck introduced
S. 1573, which l)rovided that national bank shares could be taxed "at
no greater rate than is assessed upon other moneyed capital used or
employed in the business of banking." The bill was referred to the
" Decisions up to 1934 are covered in Woosley, op. cit., and Welch, op. cit.
12 Minnesota Session Laws, ch. 382; Report of Special Tax Commission on State Taxation of National
Banks, p. 22 (reptiut of Report along with pertinent chapter from Report of Minnesota Tax Commission.
1928; address of Coy. Theodore Christianson, bafore Governor's Conference at New Orleans, November
20, 1928; and extract from Governor's Message to Minnesota Legislature on taxation of national banks).
Also printed in Eleventh Bisimial Report of the Minnesota Tax Commission to the Governor mci Legisla-
ture of the State of Minnesota (St. Paul, 1928), p. 159-82.
11 Minnesota v. First National Bank of St. Paul. 273 U.S. 561; 71 1,. ed. 535 (decided March 21, 1927),
Mjiiiesota Special Tax Commissior. Report (1928), p. 27; the attitude of Commission toward the excise
option is presented at pp. 28 if.
14 Ibid., p. 23. Members of the Committee were: George IT. Sullivan, Chairman (Minnesota); M.D. Lack
(California); J, V. Benton (Virginia); Henry F. Long (Massachusatts); C. P. Link (Colorado); George
Vaughn (Arkansas); Was. H. I3lodgett (Connecticut), and Milbank Johnson (California). Ibid.
PAGENO="0313"
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Senate Coniniittee on Banking and Currency. 011 December 15,
Senator Capper intro(Iuce(1 S. 1706; it was referred to the Committee
on Finance, but later transferred to the Committee on Banking and
Currency. On January 6, 1928, Mr. Goodwin introduced 11.11. 8727,
which l)roPose(l to limit the share tax to the rate applied to shnres of
State banks.'5
Hearings were held by the Senate Committee in late February, 1928,
on Senator Norbeck's bill, S, 1573.16 rfl1e hearings on February 23
were devoted almost entirely to statements and testimony of State
officials who favored the bill. Bankers and their representatives
testified on the second day. On the last day a very short session was
devoted largely to hearing former Senator Pepper, who was appearing
at the request of three Pennsylvania banks, hearing the continued
testimony of the Minnesota Attorney General, George Youngquist,
and hearing the closing remarks of bank attorney Martin Saxe of New
York.
The argument of State officials in favor of S. 1573 was that the 1923
amendment of section 5219 had changed nothing so far as State taxa-
tion of national banks shares was concerned. Courts still were holding
share taxes void where individually-owned intangibles were taxed at
lower rates or were incompletely assessed under general property tax
rates. A brief filed by the State of Minnesota asserted that this clouded
the tax on national banks in some 43 States. The Minnesota witnesses
were especially concerned lest section 5219 invalidate national bank
taxes because of the application of low-rate taxes to individually-
owned intangibles and registry taxes to mortgages.'7
The opposition of bankers to S. 1573 was equally clear. They did
not want the protection of section 5219 removed or changed. They
objected to being placed in a class by themselves. They testified that
States had an animus against banks and bank stock. Besides, the 1926
amendment gave the States three alternatives for taxing national
banks, "and that ought to be enough." One banker argued that capital
of merchants deposited in banks might be in competition with national
banks because they sometimes loan money. Another believed that a
man who paid $1,000 to a bank for a bond might be both a customer
and a competitor-a customer of the bank from whom he bought the
* bond, a competitor of all other banks.18
On May 10 and 11, 1928, the House Committee on Banking and
Currency conducted a hearing on Mr. Goodwin's bill, H.R. 8727.
This hearing added little to arguments previously produced by both
sides. The States sought changes in the share-tax option so that it
could be safely used without invalidating national bank taxes; the
banks opposed the change, contending that other good options were
available to States.'9
Following the House Committee hearings, two additional bills were
introduced in the 1st session of the 70th Congress. Senator Norbeck
1569 C.R., p. 5476 (December 12, 1927), p. 5676 (December 15), p. 51001 (January 5, 1928), and p. 111124
(February 6).
16 70th Congress, 1st session, Taxes on Bank Shares, hearings before the Senate Committee on Banking
and Currency on S. 1573, February 23, 24, and 29, 1928 (1028), 200 pages.
17 Ibid. Cf., e.g., Mr. Sullivan of Minnesota, p. 3; Mr. Egger, Michigan, pp. 23-4; Mr. O'Brien, Iowa, p. 29;
brief filed by Minnesota, pp. 42-4; and note summary, pp. 61-7. Designated as the only States not affected
by Supreme Court decisions were Georgia, Missouri, Pennsylvania, Texas, and Wisconsin (pp. 66-7).
18 IbId., p. 68, Mr. Paton; p. 72, Mr. Chapman; p. 93, Mr. Blngham; pp. 104-6, Mr. Cooke; p. 13.5 Mr.
Mattson. As to competition, cf the discussion of tile Guthrie Center case, supra, pp. 216-17.
19 70th Congress, 1st session, hearing bafore the House Cornniittee on Banking and Currency on HIt.
8727, May 10 and 11, 1928; 194 pages. Cf. Woosley, op. cit., pp. 68-72; Report of (Minnesota) Special Tax
Commission on State Taxation of National Banks, bc. cit., pp. 25-6: also Eleventh Biennial Report of the
Minnesota Tax Commissi9n, 1928, pp. 164-65.
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introduced S. 4486 on May 17, 1928, and Mr. Goodwin introduced
H.R. 14001 on ~\`Iay 24. These were referred to the respective Corn..
mittees on Banking and Currency. The bills sponsored by Mr.
Goodwin (H.R. 8727 and .14001) provided that bank shares shall
be taxed "at no greater rate than that assessed within the taxing
district of the bank's location upon . real estate used for mercantile
or like business purposes, nor higher than is assessed upon shares of
corporations engaged in the business of receiving deposits subject to
check or the capital of individuals likewise employed in that
business." 20
At the National Tax Association Conference in Seattle in August
1928, representatives of the Minnesota Special Tax Commission held
several meetings with tax officials from other States and other
interested persons. As a result "a nationwide organization of such
officials" was formed to promote the taxation of "property of national
banks on a fair and equitable basis"-i.e., by amendment of section
5219. The organization took the name, Association of States on Bank
Taxation. Governor Christianson of Minnesota also addressed
the Governor's Conference in New Orleans, La., November 20,
1928, on problems of the States with section 5219 in the hope of
arousing their interest and action. The Association of States was
active in promoting the Goodwin bills in 1930 and proposed amend-
ments to section 5219 for several years thereafter. It was the motivat-
ing force behind the movement to change the share-tax option.21
With the 70th Congress about to expire, Mr. McFadden pointed
out on February 26, 1929, that there could be no action at this session
with respect to the State taxation of national banks. He also called at-.
tention of the House to the position of the Comptroller of the Currency
that none of the pending bills should be enacted into law.22 Speaking
for himself, Mr. McFadden favored the use of options open to States
other than the share tax: "It is manifestly impossible to vary a national
2069 C. R., p. S8928 (May 17, 1928), p.119793 (May 24). The quotation is from Mr. McFadden's explanation
of HR. 8727 and H.R. 14001; 70 C.R., p. 114452 (Feb. 20, 1929).
21 Report of (Minnesota) Special Tax Commission on Bank Taxation, bc. cit., p. 26. Officers of the Associ-
ation were George H. Sullivan (Minn.), President; Oscar Lcser (Md.), Vice President; John H. Leenhouts
(Wis.), Secretary; James H. Stewart (Mont.) Treasurer. It is interesting that this organization was not
referred to In the Minnesota memorial to Congress, reproduced in footnote 24, below.
~ 70 C.R., p. H4452. Cf. Annual Report of the Comptroller of the Currency, December 13, 1928 (1929),
pp. 1-3. ~ * * * recommend that none of these bills be enacted into law." The Comptroller made specific
reference to S. 1573, hR. 8727, S. 4486, and 1{.R. 14001, which he characterized as follows:
"These bills have for their purpose the removal of the safeguard, which has existed for 64 years, and which
prohibits the States from taxing shares of national banks at rates higher than those Imposed upon competing
moneyed capital. * * * While the State tax authorities are undoubtedly sincere * * * the fact remains that
under such bills the States would have the right to place an undue burden upon national banks and upon
their own banks to such an extent as would make banking unprofitable or at least burdensome, which In
the last analysis is the right to destroy a Federal instrumentality. * * * To place the power in Individual
States to wreck a Federal instrumentality which is the foundation of the Federal Reserve System is not
only unwise but dangerous and fundamentally unsound. * * * It must be remembered that It is often
difficult to reach the property of Individuals for taxation purposes and that when the burden of taxation
on moneyed captial employed by individuals becomes too great, it can and usually does leave the State
which imposes the heavy burden. On the other hand the bank's property * * * can not leave the State
and it must either pay or cease to do business. Moreover the individual will look with favor upon a heavy
burden of taxation on banks when the result is to lighten his taxes, thus giving to the legislature * * * a
strong temptation to impose the heavy burden on the banks. The safety of the Federal banking structure
should not be left to the power of the legislatures to resist such a temptation. * * * It is not to the interest
of agriculture or business that any of the pending bills should pass. If money invested in bank shares is
taxed more heavily than other forms of property, less money will be so invested, * * * Without doubt
discriminatory taxation, diminishhmg as it does the security behind deposits, has been a contributing cause
of many of the bank failures of recent years. * * The States which tax all property, including bank shares,
at uniform ad valorem rates obviously need no change in section 5219. * * * The States whose constitutions
give them power to tax various classes of property at different rates have the right to use the excise alternative
of section 5219 * * and this without amendment. of State constitutions as they stand today. States that
hereafter amend their constitutions to give their legislatures classification power will be in the same class.
In providing for tax classification very few States have tied the hands of their legislatures respecting batik
taxation. It is for them to take the steps necessary to keep their systems in harmony with the existing statute
rather than that the law should be amended * * * to permit the classification of banks as targets without
any practical limitation upon the burdens then to be imposed."
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standard in order to meet the peculiarities of a few State taxing
systems." Besides, the earnings of national banks "do not warrant
permission to the States to t~x them at a greater rate than they
tax the same kind of pt'operty as that in which national banks employ
their funds nor more than they impose upon financial, mercantile,
manufacturing and business firms."23 As Mr. McFadden predicted,
Congress took no action on these bills at this session.
Shortly before adjournment, the 70th Congress received identical
resolutions adopted by the Minnesota and South Dakota legislatures
urging amendment of section 5219. The report of the Minnesota
interim commission on bank taxation also was placed in the Congres-
sional Record. But no action was taken.24
hi the 71st Congress, Senator Norbeck introduced S. 1550 on
June 17, 1929; it was referred to the Committee on Banking and
Currency.25 In the next session, Mr. Goodwin introduced three bills
to amend section 5219: H.R. 7139 on December 10, 1929; H.R. 7752,
on December 18, 1929; and H.R. 12490 on May 20, 1930. They were
referred to the House Committee on Banking and Currency. On
February 24, 1930, the Senate received a short memorial from the
State of Utah, asking that Congress amend section 5219, "to permit
any State to devise and apply a reasonable and equitable plan of bank
~ 70 CR., p. 11 4452 (February 26, 1920).
`~ Ibid., pp. S3634-53 (February 18 1929), p. 54818 (March 1), S5031 March 2), and pp. 55025-30 (March 2).
A similar resolution of the Iowa legislature was presented early in the 1st session of the 71st Congress; 71
C.R., pp. S1311-12 (May 15, 1929).
The text of the 5Iinnesota resolution is reproduced here In full because its preamble Is a good summary of
the law and the predicament of many States. However, the statement that income and excise taxes "are
neither practicable nor adaptable" was an overstatement: the situation was that some States that relied on
ad valorem taxation could not adopt income or excise taxes without first amending their constitutions.
"Joint resolution memorializing Congress to amend section 5219, Revised Statutes of the United
States so as to permit the taxation of shares of national banks upon a fair and equitable basis.
"Whereas the several States of the Union are prohibited from taxing the personal property of national
banks, and may tax their shares only as pennitted by Congress under the provisions of section 5210 of the
Revised Statutes of the United States, which, in effect, permits the taxation of such shares only at a
rate not higher than the tax imposed upon money owned by individuals and by them invested In mort-
gages, bonds, and other securities (commonly known as money and credits) in which national banks
may Invest their funds; and
"Whereas it is unfair to tax an individual sousing his own funds at as high a rate as bank shares, which
derive the benefit of the Investment returns of from 7 to 10 times their own amount in the form of depos-
its; and
"Whereas every attempt at taxation of money and credits at more than a relatively nominal rate has
always proved a failure, and the practice of taxing them at low rates has, in each of the many States
employing that method, resulted in reaching enormously greater amounts of such property and in pro.
ducing a larger revenue and in the better distribution and equalizing of the burden of maintaining
government; and
"Whereas the courts have held invalid taxes levied on bank shares In States that undertake to tax
money and credits at the same rate as bank shares on the ground that a substantial part of such money
and credits are not, and by reason of the failure of owners to declare them for taxation at a relatively high
rate can not be taxed at all; and
"Whereas the schemes contained in section 5219 of taxing bank shares l)y income or excise rather than
by value are neither practicable nor adaptable to States raising their revenue by the ad valorem method
of taxation, which method has always been and now is in use by substantially all of the States in the
Union; and
"Whereas the American Bankers Association and the associations of bankers in various States, en-
trenched behind the wall raised about them by this act of Congress, have declared that they do not trust
State legislatures to tax them, have united in exerting every effort in opposition to relief to the States by
the necessary amendment of that section, and have demanded that the States abandon their present
well-tried and satisfactory methods of taxation and substitute an income or excise tax, the result of which
has been to reduce the tax on bank shares by more tItan one-half in every one of the three States in which
It has been adopted, with the consequent increase of the burden to l)e borne by other taxpayers; and
"Whereas there is no organization corresponding to the bankers' associations to protect the interests of
the general taxpaying public In the 40 States whose present methods of taxing bank shares are now found
to be unworkable and invalid under section 5219; and
"Whereas the deplorable situation in which these States find themselves, faced as they are with the
choice of radically altering their present taxation systems In compliance with the wishes of the bankers or
of virtually exempting banks from taxation, demands immediate action in the amendment of section 5219
soas to permit the taxation of national banks on a basis that is fair and equitable to themselves and to the
general taxpaying public: Therefore be it
"Resolved by the &nate of the State of Minnesota (the House of Representatives concurring), That the con-
gress of the United States be, and the same hereby Is, urgently petitioned and requested to amend section d219,
Revised Statutes of the United States, so as to permit the taxation of the shares of national banks upon afair and
e~uLtable basis, as contemplated by bills now pending before the Senate and the House of Representatives of the
Cbngrcss and amendments proposed thereto."
~`7l C. R. p. S2940 (June 17, 1929).
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296
taxation which will be consistent and consonant with the system of
taxation in such State." 26
Introduction of H.R. 12490 followed a hearing conducted by the
House Committee on Banking and Currency on one of Mr. Goodwin's
earlier bills, H.R. 7752. This bill, like its replacement (H.R. 12490),
was a complicated affair-considerably longer than other proposed
amendments to section 5219. It proposed to add a fifth option for
taxing national banks: a specific tax on shareholders measured by
dividends received and a proportionate part of undistributed profits.
Its resemblance to the excise tax measured by time bank's net income is
obvious. It was hoped that authorization of this form of tax would
avoid the adverse effects of a new Supreme Court ruling in the case
of Macallen Co. v. Massachusetts.27
On May 9, 1930, hearings were held on the Goodwin bill, H.R. 7752,
by the House Committee on Banking and Currency. It imiriediatelv
appeared that the bill had been drafted and subsequently revised in
conferences between representatives of States and representatives of
the American Bankers Association. Changes made as a result. of the
consultations were described as "merely matters of procedure; merely
matters of making the way clear to determine what the rate should
be . . . [the bill] simply reenacts the present law word for word with
two additional alternatives." The bill was subject to later approval by
the convention of the American Bankers Association and to a like
approval by representatives of States who were not l)resent at the
Washington meeting. The revised bill eventually became H.R.
.12490.28
Time "mere matters of procedure" and the determination of rates
can be seen from the following excerpts from the "joint draft." In the
paragraph on the share tax, the proposed bill provided: 29
"(b) In the case of an ad valorern tax on said shares, the tax
imposed shall not be at a greater rate than is assessed upon other
moneyed capital in the hands of individual citizens of such State
coming into competition with the business of national banks: Provided,
That bonds, notes or other evidences of indebtedness in the hands of
individual citizens not employed or engaged in the banking or invest-
ment business and representing merely personal investments not made
in competition with such business shall not be deemed moneyed capital
within the meaning of this section: Provided, That in any State in
which bonds, notes and, other evidences of indebtedness are taxed
according to value at a fixed statutory rate or rates, less than the rate
assessed upon tangible property, a tax on said shares may be imposed
at a rate no higher than the rate assessed upon the shares of otl1er
financial corporations, nor upon the net assets of individuals, J)artfler-
ships or associations employed or engaged in the banking, loan or
investment business, nor higher than time rate assessed by the taxing
1~ 72 C. R. P. 11430 (December 10, 1929); p. 11927 (December 18); P. 119256 (May 20, 1930). For the ttah
memorial, ibid., p. S4191 (February 24, 1030).
27 Cf. Woosley, op. cit., p. 77; Welch, op. cit. p. 58. The Macallen case is discussed infra, at pp. 256-59.
The Supreme Court subsequently upheld the excise tax without overruling its Macallen decision.
~ 71st Congress, 2d session, house Committee on Banking and Currency, State Taxation of National
Banks, Hearings * * * on JIlt. 7752 (lilt. 12490), MayO, 1930 (172 pages) at pp. 4~5, 9. The initial version
of the bill was disapproved at the American Bankers Association convention, hut a conmsittee \V5S ap-
pointed to work out the. problems. Ibid., p. 9, and cf. Thornton Cooke in Proceedings of the National Tax
Association, 1030, pp. 270-82.
t~ This and the following quotations are excerpts from the draft prepared May 8, 1930, by a joint drafting
committee of representatives of banks and State taxing officials and offered as a substitute for Mr. Goodwin's
bill in the hearing before the house Committee, May 9, 1930. hearings oil II. 11. 7752 (1930), cited above, p. 6.
PAGENO="0317"
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State upon mercantile, manufacturing and business corporations hy-
ing their actual 1)rillcipal place of business within such State. For the
purpose of this ~)rov~s~ the rate of taxation upon the shares of national
banking associations in any such State shall be deemed to be no higher
than the rate assessed U~Ofl said mercantile, manUfacturing and busi-
ness corporations, if, so far as can reasonably be ascertaifle(1, the p'~-
portion which the aggregate of the taxes imj)Osed upon the real pi'op-
erty and the shares of national banking associations within such State
bears to the aggregate of the net profits of such associations is no
greater than the proportion which the aggregate of the taxes imposed
upon such other corporations under authority of such State bears to
the aggregate of the net profits of such corporations."
Note that this provision tied the share-tax rate to the rate on shares
of financial corporations and also to the rates on mercantile, manu-
facturing, and business corporations having their pnncipal places of
business in the State.
The proposal also added a fifth alternative to section 5219, the
specific tax, of which it was said, "most of the States are not interested
in it." 30 It was as complicated as the provision relative to the share
tax:
"(c) In the case of a specific tax on the shares of national banking
associations, the amount upon which the tax on each share shall be
based shall be determined by adding together the total dividends paid
during the preceding year by any such association and the amount by
which the capital, surplus and undivided profits of such association at
the end of such year exceeded the capitel, surplus and undivided profits
of such association at the beginning of such year, less any a(lditions to
capital or surplus paid in by the stockholders during such year, and
dividing such total by the number of shares issued and outstanding at
the end of such year. The rate of such tax shall not be higher than the
rate assessed upon other financial corporations, nor higher than the
rate assessed by the taxing State upon mercantile, manufacturing and
business corporations, having their actual principal place of business
within such State in l)roPortion to the net profits of such corporations:
Provided however, That the taxing State may establish a minimum tax
on each share under this paragraph, the base of which shall be the
capital, surplus, and undivided profits of the national banking associ-
ation divided by the number of shares issued and outstanding and the
rate not more than 1 mill on each dollar."
Welch in 1934 said of the proposed specific tax: "By reason of
recent decisions of the Supreme Court supporting the excise tax,
this proposal has become of historical interest only." 31
Use of either the share tax or the specific tax on national banks
in any State was to be tied to a complex requirement for statistical
reports that would provide a basis for determining the average rate
of aggregate taxes borne by. other financial corporations and by
`° Cf. ibid., p. 6, George II. Sullivan, chairman of Minnesota Interim tax commission.
~` Welch, op. cit., P. 58.
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mercantile, manufacturing, and business corporations, and for com-
paring these average rates with those applied to the national banks.32
The hearings of May 9, 1930 proceeded mostly according to form.
The provisions of the proposed bill were endorsed by several State tax
officials without enthusiasm: it was an improvement over the existing
law (the 1926 amendment); it would help some states, especially
Minnesota.33 The first discordant note was sounded by the tax com-
missioner of Connecticut, who expressed the view that the proposed
bill was better than the existing law and then denounced the plan for
the specific tax:
". . . I regard it as a grotesque proposal in the tax field, new and
unheard of, fraught with litigation and [it] will bring little public
revenue in the states where they undertake to apply it." 3~
After indicating difficulties and uncertainties that would arise in
interpreting and applying the proposed law, Mr. Blodgett offered a
letter from Professor Fred Fairchild of Yale University, who had made
a survey of the bank-tax situation for a group of Connecticut national
banks and trust companies. Professor Fairchild commented:
"As each new draft of the proposed amendment to section 5219
appears, there seems to be a steady increase in complexity and minute
details of restrictions. The so-called Saranac draft [IEI.R. 7752] was so
complicated that no ordinary man without tremendous effort could
understand its meaning, and the revisions . . . appear to increase the
complexity and confusion . . . I very much fear that proceeding
further in this direction may finally bring us to about the same result
as if Congress had forbidden the taxation of national banks completely.
Would it not be possible to put in the place of section 5219 a
brief general statement expressing the spirit of Congress to the effect
that States should be free to tax national banks according to their
32 This provision of the "joint draft" was as follows:
"4. The second proviso in paragraph (b) of subsection (1) [i.e., in the share-tax option, as quoted above]
shall not be applicable, nor shall a specific tax on the shares of a national banking association or tax on or
according to or measured by the net income of such association be assessed hereafter, in any State which
does not require the financial, mercantile, manufacturing, and business corporations with which a corn-
parison is required hereunder to file annually with the appropriate State officials, statements under oath
showing, in the case of each such corporation, the net income and the net profits as set forth in the last pre-
ceding income tax return to the Federal Government in the statement therein of reconcifiation of net income,
and the total taxes on real property and the total taxes other than on real property imposed on such cor-
poration by authority of such State during the period to which such return relates, and does not also annually
compile and publish statistics showing the respective aggregates of net income and net profits reported
by, and of such taxes imposed upon (1) national banking associations; (2) all other financial corporations;
(3) mercantile, manufacturing, and business corporations. Such statistics shall be competent evidence of
the facts therein contained: Provided, however, That this subsection shall not apply in any State which
imposes a specific tax on the shares of national banking associations or a tax on or according to or measured
by the net income of such associations at a fixed statutory rate, and imposes a tax on or according to or
measured by net income on financial, mercantile, manufacturing and business corporations at the same
rate; and provided also that in any State in which a tax on or according to or measured by income is imposed
upon such other corporations by authority of such State, if such corporations are required to file returns
showing the net income and the net profits and a statement of reconciliation of net income, a further state-
ment from such corporations shall not be required, and the statistics may be derived from such returns and
from the records of such State or the political subdivisions thereof with respect to taxes other than on real
property imposed on such corporations."
83 Cf. Hearings on H.R. 7752 (1930), cited above. For endorsements, see Henry F. Long, Massachusetts
commissioner of corporations and taxation, pp. 68-9; John R. Spring, chairman, New Hampshire tax com-
mission, p. 69; R. E. Hammond, Secretary, Utah State board of equalization, p. 70; Mark Graves, New York
tax commissioner, pp. 72-4. The brief filed by the State of Minnesota was incorporated in the Hearings, pp.
99-lOS, as were several other documents mentioned earlier in this report-the compilation of 3. 5. Armson
on the tax laws of the several States, pp. 106-22; the report of the Minnesota tax commission on the taxation
of banks, pp. 124-35; the report of the special Minnesota tax commission on State taxation of national banks,
pp. 135-45; and the address on national bank taxation delivered by the Governor of Minnesota before the
Conference of Governors in 1928, pp. 145-50. Thomas B. Paton, general counsel of the American Bankers
Association, provided a series of tables showing "that national banks paid a much greater proportion of their
income in taxes than did the State banks," (p. 28) and also comparing banks with other categories of cor-
porations (tables for all the States at pp. 30-65).
`4 WillIam H. Blodgett, in ibid., pp. 75-84, at p. 77. Earlier, C. B. Randall, tax attorney of the Kansas tax
commission, testified that his commission preferred the original bill to the substitute (pp. 70-i); and Erwin
M. Harvey, Vermont tax commissioner, said (p. 75) that "in a little State like Vermont, [I do not believe]
it is a fair standard of comparison to saythat a banking Institution shall be measured by the rate fixed on
mercantile, manufacturing and business corporations."
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299
own tax systems without restriction by Congress, provided only that
there be no discriminations against national banks? This I think, is the
real spirit of section 5219 in its original form." `~
Mr. Blodgett concluded his testimony by offering a short "simplified
bill" drafted by Commissioner Long of Massachusetts, under which
States would be permitted to tax national banks on the basis of share
values or gross or net income, provided the tax rates applied to national
banks produced an aggregate tax burden no greater in proportion to
net income than the tax burden upon competitive State-chartered
banks or the most heavily taxed category of manufacturing, mercantile
or agricultural corporations. Real estate taxes would be excluded in
measurino~ comparative tax burdens. States could, in addition, tax
individual shareholders on their dividend income if other corporate
dividends were included in taxable income.36
* The secretary of the California State Board of Equalization sup-
p~orted Mr. Blodgett's position on the bills before the Committee.37
The breach thus opened grew wider as other State officials began to
doubt the wisdom of enacting the "agreed bill."
in the third session of the 71st Congress, early in 1931, the chair-
man of the House Committee on Banking and Currency, Mr. Mc-
Fadden, introduced a new bill to amend section 5219. The following
day, February 4, his committee held a further hearing focused pri-
marily on the earlier bill, H.R. 12490, in which testimony and state-
ments from State tax officials and bank representatives differed little
from their presentations in the preceding hearing. Considerable
attention was given, however, to the question whether mutual savings
banks, building and loan associations, insurance companies, and other
institutions should be excluded from the concept of "other moneyed
capital" in competition with national banks.38
Another memorial from the State of Minnesota asked Congress to
permit States to tax national banks on the same basis as State banks,
referring to the bill "agreed upcn" May 9, 1929.~~ Near the end of
the session, the Senate Committee on Banking and Currency reported
favorably, without amendment, S. 1550, which Senator N orbeck, the
Chairman, had introduced on June 17, 1929. The bill made no further
progress.4°
in the 72d Congress, first session, Mr. Goodwin introduced H.R.
7928 on January 18, 1932. in March, a memorial from the State of
New York asked Congress to amend section 5219 to relieve States
U Ibid., p. 81. When he wrote, Professor Fairchild was president of the National Tax Association, but he
expressed only his personal opinions.
*6 Ibid., pp. 82-3.
*7 Ibid., pp. 157-60. A session on "The bank tax problem" at the October, 1930, conference of the National
Tax Association was practically a rerun of the May 9 hearing. Commissioner Long, who presided was con-
vinced that the limitations written into amendments of section 5219 had become too complicated and were
9n danger of becoming more so." He saw no end to future litigation and urged amendments in certain and
concise language, observing:
"It may well be questioned whether the banks have not gained more by way of strategic position from
these amendments than have the States whose agitation induced them."
The next speaker on the round table was Mr. Thornton Cooke, chairman of the taxation committee of the
American Bankers Association. He urged State officials to support the "agreed bill' (H. R. 12490) developed
In the May meeting of the bankers and the Association of States on Bank Taxation and endorsed by the
A±nerican Bankers Association at its general convention. Commissioner Blodgett of Connecticut explained
his reasons for opposing the measure then before Congress. (Proceedings of National Tax Association, 1930,
pp. 264-328.) With this session, the National Tax Association seemed to lose interest in the subject of national
bank taxation until 1941. It was mainly the activity of the Association of States on Bank Taxation which
since 1928 had kept alive the movement to amend section 5219.
$1 list Congress, 3d session, House Committee on Banking and Currency, State Taxation of National
Banks: Hearings * * * on H.R. 12490, pt. 2, February 4, 1931, pp. 173-298. Mr. McFaddens new bill was
ILR. 16831 (reproduced in the Hearings at p. 177); cf. 74 C.R., p E3911 (February 3, 1931).
*674 C.R., p. H3997-8 (February 5, 1931).
~074 C.R. p. S6232 (February 27, 1931), and p. 86964. The report was Senate report 1806. This bill pro-
vided that stares should not be taxed "at a greater rate than is assessed upon other moneyed capital used and
employed in the business of banking."
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L3O
from the necessity of imposing taxes on mutual savings and loan
associations lest the courts invalidate taxes on national banks. Sena-
tor Norbeck introduced S. 4291, which was the same as an earlier
proposal. it would have revised the share-tax provision (subdivision
(b) of paragraph 1 of section 5219) to read as follows:
"in the case of a tax on shares, the taxes imposed shall not be at a
greater rate than is assessed upon other moneyed capital used or
employed in the business of banking."
Reference to moneyed capital in the hands of individual citizen~
would have been dropped.
At Senate Committee hearings on this bill, State government wit-
nesses from California, among others, expressed dissatisfaction with
the excise method of taxing national banks and urged Congress to
permit nondiscriminatory taxation based on equality of tax burdens
on banks with the burdens of business and financial corporations
doing business within the State and with taxes on their shares. The
Senate Committee on April 30 reported S. 4291 favorably, without
* amendment.4' There was no floor action. At the end of the session,
Senator Norbeck introduced another bill, 5. 4986, which never emerged
from the committee. In~ the House, Mr. Steagall introduced H.R.
* 11118, with similar result.42
In the next session, for the first time since the 1926 amendment of
section 5219, the House Committee reported favorably on a proposed
further amendment. This bill, H.R. 13855, sponsored by the com-
mittee chairman, Mr. W. F. Stevenson of South Carolina, would
have modified the share-tax provision. In explaining its purpose, the
Committee observed:
"That it is, and has always been, the policy of Congress to protect
national banks from hostile discrimination in favor of such businesses
or such use of capital as [competes in a substantial manner with the
business of national banks] . . . is unquestionable; nor can the fact
be questioned that many States have taxed national banks at from
five to ten times as high a rate as is imposed on such other competing
capital, and it can not be doubted that they will continue to do so if
they can obtain the authority from Congress. Such authority ought
never to be given.
* "On the other hand, there is a vast mass of capital in the hands of
individuals and subject only to these low intangible taxes which is in
no real sense in harmful competition with the business of national
banks. . . . EA]nyone else who lends money at interest is in one
sense in competition with banks. . . . We do not believe that the
reasonable protection of national banks from competition favored by
discriminatory taxation necessarily requires the taxation of occasional
investors who put their savings into bonds, or loan their money as a
matter of friendship, at the same rate as can reasonably and fairly
be imposed on the shares of national banks." ~
Whereas the existing law permitted taxes on national bank shares
at no greater rate than was assessed "upon other moneyed capital in
41 75 C.R., p. H2205 (January 18, 1932), p. H5461 (March 8), p. S7251 (April 1), p. S9299 (April 30). Cf.
72d Congress, 1st session, Senate report 625 to accompany S. 4291 (April 26, 1932). The report concluded:
"Numerous requests for relief are at hand, including memorials or resolutions from several important
State legislatures. Everyone admits the unfairness of the present situation. A great injustice results." (Ibid.,
p. 3.)
42 75 CR., p. 117520 (April 5, 1932), p. S15698 (July 16).
`3 72d Congress, 2d session, house report 1941 to accompany HR. 138,55 (January 30, 1933), p.6. The bill
was introduced December 21, 1932; cf. 76 C. R., p. 11869. The committee report Is recorded in ibid., p. 112943
(January 30, 19~).
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301
the hands of individual citizens of such State doming into competition
with the business of national banks," the amendment would have
permitted no greater rate "than is assessed upon other moneyed
capital used or employed in business and coming into substantial
competition with the business of national banks in normal banking
activities of said banks."
The 1923-1926 proviso excluding from "moneyed capital" personal
investments in the form of bonds, notes, or other evidences of indebted-
ness in the hands of individual citizens would have been dropped. In
its place was proposed a provision expressly excluding from the
category of "competing moneyed capital" any investments by building
and loan associations, savings and loan associations, cooperative banks
and homestead associations in loans to members of such organizations
secured by mortgages of real estate or assignments of the members'
stock in the associations. Such institutions were not to be considered
"financial corporations" in the determination of comparative rates for
taxes on, according to, or measured by net income.44
There was, however, no further action on the Stevenson bill or on
other bills during 1933.~~
Pressures to amend section 5219 reached a high point in the second
session of the 73rd Congress. On Febmary 15, 1934, Senator Fletcher
.(Fla.) introduced S. 2788, a bill written by the American Bankers
Association, which would have extended the protection of section 5219
to member banks in the Federal Reserve System. Two features were
obnoxious to state officials: (1) national banks might be taxed only if
the same treatment applied to State member banks in the Federal
Reserve System, and (2) the tax rate on shares would not be allowed to
exceed the average burden imposed on other taxable intangible prop-
erty in the district in which the bank was situated. The Association of
States on Bank Taxation pointd out that the share-tax provision was
tantamount to exemption. In a brief floor discussion, Senator Overton
objected that Louisiana would be permitted to tax shares of national
bank stock only on the basis of an assessment at 10 percent of actual
cash value, the ratio applied to individually-owned intangibles.46
On March 9, 1934 Senator Shipstead (Minn.) introduced S. 3009
which provided for taxation of national banks on property or income or
both at rates no higher than were imposed on State banks. On March
10, the Senate Committee on Banking and Currency unanimously
reported S. 2788 favorably, without amendment. Although the bill
was supported by the American Bankers Association, action was
deferred indefinitely.47
In the House, Mr. Steagall (Ala.), chairman of the Committee on
Banking and Currency, introduced H.R. 9045 on April 10, 1934. This
was similar to Senator Shipstead's bill. It was supported by State tax
officials but vigorously op~)osed by thc bankers. Hearings held during
the next two days were poorly attended and elicited little ne~v infor-
mation. Bank witnesses preferred the Fletcher bill. For the States, it
44 72d Congress. 2c1 session, House report 1941, cited above, p. 1, quoting the bill in its entirety. Cf. Welch,
op. cit., p. 59; and the provisions enacted in 1923 and 1926, reproduced above in appendix 1, at pp. 1 and 4.
~~An amendment to S. 4291 was offered late in the 73d Congress by Senator Carey of Wyoming; 76 C.R.,
p. S1266 (January 4, 1933). In the 73c1 Congress, 1st session, Senator Norbeck re-introduced his bill as S.
1502 (77 C.R., p. S2064, April 21, 1933), and Mr. Hancock of North Carolina offered HR. 5045 (ibid., p.
111859, April 17, 1933). There were no proceedings on these bills.
4678 C.R., p. 52543 (February 15, 1931). and p. 55727 (March 29, 1934), cf. Welch, op. cit., pp. 59-60.
~ 78 C.R., pp. S1041, S4227, S4879. S5727, and S5S39 (March 9, 10, 20, and 29, 1934); 73d Congress, Senate
committee report 512 (March 10, 1934).
79-421 0 - 72 - 21
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302
was reported that national bank taxes of $250 million had been lost in
the preceding seven years because of delays in amending section 5219.
The Committee reported the Steagall bill with an amendment, but the
House took no further action. 48 This was the end of proposed amend-
ments to section 5219 in the 73d Congress.
Three bills to amend section 5219 were introduced in the first session
of the 74th Congress. Another memorial from the Minnesota legislature
was presented to the Senate. It revicwe.d the effect on the States of
Supreme Court interpretations of section 5219. It condemned income
and excise taxes on or measured by income as "entirely and wholly
unjust, inequitable and inadequate," having reduced national bank
taxes by 66 to 90 percent, compared with collections under share taxes.
States with low-rate taxes on individually-owned intangibles had been
compelled to reduce rates on national banks, so that taxes on these
institutions had dropped from $79 million in 1922 to $48 million in
.1932. The memorial pointed out, too, that corrective bills had been
introduced in every session of Congress, that in 1934 the House Corn-
* mittee on Banking and Currency had reported favorably upon the
Steagall bill but no action was taken, and that identical bills were
pending. It urged favorable action.49 Congress did not act. The share
* tax push had reached its zenith.
The only bill introduced in the next session was S. 4209, by Senator
Fletcher, on March 9, 1936. On June 5, Senator Shipstead offered his
earlier bill (S. 3009 of 1934) as an amendment to a general revenue bill
then under consideration. The Senate rejected the amendment.5°
Earlier iii this session the Senate voted to preserve immunity from
taxation for bank securities owned by the Reconstruction Finance
Corporation, a Government-owned agency which had been authorized
to invest in shares of preferred stock, capital notes, and debentures
of national and State banks to provide capital that would enable the
banks to continue operations in the face of deepening depression.
During the debate, Senator Couzens put in the Record a memorandum
showing R.F.C. estimates that, in 31 States where bank shares were
taxed, the annual tax applicable to $229 million of shares owned by
the R.F.C. would exceed $5.5 million if these shares were fully taxed.
Assessment ratios were reported to vary from 30 percent (in Montana)
to 100 percent of full value (in several States). In 8 States which
applied net income taxes to banks, the R.F.C. investment was $173
mihion-with.more than 70 percent of this in New York State alone.
U 78 C.R., pp. H6375, H10294 (April 10 and June 1, 1934); 73d Congress, 2d session, House Committee on
Banking and Currency, Taxation of National Banks: Hearing . . . on HR. 9045, April 11, 12, 1934; House
report no. 1853, June 1, 1934; and of Woosley, op. cit., p. 79.
Under the reported bill, each legislature would be permitted to direct the manner and place of taxing
national banks within the State "upon their real and personal property and also upon their shares." In lieu
of the tax on shares, a State could tax either the net income of the bank or impose an excise tax measured by
net Income from all sources. Those taxes were to be at no greater rate "than are imposed, respectively, upon
the real or personal property or shares or income of, or by way of excise (or franchiae) tax upon, State banks."
In addition, States could Include national bank dividends in the taxable income of individual or corporate
shareholders if dividends from State banks were similarly taxed. Definition of "State banks," "shares," and
"dividends" were included in the bill. (house report 1853, op. cit.. pp. 1 and 10-11.)
d'The bills were 5. 1115 by Senator Shipstead, S. 1700 by Senator Norbeck, and HR. 8610 by Mr. Steagall;
79 C.R., pp. S471, 51513, and H9898 (January 16, February 6, and June 21, 1935). For the Minnesota memor-
ial, Ibid., p. S3797 (March 18).
i° Senator Shipstead declared that 16 States favored his proposal. He inserted Into the Record a dozen
letters supporting the revision, most of them written in 1932 to the special Minnesota commission on bank
taxation. lie Inserted also a 1932 resolution of the Association of States on Bank Taxation. Senator Glass,
chairman of the Committee on Banking and Currency, observed that the Shipstead proposal would separate
all banks, national and State, from other enterprises for taxation and would let the States tax banks as they
pleased; that the Committee had had this proposal before it from time to time over the preceding 14 years;
and that every Secretary of the Treasury during that period had opposed this approach. Tie noted that in
1934 the Secretary of the Treasury had objected to S. 3009 (Mr. Sliipstead's bill) and endorsed S. 2788, the
Fletcher bill. SO C.R., pp. S0093-9098 (June 5, 1936).
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in 10 other States (including the District of Columbia), the R.F.C.
had bank investments of $57.5 million.5'
in the first session of the 75th Congress, memorials were received
from North Dakota, Minnesota, and Wisconsin. With these, the
efforts of the States to secure action on the share tax option in section
5219 (or any other change) expired. Bills to effect changes were not
again introduced until after World War 11.52
3. Second movement for change: 1941-54.---State tax officials active
in the National Tax Association expressed renewed interest in national
bank taxation in 1941. Senator Robert F. Wagner, as chairman of
the Senate Committee on Banking and Currency in 1940, had sent a
questionnaire to the American Bankers Association and Federal
agencies relating to national banking and monetary policies. The
following April, the American Bankers Association recommended a
clarification of the law.'3 At the National Tax Association conference
in St. Paul, Minnesota, in 1941, Henry F. Long, Massachusetts
commissioner of taxation and corporations, who had long been active
in seeking amendments, introduced a resolution asking for a com-
mittee of the Association "to confer with an authorized committee
of the American Bankers Association for the consideration of the
amendment of section 5219." A preamble recited that the American
Bal3kers Association had indicated the desirability not only of clari-
fying the fourth option in section 5219 (the excise or franchise tax)
but also of "authorizing the application of State sales and use taxes
on national banks." It also mentioned minimum rates of tax for
taxes measured by net income from all. sources, employed by some
States. The resolution was adopted, and the new committee worked
with a similar group from the American Bankers Association through
the early 1950s to formulate and seek further amendments to section
5219.'~
Prior to 1941, States had acted independently in applying sales and
use taxes to banks but there had been no concerted movement to
change section 5219 to permit application of these taxes to national
banks.
The first report of the new N.T.A. committee, presented in 1942,
made six recommendations for changes in section 5219:
(1) It should be made clear that the forms of national bank
taxation authorized by section 5219 are the only forms a State
- may impose;
11 Ibid., pp. S2626-2641 and S2646-2651, esp. p. 2631 (February 24, 1936). Identical data were reported In
the House; ibid., p. 112788 (February 25, 1936). The tabulations were not dated.
12 81 C.R., pp. 51192, 52000-1, and S4478 (February 15, March 11, and May 13, 1937). The next Introduction
of bills to amend section 5219 was in the 81st Congress, first session, S. 2547, by Senators Maybank (S.C.)
and Robertson (Va.) "by request." 95 CR., p. S12774 (September 13, 1949.)
U Report of the Study Committee on Bank Taxation, I'roceedings of the National Tax Association, 1968,
~ 290. Cf. also 81st Congress, 2d session, Senate Committee on Banking and Currency, "State Taxation of
atlonal Banks," hearing before a Subcommittee.. . on 5. 2547, July 20, 1950, p. 4, statement by C. Francis
Cocke, chairman of the Committee on Federal Legislation of the American Bankers Association.
14 Proceedings of the National Tax Association, 1941, pp. 340-341, 707, 767. Among the committee members
were three former N.T.A. presidents: Franklin S. Edmonds (chairman), Philadelphia attorney; Henry F'.
Long, who later became chairman and was the (lriving force within the committee; and Seth T. Cole, attor-
ney, Albany, N.Y. Other members included C. H. Slorrissett, Tax Commissioner of Virginia, and S. A.
Youngquist, former attorney general of Minnesota. When Mr. Edmonds resigned, he was succeeded for some
months as chairman by Prof. Robert Murray Ilaig of Columbia University and then by Mr. Long, who at
his death in 11156 was succeeded by Carter T. Lout han, New York attorney.
18 Presented as a joint report of committees of the National Tax Association and the American Bankers
Association, Proceedings.of the National Tax Association, 1942, pp. 200-2l0~(discussed at pp. 210-215). The
committee (lid not present Its bill but did catalog the proposed changes In dt.tail, pp. 208-210. Subsequent
drafts of the proposed bill were presented in full, ibid., 1943, pp. 20-32; ibid., 1U44, pp. 350-355.
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(2) It should be made clear that the tax on national banks
"according to or measured by their net income" is an excise tax
lipon the banks; 56
(3) The income or the excise tax on national banks should be
made uniform throughout the State;
(4) "The rate of income or excise tax imposed upon national
banks should not exceed the rate of tax of like character upon the
other financial corporations or the, business corporations of the
State," the purpose being to stop the inclusion "of taxes of all
kinds paid by business corporations" in the calculations used in
several States to derive "built-up" rates of excise taxes applicable
to banks;57 -
(5) ~There should be a minimum tax in States employing in-
come or excise methods, applicable to banks having no taxable
income but continuing to pay dividends;" 58
(6) It.would be "wise to add a new paragraph to section 5219
authorizing the subjection of national banks to nondiscriminatory
sales and use taxes, and to taxes upon payments for services." ~
Major objectives of the committee, thus, were (1) to prevent local
governments from adding supplements to income and excise taxes, as
had been permitted in New `1 ork and Kansas; (2) to regulate the use of
"built-up" rates in the excise tax, as in California; and (3) to authorize
States to apply nondiscriminatory sales and use taxes to national
banks.
The minimum tax was a secondary objective. A majority of the
committee favored a minimum tax equal to 1 percent of dividends
declared. (Later revisions of the bill suggested that a minimum rate
not exceeding 2 percent of dividends should be permitted.) The com-
mittee did not approve of a minimum tax on all banks measured by
capital They contended that "one of the main objects of putting the
taxation of national banks on an income basis is to avoid taxation of the
capital of the banks." The report did not mention that a prime con-
siderat.ion was to encourage States to use, and bankers to accept, excise
or income taxes in preference to share taxes, in view of the difficulties
that court decisions were creating for States that relied on share taxes.
The report suggested that banks which could pay dividends should
pay something more than a tax on real estate alone.60
The sales-use tax proposal in the draft bill was as follows:6'
66 This clarification would be accomplished by inserting the words, "impose an excise tax upon such asso-
ciations' at the beginning of clause (4) in the first paragraph of section 5219. Reasons given were that the lan.
guage of the existing law created confusion for persons not familiar with taxation and, more important, that
the Supreme Court had referred to the tax as a "franchise" tax but the concept of a State tax on the franchise
of a national bank was objectionable. Ibid., 1942, pp. 203-204.
17 Ibid., pp. 204-206.
U Ibid., p. 207.
"Ibid., p. 208.
(0 One member of the 1942 committee objected to basing a minimum tax on dividends; he favored a mini-
mum tax equal to 1 mill on each dollar of issued capital stock. Ibid., 1942, pp. 207, 210. The 2 percent mini-
mum rate appeared in the next committee report, ibid., 1943, p. 31, and also in the last bill presented by the
committec, ibid., 1954, p. 340.
A minor revision of section 5219, included in the committee proposal, concerned payments required by a
State in accordance with the Social Security Act. This wa.s tacked on to the provision in section 5219 permit-
ting States to tax real estate, preceding the proposed authorization for sales and use taxes. The 1942 report
proposed this change but did not suggest the precise wording (ibid., 1942, p. 210). This appeared in the next
report, as follows:
"2. Nothing herein shall be construed to exempt the real property. . . ; or to exempt associations from pay-
ments required by a State in ac2ordance. with the Social Security Act, for which credit is permitted under
said Act." Ibid., 1943, p. 31. In the 1954 version of the proposed bill, the final words had become: ". . . pay.
ments required by a State Tinemployinent Compensation Act, for which credit is permitted under the
Federal Social Security Act." Ibid., 1954, p. 341.
"Ibid., 1943, pp. 31-2.
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"A State or any subdivision thereof may also subject such associa-
tions to taxes upon the purchase, sale or use of tangible personal prop-
erty or upon payments for services, provided that such taxes are im-
posed upon individuals and other corporations generally."
With some elaboration, this provision was contained in all sub-
sequent drafts.62 The Committee pointed out that over the preceding
decade about half of the States and some of the larger cities had
adopted sales and use taxes but section 5219 prevented their applica-
tion to national banks, and added:
it has caused some irritation among taxing officials to find that
national banks when they purchase stationery, furniture, equipment
and supplies for their banking rooms and offices, are not subject to
sales taxes; and even more irritation when a national bank, which by
virtue of the foreclosure of a mortgage owns and operates an office
building or an apartment house, or is otherwise engaged in a business
in competition with private investors or businessmen, is able to claim
exemption from sales taxes on coal, oil, equipment -and supplies used
in connection with such business." 63
The committee pointed out that son~e national banks paid sales
taxes voluntarily, exposing themselves to possible criticism by bank
examiners and suits from stockholders for paying illegal taxes. Selective
sales taxes, such as the gasoline tax, were no different, nor were taxes
on public utility services. The committee proposal would cover all
these situations. /
It is difficult to see why the Committee did not object to supple-
mental, piggy-back or separate sales taxes imposed by cities and
other subdivisions when they so vigorously objected to similar
arrangements for income and excise taxes :)fl national banks. The
* principle was the same; only the amount of tax liability may have
been different-in one case negligible, in the other substantial. The
* way to prohibit supplementary, piggy-back, or additional local
income and excise taxes was to argue that they should be uniform
throughout the State. This the Committee did. Any nonuniform
taxes "would create an undesirable (liscrimmation among the banks
of different cities in the same State." Sales tax supplements would
create similar differences among merchants! The Committee pointed
to the desirability of geographical uniformity among St ate income and
share taxes as settling the merits of the case, then concluded:
"An invitation to lack of uniformity in income taxation should be
definitely discouraged, especially in the case of banks, which hold
- such a substantial part of the financial resources of the community.
It is believed that the attempt to achieve such a result should be
rendered impossible by unequivocal language in the statutes."
The view that this policy should be written into the law was
expressed from the beginning of the Committee's activities and
continued to the end. - -
The big guns of the joint committee were aimed at "built-up"
rates of excise tax. The 1926 amendment provided that, while the
62 The 1954 version was: "A State or any subdivision thereof may also subject associations to sales taxes and
use taxes complementary thereto upon the purchase, sale or use of tangible personal property and public
utility services, provided such taxes and fees are imposed upon individuals and corporations generally. For
the purposes of this subsection, the term `tangible personal property' shall have the meaning ascribed to it in
cèmmon law, but coin, bullion and currency shail be deemed not to be tangible personal property." Ibid,
1954,p341.
` The committee commented that the amounts involved usually were not large ($2,000 to $5,000 annually
for the larger banks outside New York City). Ibid., 1942, pp. 207-8.
~ Ibid., p. 201.
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306
excise tax could be based upon "the entire net income from all sources",
the rate applied to national banks could "not be higher than the
rate assessed upon other financial corporations nor higher than the
highest of the rates assessed . . . upon mercantile, manufacturing
and business corporations doing business" in the State. It was assumed
in some States that equality between these diverse corporations
meant an equality of actual tax rates. Other States took the view that
"rate" in the laws really meant "burden", particularly since nonbank
corporations mentioned in section 5219 were subject to more and
different taxes than were permitted for national banks. Therefore, if
equality of burdens was to be achieved, national bank tax rates would
have to increase by an amount equal to the relative "overtaxation"
of other corporations.65 In the simplest case this meant an allowance
to be added for the taxation of personal property to which nonbank
concerns were subject, but national banks were not because of section
5219. A few States merely added to the excise rates on banks their
estimates of what taxes on bank tangibles would cost national banks
if they were taxable. Since tangible personalty of banks amounts to
a very small part of their total assets, this method of buildup added
inconsequential amounts to the rates for national banks. Moreover,
it was ~judged unfair to types of business that used larger amounts
of tangible property in earning income.
California, after trying other approaches to the problem of equaliz-
ing burdens between bank and nonbank companies, finally left the
determination of the built-up rate to the State Franchise Board, which
after careful research annually fixed the excise tax rate. This l)ractice
increased the rate applicable to national banks considerably more than
the addition of an estimated tax on bank tangibles, and it was con-
demned by many banks. It was disapproved by the joint committee
of the associations and would have been prevented by the draft bills.
The committee report enumerated four objections: (1) no oppor-
tunity was afforded for banks to verify the accuracy of the State-
determined ratio; 66 (2) the rate was based on an inappropriate compar-
ison when it included property taxes-"ad valorem taxation bears no
relation to income" since the tax depends in each case on the amount of
property used in different businesses to produce income; (3) Congress
did not intend any basis of comparison between banks and other busi-
nesses except with other excise taxes, and the law refers to the com-
parison in terms of the rate of tax; 67 and (4) after 1929 bills had
been proposed, but none were enacted, to authorize the comprehensive
form of built-up rate or to specify just how the excise rate should be
determined.68
As the joint committee of the National Tax Association and the
American Bankers Association continued over the years to seek con-
gressional approval of the proposed amendments, the issue of the
"built-up" rate loomed larger and larger. Meanwhile, in California
the Security National Bank had sued the Franchise Tax Board over
its use of the "built-up" rate. The case was in the trial court eight
years. In California and other States, the stake of the banks in tax
C3 Built-up rates are also discussed infra, in subsection 7, particularly at pp. 260-61.
CO But note comments of Mr. Justice Gibson about this contention against the California rate in Security
National Bank of Los Angeles v. Franchise Tax Board of California, 55 Calif. 2d 407; 359 Pac. 2d 625, 630191
(1961), revIewed infra, at pp. 260-61.
` Cf. Martin Saxo, "Bank Tax Developments," in Proceedings of the National Tax Association, 1956,
p. 343: " * the present [California] approach forces an opening to accommodate the `built-up' rate hardly
within the clear intendment of section 5219."
~3 Ibid., 1942, pp. 205-6.
PAGENO="0327"
307
refund claims for several years during 1933-1949 and for other charges
was estimated at some $75 million.89 On January 14, 1956, the trial
court handed (lown its (lecision in favor of the (lefendant Board. The
case was appealed to the California Supreme Court and on February
23, 1961, the Board was again sustained. The United States Supreme
Court denied a writ of certiorari on October 9, 196 i.~° At long last the
use of "built-up" rates had been approved.
The work of the joint committee of 1941-42 in developing an agreed
bill finally resulted in its introduction in Congress-in the 81st
Congress, in 1949. It became S. 2547, offered by Senators Maybank
and Robertson. In the second session of the 81st Congress, Mr. Spence
introduced the bill in the House of Representatives (H.R. 7896) on
March 28, i950.~' A hearing on the Senate bill was held by a sub-
committee on July 20, 1950. Witnesses from the American Bankers
Association and the National Tax Association explained the origin of
the bill and its main provisions and recommended its enactment.
No opposition to the bill could be reported.72
House Committee hearings on H.R. 7896 also were scheduled but
were postponed-indefinitely, as it turned out.73
In the 82d Congress, H.R. 3175 introduced by Mr. Spence on
March 13, 1951, aroused bankers in four States which, in addition to
California, were using "built-up" rates for their excise taxes on national
banks. These States, instead of figuring the differential due to the
taxation of nonbank tangibles of mercantile, manufacturing, and
business corporations, had written into their laws one rate for general
business corporations and a slightly higher rate (about 2 percentage
points) for national banks. If H.R. 3175 was enacted, banks and other
corporations would be taxed alike. The banks in the four States were
satisfied with the way they were being taxed; in May 1951, they
undertook a vigorous campaign against the bill. No effort was made to
push it, and the bill expired with adjournment of the 82d Congress.74
No further bills were introduced to amend section 5219. Nor did
the bankers ever~reconcile their internal differences. By 1955 they
~° Saxe, bc ci..
70 Security National Bank of Los Angeles vs. Franchise Tax Board of CalifornIa, 55 CalIf. 2nd 407, 359
P. 2d 625 (1961); 368 U.S. 3 (1961). The case i3 discussed more extensively infra, at p. 260.
7' 95 C.R., p. S12774 (September 13, 1940); 96 CR., p. 114272 (March 28, 1950).
72 81st Congress, 2d session, Senate Committee on Banking and Currency, State Taxation of National
Banks: Hearing before a Subcommittee . . . on S. 2547, July 20, 1950: 21 pages. Witnesses were C. Francis
Cocke, chairman of the Committee on Federal Legislation of the American Bankers Association; Francis H.
Beam, American Bankers Association and vice president of the National City Bank, Cleveland, Ohio;
Henry F. Long, Massachusetts Commissioner of Corporations and Taxation and chairman of the National
Tax Association Committee on Bank Taxation. Mr. Beam presented an explanatory memorandum on S.
2547 and H. R. 7986, submitted by Philip Nichols on behalf of the American Bankers Association; ibid., pp.
11-18. The record includes also letters voicing "no objection" to the bill from S. R. Carpenter, Secretary of
the Board of Governors of the Federal Reserve System, April 4, 1950; E. H. Foley, Jr., Acting Secretary of
the Treasury, April 6, 1950; and Maple T. Harl, Chairman of the Federal Deposit Insurance Corporation,
April 5, 1950. Ibid., pp. 3-4.
~3 Report of Committee on Bank Taxation, Proceedings of the National Tax Association, lOóO, p. 399;
IbId., 1951, p. 450.
~` 97 CII., p 112304 (March 13, 1951). Mr. Spence was chairman of the House Committee on Banking and
Currency. Cf. report of the Committee on Bank Taxation, Proceedings of the National Tax Association,
1952, pp. 675-6, where the committee chairman, henry F. Long, reported developments as follows:
"As a result, a hearing on this objection was held by the Administrative Committee of the American
Bankers Association on January 16, 1952, which aroused great interest and was widely attended.
"On the following day the Administrative Committee adopted a resolution reatfirming the principle
that national banks should pay their just and equitable share of State taxes, but should be effectively pro-
tected against taxes which would be discriminatory as comparetl with other corporate taxpayers, and recom-
mending that the subcommittee on section 5219 should continue its study, jointly with a committee of the
National Tax Association, in an endeavor to develop an amendment which would secure the fundamental
objectives above stated; that further effort should be made to harmonize the views of the bankers of the
respective States; and that pending further study no action should be takemi to urge consideration of 11.11.
3175.
"We have been Informed that since this resolution was adopted negotiations have been carried on between
the bankers who favor and those who oppose the contested feature of the proposed revision and that some
progress has been made but no agreement has yet been reached."
He asked (and obtained) a continuance for the N.T.A. committee.
PAGENO="0328"
308
wanted to await a decision in the California case, mentioned above,
before doing anything to amend section 5219.~~
This second movement to amend section 5219 had neither the
vigor nor support of earlier efforts. The elapsed time was longer but
the efforts were somehow more lackadaisical. There were no significant
pressures upon Congress.76
4. Banks and interstate commerce.-In its report to the 1958 confer-
ence of the National Tax Association, the Committee on Bank
Taxation called attention to recent decisions of the United States
Supreme Court concerned with the power of a State to tax a non-
resident industrial corporation, doing only an interstate business
in the State, upon its net income from sources within the State. Because
it expected that the decisions in those cases would have considerable
bearing upon possible future developments in the field of bank
taxes, the committee planned to follow the situation closely.77 At the
time, the Committee could scarcely have anticipated the impact
that these decisions might ultimately have upon national banks,
since section 5219 prevented taxation of out-of-State national banks.
But a decade later, after enactment of Public Law 91-156, both in
the temporary period between 1969 and 1972 and thereafter, national
banks would be subject to nondiscriminatory sales, use, and other
taxes that applied to State banks.
The committee on bank taxation devoted most of its 1959 report
to this subject. Bankers were warned in these terms ~
"In February 1959, the Supreme Court of the United States
decided Northwestern States Portland Cement Co. v. Minnesota
and Williams v. Stockham Valves and Fittings, Inc., 358 U.S. 450.
Those cases involved situations where foreign corporations maintained
sales offices in the taxing State which were used as headquarters by
salesmen soliciting orders for goods, but maintained no other place
of business or stock of goods in the State, accepted all orders outside
of the State and shipped from outside of the State nfl goods used to
fill such orders. In both cases it was agreed that the corporations
were engaged solely in interstate commerce in the taxing State and
that the net income upon which the tax was imposed had been fairly
apportioned to the State. The Supreme Court held that under those
circumstances the direct net income tax did not violate the commerce
clause and that the taxpayer had a sufficient connection with the
State to satisfy the requirements of due process.
"In May 1959, the Supreme Court denied certiorari in International
Shoe Co. v. Fontenot, 359 U.S. 984 in which the Louisiana Supreme
7' Ibid., 1955, p. 398; ibid., 1957, p. 342.
~ Two efforts were made at national tax conferences to get the National Association Committee to broaden
the scope of Its recommendations. In 1943, Oscar Lcser, a veteran state official iii the struggle to amend
sectIon 5219 after the Richmond decision, asked that the Committee "broaden its powers to take up the
real mischief that is to be cured." Dixwell Pierce of California joined the effort, saying, "if more work is
to be done of any significance, [it] will have to be under a resolution broader than that originally assigned."
They lost the struggle. Proceedings of the National Tax Association, 1943, pp. 33-4, 459-65. At subsequent
conferences perfunctory reports were rendered by the Committee Chairman with no discussion following.
See IbId., 1944, pp. 350-55; 1946, p. 460; 1017, pp. 306-307; 1948, pp. 222, 562; et. seq. In 1948 the Executive
Committee of the N.T.A. voted to discharge the committee but Henry Long, during the annual confer9nce,
asked that the committee be revived, and this was done out of deference to him. Ibid., 1918, p. 222. lIe carried
on thereafter almost alone until his death (1956), and whatever the committee accomplished was due largely
to him. The lack of support is indicative of how little interest other States had in the proposed amenlm~nt.
They did not attempt to block It, hut neither did they work for its adoption. The limited scope of the recom-
mendations, particularly in not trying to improve the share tax option (which hankers oppos~d1, left the
committee with almost no support from States whose tax officials had previously worked hard to amend
sectIon 5219.
fl Proceedings of the National Tax Association, 1958, p. 314. The Committee was now under the chair.
manship of Carter T. Louthan, attorney, of New York City.
"Ibid., 1950, pp. 214-15.
PAGENO="0329"
309
Court upheld a direct net income tax U~Ofl the portion of the net
income of a foreign corporation apl)ortioned to the State; the corpo-
ration's only activity in the State being thesolicitation of orders for
goods by traveling salesmen. No orders were accepted in the State
nor did the corporation maintain any place of business or stock of
goods in the State.
* . * e * *
"As a result of the strong representations which were made by
mterstate businesses, Public Law 86-272 was enacted in September
to prohibit States from imj)osing taxes U~Ofl net income derived within
the State by a person engaged solely in interstate commerce if the
only activity within the State is the solicitation of orders by the
* taxl)ayer for the sale of tangible personal property. The statute
directs that a further study of the situation be made by congressional
committees. .
* * * * * * * *
"In view of the limited nature of the prohibition imposed by pres-
ent legislation, it is obvious that many persons, including banks,
earning income in interstate commerce still may be vulnerable to
multiple taxation of net income by numerous States with which they
have rather minimal contacts.
"The Committee intends to follow closely the proceedings of the
congressional committees in this field. The Committee also has been
in touch with the American Bankers Association and intends to
cooperate with the appropriate committee of that Association in an
effort to work out a program which will give reasonable protection to
interstate banking."
In its next annual report, the National Tax Association committee
made the warnings to the banking community even more spec~ific:79
"Although banks do not maintain offices outside of the State in
which they have their head office, they frequently make loans to
persons in other States and regularly send employees into such other
States to keep in contact with such borrowers and correspondent
banks.
"Such business is frequently generated by correspondent banks
which cannot, or do not wish to, handle the entire loan. Such loans
are closed at the out-of-state bank's head office so that no liability
for a privilege or franchise tax is incurred. However, the rule of the
above-mentioned cases [Northwest and Stockham Valves cases, 358
U.S.. 450, and International Shoe, 359 U.S. 9841 seems applicable, so
that if an income tax is imposed the only open question would seem
to be whether there was a fair apportionment of net income to the
taxing State.
"In the simple case the borrower may do only a local business or
may borrow the funds only for use within the taxing State. More
frequently, the borrower will do both a local business in the second
State and an interstate business in a third State and will borrow the
funds for use in its entire business. Under such circumstances the
interest may be said to have been earned partly in the third State
and should not be considered in its entirety as a receipt within the
second State, whether the allocation is to be made on a sejiarate
" Ibid., 1900, p. 297. Mr. Louthan submitted the report.
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310
accounting basis or in accordance with a formula using receipts as
one of the factors. Thus the difficulties which are encountered in
using sales as one of the factors in an apportionment formula also
will be encountered in using interest receipts as an apportionment
factor in the, case of banks.
"Furthermore, if the third State also imposes an income tax, the
out-of-state bank may become liable for tax upon the net income
deemed to have arisen in that State if it has sufficient activities in the
third State to satisfy the due process clause.
"The necessity of paying income taxes to several States with respect
to interest received upon an out-of-state loan could involve such
burdensome problems of compliance that there would be an inter-
ference with the free flow of credit on an interstate basis. Since credit
is the life blood of the national economy this problem deserves careful
consideration by the Congressional Committees charged with the duty
of studying the problems involved in the taxation of income earned
in interstate commerce. It may be that the national interest will be
best served where the bank's contacts with a State are minimal, if
limitations are placed upon the power to tax so that there will be w~
impediment to the free flow of credit in interstate commerce."
As indicated above, the Supreme Court in decisions in 1959 80 gave
the States tax jurisdiction over foreign corporations doing business
within their boundaries in situations where they had sales offices and
traveling salesmen within the State. Business firms, particularly small
enterprises, at once called for action by Congress to modify the con-
sequences of these decisions.
The result was the quick enactment of Public Law 86-272, on
September 14, 1959. The limitations imposed upon the States can be
seen clearly from the first paragraphs of the law (15 U.S.C. 381),
reproduced in appendix 1-G, above.8' The power of Congress to
regulate interstate commerce was invoked to restrict the taxing power
of the States, an. action that was characterized by critics as "destruc-
tive of sovereign rights. . . . [A] further encroachment by the Federal
Government on the powers reserved to the States." 82 Sales and solici-
tation of orders by independent contractors for more than one principal
were excepted from the terms of the act.83 Title II of the Act directed
the Committee on the Judiciary of the House of Representatives and
the Committee on Finance of the Senate to make full and complete
studies of State taxation of interstate commerce. Voluminous studies
were indeed made by staff employed by the House Committee.84
Several bills to regulate the rights of States in taxing interstate
commerce subsequently were introduced in Congress. Representative
Edwin E. Willis, chairman of a special subcommittee of the Judiciary
Committee, introduced H.R. 11798 on October 22, 1965.85 The next
year he introduced H.R. 16491 to supercede H.R. 11798.86 In the 1967
SO In the Northwestern. Stockham, and International Shoe cases, ibid. See appendixes 11 and 12. below,
pp. 505-584.
81 73 U.S. Stat. L. 555-56, approved September 14, 1959 (86th Congress 1st Session, 5. 2524), reproduced
supra,pp. 8-9,
52 Guy Sparks, Alabama Commissioner of Revenue, "Taxation of Interstate Commerce: The Case for
State Control," Proceedings of the National Tax Association, 1962, esp. p. 510. Cf. Leonard E. Kust, "A
New Venture in Federalism: Toward a Solution to State Taxation of Multistate Business," in the Tax
Executive, vol. 23, January, 1971, pp. 424-34.
~ P.L. 86-272, section 101(c); 15 USC 381 (c), (d) In appendix 1-G, supra, pp. 8-9.
`~ Sections 201 and 202. 15 USC 381 note, In appendix 1-G supra at p. 9. The original reporting deadline,
July 1, 1962, was extended to June 30, 1965.
86 111 C.R., p. H28659. Nine other members introduced bifls with the same title, HR. 11799 through 11807,
on the same day.
88 112 C.R., p. 1116902 (July 25, 1966). On the same day, 10 other members introduced bills with the same
title, H.R. 16492 through 16501. 11.11. 16491 was reported out by Mr. Willis on September 7; ibid., p. 1122015
(House report 89-2013).
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311
session this bill was reintroduced as H.R. 2158. On May 22, 1968 it
passed the House by a vote of 286 to 89.87
About this time the Council of State Governments came forward
with a plan to solve problems of tax jurisdiction over interstate com-
merce through the use of interstate compacts instead of Federal
legislation.88 A Multistate Tax Commission was formed to foster this
approach through State action. More than 20 States have enacted
legislation of this type. Another approach was through the National
Conference of Commissioners on Uniform State Laws, which promoted
the Uniform Division of Income for Tax Purposes Act. As the title
indicates, this legislation has been more concerned with the division
of income, or in some cases property, than with the ways in which
States acquire jurisdiction to tax. The proposals have been designed to
standardize allocation factors, about which there has been much
debate. Of 39 States with corporate income taxes, 23 had enacted the
Uniform Division of Income for Tax Purposes Act by 1969. Twenty-
nine of the 41 States with corporation or personal income taxes used
the Federal income tax, with some modifications, as the base for State
purposes.89 So far the allocation formulae have been devised with.
reference to mercantile and manufacturing businesses; formulae have
not been worked out for financial corporations, including banks.
On February 27, 1969, Representative Peter W. Rodino, Jr. of New
Jersey introduced in the House another bill (H.R. 7906) to regulate
State taxation of interstate commerce. On June 2, 1969, the Rodino
bill was reported favorably by the Judiciary Committee. It passed the
House on June 25, 1969, by a vote of 311 to 87. In the Senate, the bill
was referred to the Committee on Finance where it died.9°
The Rodino bill (H.R. 7906) was identical with the Willis bill
(H.R. 2158) passed 13 months earlier, except that. it omitted pro-
visions relating to taxation of personal income which had been added
iii a floor amendment to the earlier bill. The bill provided that no
State could (1) impose a net income tax or capital stock tax on a
foreign corporation unless it had a business office in the State during
the taxable year, or (2) require the collection of a sales or use tax on
sales of tangible property unless a person had a business office in the
State or regularly made household deliveries in the State, or (3)
impose a gross receipts tax with respect to sales of tangible property
unless the seller had a business location in the State. Where net
income (or capital) was taxed, the maximum permissible allocation
to the State would be determined by a two-factor formula based on
property and payrolls. Excluded from the protection given by the
act would be corporations doing at least 50 percent of their business
in transportation of passengers for hire, telephone or telegraph service,
sale of electric energy, gas or water, issuance of insurance or annuity
contracts, "banking, the lending of money, or the extending of credit,"
87 113 CR., p. H435 (January 12, 1967). On the same day, 8 other members introduced bills with the same
title, H.R. 2159 through 2166, H.R. 2158 was reported with amendment March 7, 1967; ibid., p. 115747 (House
report 90-69). For the debate, amendment, and House passage of H.R. 2158, cf. 114 CR., pp. H14398-402
and H14405-33 (May 22, 1968). Referred to Senate Committee on Finance May 24, 1968; 114 CR., p. S14889.
88 Drafted in cooperation with the National Association of Tax Administrators, Association of Attorneys
General and the National Legislative Conference. Cf. Proceedings of the National Tax Association, 1967,
p.241.
89 Representative Sisk (California) in 115 C.R., p. 17291 (June 25, 1969).
~s 115 C.R., p. 114758 (February 27, 1969); reported (House report 91-279), ibid., p. 1114472 (June 2) by Mr.
MacGregor for the Committee on the Judiciary; rule reported (House report 91-308), ibid., p. 1115465 (June
11); rule debated, pp. 1117290-93 (June 25); bifi debated and passed, pp. H17294-322 (June 25); referred to
Senate Committee, p. S17695 (June 30).
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312
or obtaining at least 50 percent of their ordinary gross income from
dividends, interest, or royalties. Also excluded was any corporation
with an average annual income over $1 million.9' For banks and other
financial businesses and other excluded corporations, jurisdiction to
tax and allocation of the tax base would continue to be determined
by State laws and court decisions.
The only standard rule applicable to all States appears to be Pub-
lie Law 86-272, but this Federal statute concerns only the solicita-
tion of orders and sales of tangible personal property delivered from
a point outside the State on orders approved outside the State. The
statute appears not to apply to any interstate activities of banks.92
If this is true, does a State acquire jurisdiction~ over a nondomicili-
ary bank when that bank sends its nonresident representative into
the State to solicit loans or deposits on which the nondomiciliary
bank earns interest (or profits)? Suppose the representative, makes
regular visits into the State each year (or season), does that create a
different situation? Or if the dealings are with correspondent banks
with which nondomiciliary money-market banks have had regular
profitable dealings over long periods of time? Or if, instead of having
loan and deposit production representatives make regular calls, the
nondomiciliary bank also buys or sells mortgages or other securities
from or to its correspondent? The dealings may go both ways on a
reciprocal basis. Perhaps the bank also owns equipment which it leases
to customers or correspondents; does that make n difference? This
involves some tangible property that is being used to generate income,
presumably both for the resident corporation, bank, or interstate firm
and the nondomiciiary bank. If all or several of these activities take
place, even if through the aegis of corporate subsidiaries, the State
may be able to show that the nonresident bank is surely doing busi-
ness within the State. Are the State laws broad enough to apply to
banks? Generally, it would seem so.
Under present law, there can be little doubt of State jurisdiction to
tax nondomiciiary banks after 1971 in situations where such banks
establish loan production offices, "warehouses," bookkeeping centers,
or branches within the taxing State. If a bank has employees living
and working in the State, or uses local brokers or commission men,93
this may be sufficient for a claim of tax jurisdiction. If a bank leases
tangible property to customers in the taxing State, it may be taxable.
If the bank transacts business in a State only by mail, jurisdiction is
doubtful. While interstate branches of State banks are few in number
and national banks are not permitted to establish such branches, save
in foreign countries, the time may come when they are permitted.
And where branch banks are established, they will be subject to State
taxation on allocable net income. The permanent section 5219 (in
P.L. 9 1-156) has opened this door wider than it was.
These problems affect large banks, and particularly those in money
market centers whose interstate business is of growing importance.
Occasionally the problems may arise for banks situated close to or
upon State lines. But most banks are still small local institutions
unaffected by the complications of doing business across State lines.
91 Ibid., pp. 1117315-19, reproducIng the text of the bill.
92 Cf. supra, p. 240.
93 Cf. Scripto Inc. v. Carson, Sheriff, et al, 362 U.s. 207 (1960), where resident brokers and commission
men sold goods in the State. Distinguished from Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954); where a
Delaware company had no property in Maryland, accepted no mail or telephone orders, and sold goods only
in Delaware, the Maryland use tax on a delivery to Maryland was void.
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Nevertheless, the State taxation of income from or of business trans-
acted in interstate commerce may be expected to have an increasing
impact on State and national banks in the years ahead.94
5. A section 5219 for State banks: 1967.-On January 17, 1967, Mr.
Ottinger (New York) introduced in the House a bill (H.R. 2517) to
eliminate certain inequities between State-chartered and Federally-
chartered financial institutions in the conduct of interstate business.95
At the time practically all States taxed their own and national banks
on the same basis.°1 On August 30, 1967. Senator Sparkman introduced
S. 2364 "to extend the same privileges, protection and immunities to
insured State banks as are available to national banks doing business
across State lines." ~ The bills were referred to the Committees on
Banking and Currency.
Senator Sparkman indicated that he was introducing S. 2364 at
the request of Mr. Frank Wille, Superintendent of Banks in the
State of New York, who was then the newly-elected chairman of the'
legislative committee of the National Association of Supeivisors of
State Banks. The bill had been drafted by the New York State Banking
Department. A letter and memorandum from Mr. Wille expalined its
nature and purpose: "In doing business across state lines, State
banks and savings and loan associations operate at a serious com-
petitive disadvantage as compared to national banks and Federal
savings and loan associations . . . In essence the bill would provide
that a State bank or savings and loan association doing business across
State lines shall enjoy the same privileges, protections and immunities
as a national bank or Federal savings and loan association doing such
business."
Disadvantages under which State-chartered financial institutions
operated were said to relate primarily to:
1. The necessity for compliance with "doing business" laws in
other States;
2. The imposition of taxes by other States; and
3. The possibility that they may be sued wherever they "do
business," whereas Federal law (12 U.S.C. 94) permits national
banks to be sued only in their headquarters State.
The statement attributed the special treatment of national banks
and I~ederal savings and loan associations to their status as Federal
instrumentalities. State banks have to comply with "doing business"
laws and some States do not permit compliance by banks or savings and
loan associations-[so that] they may find themselves unable to collect
on defaulted loans and unable to enforce their security interest in loan
collateral."
national banks and Federal savings and loan associations can
be taxed by the States only as Congress has specifically permitted
(e.g., in 12 U.S.C. 1464h for Federal savings and loan associations).
Under this line of reasoning, [FederaJ and State courts] . . . have held
invalid license taxes, personal property taxes, and sales and use taxes
"[For detailed examination of questions raised here, see infra, appendix 11 by Jerome R. Hellerstein,
Federal constitutional limitations on State taxation of multistate banks, and appendix 12 by 3'. Nelson
Young, Multiple State taxation of national banks: Division of tax base for income taxes and "doing business"
taxes-Ed.]
~5 113 CR., p. 11714 (January 17, 1967).
""In the Committee's last report [1965] . . . we were able to point out that today practically all of the
States tax national banks and State-chartered banks on the same basis. Full credit for this equality of taxa-
tion must be given to section 5219." Report of the Committee on Bank Taxation, Proceedings of the Na-
tional Tax Association, 1966, p. 270.
° 113 CR. p. S24544 (August 30, 1967).
1 Ibid., p. S24546 (August 30, 1967).
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levied on national banks. State-chartered banks and savings and loan
associations have no such immunity from taxation in nondomiciliary
States."
The bill did not propose to limit the power of C3ngress over national
banks nor to confer powers on State banks not given by States. It
would not amend section 5219 but would add a new section 1831 to
Title 12 of the U.S. Code under the sub-title "Federal Deposit In-
surance." 2 No hearings were held, nor was the bill reported out of
committee.
This proposal was the inverse of section 5219. It was designed to
protect State rather than national banks. If section 5219 had efficiently
protected national banks from effective State taxation, why not
invoke similar protection for State banks doing interstate business?
One wonders why it took so many years for someone to make the
attemut.
6. The latest chanqe: 1968-1969.-In the 90th Congress, 2nd Session,
on July 29, 1968, Representative Podell (New York) introduced
H.R. 19031, which read as follows:
"Section 1. A national bank has no immunity from any sales tax
or use tax which it would be required to pay if it were a bank chartered
under the laws of the State or other jurisdiction within which its
principal office is located."
The bill was referred to the House Committee on Banking and Cur-
rency.3 This was the beginning of P.L. 91-156-the 1969 amendment
of section 5219.
When he introduced the bill, Mr. Podell referred to the Supreme
Court decision a few weeks earlier in First Agricultural National
Bank of Berkshire County v. State Tax Commission.4 He declared
that the Court had opened an "escape hatch" for national banks.
He could see no sound reason why a national bank "should be per-
mitted to escape tax responsibility for the support of State and local
government. They receive a myriad of State and local services." ~
Early in the 91st Congress, numerous bills -were introduced to
clarify the rights of States to impose taxes on national banks. Mr.
Podell introduced another bill to clarify liability for sales and use
taxes-H.R. 2116. Mr. Hosmer offered a similar bill, H.R. 2182.
Mr. Patman introduced H.R. 7491 which eventually became P.L.
p1-156. Mr. Ashley introduced H.R. 8642, and Mr. Sikes, for himself
and eleven others, introduced H.R. 9794~6 On May 5, 1969, Senator
Holland introduced a bill (5. 2065) of similar import, and on Sep-
2 Ibid.; and committee report by M. A. Zizzamia, in Proceedings of the National Tax Association, 1967,
p. 240.
3 114 CR., p. 1123979 (July 29, 1968). Cf. Report of Committee on Bank Taxation in Proceedings of the
National Tax Association, 1968, p. 291 (Harry Schroeder of New York. chairman).
4 392 U.S. 339; argued April 22. 1968; decided June 17, 1968.
5 Mr. Podell in 114 C.R., p. 1123960 (July 29, 1968). Mr. Podell also inserted in the Record additional ma-
terials in support of 11.11. 19031 on September 11 and 30, 1968. These statements include copies of letters he
wrote to the Honorable Wright Patman, Chairman of the House Committee on Banking and Currency,
reporting that the Court decision entailed serious losses of revenue for New York City and State and for other
States. Mr. Podell referred to a survey he was making of losses expected by other States. 114 C. R., pp
1126531-36 and 1128825-26 (Sept. 11 and 30, 1968). Further data coliected by Mr. Podell appear at 115 CR.,
pp. 113361-62, and in House Committee on Banking and Currency "Testimony received in consideration of
hR. 7491 and related bills," Hearing . . . on HR. 7491 and related bills, May 26, 1969 (91st Congress, 1st
~ess.), pp. 3-19.
6 For the House bills, of. 115 C.R., pp. 192, 194 (Jan. 6, 1969), p. H4210 (Feb. 24), p. H 5982(Mar. 11), and
p. 118203 (April 1). Mr. Ashley inserted into the Record remarks indicating the need for legislation in the
wake of the First Agricultural National Bank decision; ibid., pp. H5991-92 (Mar. 11).
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315
tember 16, 1969, S. 2906.~ All these bills were referred to the respective
Committees on Banking and Currency. Only H.R. 7491 will be
considered further.
The House Committee on Banking and Currency held a hearing on
H.R. 7491 on May 26, 1969.8 The hearing started with the presenta-.
tion of letters generally endorsing the amendment of section 5219,
from the Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the Treasury Department. Representative Podell
presented the results of his survey, indicating that 21 states which
responded to his inquiry estimated their annual revenue losses from
inability to apply sales and use taxes to national banks at $25,303,000
per annum. The largest amounts were for New York and Pennsylvania,
$5,000,000 each, including $3,500,000 for New York City. Tennessee
and Virginia estimated revenue losses at $1,500,000 each; Mas-
sachusetts and Michigan, $1,000,000 each.9 Supporting letters to Chair-
man Wright Patman, some 31 from Governors and tax officials, also
were presented, as were a number of statements, and resolutions.1°
Except for the statement of Mr. Podell no other witnesses appeared.
On June 9, 1969, Mr. Patman, Chairman of the Committee on
Banking and Currency reported favorably H.R. 7491 with amend-
ments, submitting House report 91_290.h1 As initially offered, H.R.
7491 was identical with H.R. 19031 of the preceding Congress, quoted
above. As amended by the Committee, the bill read as follows:
"(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is
amended to read:
"Sec. 5219. For the purposes of any tax law enacted under authority
of the United States or any State, a national bank shall be deemed
to be a bank organized and existing under the laws of the State or
other jurisdiction within which its principal office is located.'
"(b) The amendment made by subsection (a) becomes effective on
the first day of the first calendar year which begins after the date of
enactment."
The report said: "The bill says that national banks shall be subject
to the same taxation as State banks, and it means exactly what it
says."
`Ibid., p.511367 (May 5, 1969) and p. S25539 (Sept. 16, 1969). 5. 2065 provided: "A national bank has no
immunity from any sales tax, use tax, personal property taxes, intangible personal property taxes, and docu-
mentary stamp taxes which it would be required to pay if it were a hank chartered under the laws of the
State or otheriurisdiction within which its principal office is located."
On July 11, 1969, Senator Holland asked to have Senator Gurney's (Fla.) name added to the bill, ibid.,
p. S19271.
S. 2906 was as follows: "In addition to any other tax which a national bank is authorized to pay under any
other law, a State or any political subdivision thereof is authorized to impose on a national bank any sales
taxes or use taxes complementary thereto, any taxes on tangible personal property (not including cash or
currency), any taxes (including documentary stamp taxes) on the execution, delivery, or recordation of
documents, or any license, registration, transfer, excise, or other fees or taxes imposed on the ownership,
use or transfer of motor vehicles, which such national bank would be required to pay if it were a bank char-
tered under the laws of the State or other jurisdiction within which its principal office is located."
* 91st Congress 1st sess., House Committee on Banking and Currency, "Testimony Received in Con-
sideration of HR. 7491 and Related Bills," Hearing . . . Ofl HR. 7491, May 26, 1969. Washington, U.S.
Government Printing Office. 1969, 47 pp.
° Ibid., p. 5, with supporting letters at pp. 6-19.
u Ibid., pp. 19-28. An additional letter to Representative Margaret M. Heckler from Governor Francis W.
Sargent of Massachusetts also was included. Statements favoring change in section 5219 were presented from
the Independent Bankers Association of America, signed by B. Myers 1-larris, President, and Bradford Brett,
Chairman, Federal Legislative Committee; National Association of Tax Administrators, signed by Charles
F. Conlon, Executive Secretary; Resolution of the Midwestern States Association of Tax Administrators,
adopted at Osage Beach, Missouri, August 25-28, 1968; Orval Hansen, member of Congress; Pennsylvania
Bankers Association, letter supporting equal taxation among banks, signed by Frank S. Smith, President
with a resolution signed by B. L. Daniels. Executive Vice President; prepared statement of the Nationai
Association of Supervisors of State Banks, signed by Frank Wille, Superintendent of Banks of New York aru5
Chairman of Federal Legislative Committee of the Association.
11 115 C.R., p. H15070 (June 9, 1969).
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316
The report stated that in California national banks paid no state
taxes on motor v~ehicles, that in Florida their recently discovered ex-
emption from documentary and - intangible property taxes would
"cause an alarming loss of revenue," and that "all over the country
they enjoy exemption from sales and use taxes." It explained the
historical basis for section 5219 and the purpose of the amendment,
adding that the proposed bill did not change any Federal tax law or
attempt to solve problems of multistate taxation of interstate com-
merce nor deal with questions of venue. The effective date of the chttnge
in law would be January 1, 1970, so that the uncertainties of litigation
"can be reduced to a minimum and very low level by making the
changeover effective with the beginning of the next calendar year."
The report also saw no reason for an extended delay in the effectiveness
of the bill.
In July, the Rules Committee reported a resolution for consideration
of H.R. 7491. This was approved July 17 and the House resolved
itself into the Committee of the Whole to consider the bill. The main
argument was whether the broad approach to the problem of State
taxation of national banks, as provided in the Committee bill, or a
restricted approach proposed in an amendment by Mr. Garry Brown
of Michigan should prevail. The Brown amend.men t was referred to
as the "laundry-list" type since it enumerated specific taxes-sales,
use, tangible personal property, documentary stamp taxes, etc.-
which States could adopt. The amendment was defeated. When a vote
was taken the bill was adopted, 344 to 4~12
*The Senate Committee on Banking and Currency held a hearing on
H.R. 7491, 5. 2065, and 5. 2906, on September 24, 1969. This was
really a "full dress" affair-a few State officials, several bankers or
their representatives, a Governor, and a Federal official testified, and
numerous statements, resolutions and letters were submitted.13
The position of the States was that they favored equality of taxation
of State and national banks and that only section 5219 protected
national banks from being taxed as other financial institutions, par-
ticularly State banks. They argued that there was no good reason
why national banks should not be subject to sales, use, documentary
stamp, and similar taxes to which all other corporations were subject.
They urged amendment or repeal of the statute.
The bankers subscribed to the principal of overall tax equality
not only among banks but among all taxpayers, particularly business
12115 C.R., p. 1119712, House report 476 (July 8. 1969); pp. 1119905-7 (July 17) for debate on the rule; and
pp. 1119908-22 (July 17) for debate and vote on the bill. On Mr. Brown's amendment, cf. ibid., pp. H19913-2J;
tellers were demanded: the vote was 65 for the Brown amendment. 66 against.
13 91st Congress, 1st sess., Senate Committee on Banking and Currency, "Taxes on National Banks,"
Hearing. . . on S. 2065, 5. 2906, and HR. 7491, Sept. 24, 1969. Washington: U.S. Government Printing Office,
1969, 6S pp.
Testimony was given by the following: Senator Spessard L. Holland of Florida; Alfred A. McKethan for
Florida Bankers Association; Ralph D. Turlington, member of the Florida House of Representatives and
Chairman of its Committee on Appropriations; Honorable Norbèrt T. Tiemann, Governor of Nebraska;
Robert Bloom, Chief Counsel to the Comptroller of the Currency; Tom Frost, Jr., for the American Bankers
Association, with supplementary comments by Matthew Hale, General Counsel of the Association; Cleo F.
Jaillet, Commissioner of Corporations and Taxation, Massachusetts; and Frank Wille, Superintendent of
Banks, State of New York, on behalf of the National Association of Supervisors of State Banks. The record
includes statements and letters from the following: Norman Gallman, Acting Commissioner, New York
State Department of Taxation and Finance; Honorable William McChesney Martin, Chairman of the Board
of Governors of the Federal Reserve System; Paul W. Eggers, General Counsel, U.S. Department of the
Treasury; Honorable K. A. Randall. Chairman, Federal Deposit Insurance Corporation; Fred. 0. Dickin-
soil. Jr., Comptroller of the State of Florida: J. L. Driscoll of the First Security Bank of Idaho; William D.
Hussey, Executive Vice President, Florida Savings and Loan League; Robert G. Willmers, Acting Finance
Administrator of the City ci New York; Charles R. McNeill, Director, Washington Office, American
Bankers Association; Frank Wille, Superintendent of Banks, New York; Honorable Raymond P. Shafer,
Governor of Pennsylvania Missouri Bankers Association; and Charles F. Conlon, Executive Secretary,
National Association of Tax Administrators.
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317
corporations. In their view, the Blouse bill was an oversimplified
approach to a complex matter and would guarantee "years of litiga-
tion and confusion, followed by years of legislative activity and further
confusion." Banker witnesses were concerned that proposed amend-
ments might permit double taxation of capital and income and inter-
state transactions. Also, they preferred a general statutory provision
to a "laundry list." They offered a draft bill that left the basic struc-
ture of section 5219 intact but would add provisions to make these
changes: (1) authorize the home State of a national bank to impose
nondiscrirninationatory sales, use, documentary stamp, motor vehicle,
and other general taxes that it applies to State banks and other busi-
nesses (other than taxes similar to the four older options and "in-
lieu" taxes), (2) permit taxation of tangible personal property at its
location in a State other than the home State, and (3) give an insured
State bank the same privileges, protections, and immunities as na-
tional banks in States other than the domiciliary State.
The subject of State taxation of national banks did not receive
further attention in the Senate until November 12, 1969, when Senator
Proxmire, for the Committee on Banking and Currency, reported
favorably on the bill (H.R. 7491) with an amendment.'4 With the bill
was filed a report in which the Committee agreed in principle with the
purposes of the bill-to give each State "the greatest possible degree
of autonomy with regard to the formulation of its tax structure"-but
indicated three problem areas which would require correcting amend-
ments. These areas were the prohibition of intangible personal prop-
erty taxes on banks, the designation of taxes which might be levied
on national banks with headquarters outside the taxing State, and
the mechanics of the change in the law. The Senate Committee wanted
the Federal Reserve Board to make a study of the intangib]es and
interstate tax problems and report to the Congress, which could then
recQnsider the statutory changes on these subjects before they took
effect. The Committee proposed, further, to* retain the existing lan-
guage of section 5219 for a period that would allow the States to take
legislative actions that might be necessary for imposition of newly
authorized taxes or to adjust to the impending repeal of the old section
5219. It had been reported that some States (~vIissouri, for example)
had tied their laws to section 5219 by explicit references, so that
repeal of the existing Federal provisions might impair their authority
to apply current State tax laws. Senator Tower, in a statement of his
individual views, supported the motives of the bill but favored Sen-
ator Holland's proposal (5. 2906) as simpler and less costly for the
States. He favored eliminating the two-step process by keeping the
"interim amendment" in effect until the Federal Reserve Board
study was completed and considered. He proposed that the study
include "all relevant matters concerning future revision of the
statute."
On November 21, 1969, the Senate considered H.R. 7491. Senator
Proxmire explained the provisions of the bill: after which an hour was
allotted to him and to Senator Bennett (Utah) for debate.'5 Senator
Proxmire told the Senate about the three problems raised in the
Committee report which were dealt with in the Committee bill before
14 115 ~.R., p. S33930 (Nov. 12, 1969); Senate Report 91-530.
15 115 CR., p. S35398 (Nov. 21, 1969).
79-421 0 - 72 - 22
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318
the Senate. Senator Bennett raised a question as to whether the sav-
ings provision (section 2) would not require all States to have their
legislatures meet to consider taxes imposed upon banks.16 He declared
that "apparently there is at least one State in which the existing
taxes on the State banks are considered to be onerous, and the na-
tional banks do not want to have that pattern of existing taxes
automatically applied to them when the bill passes." He believed that
national banks should not be included without specific acts by the
various legislatures. After discussion it was agreed to take this up
later in conference with the House committee. Sen ator Holland
reported that Florida stood to lose $25 to $27 million a year unless
remedial legislation were passed. The committee report was put into
the Congressional Record. After a very brief discussion H.R. 7491,
as amended, was then passed by the Senate and sent to a conference
with the House, which appointed a conference committee on De-
cember 417
The conference report, submitted to the House on December 9,
1969, by Mr. Patman, pointed out that the Senate struck out all of
the House-approved bill after the enacting clause and substituted a
new text. The conferees agreed to a substitute for the entire Senate
amendment.18
The following day Mr. Patman called up the conference report and
briefly explained what the committee had done. First, the permanent
amendment of section 5219 would take effect on January 1, 1972,
instead of on January 1 of the first calendar year after enactment. This
would give States the time needed to change their laws. Meanwhile the
temporary provision would allow States to collect sales, use, and
certain other taxes except on intangibles. This provision was to be
effective only until January 1, 1972. Second, as to the taxation of
foreign or out-of-State banks, the States were limited to sales, use,
documentary stamp taxes, and licenses until January 1, 1972, when the
permanent amendment would give States full authority to imposè~
intangible property taxes and other taxes on national banks on the
same basis as on State banks.19
Finally, Mr. Patman explained the requirement for a Federal
Reserve Board study. He assured the House that the House-passed
bill had prevailed and that the conferees of both houses were satisfied
with the resulting bill. The House agreed to the report.2°
16 This section read: "Notwithstanding any other provision of law, no tax may be imposed on any bank
by or under the authority of any State legislation in effect prior to the date of enactment of this Act if such
bank is not required to pay the tax prior to such date, unless the imposition of such tax on such bank is
authorized by affirmative action of the State legislature after such date." Ibid., p. S35400.
17 115 CR., p. S35398-404 (Nov. 21, 1969); ibid., p. H36928 (Dec. 4, 1969). Conferees for the Senate were
Senators Sparkman, Proxniire, Williams of New Jersey, Bennett, and Tower; for the House, Representa-
tives Patman, Barrett, Mrs. Sullivan. Reuss, Widiiall, Brock, and Clawson.
18 Ibid., p. H37997; House report 91-728. Therepoitwas included in the Record, pp. H37997-98, and ordered
printed, p. H38014.
19 Ibid., p. H38108 (Dec. 10, 1969).
20 Ibid.
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319
The Senate took up the Conference Report two days later.21
Senator Proxmire reported thai Senator Bennett (who was unable to
be present) was concerned that Congress would be acting before it had
proper knowledge if it opened up section 5219 before the Federal
Reserve Board study was completed. Senator Holland asked and
received assurance that the legislation would permit Florida to impose
without additional legislation sales and use taxes; taxes on tangible
personal property (excluding cash or currency); and taxes on the
execution, delivery, or recordation of documents, including documen-
tary stamp taxes. These taxes, he noted, were enumerated in his bill,
S. 2906. Senator Proxrnire observed:
"I am unable to describe the precise effect this act will have on the
mechanism of the tax laws of each State. Those laws are extremely
complex and require experts on the law of each State to determine
what action, if any, will be required by each State in order to take
advantage of the act."22
Senator Tower reiterated the reservations expressed in his statement
in the Senate committee report; he thought the provisions scheduled
to take effect in 1972 should not be enacted before the Federal Reserve
study was completed. The Senate agreed to the conference report
without a record vote.23 The bill was signed by the President December
24, after Congress had adjourned. It became Public Law 91_156.24
M. Court decisions: 1926-1970
Court decisions affecting section 5219 up to the early 1930s have
been discussed earlier in this appendix. Decisions from the enactment
of the law of 1864 until immediately after adoption of the 1926 amend-
ment are covered in the chapter by John B. Woosley on "The Inter-
pretation of Section 5219 by the United States Supreme Court.," from
his book on State Taxation of Banks, incorporated in earlier pages of
this appendix.1 Some landmark decisions, such as the Richmoml case2
which led to the 1923 amendment of section 5219, and the Guthrie
Center case ~ which demonstrated that the 1923 amendment had been
of no avail, have been further considered with reference to proposals
for statutory amendments.4 Problems with respect to the excise tax
"upon or measured by net inc )me" created by the Macallen decision
also have been noted.5 So have a few cases in the field of interstate
21 Ibid., pp. S38633-34 (Dec. 12, 1969). In opening debate, Senator Proxmire made a statement on behalf of
Senator Bennett (who was absent) relating to two words "which were apparently inadvertently omitted
from the report." lIe said that Mr. Bennett had asked that these words he inserted in the bill "to be sure
that themeaning of the section is clear that the Congress is expressing no intent about the Federal instru-
mentality issue concerning national banks." Mr. Bennett thought the "permanent amendment" should
read as follows (italics indicating the insertion):
"For the purposes of any tax law enacted under authority of the United States or any State, a national
bank shall be treated the san~c as a bank organized and existing under the laws of the State or other juiisdic-
tion within which its principal office is located."
Ibid., p. S38633. Subsequently, Mr. Patman reported to the house his "firm . . . recollection" that the
proposal to add these two words had not heels adopted. He inserted in the Record a staff memorandum
recounting the conference proceedings and the recollection of various indivithsals, with the conclusion
"that the text of the conference report, as a matter of law, is a faithful reflection of the legislative policy
agreed upon at the conference." Extension of remarks by Mr. Patman, with memorandum by Orasty
Crews II, assistant counsel in the Office of the Legislative Counsel, I-louse of Representatives, dated I)ec.
15, 1969, in ibid., pp. 1139763-4 (Dec. 17, 1969).
22 Ibid., p. S38634.
23 Ibid. Senator Tower voted "reluctantly" for final passage "in order to improve State revenue sources
in the immediate future."
24 Cf. ibid., pp. S38709, H38903 (Dec. 12, 1969) and p. 1141010 (Dec. 23, 1969).
Supra pp. 231-264 in this appendix.
2 Merchants National Bank of Richmond v. City of Richmond, 256 U.S. 635 (1921).
First National Bank of Guthrie Ceister v. Anderson, 269 U.S. 341 (1926).
Supra 195-218.
I Macallen Co. v. Massachusetts, 269 U.S. 620 (1929); supra, p. 226, and discussed more fully infra, at pp.
256-59.
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~omrnerce.6 Finally, the First Agricultural National Bank decision has
been described; this case and a Florida documentary stamp tax case
led to enactment of P.L. 91-156.~ Within the parameters fixed by
these cases and those of the earl's- 1930s, the decisions of the courts need
to be examined. The discussion of recent decisions will be arranged
topically, with ernj)hasis determined by the importance and volume of
cases decided.
1. Taxes on bank real estate.-Although the right of states to tax
national banks on their real estate is as old as or older than section
5219, a few cases arose in this area. Banks were subject to this tax in
the same manner as other real property owners. The manner of collec-
tion was not limited by section 5219.8 Nor could national banks as
owners escape liability to reimburse mortgagees who had paid real
estate taxes for the titleholder (bank) because the property did not.
produce sufficient income to cover taxes. The fact of being a national
bank made no difference.9
One would have thought that over the years what was real estate
would have been determined so precisely that there would be no recent
litigation on that subject. But since personal property of national
banks could not be taxed-and almost everyone knew it-the game
was played of determining how bank fixtures would be classified.
Oregon held them to be personal property. Connecticut agreed.
Vault doors in California were different. They were improvements
to real property and not personalty.1°
2. Taxes on personal property of banks.-~--Although States never had
the right to tax personal property of national banks until the adoption
of P.L. 9 1-156 in 1969, a number of States continued to try it unsuc-
cessfully. It made no difference either that the bank erroneously but
voluntarily listed its personal property on an assessment blank. The
tax was still invalid under section 5219. States could be enjoined also
from attempting to enforce this illegal tax."
3. Ulassilication of rates-Kentucky taxed deposits in banks out-of-
state at 50 cents on $100 but taxed deposits in Kentucky banks at 10
cents per $100. The Kentucky Court of Appeals held that the lower
rate applied only to deposits in banks in the State, the tax being on
citizens of Kentucky. This fiscal mercantilism was sustained by the
U.S. Supreme Court. It did not violate the due process, equal Protec-
tion, or nnmunities clauses of the 14th Amendment.1'
4. The share tax.-The share-tax option in section 5219 is not only
the oldest but the most frequently litigated portion of the national
bank tax law. This was natural in the early years. A vast body of law
had been established prior to 1930-35; nevertheless the volume of
6 Supra, pp. 238-395, 242.
7 First Agricultnral Nationni Bank of Berkshire County v. State Tax Comniicsian, 392 TJ.S. 339 (1ST);
l)ickinson v. First National Bank of homestead. 393 U.S. 409 (1969). See above, pp. 156-59 and below, pp.
266, 308. Welch in his study, op. cit., discussed decisions of the courts through 1933. lBs discussion was tnpical
whereas that by Woosley, op. cit., was lsrgelv chronological. Woosley dealt mainly with the share tax, but in
a separate chapter (ch. VI) he examined "Income and Excise Taxation of Banks," op. cit., pp. 80-90.
S Land Tide Thank and Trust Co. v. Ward. 20 F. Supp. 810 (1937).
Stephens v. Reed, 121 F. 2d 696 (1941);
`~ First National Bank of Portland v. Marion County, 130 P.269, 196 Ore. 545 (1912); First National Bank
and Trust Co. v. Town of West haven, 62 A. 2d 671, 135 Conn. 191 (1948); San Diego Trust and Savings
Bank v. Sami 1)iego County, 312 U.S. 679 (1940), eert. denied 16 Cal. 2d 142, 105 P. 2d 94. Assessment in the
San 1)iego ease included elevators, marble and bronze decorations, air.eonditioning systems, grill work,
cages, and counters. Traube Pittman Corp. v. Los Angeles County, 29 Cal. 2d 385, 175 P. 2d 512 (1946), vault
door and frame. Sec also Sinsrns v. Los Angeles Cossnty, 340 U.S. 891 (1950), cert. denied, 35 Cal. 2d 303, 217
P. 2d 936 (1950). On the treatment of fixtures as real property in California assessments, cf. R. Bruce Ricks
and Bruce M. Poliehar, "The taxation of national banks and l)ank fixtures: Inequitable methods, unpredic-
tahle law," Southern California Law Review. vol. 40, no. 4, summer, 1967, pp. 669-95.
ii First National Bank and Trust Co. of Oklahoma City v. McDonald, 289 F. Supp. 413 (1968); Gully v.
First National Bank, 81 F. 2d 502 (1936); Bank of California v. King County (Washington), 16 F. Supp. 976
(1936).
12 Madden, Executor v. Kentucky, by Reeves, Tax Commissioner, 309 U.S. 83 (1940).
PAGENO="0341"
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litigation has continued, although, it seems, at a slower rate. More
cases were concerned with the share tax up to 1970 than with any of the
other options granted by section 5219. Even the question of the "fair
market value" of shares received attention.'3
As has been indicated previously the Supreme Court invalidated
several State laws immediately after the adoption of the 1926 amend-
ment to section 5219 because these laws treated individually-owned
intangibles more favorably than national bank stock with which other
investments were competitive.14 At the same time the Supreme Court
declined to invalidate a Kentucky classification law which differen-
tiated in favor of individually-owned intangibles because evidence in
the case did not establish that these investments were in competition
with the bank." In some earlier cases such competition had been in-
ferred from allegations or, as in the Richmond case, the contention
was not controverted. But with the Georgetown (Kentucky) case, the
Supreme Court began to require proof of substantial competition.
This rule was followed in the Shreveport case.'6 The court indicated
that national banks must prove that nonbank firms were actually
competing with them.'7 The evidence showed, moreover, that the
Morris Plan, Morgan Plan, and automobile finance companies did not
compete with small loan departments of national banks in that locality.
The court also held that exemption of building and loan associations,
industrial loan associations and mortgage companies, because, of limi-
tations on taxation of national banks, did not void taxes on other
banks (State banks) accepting deposits.'8
That savings and loan associations were not competitive with
national banks was affirmed in Michigan National Bank v. State of
Michigan.'° National banks in Michigan were taxed at a higher rate
than Federal savings and loan associations on the paid-in value of their
shares.2° The banks accepted deposits and made loans many times
greater than the aggregate value of their shares, whereas savings and
loa.n associations could accept no deposits and made loans mainly out
13 Board of supervisors of City of Frankfort v. State National Bank of Frankfort, 189 SW. 2d 942, 300 Ken-
tucky 620 (1945).
14 First National Bank of Guthrie Center v. Anderson, 239 U.S. 341 (1926); First National Bank of Hart-
ford, v. City of Hartford, 273 U.S. 548 (1927); Minnecota v. First National Bank of St. Paul, 273 U.s. 561
(1927); Commercial National Bank of Miles v. Cu:ter County, 2~5 U.S. 502 (1927).
15 Georgetown National Bank v. McFarland, 273 U.S. 563 (1927).
16 First National Bank of Shreveport et al v. Louisiana Tax Commission et al, 289 U.S. 60 (1933). There
was also a claim in this case that a small tax had been levied on the bank's furniture and fixtures. Georgetown
case. supra cited with approval.
17 The Indiana Supreme Court held that the burden of proof of competition was upon the plaintiff. Davis
v. Sextois, 210 md. 138, 200 N.E. 233 (1936). Moreover, no discrimination in the rate of assessment was shown,
200 N.E. at 239. In New York it was held that competition with national banks was a question of fact which
had to be proved a~t the trial or else conceded. People's National Bank and Trust Co. of White Plains v.
Westchester County, 261 N.Y. 342, 185 N.E. 405 (1933). In Minnesota "discrimination must be shown in
fact." Cherokee State Bank of St. Paul v. Wallace, 279 NW. 410. 202 klinn. 532 (1938). In re National Bank of
West Virginia et al at Wheeling, 73 SE. 2d 655, 137 W. Va. 637 (1952): "taxpayers failed to carry the burden of
clearly establishing that the assessment fixed by the county court is erroneous." In Fir.st National Bank of
Scottsboro v. Jackson County, 150 So. 690, 227 Ala. 443 (1933), there is dictum to the effect that "there must
be unwarranted discrimination and this must be made to appear from the proof."
18 Union Bank and Trust Co. v. Phelps, 288 U.S. 181 (1933). Case cited also for holding that State
banks can be more heavily taxed than national banks. In Flournoy v. First National Bank of Shreveport, 3
So. 2d 244, 197 La. 1067 (1941), where part of law relating to State banks was declared unconstitutional, share
tax on national banks was held valid, but tax must be assessed to shareholders and is collectable from bank
as agent for shareholders.
15 365 U.S. 467 (1961). Affirming 358 Mich. 611, 101 N.W. 2d 245, at p. 470. In 1933, the Montana Supreme
Court held in Merchants National Bank of Glendive v. Dawson County, 19 P 2d 892, 93 Mont. 310 (1933)
that building and loan associations did not compete with national banks. Among other things the court
said: "There is nothing in the record to indicate that the business conducted by the building and loan associ-
ations lessened the opportunities of plaintiff bank to invest all the capital it desired and more" (p. 896).
Evesi some of the loans about which the plaintiff complained were made at the instance of the bank "to
enable debtors to discharge an obligation owing to the hank. In such a situation it would be preposterous to
hold that the act of making the loans was done in competition with the business of the bank." (Ibid.)
25 rate on national bank shares was 53/~ mills on the dollar; the rate on Federal savings and loan associ-
ations in addition to other taxes was 33 of a mill per $1 on paid-in value of shares. Savings and loan a.ssocia-
tions also paid a franchise tax of 34 mill per $1 on their capital and legal reserves. Cf. 365 U.S. 467, at p. 468.
PAGENO="0342"
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of the proceeds of the sale of their stock. The Supreme Court held,
"Even if savings and loan associations were in competition with
national banks the tax levied on shareholders of national banks is not
so discriminatory in practical effect as to violate R. S. section 5219."
The court declared that section 5219 was designed to prohibit "only
those systems of State taxation which discriminate in practical oper-
ation against national banking associations or their shareholders as a
class." 21 The tax structure of Michigan did not have a discriminatory
effect. Nor could the court say that its burden was so heavy as to
"prevent the capital of individuals from freely seeking investment in
its shares." Originally the Michigan National Bank had included in
its suit insurance and finance companies, credit unions, and individ-
uals, as well as savings and loan associations, but before trial all were
dropped except the savings and loan associations. It was said that
they competed with national banks for residential mortgage loans. In
view of the broad grounds on which the issues were decided, the court
did not have to consider whether such competition did in fact exist
between the national bank and the savings and loan associations.
A year later the Oregon Supreme Court decided that the General
Electric Credit Corporation whose principal business was the pur-
chase of conditional sales contracts from retail merchants was not a
"financial corporation" or "financial institution" in competition with
State or national banks. This case harked back to an Indiana case
decided in 1936, that finance companies were not in competition with
national banks.22
Even the manner of collecting taxes on shares was contested. An
Ohio statute, like many others, required the banks to pay the taxes
and collect from the shareholders. This method of collection was held
valid, and if the bank failed to collect it was not discharged from its
obligation by insolvency. But in Illinois the tax had to be assessed
in the name of the shareholders and not against the bank, although
practically all Illinois banks paid the tax for their shareholders.23 In
Louisiana shares are assessed against the bank and the taxes are paid
by the bank.24 The Ohio law, which made taxes on bank shares a lien
on such shares until paid and required payment by the bank, did not
violate section 5219.25 The lien, however, did not extend beyond the
stock to the bank's real estate.
National banks, like other taxpayers, were not absolved by section
5219 from pursuing administrative remedies before taking their
cases to court. One bank tried to sue before its tax became final and
while other administrative remedies were available. Its effort failed.26
Another bank affixed to its return a statement that competing
capital should be assessed on the same basis and that the bank should
not be ~nscriminated against. But it did not apply to the board of
review for relief before starting suit. Judicial relief was denied.27
21 Ibid., p. 473.
22 General Electric credit Corporationv. Oregon State Tax Commission, 373 P.2d 974, 231 Ore. 570 (1962).
Cf. Davis v. Sexton, 200 N.E. 233, 210 md. 138 (1936). Burden of proof is on plaintiff to prove competition,
~st p. 239 (N.Ei.
23 Findley v. Odland,. 127 F.2d 948 (1942). People v. First National Bank of LaGrange, 351 Ill. 435, 184
N.E. 645 (1933).
24 City of Hattiesburg v. First National Bank of Hattiesburg, 9 F. Supp. 519 (1935). Total tax against
bank was sufficient to meet jurisdictional limit of fed3ral court.
25 Union Savings Bank of Bellaire v. Pancoast, 142 Ohio St. 6, 50 N.E. 2nd 157 (1943). In Brophy et al
v. Powell, County Assessor, 121 P. 2d 647 (1942), bank did not foreclose lien against nonresident shareholder.
Share tax sustained. In Atlantic National Bank of Jacksonville v. Simpson, 188 So. 636, 136 Fla. 809 (1938)~
bank failed or refused to file return on shares owned by nonresident stockholders. Assessor assessed such
shares in aggregate against bank. Sustained.
26 First National Bank of Greenville v. Gildart, 64 F.2d 873. Certiorari denied, 290 U.S. 631 (1933).
27 Hammerstrom v. Toy National Bank of Sioux City Iowa, 81 F.2d 628. Certiorari denied, 299 U.S. 546
(1936). See also, Albertvffle National Bank v. Marshall County, 71 F.2d 848 (1934).
PAGENO="0343"
323
Another bank was unsuccessful because it did not pay the tax under
protest and did not sue before the statute of limitations expired.28
Administrative remedies need to be followed by all taxpayers before
they resort to law suits. Section 5219 does not abrogate this
fundamental rule.
The deduction of tax exempt securities in valuing shares received
some attention during this period. The Maryland Court of Appeals
required the deduction of both federal securities and national bank
stock in assessing the capital stock of a fidelity, guaranty, and insur-
ance company.29 In Commonwealth v. Mellon National Bank and
Trust Co., the Supreme Court held that Federal tax-exempt securities
and Federal Reserve Bank shares were deductible in determining the
value of national bank stock.3°
The depression of the 1930s brought about the creation the Govern-
ment-owned Reconstruction Finance Corporation which helped many
corporations, including banks, solve critical financial problems in this
emergency. The tax effects of R.F.C. purchases of preferred stock in
national banks were soon tested in the courts as states attempted to tax
the shares owned by the R.F.C. The first such case to reach the Supreme
Court was Baltimore National Bank v. State Tax Commission in
i935.~' The R.F.C. had subscribed to preferred stock in the closed
Maryland Trust Company, and the Maryland Tax Commission
assessed the stock to the R.F.C. The court held that the tax was upon
bank shares and not the R.F.C.; the tax was valid and not prohibited
by other Federal laws. As a share tax, the levy conformed to section
5219. However, under an act approved March 20, 1936, Congress
withdrew its consent, making any such stock nontaxable by States or
localities while it was owned by the R.F.C.32 The validity of this
exemption was upheld.33 The court said. "In withdrawing pro tanto the
consent which by R.S. section 5219 it had previously given to State
taxation of shares of stock of national banks, Congress did not invade
powers reserved to the States by the Tenth Amendment." ~
In two States it was held that Joint Stock Land Banks organized
under the Federal Farm Loan Act came within the meaning of section
5219 for State taxation of their shares of stock.35 in Kentucky they
were held liable for share taxes imposed by the State and counties. in
Texas shares were held assessable and taxable to the bank as agent
for nonresident stockholders, as was generally the case for national
bank shares throughout the country.
28 First National Bank of Scottsboro v. Jackson County, 150 So. 690, 227 Ala. 448 (193~).
25 Fidelity and Guaranty Fire Corporation v. Leser, 193 A. 164, 172 Md. 652 (1937). In Miners National
Bank of Butte v. Silver Bow County, 148 P.2c1 538, 116 Mont. 31(1944) a bank was not allowed to deduct a
reserve for loss on bonds which did not also take into account appreciation on other bonds.
~° Commonwealth v. Mellon National Bank and Trust Co., 346 U.S. 87b (1953), certiorari denied. See 374
Pa. 519, 98A.2d 168. This case continued the controversy with the Schuykill Trust Company which arose in
1934 and was the direct result of the decision of the Supreme Court in Schuykill Trust Co. v. Pennsylvania,
302 U.S. 506 (1938). That case held that the deduction of Federal securities in valuing the stock of trust com-
panies was not required by law but that the law could not include the value of national bank stock already
taxed to the owner pursuant to section 5219. An earlier case, Schuykill Trust Co. v. Commonwealth of
Pennsylvania, 296 U.S. 113 (1935), had held a share tax void because the State law did not allow deduction
of U.S. tax-exempts and national bank stock. The history of this litigation is reviewed by the court in 346
U.S. 875. It is pointed out that statistics showed in the court below that national banks in 1934 paid almost
twice the effective rate paid by trust companies and that the Mellon Bank paid at a slightly higher rate.
31 296 U.S. 538 (1935) certiorari granted; 297 U.S. 209 (1936).
32 49 Stat. 1185, 12 U.S.C. section Sid. The entire section was repealed June 30, 1947, by 61 Stat. 208. On
tfle 1936 amendment, cf. supra, pp. 232-33 in this appendix.
33 Ex parte Bransford, 310 U.S. 354 (1940). An excessive valuation o'~ capital stock was also said to violate
section 5219. iviaricopa County v. Valley National Bank of Phoenix, 318 U.S. 357 (1943). Cf. also United
States v. Lewis, 10 F. Supp. 471 (1935), citing 15 U.S.C.A., section 611 et seq.
34 Maricopa County v. Valley National Bank of Phosnix, 318 U.S. 357, 361 (1943).
35 Land v. Kentucky Joint Stock Land Bank of Lexington, 131 SW. 2d 838, 279 Ky. 645 (1939); First
Trust Joint Stock Land Bank of Chicago v. City of Dallas, 167 SW. 2d 783 (1939).
PAGENO="0344"
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Who could tax national bank shares was also decided in several
cases. in 1935, the Supreme Court held that section 5219 was appli-
cable to national banks in Puerto Rico.36 it may be assumed that the
statute was also binding on Alaska and Hawaii, which joined the
UniOn later. The court held also that a municipality, under proper
grant of authority from a State legislature, could tax shares of stock
in a national bank in conformity with section 5219.~~ Unless prohibited
by their own constitutions, States have always been able to grant
their own powers to municipal corporations which they have created.
in a Georgia case it was decided that if a State elected to tax the
shares of a national bank it could not also levy a tax on its branches
measured by capital employed in their operations.38 It was decided by
the Missouri supreme court that, having elected to tax national banks
on the basis of shares of stock, the State could not also impose an
income tax on the same banks for the same year.39
5. Taxes on diviclends.-The 1923 amendment of section 5219
opened the taxation of national bank dividends to trie States as an
option in lieu of the share tax. As has been indicated,40 the revenue
that could be derived was limited, so that few States adopted this
course. Nevertheless a few recent cases have been concerned with the
taxation of national bank dividends.
In 1934 the Court of Appeals of Georgia decided .that since the
State taxed national bank shares and exempted national banks from
income taxes (as it had to do under section 5219), it could not include
dividends on shares of stock in national banks in the taxable income
of shareholders.41
Arkansas taxed national banks on the basis of shares up to 1941.
The legislature then adopted a law providing: "That dividends
derived from shares in State and national banks shall be taxable in
the same manner and at the same rate as taxable dividends from
foreign and domestic corporations." 42 JIn 1942 the Arkansas Corpora-
tion Commission, on advice of the Attorney General, directed all local
assessors to relieve national banks of ad valorem assessments on their
shares. This was sustained by the trial court. in enacting the dividend
tax the legislature did not repeal the share tax or make any reference
to it. On appeal the Arkansas Supreme Court, while disapproving the
repeal of laws by implication, held that where there is an irreconcil-
able conflict between laws, the last enactment controls (even if taxes
on the national banks were substantially reduced by this action of the
legislature) ~
More important, however, is the case of Irvine v. Spaeth involving
a bank holding company. Denying a writ of certiorari, the United
States Supreme Court let stand a Minnesota decision that the
immunities of section 5219 as to national banks did not extend through
36 Domenech, Treasurer of Puerto Rico v. National city Bank of New York, 294 U.S. 199 (1935). A tax
on bank capital and net on shares was held to violate section 5219.
37 city of Longviea, Texas v. First National Bank of Longview, Texas, 327 U.S. 784 (1945) certiorari
denied; 152 F.2d 97 (1946). First National Bank of St. Joseph v. Buchanan County, 205 S.W. 726, 356 Mo.
1204 (1947). But a municipality could not imp3se a license tax on national banks, although it could collect
from State banks and trust companies. City of Shelbyville v. Citizens Bank of Shelbyville (Ky.), 114 S.W.2d
719, 272 Ky. 559 (1938).
38 Goodwin v. Citizens and Southern National Bank, 76 S.E. 2d 620, 209 Ga. 908 (1953).
~ First National Bank of St. Joseph v. Buchanan County, 205 SW. 726, 356 Mo. 1204 (1947) at pp. 1215-16.
45 See Welch, op. cit., pp. 177 if; also supra, p. 210. iii this appendix.
41 State Revenue Commission v. Hawkins, 172 SE. 845, 48 Georgia App. 414 (1934).
42 Act 129, section 5, quoted by court below.
43 City of Little Rock v. Arkansas Corporation Commission, 189 SW. 2d 382, 209 Ark. 18 (1945).
PAGENO="0345"
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them to bank holding companies.44 The case involved the First Bank
Stock Corporation which operated a system of banks, some of which
were national banks. The State Supreme Court pointed out that the
First Bank Stock Corporation was an entity distinct from the banks it
controls. Moreover, "the First Bank Stock Corporation is a complete
`non-conductor' of the qualified immunity from State taxation enjoyed
by national banks."45 No other section 5219 cases involving bank
holding companies were discovered for the period under review.
6. Net income taxes.-The right of a State to tax the net income of
a national bank under section 5219 was affirmed in People v. Loughman
in 1938.46 The State was allowed to enforce its claim against the
receiver of the bank and ahead of the claim of depositors. In another
case, the National City Bank of New York established branches in
Manila and Cebu. The Philippine government levied a tax on the
net income of these branches which was paid. It levied an additional
tax on capital and deposits, but since it had elected one option under
section 5219 it could not impose additional taxes.47
7. Excise taxes.-Under the 1923 amendment to section 5219,
income from tax-exempt securities could not be included in the base
for State net income taxes on national banks. The law was changed
in 1926 to permit State taxation of all net income received by national
banks, provided the tax was "according to or measured by net in-
come." 48 This tax is generally known as an "excise" or "franchise tax."
In legal theory the tax is imposed by a State for the privilege of doing
business in the State or, what amounts to the same thing, for the
exercise of a corporate franchise to do business in the State. When
Congress gave its consent to the State taxation of national banks
"according to or measured by their net income," it placed these
conditions on the use of that tax:
(1) the rate shall not be higher than the rate assessed upon
other financial corporations,
(2) nor higher than the highest of the rates assessed by the
taxing State upon mercantile, manufacturing, and business
corporations doing business within its limits.
Another proviso, common to all of the permitted options under
which States could tax national banks, was that if a State imposed
an excise tax it could not also impose other taxes, except on bank
real estate.49
It is important in the discussion of the court decisions relating to
the excise tax to have these provisions in mind. Certainly they were
clearly stated in the law.
~ Irvine v. Spaeth, 210 Minn. 489, 299 N.W. 204; certiorari denied, 314 U.S. 575 (1941).
~` 299 N.W. 204, 205.
48 100 F. 2d 387 (1938), Circuit Court of Appeals, N.Y.
4' Posadas v. National City Bank of New York, 296 U.S. 497 (1935). The Philippine Islands were, at that
time an insular possession of the United States.
48 12 U.S.C. 548, paragraph 1(c) prior to enactment of P.L. 91-156. For the text, see appendix 1-A, above at
pp. 1-2. For discussion of the 1926 amendment, see above, pp. 213-21 in this appendix.
~° The dividend option permitted the inclusion of national bank dividends in the taxable income of
individual stockholders, subject also to certain provisos, but did not affect the excise tax per se. Dividend
taxes arc discussed above in subsectionS, pp. 254-55. That the election of one option in section 5219 precluded
States from adopting other taxes on national banks was upheld by the Supreme Court in Johnson v. Meagher
County 328 U.S. 689 (1945). Appeal dismissed for want of jurisdiction. Certiorari denied. 326 U.S. 809
(1945); rehearing denied. Case below, 155 P. 2d 750 (Supreme Court of Montana): Montana legislature
adopted an income tax based on income from all sources without repealing its share tax. Court held that
1e'islature did not intend to repeal share taxes on national banks. Therefore that tax applied even though
the bank had paid income tax. Other corporations had to pay oa both property and income but section 5219
gave States one option in taxing national banks. Cf. also Goodwin v. Citize'ss and Southern National Bank,
76 S.E. 2d 620, and First National Bank of St. Joseph v. Buchanan County, 205 S.W. 726 hire similar situation
under share tax, noted supra at p. 254.
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In view of the importance of the excise method of taxing national
banks, and as a preface to recent decisions, a brief review of early
cases is included here even though it involves some repetition.
Use of an excise or franchise tax "upon or measured by" net income
had been approved by the Supreme Court in Flint v. Stone Tracy
Co.5° The tax in question was the 1909 corporate franchise tax imposed
by the Federal government. Net income involved in this case included
income from tax-exempt securities. Congress in adopting the excise op-
tion for taxing national banks knew of this decision and adopted the
option in the belief that an excise on net income from all sources was
legal. When Massachusetts adopted the excise option it appointed a
special tax commission which recommended that an existing law be
amended to include specifically the income from U.S. Government
tax-exempt securities in net income used as the measure of the tax.51
The Massachusetts law was thus modified in 1925, but this proved to
be a mistake! Instead of adopting a whole new law, the Massachusetts
legislature merely amended an existing statute. Perhaps the State
should have been forewarned, for in Miller et al., Executors, v.
Milwaukee,52 in an opinion by Justice Holmes, the Supreme Court
had ruled that-
"Where income from bonds of the United States which by Act of
Congress is exempt from State taxation is reached purposely, in the
case of corporate-owned bonds, by exempting the income therefrom
in the hands of the corporation, and taxing only so much of the stock-
holders' dividends as corresponds to the corporate income not assessed,
the tax is invalid." ~
Among other things, Justice Holmes said ~
"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."
Perhaps the attorneys for Massachusetts thought that section 5219
had definitely taken care of such situations with respect to national
banks. But the 1926 amendment to section 5219 (which followed the
Massachusetts legislation) was adopted so that income from tax-
exempt securities could be included in total income. Soon thereafter
they learned from Macallen Co. v. Massachusetts,55 that where the
legislature merely changed the definition of net income by striking an
earlier permission to deduct interest derived from bonds, notes, and
certificates of indebtedness of the United States, so that they were
thereby included in the excise tax on national banks, that amendment
was void. 56 The majority opinion was written by Justice Sutherland.
Justice Stone dissented in an opinion in which Justices Holmes and
Brandeis concurred. The wajority opinion stated that the act had the
ii 220 U.S. 107 (191'). Concerning the application of the Federal tax to commercial banks, the Court said
(at p. 171): "What we have already said disposes of the objections made in certain cases of life insurance and
trust companies, and bants, as to income derived from United States, state, municipal, or other non-taxable
bonds." (Italics added.)
i~ The Massachusetts report is quoted in the opinion in the Macallen case; see next page.
ii 272 U.S. 713 (1927). Justice Brandeis wrote a concurring opinion agreeing that the tax was void but
emphasizing different considerations.
a This quotation is from a headnote, rather than the opinion.
i4 Ibid., p. 715.
ii 279 U.S. 620 (1929).
ii The State excise tax had been adopted in 1923 with a defimtion of net income that permitted the deduc-
tion of income from U.S. tax-exempt securities. The Act of 1925 removed this deduction.
PAGENO="0347"
327
effect of-"irnposiiig a burden upon the securities from which, by ex-
press language, they had theretofore been free. This was a distinct
change of policy on the part of the Commonwealth, adopted, as
though it had been so declared in precise words, for the very purpose of
subjecting these securities pro tanto to the burden of the tax. This
conclusion is coufirmed, if that be necessary, by the report of a special
commission appointed by the legislature to investigate the subject of
taxation of banking institutions." ~"
The court quoted four paragraphs from that report which recom-
mended the inclusion of income from all sources in the excise tax. The
State report pointed out that so far as banks were concerned the effect
(tax increases) would be greater on banks than on other corporations-
but was permitted under section 5219. Nevertheless the court held that
the Massachusetts act was in derogation of the constitutional power of
the United States to borrow money and of acts of Congress declaring
United States securities non-taxable.
Justice Stone in his dissenting opinion contended that, under a long
series of Supreme Court decisions, the Commonwealth had power to
impose an excise tax on a corporation for privileges the State con-
ferred, "even though all of its property were tax-exempt securities
of the United States and income derived therefrom." 58
The Washington Supreme Court followed the rule in the Macallen
case in two decisions.59 But when a case involving the excise tax of
New York reached the U.S. Supreme Court in 1931, enough changes
in the composition of the court had taken place to provide a different
result.6°
The case of Educational Films Corporation of America v. Ward 65
raised the question whether income from copyrights could be included
under the New York excise. This tax was imposed for the privilege of
exercising a corporate franchise in the State, with the value of the
privilege measured by the corporation's entire net income, "including
all dividends received on stocks and all interest received from Federal,
State, municipal or other bonds." The plaintiff contended that income
from copyrights was not taxable. The opinion of the court was delivered
by Justice Stone. It held the New York excise tax to be a nondis-
criminatory tax upon the corporate franchise, notwithstanding the
inclusion of tax-exempt property or income. Nor did the tax impose
a direct burden on the Federal Government.
The case was distinguished from the Macallen case because the
New York excise was not aimed at copyrights nor intended for the
very purpose of including copyrights.62
The California franchise tax was also upheld in Pacific Co., Ltd. v.
Johnson, which involved the inclusion in net income of interest on
municipal bonds.63
The next test involved the Georgia privilege tax, on a business
licensing copyrighted motioLt pictures, measured by gross receipts
~ 279 U.S. 620 at 631-2. Briefs as amicus curiae were filed by the New York Tax commission and for a
rehearing by california and Washington.
a Aber lean Savings and Loan Association v. chase, 289 P. 536 (1930); Burr v. chase, 289 P. 551 (1930).
~f Welch op. cit., p. 51.
60 Chief Justice Hughes and Associate Justice Roberts had succeeded Justices Taft and Sanford, both
of whom had died. Welch, op. cit., p. 52.
61282 U.S. 379 (1)31). . . .
62 289 U.S. 379, 393 (1931). Distinguishing the Macallen case, the court said that the Massachusetts amend-
ment "was specifically intended to reach the income from tax-exempt national and municipal bonds which
had reviously not been included in the measure of the tax.
~ 285 U.S. 480 (1932). The California excise tax, as applied to a manufacturing firm, was upheld also in
Oliver Continuous Filter Co. v. McColgan, 120 P. 2d 682, 48 Cal. App. 2d 800 (1942.
PAGENO="0348"
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from royalties. This tax was sustained by the Supreme Court.64 The
Court differentiated this case from the Educational Films Case, above
described, because the Georgia tax was on gross receipts, whereas the
New York tax was on net income. Nevertheless, an excise tax measured
by net or gross income was sustained in the decision.
In 1933, the Supreme Court again upheld the New York excise
in a memorandum decision which did not disturb the decision of the
court below.65 It cited Pacific Co., Ltd. v. Johnson, above, in affirming
the judgment of the lower court. Three years later the Supreme Court
upheld the California excise of 4 percent on the privilege of exercising
a corporate franchise within the State based on income "according to or
measured by" income from all sources.66 The income under litigation in
this case included intrastate, interstate and foreign income. The court
also upheld the privilege tax of Washington, for doing business in the
State, the tax being measured by gross income from intrastate busi-
ness.67 The next decision was in a bank tax case and again the tax was
upheld, this time by the Oklahoma Supreme Court.68 The tax vali-
dated was a net income tax "according to or measured by" income,
including income from Federal securities.
In 1940, a similar case reached the United States Supreme Court
from Oklahoma contesting an excise tax on national banks in the
State based on income from all sources. The income in question
included dividends from Federal Reserve Bank stock (to which all
national banks had to subscribe in joining the Federal Reserve Sys-
tern) and interest from tax-exempt securities. Unlike the Massachu-
setts statute which covered only tax-exempt securities, the Oklahoma
law had included all income in the tax base. In Tradesmen's National
Bank of Oklahoma City v. Oklahoma Tax Commission, the excise
tax was upheld.69 Among other things the court said:
"[As the Oklahoma law measures the tax] on the corporate franchise
by the entire net income of the corporation, ~without any discrimina-
tion between income which is exempt and that which is not, there is
no infringement of any constitutional immunity.7°
* * * * * * *
"We do not now decide just what circumstances, if any, would
bring the situation within the precise scope of the Macallen case,
assitming that case still has vitality.7'
* * * * * * *
it is not a valid objection to a tax on national bank shares
that other moneyed capital in the State or shares of State banks are
taxed* at a different rate or assessed by a different method unless it
appears that the different treatment results in fact in a discrimination
unfavorable to the holders of national bank shares.72
* * * * * * *
0~Fox Film Corp. V. Doyal, 286 U.S. 123 (1932). 173 Ga. 403 was affirmed. T.he court also ~peciiicaIlv
overruled Long v. Rockwood, 277 U.s. 142 (p. 131).
65 New York cx rel Northern Finance Corp. v. Lynch, 290 U.s. 601, 54 s.ct. 230 (1933); for decision below
see 262 N.Y. 477, 188 N.E. 27.
66 Matson Navigation Co. et al v. State Board of Equalization of California, 297 U.S. 441 (1936).
67 Pacific Telephone and Telegraph Co. v. Tax Commission of Washington, 297 U.S. 403 (1936) Nor
was the tax an undue burden on interstate business.
~ First National Bank V. Oklahoma Tax Commission, 185 Okla. 98, 90 P. 2d 438 (1939).
60 309 U.S. 560 (1940).
70 At p. 566, quoting Pacific Co., Ltd. V. 30hfl50fl, 285 U.S. 480, cited above.
71 Ibid. Italics added.
72 P. 567.
PAGENO="0349"
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"Discrimination is not shown merely because a few individual
corporations, out of a class of several thousand which ordinarily bear
the same or a heavier tax burden, may sustain a lighter tax than that
imposed on national banking associations."
Accordingly, it appears that a State excise on national banks can
no longer be questioned.
That conclusion was adopted by the Idaho Supreme Court in
Grange Mutual Life Co. v. State Tax Commission.74 In this decision
Chief Justice Taylor said:
"The confusion wrought by the Macallen case has been for the
most part eliminated by these subsequent decisions. So now it may
be said:
"`It is well settled by our highest judicial authority that a State
has the power to levy a tax on a legitimate subject, such as a corporate
franchise, measured by net assets or net income including tax-exempt
Federal securities which, as such, could not be directly taxed. Werner
Mach. Co. v. Director of Division of Taxation, 1954 N.J. Super.
444, 107 A. 2d 36 at page 39.'
Even if the ghost of the Macallen case still walks, it would seem
to be effectively chained or hobbled. The constitutionality of the
excise option in section 5219 can no longer be of doubtful validity so
long as income from Federal securities is not singled out, by one law
or amendment, for specific taxation. Surely. the States have learned
not to do this.
One of the provisos relative to the excise tax on national banks,
set forth above,76 was that the excise tax rate should not exceed the
rate assessed upon other financial corporations. Thus, when a number
of States adopted excise taxes on national banks, they recited this
proviso in the law or provided that other financial corporations
coming into competition with national banks should be taxed at the
national bank tax rate. A number of court cases involve this point.
A California court held that Morris Plan banks were in substantial
competition with national banks within the meaning of the State
franchise tax law and therefore were taxable at the bank rate-to
comply with section 5219.~~ "Financial corporations" were also held
by the Supreme Court of California to be in competition with na-
tional banks under the franchise tax law.78 A loan service company,
which negotiated small loans for borrowers from finance companies
for which a fee was charged and guarantee of payment of the loan
was given, was in competition with national banks under the Cali-
fornia franchise tax.79 In New Jersey a company doing a second-
mortgage business was in competition with nationa1~ banks under an
annual excise measured by net worth.8° In California, a mortgage
~ P. 568.
74 283 P. 2d 187, 76 Idaho 303 (1055). Included in the opinion are dicta to the effect that life insurance com-
panies as "financial corporations" are in competition with national banks within the scope of section 5219
73 Page 187. He also cited Nashville Trust Co. v. Evans, 195 Tenn. 205, 258 SW. 2d 173, A.L.R. Annota-
tion section 81, p. 162.
76 Supra, p. 255.
77 Morris Plan Co. of San Francisco v. Johnson, 100 P. 2d 493, 37 Cal. App. 2d 621 (1941).
78 Crown Finance Corporation v. McColgan, 144 P. 2d 331, 23 Cal. 2d 280 (1943). Plaintiff engaged solely
in business of purchasing conditional sales contracts and accounts from neighborhood retailers dealing in
household furniture, furnishings, and clothing but never made loans. Bank officer testified banks did sub-
stantial business in that field. Bank relied on credit of dealer whereas finance company relied on references
of purchasers. "The only reasonable conclusion from that evidence is that plantiffs were in substantial com-
petition with national banks" (p. 334).
76 HAS. Loan Service v. I\'lcColgan, 113 P. 2d 391, 21 Cal. 2d 518 (1943).
80 Morris and Essex Investment Co. v. Director of Division of Taxation, 161 A. 2d 491, 33 N. 1. 24 (1960).
PAGENO="0350"
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company which solicited loans from builders, realtors, and the public
and which either made loans or sold them to others (borrowing capital
from banks as needed) was held to be a "finance corporation" taxable
at the national bank rate.81
Next to the cases upholding the constitutionality of the excise
tax "measured by or according to" total national bank income, the
most important case in recent years was the one upholding the
"built-up" method of computing the bank tax rate for the California
franchise tax. That case was Security-First National Bank of Los
Angeles v. Franchise Tax Board. It came up to the United States
Supreme Court on appeal from the decision of the Supreme Court of
California and that appeal was dismissed. The California decision
therefore stands.82 As has been indicated, the California law fixed the
the rate on all corporations except financial corporations at 4 per cent
but left the annual determination of the rate of the franchise tax on
financial corporations to the Franchise Tax Board, which after in-
vestigation fixed the rate so that the burden of the tax on national
banks would not exceed the rate assessed upon other financial cor-
porations nor exceed the highest rate assessed upon mercantile,
manufacturing, and business corporations-as specified in section
5219. Nonfinancial corporations were required to pay, in addition to
the franchise tax, taxes on real estate and personal property but
section 5219 did not permit taxation of personal property of national
banks. The Franchise Tax Board sought to equalize the burden be-
tween financial and nonfinancial corporations, not by estimating
what taxes on bank personalty might have been, but by estimating
what the burden on other corporations actually was, a practice that
the banks bitterly opposed.
The argument that the law meant to measure burdens rather
than tax rates was sustained by the Court: 83
"In determining whether a State tax on such* banks according to
or measured by net income violates the limitations, consideration
must be given to the State tax structure as a whole, not merely to
taxes of the kind imposed on those banks. The State tax on them is
valid so long as the resulting burden does not exceed the burden to
which State banks, mercantile, business, manufacturing and financial
corporations are subject. Tradesmens National Bank of Oklahoma
City v. Oklahoma Tax Comm., 309 U.S. 560, 567-568, 60 S.Ct.
688, 84 L.Ed. 947; see Franchise Tax Board v. Superior Court, 36
Cal. 2d 538, 551-552, 225 P. 2d 905; H.A.S. Loan Service, Inc. v.
McColgan, 21 Cal. 2d 518, 520, 133 P. 2d 391, 145 A.L.R. 349. In
Tradesmens National Bank, the court, in upholding the validity of
a bank franchise tax against a claim of discrimination, took into
consideration not only franchise taxes imposed on nonfinancial
corporatiolis but also their income and ad valorem taxes."
The "built-up" method of fixing excise tax rates on national
banks was thus sustained.
The question as to whether the banks were denied due process
because they were not permitted to examine the original tax returns
of other corporations used in fixing the bank rate, these having been
81 Marble. Mortgage Co. v. Franchise Tax Board, 50 Cal. Reptr. 345, 241 C.A. 2d 62 (1966).
82 Security-First National Bank v. Franchise Tax Board, 359 pp 2d 625 (1961); appeal dismissed, 368 U.S.
3 (1961). This case is also discussed supra, at pp. 306-307. -
83 350 P. 2d 625, p. 628.
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declared by prior law to be confidential, was also laid to rest. The
banks were given all of the statistical information needed to verify
the accuracy of the computations both before and at the trial but
they were not given the original corporate returns or other information
from which the facts pertaining to individual companies could be
identified, such disclosure being prohibited by law.
"Defendant also offered on several occasions to comply with any
other reasonable method of verification which might be proposed by
plaintiffs, and as far as appears no request for production was refused
where it could have been granted without violating section 35~" 84
The court also said: 85
"The nondisclosure provisions of section 35 merely mean that the
plaintiffs `are confronted with the common situation wherein proof
of alleged facts is rendered more difficult because of the existence of
certain privileged communications, protected as such because under-
lying public interests and policies outweigh the convenience of a
particular litigant.' Franchise Tax Board v. Superior Court, supra,
36 Cal. 2d 538, 551, 225 P. 2d 905, 913. Much material helpful to
plaintiffs in determining the accuracy of the rate was made available
to them at both the administrative hearings and the trial, and the
only information withheld was such that it would have revealed to
them, contrary to section 35, the amount of income or business
activities, reported by named nonfinancial corporations. We are
satisfied that plaintiffs received all the information they reasonably
needed."
This ruling laid to rest the charges of "secrecy" surrounding rate
determinations from confidential returns. The inclusion in the rate
computation of the personal property taxes on cooperatives was also
approved.
An Alabama case involved the computation of the excise tax from an
entirely different angle. The Alabama statute imposing the excise tax
on national banks limited charge-offs for bad debts to the amounts
required by bank examiners, but provided that the State tax commis-
sion was not required to make these allowances. In State v. First
National Bank, the examiner required the bank to write off pre-
miums paid on bonds purchased. These were disallowed by the tax
commission but the court held that plaintiff bank was entitled to the
deductions required by bank examiners.86
In another case involving the Alabama excise tax the bank claimed
a loss on a piece of real estate on which the State contended the bank
made a profit. The court held that the tax could only be levied on the
net income of the bank, not on sales of particular parcels of real estate.
In the transaction in question, title to the property passed before the
excise was adopted.87
In 1962, in Grayson County State Bank v. Calvert it was held that
the equal protection clause of the Fourteenth Amendment was not
violated by imposition of a franchise tax on State banks without the
imposition of a similar tax on national banks.88
In 1967 it was held in Arizona State Tax Commission v. First Bank
Building Corporation, that a privilege tax on a wholly-owned sub-
sidiary of a national bank was a tax upon the subsidiary and not a tax
`~ Ibid., p. 631.
"Ibid., p. 632.
a 196 So. 114, 239 Ala. 492 (1940).
87 First National Bank of Birmingham v. State, 77 S. 2d 653, 262 Ala. 155 (1958).
8~ 357 SW. 2d 160 (1962).
PAGENO="0352"
332
on the national bank. The building corporation held title to thebank
building and the directors of the bank were also the directors of the
building corporation. The bank could not transfer the immunities of
seètion 5219 to its subsidiaries.89
8. Sales and use taxes.-The development of State sales and use
taxes in the depression of the 1930's and their continuing importance
to the States as revenue producers brought many cases before the
courts, prior to the First Agricultural National Bank case which was.
decided in 1968.~° Not all these cases involved national banks but some
decisions did affect them.
In McGoldrick, Comptroller of New York City v. Berwind-White
Coal Mining Co., a contract of sale made through a sales office in New
York of coal mined in Pennsylvania, delivered by rail to New Jersey,
and then moved by barge to New York City, was sufficient to support
the sales tax levied .by the city. The sales tax was upon the seller and
did not violate the commerce clause.9'
Colorado imposed a 2 percent tax on the value of services rendered
to safe deposit customers which the Colorado National Bank of
Denver refused to pay, alleging that the tax violated section 5219.
The Supreme Court, however, held that the tax was on the user and
not on the bank, although collected in the first instance from the bank.
The law requred the tax to be added to the service charges and made
it a debt of the user until paid. Credit was given the bank for taxes
so paid. The State court had held that the user is the payer; the
Supreme Court agreed.92
Mail orders also caine to the attention of the Supreme Court. In
Nelson, Chairman of the State Tax Commission, et. al. v. Sears,
Roebuck & Co., the retailer-which maintained stores in Iowa-was
required to collect the use tax on mail orders sent into the State from
out-of-State branches of the corporation by direct mail or common
carrier. Since the tax was paid by iowa purchasers, its imposition
did not involve discrimination against interstate commerce.93 The
court also held that the State could impose a sales tax on a purchaser
who used the taxed property to perform a cost-plus contract for
the United States~ government. The fact that the economic burden
of the sales tax was passed on to the Federal Government did not make
it a tax on the United States. The goods, moreover, were purchased in
the name of the plaintiff who paid the tax in the first instance.94 In a
similar case a contractor had to pay a use tax on material purchased
outside the State but used within the taxing State in the performance
of a cost-plus contract with the United States government. The
Supreme Court sustained the tax; this, too, was not a tax on the
United States. The contractor was not the agent of the United States,
nor did the shifting of the economic burden to the United States make
it a tax on the Federal Government.95
In 1952 the State of Arizona attempted to collect a sales tax on
rentals received by a national bank from tenants of offices in a building
89429 P. 2d 481 (1967).
`° Discussed supra at pp. 226-229, and infra, p. 336, in this appendix.
"309 U.S. 33 (1940).
92 Colorado National Bank of Denver v. Bedford, 310 U.S. 41 (1940).
`3 312 U.S. 359 (1941). The issue in Nelson, Chairman of the State Tax Commission et al v. Montgomery
Ward & Co., 312 U.S. 373 (1941), was identical.
"Alabama v. King and Boozer, 314 U.S. 1 (1941). The differing view that prevailed in Panhandle Oil
Co. v. Knox, 277 U.S. 218, and Graves v. Texas Co., 298 U.S. 393, ~ overruled.
"Curry, Commissioner of Revenue of Alabama v. United States et. al. 314 U.S. 14 (1941).
PAGENO="0353"
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owned by the bank. The court held that such a tax was not permitted
by section 5219.96
That same year the Supreme Court of lVlichigan upheld a sales tax
on a retailer who, when he sold food to a national bank, shifted the
sales tax to the bank.97 The bank claimed it could not purchase food
for its cafeteria without paying the tax. The court, however, pointed
out that the legal incidence of the tax was on the retailer for doing
business in the State; that he had to pay the tax and could add it to
the price of goods sold,. even to a national bank. The Supreme Court of
Illinois upheld a similar tax on a national bank in that State.98
California imposed a use tax on specially printed checks purchased
from a Minnesota corporation whose principal place of business was in
Chicago, the cost of which was collected by the bank from depositors.
Orders for checks were approved by the bank and sent on to Chicago;
printed checks were shipped from Chicago either directly to the
depositor or to branches of the bank for delivery. Orders signed by
depositors authorized the bank to charge their accounts for the printed
checks. The bank refused to collect the use tax from depositors or file
a return with the State. The use tax was upheld by the trial court and
was affirmed by the State court.99
The famous Bellas Hess case was decided by the Supreme Court
in 1967. The principal place of business of National Bellas Hess was
in Missouri. From there twice a year catalogs were mailed to cus-
tomers in the United States, including those in Illinois. Orders were
sent by mail to the Missouri plant, whence goods were shipped by
mail or common carrier to the person placing the order. Illinois at-
tempted to collect its use tax from Bellas Hess on orders shipped
into the State. The Supreme Court held that the commerce clause
in the Bill of Rights prohibits a State from imposing the duty of
use tax collection and payment upon a seller whose only connection
with customers in the State is by common carrier or by mail. The
decision was written by Justice Stewart, with Justices Fortas, Black,
and Douglas dissenting.'°°
In Liberty National Bank and Trust Company v. Buscaglia, the
Supreme Court denied a writ of certiorari on appeal from New York
which had applied its sales and use tax to a national bank. The
State was without power to impose a sales or use tax on national
banks without the consent of Congress.' The same rule was applied
in South Dakota, where it was held that since section 5219 did not
permit sales or use taxes, national banks were not liable for such
taxes on food and refreshments served to and sold by national banks
to employees and guests.2
The next pronouncement by the. U.S. Supreme Court was in First
Agricultural National Bank of Berkshire County v. State Tax Com-
mission which again held that since the legal incidence of the tax
was* upon the bank (the purchaser), State sales and use taxes could
not be applied to national banks without the consent of Congress.3
~ O'Neil v. valley National Bank of Phoenix, 58 Ariz. 539, 121 P. 2d 646 (1952).
~7 National Bank of Detroit v. Department of Revenue, 54 N.W. 2d 278, 334 Mich. 132 (1952).
98 National Bank of Hyde Park, Chicago v. Isaacs, 188 N.E. 2d 704, 27 Ill. 2d 205 (1963).
99 Bank of America National Trust and Savings Association v. State Board of Equalization, 26 Calif.
Reptr. 348 (1963).
100 National Bellas Hess, Inc. v. Department of Revenue of State of Illinois, 386 U.S. 753 (1967).
I Liberty National Bank and Trust Co. v. Buscaglia, 396 U.S. 941 (1967). For the lower court decision, see
25 N.Y. 2d 776, 229 N.E. 2d 700 (1967).
2 Northwestern National Bank of Sioux Falls v. Giles, 148 N.W. 2d 293, 82 S.D. 457 1967).
392 U.S. 339 (1968). See also discussion of this case supra, at pp. 156-159, and infra, p. 265, in this appendix.
79-421 0 - 72 - 23
PAGENO="0354"
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This case was followed by Oklahoma in 1970 in First National Bank
of Stiliwater v. State ex rel. Oklahoma Tax Commission.4
In 1971, the Ohio Supreme Court upheld a use tax against a bank
for building material purchased and incorporated in a building pur-
chased by the State teachers' retirement board and leased back to
the bank for 30 years, after which the board would sell the building
to the bank for $100. The court held that legal incidence of the tax
was upon the construction contractor, not on the bank.5
9. Gross receipts taxes.-Although the gross receipts tax was not a
tax to which Congress gave its consent in section 5219, Congress did
provide this mode of taxation for national banks in the District of
Columbia.6 Such a tax was upheld in 1965 in District of Columbia
National Bank v. District of Columbia.7 The court pointed out that
12 U.S. Cede 548 (section 5219) is not a restrictive statute. Congress,
moreover, has the power to enact tax laws covering District of Colum-
bia banks. Earlier it had been held that Congress could not discrimi-
nate in favor of State banks and against national banks in the District
of Columbia gross receipts tax.8
New Mexico imposed a gross receipts tax on national banks on the
proceeds derived from rendering bookkeeping and accounting services
to four other banks on its electronic data processing machines. The
bank, in turn, shifted the tax to the banks it served, being under
obligation to refund if it won its law suit. The court sustained the
tax: ~
"(1) The services here performed are not reasonably necessary or
incident to the business or functions of a national bank, and therefore,
are not immune from taxation under provisions of 12 U.S.C. 548.
"(2) In any event the bank is not the real taxpayer."
10. Other points of law.-Where is the principal office of a national
bank? The First Bank Stock Corporation was a Delaware corporation
doing business in Minnesota. It had a business office there and held
meetings of stockholders, directors, and its executive committee there.
From its office in Minnesota it offered advice to its subsidiaries,
made recommendations on loans, interest rates, the sale and purchase
of securities, etc. It owned stock in banks, trust companies, and other
concerns in Montana and North Dakota. Minnesota taxed the shares
of stock of the First Bank Stock Corporation and its shares in Mon-
tana and North Dakota banking corporations. The Supreme Court
upheld the tax.1° The plaintiff's activities had .established a commercial
domicile in Minnesota.
A New Jersey case held that the "location" of a bank was the place
mentioned in the bank's charter, and if the place originally mentioned
in the charter was subsequently changed, the last mentioned place
was the bank's "location." ~ This law suit was between two cities
because the county treasurer was required, to allocate 50 per cent of
the revenues from the tax on shares to the district in which the bank's
principal office wa~ located.
4466 P. 2d 644 (1970).
Huntington National Bank of Columbus v. Kosydar, cited in Tax Administrators News, vol. 35, no. 3
(March 1971), P. 35. (Advance sheets not available at time of writing.)
6 Cf. 47 D.C. Code 1703.
348 F. 2d 808, 121 U.S. App. D.C. 196 (1965).
8 Hamilton National Bank of Washington v. District of Columbia, 176 F. 2d 624, 85 U.S. App. D.C. 109,
certiorari denied, 338 U.S. 891, 70 5. Ct. 241 (1949).
9 First National Bank of Santa Fe v. Commissioner of Revenue, 460 P. 2d 65, 80 N.M. 699 (1969).
10 First Bank Stock Corp. v. State of Minnesota, 301 U.S. 234 (1937).
11 City of Passaic v. City of Clifton, 97 A.2d 437, 23 N.J. Super. 333 (1952).
PAGENO="0355"
335
A case decided that same year (1952) dealt with what constituted
doing business in the State and related to the sale of travelers checks
issued by the Bank of America National Trust and Savings Association.
This case held that the sale of travelers checks by a Massachusetts
agent did not constitute doing business in Massachusetts by a foreign
national bank issuing such checks. The Massachusetts law regarding
foreign corporations was not intended to cover national banks, but
if it so intended the tax would be repugnant to the banking laws of
the United States and the Constitution. A State may not levy a
license fee upon a foreign national bank.12
In Austin v. City of Seattle, a city license on persons making chattel
loans was valid, except as to national banks. For them, a license
requirement was void.'3
Suppose, however, that a State gives a national bank the option of
paying a tax which is void under section 5219 or of paying a different
but valid tax? Massachusetts gave a national bank the option of paying
a minimum tax, measured by dividends paid, which was not permitted
under section 5219, or of paying a valid tax conforming to section 5219,
and the bank elected to pay the minimum tax. The court held that the
bank was bound by its choice.'4
Finally, since it is not covered under other topics, the case of
Dickinson v. First National Bank of Homestead should be mentioned.
As has been indicated, that case held that the mortgage recording and
documentary stamp taxes imposed on national banks by Florida
could not be collected from them." This decision was one of the
forces that led to enactment of P.L. 91-156.
11. Goncl'usions.-From this survey of court decisions since 1934
a few matters of law seem clear. rfhese conclusions relate to section
5219 before amendment by P.L. 91-156.
The courts are unanimous that national banks can be taxed only
with the consent of Congress. That consent has been embodied in
section 5219 and the options there set forth have been controlling, as
have been the limiting provisos. Both must be complied with by States
and also by local governments where States have delegated some of
their powers to municipalities.
There can be no question now that the excise or franchise option
permitting taxes "measured by or according to" net or gross income
may include income from tax-exempt Federal obligations, provided
the State law is a general statute not directed solely at including income
from these sources, the Macallen case not having yet been specifically
overruled.
The "built-up" method of equating national bank taxes with those
on other financial and nonfinancial corporations, as is done in Cal-
ifornia, is also legal. There is no question either that national bank
real estate can be taxed in the same manner as other real estate. It is
equally certain that, prior to P.L. 91-156, the personal property of a
national bank could not be taxed. The cases seem to be equally clear
that the heavier taxation of State as compared with national banks
is also constitutional. And where the classification of subj ects or
objects of taxation is pertinent, the grouping of commercial banks or
financial corporations in tax measures is a "reasonable" classification
12 Bank of America National Trust and Savings Assoc. v. Lima, 103 F. Supp. 916 (1952).
13 30 P. 2d 646, 176 Wash. 654 (1934).
14 Commissioner of Corporations and Taxation v. Woburn National Bank, 53 N.E. 2d 554, 315 Mass. 505
(1944).
12 393 U.S. 409, 21 L. ed. 634 (1969).
PAGENO="0356"
336
within the laws. How many sab-groups banks or financial corporations
can be divided into and still be "reasonable" is not so clear.
Share taxes remain a valid option for States to use in taxing national
banks, provided that "other moneyed capital coming into competition
with national banks" is equally taxed. There seems to have been no
change in the rule that discrimination in favor of such competing
capital violates section 5219. This includes individually owned in-
tangibles if, on facts shown or conceded, they compete with national
banks. But the courts seem now to require adequate proof of sub-
stantial competition before declaring national bank taxes void. Ad-
missions by attorneys that such competition exists and is substantial
are still fatal to those who endeavor to enforce tax laws.
The cases have not been so clear as to the imposition of sales taxes.
on national banks. Where the sales or use tax has been upon the ven-
dor, the weight of authority seems to have sustained the tax; where
the tax was on the vendee, the results would seem to be against appli-
cation of sales taxes to national banks. P.L. 9 1-156 has established
the right of States now to impose or collect sales and use taxes from
national banks.
As to what constitutes doing business in a State or what activities
give a State jurisdiction to tax income on an apportionment basis,
the cases are not so clear. The legal principles here seem only to be
in course of evolution.
Finally, the case law as it has recently developed is only a preface
to consideration of the decisions to be forthcoming after the "perma-
nent amendment" of section 5219 takes effect.
N. Public Law 91-156: 1969
The latest amendment of section 5219-Public Law 91-156-was
approved December 24, 1969. This legislation was enacted in response
to complaints from States over the situation created by two decisions of
the U.S. Supreme Court: First Agricultural National Bank of Berk-
shire County v. State Tax Commission, 392 U.S. 339 (1968); and
Dickinson v. First National Bank of Homestead, 393 U.S. 409, 21 L.
ed. 634 (1969).'
In the First Agricultural case, the court held, Justice Black deliver-
ing the opinion of the court (with Justices Marshall, Harlan, and
Stewart dissenting and Justice Fortas not participating),~ that the
Massachusetts sales and use tax, enacted in 1966, could not be applied
to national banks because sales and use taxes were not listed among the
permitted State taxes enumerated in section 5219.2
Similarly, the court in the Dickinson case held that Florida's docu-
mentary stamp tax could not be collected from national banks. The
Federal District Court held that national banks were instrumentalities
of the United States and that since the taxes in question were "not
within thc purview of 12 U.S.C.A. section 548" they could not be
collected from national banks.3 The judgment of this court was
affirmed by the U.S. Supreme Court on January 20, l969.~
1 On the legislative history of the legislation, see supra, pp. 244-49 in this appendix.
2 "It seems clear to us from the legislative history that 12 U.S.C. section 548 [i.e., section 5219] was intended
to prescribe the only ways in which the States can tax national banks." 392 U.S. 339, at p. 344 (1968), 20 L.
ed. 2d. 1138 at p. 1142. Justice Black cites and quotes Owensboro National Bank v. Owensboro, 173 U.S. 664,
669 (1899), 43 L. ed. 850, 852; -Bank of California v. Richardson, 248 U.S. 476 (1919), 63 L. ed. 372; Des Moines
Bank v. Fairweather, 2631.1.5.103 (1923), 68 L. ed. 191. /
3 291 F. Supp. 855, 856 (1968). See comment at p. 308 infra.
4 393 U.S. 409.
PAGENO="0357"
337
1. Provisions of P.L. 91-156.-The provisions of P.L. 91-156, "to
clarify the liability of national banks for certain taxes," are reproduced
in full in appendix 1-B .~
The law specifies how national banks may be taxed prior to January
1, 1972; and under the "permanent amendmefit" scheduled to take
effect on that date, it directs that a national bank "shall be treated
as a bank organized and existing under the laws of the State or other
jurisdiction within which its principal office is located." The primary
concern of the statute is to permit certain enumerated taxes to be
imposed by the States on national banks in the jurisdiction where their
principal office is located. This place is referred to in the literature as
the "home" or "domiciliary" State. Most of the litigation over State
taxes on national banks has been concerned with such domiciliary
taxation.
To a limited extent, P.L. 91-156 also makes provision in the "tem-
porary amendment" of section 5219 for the use of certain enumer-
ated taxes which a State may impose "on a national bank not having
its principal office located within the jurisdiction of such State."
This is referred to as "nondomiciliary taxation," or the taxation of
"foreign" banks. The statute with its enumeration of permitted taxes
is both clear and specific as to State taxes on national banks prior to
January 1, 1972. The power of States to tax nondomiciliary banks
after that date is less clear. The "permanent amendment" says
national banks "shall be treated as a bank organized and existing
under the laws of the State * * * within which its principal office is
located." Does this provision give the taxing State a clear right to
impose taxes on a foreign national bank that has its principal office in
another State? This question and collateral issues may have to be
settled by litigation.
2. Plan of discussion.-The problems and issues in State taxation of
national banks can be discussed most effectively if domiciliary and
nondothiciliary taxes and problems are considered separately. Sim-
ilarly what can be done before January 1, 1972, will be considered
prior to the discussion of what can be done under the broader grant of
power effective after January 1, 1972. The interim amendment is a
temporary solution designed to give States an opportunity to recast
their laws, and Congress, after receiving the st~udy made by the Board
of Governors of the Federal Reserve System, an opportunity to
appraise and develop further changes if these appear to be necessary.6
3. Domiciliary taxation under P.L. 91-156 prior to 1972.-To
enable States to collect sales, use, documentary stamp, and motor
vehicle taxes from national banks, Congress added a temporary new
paragraph 5 to section 5219 specifying additional types of permissible
taxes. All these specifications-those in the law since 1926 and those
now added-are scheduled to expire December 31, 1971, when they
are to be replaced by the brief, general "permanent amendment"
quoted above. Sub-paragraph (a) of the new paragraph 5 is con-
cerned with domiciliary taxation; sub-paragraph (b) relates to
nondomiciliary taxation.
Under sub-paragraph (a), States and their political subdivisions
may go beyond the four methods of. taxation enumerated and per-
`Cf. supra, p. 3, where a summary of the legislative history follows the text of the act.
6 ~f* Charles F. Conlon, "Repeal of National Bank Tax Immunity," National Tax Journal, vol. XXIII,
No. 2, P. 225 (June 1970).
PAGENO="0358"
338
mitted since 1926. They may impose "any tax which is imposed
generally on a nondiscriminatory basis throughout the jurisdiction"
of the taxing State or subdivision, other than a tax on intangible
personal property. However, no sales tax or use tax complementary
thereto may `be imposed under paragraph 5 upon purchases, sales,
and use of tangible personal property which is the subject of a written
contract of purchase entered into by a national bank prior to Septem-
ber 1, 1969.
Under a "saving provision" (section 3 of P.L. 92-156), no tax may
be imposed on any class of banks by or under authority of State
legislation in effect prior to December 24, 1969, unless the tax was
imposed on that class of bank before that date or the imposition of the
tax is authorized by affirmative action of the State legislature after
December 24, 1969. However, this limitation is subject to exceptions.
It does not preclude the application of the following taxes imposed by
a State which does not impose another tax or an increased rate of tax
(such as a "built-up rate") in lieu thereof:
(1) any sales tax or use tax complementary thereto;
(2) any tax (including a documentary stamp tax) on the
execution, delivery, or recordation of documents; or
(3) any tax on tangible personal property (not including cash
or currency), or any license, registration, transfer, excise or
other fee or tax imposed on the ownership, use or transfer of
tangible personal property.
4. Nondomiciliary taxation prior to 1972.-In sub-paragraph (b) of
the new paragraph 5 added to section 5219 by the "temporary amend-
ment," Congress enumerated five categories of taxes which State
legislatures may apply, or may authorize local governments to apply,
to out-of-State national banks during the interval from December 24,
1969, through December 31, 1971. These taxes may be imposed upon
nondomiciliary national banks if they are imposed generally through-
out the taxing jurisdiction on a nondiscriminatory basis:
(1) Sales taxes and complementary use taxes on purchases,
sales, and use within the jurisdiction.
(2) Taxes on real property or on the occupancy of real property
within the jurisdiction.
(3) Taxes (including documentary stamp taxes) on the execu-
tion, delivery, or recordation of documents within the jurisdiction.
(4) Taxes on tangible personal property (not including cash or
currency) located within the jurisdiction.
(5) License, registration, transfer, excise, or other fees or taxes
imposed on the ownership, use, or transfer of tangible persona]
property located within the jurisdiction.
In these instances, also, no sales or use tax may be imposed upon
purchases, sales, and use within the taxing jurisdiction with respect
to tangible personal property which is the subject of a written contract
of purchase entered into by a national hank before September 1,
1969
The "saving provision" of P.L. 9 1-156, described above in connec-
tion with domiciliary taxation, is not by its terms limited to banks
with their principal offices in the taxing State. Accordingly, the
restrictions enumerated in this provision presumably apply also to
PAGENO="0359"
339
taxation of out-of-State banks in circumstances where these restric-
tions may be pertinent.7
5. Taxation under P.L. 91-156 after January 1, 1972.-On January
1, 1972, the previously described provisions expire and will be replaced
by the "permanent amendment."
The intent of Congress in substituting this new section for the old
one is clearly exj)ressed in the "Statement of the managers on the part
of the House" in the Conference report on H.R. 7491.8
"On [January 1, 1972], States will become free to impose intangible
property taxes on national banks just as they have always been free
to impose such taxes on State-chartered banks. Likewise any State
will be free to impose taxes on income derived within its borders by
the operations of a bank having its principal office in a different State,
regardless of whether the foreign bank is State or National. This has
always been the law with respect to State banks."
Concerning nondomiciliary national banks that maybecome subject
to the taxing.jurisdiction of a State, this statement in the Conference
report-and the language of the "permanent" section 5219-appear
to accord to each State authority to tax an out-of-State national bank
as that State would tax a State bank chartered in the State whei~e the
national bank has its principal office.
Clear as the intent and meaning appear now, in the immediate wake
of congressional action, the possibility remains that the interpretation
will seem less certain after a period of discussion and litigation.. The
congressional intention embodied in the amendment of 1923 did not
appear to prevail when that amendment required interpretation. The
likelihood is that new issues will emerge under the "permanent
amendment." ~
6. Federal Reserve study.-The requirement for a study by the
Federal Reserve Board was added to H.R. 7491 by the Senate
Committee.
Section 3 of the bill as reported to the Senate and approved by that
body directed the Board of Governors to study the probable effects on
the banking systems of the imposition on banks of (1) intangible
personal property taxes on banks and (2) taxes on banks whose
principal offices were outside the taxing State. The Senate-approved
provision read as follows: 10
"(a) The Board of Governors of the Federal Reserve System
shall make a study to determine the probable effects on the banking
systems of the Nation if banks were subject to (1) taxes on intangible
personal property imposed by any State or other jurisdiction within
which their principal offices are located, and (2) taxes (other than those
enumerated in paragraph 5(b) of section 5219 of the Revised Statutes,
`In the Conference report on HR. 7491 (91st congress, 1st sess., House Report 91-728, Dec. 9, 1969), the
statement of the managers on the part of the House refers to the saving provision in the context of congres-
sional concern that "the repeal of the prohibition in section 5219, without any compensating action by the
State legislature, would have the effect of substantially increasing the tax burden on the banks" in some
States. This concern related to domiciliary taxation. The discussion of taxes on nondomiciliary national
banks does not refer to the saving provision. (Ibid., p. 5.)
8 Ibid.
9 For example, does the "permanent amendment" harbor the possibility of differences in the tax treatment
of individual out-of-State national banks, the differences depending upon the States of their principal offices
(somewhat as "foreign" insurance companies are accorded differing treatmentin reciprocity for the varying
taxes in their home States)? Or would the "permanent amendment" effectively prevent a State from
classifying banks so that out-of-State institutions were taxed more heavily than domiciliary banks on a given
tax base?
is For the text of the Committee bill as approved in the Senate, cf. 115 C.R., p. S35399 (Nov. 21, 1969).
See also ibid., p. S35402, and Senate report 91-530, p. 6. The reference in paragraph (a) to taxes enumerated
in paragraph 5(b) is to provisions identical to those finally enacted as paragraph 5(b) of sec. 1 in P.L. 91-156;
the list is quoted supra, p. 268, and the statutory provision is reproduced in appendix 1-B at pp. 2-3, above.
PAGENO="0360"
- 340
as amended by this Act) imposed on a nondiscriminatory basis by any
State, or political subdivision thereof, without regard to whether the
principal offices of such banks were located within the taxing jurisdic-
tion. In conducting such study the Board shall consult with the
Secretary of the Treasury and appropriate State banking and taxing
authorities.
"(b) The Board shall make a report of the results of its study to the
Congress no later than December 31, 1970. Such report shall include
the Board's recommendations with respect to the desirability of
permitting banks to be subject to the taxes referred to in subsection
(a)."
The provision was modified by the conferees. The managers on the
part of the House reported that some apprehension had been expressed
"as to whether the expanded taxing powers might be used in a way
which could impair the mobility of capital or the economic efficiency
of the banking system. For this reason, the conference substitute
includes a section requiring a study by the Federal Reserve Board `to
determine the proba~le~ impact on the banking systems and other
economic effects of the changes in existing law to be made by section
2 of this act (the permanent amendment to section 5219) governing
income taxes, intangible property taxes, so-called doing business
taxes, and any other similar taxes which are or may be imposed on
banks'." 11
The conferees added this comment:
"The Federal Reserve Board is required to transmit its report of
this study to Congress no later than December 31, 1970. Thus, if the
report should disclose a serious danger or deficiency in the amendment
to section 5219 to take effect in 1972, the Congress would have a
full session in which to take remedial legislative action. The conferees
from both Houses were agreed that their respective committees would
give prompt and serious consideration to any recommendations
transmitted by the Federal Reserve Board as a result of its study." 12
`When the conference report came up for Senate agreement, Senator
Tower made his comments characterizing the procedure as "un-
orthodox," on the ground that Congress was enacting "legislation for
1972 now which is substantially based on a study that has not yet
begun." ~ He commented further:
"We may well find that substantial revision of the 1972 provisions
are needed when the study is completed, and yet in the meantime
the banking industry and the State taxation authorities are going to
be planning on the basis of the 1972 provision we are passing today."4
In the House, there was no discussion of the proposed study.
Chairman Patman paraphrased the language of the conferees' state-
ment to explain that the bill provided for a study and that the com-
mittees expected to give "swift and serious consideration" to the
findings and recommendations."
IL CONFORMITY OF SECTION 5219 TO STATE TAX SYSTEMS
The evolution of section 5219 from 1864 to 1971 has been traced
in preceding pages. During this period the provisions or permissions
11 House report 91-728, conference report to accompany HR. 7491, December 9, 1969, p.,.
l2Ibjd., pp.5-S.
13 115 C.R~, p. S38634 (Dec. 12, 1969).
14 Ibid.
11 Ibid., p. H38108 (Dec. 10, 1969).
PAGENO="0361"
341
under which States could tax national banks changed greatly. Time
and again it was indicated that many of those involved in the legislation
and litigation were of the opinion that section 5219 forced changes in
State tax methods and tax laws. This subject has been considered
elsewhere and at various places in this study) Perhaps it is also true
that the prevailing tax systems and practices in States shped from
time to time the content or consents in section 5219.
A. Periods to be considered
The writer is not undertaking a history of the development of
State taxation over the last 107 years, interesting and important os
that is. This is a period in which there were significant developments
in the theory, practice, and administration of American taxation at
all levels of government. It was a period of tremendous change and
expansion in the functions of government, the economy, and the
social consciousness of the American people.
To assess the impact of prevailing State tax systems upon the
provisions of section 5219, three periods will be observed. The original
grant to States of powers to tax national banks was made in 1864 at a
time when Congress was preoccupied with financing the war and
regulating the wartime economy. Few comprehensive statistics of
State revenues or expenditures were collected at that time and no
overall studies of government finances in that period have since been
made. There are data for individual States and cities; and, of course,
details of Federal Government finances are available from 1789 in the
summary tables in annual reports of the Secretary of the Treasury.
The Federal figures show better than any other data the magnitude of
changes from 1789, or even from 1864, to the present, but they are of
little help in describing State and local finances. Financial histories of
individual States are an invaluable repository of the events and devel-
opments in single commonwealths. The same is true of the financial
histories of particular cities. Primarily from such sources, one may
assemble fragments of fact to indicate the structure of State and local
taxation that existed when Congress first gave permission to States to
tax national banks.2
The sketch thus derived of State and local taxation during the
period from about 1850 to 1870 will be taken as typifying the 1860s and
particularly 1864.
The second period for observation is the year~1922. That year is
close to the time of the Richmond decision (1921) and the 1923
amendment of section 5219. The year 1922, moreover, is covered by a
study, Wealth, Debt, and Taxation of State and Local Governments,
made by the U.S. Bureau of Census.3 Comparative data can be
secured easily from this study.
1 See also Welch and Woosley, op. cit.
2The Census Bureau did not begin to collect data on property assessments and make estimates of the true
value of property until 1850. More complete financial data were not gathered until several decades later The
Sixth Census in 1840 tabulated the value of produce of mines, agriculture, horticulture, commerce, fisheries,
and manufacturers by States and counties. Capital invested in manufacture was also estimated. The Sev-
enth Census of 1850 tabulated the assessed value of real estate and personal property, the true value thereof,
and the total revenues, expenditures and debt of the States, together with annual taxes classified as State,
county, school, poor, road, and others. Statistical View of the United States, by 1. D. B. DeBow, Washington,
D.C., 1854, pp. 189-90. The Ninth Census of 1870 published Wealth, Taxation and Public Indebtedness,
Washington, D.C., 1872, which included summaries of assessed and true property values, taxes by major
units for 1870 and 1860 and public indebtedness for 1870. The Tenth Census of 1880 also had a volume on
Valuation, Taxation and Public Indebtedness, Washington, D.C., 1884, which contained similar data and a
table on the financial condition of cities having a population of 7,500 and over. As will be seen, there was no
information about revenue sources other than the property tax and public indebtedness.
3 Earlier years covered by shnilar compilations were 1902 antI 1912.
PAGENO="0362"
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The final period for comparison is 1969, the date of the latest
amendment. Ample statistical and descriptive data are now available to
indicate the patterns, scope, and details of State and local tax systems,
as well as of governmental services provided. Moreover, the nature of
State and local taxation at this time is a matter of quite general
knowledge.
B. State taxes in 1864
The equalitarian sentiments of nineteenth century America were
reflected in most tax systems of the States at that time. All property,
real and personal, was to be taxed at the same rate in the jurisdiction
imposing the tax. Universality and uniformity were the cardinal
principles enshrined in constitutions and statutes.4 The general
property tax, of course, was not the sole source of State and local
revenue, but it was the major one.5
For some governments, such as school and road districts, it was
almost the only source of funds. The smaller the unit of government
the greater the dependence on the property tax. One writer called it
"the American system" and said it was "the only direct tax known in
most of our commonwealths."6 Save for one reference to classified
property taxes, the only State tax mentioned in the debates in Congress
on the National Currency Act of 1864 giving States the right to tax
national banking associations was the tax on real estate and personal
property.7
The aggregate assessed and true valuation of all real and personal
property taxed and the per capita amounts for each series are shown
in table 1.
`Among State constitutions which at the time required uniformity in property taxation were: Illinois
(1818, 1848, 1870), Missouri (1820), Arkansas(1836), Florida (1838), Indiana (1851)., Maryland (1851), Louisiana
(1845), Texas (1845), California (1849),Virginia (1850), Oregon (1851). Ohio (1851), Minnesota (1857),Michigan
(1850), West Virginia (1863), Virginia (1864), and Nevada (1864). A number of states had constitutions so
broad that the legislatures were free to adopt such tax measures as were deemed "just." Many of them had
adopted general property taxes. See Jens P. Jensen, Property Taxation in the United States, University of
Chicago Press, 1031, pp. 38-40; Leland, op. cit., pp. 09-104.
In general, statutory uniformity preceded constitutional provisions, Jensen, op. cit., p. 35. In Maryland
statutory values were applied to land 1834-1888, then to personal property and slaves. The general property
tax was adonted in 1841; Leland, op. cit., p. 71. Uniformity seems to have been the rule in local taxation since
1776; Ely, op. cit., p. 137. Connecticut. which had experimented with difierential taxes (classification) from
colonial days, adopted uniformity in 1850 with property assessed at 3 percent. Tn 1860, 100 percent assess-
ments were adopted: Leland, op. cit., pp. 65-69. Ohio which had a classified land tax prior to 1825 adopted
the uniform rule in 1846; ibid., pp. 78-79; Ely, op. cit. p. 136. Vermont adopted listing according to true
value in 1841; Leland, op. cit., p. 74. Mississippi had a classification system in 1857 but adopted the general
property tax in 1876; ibid., p. 80.
5 Among the other taxes to be noted was the poll tax-termed "unworthy of a civilized nation in the nine-
teenth century," by Ely, op. cit., p. 209. It was well known in New England, used extensively in southern
States and in the Midwest: ibid.. pp. 209-13. There were numerous licenses and occupation taxes. Special
charters granted to such corporations as railroads often provided for special taxes or payments to the States
for urivileges granted. The gross receipts tax provided in the charter of the Illinois Central Railroad in 1851
is such an example. In 1886 it provided 15 percent of the State's revenue; ibid., p. 214. There were also numer-
oiis corporation taxes in other states, particularly Pennsylvania and Massachusetts. See ERA. Seligman,
Essays iii Taxation, 9th ed., MacMillan Co., New York, 1921, eh. VI for numerous examples of these early
taxes. There were also income taxes; see Seligman, The Income Tax, MacMillan, New York, 1941, part II,
ch. II, especially pp. 406-14. A few States had inheritance taxes. See T. S. Adams, "Taxation in Maryland,"
pp. 61-62: Barnett, "Taxation in North Carolina," pp. 108-109, in Studies in State Taxation, edited by J. H.
Bollander, Johns Hopkins University Studies, series XVIII, nOS. 1, 2, Baltimore, Maryland, 1900. See also,
Seligman, Essays in Taxation, p. 137. The evolution of the revenues of Providence, Rhode Island is shown
in an interesting table in Stokes, The Finances and Administration of Providence, 1636-1901, The Johns
Hookins Press, 1903. pp. 404-13.
`Ely, op. cit., p. 131.
7 Cf. Mr. Francis Kernan (N.Y.), in Congressional Globe, vol. XXXIV, 38th Congress, 1st Session, p.
1271, hereafter referred to as 34 Globe 1271 (March 24, 1864).
PAGENO="0363"
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TABLE 1.-ASSESSED AND TRUE VALUE OF PROPERTY IN THE UNITED STATES, 1850-90
True valuation
Assessed va
luation of real and personal
property taxed
Total
Per
Increase
Total
Per Increase
Year
(millions)
capita
(percent)
(millions)
capita (percent)
1850
1860
1870
$7,136
16,160
30,069
$308
514
780
126.46
86.07
$6,025
12,085
14, 179
$260
384 100.58
368 17.33
1880
43,642
870
45.14
17,140
342 20.88
1890
65,037
1,036
49.02
25,473
407 48.62
Source: U.S. Bureau of the Census, report on Wealth, Debt, and Taxation, at the 11th Census: 1890, pt. II,Wealth and
Taxation; Washington, D.C., 1895, p. 9.
The defects of these aggregates-both true values and assess-
ments-can be seen from the following remarks by Francis A. Walker,
Superintendent of the Census. They were as true of 1864 (or almost
any other time) as in 1872: 8
the customs of assessment vary greatly in different States, and
oftentimes in the several counties of the same State-in some the tax-
able value of the property not exempted by law being fixed at no more
than a third of its recognized selling-price; in others, at fifty, sixty,
seventy, eighty or ninety percent-it will be seen that the result of the
first two inquiries [assessed value of real and personal property] is not
to obtain wealth of the several States and Territories, but to present
merely the actual basis of State or local taxation: * * * The utter want
of uniformity in this matter of assessment for purposes of taxation can
not be too strongly insisted on."
TABLE 2.-ASSESSED VALUATION OF REAL AND PERSONAL ESTATES, 1860-90
[In millions of dollarsj
Assessed value
Personal
Year
Total
Real estate
property
1860
1870
1880
1890
$12,084
14,179
16,903
25,473
$6,973
9,915
13,037
18,956
$5,112
4,264
3,866
6,517
Source: U.S. Bureau of the Census, preliminary report of the 8th census, Washington, DC., 1862; report on valuation,
taxation, and public indebtedness in the United States, as returned at the 10th census, June 1, 1880, Washington, D.C.,
1884; report on wealth, debt, and taxation, pt. 2, Valuation and Taxation, final report, 11th census, 1890, decennial census
publication 217, Washington, D.C., 1895.
TABLE 3.-RANKINGS OF SELECTED STATES IN ESTIMATED PER-CAPITA WEALTH, 1850-80
1850 1860 1870 1880
State Rank State Rank State Raek State Rank
Massachusetts 1 Connecticut 1 New York 1 New York 1
Rhode Island 2 Louisiana 2 Massachusetts 2 Pennsylvania 2
Louisiana 3 South Carolina 3 Connecticut 3 Ohio 3
South Carolina 4 Rhode Island 4 Rhode Island 4 Illinois 4
Connecticut 5 Massachusetts 5 California 5 Massachusetts 5
New York 11 New York 6 Pennsylvania 7 Missouri 6
Pennsylvania 13 Pennsylvania 21 District of Columbia 8 Indiana 7
Source: Compiled from Census of 1880.
8 The Statistics of the Wealth and Industry of the United States, June 1, 1870, Ninth Census, vol. III,
Washington, D.C., 1872, p. 3. No attempt will be made to discuss the defects of the general property tax or of
property taxes. They have been discussedmany times by scores of writers. See, e.g., Leland, op. cit., ch. I;
Jensen, op. cit., cbs. III, IV, VI and elsewhere; Seligman, Essays in Taxation, 9th ed., ch. 11; Ely, op. cit., pp.
141-45, 149-59.
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The division of assessments between real and personal property in
1850 to 1890 can also be indicated, as in table 2. These data show
clearly one of the several defects of the general property tax-the
difficulty of securing adequate assessments of personal property.
Complaints on this score were voiced repea1~ed1y at the time. The
decline from 1860 to 1880 in the aggregate assessment of personalty-
in a period when the stock of personal property was rising substan-
tially-emphasizes this failure.
Estimates of wealth were based primarily on "true value" estimates
derived from property valuations for tax purposes. As table 3 illus-
trates, the several States show interesting variations from 1850 to
1880 in their rankings in per capita wealth. These variations resulted
largely from shifts in the economic development of the States and
regions during these years. The composition of assessments in Connect-
icut is worth noting, for assessments in that State were fairly typical
of the way the property tax operated.
Schedules on tax return forms used by assessors and individuals, in
listing personal property for taxation have always been detailed
inventories, presumably on the supposition that the more items
enumerated, the fewer items were likely to be omitted. And when a
taxpayer did not file an inventory with a statement of values, it was
generally filled in by assessors with appropriate penalties added.9
While no actual schedules or lists are available to the writer, the
"grand list" of Connecticut for 1864 names the items which taxpayers
were supposed to return and the total of such valuations for that
year. This "grand list" is shown in table 4.
TABLE 4.-GRAND LIST" OF CONNECTICUT, 1864
Value
Type of property Number (thousands)
Dwelling houses 72, 664 $75, 067
Land (acres) 2,517,690 60, 819
Mills,stores,etc 7,519 21,582
Horses, etc 37,492 3,042
Neat cattle 191, 092 5,505
Sheep and swine 54,054 410
Carriages, etc 13,722 1,100
Farming utensils 128
Clocks,watches,etc 13,919 596
Pianofortes,etc 1,780 575
Household furniture, etc 1,305
Quarries, fisheries, etc 901
BRIDGE, ETC. STOCKS 216
BANK, INSURANCE, ETC., STOCKS 28,376
STATE STOCKS 776
RAILROAD, CITY, ETC., BONDS 3,454
Amount employed in merchandise 8,174
Investments in mechanical and manufacturing operations 16, 708
Investments in vessels, etc 2,819
MONEY AT INTEREST 13,789
MONEY ON HAND 764
All other taxable property 8,520
Additions by board of equalization and 10 percent by towns
Amount 254,617
Polls at $3 each 21, 469
Total 276, 086
Source: Richard T. Ely, Taxation in American States and Cities, New York, Thomas Y. Crowell & Co., 1888, pp. 503-6,
(Ely gives similar data for each year from 1864 through 1885. The amount shown for poll tax presumably is erroneous.
since it implies payments for more than 7,000,000 persons annually, but similar amounts are reported for 1865 and 1866.)
° Cf. Jensen, op. cit., pp. 346-50.
PAGENO="0365"
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Categories of property named in the Connecticut list illustrate the
scope of personal property taxes prevalent at the time and show what
was included in the tax return expected of each individual. Intangibles,
particularly bank stock and other securities, are designated by capital
letters. Bank stock was treated exactly like bridge stock, turnpike
stock, insurance stock, money at interest, etc. Assessments presum-
ably were limited to State bank stock, since it is doubtful that many
States tried in 1864 to tax the stock of any national banking associa-
tions which had been formed under the National Currency Act of
1863.
The Connecticut "grand list" for 1864 also indicates that next to
dwellinghouses and land, the largest assessment category was "bank,
insurance, etc., stocks"-$28,376,000, nearly $6,800,000 more than
"mills, stores, etc." This tends to bear out contentions that bank assess-
ments were generally more complete and closer to true value than as-
sessments of other personal property.'°
While the National Currency Act of 1864 was being debated in
Congress, Representative Kernan (N.Y.) said:
"All our banks in the State of New York are put upon the assess-
ment rolls, and they pay a tax upon the real estate which they occupy
for bank purposes and pay a tax upon their personal property paid in,
deducting the value of the real estate."
* * * * * *. *
"In all our States we levy a tax upon property
". . . in the city where I reside the wealth, the personal wealth
of the whole country, is gathered there in our banks. They pay a con-
siderable portion-about one-fourth-of the city or municipal taxes,
being rated like others. A great portion of our population is composed
of mechanics who own their own houses and lots, and there are a few
men who own stores."
Words to the same effect were spoken by Mr. Giles W. Hotchkiss
(N.Y.) a few days later: 12
there is no existing law that exempts the banking business
in any State from taxation.
* * * * * * *
"The State banks now pay in all of the States, in most of the large
towns, at least one-fourth of the State and county, the corporation,
and school tax."
They were listed the same as other corporations and individuals
on lists similar to the one used in Connecticut. The New York law of
1865 assessed shares of stock in national banks at full value and taxed
them as personal property.13 There was no change in the method of
taxing State banks.
1. Property tax and section 5fd19.-The general property tax with
which members of Congress were familiar had its impact on the tax
provisions of the Act of 1864. Nothing in the act was to interfere with
10 Cf. "The New York assessors say in their report for 1881 that `banking capital is assessed fully eighty-
five percent of its nominal value, while it is quite evident that other personal property is assessed at an
average of less than ten percent.'" Ely, op. cit., pp. 176-177.
11 34 Globe 1271 (March 24, 1864).
1234 Globe 1393 (April 5, 1864).
13 Law declared invalid. Van Allen v. The Assessors, 3 Wall 573 (1865).
PAGENO="0366"
346
the traditional method of taxing real estate.'4 Even in McCulloch v.
Maryland (1819), Justice Marshall had said: 15
"This opinion does not deprive the States of any resources which
they originally possessed. It does not extend to a tax paid by the
real property of the bank, in common with the other real property
within the State, . . ."
The tax on real property, however, was only one part of the almost
universal property tax. The other part was the personal property
portion which applied alike to individuals, firms, businesses, corpora-
tions, and banks with listings or declarations similar to the one used
in Connecticut described above. The writer believes it is this familiar
tax which was in the minds of members of Congress when they in-
serted into the Act of 1864 the often litigated proviso "that nothing
in this act shall be construed to prevent all the shares in any of the
said associations, held by any person or body corporate, from' being
included in the valuation of personal property, . . . but not at a greater
rate than is assessed upon other moneyed capital in the hands of
individual citizens of such state." 16
Congress has been criticized for not making plain what it meant
by "other moneyed capital" and "in the hands of individual
citizens." 17 Undoubtedly other words could have been used, but in
the light of common practice at that time and earlier, perhaps Congress
said what it meant to say. As was pointed out in connection with the
amendment of 1923, many State tax officials and soñie others had
been under the impression that "in the hands of individual citizens"
really was intended to refer to State banks, so that if national and
State banks were treated alike the permission of section 5219 was not
`violated.'8 This interpretation was also arrived at by Professor Lutz
in his careful review of the debates and amendments to the Act of
1864. He concluded: 19
". . . there is no finally conclusive evidence as to what was meant by
the expression `other moneyed capital in the hands of individual
citizens,' but to the writer the evidence is persuasive in favor of the
construction that the reference was to the stocks of State banks, and
not to personal investments."
1\4r. Ronald Welch in his definitive study, State and Local Taxation
of Banks in the United States, came to the opposite conclusion: 20
"Professor Lutz finds the evidence `persuasive in favor of the
construction that the reference [in the term "moneyed capital"] was
to the stocks of State banks, and not to personal investments' (bc.
cit., p. 211). The writer is persuaded to the contrary. For one thing,
some members of Congress still expected national banks to completely
displace State banks, though this expectation was far less prevalent
in 1864 than it was in the preceding year. In the second place, there
existed at that time no such multiplicity of financia~l organizations as
"The second proviso in the Act of 1864 read: "And provided always, That nothing in this act shall exempt
the real estate of associations from either State, county, or municipal taxes to the same extent, according to
its value, as other real estate is taxed."
15 Mcculloch v. Maryland, 4 Wheaton 316 at 436 (1819).
1~ Italics added. See appendix 1-C, p. 3 above for the entire section.
17 Lutz "The Evolution of Section b219, United States Revised Statutes," Bulletin of the National Tax
Association, vol. XIII, no. 7, pp. 205 if. (April, 1928). Cf. also, Welch, op. cit., p. 17.
18 See discussion of the Richmond case, supra, pp. 195-202.
15 Lutz bc cit., p. 211. He bases his conclusions as to what was meant in 1864 in part on statements of
Messrs. Paine and Pomeroy in the Congressional Globe in connection with the 1868 amendment; pp. 210-11.
20 Welch, op. cit., p. 17 note.
PAGENO="0367"
347
we find today. Insurance companies had, in 1867, been excluded from
the realm of moneyed capital on the ground that they were not com-
petitive with national banks (People ex rel. Duer v. Commissioners,
4 Wall. 244). Hence, if `moneyed capital' meant anything more than
shares of State banks, it probably extended to private investments.
Finally, the Congressional debates show that most of the participants
were thinking in terms of the general property tax, which was reaching
the peak of its popularity at that time."
The writer believes that Mr. Welch has the proper interpretation
and has so concluded from reading the Congressional Globe. Professor
Lutz in his admirable review of proceedings in the Congress is believed
not to have given sufficient weight to what the members of Congress
knew about the prevailing State tax systems or what they said about
State taxes in introducing the various amendments which were
presented and which Professor Lutz carefully detailed.
What Congress meant is not an academic controversy but the meat,
if not the core, of the vast amount of litigation over section 5219
involving the meaning of "other moneyed capital in the hands of
individual citizens." If one accepts the Welch interpretation, the
Supreme Court has correctly interpreted the intention of Congress;
if the conclusion of Lutz is accepted, the Court has been mistaken
about what those famous words actually meant.
Under these circumstances, a "second look" at the debates in 1864
may be in order.
2. The debate on State taxation of banks: 1864.-The National Currency
Act of 1864, as originally drafted, exempted the banks from State
taxation. Some of the members of Congress thought this was wrong.
Mr. Kernan (N.Y.) was the first to object. He pointed out the benefits
banks received from the States and that exemption would throw the
burdens of the State upon real estate.2' Mr. Kasson (Iowa) was of the
opinion that the prohibition in the bill did not prevent the States
from taxing the income of the stockholder in the bank. To which
Mr. Kernan replied:
"In all our States we levy a tax on property, and I do not see any
mode of legislation by which a particular class of men may be taxed
upon their income so as to make them equal with others. I may own
$5,000 in a bond and mortgage, and although the man fails and I do
not get a dollar of income, yet the capital is taxed, and is placed on
the assessment roll.
"Now, then, if this bill becomes a law all the State banks have got
to come under its provisions . . . By exempting them from taxation
you take all that personal estate from under taxation, unless it can
be got at by some special legislation."
Mr. Kasson explained that the exemption applied only to the bank;
that the representations of that stock might be taxed to the individual.
If Mr. Kernan invested $100,000 in a b~nk, he might be assessed on
that amount. After a short speech he introduced an amendment per-
mitting State taxation as follows :22
"And such associations and corporations shall severally be subject
to such municipal taxation upon their real and personal estate the same
21 Mr. Kernan: ". . . Will you allow the wealthy men of the State to take their personal property and put
it into one of these banks and say that shall be exempt from taxation and throw all the burdens of the State
upon real estate owners, many of whom are men of comparatively small wealth? . . . Now, if you take
millions of personal property from under the taxing power, the tax will be thrown upon real estate, and the
effect would work great hardship." 34 Globe 1271 (March 24, 1864).
22 Ibid. Amendment offered again on April 1, 1864, 34 Globe 1392, infra.
PAGENO="0368"
348
as persons residing at their respective places of business are subject to
such taxation by State laws."
The amendment was rejected.
On April 1, 1864 the National Currency Act was again considered.
Mr. Kalbfieisch (N.Y.) moved to strike "and such tax or duty [Federal]
shall be in lieu of all other taxes on such associations" in order that the
section might not be construed "to prevent States, counties and cities
from imposing a tax on these banks." This was not agreed to. Mr.
Griswold (N.Y.) offered an amendment at the request of Mr. Kernan
who was absent:
"And the said associations or corporations shall severally be subject
to State and municipal taxation upon their real and personal estate,
the same as persons residing at their respective places of business are
subject to such taxation by State laws."
This also was not agreed to.
Mr. Kalbfleisch thought that national banks "should be subject to
State and other taxes the same as individuals and other banks." Mr.
Tracy (Pa.) then moved the following amendment:
"Provided, That no provision contained in this act, or contained in
any law of Congress authorizing the bonds referred to in the sixteenth
section of this act, shall be so construed as to prohibit any State from
imposing such tax upon the dividends of the several banking associa-
tions organized therein, under this act, as shall to the Legislature there-
of seem just and equitable."
In support of this, among other things, he said:
"I hope it is not proposed that all this great interest shall be released
from taxation within the States. Sir, how can gentlemen answer, after
this money shall have become the currency of the country, to the poor
laborer, whose cow, \\Those oxen, whose horses are taxed for local and
State purposes, if you allow the banker across the way, who furnishes,
the currency of the country, to escape entirely from taxation?"
Mr. Hooper (Mass.) thought that "the gentleman misapprehends
the provision of the bill as it now stands. It does not exclude the States
from taxing the personal property of an indi~vidua1 which is invested
in the bank, but simply prevents the taxation of the bank itself." Mr.
Eldridge (Wis.) thought that it might be hard to find these individuals
to tax them upon their personal property. They might live in another
locality from this one in which the bank is located, or even in other
countries. Mr. J. C. Allen (Ill.) could not understand-
upon what principle or reason, morality, or justice, [Congress]
can exempt one particular species of property from taxation by the
States and leave all other classes of property subject to taxation. . . be
that property mules, horses, cattle or any other species of property.
I know in my own neighborhood men who, for the purpose of
exempting their property from taxation are investing in bonds of the
Government. This bill holds out inducements to others to invest
their means in bank stock so that they may avoid their portion of
State taxation which should `fall justly on every individual in the
State according to the value of his personal property."
Mr. Washburne (Ill.) thought the bill favored city banks over
country banks. lie believed all bank capital should be taxed but by
the general government. Several members thought that the States
would tax the national banks out of existence.
PAGENO="0369"
349
Mr. Washburne opposed giving the States power to tax the capital
of banks because it would inevitably bring the States into conflict
with the general government. Mr. Hotchkiss (N .Y) proposed this
amendment:
"Provided, That nothing herein shall exempt any association organ-
ized under this act from the same State and municipal taxation
imposed upon other corporations in the States where such associa-
tions are located."
He thought this would protect the banks from being taxed out of
existence since it proposed that "they shall impose no other taxes
upon them than such as they impose upon citizens and other corpora-
tions." ~
1\4r. J. C. Allen remonstrated at the idea of exempting one class of
taxpayers at the expense of others:
"It tends to build up a moneyed oligarchy wherever you have a
national bank established, by enabling capitalists to invest their
money in this class of securities, and then, by depositing them in one
of the banks, to relieve themselves from their fair proportion of State
taxation according to the wealth and property they use and enjoy.
* * * * * * *
"Sir, there are other things beside~ Government bonds upon which
the Government is dependent for its success and the maintenance of
of its credit. Why should we exempt one species of property necessary
for those purposes and not another? In order to sustain the credit of
the Government, and maintain its integrity, you have to call into the
military, organization the horses and mules of the farmers of the
country. You have to feed your army, and you can not support it
without calling on the farmers of the country for their beef and pork,
and flour and corn. All these are essential to the maintenance of the
national integrity. If you have a right to exempt from taxation by a
State one species of property, you have a right to exempt that other
species of property . . ."
Shortly thereafter Mr. Kasson rose to perfect the amendment so
that it would read:
"And the taxes or duties imposed by Congress from time to time
shall be in lieu of all other taxes on such association."
This amendment was agreed to, whereupon the House adjourned.24
On April 4, 1864, Mr. Van Valkenburg (N.Y.) submitted the
following additional section:
"And be it further enacted, That nothing in this act shall be so con-
strued as to prevent the taxation by the States of the capital stock of
the banks organized under this act the same as the property of other
moneyed corporations for State and municipal purposes."
Mr. Davis (Maryland) objected to the amendment because it
placed the banks "at the mercy of the States" and they could negate
the existence of the new banking system. Mr. Kernan thought that
under the amendment:
". . . the property of these corporations is to be liable to State and
municipal taxation the same as other personal property existing at the
place where they are located. Therefore the State laws will operate
23 Ibid., pp. 1392-30 (April 1, 1864). Among those who thought national banks might be taxed out of exist-
ence were, e.g., Messrs. Grinnell (Iowa) and Stevens (Penn.), ibid. See also infra, p.280.
24 Ibid.;p. 1393 (April 1, 1864).
79-421 0 - 72 - 24
PAGENO="0370"
350
upon the capital of these banks precisely as they do upon the personal
property of individuals or any other corporation at the place where
they are located~ That will protect them from any unfair taxation."
He thought that banks should pay their part of the expenses of city
government-lighting, streets, sustaining the courts, etc. These
burdens should not be "thrown upon other property in that locality."
Moreover, the "object of the amendment is to provide that they [the
banks] shall be taxed the same as other property is taxed." 25
Mr. Davis thought Mr Kërnan was mistaken in this interpretation:26
"He says that bank stock is merely to be liable to the same tax as
other personal property. In the first place, sir, that is not the language
of the amendment. In the next place, all personal property is not
subjected to the same taxation. There is nothing to prevent a State
from taxing a horse at one rate, a cow at* another, a hog at a third,
insurance companies at a fourth, manufacturing companies at a fifth,
State banks at a sixth, and national banks at a seventh rate. There is
no such thing as a uniform limit of taxation to which this. section can
refer. In some States there is a general pro rata tax on everything that a
man is worth; in some there is an income tax; in some States there is a
tax on lands at one rate and a. tax on personal property at another rate.
There is nothing in this amendment that limits or confines or defines
the rate of taxation which a State may impose; and it is almost im-
possible to prescribe a limitation which will be effectual. It therefore
does, as I said, leave the banks subject to the unrestricted taxation of
the State."
These statements hark back to earlier periods when a number of
States-Maryland, Connecticut and others-employed classified prop-
erty taxes, some on land, others on personal property. Does the fact
that differential property taxes were once in vogue help explain the
proviso that shares shall not be taxed "at a greater rate than is assessed
upon other moneyed capital in the hands of individual citizens of such
State"? Little attention, however, seemed to be paid to these remarks.
Mr. Mallory (Ky.) said, ". . . we are told that if we give to the
States power to tax these institutions at all we confer on the States
power to destroy them. It seems to me that if we do not give the States
this power, the banks will destroy the States." Mr. Morril (Vt.)
then reaffirmed his opposition to all State taxes on banks-for the
same reasons that Congress prevented State taxation of Federal
buildings or ships of the United States. "If they could tax them at all,
they could tax them out of existence." Mr. J. C. Allen replied that
there was no substance to this argument: that they could not impose a
rate of tax higher than on other capital stock. Mr. Strouse (Pa.)
wanted to know in what particulars banks-
differed from businessmen generally throughout the States
who are taxed not only by the national Government, but by the
States for State, county and municipal purposes? Why should we be
so charitable, when men have loaned this money for purposes of mak-
ing more, as to exempt them from taxation?"27
Next to take the floor was Mr. Hotchkiss who moved to add this
amendment to the original amendment:28
25 Ibid., p. 1412 (April 4, 1864).
26 Ibid., p. 1413.
"Ibid., p. 1414.
28 Ibid.
PAGENO="0371"
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"And no State shall impose any tax upon said associations, or. their
capital, circulation, dividends or business at a higher rate of taxation
than shall be imposed by the said State upon the same amount of
moneyed capital in the hands of individual citizens of said State."
This amendment, he thought, would obviate the objection that the
States would tax the banks "out of existence." Mr. Eldridge added
that States would not so tax institutions "which are for their benefit."
Moreover, local taxes have to' bear uniformly upon all personal prop-
erty. Mr. Van Valkenburg accepted the amendment of' Mr. Hotchkiss
as his own. There was more discussion and parliamentary maneuvering
and on April 6, 1864, the following amendment-the sixteenth
offered-was adopted by a vote of 78 to 56:29
"Sec. 65. And be it further enacted, That nothing in this act shall be
construed to prevent the taxation by States of the capital stock of
banks organized under this act, the same as the ~roper~y of other
moneyed corporations, for State or municipal purposes; but no State
shall impose any tax upon such associations or their capital, circula-
tion, dividends or business at a higher rate of taxation than shall be
imposed by such State upon the same amount of moneyed capital in
the hands of individuals of such State."
On April 16, Mr. Holman asked the Clerk of the House to read
section 41 which contained the following proviso: 30
"Provided, That nothing in this act shall be construed to prevent
the market value of the shares in any of the said banking associations,
held by any person or body corporate created by State law, being
included in the valuation of the aggregate personal property of such
person or State corporation in assessing any tax imposed by any
State or municipal authority on the aggregate personal estate of all
persons subject to the authority of such State or municipality."
He raised a point of order, to the effect that this section was in the
nature of a `tax bill that should have been considered first in the Com-
mittee of the Whole. rfhis point was overruled, on the ground that the
provision did not impose "a tax or charge upon the people."
On April 18, 1864, the entire national currency bill came up for
amendment. Mr. Fenton (N.Y.) offered the following amendment to
section 41:
"And that nothing in this act shall be construed to prevent the
taxation by States of the capital stock of banks organized under this
act, the same as the prO~)erty of other moneyed corporations for State
or municipal purposes; but no State shall impose any tax upon such
associations or their capital, circulation, dividends, or business, at a
higher rate of taxation than shall be imposed by such State upon the
same amount of moneyed capital in the hands of individual citizens
of such State: Provided, That no State tax shall be imposed on any
part of the capital stock of such association invested in the bonds of
the United States, deposited as security for its circulation."
There followed some parliamentary tactics after which the amend-
ment was approved.32
The Senate again took up the debate on the currency bill on April
26, 1864. Senator Sherman (Ohio) presented the proposal of the
29 Ibid., p. 1452 (April 6, 1864). . .
30 Ibid., p. 1680 (April 16, 1864).
3' Ibid., p. 1682 (April 18, 1864).
32 Ibid.
PAGENO="0372"
352
`Committee on Finance, the State tax provision of which was as
follows:
"Provided, That nothing in this act shall be construed to prevent
the market value of the shares in any of the said associations, held
by any person or body-corporate, from being included in the valuation
of the personal property of such person or corporation in the assess-
ment of all taxes imposed by or under State authority for. State or
other purposes, buy not at a greater rate than is assessed upon other
moneyed capital in the hands of individual citizens of each State;
and all the remedies provided by State laws for the collection of such
taxes shall he applicable thereto: Provided, also, That nothing in this
act [shall] exempt the real estate of associations from either State,
-county, or municipal taxes to the same extent, according to its value,
as other real estate is taxed."
Senator Chandler of Michigan described taxes in his State-a city
tax of two percent on all property and a State tax of one percent on
banks which was in lieu of all other taxes on banks. He did notbelieve
any bank could pay these taxes plus the Federal .taxes on note issues.
He read the proviso quoted above and indicated that under it banks
"are liable. . . . to the same taxation precisely as is all other indi-
vidual property." Senator Fessenden (Maine) pointed out that the
fear of excessive State taxation of the national banks was limited:
"They must tax this property thus invested [in bank stock] precisely
as they tax other personal property, and to no greater extent." rfhe
burdens on the States were heavy in connection with the war now that
it was proposed to 1~ake away from the States additional revenues,
creating a difficulty- "which it will be very troublesome to get over."
Senator Chandler told the Senate, "if you allow this local taxation,
the bank stock will of course be assessed at its full value. . . . it is
very well known, however, tha t in most cities real estate and other
property is estimated at very much below its actual value." He opposed
State taxation as it would militate against the establi~hment of the
banking system.34
Senator Fessenden advanced this additional argument for taxation:
"As a .general rule, those who put stock into a bank or who own the
great majority of stock are those who are the most wealthy persons in
the community. You hold out to them a great additional inducement
to put their money into those banks if they are relieved from State
taxation. What is the result? The result is that you increase the burdens
of those who are the poorer classes, comparatively, and less able to
bear the burdens of taxation."
This dialogue it would seem illustrates some of the complexities of
the property tax.
Senator Sherman pointed out that the House bill left banks free
from State taxation but permitted States to tax the shares to indi-
vidual owners. He favored a. uniform system of taxing banks in the
United States; this could only be achieved by the general government.
However, they should "bear their full value of taxation." Senator
Chandler favored a uniform tax-"tax them. heavily but let the tax
be uniform"-umlorm w ithin and among the States 36
~ Ibid., p. 1871 (April 26, 1864). The word "shall" in the final proviso was not in the Comniittee draft
but was inserted by an amendment.
~ Ibid., p. 1872.
"Ibid.
3' ibid., pp. 1873, 1874 (April 26, 1864), and p. 1891 (April 27, 1864).
PAGENO="0373"
353
Senator Collamer (Vermont) explained the operation of state taxes
as the people understood it:
"You go to a town in New England, and the tax for the support of
the poor every man understands and feels. The same is true of the
taxes for the support of their schools and for the building of their
highways and bridges. These are domestic, municipal affairs; taxes
laid under State authority, to be sure; and every man understands
and appreciates them. Again, sir, you may go into one of our ordinary-
sized towns anywhere, in New York, Pennsylvania, or New England,
and there are some few comparatively wealthy men, but not many. By
fortuitous circumstances you may occasionally find in each town some
man of wealth. The one that I will now mention would be no very
unsupposable case. Suppose in a town of some three thousand inhabi-
tants there lives a man of wealth, for us, a man worth, say, $300,000,.
mostly money invested in bank stocks or some other corporation
stock. We pass this law. This man immediately takes his stock in
these banks under this bill. He either buys bonds and puts them in or
puts in money with which they buy bonds. The town levies a tax for
the purpose of repairing the highways or building a bridge. Some of
the people pay in money; some turn out and labor on the road. Some-
one asks, `Now, Mr. Taskmaster, who is on your tax-list for repairing
this road and bridge?' `There are such and such men.' `Where is Mr.
Stiles, our wealthiest man? He is not on your list at all. Does he pay
anything for the building of our bridges and roads? Does he contribute
anything for the support of town schools?' `No, sir; not at all.' `Does
he do anything to support the expenses of the government of the
State?' `No, sir; not at all.' `Is it the law of the land by which the
wealthiest man among us is exempt from these contributions which
all the rest of us feel and are compelled to pay?'
His "no very unsupposable case" of Mr. Stiles was referred to fre-
quently in the ensuing debates.
Senator Sherman again took up the argument. He favored heavy
taxation but-
"1 am willing, as one of the friends of this measure, to impose on
this property any burden of taxation that any Senator thinks it can
bear and live. The only difference is that 1 do not wish any portion
of this taxation to be diverted from national objects for State, county,
and municipal purposes. Here we are creating corporations with power
to bank; and the only question with us is, shall we confer on all the
towns and counties and cities and States of this Union the power of
taxation, to control their operations, and substantially to destroy
them? It seems to me that is the only question, and not as to the rate
of taxation." 38
And to prevent complete "sequestration" of bank property, like
real estate belonging to English monasteries, he called attention to
the provision allowing States and local governments to tax bank real
estate ~
"Provided, That nothing in this act shall exempt the real estate from
either county, State or municipal taxes to the same extent, according
to its value, as other real estate is taxed."
~ Ibid., p. 1891. 5
~` Ibid., p. 1897. S
`° Ibid., p. 1898.
PAGENO="0374"
354
This may have been the first time this permissive provision was
mentioned in the 1864 debates.4° On the other hand, it is believed that
the right of the States to tax bank real estate had been assumed from
the beginning. Certainly the real property of State banks had been so
taxed.
On April 29, 1864, the Senate, as a Committee of the Whole, resumed
consideratiOn of the National Currency bill. The Committee on
Finance proposed the following provision in respect to State taxation 41
"Provided, That nothmg in this act shall be construed to prevent
the market value of the shares in any of the said associations, held by
any person or body-corporate, from being included in the valuation
of the personal property of such person or corporation in the assess-
ment of all taxes imposed by or under State authority for State, county
or municipal purposes; but not at a greater rate than is assessed upon
other moneyed capital in the hands of individual citizens of such State.
And all the remedies provided by State laws for the collection of such
taxes shall be applicable thereto."
Then there followed the further proviso giving States the right to
tax real estate, as indicated above.
Senator iPomeroy (Kansas) proposed to insert instead of the first
proviso the following: 42
"Provided nothing in this act shall be construed as exempting the
capital stock of an association, beyond the amount invested in United
States bonds and deposited with the Treasurer of the United States as
part of its capital or as security for its circulating notes, from being
subject to the same rate of State and municipal taxation as is imposed
upon other personal property in the State, city or town in which the
association is located."
This amendment was intended to subject the entire capital of a
bank not invested in government bonds to municipal taxation,
including buildings and every other facility of the corporation. But the
portion of capital invested in government bonds was to be taxed only
by the U.S. Government. The amendment was rejected.43
Then Senator Howard (Mich.) proposed an amendment to limit
State and local taxation of shares to the place "where the bank is
situated." His object was this:
that the States in which the banks are situated shall have the
benefit of the taxation of the banks, and that the States where the
capitalist owning the stock may happen to reside shall not, on account
of that residence, be entitled to the benefit of the taxation. I am quite
aware of the principle of common law that personal property is
supposed to follow the owner wherever he may be, and that in contem-
plation of that code, a man's personal property is attached to him and
belongs to his residence. If the bill shall pass without this amendment,
this will be the result: .that where the owners of the stock reside, for
instance, in the State of Massachusetts or Maine, and their money is
invested and employed in banking operations in Michigan or Indiana
or Ohio or any western State where capital is not so abundant, the
money thus invested will be taxed by the State of Massachusetts or
4° This is alsonoted by Lutz, be. cit., p. 209.
41 34 Globe pp. 1952-53 (April 29, 1864).
42 Ibid.
~3 Ibid., pp. 1953, 1957.
~ Ibid.
PAGENO="0375"
355
Maine and the tax put into the treasury of those States instead of
going into the treasury of the State where the bank is in its actual
operation."
Mr. Howard's proposal corresponded with the fact that most banks
in fact were and still are primarily local institutions. Their stock for
the most part has been subscribed to by local residents and the banks
have always catered first to local needs. This proposal was debated
but lost. ~
Discussion of the National CurrencyActwas continued on April 30.
Senator Chandler proposed to limit the amount of State and local
taxes to "the amount of taxes assessed by the State upon its local
banks." 46 There was discussion as to where this amendment belonged.
Senator Fessenden thought that it was already covered by the previous
provision "that the taxation shall not be at a greater rate than the
taxation on money in the hands of individual citizens, but 1 see the
object is to prevent a State making a different rule to favor its local
banks." Senator Chandler answered, "Precisely; that is the object."
At the request of the Chairman of the Committee on Finance, Mr.
Chandler withdrew his amendment but promised to renew it when the
bill came before the Senate.
This he did on May 5, 1864. The wording of the amendment was
slightly different (perhaps improved) as follows.47
"And provided further, That no tax shall be imposed under the laws
of any State upon the shares in any of the associations authorized by
this act at a rate exceeding that imposed on the shares in banks
organized under the authority of the State where such association is
located."
This amendment was agreed to immediately with no debate.
On May 5, 1864, Senator Chandler spoke at length on making bank
taxes uniform, that is, restricting their taxation to the national
government, "but during the continuance of this war let banks be
taxed, let individuals be. taxed, and let them be taxed to their utmost
capacity to pay." 48 He favored heavy national taxation. The talk
then drifted to circulation based on government bonds. Senator
Fessenden referred to this amendment which was in the House bill:
"Provided, That no State tax shall be imposed on any part of the
capital stocks of such association invested in the bonds of the United
States deposited as security for its circulation."
He pointed out, too, that the Committee on Finance was of the
opinion
that the good of the bill itself, the good of these institutions
would be advanced by not undertaking to say that the property of
private citizens of the State invested in them should be free from State
taxation; that such exemption would create a feeling of dissatisfaction
and anger with regard to it that might in the end be fatal to the
institutions themselves." ~
As for the fear of excessive* State taxation, Senator Fessenden
thought that was provided against by the provision that* the tax
*upon these national institutions cannot be made greater by
~ Ibid., p. 1959.
46 Ibid., p. 1989 (April 30, 1864).
47 Ibid., p. 2128 (May 5, 1864).
:: ~~:: ~: ~?:
PAGENO="0376"
356
any State legislature than that on the State banks, and it is so pro-
vided. . . . but I deny that it has the slightest connection in the
world with the question now before the Senate on this amendment;
and that is whether or not the Government shall allow the States to
tax the private property of their own citizens when invested in these
institutions in the ordinary form."
This illustrates, as has often been pointed out, that the Congress
was really never quite clear whether it was talking about taxes upon
the banks or taxes upon stockholders on their personal property.
On May 6, 1864, when the national currency bill came up again,
national uniformity of taxation was again an issue. To reinforce the
argument, a letter from Secretary of the Treasury Chase was read
into the record.'° Senator Sherman supported a tax of 2 percent on
circulation, 1 percent on deposits and 2 percent on capital in excess
of circulation, whereas the Committee on Finance had proposed 1
percent on circulation and ~ of 1 percent on deposits and then reserved
the stock of the shareholders for taxation for State and municipal
purposes. The amendment to the amendment was lost.5'
The question then was on the amendment by the Finance Commit-
tee. Senator Collamer moved to strike the words "in lieu of other
taxes" in order "to save to the States the right of taxation." Senator
Sherman thought the statute should say "existing taxes." Senator
Collamer agreed and the amendment was so modified. This was
accepted by the Senate.'2
5° Ibid., p. 2142 (May 6. 1864). This letter was as follows:
"Treasury Department, May 2. 1864
"SIR: Nothing hut my deep sense of the importance of sustaining by every possible means the public
credit, upon which the sole dependence of the 9overnment for means to suppress the insurrection must
rest, would induce me to address you this letter upon a subject which has already received so much con-
sideration.
"The bill in relation to the national banking system now under debate is in the nature of an amendment
to the act of last session. Though a complete bill in itself, it contains few provisions not substantially em-
braced in that act, among which that in relation to the measure and distribution of taxation may be regarded
as perhaps the most important.
"Under ordinary circumstances there might he no insuperable objection to leaving the property organized
under the national banking law subject, as are almost all descriptions of property, to general taxation, State,
national, and municipal. But in the present condition of the country, I respectfully submit that this par-
ticular description of property should be placed in the same category with imported goods before entry into
general consumption, and be subjected to exclusive national taxation.
"At the present moment, the duties on imports form the sole reliance of the Government for means to pay
the interest on the public debt. If to these means the taxes to be paid by the national banks shall be added, a
most important addition will be made to those resources. The mere fact that these taxes are made payable
to the national Government. and so available for the payment of interest on the public debt and for the
reduction of its principal, will greatly strenghen the public credit and facilitate the negotiations of the
necessary loans at moderate rates of interest. I have no doubt that such a disposition of these taxes would be
worth more to the Government during the present struggle In practical results than three times the actual
value of the taxes themselves.
"I do not at all suggest that this description of property should not be taxed as heavily as any other de-
scription. On th~' contrary, I think it only just that it should bear its full proportion of the public burdens.
I am only anxious that the taxation upm it shall be made to contribute as largely as possible to the general
welfare; and it is the conviction, deeply impressed on my mind, that it will contribute more when aggre-
gated in one mass and made to tell upon the general public credit than when distributed between the nation
and the States and numerous municipal corporations, that prompts me to address these views to you.
"Under any plan of partition that may be adopted, the amounts of taxation distributable to the several
States and municipalities will be comparatively small and unimportant, and it is quite possible that the
total taxation of banking property for all purposes will be less than it will be if taxed exclusively for national
purposes. The advantages of partition to States and municipalities will therefore be small, and the banks
may not lose by it. The nation alone will be injured.
"It wifi not be understood of course that the foregoing suggestions are intended to apply to real estate
held by any banking association. That description of property must necessarily be held by titles under
State laws, and should properly be subjected exclusively to State taxation, except in the event of a direct
tax by Congress. The case is otherwise with the personal property and credits of the banking associations.
These receive their organization from national law and for great national purposes, and may therefore with
great propriety, and as I have endeavored to show, at the present time with great public advantage, be
subjected to exclusive national taxation.
"Very respectfully yours,
"S. P. CHASE,
~`Secretary of the Treasury.
"Hon. William Pitt Pessenden, Chairman. of Committee on Finance, Senate Chamber."
51 Ibid.
52 Ibid.
PAGENO="0377"
357
The national currency bill was finally passed in the Senate on
May 10, 1864-30 yeas; 9 nays. The House disagreed with some of
the Senate amendments and asked for a conference which was held.53
On June 1, 1864, Senator Sherman reported the results of the
actions of the Conference Committee, the major disagreements to be
ironed out being those relating to State and local taxation of national
banks.54 The Committee report on this matter is as follows:
"The House recede from their disagreement to the forty-first
amendment of the Senate and agree to the same with the following
amendment: strike out all after the word `provided,' in line forty-
seven of said Senate amendment down to and including the word
`located,' in line sixty-six, and insert in lieu thereof the following:
"`That nothing in this act shall be construed to prevent all the
shares in any of the said associations held by any person or body-
corporate from being included in the valuation of the personal prop-
erty of such person or corporation in the assessment of taxes imposed
by or under State authority, at the place where such bank is located,
and not elsewhere; but not at a greater rate than is assessed upon
other moneyed capital in the hands of individual citizens of such
State: Provided further, That the tax so imposed under the laws of
any State upon the shares of any of the associations authorized by this
act shall not exceed the rate imposed upon the shares in any of the
banks organized under the authority of the State where such associa-
tion is located,' and the Senate agree to the same."
Senator Sherman explained the report. This is what he said about
the State taxation problem:
"The last amendment, which was the only material one upon
which there was disagreement, and the only one upon which there was
much trouble, was the forty-first amendment, reserving to the States
the power of taxation. We have slightly modified the Senate amend-
ment, but the legal effect is very much the same as the Senate amend-
ment, in my judgment. The slight difference between the Senate
amendment and the amendment proposed by the committee of con-
ference will be very readily seen. These were the only points of dis-
agreement."
"Mr. HALE. Will the Senator be kind enough to inform me how
the matter of taxing the State banks and national banks relatively
is left by the bill.
"Mr. SHERMAN. This bill says nothing about taxing the State
banks. It provides for a tax of one per cent on the circulation of the
national banks, one half of one per cent on their deposits, and one
per cent on their capital above the amount invested in United States
bonds. It reserves to the States the right to levy a tax on national
banks not exceeding the rate that they assess upon their own banks,
and it is to be levied at the place where the bank is located."
The report was concurred in.
The President signed the bill on June 3, 1864. The long and historic
struggle had ended. The Congress had continued the national banking
system; it had a national currency; the right of the States to tax the
banks had been assured.56
"Ibid., p. 2207 (May 10, 1864), p. 2458 (May 25, 1864). The House Committee was composed of Messrs.
Hooper, Washburne, and Mallory; the Senate Committee was Sherman, Foster, and Johnson.
~ Ibid., p. 2621 (June 1, 1864).
55 Ibid., p. 2622.
"Ibid., p. 2651 (June 2, 1864), p. 2727 (June 4, 1864).
PAGENO="0378"
358
Just what rights had been given the States? They were (1) the
right to tax the shares at the place where the bank was located,
"but not at a greater rate than is assessed upon other moneyed
capital in the hands of individual citizens of such State," nor
should the tax on shares exceed the rate imposed upon the shares in
any of the banks organized under the authority of the State where
such association is located; and (2) bank real estate was to be taxed
for State, county or municipal purposes "to the same exter~t, according
to its value, as other real estate is taxed."
These provisions-as to real estate and personal property (bank
shares)-conformed to the property taxes in vogue in most of the
States at the time (1864). Current practices were reflected in the
permissions extended to the States and their subdivisions. In spite
of a few contradictory statements, it would seem that Congress
meant exactly what it said: States shall not tax national banks at a
greater rate than is assessed "upon other moneyed capital in the
hands of individual citizens of such State." They did not say, nor
intend to say, "at a greater rate than State banks." So indicates
the preponderance of evidence.
C. State taxes in 1922
Between 1864 when the National Currency Act was amended to
permit State taxation of national banks on their real estate and shares
and 1922, profound changes took place in the basis of life and in all
facets of society in the United States. The economy of the country
shifted from primarily agricultural to an expanding industrial civiliza-
tion. In the 1860s corporations were small and few, most of them
created by special acts of legislatures, whereas in 1922 they were
numerous, organized under general laws, and stimulated by growing
opportunities for profit. Their financing by issuance of stocks and
bends multiplied greatly the volume of intangible personal property
which tax collectors were desperately trying to reach. Great networks
of railways had replaced the few trunk lines of the earlier period.
Goods and materials moved freely and cheaply from sources to
factories to markets. The automobile, now coming into its own, had
made obsolete the toll roads, turnpikes, and macadam trails of earlier
years. An ever-expanding network of interstate high-speed highways
was under construction, financed largely by user-service charges in the
form of gasoline taxes (first adopted in 1919 but spreading rapidly)
and annual vehicle licenses, supplemented by ton-mile and other
levies on motor trucks and carriers. Grants-in-aid for road construction
had begun. Higher education, stimulated by the Morrill Act of 1862,
had been expanded with the founding of many new institutions and
the further development of others. State aid to common schools had
grown. Hospitals, charities, and correctional institutions had been
improved. The functions and the cost of government as a consequence
had greatly increased. The interferences of World War I with normal
activities of State and local governments were followed by increased
demands for service and capital outlays when the war was over.
Methods for raising governmental revenue likewise had greatly
improved in this period.
PAGENO="0379"
359
TABLE 5.-STATE AND LOCAL GOVERNMENT TAXES, BY TYPE OF GOVERNMENT AND TAX, 1922
[In millions of dollars]
Taxes collected
Total
States
Counties
Incorporated
places
Specified civil
divisions
Total
General property taxes
Special taxes:
Inheritance
Income
4, 221
868
745
1, 628
981. 0
3,321
68
62
348
66
29
687
(1)
1
1,345
(1. 4)
30
941.0
(.1)
Other2
126
101
2
21
1.5
Poll taxes
29
8
9
7
4. 0
Licenses and permits
Special assessments
408
205
305
9
25
19
73
149
4.0
27. 0
`$492,000.
2 Includes receipts from taxes on stocks of banks and other corporations, on the valuation of life insurance policies,
on mortgages at time of registry, on vessels at a specified amount per registered tonnage, and on grain at a specified
amount per bushel. (Source cited below, p. 10.)
Source: U.S. Bureau of the Census, "Wealth, Debt, and Taxation: 1922, Taxes Collected," pp. 12, 146.
Nevertheless the general property tax still was the principal source
of State and local revenue. This may be seen from table 5, which
shows taxes collected by various types of government. About three-
fourths of all State and local collections came from the general prop-
erty tax, but the smaller the unit of government the greater its de-
pendence on the property tax.'
The growth in national wealth since the 1860s, of course, was
reflected in assessments and in the estimated true value of property,
as compiled by the Census Bureau. This increase can be seen from
table 6. From the beginning, assessments seldom reflected the true
value of property. The assessed value of all property subject to the
general property tax in 1922 was $124,617,000,000. This was com-
posed of $92,369,000,000 in real estate and improvements; $27,400,-
000,000 of personal property; and $4,847,000,000 of other property.2
The relative amount of personal property assessed compared with
total assessments had been declining over the years as had been
pointed out over and over again.3
I This is clearly shown by the following table:
General property tax burden; 1902, 1912, 1922
Year
Aggre
Per
capita
gate
Percent
of total b
Sta
Per
capita
tes
Percent
of total b
Cit
Per
capita
ies
Percent
of total b
Cou
Per
capita
nties
Percent
of total
1922
1912
$30. 55
11.20
78.7
79.4
$3.22
1.44
40. 1
45.9
$20.30
14.47
82..8
77.5
$7.07
3.29
92. 1
91.1
1902
8. 35
82. 1
1. 02
51. 0
12. 21
86. 7
1. 85
91. 1
a Includes also minor civil divisions not shown in this table.
b Percent of total taxes and special assessments.
Source: ITS. Bureau of the Census, Wealth, Debt, and Taxation, 1907, 1913, 1922; Leland, op. cit.,
p. 11.
2 Wealth, 1)ebt, and Taxation: 1922, Assessed Valuation and Tax Levies, p. 34.
3 Cf. Ely, op. cit., pp. 165-16, 180-81; Seligman, op. cit., pp. 22-26.
PAGENO="0380"
360
TABLE 6--ESTIMATED TRUE VALUE OF ALL TAXABLE PROPERTY, 1850-1922
Amount
Year (in
millions)
1850 $7, 136
1860 16,160
1870 2 30, 068
1880 43, 642
1890 65, 037
1900 88, 517
1904 107, 104
1912 187, 739
1922_ 320, 804
1 Data for 18,50-1870 are for taxable property only. Thereafter total includes exempt property of the follow-
ing amounts (in millions): 1890, $3,833; 1900, $6,213; 1904, $6,831; 1912, $12,314; 1922, $20,506.
2 Currency basis. Gold basis, $24,055 million.
Source: U.S. Bureau of the Census, Wealth, Debt and Taxation: 1913, vol. 1, pp. 24-25; ibid., 1922, Esti-
mated National Wealth, p. 18.
The property tax of this period was a locally-administered centrally-
shared tax. Assessments were made by local officials practically without
supervision or instruction. Collections were made by county and other
officials, usually locally elected. They remitted the proper portion of
the taxes collected to the various units, including the State. This was
the opposite arrangement from what is now customary for other types
of taxes-State-administered taxes with revenues shared with locali-
ties. As property tax levies began to rise during and after the Civil
War, there were increasing incentives to competitive local undervalu-
ation as a means of reducing the weight of State taxes, just as similar
competition among townships and districts was used in efforts to
reduce local shares of county taxes. County boards of equalization
were first created to reduce inequalities in assessments within counties.
Later State boards of equalization, first ex officio, then appointed or
elected, were created to provide greater assessment equality among
counties with respect to State levies. These measures had little success.
Seldom could defective local assessments be. made equitable by the
equalization process so generally applied, nor could the boards over-
come tendencies for individual members to try to favor their own
localities at the expense of others.4
In due time the State equalization boards were replaced by State
tax commissions, full-time officers (some of professional calibre) whose
duty it was to supervise original assessments, make equalizations, and
assess for all purposes intercounty properties, railroads, public utilities,
and other corporations-duties local assessors had not been able to
perform satisfactorily. They also were made responsible for the
direction and improvement of State tax systems. They helped lead the
States away from the general property tax and sponsored the develop-
ment of new taxes, such as gross receipts taxes on public utilities,
low-rate taxes on intangibles, personal and corporate income taxes,
the sales tax, and the like.5 They also spearheaded the movement of
State officials to amend section 5219, as has been related.
4 See Lutz, The State Tax Commission, Harvard University Press, 1918, chs. II and III. Leland, op. cit.
pp. 19ff, 34.
5 Lutz, op. cit., ch. IV and following.
PAGENO="0381"
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During 1864-1922 many special taxes on corporations were devel-
oped. The franchise tax, at first an organization fee, was converted
into an annual money raiser.6 Special property ti~xes also were im-
posed. Some of those in force in 1922 are indicated in table 7 which
shows the receipts of State governments from these taxes. Cor-
responding detail for local government taxes is not available.
Over half of the special property taxes were paid by corporations
generally. Of the $81 million aggregate of special property tax receipts
of State governments, $62 million, or three-fourths, was reported for
six States-Pennsylvania, California, New York, Massachusetts,
Ohio, and Michigan.
The category designated "bank stock" taxes comprised one-sixth
of the total for all States, although it was reported in only the
10 States named in the table. Of the bank stock taxes, 98 percent
were received in five States-New York, California, Massachusetts,
Pennsylvania, and Connecticut.
TABLE 7.-STATE RECEIPTS FROM SPECIAL PROPERTY TAXES, 1922
[In thousand
s of dollarsi
State 1
Special property taxes
Total
Bank Street
stock Corporation railway All other
Total, all States 2
81, 003
13, 999 49, 833 10 17, 161
Maine
Massachusetts
Connecticut
New York
Pennsylvania
Delaware
Mississippi
Texas
Nevada
California
500
6, 513
2,617
7,604
28, 313
918
433
1,280
4
7, 770
214 284 1
2, 827 2, 691 4 991
1,216 150 1,250
4, 621 2,983
1, 362 20, 494 6, 457
33 138 747
43 390
5 1,275
4
3, 674 4, 096
1 This table enumerates only those States for which a category of "bank stock" taxes is reported separately in the census
compilation.
2 Includes receipts of allStates, including those not named.
Source: U.S. Bureau of the Census, Financial Statistics of States, 1922, p. 12.
The general property tax was the important tax upon banks. In
1921, banks were taxed by this method in 38 States with 52.6 percent
of the banking capital of the nation. Ten states reached bank stock
through low-rate taxes, applicable to 38.3 percent of bank capital.
Only the District of Columbia taxed banks on the basis of gross
receipts. In all the general property tax States except New Hampshire
and Vermont, the tax was levied at the location of the bank. In these
two States, the law provided for taxing bank stock at the residence of
the owner. Under the low- or special-rate taxes in California, Delaware,
New Jersey, New York, Pennsylvania, and Virginia, the location of
the bank was made the situs for taxation. In Maryland and Rhode
Island the situs of shares owned by residents was at the residence of the
In general these taxes were based on capital stock, authorized and paid in. Seldom did they include
earned surplus. When made applicable to banks, among other corporations, they did not include national
banks. Special license taxes Were imposed on banks only in Florida (capital), Louisiana (capital, surplus,
and undivided profits), Nevada (capital). Authorized capital was the base of franchise taxes in Colorado,
Idaho, Oregon, Rhode Island, Utah, and West Virginia. Other bases were used in Alabama (paid up cap-
ital), Arkansas (capital subscribed, issued, and outstanding), Cxeorgia (capital), Michigan (paid up capital
and surplus), Missouri (par value capital and surplus), Ohio (subscribed, issued or outstanding), Texas
(authorized or paid-tn capital, surplus, and undivided profits whichever is higher), Vermont (capital stock
or deposits), Washington ($15 each corporation). See Kimmel, op. cit., pp. 10-11, where further details are
given.
PAGENO="0382"
362
owner. In conformity to Section 5219, bank shares owned by non-
residents were taxable at the location of the bank. In Connecticut and
Maine, the situs for taxing all shares was the location of the bank, but
the taxes derived from shares owned by residents of the State were
distributed to local jurisdictions where these shareholders resided.7
TABLE 8.-LOW-RATE TAXES ON INTANGIBLES: 1927
State
Date of Type of
adoption Rate in force evaluation
California
Connecticut
District of Columbia
1925 1.45 percent Annual.'
1889 4 mills Registration.
1916 5 mills Annual.
Do.
Iowa
Kansas~_.
1911 6 mills
1925 5 mills2 Do.'
Kentucky
Maryland
Minnesota
Montana
Nebraska
Oklahoma
Pennsylvania
Rhode Island
South Dakota
1917 do.'
1896 434 mills Do.
1911 3 mills Do.'
1919 Assessed at 7 percent of true value Do.
1921 5 mills 3 Do.
1917 Registration at 2 percent of face value for Registration.'
5 years.'
1879 4 mills Annual.
1912 do Do.
1919 do Do.'
Do.
Vermont
Virginia
1925 do.7
1915 6 classes of intangibles. Rates vary from Do.'
2 mills to 11.0+ mills.
1 7 percent assessment law repealed 1927.
2 Bonds of other States and foreign governments taxable at 1 mill.
2 Also has a mortgage recording tax.
4 Bank deposits 1 mill.
3 Money in bank and elsewhere, 234 mills; bank stock, 70 percent of local tangible property rate. -
Money and credit tax of 14o of 1 percent adopted 1925; intangibles subjected to special levy of 36 of 1 percent in 1927.
7 Intangibles assessed at 1 percent of value; taxed at 40 cents on the dollar. Bank stock and competing capital taxed
at 2 percent.
Source: Leland, op. cit., p. 180.
1. Low-rate taxes ort intartgibles.-Low-rate taxes on intangibles
were employed in 15 States and the District of Columbia, as is shown
in table 8. It was the use of such a tax and the fact that the low rates
were not applied to shares of bank stock which led to the Richmond
decision and to the amendment of Section 5219 in 1923 and 1926.8
Failures to apply these and similar rates to shares of national banks
left ad valorem share taxes in jeopardy until the passage of P.L. 91-156
in 1969. It has been said that the Richmond decision and the ensuing
controversy over national bank taxation took the steam out of the
classification movement and retarded both its extension and more
intensive development. There is no doubt that the movement was
given a severe setback. Nevertheless, even though many States
collected more revenue under their low-rate taxes than they had
previously collected under high-rate general property taxes, the rev-
enue potential from these taxes was so low that they could not for
long have satisfied the needs of State and local governments. Atten-
tion was turned to more productive sources administered by the State
and often shared with locnf governments.
Some special taxes on intangibles also were adopted. Chief among
these were the taxes on mortgages and bank deposits. The motive for
these taxes was principally justice, since the high general property tax
rates when and if applied to this property were confiscatory or almost
7Kimmel, op. cIt., pp. 4-7. -
8 Cf. supra, pp. 265-291 in this appendix.
PAGENO="0383"
363
so. Some States preferred to exempt intangibles from taxation. Other
States adopted recording or registry taxes, since the occasion for
recording documents not only made collection easy but made possible
the use of revenue stamps. Any attempt to apply high annual rates to
these taxes added to the costs to be met by borrowers. Moreover, the
mortgages were completely representative of property already taxed.
Justice and expendiency both favored the adoption of the mortgage
registry taxes. Those in force in 1926 are shown in table 9~9
The amount collected from State mortgage taxes in 1922 was
$29,329,000, of which $2,785,000 was in New York and $1,052,000
in Michigan.1°
TABLE 9-MORTGAGE REGISTRY TAXES: 1927
State
Date of
adoption
Rate
Alabama
Kansas
Kentucky
Michigan
Minnesota
New York
Oklahoma
Tennessee
Virginia
1903
`1925
2 1917
1911
1907
1906
1913
1917
1910
$0.15 on each $100.
$0.25 on each $100.
$0.20 on each $100.
$0.50 on each $100.
$0.15 on each $100 when mortgage runs for 5 years or
less; $0.25 when mortgage runs for over 5 years.
$0.50 on each $100.
$0.10 on each $100 on mortgages running 5 years or
more; tax decreases with decrease in period to $0.02
per $100 if mortgage is for less than 2 years.
$0.10 on each $100 on loans in excess of $1,000.
$0.10 on each $100.
In 1927 an alternative stamp tax on secured debts registered with the State treasurer was adopted; rate, 3~e of 1 percent.
2 Declared unconstitutional.
Source: Leland, op. cit., p. 195.
Although justice was the early motivation for mortgage recording
taxes, several States have since adopted such taxes as a means of
collecting information useful in improving the quality of local assess-
ments, particularly real estate. County equalization ratios computed
in Illinois and used to equalize assessments are derived from such
data.1' Mortgage recording taxes have thus become a useful tool for
State use in improving the operation of the property tax.
At the time low-rate taxes on intangibles were putting national
bank taxes in jeopardy, as in Virginia, some students of the problem
wondered if the mortgage recording taxes would not produce the
same consequences. Though long delayed, the answer came in 1969
when the Supreme Court decided the appeal in Dickinson v. First
National Bank of Homestead.'2
2. Ban/c deposit taxes.-Bank deposit taxes were another phase of
the classification movement, although the early special taxes on
savings deposits can hardly be attributed to that movement. A court
decision in Mississippi in 1876 holding that national bank notes were
obligations of the United States and therefore exempt from taxation
led to passage of the Act of August 13, 1894. This act permitted
taxation by States of bank notes, U.S. legal tender notes, and other
notes and certificates payable on demand, circulating or intended to
circulate, and gold, silver, and other coins as money on hand or on
9 Leland, op. cit., pp. 187-95. On the present use of stamps, for real estate transfer taxes, see infra, table 16,
7th column.
10 U.S. Bureau of the Census, Financial Statistics of States: 1922, p. 13.
11 Cf. Illinois Department of Revenue, Illinois Property Tax StatIstics, 1966, Springfield, Ill., pp. 13.5ff.
12 291 F. Supp. 855 (1968), affirmed 89 S. Ct. 685 (1969).
PAGENO="0384"
364
deposit, provided that they were taxed in the same manner and at
the same rate as other money or currency circulating in the State.
This would seem to be an overall permission for States to tax money
on hand or on deposit. Of course, discrimination between deposits in
State and national banks would not be permitted.13
Taxes on savings deposits in Connecticut, Maine, Massachusetts,
New Hampshire, and Vermont were of early origin. Deposits taxes in
other States came as part of general classification programs and in
general applied to all money on deposit. These taxes are listed in
table 10. Other States either included deposits among intangibles
subject to general property tax rates or to low-rate taxes or exempted
them entirely.14 In some States, individuals were required to list
their deposits for taxation; in others collection at the source was
employed; in still others, the taxes were levied on the banks to be
borne by the banks or collected from depositors as competitive
conditions dictated. Often as an inducement to increase deposits,
many banks assumed the burden of deposits taxes. This constituted
an added tax on shareholders if it affected the amount of bank
dividends, otherwise only profits (perhaps undeclared profits) were
reduced. Since these taxes were at low rates, the burdens were
nominal.15
In the history of national bank taxation, taxes on bank deposits did
not have much impact.
TABLE 10.-LOW~RATE TAXATION OF BANK DEPOSITS: 1927
State
Whether special tax
Date of or part of classifi-
law cation plan Deposits taxed
Rate per
$100
Assessable to bank
or to inilvidual
taxpayer
Connecticut
District of Columbia
Iowa
Kansas
Kentucky
Maine
Maryland
Massachusetts
Minnesota
Montana
Nebraska
New Hampshire
Newiersey
Oklahoma
Pennsylvania
Rhode Island
South Dakota
Vermont
Virginia
1852 Special Savings
1916 Classification Savings over $500_ -
1911 do All money
1925 do do
1917 do All bank deposits-_-_
1872 Special Savings'
1888 do do
1862 do do~
1910 Classification All money
1919 do do
1921 do do
1864 Special Savings
1888 do do°
1925 Classification All money
1879 - do do
1860 do do3
1919 do do
1878 Special Depositsand
accumulations.
1914 Classification All money
$0.25
.50
.60
.50
.10
.50
.25
.50
.30
(3)
.25
4 . 50
.50
. 10
.40
.40
.40
.70
.20
Bank.
Individual.
Do.
Do.
Bank.
Do.
Do.
Do.
Individual.
Do.
Do.
Bank.
Do.
Individual.
Do.
Depositstobankall
other to taxpayers.
Individual.
Bank.
Individual.
1 Average deposits, reserve funds and undivided profits less certain deductions.
3 Less certain deductions.
Assessed at 7 percent.
4 Law of 1925 provided for gradual reduction of rate. Rate to be 50 cents after 1931.
3 At first applied to deposits and reserves (K. M. Williamson, `State taxes on savings deposits in New England,"
American Economic Review, vol. xviii, No. 1 (March, 1928), p. 48); later to savings depnsits, Acts and Resolves, Rhode
Island, 1893, ch. 37. Since 1912, 4-mill rate has applied to all money. Cf. General Laws, 1923, ch. 59, sec. II, p. 307.
Source: Leland, op. cit., p.217.
13 J. R. Home, Tax Collector v. 3. & T. Green, 52 Miss. 452. Cf. Welch, op. cit. ch. v; Clement National
Bank v. Vermont, 231 U.S. 120, 135 (1913). For the text of the 1894 law, see supra, p. 8, appendix I-F, 31
U.S.C. 425, 426.
14 Money and deposits were exempt from taxation in the following states: Alabama, money on deposit in
banks, and solvent credits; Delaware, ready money; Louisiana, cash on hand and on deposit; Massachusetts,
savings deposits in hands of individual; Mississippi, money on deposit; New York, savings deposits; North
Dakota, money; Washington, money; Wisconsin, money; Ohio, "Dunker's money." U.S. Bureau of the
Census, Digest of State Laws Relating to Taxation and Revenue, 1922.
`5 These taxes are fully discussed in Welch, op. cit., cli. v.
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3. Comprehensive classifieation.-In this period comprehensive
systems of classification for property tax purposes were adopted in
Minnesota (1913), Virginia (1916), Kentucky (1917), North Dakota
(1917), and Montana (1919).16 More recent applications are found,
for example, in Arizona. Since it is only the intangible taxes in these
systems that affected section 5219, comprehensive classification is not
discussed here.
4. State income taxes.-The search for additional revenue soon
turned attention away from the property tax, general and classified.
Tax burdens on property had grown heavy, and the defects of the tax
were such as to create increasing resistance to further dependence
upon it. Interest and attention shifted to the income tax.
During the Civil War and Reconstruction period, income taxes
were adopted in Missouri, North Carolina, and South Carolina in
1861; Alabama and Virginia in 1862; Texas, Georgia, and West
Virginia in 1863; Louisiana in 1864; Kentucky (1867), Delaware
(1869), and Tennessee (1883) ~ The revenue results were disappointing
and most of these taxes were soon dropped. It remained for Wisconsm
in 1911 to demonstrate that a State income tax could be administered
successfully and could produce substantial revenues. The success of
Wisconsin preceded adoption of the present Federal income tax (1913)
and influenced its administration.
By 1922 individual income taxes were in use in Delaware, Mississippi,
Missouri, New York, North Carolina, North Dakota, Oklahoma, and
Wisconsin. In Massachusetts a selective income tax had been adopted
under which individuals were taxed at different rates on income from
selected intangibles. These personal taxes replaced in considerable
part the previously-used taxes on intangible personal property. But
the exemption did not apply to bank shares. These continued to be
taxed at local property tax rates until 1923 when national banks were
given the option of the share tax or a net income tax of 12j~/~ percent.18
In Delaware, bank shares were taxed at a flat rate of ~ of 1 percent of
value. In New York, where personal property generally had been
exempted, bank shares were taxed at 1 percent. The difficulties this
differentiaiion caused in taxing national banks have been described.19
In North Dakota, bank shares were assessed at 50 percent after de-
ducting the assessed value of bank real estate. Other intangibles were
taxable at 3 mills on their assessed values.20 In Massachusetts,
Missouri, North Carolina, Oklahoma, and Wisconsin banks were
subjected to the same taxation as real estate.2' These differences-
taxation of incomes in one way and banks in another-caused litiga-
tion in which the taxes of several States were declared unconstitutional
by the Supreme Court.22
In 1922 State income taxes produced revenues totaling $62,447,000.
The yield in the several States is shown in table 11. Distributions to
governmental units within States also are indicated.
16 See Leland, op. cit., pp. 225ff.
17 E.R.A. Seligman, The Income Tax, New York, Macmillan, 2d ed, rev., pp. 405-14.
18 Kimmel, op. cit., p. 47.
19 See supra, p. 202 In this appendix. Bank taxes were invalidated by People ex rd. Hanover National
Bank v. Goldfogle, 234 N.Y. 345, 137 N.E. 611 (1922); the U.S. Supreme Court refused to review the case,
261 U.S. 620 (1923).
20 Bank tax declared invalid. Eddy v. First National Bank of Fargo, 275 U.S. 550 (1921). Cf. Welch, op.
cit., p. 37.
21 Report of the Committee on the Taxation of the Shares of National Banks, Proceedings of the National
Tax Association, 1922, pp. 344-46.
22 The bank share taxes in Wisconsin from 1921-26 were held void in First National Bank of Hartford,
Wisconsin v. City of Hartford, 273 U.S. 548 (1927). Cf. Welch, op. cit., pp. 36-38.
79-421 0 - 72 - 25
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TABLE 11-STATE INCOME TAXES COLLECTED, 1922
Amount
(in
thousands)
Total $62,447
Delaware 295
Massachusetts 13,262
State 1,316
Incorporated places 11,936
Other
Mississippi
Missouri 2,568
New York 29,930
State 14,900
Incorporated places 13,434
Other 1,596
North Carolina 2,636
North Dakota j61
Oklahoma. 396
South Carolina
Virginia 2,240
Wisconsin 9,736
State
Counties 1,315
Incorporated places 4,318
Other 509
Source: t.J.S. Bureau of the Census, "Wealth, Debt, and Taxation, 1922, Taxes Collectad," pp. 146-47.
5. Impact on Section 5219.-The foregoing account is only a sketchy
portrayal of the public revenue system of the period. Numerous taxes
and related sources of revenue have not even been mentioned, but
enough has been said to provide a basis for judging whether the State
revenue pattern of the early 1920s had any impact on the 1923
amendment to section 5219.
Since real estate taxation was common to every State the provision
in 1923, and again in 1926, repeated word for word the provision
originating in 1864. Bank real estate was, and is, taxed "as other real
estate is taxed."
The share tax option in the 1923 amendment was changed in the
hope that low rates of taxation on individually-owned- intangibles
would not invalidate taxes on national banks.23 In the Richmond case
"other moneyed capital in the hands of individual citizens" taxed at
substantially lower rates than national bank stock had made void the
taxes on national banks in Virginia.24 Fears that other low-rate taxes
might be similarly affected brought pressure from States for amend-
ment of section 5219. In the writer's opinion, the effective force that
induced Congress to act was a concern that States might suffer serious
revenue losses and be compelled to refund taxes, rather than dire3t
congressional interest in encouraging States to adopt and retain
classified property taxes. Perhaps this is a distinction without a real
difference. In any event, pressures from State officials were countered
by bank organizations and attorneys who sought to yield as little as
possible in descriptive words and phrases that would permit differential
taxation of individual investments without invalidating taxes on
national banks. The amendment of 1923, according to a subsequent
23 Congress intended to preserve classification: cf. Woosley, op. cit., pp. 55ff; Welch, op. cit., p. 43.
24 Discussed above at pp. 265-272 in this appendix.
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decision,. effected no substantive change-the decision in the Richmond
case was simply written into the statute.25
The success of States that used classified property taxes, both in
according greater justice to taxpayers and in providing substantially
greater revenues from intangibles (although not enough to help solve
emerging fiscal problems), was noted in the congressional discussions,
but this had little to do with the 1923 amendment.
The income tax option incorporated into the 1923 amendment
was in recognition of the fact that several States, following the lead
of Wisconsin, had become interested in adopting, so far as they
could constitutionally, personal and corporate income taxes. The
property tax was falling further into disrepute and was unable to
reach directly the taxable capacity of many citizens. Individual
income taxes were favored on the ability-to-pay principle; corporate
income taxes alienated few voters. Both types of taxes had won
substantial support. They combined much justice with high revenue
potentials.
Little was said about the income tax option on the floors of Congress
during consideration of the amendments. The share tax held the
center of the stage. Nor was much said about income taxes in the
1923 hearings. They came to attention in debates on the 1926 amend-
ment. However, the committee bill provided for the income tax
option and it took hold even without much express support from the
States. The amendment did recognize what was going on in a growing
number of important States.
The limiting provision in the case of a net Income tax applied to
national banking associations-that they shall not be taxed "higher
than the rate assessed upon other financial corporations nor higher
than the highest of the rates assessed by the taxing State upon the
net income of mercantile, manufacturing, and business corporations
doing business within its limits"-corresponded with what States
were attempting to do. They were trying to develop net income taxes
applicable to corporations generally. Extension of net income taxes
to banks would mean also-as later results demonstrated-that taxes
based on net income were less than share taxes for national banks.
There was no reason for banks to oppose this option or to slow the
development of either personal taxes (which included bank dividends
in the taxable income of shareholders) or corporate net income
taxation.
Unfortunately, the permission to include dividends in individual
taxable income was vague, unsatisfactory, and unworkable. The
amendment of 1923 provided that "In case dividends derived from
the said shares are taxed, the tax shall not be at a greater rate than
is assessed upon net income from other moneyed capital." This is
about as unclear as the share tax proviso from which it was drawn.
The consent that Congress may have tried to extend in granting
the dividend option was cut back by this proviso. It remained for
the 1926 amendment to clear this up.
25 First National Bank of Guthrie center v. Anderson, 269 13.5. 341 (1926), review above at pp. 286-287
in this appendix. The 1923 proviso which 5tate officials honed would overcome the Richmond decision
read: "Provided, that bonds, notes, or other evidences of indebtedness in the hands of individual citizens
not employed or engaged in the banking or investment business and representing merely personal invest-
ments not made in competitition with such business shall not be deemed moneyed capital within the
meaning of shis section." For complete text of 1923 amendment, see appendix i-c, above, p. 4.
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Nevertheless, it is believed that the, income tax option in the 1923
amendment of section 5219 was a response to the growing use of
such taxes by the States.
6. Impact of State prw~tices on 1926 amendment.-What impact, if
any, did'State tax practices have on the form or substance of the 1926
amendment? That amendment, as has been indicated,26 added a
fourth option-a tax according to or measured by net income-under
which States could tax national banks. In the three years between
the 1923 and 1926 amendments, New Hampshire shifted from the
general property tax method to a special-rate tax (1923), South
Dakota adopted a low-rate tax (1923), and Kansas did likewise
(1925). Kentucky adopted a special rate in 1924, and Vermont in
1925.
Massachusetts pioneered in 1925 by adopting a privilege tax
measured by net income, including income from Federal securities.27
This was the first time the privilege tax idea had been applied to
national banks since the indirect method of reaching income from
tax-exempt securities had been upheld in a case that involved the use
of a tax base "measured by" net income from all sources under the
Federal corporate income tax act of 1909.28
In 1926, New York adopted an income tax. The limited productivity
of the direct net income tax, which could not reach income from
tax-exempt securities, caused it to have little appeal to New York
State officials. They much preferred to stick to the higher-yield share
taxes which they thought could be continued under the 1923 amend-
ment. However, New York wanted to expand the income approach
applying the Massachusetts tactic, so under pressure from these two
States and with leadership from them, an agreed amendment to
section 5219 was adopted in 1926.~~ Other States sought to clarify
the share tax provision in the 1923 amendment but were unable to
overcome opposition from the national banks and their representa-
tives.30 The excise tax option which was adopted constituted a far-
reaching and attractive alternative for the States; also, it was a cheaper
one than the share tax for the banks.
Even though the 1926 amendment was an agreed proposal sponsored
by committees from the National Tax Association and the American
Bankers Association, it is believed that its form was influenced by
the law in Massachusetts and the income tax plans of New York.
Again State tax programs had influenced the authoriz~ttions in section
5219.
D. State taxes in 1 968-1 969
In the fifty years following 1920, tremendous changes took place
not only in the finances of governments and their functions but in
the national economy and in the lives of citizens. Five major changes
in the revenue systems of State and local governments are clear: (1)
the introduction and expansion of sales and consumption taxation;
26 See above, this appendix.
27 Cf. Kimmel, op. cit., pp. 17, 45.
28 PUnt v. Stone Tracy Co.. 220 U.s. 107 (1911).
29 More fully discussed above at pp. 283-291 in this appendix.
30 Supra, pp. 284-303.
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(2) the extension and development of income taxes; (3) the increased
reliance on intergovernmental revenue transfers; (4) the assumption
of new functions or their financing (mainly public assistance and other
relief measures) by State and Federal Governments; and (5) relegation
of the property tax by States to local governments, followed by
deterioration oI~ this tax as the primary source of revenue in urban
areas. The first two changes directly affected State taxation of banks;
at least two of the others affected the size of bank tax burdens. All
these changes are part and parcel of the increased burdens of taxation
on everyone, a development characteristic of the last 50 years.
The background out of which these changes came is worth noting.
The short post-war depression of 1920 was followed by a feverish
period of speculation and prosperity. The productive capacity so
important in World War I was again turned on for production of
civilian goods and services. The nation was no longer primarily
agricultural in its endeavors; it had become one of the industrial
giants of the world. High production and profits helped feed the
speculation of the late 1920s. In 1926, the Florida real-estate-specula-
tion bubble burst, followed soon by the stock market collapse of 1929
and the depression of the 1930s. Bankruptcy, unemployment, and
misery necessitated relief, welfare, public works (P.W.A.), works
projects (W.P.A.), Reconstruction Finance Corporation, and other
Federal programs, and finally brought about the Federal-State public
assistance and Federal social security programs. Aid to the poor and
the indigent, which had been almost exclusively a county or township
function, had to be taken over by States with support and guidance
from the Federal Government. Vast highway programs also were
undertaken to stimulate business and provide employment, as well as
to meet current needs of automotive travel. A new and higher level of
intergovernmental transfer payments was the result.
Hardly had these steps been taken or economic recovery begun,
when World War II engulfed the nation. Armed conflict followed
armed conflict into the Korean War and the Viet Nam engagement.
Once it was "guns or butter," then followed an attempt to have both.
Rising costs, inflation, and social discontent ensued. Governmental
deficits to provide increased purchasing power during the 1930 de-
pression were followed by deficits during war and postwar readjust-
ments. The immense productivity of Federal income taxes led all
levels of government to look to Washington for financial assistance
in an ever-widening array of projects.
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TABLE 12.-TAX REVENUE, 1966-67
Amount
.
(millions of dollars)
Percent
All
Federal State
Local
All
Federal
State
Local
Item
govern-
ments
Govern- govern,
ment ments
govern-
ments
govern-
ments
Govern-
ment
govern-
ments
govern-
ments
Total taxes 176,362 115,121 31,926 29,315 100.0 100.0 100.0 100.0
Income 103, 559 95, 497 7, 136 926 58. 7 83. 0 22. 4 3. 2
Individual 67, 361 61, 526 4, 909 926 38. 2 53. 4 15. 4 3. 2
Corporation 36, 198 33, 971 2, 227 20. 5 29. 5 7. 0
Property 26,280 862 25,418 14.9 2.7 86.7
Sales, gross receipts, and
customs 36, 360 15,806 18, 575 1,979 20. 6 13. 7 58. 2 6. 8
Customs duties 1, 901 1, 901 1. 1 1. 7
General sales and gross
receipts 10, 143 8, 923 1, 220 5 8 27. 9 4. 2
Selective sales and gross
receipts 24, 316 13,905 9, 652 759 13. 8 12. 1 30.2 2. 6
All other 10, 163 3, 818 5, 354 992 5. 8 3. 3 16. 8 3 4
Note: Because of rounding, detail may not add to totals. Leaders represent zero or rounds to zero.
Source: U.S. Department of Commerce, Bureau of Census, "Governmental Finances in 1966-67," series GF 67, No. 3
(Washington, D.C., 1968), p. 5.
Major tax sources of the several levels of governments are shown in
table 12 for the year 1966-67. Whereas the property tax had once been
the main support for American governments, that distinction now
belonged to income taxes, with the individual income tax producing
twice the yield of corporate income taxes. The aggregate of consump-
tion taxes (grouped as sales, gross receipts, and customs) also exceeded
the yield of property taxes. When revenues are examined separately
for each level of government, it is seen that 83 percent of Federal
revenues came from income taxes and 17 percent from other sources,
of which sales taxes far outstripped the yield of customs duties. In
the States, the property tax provided only negligible support for State
governments. These depended on sales taxes for over 58 percent of all
tax revenues in 1966-67. Income taxes provided more than a fifth of
State revenues. Local governments, however, still drew almost 87
percent of their revenues from the property tax, with sales taxes the
next largest contributor.
All the revenues of the various governments, as has been indicated,
did not come from their own sources, except for the Federal Govern-
ment. As can be seen from table 13, States received more than $14
billion, or 23.4 precent, of their revenues through intergovernmental
transfers, a large part of which were passed on to local governments.
The States added some of their own revenues, so that transfers to local
governments amounted to over $20 billion, or 32.2 percent, of their
aggregate revenues from all sources.
The primary functional beneficiaries of transfer payments between
levels of government have been education, highways, and public
welfare.
Interesting and important as transfer payments have been, they
have not directly affected the State and local taxation of banks, except
as demands for funds have increased all tax contributions to public
treasuries.
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TABLE 13--GOVERNMENTAL REVENUE, 1966-67
- Amount (millions of dollars) Percent
All Federal State Local All Federal State
govern- Govern- govern- govern- govern- Govern- govern-
Item ments ment ments ments ments ment ments
Local
govern-
ments
Revenue from all
sourceo 1253,125 161,351 61,082 65,377 100.0 100.0 100.0
Intergovernmental revenue. (1) 14,289 20,396 23.4
Revenue from own sources - - 253, 125 161, 351 46, 793 44,981 100. 0 100. 0 76. 6
General revenue f-ram
own sources 206, 990 130, 869 37, 782 38, 340 81. 8 81. 1 61.9
Taxes 176,362 115,121 31,926 29,315 69.7 71.3 52.3
Charges and miscel-
laneous general
revenue 30,629 15,748 5,856 9,025 12.1 9.8 9.6
Currentcharges 21,117 10,602 4,197 6,318 8.3 6.6 6.9
All other 9, 512 5, 146 1, 659 2, 707 3. 8 3. 2 2. 7
Utility revenue 5,505 5,505 2.2
Liquorstores revenue.. 1,675 1,470 205 .7 2.4
Insurance trust revenue. 38, 955 30, 482 7, 541 932 15.4 18.9 12. 3
100.0
31.2
68.8
58. 6
44.8
13.8
9.7
4. 1
8.4
.3
1.4
1 Net of duplicative intergovernmental transactions.
Note: Because of rounding, detail may not add to totals. Leaders represent zero or rounding to zero.
Source: U.S. Department of Commerce, Bureau of Census, "Governmental Finances in 1966-67," series GF 67, No. 3
(Washington, D.C., 1968), p. 4.
1. Sales taxes-State general sales taxes were introduced in the
depression of the 1930s. They provided many States with quick reve-
nues to hell) pay costs of relief and public welfare. Property taxes
proceed through a time-consuming process of assessment, levy and
collection. Income taxes have to be estimated, declared, and collected,
a process that consumes some weeks or months. By contrast, sales
taxes can go into collection almost as soon as they are enacted with
remittances beginning as early as the following month, if this is
desired. In some States, too, the sales taxes were among the few types
of new taxes which could be enacted without change in the State
constitution. In general, these imposts applied to sales of tangible
personal property at retail. In some instances, the tax applied legally
to vendors, in others, to vendees. Regardless of the legal theories upon
which they were enacted, the sales taxes immediately demonstrated
their capacity to produce needed funds.
The first State general sales tax was enacted in Mississippi in 1932.
Thirteen states adopted similar taxes in 1933, and by 1938 the number
had risen to 24. No other tax except the gasoline sales tax had spread
as rapidly. In the decade from 1941 to 1950 five additional States
adopted general sales taxes; and from 1951 through 1969, sixteen more
were dcled to the list. In 1970, sales taxes were in force in 45 states,
not counting the Delaware use tax on lessees of tangible personal prop-
erty other than household furniture, fixtures, or furnishings which went
into effect July 1, 1969. Such use taxes generally accompanied the
general sales tax in order to l)revent loss of yields from out-of-state
purchases. The spread of sales taxes through the nation is shown in
table 14.
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TABLE 14.-YEAR OF ADOPTION OF STATE GENERAL SALES TAXES IN STATES THAT USED THE TAX JAN. 1, 1970
1931-40:
Mississippi, 1932; Arizona, 1933; California, 1933; Illinois, 1933 Indiana, 11933; Iowa, 1933~ Michigan, 1933;
New Mexico, 1933; North Carolina, 1933; Oklahoma, 1933; ~outh Dakota, 1933; Utah, 1~33; Washington,
1933; West Virginia, 1933; Missouri, 1934; Ohio, 1934; Arkansas, 1935; Colorado, 1935; Hawaii, 1935; North
Dakota, 1935; Wyoming, 1935; Alabama, 1936; Kansas, 1937; Louisiana, 1938; total 24
1941-50:
Connecticut, 1947; Maryland, 1947; Rhode Island, 1947; Tennessee, 1947; Florida, 1949; total 5
Since 1951:
Georgia, 1951; Maine, 1951; South Carolina, 1951; Pennsylvania, 1953; Nevada, 1955; Kentucky, 1960; Texas,
1961; Wisconsin, 1961; Idaho, 1965 New York, 1965; Massachusetts, 1966; New Jersey, 1966; Virginia, 1966;
Minnesota, 1967; Nebraska, 1967; Vermont, 1969; total 16
Grand total 2 45
1 Gross income tax; in 1963 Indiana enacted a 2 percent retail and use tax.
2 Excludes the Delaware use tax (effective July 1, 1969), on lessees of tangible personal property other than household
furniture, fixtures, or furnishings.
Source: Advisory Commission on Intergovernmental Relations, State and Local Finances: Significant Features: 1967 to
1970, Information report M-50, Washington, D.C., November, 1969, p. 60.
Since these taxes applied to the sale (or purchase) of tangible
personal property, they reached not only the transactions of individ-
uals but those o~ corporations as well. It was natural, therefore, that
the States would try to apply them to national banks. Banks were
consumers of paper products, printing, ink, typewriter ribbons, office
furniture, and the like. If individuals and others had to pay sales
taxes, why not national banks? The answer was in section 5219. Sales
taxes were not among the permitted taxes, nor were gasoline taxes,
cigarette taxes, or liquor taxes, to name a few others. Massachusetts,
among other States, applied its sales tax to national banks only to
find from the Supreme Court decision in the case of First Agricultural
National Bank of Berkshire County v. State Tax Commission that
this could not be done.'
The logic of extending retail sales taxes to national as well as other
banks was so unassailable that many banks prior to 1968 paid the tax
in many States without protest. The items covered were seldom large,
so the tax oi dinarily was not a substantial burden. Nevertheless, it
remained for P.L. 91-156 in 1969 to legalize sales and use taxes on
national banks.
1 392 U.5. 3~9 (1968) ; see above, p. 333 in this appendix.
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10
Grand total_~
I Income from stocks and bonds only.
2 In effect applies only to New York residents who derive income from New Jersey sources.
3 Investment income only.
4 Exclusive of South Dakota tax applicable to financial institutions only.
Source: Advisory Commission on Intergovernmental Relations, "State and Local Finances: Significant Features, 1967-
70," informatioa report M-50, Washington, D.C., November 1969, p. 59.
2. Extension of State income taxes.-Prior to 1922 ten states, ex-
cluding Hawaii which had not yet been admitted to the Union, had
individual and corporate income taxes. The two groups, however,
were not identical, as may be seen from table 15. From 1922 through
1930, South Carolina, New Hampshire, Arkansas, Georgia, and
Oregon adopted personal income taxes. During the same years cor-
porate income taxes were enacted in South Carolina, Tennessee,
Arkansas, California, Georgia, and Oregon. In the next 10 years, 16
States adopted individual income taxes, and 15 adopted corporate
income taxes (with 13 States enacting both forms). In th~ next 10
years, from 1941 to 1950, Alaska with its personal and corporate
income tax of 1949 and Rhode Island with its corporate tax joined
the income tax group. In the 1950s, Delaware and New Jersey enacted
co!porate income taxes; no States adopted the individual income tax.
Pressure for funds in the 1960s brought personal income taxes to
eight more States and corporate net income levies to six more States.
Thus by 1970, personal income taxes were found in 41 States and cor-
porate income taxes in 42. One reason the adoptions were slowed
in later years was the application of uniformity provisions in State
coPstitutions. Some State courts had held income to be property,
thus outlawing all progressive income tax rates.2 Others would not
permit specific flat rates because other property was not similarly
taxed. However, by 1970 the State income taxes had become almost
universal with hold-out States gradually coming in line as constitutions
were changed or courts became convinced of their legality.
2 For example, Bachrach v. Nelson, 349111. 579, 182 N.E. 909 (1932).
373
TABLE 15.-DATES OF ADOPTION OFSTATE INCOME TAXES IN STATES THAT USED THE TAX JAN. 1,1970
INDIVIDUAL INCOME TAX
Before 1911: Hawaii, 1901, total 1
1911-20:
Wisconsin, 1911; Mississippi, 1912; Oklahoma, 1915; Massachusetts, 1916; Virginia, 1916; Delaware, 1917;
Missouri, 1917; New York, 1919; North Dakota 1919 total 9
1921-30:
North Carolina, 1921; South Carolina, 1922; New Hampshire,1 1923; Arkansas, 1929; Georgia, 1929; Oregon,
1930; total 6
1931-40:
Idaho, 1931; Tennessee,1 1931; Utah, 1931; Vermont, 1931; Alabama, 1933; Arizona, 1933; Kansas, 1933;
Minnesota, 1933; Montana, 1933; New Mexico, 1933; Iowa, 1934; Louisiana, 1934; California, 1935;
Kentucky, 1936; Colorado, 1937; Maryland, 1937; total 16
Since 1941:
Alaska, 1949; New Jersey,2 1961; West Virginia, 1961; Indiana, 1963; Michigan, 1967; Nebraska, 1967; Illinois,
1969; Maine, 1969; Rhode Island, 3 1969; total 9
Grand total 41
CORPORATION INCOME TAX4
Before 1911: Hawaii, 1901; total 1
1911-20:
Wisconsin, 1911; Connecticut, 1915; Virginia, 1915; Missouri, 1917; Montana, 1917; New York, 1917; Massachu-
setts, 1919; North Dakota, 1919; total 8
1921-30:
Mississippi, 1921; North Carolina, 1921; South Carolina, 1922; Tennessee, 1923; Arkansas, 1929; California,
1929; Georgia, 1929; Oregon, 1929; total 8
1931-40:
Idaho, 1931; Oklahoma, 1931; Utah, 1931; Vermont, 1931; Alabama, 1933; Arizona, 1933; Kansas, 1933;
Minnesota, 1933; New Mexico, 1933; Iowa, 1934; Louisiana, 1934; Pennsylvania, 1935; Kentucky, 1936;
Colorado, 1937; Maryland, 1937; total 15
Since 1941:
Rhode Island, 1947; Alaska, 1949; Delaware, 1957; New Jersey, 1958; Indiana, 1963; Michigan, 1967; Nebraska,
1967; West Virginia, 1967; Illinois, 1969; Maine, 1969; total
PAGENO="0394"
374
No matter how fast States worked to adopt new taxes, the demand
for additional funds in the late 1960s outran their efforts. States with
income taxes adopted sales taxes to supply needed revenues; States
with only sales taxes adopted income taxes-and all asked for greater
financial assistance from the Federal Government. By 1970, the dual
use of income and sales taxes seemed to cover three-fourths of the
country.3
3. Mortgage recording and transfer taxes.-Mortgage recording
taxes, or real estate transfer taxes with broader coverage, received a
great impetus for State adoption when the Federal transfer tax was
abolished. No longer could States depend upon Federal revenue stamps
for data with which to compute sales ratios for use in assessment and
equalization of property taxes. If they were to secure such data con-
veniently they had to enact their own taxes. On January 1, 1970, 37
States and the District of Columbia had such levies. Fourteen States
enacted real estate transfer taxes in 1967; six States adopted them in
1968 and 1969. Kansas was the only State that had a mortgage record-
lug tax in 1926 but did not have it, or its equivalent, in 1970. Most of
the States which had this tax in 1926 have since reenacted it with
wider coverage and changes in rates. Details of the real estate transfer
taxes are shown in table 16.
Although the primary objective was not neces~arily revenue,
collections under the Florida documentary tax were substantial-over
$35,256,000. In Pennsylvania the yield was $27,432,000; in Virginia,
$7,469,000; and these taxes in Massachusetts, Minnesota, and South
Carolina each produced over $2,000,000 per annum. In twenty-eight
States the tax was collected by means of revenue stamps which indi-
cated the true value of the property transferred. On most transfers the
amount of the tax, or of stamps purchased, was not burdensome.
3 For maps showing (1) the extent of use of broad-based personal income taxes and (2) the use of both
personal income and general sales taxes by States (December 31, 1969), see Advisory Commission on Inter-
governmental Relations, State and Local Finances: Significant Features: 1967-1970, Information report
M-50, Washington, D.C., Nov., 1969, p. ii.
PAGENO="0395"
TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970
State and government imposing et~'a~~d
Alabama (State) 1935
Arizona (State) 1968
Arkansas (State) 1969
Ca(ifornia ()oca)(6 1967
Co)orado (State) 1967
Connecticut (State) 1967
De)aware (State and )oca)(8 1965
District of Co)umbia ))ocal( 1962
F)orida (State) 1931
Surtax on transfer of real estate, . 1967
Georgia (State) 1967
Hawaii (State) 1966
Illinois (State) 1967
Indiana (State)'1 1961
Iowa (State) 1965
Kentucky (State) 1968
Maine (State) 1967
Maryland (State and local)'2 1937
Additional State tax 1969
Massachusetts (State) 1951
Michigan (State) 1966
Minnesota (State) 1961
Nebraska (State) 1965
Nevada (State) 1967
New Hampshire (State) 1967
New Jersey (State) 1968 f.v.
New York (State and local):
State 1968 x.m.
Local 19Su tm.
North Carolina (State) 1967 x.m.
f.v. . full State
value; x. Rate Distribution collections Provision for
m. exclusive 1/1/70 of receipts 19681 Use of recording full
of assumed ($0001 stamps sales price2
mortages
x.m. 50~/$5O0 State 2/3 1,607~
$2/document local
fe. $150/$Soo' na.
x.m. 55d/$500' local
f.v. ld/$1007 local
em. lOd/$1009 0
f.v. 5d/$1005 State
f.v. 50d/$500' State 1/2
x.m. 2% State
x.m. 55~/$500 State
50d/$500 local
55~/$500 State 9/10 --- X
55d/$500 local'3 774
0.5% State
$1/$50O~ 14 State 2,638 X
55~/$500 local --- X
$1.10/$5O0'~ State 2,093~ X
55d/$500 State 247 X
5Su/$500' State 95% --- X
10~/$100~ State 96 X
50d/$500' local --- X
55~/$500' State --- X
16 local
50d/$500 local --- X
Provision for
automatically
transmitting
sales price
information3
X S
X L
X S
X S,L
Base
Administrative features
f.v. 55~/$500' local
f.v. 1% State°
f.v. 0.5% local
x.m. 30d/$100 State
x.m. 55d/$500 State
X S,L
X
X X L
X
1,910 X
1,523
35,256~ X
X
266 X
1,166 X
na. X
na. X
f.v.
f.v.
f.v.
f.v.
f.v.
f.v.
X
X
L
S,'L
L
X
See footnotes at end of table.
PAGENO="0396"
TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970 (Cont'd)
.
State and government imposing
Year
enacted
Base
tv.- full
value; x.
.
m. - exclusive
of assumed
mortages
Rate
1/1/70
.
Distribution
.
of receipts
State
.
collections
I
1968
($000)
Administrative features
Use of
stamps
. .
Provision for
.
recording full
2
sales price
.
Provision for
.
automatically
.
transmitting
*
sales price
. . 3
information
Ohio local)
1967
f.v.
iø~/$i0O'~
local
---
---
---
---
Oklahoma (State)
1967
x.m.
55d/$5005
State 95%
354
X
---
---
Pennsylvania (State and local)'t, . .
1951
f.v.
1%
State'8
27,432
X
X
---
Rhode Island (State(
1967'°
f.v.
55~/$5OO
State
---
X
X
---
South Carolina (State and local):
.
State
1923
f.v.
$1/$5O0~
State
2,484k
X
X
County
1967
tv.
55~/$5OO'
local
---
X
---
---
South Dakota (State)
1968
x.m.
5O~/$500
local
---
X
---
---
Tennessee State)
1937
f.v.
26d/$100
State
---
---
Vermont (State)
1967
f.v,
1/2 of 1%
State
---
---
X
5, L
Virginia (State and local)
State and local20
1922
f.v.
15~/$100
State2°
7,469k
--.-
State
1968
x.m.
50d/$500'
State 1/2
---
---
---
--
Washington State and local)21. ,.,
1935
f.v.
50i//$500
State2'
1,186
X
X
L
West Virginia (State and local(
State
1959
f,v.
$1.10/$500
State
744
X
X
--~
County
1967
f.v.
5W/$500
local
---
---
X
---
Wisconsin (State)
1969
f,v,
1D~/$100'
State 1/2
---
---
X
S
na. - Data not avaiiabie.
Eociudes amounts collected and retained by locai governments.
denotes Yes"; --- denotes "No."
3~ . "State agency"; L. "local assessor or simiiar local olliciai."
4lncludes documentary taxes other than reai estate transfer taoes.
tTrensfers under $200 are eoempt.
6Counties, or a city and a county are authorized to impose a tao on reai estate transfers. Cities within a county which has aiready imposed the tan may ievy a tax of `A the rate with a credit being given against the county
tax for the city tao.
7rranseers of $500 or less are exempt.
CThe city of Wilmington else ievies a 1% realty transfer tao.
PAGENO="0397"
TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970 (Cont'd)
9Rate is SOd for the first $500. Transfers of $100 or less are exempt.
10D,stribuned in the same proportion that revenues derived from the tao imposed by the Act providing for the levy of naves on certain classes 0f intangible personal property approved December 27. 1937 (Ga L. 1937.3g,
P. 1561 as now or may hereafter be amended, are divided.
1Tha tax is applicable only to corporations subject no gross income tax.
t2The city of Baltimore and specified counties are authorized to supplement the State tao, at rates ranging from $1.1O/$500 no ii', percent of the actual consideration paid.
`3Except that tax on recordation of instruments granting encumbrances os property situated in two or mom counties as security for corporate bonds of public utilities, are peid to the State.
t4Plus an additional 14% surtax.
ttRate is $2.20 on first $1,000.
t6New York City imposes a tax of 0.5% on transfers of real property where the consideration exceeds $25,000.
`7me rate shown is the statewide county rate. The minimum tax is $1, unith transfers under $100 exempt. An additional tax, not to exceed 30d on each $100 of value of real property, may also be levied by any county.
t0Local governments are authorized to impose a real estate traesfer tax up to 1% and about 1,850, including mare than 1,000 school districts, have done so.
9Repealed and reenacted is 1968.
20Counties and cities levy a tax of 1/3 the State recordation tax 15d/$100l.
2tCounties are authorized to levy a 1% real estate sales tax; all 39 counties have done so.
SOUCCE: Advisory Commission on Intergovernmental ReIations~ State and Local Finances: Significant Features, 1 967 to 1 970:
On Information Report, No. M-50 (Washington, D.C., Nov., 1969)z pp. 135137.
PAGENO="0398"
378
When such a tax was required of national banks in Florida, one bank
contested the charge and succeeded in having the tax declared in-
applicable because a mortgage registry or real estate transfer tax was
not permitted under section 5219.~ One cannot help but wonder what
would have happened if, instead of calling it a tax, the law had
designated the charge as a "fee" -for "fees" are not taxes. But if the
"fee" depended on the full value of the property transferred instead
of the cost of service rendered, on the ground that it may cost more
to record a transaction involving $1 million than $1 ,000, legal diffi-
culties might still have ensued. Of course, if the transfer tax had been
levied for the privilege of recorJing the deed or mortgage "measured
by or according to the value of the property transferred," the courts
would have faced other problems in legal classification. P.L. 91-156
cut through such uncertainties; the Federal statute no longer jeopar-
dizes such taxes when imposed upon national banks.
E. State bank tax legislation
After adoption of the 1926 amendment of section 5219, Wisconsin
the following year extended its income tax to banks, taxing them at the
same rates as other corporations. Oregon followed the excise concept
in 1929 adopting a privilege tax on or measured by net income. Utah
also took this course in 1931. That same year Florida and Ohio
adopted low-rate taxes on intangibles to which banks were subject,
Oklahoma adopted a net income tax applicable to banks, and Vermont
enacted a tax on dividends. In 1932, Alabama passed an excise tax on
or measured by net income, while Washington selected the net income
approach. In 1933, Idaho and Oklahoma adopted the excise "measured
by" net income, Indiana and Iowa adopted low-rate taxes, Arizona a
special rate, and Washington, a gross income tax. This shows what a
number of States did in the years immediately following adoption of
the 1926 amendment.5
A further recital of changes in bank taxes in subsequent years
would serve no significant purpose; comparison of bank tax methods
in each of three years is sufficient to show trends in legislation. These
trends may be seen from table 17. The abandonment of general
property taxes on shares has continued. Some States that continue
to use the property tax have not been able constitutionally to abandon
that system, but year-by-year more legislatures are being given
authority to do so. The use of low-rate taxes, or specific taxes, as a
means of taxing banks also has decreased. Their use, forced mainly
by judicial decision, has provided the States with less than the desired
revenue yields.
4 Dickinson v. First National Bank of Homestea~i, 393U.S. 409 (1069) .See above, p. 3361n this appendix.
`This discussion of legislation during 1927-1933 is based on Kimmel op. cit., p.17 if.
PAGENO="0399"
379
TABLE 17.-METHODS OF TAXING BANKS, 1934, 1958, 1969-70
Year-
Method of taxation 1934 1
19582
1969-70~
Share taxes at general property rates 19
Low- and special-rate taxes on shares 18
13
14
4 9
10
Excise measured by net income 9
Netincome
19
1
15
11.
Dividends taxed to shareholders 1
Gross income 1
Franchise tax based on gross income (District of Columbia) 1
1
(5)
1
1 Taken from Kimmel, op. cit., p. 22.
2 Helmberger, op. cit., pp. 33-36, 41-42.
From tables infra in sec. Ill of this appendix.
4 Includes Montana, where banks are assessed at 30 percent.
Pennsylvania applies tax of 1 percent of gross receipts to private bankers.
The movement to adopt excise taxes also has continued. The
numbers shown in the table for excises measured by net income and
taxes on net income separately may be erroneous, but when added
together they indicate a clear trend.6
The gross income method has continued to be the choice of Congress,
unfettered by its own limitations in section 5219, for taxing banks
in the District of Columbia. The simplicity of the method and its
easy administration have not been disturbed since its adoption.
Pennsylvania has employed gross income as a method for taxing
private bankers, who also are not subject to section 5219.
F. impact of State taxes on 1969 amendment
What influence did the practices of the States in taxing national
banks have upon Congress in the drafting of P.L. 91-156, the 1969
amendment of section 5219?
The immediate cause of this amendment was the two decisions
of theSupreme Court in 1968 and 1969-the first prohibiting appli-
cation of State sales taxes to national banks, the other prohibiting
a registry tax on a mortgage recorded by a national bank, both
discussed earlier.7 In the interim amendment in P.L. 91-156, Congress
added to section 5219 a provision permitting the application of such
taxes to national banks on a nondiscriminatory basis. Details of the
amendment are summarized in earlier pages.8
The temporary authorizations allowed States to use the sales and
other taxes that they had been applying to their own banks and other
taxpayers. They were also permitted to do something that had been
prohibited since 1864, namely, to tax the tangible personal property of
national banks, if State banks were so taxed. Most States had applied
tangible property taxes to taxpayers since Colonial days. Some States,
however, had refrained from taxing the personal property of State
banks since they could not apply such taxes to national banks.°
Congress had also withheld permission to tax bank-owned intangibles
of national banks.
For purposes of table 17, the test used to distinguish an "excise" from a direct net income tax ix whether
the tax applies to income from all sources, even though the "direct net income tax" may be called in the
State law an "excise" or a "privilege tax on or measured by net income." Regardless of title, if the State
Tax Guide did not specifically state that the definition of taxable net income included income from Federal
tax-exempt securities, or that such tax-exempt income was excluded from deductions from gross income, the
tax is classified here as a net income tax rather than an excise tax. If time permitted a further search of the
laws, some of the classifications in table 17 might be changed.
7 First Agricultural National Bank of Berkshire county v. State Tax Commission, 392 U.S. 339 (1968),
and Dickinson v. First National Bank of Homestead, 393 U.S. 409 (1969). Cf. supra, p.336 in this appendix.
8 Cf. supra, pp. 337-339 in this appendix.
Cf. First National Bank of Shreveport et iii. v. Louisiana Tax Commission et al, 289 U.S. 60 (1933).
PAGENO="0400"
380
Finally, to follow the expiration of this temporary or interim period,
December 31, 1971, Congress gave States full power to tax a national
bank "as a bank organized and existing under the laws of the State
or other jurisdiction within which its principal office is located."
Congress had now come full circle, adopting a position that had
been urged by a minority in Congress in 1864 and repeated often by
State officials and some members of Congress ever since.
III. THE IMPACT OF SECTION 5219 ON THE TAXATION OF NATIONAL
BANKS
A. The background
From 1864 through 1971 the methods by which national banks
could be taxed were limited by section 5219 of the Revised Statutes.
The terms of the statute were vague and uncertain; their meaning
was clarified only by continuous litigation. "One national bank after
another has challenged every type of State tax utilized." Even so,
doubts about the legality of many State taxes on national banks
persisted until the amendment of 1969. 2 Whether that amendment
has completely clarified the rights of States to tax national banks the
future alone can tell. What constitutes discrimination against them
may continue for some time to be a legal issue
Nevertheless over the last century section 5219 has been moved, by
successive amendments, from a narrow restriction on States to a wide-
open grant in the "permanent amendment" for nondiscriminatory
taxation based on equality of treatment between national and State
banks. The rivalry and jealousy that once existed and called for Federal
protection of national banking associations from the wrath of State
legislatures no longer prevails; it was not a strong influence even when
the regard for banks was at its lowest ebb during times of financial
crisis and severe depression, or when interest rates were at their highest
points. The whole issue of State taxation of these institutions must be
viewed with a long hLstorical perspective.
It is generally agreed that in 1864 national banks probably needed
the protection from discriminatory taxation provided by section 5219.
That need soon passed. It was completely removed with the creation
of the Federal Reserve System. Though State banks were not com-
pelled to join the System, as were national banks, they could join
easily and quickly whenever they desired to take that step. At that
time, too, the national banks lost their note-issue monopoly and save
for a few minor differences in powers and supervision, it became
difficult to tell the two classes of banks apart. State taxes upon State
and national banks, however, often differ. Those differences usually
are attributable to section 5219. ~
Over the years that section of the statutes has had very little effect
on the general contours of State tax systems. These developed inde-
I Helmberger, op. cit., p. 9.
2 Cf. ibid., p. 10. Woosley remarked in 1935, "The undisguised fact is that national banks cannot now be
taxed with certainty and adequacy. They are, and for several years have been, a favored group in the tax
system, actually in many States, potentially in other States." Woodey, op. cit., p. 127.
3 Cf. Welch, op. cit., p. .210; Gary, in Proceedings of the National Tax Association, 1921, P. 400. W. H.
Blodgett, tax commissioner of Connecticut, remarked: "Time was when section 5219 was found to be neces-
sary. It was necessary because of political conditions. Can we now with any assurance say that those political
conditions will not recur ...?" Ibid., 1923, pp. 388-9. Welch, bc. cit., said: "The doubtful claim of national
banks to the status of federal instrumentalities has led to criticisms of section 5219 as a serious infringement
of States' rights. It Is contended that Congress is forcing upon the States constitutional amendments and
radical revisions of tax systems simply by way of protecting a small minority of taxpayers who have neither
the need for nor the right to such protection."
PAGENO="0401"
381
pendently and tended to influence the enlargement of State tax
powers over national banks as section 5219 came to be amended.
What did happen was that in the taxation of national banks States
had to conform to section 5219 and adapt their bank tax practices
to it. This often meant that the terms of the Federal law controlled
State policies toward their own chartered banks as well. Many States
regarded it as unfair not to tax their own banks as they did national
banks. Yet some States thought it unfair to other classes of other
taxpayers to deal with State banks as they were forced to treat the
national associations. So it was that the influence of section 5219
extended to the protection of banks other than those nationally
organized.
For better or worse, too, the impact of section 5219 was far heavier
on ad valorem property taxes than on other forms of State bank
taxation. During most years since 1864, only that type of State or
local taxation was permitted. It was the prevailing State tax system
not only in 1864 but even into the twentieth century. Reforms in the
property tax, with the adoption of classification and low-rate taxes
on intangibles, made it easy to allege that there was discrimination
against national banks. The resulting court decisions forced States
either to reduce bank taxes to the level of the low taxes on individually-
owned intangibles or give up their classified property taxes. Litiga-
tion and the amendment of section 5219 both followed. Coincident
therewith came the development of other types of State taxes to meet
the growing needs for revenues, some of them inapplicable to national
banks because of section 5219. Some writers have concluded that this
situation was tantamount to Federal control over State tax systems
and programs.
For example, Woosley, in 1935 came to this conclusion: ~
"TJntil the status of national bank taxation can be more definitely
determined, the States cannot safely adopt schemes of classification
without openly endangering the legality of their taxes on bank shares.
Nor can they adopt the taxation of income from intangibles in lieu
of ad valorem taxation without invalidating their share taxes on
national banks.
"Moreover, the employment of the income or franchise tax methods
on national banks, as now authorized by Federal law, is so restricted
as to compel the States to readjust their tax systems in essential
respects in order to validate the franchise taxes on national banks.
Thus, Congress, in its effort to protect the national banking system
from potentially inimical taxation, has so circumscribed the methods
of taxing these institutions that the States are in fact subj ect to a
considerable degree of coercion in the construction of their entire tax
structures."
A more moderate view is at least equally plausible. It hardly seems
that being forced to lower bank share taxes to the level of taxes on
personal intangibles involves coercion as to the form of the entire tax
structure even though reduction of national bank taxes constitutes a
price few like to pay. Loss of revenues through reduced bank taxes is
4 Woosley, op. cit., pp. 7-8. Cf., also, F. B. Thomas of Vermont in Proceedings of the National Tax Asso-
ciation, 1923, p. 377: "Now what is the effect of this law [section 5219 as amended in 1923] as it stands at this
moment? A. State must adopt a system of taxation which conforms to the requirements of the Federal Coy-
ment and must discri ninate against its own subjects of taxation and in favor of national banks. There is
no other choice for It. Its system of taxation must be controlled by the Federal Government, and I think
that is a very obnoxious feature of the present law,..."
79-421 0 - 72 - 26
PAGENO="0402"
382
painful, but it seems to the writer that the productivity of the rest of
the tax system was not much affected.
An observation by Helmberger appears more realistic if less dra-
matic: ~
"Most State tax officials, many (if not most) State legislators, and
many students of public finance consider these Federal restrictions
on State and local taxation of national banks to be an infringement of
the State's taxing powers and favor removal of such restrictions."
He thought section 5219 should be revised to reduce its complexity
and confusion.6 This, of course, is an aim of the "permanent amend-
ment" in P. L. 9 1-156 of 1969.
Even though the application of personal property taxes, especially
taxes on intangibles, required special treatment for national banks,
the successive amendments did gradually extend the methods by which
States could tax these banks. The wait between extensions was long
but the trend was clear. With the aborted amendment of 1923 and
the further amendments of 1926 and 1969, Congress moved to enlarge
the outer boundaries which it prescribed for State taxation of national
banks.
B. Evointion of per nission~s and restrictions.
From the historical account in part I of this appendix, it is evident
that the powers given States to tax national banks were extended and
the restrictive conditions were elaborated in successive amendments
until finally in 1969, all explicit restrictions were removed as of Jan-
uary 1, 1972, save for a non-discrimination requirement.
The provision for real estate taxation continued without substantive
change from 1864 until 1969, when it was supplemented (though not
significantly enlarged) by a provision of the "temporary amendment"
relating to taxes on real property or its occupancy that might be ap-
plicable to a national bank with its principal office outside the taxing
State. The "permanent amendment" drops the specific reference to
taxes on real property or other types of taxation.
The share tax also continued from the beginning but became one
of several exclusive options beginning with the 1923 amendment.
The net income tax option which excluded income from tax-exempt
securities from the tax base remained almost unchanged from the
time of its introduction in 1923. The exclusion of tax-exempt income
from the base of a direct tax on net income was incorporated into the
law in 1926 and was not affected by the "temporary amendment" of
1969. But until 1926 a State could not tax the income of a national
bank and also include dividends from such stock in the taxable income
of individual owners. Under the 1923 amendment the taxation of net
income to national banks precluded the taxation of such dividends
to individual owners; so did the use of the share tax. After 1926 na-
tional bank dividends could be included in the taxable income of
individual owners if the State, in addition to personal income taxes,
also imposed a general net income tax "on or according to or measured
by" net income on financial and other corporations. The "temporary
amendment" of 1969 did not change these provisions. Nor was there
a change in the excise "according to or measured by" net income from
all sources, which had been adopted in 1926.
`Heimberger, op. cit., p. 5.
Ibid., p. 137.
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The 1969 amendment contains three sets of provisions: (1) those
permitting additional taxes on national banks having their principal
offices in the taxing State; (2) those pertaining to national banks
having their principal offices outside of the taxing State; and (3) the
completely new section 5219 scheduled to take effect after January 1,
1972. The first two sections of these sets of provisions are of an interim
character effective only until December 31, 1971, and subject to
conditions specified in a "saving provision" in section 3 of P.L. 9 1-156.
As to national banks with a principal office in the taxing State, the
States are allowed a fifth alternative-they may tax national banks
on a nondiscriminatory basis in the same manner and to the same
extent as they tax State banks. This resembles the general provision
that is to become effective in 1972.
The 1969 provision relating to the taxation of national banks
having their principal offices outside the jurisdiction of the State
imposing the tax is a purely temporary arrangement. It is designed to
permit the imposition of sales, use, and documentary (stamp) taxes.
It carries permission also to tax tangible property, excluding cash or
currency.
The act of 1864 was silent on the taxation of shares owned by non-
resident stockholders, save that it specified that nothing in the act
should prevent "all the shares" of a national bank "held by any person
or body corporate" from being included in the assessment of personal
property "of such person or corporation. . . at the place where such
bank is located, and not elsewhere..." The act of 1868 affirmed that
the words, "place where the bank is located, and not elsewhere," in the
1864 act, meant "the State within which the bank is located," and
that shares owned by non-residents of the State could be taxed only
in the city or town where the bank is located, "and not elsewhere." 1
The amendment of 1923 specified that the legislature of each State
"may determine and direct, subject to the provisions of this section,
the manner and place of taxing all the shares of national banking
associations located within its limits." It directed that if a State
taxed the shares or the net income of any national bank owned by
nonresidents of the State, the situs of taxation was to be in the taxing
district where th~bank was located and not elsewhere. The bank was
required to report the income and pay the tax thereon as agent of the
nonresident shareholders. The 1926 amendment separated the pro-
visions relating to income tax from those relating to shares, so that
the condition governing shares of nonresident owners was expressed
as follows:
"The shares of any national banking association owned by non-
residents of any State shall be taxed by the taxing district or by the
State where the association is located and not elsewhere; and such
association shall make return of such shares and pay the tax thereon
as agent of such nonresident shareholders".2
This provision was not affected by the "temporary amendment"
of 1969.
In the following paragraphs, the impacts of the major provisions of
section 5219 during 1864-1969 will be considered.
1 For the full texts, cf. supra, appendix i-C, at p.4.
2 Paragraph 2 in section 5219 (12 USC 548); cf. supra, appendix 1-A, at p. 1.
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C. Taxation of national bank real estate
The act of 1864 made it clear that nothing in that act exempted
real estate owned by a national bank from taxation "to the same ex-
tent, according to its value, as other real estate is taxed." From
Colonial times real estate taxes had been the backbone of State and
local revenues. Most governments had little else to tax and ~it was the
one thing that was always visible to local assessors. That States and
local governments had the right to tax real estate belonging to national
banks never has been questioned. Even Justice Marshall in his opin-
ion in McCulloch v. Maryland emphasized that the Court's judgment
holding the Maryland tax on the Bank of the United States uncon-
stitutional did not extend to a tax "paid by the real property of the
bank, in common with the other real property in the State . . ."
In any event, congressional consent to real estate taxation was ex-
plicit in the act of 1864; whether it was necessary may be debated.
Of course, under uniformity provisions in State Constitutions as-
sessors could .no more put unequal and discriminatory assessments
against national bank real estate than they could against any other
class of property. But discrimination had tobe proved, and it had to
be substantial. Mere differences of opinion over values would not
suffice, nor would random sampling conducted by banks be adequate
to prove discrimination if the data were not sufficient to convince
non-statistical judges. At first mere allegations of discrimination were
often accepted in lieu of proof, but after a time the judges began to
call for adequate evidence of actual discrimination.
Whether bank real estate was over- or underassessed relative to
other property was a question of fact in each case that came up for
trial. Sometimes bank real estate was over-assessed just because it
was commercial property or because it was located in a central busi-
ness district, as in Chicago, where it was valued at a higher percentage
of sale value than outlying properties or than homes in areas where
large numbers of voters lived. On the other hand, assessors might tend
to curry favors with bankers or might have doubts about the value
of bank property and therefore tend to assign relatively low values.
There were many instances in which the true value of bank real estate
was debatable. Sales to establish market values were not frequent.
Some structures were designed only as bank premises with costly
vaults and underground storage chambers. It was often argued that
such premises were one-use structures of dubious market value. If a
bank did not occupy them, no one else would put them to efficient
use. Other bank-owned structures were multiple-use buildings in
which bank floors generally occupied only a small portion of the usable
or rentable space. Alternative uses for such premises were numerous,
so whether bank buildings tended to be overassessed depended on
the facts of particular cases.
The requirement that national bank real estate was to be taxed as
other real estate was taxed did not in itself assure uniformity of tax-
ation. Many States could classify property for tax purposes. In these
States, uniformity of treatment had to prevail only within classes of
property, not between classes. In such States, apart from specific
constitutional differentials or prohibitions, legislatures could adopt
such classifications as were logical and reasonable but not arbitrary.
34 Wheat. 316 (1819), at p. 436, quoted more fully supra, at p. 346.
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Could the real estate of national banks be taxed as a separate class?
Probably not, but treatment of property of financial institutions and
associations as a class would be as logical as groupings of commercial,
mercantile, manufacturing, or agricultural properties as classes to
which different effective tax rates would be applied. The laws of Min-
nesota, Kentucky, Montana, North Dakota, and Arizona contain
such classifications, but none of these set out bank real estate (as
distinct from bank shares) for discriminatory or differential taxation.
This was not done in compliance with section 5219; it simply was not
the policy of the States to classify along those lines.
All States and the District of Columbia tax national banks on real
estate. For many years, the State of Washington, because of con-
stitutional prohibitions; could tax national banks only upon their real
estate but taxed State banks on both real estate and tangible personal
property.4
D. The optional taxes
1. The share tax.-Prior to 1923 the only taxes States could levy
on national banks were those on "all the shares" and on bank real
estate. Consent to levy these taxes was granted by the act of 1864,
a year after enactment of the initial law establishing the system of
national banking associations. By this time a number of States had
begun to tax capital stock of banks and other corporations.5 in the
early years, conforming to general property tax practices, national
bank and other shares were taxable as personal property of the in-
dividual owners. This meant that for a considerable period the only
tax paid by the bank as a corporate entity was the tax upon its real
estate1 usually only the bank premises.6 Even when the taxes on
shares were returned and paid by the banks, the payments so made
were regarded as a lien upon the stock and were deductible from
future dividend payments. Neither the States nor Congress were ever
very clear whether the share tax was a tax upon the bank or a tax upon
individuals as shareholders. Even where the tax was assessed upon
and paid by the bank, the shares were often assessed in the names of
the shareholders. Regardless of the legal theory upon which the tax
was levied, the share tax gradually became a tax upon the bank, and
the payments were allowed as deductions from bank income in de-
termining Federal income taxes.7
Where the banks paid the tax on the shares, individual owners did
not have to list them with other items of property subject to taxation.
Securities owned in many other corporations were supposed to be listed
by and taxed to resident shareholders. These corporations generally
did not pay such taxes for the shareholders, even as a condition to domg
busmess m a State. And, until the adoption of requirements for giving
mformation-at-the-source under income tax laws, corporations did not
mform assessors or income tax officials of dividend payments made to
shareholders. Thus, in the general property tax States, bank shares
were m effect tax-exempt securities in the hands of the owners. Some
States accorded similar exemptions to resident stockholders of domestic
4 Excise tax declared unconstitutional. Cf. Helmberger, op. cit., p. 30.
`CI. Seligman, Essays in Taxation, 9th ed., pp. 151ff; Welch, op. cit., pp. 12ff.
e Helmberger, op. cit., p. 20.
`In 1870, Kentucky's law requiring the bank to pay the tax on shares was upheld by the U.S. Supreme
Court. Soon other States adopted this practice. Helmberger, on. cit., p. 22. Cf. Welch, op. cit., p. 81. Assess-
ment in the names of the shareholders is still the rule in Illinois and some other States. In 1934, practically
all banks were paying the share tax (Welch, op. cit., pp. 21, 81).
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corporations, and a few, such as illinois, exempted resident owners of
shares in foreign corporations from personal property taxes on shares if
the foreign corporations paid property taxes in the State. in the case of
national banks, section 5219 provided a further advantage to owners of
national bank stock. If the State elected to tax national bank shares it
could not concurrently tax shareholders on their bank dividends. Un-
der the 1926 amendment, dividends could be included in the taxable in-
come of the shareholder if the State had a general income tax applicable
also to financial and other corporations and included dividends on
their shares also in the taxable income of shareholders. To the extent
that national banks charged share taxes against stockholders, this
left national banks with only real estate taxes to pay during the years
from 1864 until 1926, assuming that after 1923 the State did not select
the direct tax on net income as an alternative to the share tax. But
if the State did adopt the direct tax on net income, this reduced the
level of taxes on national banks below what they had been paying
under the share tax option. Since only a few States ever used the direct
income tax alternative, the foregoing qualifications had little effect on
the general situation. Even though the national banks had a lien upon
their stocks or dividends for taxes paid on behalf of stockholders,
explicit charging of the share tax to the stockholder was the exception
rather than the rule. Assumption of the tax by the banks made national
bank stock an investment preferred to other corporate securities in
situations where profits and dividends might be assumed to be ap-
proximately equal.
Collection of share taxes from the bank was adopted in the early
years to lessen tax avoidance and delinquency. The bank could always
be found, whereas stockholders often could not be located or did not
pay, or even resided in a taxing district other than the one in which
the bank was located. Some shares might be the property of tax-
exempt institutions. Efficiency in assessment and collection dictated
levying the tax on the bank and collecting the tax from the bank.
But even as late as 1934, Florida, Rhode Island, and Texas had not
adopted this policy. A further step in improving the assessment of
bank stock was to have it valued by the central tax administration
of the State. In 1934 at least 10 States were doing this.8
The number of States using the share tax to tax national banks has
declined over the years. Prior to 1923, 48 States had share taxes; in
1934 the number had declined to 37 States; in 1958, share taxes were
used in 27 States, 14 of which employed flat rates rather than rates
applying to general property. On January 1, 1970, 21 States still
were imposing share taxes on national banks.'° Twelve States were
using specific rates; four States required fractional assessments. These
and other details are shown in table 18.
8 Cf. ibid., p. 105-106 and table IV, p. 83 (insert). Florida and Rhode Island assessed the tax in the district
where the shareholder resided. At that time Delaware, Indiana, Michigan, and North Dakota provided for
collection of the tax either from the bank or the shareholder.
`Kimmel, op. cit., pp. 22; Heimberger. op. cit., no. 33-36.
10 counting Michigan where the share tax applied only to building and loan associations.
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TABLE 18.-BANK SHARE TAXES: 1969-70
State Description of law
Arkansas Based on market value; assessed value of real estate deducted; general property tax
rate. Applied to National, State banks, and trust companies.
Delaware Based on true value; determined by total of capital, surplus undivided profits and
reserves. Rate i~t of 1 percent of value. Appliod to National and State banks and trust
companies.
Florida Bank stock taxed at just value under intangible personal property tax, class B-rate 1
mill per dollar.
Georgia Shares taxed at full market value, determined by total of capital, surplus and undivided
profits, less assessed value of real estate; rate on national banks and computitors not
to exceed 5 mills per dollar.
Illinois Based on market value, equalized with other property, less assessed value of real estate
within county. Rate, general property tax rate. Applies to all incorporated banks, National
and State, and building and loan associations.
Indiana Based ofl value of shares determined by total of capital, surplus and undivided profits, less
assessed value of real estate. Rate 23/b mills per dollar. Applies to every bank, trust com-
pany and industrial loan and investment company where located. Building and loan
associations also pay annual franchise excise tax.
Kentucky1 Based on financial value. Building and loan associations can deduct shares of borrowing
members where borrowings exceed or equal amount paid in. Rates: State rate on banks
and trust companies, 4.75 mills per dollar; county, city, and district may add 1.9 mills;
school districts may add 3.8 mills. Savings and loan associations and production credit
associations pay 10 cents per $100. Applies to State, National banks and trust companies,
savings and loan and production credit comoanies.
Louisiana Basis: Declared capital stock, surplus, undivided profits and capital reserves less (1)
value of preferred stock owned by United States or agency thereof; (2) assessed value
of real estate wherever located: (3) assessed value of real estate wherever located of
wholly-owned subsidiary and all, or substantially all of real estate acquired for debt,
or buildings in which are located the main or branch building of bank, or land on which
situated. etc. Shares assessed at 50 percent reduced by 2 percent per taxable year
beginning with 1967 until a 30 percent assessment ratio is reached for 1976 and there-
after, except shares of Federal joint-stock land banks, organized under Farm Loan
Act sf1916, which are assessed at 10 percent. Tax rate is general property levy. Applies
to State and National banks and corporations engaged in banking business.
Maine Basis: Assessed value of shares less proportionate part of assessed value of real estate,
vaults and safety deposit plant. Rate 15 mills per dollar. Applies to domestic trust
companies and banking institutions formed under laws of United States doing business
in Maine.
Michigan2 Applies only to savings and loan associations (banks subject to excise measured by net
income). Basis: Savings liability or capital, legal reserve and any other loss reserves.
Rate 1% mill per dollar.
Mississippi Basis: Banks estimate net worth, deduct amount of capital invested in real estate, par
value of preferred stock and debentures owned by RFC or other Government agencies
and "earned surplus" to eetent allowed by bank equalization statute. Rate: General
property tax rate. Applicable to banks and banking associations, and banks not corpo-
rations or stock company. National banks pay tax as agants of stockholders.
Montana Basis: True value of shares less real estate. State banks deduct value of real estate,
moneyed capital and other property assessed and taxed. Value of building and loan
association shares based on moneyed capital less (1) amount of bonds, notes and other
evidences of debt (including those secured by mortgages), and (2) the amount of credit to
members on books and debts for money borrowed for use as moneyed capital. Moneyed
capital so ascertained shall be taxed at the same rate and take same classification as
national bank shares or moneyed capital coming into substantial competition with
national banks. Banks assessed at 30 percent of value. Rate: General property tax rate.
Nebraska Basis: Actual value of capital stock, less real estate and other tangible property separately
assessed. Assessed where principal place of business is located. Rate: 8 mills per dollar.
Applies to banks, industrial loan and investment companies and trust companies.
Nevada Basis: Full cash value or proportionate part of aggregate taxable capital. Aggregate taxable
capital found by averaging amount of cash demand deposits, time deposits and total
deposits for preceding year and subtracting appropriate cash reserve and excess cash.
Capital equivalent of deposits determined by multiplying the difference by 9 percent.
Aggregate capital then obtained by subtracting full cash value of real estate assessed to
bank. Branch banks, having branches in more than one taxing district, are assessed
proportionate parts of shares in such districts, determined by the ratio which total depos-
its in each district buar to total deposits of such branch on last day of precedingye ar.
Assessed at 35 percent of value (same as other property). Rate-general property tax
rate. Applies to State and National banks.
New Hampshire Basis: Par value of capital stock. Assessed at 1 percent. Rate: General property tax rate.
Applies to capital stock of eational banks, except preferred stock issued under Fed-
eral Emergency Banking Act of Mar. 9, 1933. Paid by bank for and on behalf of stock-
holders. Tax is in lieu of all other taxes against national banks, their stockholders and
depositors. National banks having savings departments. are taxed as to such depart-
ments by excise tax. (All other banks and financial institutions taxed by excise tax.)
New Jersey 3 Basis: Value of capital stock determined by adding amount of capital. surplus and undi-
vided prolts and deducting therefrom assessed value of real estate equaiized for se-
lected years, including assessed value of real estate of a wholly'owned corporation
and aggregate par at retirement value of all classes of preferred stock and dividing
result by number of shares of common stock outstanding. Preferred stock valued and
taxed by classes. Rate: ~ percent of true value of stock. Applies to capital stock of
State and National banks and domestic trust companies whose principal place of business
is in New Jersey.
See footnotes at end of table, p. 388.
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TABLE 18.-BANK SHARE TAXES: 1969-70-Continued
State Description of law
Ohio Basis: Book value of capital employed. Rate: 2 mills on dollar. Applies to all financial
institutions, whether incorporated or not, and whether State or National banks, having a
place of business in Ohio and engaged in the business of receiving deposits, lending
money, buying or selling bullion, bills of exchange, notes, bonds, stock or other evidences
of indebtedness with a view to profit.
Pennsylvania Basis: Actual value of capital stock, Jan. 1 preceding year, determined by adding capital
stock paid in, surplus and undivided profits and dividing amount by number of shares.
Banks and trust companies, national banks, savings associations, mutual savings banks
and building and loan associations may take annual credit of 50 percent of amounts
invested in approved neighborhood assistance programs but not to exceed $175,000 a
year. Rate: 13 mills per dollar share valuation of National and State banks or savings
institutions and title insurance or trust companies. Share tax applicable to National and
State banks, savings institutions, title insurance and trust companies. (Private bankers
taxed at 1 percent of gross receipts. Mutual thrift institutions," building and loan as-
sociations, savings and loan associations, and Federal savings and loan associations
located in Pennsylvania taxed at 113~ percent of net earnings or income.)
Tennessee Basis: Actual cash value of shares, Jan. 10, considering the rate and valuation of real and
personal property made by same taxing authority, less the assessed value of real estate
and personal property otherwise assessed. Where capital is not divided into shares,
each $100 of invested capital is held to be 1 share and assessed as such. Rate: General
property tax rate. Applies to stock of any bank, banking association, savings bank,
loan company; investment company, cemetery company, or company or corporation
doing business in Tennessee other than certain quasi-public, manufacturing and other
corporations whose stock is taxed as personal property to stockholders.
Texas Basis: Each share istaxed onlyfor difference between itsactual cash value and proportionate
amount per share at which real estate is assessed. Rate: General property tax rate. Ap-
plicable to shareholders in every State and National banking corporation doing business
in Texas. Bank and shareholders required to report to assessor annually. Tax is lien on
shares and bank cannot pay dividends to shareholders in default.
Virginia Basis: Value of shares determined by adding capital, surplus and undivided profits less (1)
assessed value of real estate owned by ban4c, or if used or occupied by bank, which is
held in name of a bank holding company owning a majority of the capital stock of the bank
and (2) proportionate sum of real estate taxes assessed against a subsidiary. Allocations
to branch banks based on proportions of deposits in branch to total deposits of bank.
Allocations method applies to banks in cities and branches in country outside city or town.
Shares owned by tax exempt institutions not taxed. Rate 10 mills per dollar for State.
Any city where bank is located, or town where branch of city bank is located may impose
a tax of not to exceed 10 percent of State rate. Any town in which a bank is located, or
town in which a branch of a country bank is located may impose a tax not to exceed 80 per-
cent of State rate. The municipal tax may be credited against State tax. Assessments
made by State commissioner of revenue. Applies to stockholders in any incorporated
bank, banking association or trust company organized under laws of Virginia or United
States doing business or having an office in Virginia or having a charter which designates
its principal place of business in Virginia.
West Virginia Basis: True or actual value of shares, less proportion of value attributable to real property
upon which property taxes are paid. Rate: General property tax rate. Applicable to banking
institutions, national banking associations and industrial loan companies.
I Production credit associations included with savings and loan associations; shares made taxable at State rate of $1
per $1,000 of paid in capital. Effective July 18, 1970.
2 See excise tax, pp. 403-411, especially table 20.
`New Jersey also imposes an excise tax based on net worth of all businesses which are in substantial competition with
national banks and employ moneyed capital with object of profit. Tax is 13/i percent of allocated net worth, less deduc-
tions, but not less than $25. Is in lieu of any franchise or local tax upon or measured by personal property entering into
determination of net worth. Applies generally to industrial banks, dealers in commercial paper and acceptances, sales,
finance, persona! finance, small loan and mortgage finance businesses. Does not apply to State and National banks, in-
surance companies, security dealers and investment companies not employing moneyed capital in competition with
national banks,credit unions, savings banks, building and loan associations, pawnbrokers, trust companies, production
credit associations.
Source: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov. 1, 1970).
a. Value detern-tirtatjon.-Jjow has the value of bank shares been
determined for assessment purposes? In 10 States the basis of valua-
tion is actual, true, or market value of the shares, all of which seem
to mean the same thing.1' Share values are stated to mean the value
determined by the amount of capital, surplus, and undivided profits
of banks in Indiana, Louisiana, New Jersey, and Virginia, although a
few States that specify other standards, such as true value, use these
accounts to determine the worth of shares. Ohio specifies "book value,"
which should mean the same thing. "Fair cash value" is the Kentucky
standard; "full cash value" arrived at by an averaging process is
11 True or market value: Arkansas, Delaware, Georgia, Illinois, Montana, and West Virginia. Actual
value: Nebraska, Pennsylvania, Tennessee, and Texas.
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389
required in Nevada. A "just value" is the Florida requirement. "Par
value" is employed in New Hampshire, and assessed value in Maine.
In arriving at the value to be used for assessment purposes, stated
deductions from true values are allowed in certain States. These are
considered below.
Inasmuch as national banks have been required to publish periodic
statements of assets, liabilities, and capital accounts, basic informa-
tion has always been available to the local assessor who cared to use
it.12 These were the basis for book values used in Ohio and for values
determined in other States which took into account the aggregate of
capital, surplus, and undivided profits. Delaware and Louisiana
added reserves. Such assessments were fairly automatic, since the
assessor had data for national banks that were neither furnished by
most other taxpayers nor available as to their stocks or other prop-
erty. The result was that assessments of national bank stock were
complete and generally nearer the true value of property to be assessed
than other property, tangible or intangible.13
Welch found that in 1930 bank and trust company stock seemed
to be assessed at approximately full book value or more in 18 of 32
States.14 He pointed out that the shares were subject to central
assessment in six of the 18 States and to low tax rates which were
conducive to full listing in 10 of the 18 States. Assessments above
100 per cent were found in Connecticut, Iowa, Kentucky, Maryland,
Nebraska, New Hampshire, North Dakota, South Dakota, and
Virginia. This also meant that banks were probably paying more
than their proper share of property taxes. Opinion is general that
bank shares were assessed at more nearly true value than real estate
and most personal property. While the property tax carried no dis-
criminatory rates against banks or bank shares, all property being
supposed to be assessed uniformly, the property tax in actual opera-
tion apparently did discriminate against them in at least some juris-
dictions. Whether this was so, and the degree of the discrimination,
if any, could only be determined by exhaustive statistical analysis
which has never been done. Presumptively the case seems conclusive.
Of course, discrimination was not universal. In 6 States the ratio
of assessments of shares to book values less the value of real estate
was less than 50 percent in 1930.15 But under-assessment of all prop-
erty was notorious, so that this did not necessarily mean the exten-
sion of favors to banks. That could only be determined on the basis
of an investigation such as the one mentioned above.
12 Welch made this interesting observation: "As for determining book values, disclosing hidden reserves,
and the like, it is only necessary to reflect upon the fact that many bank directors are unable to read the
balance sheet of their own bank to see the folly of expecting proper assessment from the underpaid, poorly
equipped, politically-minded incumbents of so many assessors' offices." Op. cit., p. 104.
13 Woosley, op. cit., pp. 94, 105. During the debates on the 1923 amendment, Mr. Stevenson pointed this
out and said real estate was assessed in some States and counties at 50 percent of value. 64 CR, p. H4790.
Overassessment of bank stock was reported in an article from New York Evening Mail by Henry Hazlett,
reprinted In 64 CR, p. H4789-90.
14 Welch, op. cit., pp. 102-03.
15 The ratios of assessments of bank share3 to book value of bank shares less value of real estate in 32 States
in 1930 were as follows:
Ratios: Number of State8
Over 100 percent 10
90-99.9 8
80-89.9 2
70-79.9 4
60-69.9 0
50-59.9 2
Under 50 percent 6
Welch op. cit., p. 102.
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There were also inequalities in assessments of individual banks,
just as there were in assessments of all other types of property. Such
results were characteristic of the general property tax.'6
Inclusion of surplus and undivided profits in the base for fixing the
value of bank shares was often objected to because it might retard
these accumulations so desired to increase the financial strength of
individual banks. A bank with a large earned surplus or undivided
profits account would be taxed more heavily than a bank without
them. If they were not included in the tax base, stockholders would
prefer that their banks earn a sizeable surplus instead of calling on
them for larger capital contributions. At one time New Hampshire
exempted both surplus and undivided profits; prior to 1927 Wyoming
exempted 50 percent of surplus, and after that date all surplus. In
1932 the Tax Commission of North Dakota complained that some
banks were reorganized to transfer capital to surplus so as to take
advantage of the~ exemption of surplus, thereby reducing their tax
burden.17 Such exemptions meant that the entire capital of the bank
was not reached by the share tax and only part of the worth of shares
was considered in determining the assessments.18 At present, none of
the share taxes in force provides for deduction of surplus and undivided
profits.
b. Decluctions.-In the determination of assessed values for national
bank shares, the laws of the States and decisions of the courts required
certain deductions to be made in arriving at assessments. No deduc-
tions, however, were required by section 5219 in the original act or
any subsequent amendment.'9 In 1970, no deductions from the value
of shares are allowed in five States-Delaware, Florida, Kentucky,
New Hampshire and Ohio. The assessed value of real estate is de-
ductible in Arkansas, Georgia, Indiana, and Texas.2° In New Jersey
the assessed value of real estate equalized for selected years is deduct-
ible. Illinois limits its deduction to the assessed value of real estate in
the county in which the bank is situated.2' Proportionate parts are the
rule for deductions in three States. Maine itemizes real estate, vaults,
and safety deposit plant. Virginia allows a deduction of the assessed
value of real estate and prorated portions of real estate assessments
of bank holding companies or subsidiaries. West Virginia allows a
deduction of proportionate values attributable to taxed real property.
Louisiana includes in its deductions for assessment purposes the value
of preferred stock owned by an agency of the Government, real estate
wherever located, all or substantially all the real estate acquired for
debt, and the main office and branch buildings with land occupied by
these buildings. Mississippi deducts the value of preferred stock issued
to the R.F.C. or other Government agencies and earned surplus to
the extent allowed by the State's bank equaliz~ttion statute, as well as
real estate. The value of real estate is deductible by national banks in
Moutana; State banks get additional deductions. Nebraska and
Tennessee deduct separately assessed personal property as well as real
estate; the personal property deductions apply to other financial
1~ See 3en'en, op. cit; especially ch. XII; Leland, op. cit., ch I; Seligman, op. cit., pp. 45 if. and bibliog-
raphy, pp. 63-65.
17 Welch, op. cit., pp. 89-90.
18 The inclusion of deposits is discussed below at p. 394.
19 Cf. Eleimberger, op. cit., p. 20.
25 Texas statement amounts to this: each share Is taxed only for the difference between its actual cash
value and proportionate amount per share at which real estate is assessed. The text discussion is based on
table 18.
21 Branch banks are prohibited in Illinois.
PAGENO="0411"
391
institutions, since such property of national banks could not be taxed
prior to the 1969 amendment. After arriving at the aggregate capital
of each bank by an averaging process, Nevada allows a deduction of
the cash value of real estate assessed to the bank. Pennsylvania,
seeking to stimulate neighborhood assistance programs, allows a
credit of half of the amount invested in such programs but not more
than $175,000 a year.
Permission to deduct the assessed value of real estate could easily
mean that such assessments might completely wipe out the assess-
ment upon bank shares. To prevent this the Arizona Tax Commission
recommended in 1928 that the deduction be limited to the banking
house. The Minnesota Tax Commission complained in the same year
that over 100 banks in the State would pay no share tax because of
these deductions and that half of the banks would pay only $250 or
less.22 Where book values are used, the writing up of real estate on the
books of the bank made a corresponding increase in the book value of
bank capital, surplus, or undivided profits. Deductions had the oppo-
site effect. For many years it was the practice of banks to carry their
real estate at negligible amounts. However, during severe economic
depressions when security losses were large, real estate accounts were
often written up. The effects of such "write up" practices do not lend
themselves to generalization because their effect depends on the facts
of each case, the State law, the level of assessments of both real estate
and stock, and the capital structure of the bank. Manipulation of
these values might be profitable to some banks, of little value to others.
Another tendency to be noted is where different tax rates prevail,
one for real estate, another for bank shares. Usually the property tax
rates on real estate were high; some States applied lower rates to
shares. Where that was true it was to the advantage of the bank to
keep its real estate assessments as low as possible so as to transfer as
much of the aggiegate value as could be arranged to the shares.23 The
extent to which this may have been done is unknown. Not all theoreti-
cal possibilities are utilized, even by profit-conscious taxpayers.
The reason for deducting the value of real estate and, in some in-
stances, other assets in the process of valuing bank shares is by no
means clear. It has been said that the purpose was to avoid double
taxation or the indirect taxation of tax-exempt assets of the bank.24 To
be sure, bank premises are taxed, and, depending on how they are
carried on the balance sheet, are included in book values of stock
whether these are arrived at by adding capital, surplus, undivided
profits, and certain reserves or by substracting liabilities from assets.
Certainly the market value of stock will include the value of real estate
owned by the bank. The purchaser of all the stock of a bank would
assuredly own the bank's real estate. Each share would include its
ahquot part. The taxation of bank shares, however, is legally different
from and does not rest on the taxation of bank assets.25
Even so, much bank property either is taxed (the real estate) or
is representative of other property already taxed to another owner
(as in the case of most intangibles). This argues for exemptions or
22 Welch, op. cit., pp. 94-5.
23 IbId., p. 93.
24 IbId., pp.90-91.
25 Cf. First National Bank of Gulfport, Miss., v. Adams, 255 U.S. 362 (1922).
PAGENO="0412"
392
low preferential rates on shares.26 Section 5219 has not permitted taxa-
tion of intangibles owned by national banks.
Prior to 1864 when some States taxed banks on their capital, tax-
exempt securities of the United States had to be deducted. A New
York law denying such a deduction was declared unc jnstitutional
about the time Congress was passing the act of 1864.27 That act, how-
ever, did not require deduction of the value of tax-exempt securities
from the value of bank shares, and section 5219 never has required
deductions iii the determination of the value of "all of the shares."
However, some States, such as North Carolina (1913), South Carolma
(1922, 1931) and Michigan did permit such deductions from the value
of shares.28 Most tax-exempt securities have been purchased with
deposits rather than with capital, so that more than a proportionate
deduction, if apy, was hardly logical. Full deduction, if allowed, would
leave little in the way of stock values to tax. This was reported to
have been the situation in New Jersey in 1922.29 This deduction has
caused difficulty in some States. Heimberger reported that most
States in practice allowed tax-exempt holdings to be deducted ~
Whatever the general practice, no such deductions are specified in
the laws and regulations as reflected in the current digest of State
bank tax laws in the Commerce Clearing House State Tax Guide.
To the extent that the financial statements of banks are used in
finding the value of shares, a figure determined by the deduction of
selected liabilities from assets would seem appropriate for a proper
determination. A further deduction of tax-exempt securities (one of
the assets) from capital is not only illogical but incomprehensible.3'
Too liberal deductions can easily wipe out share taxes.32
c. Tax rates on shares.-In the early years of section 5219, the
States taxed bank shares at general property tax rates prevailing in
the locality where the bank was situated. That practice still prevails
in Arkansas, Illinois, Mississippi, Tennessee, Texas and West Virginia.
Fractional assessments are required in Louisiana (to be 30% by 1976),
Montana (30%), Nevada (35%), and New Hampshire (1%), but the
property tax rate in the locality where the bank is situated is then
applied. The effective rates in all these cases can only be determined
after long and careful research as to true values and applicable local
tax rates. This is also true where specific rates, most of them low, are
used. These rates range from 1 miii in Florida to 15 mills (1 3~2%) in
Maine and New Jersey; Delaware and Ohio tax banks at 2 mills on
the dollar; Indiana at 23'~ mills; Georgia at 5; Nebraska at 8; and
Pennsylvania at 13 mills. In Kentucky, the State rate is 4.75 mills
26 Cf. Welch, op. cit., p. 91, quoting a Senate report and a comment by Harley Lutz that distinguished
bank shares from other intangibles on the ground that the other intangibles as a rule represent property
which is already subject to substantial taxation, whereas a national bank share does not represent such fully
taxed property. Welch commented:
"The fallacy in this contention lies lathe assumption that the assets ought to be taxed. . . . We are forced
to the conclusion that the taxation of bank stocks leads to a certain amount of double taxation and that the
contention of the advocates of full valuation without deduction for any other asset than real estate is devoid
of logic."
27 People ex rel. Bank of Commerce v. New York City, 2 Black 620 (1863). See also People ex rel. Bank of
Commonwealth v. Commissioner, 2 Wall. 200 (1865).
2sWoosley, op. cit., p. 100.
20 Leser in Proceedings of the National Tax Association, 1922, p. 377.
0O Cf. Helmberger, op. cit., p. 101.
Z1 This was Heimberger's characterization of such a computation. Ibid. Woosley (op. cit., p. 100) said,
"Such deductions can hardly be defended on grounds of equitable taxation."
32 Welch, op. cit., p. 93. He observed that, despite this result, consistency seemed to require deductions for
stocks, bonds, mortgages, and similar instruments in States where such property was exempt or taxed at
low rates to other owners. "Even if deduction were limited to the stockholders' equity in such assets, exemp-
tion would be practically complete. Yet logic would seem to require this course of any State which looks
upon the tax on bank stock as a property tax."
PAGENO="0413"
393
but county, city, and certain districts may add 1.9 mills and school
districts may add 3.8 mills. In Virginia the State rate on bank shares
is 10 mills, to which cities may add 1 mill; towns may add a tax of not
to exceed 8 mills which may be credited against the State tax.
Low rates seem to prevail but what is a "low rate" is open to
-differences of opinion. However, as has been indicated, the adoption
of low-rate taxes on individually owned intangibles, under Supreme
Court decisions, required the application or extension of such rates to
national banks. The impact of section 5219 in the field of share taxes
was undoubted and far-reaching.
Low or fiat rates on shares were advocated by the American Bankers
Association and a few experts.33 They helped alleviate some of the
woes of assessment practices; besides, such rates reduced bank taxes.
The use of specific rates did raise the question whether one class of
*corporations should be assessed at fiat (or low) rates while others were
taxed at the higher variable local property tax rates.34 Did national
banks deserve such favored tax treatment? Only because section 5219,
as interpreted, required the same rate as other moneyed capital in
competition with national banks. The force of the law, as has been
indicated heretofore, caused States to lower their stated tax rates on
national banks or otherwise to reduce their effective rates. The courts
had to say in specific cases what the rate should be.35
d. Burden of share taxes.-So far as banks were concerned, they
were more interested in the tax burdens imposed by share taxes than
in other details of the State tax laws. They likewise were concerned
with the tax burdens imposed on other competing moneyed capital.
Under section 5219 that competition fixed the maximum rate that
-could be applied to national bank shares, even if they had to go to
court to secure their rights. Most of the low rates indicated above and
in table 18 were forced upon reluctant States by the Richmond case
and similar decisions. To protect themselves from such consequences,
many States applied the bank tax rate to all corporations or individuals
or to moneyed capital coming into competition with national banks.36
The share taxes at general property tax rates raised larger revenues
for States and imposed higher taxes on banks than any of the altern~
atives permitted by section 5219. Even the reduced flat-rate taxes
were not far behind. These conclusions rest upon comparisons based
on net incomes, a base used by many but not preferred by all.3
Welch came to this conclusion: 38
this analysis [on the basis of net incomesj offers little, if any
*proof of excessive taxation of national banks the country over. It is
true, of course, that higher ratios in some States are offset by lower
ratios in others, and it would be surprising indeed if the ratios of other
corporations within such States varied in the same direction and
degree. It is, nevertheless, difficult to escape the conclusion that the
-share tax, which was almost universal in 1926 and is still far the most
prevalent tax, has succeeded fairly well in imposing a proper tax
burden upon banks, if we accept the premise that tax burdens are
33 Cf. Welch, op. cit., p. 97 and his note 51.
34 Ibid., p. 98. Welch preferred central assessment:
35 California adopted a flat rate of 1% in 1910, changed it to 1.2% (1915), 1.16 (1917), 1.45 (1921) and finally
.abandoned share taxes in 1929. Welch, op. cit., p. 97. Cl. supra pp. 271-272, 284, in this appendix.
36 See, e.g., Montana, New Jersey, and Oflioin table 18, supra, pp. 387-388.
37 Heimberger, op. cit., pp. 70-71.
38 Welch, op. cit., p. 215, italics in original.
PAGENO="0414"
394
properly measured by total net income. But this the writer is unable to
do."
Welch, however, did not construct an alternative comparative
measure. He thought the share tax could be improved and should be
completely dissociated from the general property tax out of which it
grew and that it Should be recognized "as solely a business tax'0
with maximum rates of say 10 to 12 mills, related to but not to exceed
the~ rates assessed against shares of other financial corporations.39
e. Inclusion of deposits.-Welch, like many other students of
taxation, saw no reason why, if shares are taxed, deposits should not
also be taxed on the same basis.4° Bank earnings, as a matter of fact,
can be `attribtited more to the investment of deposits than to the
investment of capital, surplus, and undivided profits. This can be
seen on almost any bank balance sheet by comparing capital accounts
with earning assets and investments. Historically, in individual banks
the initial capital subscriptions usually w ere invested first m bank
premises and the remamder m other assets The earning pow er of
coimnercial banks comes essentially from the* profitable investment
of deposits, even those created by loans.
There is no more reason for not considering a substantial portion
of deposits (total depOsits minus cash, for example) as capital of a
ban-k than for not considering bonds in valuing railroads or other
public utilities for taxation. Stock and bond valuations, as one, of
several alternatives, `are in common use in the taxation of railroads
in the United States. Here it was early recognized that proceeds of
bonds were used to build and extend railroad properties. The con-
tribution~ of bondholders was to capital just as surely as money
raised from the sale of stock. To lithit railroad valuations to the
total worth of shares of stock outstanding would have produced only
a partial valuation of these companies. The parallel with bank deposits
not only fits, but the argument is even more cogent for bank deposits.
Railroad bonds represented savings or wealth (sometimes loans)
transferred for reinvestment in railroad company assets. Bank
deposits not only represent the savings and transfers of other people
to the bank but also credit created by the bank for the use of borrowers
which generally is deposited with the bank until withdrawn for other
uses (consumption or investment). So long as banks can manufacture
deposits and can invest deposits that exceed reserves necessary for
required payments, only a part of a bank's real capital is taxed
unless deposits also are taxed. In its amendments to section 5219~
Congress has paid little attention to this. Of course, when bank
income is taxed, earnings from investments financed by deposits are
taxed along with taxable income from other sources.
f. Effects of share taxes.-It has already been indicated that the
primary effect of share taxes on national- banks was to cause them to
pay higher taxes than would have been paid had the States used the
other options permitted by section 5219. These other options, how-
ever, only became.available in 1923, whereas from 1864 to 1923 only
share taxes were permitted, in addition to real property taxes. The
rates of share taxes in comparison with other moneyed capital often
were higher than section 5219 permitted but the bases utilized, de-
ductions considered, were often less than section 5219 allowed.4' Nor
~ Ibid., p. 221.
40 Ibid., p. 217.
41 "The courts seem to overlook the latter, to say nothing of overlooking the comparison of a net worth
tax with an assets tax in the first place," Heimberger, op. cit., p. 111.
PAGENO="0415"
395
did the Federal law prohibit States from discriminating against
national banks if they were willing also to discriminate against other
moneyed capital.42 This price the States seldom were willing to pay~
Actually when they tried, but generally failed, to assess other in-
tangibles in the hand of individuals (competitive with banks or not),.
their national bank taxes often were invalidated.43 The result was-
that they often were forced to discriminate in favor of banks, relative-
to other businesses, if they wanted to collect the share taxes.44 Th~
uncertainty surrounding the meaning of "other moneyed capital in
the hands *of individual citizens" and later of capital "coming into
competition with the business of national banks" contributed to this.
Banks had a built-in incentive to litigate; chances were good they
could have present taxes declared void and future taxes reduced.
They could also force the States to adopt lower rates, accept com-
promises or, after 1923, adopt other permitted alternatives.
Recently the volume of share tax litigation has declined. Many
legal principles had been established, yet they could always be applied
to new facts. Other alternative taxes had been provided and these
promised lower taxes than the share tax. The banks over a consider-
able part of the period could gain more by attending to the banking
business than by contesting taxes.45
From the standpoint of banking operations, other than the weight
of the tax relative to alternative tax methods, the share tax tended to
produce adverse effects upon the capital structure of banks. Kimmel's
statistical analysis, published in 1934, suggested that where shares
were taxed at high rates, this was a factor-though. not a major
factor-contributing to undercapitalization, and that small under-
capitalized banks were more prone to failure than other banks.
Woosley (1935) expressed doubts that taxes on national banks were
of sufficient moment to reduce seriously the ratio of invested capital
to deposits. Welch (1934) also doubted that State and local taxation
was an important factor in determining dividend policies; he thought
the abandonment of ad valorem taxes on bank surplus would ease
the banking situation in some States, but only slightly.46
The States liked share taxes because of their relatively high yields,
because they fitted into conventional patterns of taxation, and because
often no other alternatives were permitted by section 5219 or their
own constitutions. Prior to 1926, use of the share tax option prevented.
the inclusion of national bank .dividends in taxable income of the
shareholders, and after 1926 it prevented use of the net income tax
against the banks-a restriction that was criticized by State officials
and many tax scholars.
The share tax, however, seems to be on its way out. Gradually it
has been displaced by other options.
2. Net income taxes.-The first alternatives to the share tax were
provided in the 1923 amendment of section 5219. They took two forms::
(1) inclusion of national bank dividends in the income of the several.
stockholders, subject to the usual deductions in determining the tax-
able net income of these individuals or companies; or (2) direct. taxa-
tion of the net income of the bank. The act of 1923 said, "The several
States may tax said shares, or include dividends derived therefrom in.
42 Ibid., p. 117.
~ Cf. Welch, op. cit., pp. 47-8. Failure to assess intangible property under the general property tax in-
validated an Oregon tax; Brotherhood Cooperative National Bank v. Hurlburt, 21 Fed. 2d 85 (1927).
~ Heimberger, op. cit., pp. 146-7.
4~ Cf. ibid., pp. 111-12.
4' Kimmel, op. cit., pp. 109-32 (ch. vi); Woosley, op. cit., p. 108; Welch, op. cit., pp. 88-90.
PAGENO="0416"
396
the taxable income of an owner or holder thereof, or tax the net
income of such associations." But it made the imposition~of any one
of these three forms of taxation "in lieu of all the others." This is why
it is said that the 1923 amendment gave the States three options in
taxing national banks.
Since dividends were mentioned first, such taxes will be considered
first.
a. Dividends taxed to shareholders.-Wisconsiri in its income tax of
1911 and New York in 1919-the oneby statutory references, the other
by a ruling of the Attorney General-had included bank dividends
in the taxable income of shareholders. The Massachusetts selective
income tax of 1919 had included them in its enumeration. This was
also the practice in Missouri and Virginia. Legal difficulties immedi..
ately ensued, since dividends were not mentioned in section 5219 as
it then stood.47
Then came the 1923 amendment giving States the right to tax
dividends to recipients, but only if no other permitted alternative was
utilized. But dividends so taxed could not be taxed "at a greater rate
than is assessed upon net income from other moneyed capital." This
effectively nullified the dividends tax. No State adopted the method
between 1923 and 1926. It did not fit into any rational pattern for
taxing net income.
If a State, such as Wisconsin, desired to tax individuals on their
total income, taxable capacity could be measured only if income of the
individual from all sources was included in his taxable income. To
earnings from labor would be added all income from corporations
(dividends from stocks and interest from bonds). Only income from
United States tax-exempt securities, by Court decision, had to be
excluded. The State could include income from its own securities and
those of its subdivisions and income from securities issued by other
States and their municipalities. But the 1923 amendment decreed
that even if a State income tax included dividends from other cor-
porations in the taxable income of individuals, national bank dividends
could not be similarly included if the bank itself was subject to income
tax-though this might be the only tax on the national bank other
than the tax on its real estate. Thus, where a State taxed national
banks on net income, individu~als could invest in national bank stock
to the point that if substantially all their income came from this source
they would not have to pay a cent of individual income tax to the
State. Smaller proportionate investments would be treated the same
way. Yet an individual who owned stock in other corporations had to
include dividends from those corporations in his taxable income
regardless of whether or how the corporations were taxed.
If perchance a State taxed national bank shares it could not include
national bank dividends in the taxable income of those individuals to
whom its income tax applied, even though the bank paid the share
tax and did not collect it from shareholders. This prohibition lends
support to the view that Congress did not know whether to regard
the share tax as a tax on the bank or on the shareholder. Wisconsin
made the mistake when it adopted its income tax of including national
47 01. Welch op. cit., pp. 39-40, 177. People ex rel Hanover National Bank v. Goldfogle, 118 Misc. Rep. 79
(1922), 202 App. Div. 712 (1922), 137 NE 611 (1922); and Goldfogle v. Hanover National Bank, 261 U.S. 620
(1923), denying review.
PAGENO="0417"
397
bank dividends in the taxable income of the individual at the time it
applied a share tax to the banks. This invalidated the share tax.48
The section 5219 dividend tax option of 1923 was not equitable,
reasonable, or logical. It did not fit the tax pattern of the States or
of the nation at the time. It is believed that this portion of the Federal
law definitely dampened the enthusiasm of States for extension of
State income taxes.
The 1926 amendment of section 5219 greatly improved the position
of the dividend tax. A State could then tax dividends to individual
shareholders concurrently with a tax "on or according to or measured
by" the net income of the national bank, provided the State also had
a general corporation tax and also taxed individuals on their other
corporate dividends.49 This applied to dividends paid by both domestic
and foreign national banks and by other corporations, both domestic
and foreign. However, if a State continued to tax national bank shares,
whether for State constitutional reasons or by preference, it could
not also tax national bank dividends to individuals stockholders. Of
course, it could tax dividends to shareholders if the share tax was
repealed. This policy was adopted because national banks opposed
the share tax and hoped to induce the States either to adopt other
options in section 5219 or to lower the share-tax rates.
The only State to adopt the dividend tax in addition to a net in-
come tax was Vermont in 1931. "But," said Welch, "no other State
has been content with the meager revenues which it has promised."
The restrictions in the Federal law did not apply to State banks.
Many States taxed dividends paid by State banks.5°
As a part of a personal net income tax, the 1926 dividend option in
section 5219 has a place in every State income tax law. Bank dividends
are personal income and should be included with all other taxable
mcome. The provision is also simple to operate and easy to include
within an income tax, provided the State's corporate income tax meets
the requirements of section. 5219. It tends to encourage increases in
surplus accounts; hence it needs to be supplemented by a tax on
undistributed earnings. Indirectly and in modest fashion, it reaches
income from tax-exempt securities as portions of such income find
their way into bank dividends. But since only a portion of net income
is paid out in dividends, the tax takes a much smaller portion of
earnings than a net income tax-although highly progressive personal
income tax rates may offset some of this difference. And since only a
part of net earnings of any year are ordinarily distributed in dividends,
the yield of a tax on dividends will fluctuate less widely than taxes
directly on the net income of the bank.51
Section 5219 did nothing to promote adoption of taxes on dividends
or make them attractive to the States. The practices and needs of the
States, on the contrary, created pressures for bringing the dividend
provision in section 5219 into line with sound income tax practices.
The States, particularly New York and Massachusetts, won these
changes in section 5219 in 1926.
b. Direct net income tax on ban/cs-Taxes on the net income of
national banks located in each State were permitted by the 1923
amendment of section 5219. The rate could "not be higher than the
48 First National Bank of Hartford, Wisc. v. City of Hartford, 273 tT.S. 548 (1927).
49 The requisite conditions are discussed in connection with these taxes in the pages that follow. For the
text of the 1923 and 1926 amendments, see supra, appendix 1-A and 1-B at pp. 1 and 4.
9° Welch, op. cit., p. 177, and cf. his table XXI at pp. 178-9.
91 Cf. ibid., pp. 180-1.
79-421 0 - 72 - 27
PAGENO="0418"
398
rate assessed upon other financial corporations nor higher than the
highest of the rates assessed by the taxing State upon the net income
of mercantile, manufacturing, and business corporations doing busi-
ness" withm the State. Thus, the income tax on national banks was
tied to rates upon financial and other corporations. The tax on national
banks had to conform with rate policies applicable to general corpora-
tions, not simply with rates on other financial institutions. National
bank income, moreover, must be taxed in the jurisdiction where the
bank is located "and not elsewhere". Wisconsin, the first and principal
State having a net income tax applicable to persons and corporations
generally, continued to tax national banks on a share-tax basis until
the tax was invalidated in 1927. It then placed banks under the
~corporate net income tax. During the period 1911-26, Virginia, New
York and Missouri also at times taxed national bank shareholders
~extra-legally on their dividends.52
The 1926 amendment made no substantive changes with respect to
the direct net income tax on banks. The words and phrases were
arranged differently but the requirements that rates be measured by
those on financial, mercantile, manufacturing, and business corpora-
tions were retained. The addition of variants in which the tax could
be "according to or measured by the net income" did not affect the
net income option except to reaffirm the exclusion of income from
tax-exempt securities from the base for the tax "on" net income.
Only a tax "according to or measured by" the net income of the bank
could include "the entire net income received from all sources."
This is the clue to the low revenue yields of direct net income taxes
on national banks, to their lack of attractiveness to States, and to
their slow rate of adoption. In 1928 and 1929 the income tax on banks
in Wisconsin produced less than a half million dollars per annum,
about one-fifth as much as the share taxes imposed in 1926.~ As
discouraging as were the low yields of the tax as applied to banks,
and as attractive as it was when applied tO corporations generally,
m~tny States could not adopt income taxes because of State constitu-
tional prohibitions.
The main objection to direct net income taxes on national banks
was that income from tax-exempt Federal securities could not be
taxed. Such income was often a substantial portion of national bank
receipts, particularly during war time when the banks underwrote
the financing of wars. Some banks, however, often had little income
left after the exclusion of income from tax-exempt Federal securities.
Such exemptions were estimated in 1923 to reduce the tax liabilities
of 652 New York banks and trust companies by 40 to 45 percent.54
Any bank that wanted to reduce its income tax could do so by investing
in tax-exempt securities. States were not required to exempt income
from their own securities or those of their subdivisions or the securities
of other States, but most of them did. Where tax-exempt income greatly
reduced national bank taxes, about all that was left for the States
to tax was real estate.55
52 Woosley, op. cit., p. 80. Laws of Wisconsin, 1927, ch. 396; Wisconsin share tax invalidated in FirstNational
Bank of Hartford v. Hartford, 273 U.S. 548 (1927). Helmberger, op. cit., p. 27.
53 Woosley, op. cit., p. 81.
~ This estimate, by the New York Tax Commission, covered obilgatlons of the United
States and its possessions and securities issued under the Farm Loan Act. Exclusion of all
Federal non-taxable income would have reduced the New York taxes by 60 to 65 percent.
Welch, op. cit., p. 156.
551n spite of the effect on State tax revenues, an implied restriction in the Wisconsin constitution prevented
that State from adopting an excise under which the tax WoUld be based on income from all soutces. Helm-
berger, op. cit., p. 148.
PAGENO="0419"
399
The status of State net income taxes on banks in 1969-70 is shown
in table 19.
Some States listed as having taxes "on" net income may be in-
correctly included in table 19. Unless it was clear from the description
*of the law in the Commerce Clearing House State Tax Guide that
income from all sources was included in the tax base, the tax was
considered to be a direct net income tax. The dividing line between
(1) the direct tax and (2) an excise, franchise, or privilege tax "ac-
cording to or measured by" net income is whether income from all
sources might be included in the tax base. If it is included, the tax is
listed in table 20, State taxes according to or measured by net income.
If all income could not be taxed, the State is listed in table 19.56
Flat rates are found in all except two of the 12 States listed in table
19. In Arizona and Wisconsin progressive tax rates based on the
amount of taxable income are, in effect. Alabama, to make sure that
its tax does not violate section 5219, applies the tax to any other
institutions or persons coming into competition with banks.57
The theory behind the general income taxes, such as the one in Wis-
~onsin, is that in addition to property taxes, individuals and businesses
should contribute to the support of government on the basis of their
net incomes. This assures a higher effective total tax on those with
funded incomes (returns from property) than on recipient~ of unfunded
(labor) incomes, thus conforming roughly to notions of ability to pay.
Progressive rates, according to some, add further conformity to this
theory although there is considerable difference of opihion as to what
is a proper base for progression as applied to corporate income and
business taxes. Or even whether progression is proper, except for
individuals.
56 [Editor's vote. See also at pp. 406-408, below, table 20A, a supplemental table showing the treatment of
Interest received on governmental obligations in State or local taxes measured by net or gross income of -
~sommercial banks.]
~ The income tax in Arizona, Colorado, Hawaii, Tennessee, and Wisconsin applies to all corporations
doing business in the State. Maryland applies the tax to all banks and financial corporations; South Carolina
law applies to all financial corporations except credit unions and new associations in the first three years of
operation; Vermont applies the tax to banks, savings banks and institutions, trust companies, savings and
loan and building and loan associations that have a business location in vermont. The Connecticut law
applied only to savings banks.
PAGENO="0420"
400
TABLE 19.---STATE NET INCOME TAXES ON BANKS: 1969-70
State Description of law
Alabama Basis: Net income. Rate 6 percent of net income. Applies to national banking associations,
banking associations, trust companies, industrial and other loan companies, building
and loan associations, and any other institutions or persons coming into competition
with banks.
Arizona 1 Basis: Net income. Rate: Progressive on taxable income, 2 percent to 8 percent, as all
domestic and foreign corporations. All banks, investment companies and savings and
loan associations, including Federal savings and loan associations subject to all taxes:
levied on a nondiscriminatory basis throughout State or any political subdivision to same
extent as other corporations. Applies to all corporations.
Colorado Basis: Net income. Includes interest income on State obligatians other than those of Colo-
rado. Deductions include income from U.S. obligations and those of U.S. instrumentalities:
to extent included in Federal adjusted gross income but exempt from State income taxes
under U.S. law. Rate: 5 percent. Applies to all corporations.
Connecticut Basis: Amount of interest or dividends credited to savings accounts of depositors or
shareholders. Rate: 8 percent, Jan. 1, 1969 and prior to Jan. 1, 1971 or 4 mills (Jan. 1,
1969 to Jan. 1,1971) per dollar of average parorface value of indebtedness olus average
value of issued and outstanding stock plus average value of surplus reserves and
undivided profits less average value of deficits on private stockholdings, whichever is
larger. Minimum tax $45 on and after Jan. 1, 1969 and prior to Jan. 1, 1971, except for
State banks and trust companies, national banks, mutual savings, savings and loan
associations and building and loan associations on which minimum tax is 3.2 percent of
interest or dividends credited to accounts of depositors or shareholders. Applies to all
savings banks and associations.
HawaiL_...-_ Basis: Entire net income as defined under corporate income tax law. Includes income
from State securities other than Hawaii. No mention of inclusion of income from United
States or instrumentality securities. Rate: 1.7 percent. Applies to all banks, State and
National, building and loan associations, industrial loan companies, and financial:
corporations and all corporations doing business in Hawaii.
Mar land..~~ ~._.. ~ Basis: Allocable net earnings, including taxes paid to Maryland and other States. Rate:
7 percent of allocable earnings of commercial banks, safe deposit and trust companies~
and finance corporations. Rate on savings banks and associations is 3% of 1 percent of
annual earnings in excess of $100,000. Credit is rllowed against basic corporation net
income tax rate for State personal property taxes payable after July 1, 1968. Applies to
commercial banks, safe deposit and trust companies, and finance corporations.
South Carolina .._ Basis: Net income in State, or from sales or rentals of property within State. Rate: 43~2
percent of net income. (Income of building and loan and savings and loan associations,
8 percent). In lieu of all other taxes on banks except taxes on real property. Applies to
every bank, including State and National, engaged in business in State. Also covers
building and loan associations, savings and loan associations, Federal savings and loan
associations located or doing business I n State, except credit unions and new associa-
tions in first 3 years of operations.
Tennessee Basis: Net allocable income with no allowance for Federal income or excess profits taxes.
Income from bonds or other such obligations of State, its instrumentalities and political
subdivisions not included in net income. Appears not to include income from Federat
securities though called an "excise tax." Rate: 5 percent of net earnings. (No in-lieu
statement.) Applies to State and National banks, organized or doing business in State,
and other corporations and cooperatives conducted for profit, joint stock associations,
and business trusts (Laws 1970, ch. 446).
Utah Basis: Net income allocable to State. Rate: On national banks, 6 percent net income or
1/20 of 1 percent of fair value of taxpayer's tangible property in Utah, whichever is
greater, but not less than $25. (Alternative on fair value of propetty began Jan. 1, 1969.
Minimum tax increased then from $10 to $25.) On State banks (called franchise tax),
6 percent with minimum of $25. (Laws of 1969, ch. 183).
Vermont Basis: Net allocable income earned or received by taxable corporations, as determined
under Federal law reduced by amount of direct corporate income tax payable by the
banking or loan corporation or loan association under laws 1969 §15832, 5836. Rate:
6 percent (Laws 1969 §5832). Applies to banks, savings banks, savings institutions,
trust companies and savings and loan and building and loan associations that have a
business location in Vermont.
Wisconsin Basis: Net income i.e. gross income less allowable deductions. Rates: 1st $10002 percent;
2d $1,000, 23~ percent; 3d $1,000, 3 percent; 4th $1,000, 4 percent; 5th $1,000, 5 percent;
6th $1,000, 6 percent; excesa over $6,000, 7 percent. Applies to all foreign and domestic
corporations doing business in Wisconsin.
1 Excise tax repealed, May 18, 1970, effective Jan. 1, 1970.
2 Excise tax repealed as of Mar. 16, 1970.
Source: Compiled from Commerce Clearing House, Inc., State Tax Guide( Nov. 1, 1970).
Ability to pay relates to persons, not corporations. Except under
selective income taxes, such as in Massachusetts, distinctions ordinar-.
ily are not made among the various types or classes of taxpayers
subject to a given income tax law. Thus, no differences of tax treat-
ment are accorded to State or national banks or to mercantile, manu-
facturing, or business corporations. Uniformity is the rule.
PAGENO="0421"
401
Although various other businesses are not homogeneous, State and
national banks at the present time are so nearly alike it is hard to
distinguish between them. Since the currency issuance function of
national banks was taken over by the Federal Reserve System, the
maj or feature distinguishing them over the years has disappeared.
The slight differences in powers have been gradually eroded, and
variations in supervision appear to be minimal, particularly since
State banks have become members of the Federal Reserve System in
large numbers and nearly all have embraced the protection of the
Federal Deposit Insurance Corporation. The remaining differences do
not furnish a basis for differential tax treatment. State and national
banks are usually taxed the same under the various State net income
tax laws.
Savings banks, building and loan associations, credit unions and the
like are often distinguished from other financial corporations and
accorded different tax treatment. They have seldom been considered
"other moneyed capital" competing with national banks.
The requirement that national banks shall be taxed no higher than
mercantile, manufacturing, and business corporations pays little heed
to the generic differences between banks and these corporations. Only
banks can crea te deposits out of which they earn income. Tax-exempt
income plays a larger role in bank income than in other corporations,
so that its exclusion from taxable income gives banks a great advantage
over other corporations. Some students of bank taxation think banks,
because of differences from other corporations, need to be taxed at
higher nominal rates if equality is to be attained.58
The direct net income tax option under section 5219 never has been
popular with State. officials. The exclusion of income from Federal
securities, which reduced the yield of the tax, was the primary diffi-
culty. The excise tax which could reach exempt income has gradually
replaced the net income tax.
3. Tax measured by all income (Excise tax) .-Permission for States
to impose upon national banks a tax "according to or measured by"
their net income was granted in the 1926 amendment. They were
authorized specifically to "include the entire net income received
from all sources." As in the case of the direct tax "on" net income,
"the rate shall not be higher than the rate assessed upon other financial
corporations nor higher than the highest of the rates assessed by the
taxing State upon mercantile, manufacturing, and business corpora-
tions doing business" within the limits of the taxing State. This
provided the widest possible base for the tax-income from all
sources-and limited the applicable rate to that used on other finan-
cial and general corporations. The same conditions applied to inclu-
sion of national bank dividends in the taxable income of individual
stockholders.
The States using the formula of "according to or measured by"
net income generally enacted the tax as a privilege or franchise tax
for the privilege of doing business in the State. It was also called an
"excise" for the same purpose. Thus, the tax in legal contemplation
was not a tax on income directly but upon one of the vague privileges
conferred by the State, the value of which could be measured by
something else. In this case it was measured by total income from all
sources including income from Federal tax-exempt securities.59
5S Heimberger, op. cit., pp. 155, 160-61; Woosley, op. cit., pp. 85-90; and cf. Welch, op. cit., pp. 61-2, 218-20.
`9 For the earlier history of this tax, cf, supra, pp. 285-291 an~1 325-332 in this appendix.
PAGENO="0422"
402
Following the lead of Massachusetts in 1925, other States adopted
this approach: New York (1926), California (1929), Washington
(1929), Oregon (1929), Utah (1931), Alabama (1933), Idaho (1933),
Oklahoma (1933) ~60 By 1970 the excise "measured by" net income was
in effect in 15 States, as is shown in table 20. Two States, New York
and Kansas, allow supplementary local levies of the type used by
the State. New York City can impose its own supplement or excise;
Kansas permits city and county supplemental taxes a dministered by
the State Department of Revenue.
The tax rates specified in the laws range from 2 percent in Alaska
and the counties and cities in Kansas to 13.09 percent in Minnesota..
California and Massachusetts have the rate determined by State-
boards so that the rates can take account of the various taxes that
apply to corporations other than banks. These "equivalent" rates
are determined annually and may be fixed without endangering the
constitutionality of the whole law and without violating section 5219.
New York has an alternate minimum tax; Rhode Island has a choice
of taxes. Six states and New York City specify minimum taxes
ranging from $100 to $10. Permissible deductions vary from State to
State and so does the coverage of the laws. in Alaska and Minnesota,
only State and national banks are covered by the excise. North Dakota.
adds trust companies, Oklahoma adds credit unions, North Carolina
adds business development companies, Oregon adds financial and
other corporations. The Michigan and New Mexico laws. cover
financial institutions, with a fairly complete enumeration. California
omits no business; its law covers all corporations doing business in
the State. Other variations are shown in table 20.
The in-lieu features vary. The most common provision is that the
excise shall be in lieu of all taxes except those on real estate. This is
the law in California, North Dakota, Oregon, and South Dakota.
Sales and use taxes are included in Michigan. Minnesota's in-lieu
provision includes all taxes on capital, surplus, assets, and shares
except real estate. Missouri's tax is in lieu of taxes on bank shares.
and personal property, neither of which could be taxed under section
5219, the one because the excise option was being utilized, the other
because it was not permitted. Of like character is the in-lieu provision
in North Carolina, which includes tangible and intangible personal
property, franchise, income and share taxes.
~` Woosley op. cIt., pp. 74-75; Kimmel, op. cit., pp. 45-56.
PAGENO="0423"
403
TABLE 20--STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES): 1969-70
State Description of law
Alaska Basis: Net income means taxable income before deduction of net operating loss and official
deductions but including income from Federal, State, or municipal obligations. Rate:
2 percent. Applies to national and State banks and trust companies. Does not apply to
building and loan associations.
California Basis: According to or measured by net income allocable to California for previous year.
Income from sources within State includes income from tangible and intangible property
within State or having situs within State and income from any activities carried on in
State regardless of whether carried on in intrastate, interstate, or foreign commerce.
Doing business means actively engaging in any transaction for purpose of finsncial or
pecuniary gain or profit. Rate: maximum rate is 11' percent; 7 percent computed for first
installment. Final rate determined annually by franchise tax board. Final payment is
difference between this rate and 7 percent. Financial corporations, other than banks,
allowed to offset personal property taxes, license fees, and excise taxes so long as offsets
do not reduce tax below 7 percent or minimum tax of $100. Offsets can by carried over
up to 4 years. State banks and financial corporations competing with banks pay for
privilege of exercising corporate franchises within State. National banks pay excise
above described. These taxes are in lieu of all other taxes except real estate for StatO
and national banks. Applies to all corporations doing business in State.
Hawaii (See table 19. Often called an excise tax)
Kansas `(State) Basis: Net income including income from U.S. Government and municipal securities to
extent deducted in arriving at Kansas taxable income, less interest paid on withdrawable
shares of savings and loan associations to extent not deducted in arrivisg at Kansas
taxable income. Rate: 5 percent. Applies to national banks, other banks, trust companies,
and savings and loan associations located or doing business in Kansas.
(City and county Any city or county imposing an earnings tax on corporate or individual incomes must rn-
taxes). pose a 2-percent privilege tax according to or measured by net income, as defined in
State tax, above, of banks, trust companies and savings and loan associations. Adminis-
tered by State department of revenue. Expires Dec. 31, 1972. (As of May 26, 1970, no
county or city privilege taxes had been imposed.)
Massachusetts 2 Basis: On banks, gross income from all sources less deductions allowed by Federal Re'nnu e
Act for the year, other than losses in other fiscal years and other than dividends. Tax on
savings banks measured by net operating income, i.e., gross income from all sources
less (1) operating expenses, (2) Federal and State taxes, (3) net losses on assets and
(4) minimum additions to guaranty fund or surplus required by law. Ratss: Tax rate
on net income of banks determined annually by State commissioner of taxation and
corporations. Maximum rate is 11.4 percent (Laws 1969, ch. 546). Rate on savings banks
is 1 percent annually. In lieu of corporate excise (income) tax. Applies to banks, banking
associations and trust companies, including cooperative banks organized under Farm
Credit Act of 1933 doing business in Massachusetts. Tax on savings banks applies to all
including cooperative banks, Massachusetts Hospital Life Insurance Co., and State and
Federal savings and loan associations.
Michigan Basis: Federal taxable income, as defined in §63 Internal Revenue Code, except no add
back for losses from sale or exchange of Federal obligations and no deduction for income
from Federal securities or their sale or exchange. Rate: 7 percent of taxable income. In
lieu of all State and local taxes except realty, sales, use and similar excises, examination
and credit fees and taxes on certain savings and loan associations. Applies to financial
I nstitutions, i.e., banks, trust companies, building and loan or savings and loan associa-
tions, or industrialbanks.
Minnesota Basis: Gross income less deductions excluding property consisting of bonds, stock, notes,
mortgages, debentures, certificates or any evidence of indebtedness or property held
for investment or sale which shall not be deemed to be capital assets. Additional deduc-
tion allowed for dividends paid to United States or instrumentalities exempt from Fed-
eral income tax on preferred stock owned by them. Rate: 10.5 percent (Dec. 31, 1966
to Jan. 1, 1972) plus additional rate of 1.9 percent (Dec. 31, 1958 to Jan. 1, 1972). Primary
and additional rate increased 10 percent (Dec. 31, 1960 to Jan. 1, 1972). Total rots until
Jan. 1, 1972 equals 13.09 percent. In lieu of all taxes on capital, surplus, assets and
shares except taxes on real property. Applies to State and national banks.
Missouri Basis Net income from sources in Missouri Specific deductions are listed for ban so In
dude usual costs but exclude income from State and Federal securities. Rate: 7 percent
per annum. Is in lieu of bank share taxes and personal property tax (on tangibles and
intangibles). Applies to State banks and trust companies, national banks, and credit
i nstitutions.
New Mexico Basis: Net income, defined as Federal taxable income plus income from Federal, State
and municipal securities. Net income does not include amounts taxed as income to
another member of an affiliated group of corporations. Rate: 6 percent on every bank and
financial corporation located in New Mexico. Minimum tax, $100 per year. (For calendar
1969 rate reduced 20 percent. Laws 1970, ch. 3; Laws 1969, ch. 151.) Applies to State
and National associations, trust companies, State banks or bank holding companies,
savings and loan associations, incorporated savings and loans, mortgage banking com-
panies, consumer finance companies, and other finance companies.
See footnotes at end of table, p. 405.
PAGENO="0424"
404
TABLE 20.-STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES):
1969-70-Continued
State Description of law
New York 3 Basis: Net income from business of whatever kind and in whatever form received less (1)
ordinary and necessary business expenses, (2) interest, (3) taxes other than on income
or profit but including net income taxes of New York City, (4) uninsured losses, (5) bad
debts,(6) depreciation and obsolescence,(7)amortizable bond premiums,(8) reasonable
contributions to nontaxable employees' trust. If business is carried on within and without
New York allocations are made under rules prescribed by Tax Commission. Savings
banks may deduct interest credited to depositors, repayments of loans or advances from
mutual savings bank fund, and interest subject to minimum tax. Deduction on tangible
depreciable business property situated in New York allowed at twice rate of Federal
income tax, for property acquired iiew and first used after Dec. 31, 1963, or which is
constructed, reconstructed or erected after that date. Taxpayers owning and operating
eligible facilities in low-income urban areas allowed specified credit but not to reduce
minimum tax. Financial institutions servicing mortgages acquired by State of New
York Mortgage Agency entitled to annual credit against tax of ~ of 1 percent of principal
due on 1- or 2-family dwellings and of ~`Io sf1 percent on multiple dwellings. Rate:
6 perceet since passage of U.S. Public Law 91-156, due to permission for States
to impose sales and use taxes on national banks if State banks were similarly taxed.
(Prior to Public Law 91-156 rate was 7 percent.) Minimum tax of $50 and not less than
13~ mills per dollar of allocated capital for domestic and foreign corporations doing
business in New York, except savings and loan associations which pay minimum tax
of $50 and not less than 2 percent of interest credited to depositors in preceeding year.
Applies to State banks, savings and loan associations, trust companies (other than a
trust company owned by not less than 20 savings banks), domestic trust companies
organized under special or general laws of New York, and other domestic financial
corporations, national banks and production credit corporations after stock held by
Federal credit corporations is retired.
New York City 3 Basis: Net income as determined for State tax, above, except no deductions are allowed
in re new buildings, permanent improvements, or restorations. Double deduction, as in
State tax, applies only to depreciable tangible property situated in New York City
constructed, reconstructed or erected after Dec. 31, 1965. Allocations for business
carried on within and without State prescribed by finance administrator. Rate: 43'2
percent allocable net income of banks, production credit corporations and finoncial
corporations, or, if higher, 1 mill per dollar of apportioned issued capital stock. Minimum
tax $10. 4j/~ percent of allocated net income of savings banks, savings and loan associ-
ations or, if higher, 2 percent of interest or dividends credited to depositors or share-
holders but not in excess of interest or dividends at rate of 2 percent per year, or $10.
Applies to same groups as State tax alone, including foreign financial corporations
doing business in city. Corporations subject to New York City corporate income tax
excluded.
North Carolina Basis: Entire net income including income from all sources during preceding year, in-
cluding all income from Government securities, except obligations of State and political
subdivisions thereof. Excise tax on building and loan associations (in addition to a capital
stock tax) is based on net taxable income of preceding year less all dividends paid on
outstanding shares. Rate: 6 percent of net income of banks; 43/i percent on building
development corporations, with minimum tax of $10; 73'~ percent of net income of
building and loan associations. Applies to National and State banks and banking associa-
tions, and business development companies. In lieu of intangible personal property tax,
franchise tax, income tax, taxes levied on shares of stock of banks and taxeslevied upon
tangible personal property by local jurisdictions. Excise tax also covers building and
loan and savings and loan associations doing business in State. This tax and capital
stock tax on such associations in lieu of all taxes and fees except those in subchapter I,
ch. 54, Gesl. Stat., ad valorem taxes, sales and use taxes, and taxes levied on intangible
personal property.
North Dakota Basis: Net income for preceding year, including amounts from tax-exempt securities.
Rate: 5 percent with minimum of $50. Additional tax on banks and trust companies
based on and measured by net income of preceding year and is computed at 2 percent
in lieu of all other taxes, State, county, and local except on real property. Applies to
national banks, State banks and trust companies,
Oklahoma Basis: Net income, with no allowance for bad debts unless charged off within taxable year.
Gross incnme from which specified expense deductions are allowed includes income
from any source whatever, except life insurance, return premiums thereon and en-
dowment contracts, and property acquired by gift, bequest, devise or descent. Rate:
4 percent. Applies to national and State banks and credit unions.
Oregon Basis: Net income, including income from property in State and activities carried on in
State regardless of whether carried on in intrastate, interstate or foreign commerce,
except income subject to corporation excise tax (on mercantile, manufacturing, and
business corporations and others.) Rate: 8 percent. (Rate on mercantile, manufacturing
and business corporations, 6 percent.) In lieu of all State, county and municipal taxes
except real property. Applies to national banks and production credit corporations not
exempt by Federal law, State banks, financial corporations, building and loan associa-
tions, savings and loan associations and mutual savings banks.
Rhode Island Basis: Net income, including income from all sources. Exciaded from net income are
dividends received from stock of any corporation owning over 50 percent of its business
in State or of any utility if over 50 percent of its earnings was apportioned to State or
of any banking institution liable for this tax. Rates: on State banks, 8 percent of net
income, or tax of $2.50 per $10,000 of authorized capital stock on last day of calendar
year. On national banks 8 percent of net income. Minimum tax on State and national
banks, $50. Intangible property and shares of stock in any banking association liable for
this tax are exempt from other taxation. Applies to State banks, trust companies, na-
tional banks, loan and investment companies and national banking associations located
in State.
See footnotes at end of table, p. 405.
PAGENO="0425"
405
TABLE 20.-STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES):
1969-70-Continued
State Description of law
South Dakota Basis: Net income. Income from Government securities not excluded from gross incomet
Rate: 53/i percent with minimum tax of $24. In lieu of all other taxes except real estate.
Applies to every State and National bank, savings bank or trust company, and financial~
institutions doing business in South Dakota.
1 Rate of State tax increased from 5 to 51/2 percent with surtax of 214 percent; rate on trust companies and
savings and loan associations not changed but same surtax applied. Provision effective July 1, 1970. See also
text comments at p. 402.
2 Does not include deposit tax on savings banks.
See also text comments, infra at pp. 402, 409, 410.
Source: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov. 1, 1970).
PAGENO="0426"
TABLE 2OA.-TR~ATMENT OF INrEREST RECEIVED ON GOVERNMENTAL OBLIGATIONS AS AN ELEMENT IN STATE AND LOCAL TAXES MEASURED BY NET OR GROSS 1r~coME OF
COMMERCIAL BANKS, JAN. 1, 1971
[CB-Commercial banks, State and national banks, OF-Other financial institutions, G-Corporations, generally, NB-National banks, SB-State banksl
State
State and local obligations of
the taxing State
State and local obligations of
other States
U.S. Government obligations
Differences from treatment of similar re-
ceipts of corporations
Reference to State revenue laws
(1)
(2)
(3)
(4)
(5)
(6)
Alabama Included (CB, OF) Included (CB, OF) Included (CB, OF) Interest from Alabama State and local Sec. 425(b), title 51, Code.
obligations and U.S. Government obliga-
tions is exempt from taxation under the
corporate tax law.
Alaska' do do do Under the corporate tax law, interest from Sec. 43.70.030.
all 3 categories is exempi.
Arizona Excluded (G) Excluded (G) Excluded (G) None Sec. 43-112.
Arkansas Excluded (NB, OF, G) Included (NB, OF, G) Excluded (NB, OF, G) do Sec. 84-2008.
California Included (G) Included (G) Included (G) do Sec. 24271.
Colorado Excluded (G)2 do Excluded (G) do Sec. 138-1-10.
Connecticut Included (G) do Included (G) do Sec. 12-217.
Delaware Exlcuded (SB, OF, G) Included (SB, OF, G) Excluded (SB, OF, G) do Sec. 1903, title 30.
District of Columbia._ Included (CB, OF) Included (CB, OF) Included (CB, OF) Cols. 2, 3, 4, are excluded from the cur- Secs. 47-1701, 47-1703.
porate income tax.
Florida No income tax
Georgia Banks pay no income tax in
Georgia.
Hawaii Included (CB, OF) Included (CB, OF) Included (CB, OF) Corporations do not have to pay tax on the Sec. 241-4.
interest on U.S. Government and State
and local obligations.
Idaho Included (G)3 Included (G) Included G) None Sec. 63-3022.
Illinois Included (G,SB) Included (G,SB) Excluded (G,SB) do
Iowa Excluded (CD, OF) Included (CB, OF) Included (CB, OF) Corporations must include interest from Sec. 422.73.
Iowa State and local obligations and may
exclude interest from Federal obligations.
Kansas Included (CB, OF) 4 Included (CB, OF) do Interest from Federal obligations is ex- Sec. 79-1109, 79-32, 117.
cluded from corporate tax.
Kentucky Banks are not taxed on their
income in Kentucky.
Louisiana There is no tax on the net
income of banks.
Maine a (a) Excluded (SB,G) Excluded (SB,G) Excluded (SB,G) None Sec. 5102
(b) Excluded (SB,OF) Excluded (SB,OF) Included (SB,OF) Interest from Federal obligations is ex- Sec. 206.34.
cluded.
Maryland Included (CB,OF) Included (CB,OF) Included (CB,OF) Corporate taxable income does not include Sec. 128A.
interest from Federal obligations.
PAGENO="0427"
Massachusetts - Included (CB) Included ~CB,G)~ Included ~CB~G>~ ~omecorporatkinsdo notpaytaxon nierest,
- from Massachusetts State and local
obligations~
Michigan Excluded (CB,OF) Included (GB,OF) Included (CB,OF) Interest from Federal obligations is ex- Sec. 206.34.
cluded from corporate tax.
Minnesota Included (GB) Included (GB) Included (CB) None Sec. 290.08.
Mississippi Banks are exempt from
the Mississippi income tax.
Missouri 0 (a) Included (GB) Included (CB) Included (GB) Interest from Missouri State and local Sec. 148.040.
obligations and U.S. obligations is
exempt from taxation under corporate
law.
(b) Excluded (SB, G) - - Included (SB, G) Excluded (SB, 0) None Sec. 143.040.
Montana Banks are exempt from the -
income tax.
Nebraska Excluded (OF, GB) Excluded (OF, GB) Included (OF, GB) None Sec. 77-2716.
Nevada There are no income taxes on
banks.
New Hampshire Excluded (G SB) Excluded (G SB) Excluded (G SB) None Sec 77-A 4
New Jersey Banks are exempt from the cor
porate franchise tax on incomee
New Mexico Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations do not pay taxes on the Secs. 72-15A-1 to 72-15A-15.
interest of any government obligations,
United States, State, or local.
New York Included (G) Included (G) Included (G) None Tax law, arts. 9A, 9B, 9G.
North Garolina Excluded (GB, OF) Included (GB, OF) Included (GB, OF) Interest on Federal obligations is excluded Secs. 105-228. 15, 105-228.16. ...~j
from the taxable income of corporations.
North Dakota lncluded(GB, OF) do do Gorporations do not include North Dakota Sec. 57-35-02.
State and local obligations nor U.S.
Government obligations in their taxable
income.
Ohio Thereare no State income
taxes.7
Oklahoma Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations are exempt from paying taxes Sec. 2316, title 68, OS.
on U.S. Government obligations.
Oregon Included (G) Included (G) Included (0) None ORS 317.015.
Pennsylvania Banks are not taxed on their
income.
Rhode Island Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations do not pay taxes on United Secs. 44-14-13, 44-14-14.
States and Rhode Island State and local
government obligations.
South Garolina do do do Gorporations are not taxed on United Rule BA-R--1.
States and South Garolina State and
local government obligations.
South Dakota don do do Gorporations are not taxed on income Art 2602-15.
Tennessee Excluded (GB, OF) do do None Sec. 67-2701.
Texas There is no income tax in
Texas.
See footnotes at end of table.
PAGENO="0428"
TABLE 20A.-TREATMENT OF INTEREST RECEIVED ON GOVERNMENTAL OBLIGATIONS AS AN ELEMENT IN STATE AND LOCAL TAXES MEASURED BY NET OR GROSS INCOME OF
COMMERCIAL BANKS, JAN. 1, 1971-Continued
LCB-Commercial banks, State and national banks, OF-Other financial institutions, G-~-Corporations, generally, NB-National banks, SB-State banksl
State
State and local obligations of
the taxing State
State and local obligations of
other States
U.S. Government obligations
Differences from treatment of similar re-
ceipts of corporations
Reference to State revenue laws
(1)
(2)
(3)
(4)
(5)
(6)
Utah Included (CB, G) Included (CB, G) Included (CB, G) None Sec. 59-13-7.
Vermont 10 (a) Excluded (G) Excluded (G) Excluded (G) do Sec. 5811.
(b) Excluded (CB, OF) Excluded (CB, OF) Included (CB, OF) U.S. Government obligations not included Sec. 5836.
in corporate income tax.
Virginia Banks are exempt from income
taxes.
Washington Excluded (G) Included (G) Included (G) None RCW 82.04.080, 82.04.432.
West Virginia Banks are exempt from income
taxes.
Wisconsin Included (G) Included (G) Included (G) None Secs. 71.01, 71.03.
Wyoming There is no income tax on
banks or corporations. -
1 This entry reports the treatment of interest under the license tax on gross receipts. 8 There are I or 2 exceptions where the interest from these obligations is exempt.
2 Included in the income base unless such interest has been specifically excluded by Colorado 9 Cols. 2, 3, and 4 are a composite of a franchise tax on corporations on their net income and a
statutes. privilege tax on national banks. National banks pay only the privilege tax and State banks pay only
3 Only municipal revenue bonds are exempt. the franchise tax.
4 Certain State and local obligations are exempt from income tax under the l.:i~ of Kansas authoriz- 1~ In Vermont, banks are subject to both a corporate net income tax(a) and a franchise tax on bank-
ing their issuance. ng corporations (b). The amount the bank pays under the franchise tax is reduced by the amount it
5 If a State bank pays the frai~chise tax instead of the corporate income tax, the interest from pays under the corporate income tax.
obligations would follow (b) instead of (a). . . . . . .
6 State banks pay both tax (a)the bank tax and (b) the corporate income tax. Source; Table compiled by Mrs. Arlene Lustig, Division of Research and Statistics, Federal Reserve
In Ohio local governments impose income taxes but provisions pertaining to banks vary. Board, April 1971, from Commerce Clearing House, Inc., State tax reports for the several States.
PAGENO="0429"
409
The thing that distinguishes the excise "measured by" from a
direct tax on net income is not just the use of a State-granted "priv-
ilege" as a basis for the tax but, more especially, the definition of
income. By design, the excise tax was framed to include in the tax
base income derived from Federal tax-exempt securities-a concept
to which some objected,6' and one which gave Massachusetts trouble
when that State adopted it overtly 62 but was sanctioned by the
Supreme Court when used by New York and California.63 The im-
portance to the States of including income from Federal securities in
the tax base is clear. In 1954, for example, national banks in the 18
States with excise taxes had net income before taxes of $602 million,
of which $283 million, 47 percent, came from interest on Federal
obligations.53 The Federal securities deductions arise because of the
character of our federation with its dual sovereignty for the national
government and the States. No similar impediments prevent one State
from taxing the obligations of another State held by its own residents
or income therefrom.65
The usual deductions from gross income include the appropriate
costs of doing business. Some States tie these deductions to those
permitted under the Federal income tax. This is done in Massachu-
setts, Michigan, and New Mexico. Other States add deductions of
their own. Minnesota allows deductions for dividends paid to the
United States or to instrumentalities exempt from Federal income tax
on preferred stock owned by them-probably an obsolete provision.
New Mexico excludes income taxed to another member of an affiliated
group of corporations. New York excludes specifically among enum-
erated deductions reasonable contributions to non-taxable employees'
trusts. Bad debt charges in Oklahoma cannot be deducted unless
charged off in the taxable year. Rhode Island allows the deduction of
dividends received from stock of any corporation owning over 50
percent of its business in the State, or of any public utility if over 50
percent of its earnings are apportioned to the State, or of any banking
institutions liable for this tax.
How burdensome upon the national banks are the taxes "according
to or measured by" net income? At least in the early years, they were
less burdensome than the share taxes which they generally replaced.66
They also produced less than the 3, 4, or 5 mill taxes on invested
capital would have produced.67 Like the direct tax on net income, the
excise tax is not paid unless net income is realized. When there is 110
61 Cf. Welch, op, cit., p. 160n, citing Professor C. G. Plehn to this effect in the California Law Review, vol.
17 (1928-29), pp. 364-69.
62 Macallen Co. v. Massachusetts, 279 U.s. 620 (1929).
~` International Films Corp. of America v. Ward, 282 U.S. 379 (1931); Fox Film Corp. v. Doyal, 286 U.S.
123 (1932); Pacific Co. Ltd. v. Johnson, 285 U.S. 480 (1932). See especially Thomas Reed Powell, "The Macal-
len Case-and Before" and "The Macallen Case-and Beyond," In National Income Tax Magazine, vol. 8, /
pp. 47ff, 118ff (1930). Also Welch, op. cit., pp. 50-53. The Massachusetts tax law was later amended to con-
form to the decision (Acts 1930, ch. .214; Acts 1933, ch. 327); ibid., p. 53.
64 Uelmberger, op. cit., p. 120. Refunds required in Massachusetts as a result of the Macallen decision
amounted to 31.8 percent of taxes originally assessed for 1928. Welch, ibid., pp. 156-57.
65 Cf. table 20A.
66 Cf. Welch, op. cit., p. 165. The last year the share tax was in effect in California (1928) it produced $4,-
767,000; the revenue from the excise tax in the next year was $555,000 and in 1930, $906,000. In Massachusetts
the share tax produced in its final year $4,038,000 (1922); the excise in its first year, $1,086,000. In N~w York
the comparison was $13,908,000 (1926) to $6,501,000. In Oregon it was $411,000 (1929) to $140,000. In Utah the
last year of the share tax produced $281,000 (1930);the excise yield in 1932 was $28,000. The Wisconsin share
tax yielded $1,935,000 in 1926; the income tax yield in 1928 was $406,000. Ibid., table XIX, p. 166. Revenue
from personal income taxes on dividends paid to shareholders is not included. For year-to-year changes in
Massachusetts, cf. Kimmel, op. cit., p. 47. Additional data appear in Woosley, op. cit. p. 83.
67 Woosley, op. cit., p. 90.
PAGENO="0430"
410
taxable net income, States and localities can tax national banks only
upon real property. And since real property taxes are deductible in
measuring taxable net income, the weight of the excise tax is reduced.
The excise tax does, however, impose heavier taxes on banks than
would a direct net income tax with a similar rate, since the excise
npplies to total income from all sources.68
The excise tax rate may not exceed "the rate assessed upon other
financial coporations" and may not be "higher than the highest of the
rates assessed * * * upon mercantile, manufacturing and business
corporations doing business" within the State. This ties the excise to
rates employed in taxing these enumerated corporations which pay
taxes which cannot be imposed on national banks because of section
~5219. If the same actual tax rates are specified in the law as to national
banks and these other corporations, the result is a lower effective total
tax upon national banks. Up until the 1969 amendment, national banks
were not taxed on personal property, nor were they subject to fran-
chise, sales, use and certain other taxes imposed upon other corpo-
rations. This meant relative overtaxation of mercantile, nianufactur-
ing, and business corporations compared to national banks. How could
this be corrected?
Adjustment by means of tax rates meant that the nominal rates
would have tobe higher on national banks than on other corporations-
if "rates" literally meant actual tax rates as stated in the law. This
approach might violate section 5219. Some States, however, decided
that "rates" really meant "burdens" and that if there was an equiva-
lence of total tax burdens the limitation of section 5219 was met.69
Minnesota in 1941 adopted a differential of 2 percentage points
to establish this equality. It taxed national banks at 8 percent, other
corporations at 6 percent. This 2 .percent was the estimate of what
personal property taxes would have cost the banks .had section 5219
permitted suchlevies. In 1959 when Minnesota established a rate of
11.4 percent on banks, it retained the earlier differential by fixing
the rate on other corporations at 9.4 percent.7° Oregon follows the
same policy. Its bank rate is 8 percent; mercantile, manufacturing,
and business corporations are taxed at 6 percent. A similar change
was made in New York after the 1969 amendment of section 5219.
In consequence of the permission to apply sales and use taxes to
national banks, the excise tax rate was reduced to 6 percent (from
7 percent).7'
The attempt to adjust excise tax rates on banks to compensate for
the additional taxes other corporations pay is referred to as "building
up" the rates. In 1960, seven states were using "built-up" excise
taxes on banks. This approach to the problem of equality-a far
better one than uniform nominal tax rates-has been opposed by
bankers and others. Congress, however, did not adopt an amend-
ment proposed in the 1940s in a joint report of committees of the
National Tax Association and the American Bankers Association
under which the comparison of rates applicable to banks, other
6 8"*~ it is difficult to state definitely the full extent of the fiscal advantage of the tax `measured by'
net income." Welch, op. cit., p. 157. Under reasonable assumptions it "amounts in prosperous years to at
least 15 percent and more probably 25 to 30 percent." Ibid.
69 Cf. Tradesmens National Bank v. Oklahoma Tax Commission, 309 U.S. 560 (1940).
75 Helmberger, op. cit., p. 126-7.
71 Cf. table 20, supra.
PAGENO="0431"
411
financial institutions, and other corporations would have been limited
explicitly to rates of net income, excise, or franchise tax, and the more
comprehensive "built-up" rates would have been forbidden. Sub-
sequently, the "built-up" rates were sanctioned by the courts.72
Another approach to the problem was for a State to give mercan-
tile, manufacturing, and business corporations a credit on their excise
tax for taxes levied on them but not on national banks. The credit
given was not always complete nor fair to the State. Its effect thus
applied was to extend the protection of section 5219 beyond national
banks to other corporations. California and Oregon both used this
device for a short time but dropped itY3
rfhe best approach, taken by Massachusetts and California, proved
to be one that leaves the determination of the excise tax rate to State
administrative authorities: the Franchise Tax Board in California and
the Commissioner of Taxation and Corporations in Massachusetts.
These officials estimate the tax burdens of each set of corporations
and fix the rate on banks accordingly. Instead of estimating what per-
sonal property taxes might have cost banks, they estimate what the
other taxes cost non-bank corporations, on the average, as a percentage
of net income. The maximum permissible rate in California is 11 per-
cent, in Massachusetts, 11.4 percent. As States impose additional
taxes under P.L. 9 1-156, such as sales and use taxes, it is expected
that excise rates in these two States will be reduced administratively
in recognition of the new additional taxes.
Of the four options given States in 1926, the excise "according to or
measured by" net income is by far the best.74 It has been preferred by
State officials over the direct net income tax for its greater yield, al-
though many have lamented that it is not as productive as the share
tax.75 Income as a base is easier to determine than capital or market
values, and this approach has presented fewer legal snarls than ad
valorem share taxes. The prospects under the "permanent amend-
ment" that banks may be required to pay taxes on their real estate,
their personal property, and "according to or measured by" their net
income opens the way for taxation of national banks and other corpo-
rations by like methods and with substantial equality.76 The excise
on banks fits best into such a program so long as some income is other-
wise tax-exempt. The excise and the net income tax both have less
deleterious influence on banking policies than do share taxes, a fact
which should commend them to both bank operators and regulatory
agencies. The excise also has the advantage that it is approved and
often actually sponsored by baukers. The opening of the fourth option
in 1926 profoundly influenced State taxes on national banks, as evi-
denced by the growing list of adoptions.77
72 Cf. "Joint report of Committees of the National Tax Association and the American Bankers Associa-
tion upon proposed changes in T5.S.R.S. section 5219," submitted by Franklin S. Edmonds of Pennsylvania,
in Proceedings of the National Tax Association, 1942, pp. 199-210, esp. pp. 204-7; and supra, p. 330 in this
appendix.
73 Cf. Helrnberger, op. cit., pp. 124-5.
~ Cf. Welch, op. cit., p. 62: ". . . this will doubtless prove the most attractive alternative as the States are
one by one forced to abandon the farce of attempting to tax competing moneyed capital at general property
tax rates."
~` Cf. ibid., p. 49; Woosley, p. cit., p. 83; and comparisons of revenue yields, supra at p. 339.
76 The excise measured by net income fits well into the Model Plan of State and local taxation of the Na-
tional Tax Association, proposed in 1919 and modified in 1933. Cf. Welch, op. cit., pp. 218-21; Helmberger,
op. cit., pp. 148-49.
~ Cf. Kimmel, op. cit., pp. 126-31, 137-41, 143-44; Welch, op. cit., p. 49; Woosley, op. cit., p. 83.
PAGENO="0432"
412
4. The fifth option: (a) As to domiciliary ban/es.-The 1969 amend--
ment to section 5219-P.L. 9 1-156, section 1-added a fifth option to
the four prevailing after 1926. It is a temporary permission, effective
from December 24, 1969, when it was adopted, until the "permanent
amendment" in section 2 takes effect. Without delineating the limita-
tions in the amendment, all of which have been pointed out earlier,78
it may be noted here that a State or political subdivision "may impose
any tax which is imposed generally on a nondiscriminatory basis.
throughout the jurisdiction of such State or political subdivision
(other than a tax on intangible personal property) on a national bank
having its principal office within such State in the same manner and
to the same extent as such tax is imposed on a bank organized and
existing under the laws of such State." That is, States may tax domi--
ciliary national banks exactly as they tax their own State banks-
lighter perhaps, if they so desire, but not heavier.
In other words, if a State taxes State banks on their real estate,
tangible personal property, or "according to or measured by" net-
income from all sources, it may tax national banks in the same ways
so long as the rates do not discriminate against national banks. If
sales of tangible property (not for resale) a-re taxed to State banks,
such transactions may be taxable for national banks. If out-of-state
sales to State banks (or purchases by them) are taxed through a use
tax, like, transactions may be taxed to national banks. If mortgage
recording or registry taxes on transfers are collected from State banks,
they may also be collected from national banks. The same ru'e applies
to documentary stamp taxes. In short, members of the dual banking
systems of the United States are to be taxed alike.
For the first four options, however, the rule continues under the
"temporary amendment," that the imposition of any one of the speci-
fied forms of taxation is in lieu of the others-apart from the previously
permitted combination of taxes on shareholders' dividends concur-
rently with taxes on, according to, or measured by the net income of
the bank.
The application of such taxes as sales, use, transfer, recording or
documentary taxes probably required in many States no specific
legislation to make them applicable to national banks. These laws
usually provided, for example, that all sales of tangible property at
retail shall be subject to a tax of "X" percent. Licensed vendors were
required to collect proper taxes on each such sale and remit periodically
to the State. The most that might be needed would be a ruling by the
administrative agency that such taxes were to be collected from
national banks, as had previously been done for sales to or purchases
by State banks. It is believed that this is what has happened in the
case of sales, use, documentary, gasoline, automobile, and similar
taxes already in operation.
The imposition of such taxes was contemplated in P.L. 91-156.
Other taxes not previously permitted under section 5219 could be
applied to national banks under the 1969 amendment, save taxes on
intangible persona-i property. A gross income tax, such as the one in
78 Cf. supra, pp. 337-338 in this appendix.
PAGENO="0433"
413
effect in the District of Columbia, would now be permissible if State
banks were similarly taxed. Some States, like Illinois, have imposed
annual franchise taxes upon domestic and foreign corporations doing
business in the State. These taxes are generally based upon amounts
*of paid-in capital, actual capital, stated surplus, earned surplus or
some combination of these accounts. In a number of States these taxes
are in addition to corporate income and property taxes. Sometimes
the corporate income tax is substituted for the franchise tax which
generally has been. the older device. Whether one tax should be in lieu
of another often involves considerations of administrative convenience
as well as the rates of taxation employed in the other taxes. So far as
is known, the franchise tax has been applied to business corporations
and not to banks and other financial associations. The prohibition in
.section 5219 may have prevented such applications even to State
banks where States sought to preserve neutrality between State and
national banks. But under P.L. 91-156 a State may now impose a
franchise tax on national banks if it also imposes a franchise tax on
its own banks. Whether States would be inclined to do so is another
question. Since corporate income taxes, particularly the excise, are
better and more equitable tax devices, as well as more productive, it
may well be doubted if many States will extend the corporate franchise
tax to banks. The legal theory behind this tax is that it is exacted for
the privilege of exercising a corporate franchise granted by the State
or in the case of foreign corporations for the privilege of doing business
in the State. The same legal theory underlies the tax "according to or
measured by" net income. It is doubtful that the Supreme Court
would countenance two distinct taxes for the same privilege.
b. As to nondomiciliary ban/cs.-P.L. 9 1-156 also made a separate
interim provision for the imposition of State taxes "on a national
bank not having its principal office located within the jurisdiction" of
the taxing State. This consent, like the one for taxes on domiciliary
national banks, is limited to taxes that are "imposed generally through-
out such jurisdiction on a nondiscriminatory basis." This rules out (1)
special taxes applying only to national banks or perhaps to banks
generally and (2) taxes which apply discriminatory rates or burdens
on national banks.
Subject to these and other specified limitations during the interval
from December 24, 1969, until the "permanent amendment" takes
effect, each State legislature may impose and may authorize political
subdivisions to impose the following taxes on nondomiciliary national
banks:
(1) Sales and use taxes, on purchases, sales, and use within the
taxing jurisdiction.
(2) Taxes on real property or occupancy of real property in
the jurisdiction.
(3) Taxes on the execution, delivery, or recording of docu-
ments, including documentary stamp taxes (a collection device).
(4) Taxes on tangible personal property, excluding cash or cur-
rency, located within the jurisdiction.
(5) License, registration, transfer, excise, or other fees or taxes
imposed on the ownership, use, or transfer of tangible personal
property located within the jurisdiction.
79-421 0 - 72 - 28
PAGENO="0434"
414
Until the "permanent amendment" becomes effective, taxes not
enumerated as applicable to nondomiciliary banks may not be em-
ployed by the States and their subdivisions by virtue of the longstand-
mg rule as to section 5219: that (apart from real property taxes) only
those taxes to which Congress has given its express sanction in options
enumerated in the statute may be imposed on.national banks.
E. Taxes prohibited prior to the 1969 amendments
As a preface to a review of the legislative actions of the States in
1970, a recapitulation of taxes prohibited under section 5219 from
1926 to 1969 may illuminate what the States have done.
From 1864 to 1923, only real estate and share taxes could be ap-
plied to national banks. From 1923 to 1926, States could tax, besides
bank-owned real property, only the shares owned or dividends re-
ceived by shareholders or the net income of the bank. From 1926
through 1969, States could tax national banks only on their real
property and one of the following: (a) shares (on an ad valorem basis),
(b) net income, or (c) "according to or measured by net income." If
the tax was on the net income of the bank or "according to or meas-
ured by" its net income, dividends could also be taxed in the incomes
of individual shareholders. At all times, discriminatory taxes on na-
tional banks were outlawed. All other taxes on national banks were
prohibited. Within this narrow framework, States had to develop
their systems of bank taxation.
State taxes which were prohibited by section 5219 were as follows:
1. Taxes on tangible personal property.-Never from 1864 until after
1969 could States tax the tangible personal property of national banks.
Few States exempted the tangible personal property of other businesses
and individuals from State or local levies. New York substituted in-
come taxes for personal property taxes, but few States followed this
lead. Selective items of personal property, such as machinery or
business inventories were exempted in some States, but the usual rule
was to tax all real property, personal property, and incomes-the
latter in the States that had been able to adopt income taxes. Tangible
personal property was not a large element in the assets of national
banks in any case, but its preferential treatment was guaranteed by
the exclusion from section 5219.
2. Taxes on bank intangibles.-State taxation of national bank in-
tangibles was never permitted from 1864 through 1969. Shares of stock
could be taxed from the beginning but intangible property owned by
the banks, such as cash on hand, cash due from banks, notes receivable,
State and municipal securities, and mortgages, never was included in
any of the options granted under section 5219. Moreover, the ban on
taxes on intangible personal property was specifically continued in
option 5 governing the interim imposition of taxes on domiciliary banks
during 1970-72. Taxes on intangibles of nondomiciliary banks also
are not permitted in this same period, because they are excluded from
the enumerated taxes States are allowed to impose. In addition, State
taxes on cash and currency are specifically excluded from permitted
taxes on tangible personal property. This exclusion undoubtedly
prevents States from taxing cash on hand and due from other banks.
3. Taxes on bank deposits.-States have never been able to tax na-
tional banks upon their deposits. No amendment of section 5219 has
PAGENO="0435"
415
ever enumerated deposits among the permitted taxes. And although
P.L. 91-156 does not give States specific authority to tax them, it.
may be inferred that States might be able to tax national bank de-
posits if State bank deposits were taxed-unless the exclusion of
"taxes on intangible property" were to be interpreted by the courts to
include bank deposits. This would mean, however, that deposits,.
which are a liability of the banks, would be treated as though they
were an asset.
But what if States having ad valorem share taxes decided to add
deposits to the capital accounts of national banks? Certainly deposits,
less reserves for paying out cash, are used to provide earnings for all
commercial banks. They are invested in earning assets-commercial
paper, loans, stocks, bonds, and other securities-to a far greater
extent and volume than capital paid in or earned surpluses. Prior to
1969, since deposits were not traditionally treated as capital, it is be-
lieved that a special amendment to section 5219 would have been re-
quired to permit States to tax them to the bank.
Deposits taxes that might be levied upon the banks are not to be
confused with taxes on individual owners of bank deposits, even though
the banks frequently are made the collection agents for such taxes or
have been forced by competition with other institutions to absorb
deposits taxes as a cost of doing business. Taxes of this type are per-
sonal property taxes of the depositors and remain so. Section 5219
does not and never did apply to them.
4. Gross receipts taxes.-Gross receipts taxes on national banks were
not permitted prior to the 1969 amendment of section 5219. Pennsyl-
vania, however, has used a tax on gross receipts of private bankers.
Although States could not impose a gross receipts tax on national
banks, there was no such impediment on Congress. For many years,
Congress has prescribed gross receipts taxes for banks in the District
of Columbia. The rates vary among classes of financial institutions
doing business in the District.
Details of the Pennsylvania and District of Columbia taxes are
shown in table 21.
`After. the passage of P.L. 9 1-156, States could tax domiciliary
national banks on the basis of gross receipts if State banks are also
taxed on their gross receipts on a nondiscriminatory basis. The gross
receipts tax, however, may not be imposed on nondomiciliary national
banks in the interim period before the "permanent amendment" takes
effect.
5. Sales and use taxes.-S ales, use and documentary taxes could not
be imposed on national banks prior to the 1969 amendment. They are
included explicitly in the interim amendment. Under the "permanent
amendment," these and other taxes may be applied to national banks
provided State banks are likewise taxed.
F. 1970 bank tax legislation
P.L. 91-156 was effective on December 24, 1969. Soon thereafter
State legislatures were enacting new legislation or amending existing
laws to take advantage of the new freedom given them by Congress.79
7' The Information that follows regarding State tax legislation during 1970 is drawn from Commerce
Clearing House, Inc., State Tax GuIde, pp. 1991-95.
PAGENO="0436"
416
TABLE 21.-GROSS INCOME TAXES ON BANKS
State Description of tax
District of Columbia Basis: Gross earnings. Rates: Classified by types of institutions as follows:
1. National banks and other incorporated banks and trust companies 4 percent (law
specifies 6 percent but Hamilton National Bank v. D.C., 176 Fed. 2d 624 held.
6-percent rate to be discriminatory as to national banks, which pay 4 percent.
Law imposing 6 percent tax has not been repe~led. State Tax Guide p. 1827 n.)
2. Bonding, guaranty, title abstract and title insurance company, 13o percent of gross
receipts in District.
3. Savings banks having no capital stock and paying interest to depositors on surplus
and undivided profits, 134 percent.
4. Incorporated svaings banks, 4 percent on gross earnings less interest paid to
depositors.
5. Building associations, 2 percent of entire gross earnings.
6. Private banks or unincorporated bankers, $500 annually.
7. Washington Stock Exchange, $500 per annum in lieu of tax on members.
Applied to: See above rates.
Pennsylvania Basis: Gross receipts of private bankers. Rate: 1 percent. Applies to private bankers.
Note: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov 1, 1970).
Arizona repealed its 5 percent income excise on banks, building and
loan associations, and investment companies to make them taxable
under the corporate income tax at the same rates. These financial
institutions were made subject to all taxes imposed generally on a
nondiscriminatory basis on other corporations. The law also provided
that all tangible personal property of banks and other corporations
not previously assessed was to be assessed ~nd. taxed on ~aii~El after
January 1, 1970.
Colorado repealed its 6 percent excise tax on national banks, State
banks and certain other financial corporations but included them in
the general corporate income tax at 5 percent of net income from
Colorado sources. It also subjected personal property of banks and
corporations to taxation. These provisions became effective March 16,
1970.
Iowa repealed its tax on the shares of national and State banks,
savings banks, loan and trust companies, etc., on May 1, 1970. These
taxes were assessed to the shareholders. The rate on bank shares was
5 mills and on building and loan association shareholders, 1 mill. The
law also repealed a provision which taxed personal property, money
and credits of branch banks. This law makes bank stock and personal
property of banks subject to property taxes in the jurisdiction where
situated.
Kansas increased the rate of its income tax on banks and develop-
ment credit corporations from 5 to 53/~ percent with a surtax of 23~
percent on net income in excess of $25,000. Trust companies and
savings and loan associations were made subject to a like surtax but
the normal rate of 5 percent on net income was not changed. These
provisions became effective on July 1, 1970. The rate of the privilege
tax imposed by cities or counties was not changed; this rate still must
be 2 percent if such a tax is adopted. The expiration date of the existing
tax was removed so that this tax becomes a permanent feature of the
Kansas law.
* Kentucky in 1970 made production credit corporations subject to
its share tax applicable to savings and loan associations, at the rate
of $1 per $1000 of paid-in capital stock. This tax is payable directly
to the State treasury. The law became effective June 18, 1970.
PAGENO="0437"
417
New Jersey increased the rate of its share tax from 3% to 1~ percent
beginning in 1970. The tax also applied to preferred stock which
formerly was not assessed or taxed, but any such stock held by the
United States or its agencies is not taxable. The law was approved and
effective February 9, 1969.
New York adopted a law which provides that any bank, trust
company, savings bank, etc., located in the State which enters into a
contract with the State mortgage agency (created by the law) to service
mortgages acquired by the agency is entitled to an annual credit
applied to or in lieu of the payment of the franchise, or excise, tax.
The credit is equal to 34 of 1 percent of the average unpaid principal
balance on mortgages secured by liens on one- or two-family residences
which. the bank shall have serviced during the fiscal year. On mortgages
upon multiple dwellings, the credit is ~o of 1 percent. No credit is
allowed in excess of franchise tax due. For service of less than a year
on mortgages, the tax may be apportioned. The act became effective,
May 12, 1970.
In connection with the supplementary excise tax on banks in New
York City, a law which became effective on August 10, 1970, rede-
fined retroactively to May 26, 1969, the term "financial corporation"
to include any corporation of which 80 percent of the voting stock was
owned by a national bank or a corporation engaged in the banking
business and subject to Act 3 or 3a of the Banking Law. The law also
made provision for consolidated retiiI~qis. Changes in Federal or State
taxable incomes have to be filed withià90 days and may no longer be
reported with the next return.
In Pennsylvania, 1969 legislation increased the excise tax on mutual
thrift institutions from 73/~ to 1 13/i perceilt of net earnings on income
and made provision for payment of a large~r initial amount of the tax
due on the ffling of the return. The increased rates are applicable to
1969 and thereafter. The rate on the "actual value" of shares of stock of
* national and State banks and savings institutions that have capital
stock was increased from 10 to 13 mills beginning January 1, 1969.
The 10 mill rate had been effective during 1967 and 1968. In a law
that was approved and effective December 31, 1969, but probably was
passed before P.L. 91-156 was adopted by Congress, the tax rate of 13
mills, increased also from 10 mills, was applied to shares of stock of
title insurance and trust companies. The initial or tentative tax pay-
ments of financial institutions, including banks, were also increased.80
Rhode Island in 1970 increased the rate of its excise tax on State
and. national banks from 7 to 8 percent. The minimum tax was in-
creased from $10 to $50. The date for ffling returns was moved from
April 1 to March 15. Changes were made also in the estimated amount
of tax to be paid.
Virginia changed the definition* of "banking holding company"
under its share tax to mean any corporation organized under Virginia
laws and doing business in the State which is a holding company under
Federal law or which owns all the capital stock of one bank, except
qualifying shares, where at least 2% of the assets of the holding com-
pany, computed on a consolidated basis, consist of assets held by the
$0 Pennsylvania Laws, 1969, Acts 69, 179, and 183.
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418
bank and controlled by its subsidiaries. Formerly, the definition in-
cluded only corporations organized under Virginia laws which were
holding companies under Federal law. The law was effective June 26,
1970 but applicable from January 1, 1970.
In summary, legislation of 1969-1970 resulted in the repeal, of the
excise tax in two States (Arizona and Colorado) and an increase in
the rate in two other States (Kansas and Rhode Island). Share taxes
were increased in three States (Iowa, New Jersey, and Pennsylvania).
Two States acted aflirmatively to subject the tangible property of
-national banks to general property taxes (Arizona and Colorado). In
`these same States, national banks became taxable on net income under
the general corporate income taxes there in effect. One State (Virginia)
reflected recent developments in banking organization by changing
its definition of holding companies. (This review does not include
legislation that may have been enacted with reference to sales, use,
*transfer, and some other categories of taxes.)
G. Possibilities for the future
Does the legislation of 1970 presage the action State legislatures will
take when the "permanent amendment" of section 5219 goes into
effect?
This survey, probably incomplete, indicates what to expect after
1972: no uniformity of action; some States will do one thing, some
another, and others will do nothing at all or will act very slowly. On
the basis of past actions it seems very likely that States will change
the laws to make national bank taxes conform to their methods and
levels of taxing State banks. Since 1864 the conformity has had to be
the other way around: Some States have imposed taxes on their own
banks which they could not apply to national banks because of section
.5219, but the differences have not been great because major differences
might impel State banks to transfer to the national bank system.
Charter transfers have not been difficult, but differences in taxation
seem not to have been a motivating factor in such transfers in the past
and are even less likely to be a factor in the future. Of course, State
banks have always had some protection under State constitutions, if no
more than `the requirements for uniform treatment under tax laws; and
they have had the protection of the Fourteenth Amendment of the
U.S. Constitution.
Undoubtedly, national banks will have to pay State sales and use
taxes on their purchases the same as other consumers. Only section
5219 previously protected national banks from having to make such
payments. State taxation of transfers of tangible property at retail was
not contemplated in 1864 or even as late as 1923'or 1926 when section
5219 was previously amended. But the terms of the section were
sufficiently broad to exempt national banks from these taxes. Most of
the sales, use, transaction, and transfer taxes are broadly drafted and
require little or no modification to apply them to national banks. Their
almost universal application in the States, save on food and drugs, does
not permit much avoidance.
Administrative devices used to make sales taxes effective may apply
to the collection of other taxes, especially taxes on net income. They
revolve around what constitutes "doing business" within a State. Some
fact has to transpire to give the State a basis on which to predicate its
PAGENO="0439"
419
*~laim of jurisdiction to tax. If a foreign corporation establishes a branch
within a State from which business is transacted or from which sales-
men leave to solicit orders and then return, a State can assert juris-
diction to tax the activities that take place from that site. If a firm
sends solicitors into a State regularly to take orders for goods to be
shipped there, it is also in the State for the purpose of doing business.
~Sales which take place in such fashion may be taxed by the State, as
may income earned thereby. The relationship to the State may be such,
moreover, as to give the State the right to tax a portion of the total
business or income of the company. HOW much may a bank or other
business concern do and still not be "doing business" in a State? Sales
by mail, by telephone, or telegraph might not give taxable jurisdiction,
depending on details of the sales contract. If salesmen or bank solicitors
~are sent into the State periodically, the bank or corporation may be
held to be "doing business" within the State. Banks, State and
national, probably will find that correspondent relationships, loan-
~generating solicitations, deposit agreements, establishment of credit
lines, and even loan underwritings for fees or interest payments may
provide a factual basis for State assertions of tax liability. Precedents
from other lines of business suggest that States will attempt to apply
their taxes on the basis of various kinds of activities or incidents and
that the courts will be called upon to determine whether these activities
and incidents constitute "doing. business" to a degree that permits or
warrants taxation.
It is likely also that national banks will be required to pay the cus-
tomary property taxes on their tangible personal property. Such tax-
ation is widespread and longstanding. It has applied to individuals
and most businesses in most States .for many years. In most States,
only section 5219 has prevented its extensiOn to national banks,
whereas State banks in many cases have been taxed on similar prop-
erty. The volume of bank-owned tangibles has generally been small
or moderate, but it may increase substantially with the spread of
equipment-leasing arrangements in which banks hold title to the
equipment.
The superiority of the excise or franchise tax "according to or meas-
ured. by" net income over a direct net income tax suggests that this
tax might be adopted more widely. Two States, however, have
repealed their excises, placing national banks under general corporate
income taxes. This may be only a short-run movement or an indication
of local Situations, including the activities of interested bankers. With
taxation of 1)ersonal property of banks, excise rates on national banks,
where previously "built up" in an effort to equalize tax burdens,
may be adjusted downward to reflect the other taxes.
Although low-rate ad valorem taxes on bank shares may be raised
in some States, there is also a likelihood that other States will give up
this mode of taxation in favor of net income taxes of either type. The
tendency seems to be to tax all corporations on the basis of net
income. Share taxes may give way to this trend.
Taxation of intangibles owned by national banks has been prohibited
since 1864. Until 1969, this was because that form of tax was not
mentioned in any of the permitted options. In the fifth option added
in the "temporary amendment" of section 5219 in 1969, a tax on in-
PAGENO="0440"
420
tangible personal property is specifically banned. When the "perma-
nent amendment" becomes effective, unless it is changed by Congress,
section 5219 no longer will prevent taxation of intangible personal
property owned by banks.
However, not many States are likely to attempt to tax their own or
national banks on bank-owned intangibles. This property never has
been taxed to national banks and most State banks, an~I this may be
considered a good reason for not beginning. Both State and n.ational
banks will oppose such taxes. Most States have been dropping in-
tangible personal property from their systems of ad valorem taxation.
Even where il~ is still in the law, it frequently is not enforced or is
only haphazardly applied against individuals and many businesses.
In the case of banks, it should be comparatively easy to assess their
intangibles. Their value is clearly shown on every bank statement.
But in few States would there be strong support for applying to banks
a form of tax that cannot be applied to other property-owners. The
banks might gain some protection from such treatment under the
Fourteenth Amendment. Their greatest protection, however, probably
would come from the historical fact that heretofore no State has been
able to tax national banks on their intangibles; and most States have
not taxed State banks on this basis even when they could legally do
so. Custom and usage seem to be against such taxation, along with
reason and justice. These are not easily upset. A few States may under-
take to tax bank-owned intangibles under the "permanent amend-
ment" but probably not many and not for long. Other methods are
likely to win support as fairer and more productive.
Many scholars oppose taxation of bank-owned intangibles (or
intangibles generally) and will give little support to proposals for such
taxation if they appear. Their principal concerns are with the im-
possibility of achieving equitable application of this kind of tax and
its heavy element of double or multiple taxation of the same under-
lying properties.
Some bank-owned intangibles are in the nature of reserves required
by law or held to meet claims upon the banks for cash. As such, they
earn no income directly (although, of course, they are necessary if
other assets are to yield income). Other intangibles, such as notes
secured by loans, represent property already taxed or presumably
taxed. The security behind such loans may be merchants' inventories,
machinery or other producers' goods, automobiles, trucks, railroad
equipment, airplanes, and other tangibles on which property taxes have
been paid. Federal Government securities, held in large amounts by
banks, represent munitions, other defense goods, public buildings,
hospitals, post offices, roads, waterways, parks, and other public
properties which States are not free to tax directly. State and munici-
pal securities, likewise held in large amounts by banks, represent
tax-exempt public properties also.
There is an abhorrence of multiple taxation which reinforces the
representative-property argument against taxing intangibles. But
if the bank which holds a certificate, bond, or stock is in one State
and the underlying tangible wealth is in another State, the State
where the bank is located will get no revenue under its property tax
if it exempts bank-held intangibles. It cannot be said, either, that
PAGENO="0441"
421
interstate comity in such exemptions will be of equal benefit to all
States, balancing losses against gains. Some States need and use
outside capital to build factories, stores, homes, and public improve-
ments more than do others. They draw from other States and money-
market centers. As the real wealth of the one is enlarged, the volume
of intangibles held by banks in the other States also expands. Then
why not tax the latter? An argument against such taxation is that it
will increase the barriers to economic development, the cost of living,
or the cost of borrowing, and will tend to divert or hamper the free
flow of funds in the nationwide economy. This may retard develop-
ment of the nation as a whole. Taxes on bank-owned intangibles may
operate as hindrances to free trade. If banks earn profits from invest-
ments, it is the profits that should be taxed rather than the nssets
themselves.
Finally, tradition, as has been suggested, is an important factor in-
fluencing tax systems. Trends that have developed over the years may
be expected to continue in the long run. Outside of taxes on real estate,
property taxes seldom have been satisfactory. Productive thngibles,
such as machinery and fixtures may differ only slightly from real prop-
erty, yet they have always been difficult to assess uniformly and
completely. Tangible consumers' goods seldom indicate the taxable
capacity of the owners. Intangibles never have been satisfactorily
taxed with the mass of general property. Special low rates have been
most helpful in augmenting property tax revenues. But the owner's
capacity to pay, save perhaps at death, can best and more completely
be reached through annual personal income taxes. Thus, the decline of
the property tax should carry with it ad valorem taxes on bank shares
and discourage taxation of bank-owned intangibles. Coinciding with
this is the expansion of State income taxation for both personal and
corporate incomes. Bank share taxes doubtless will be absorbed in this
change. Taxes on bank real estate, however, will surely continue so
long as other real estate is taxed.
H. Uniformity in bank taxation?
It has often been said that section 5219 produced a high degree of
uniformity among the States in their taxation of national banks, which
in turn influenced the patterns for the taxation of State banks. Some
writers qualify this tendency by indicating that the uniformity pre-
vailed up until 1921, 1923, or even 1926.81 Of course, from 1864 to 1923
States could tax national banks only on their real estate and shares.
After 1923, two other courses were open but neither had much appeal.
The 1926 amendment added a fourth option. There is no doubt that
section 5219 did restrict the States. But even the share tax was not
applied uniformly; variations in deductions, credits, and methods of
valuation were substantial. The stated options created an illusion of
uniformity.
Nationwide uniformity of national bank taxation as a goal had great
appeal to bankers.82 It was supported also in Congressional debates in
81 Cf. Woosley, op. cit., p. 120. Kimmel based his comparisons on 1921; Helmherger op. cit., p. 19, used the
period from 1864 to 1923. Kimmel said, "In 1921 there was a high degree of upiformity in the principal
methods of taxing commercial banks for State and local purposes. The basic reason for this uniformity was
the nature of the restrictions imposed by the Federal permissive statute." Op. cit., p. 12. But since the 1923
alternatives were unacceptable to States, the date 1926 may well be substituted for 1923.
62 Woosley, ibid.
PAGENO="0442"
422
1864 and in 1923. By then, bankers believed that aside from a modifica-.
tion of the income tax to permit States to tax total bank income, the
latitude given the States was wide enough, and they were able to hold.
the States to four options until 1969.
As to the effect of section 5219 on State taxation of State-chartered
banks, there is a degree of uncertainty. States always were free in
point of law to tax their own banks as they chose, subject only to
limitations in their own constitutions and the Bill of Rights of the
Federal Constitution. But competition between the two sets of banks.
and notions of fairness on the part of legislators and communities.
would not permit too much disparity of treatment. In fact, identical
treatment was provided in the laws of many States. In others,. sup-
plementary taxes often were imposed on State banks. 83 The burden
of such taxes varied from light to heavy, but, as Kimmel pointed out:8~
"The difference in burden may be considerable when the sup~Ie-
mentary tax is equal to 6 percent of net income, as in North Carolina,
or when banks other than national are subject to two supplementary
taxes, as in Arkansas, Missouri, and West Virginia."
The reasons for these supplementary taxes Were stated by Woosley :85
"The reasons are patent for the heavier taxation by certain States
of banks of their own creation. Prominent among them is the inflexi-
bility of section 5219. Under the Federal statute, national banks.can-
not be taxed both on property and on income. Since .several States
resort to both property and income taxation on other corporations,.
section 5219 unduly circumscribes them in the taxation of national
banks. The State is faced with the alternatives of taxing State banks.
at a higher rate through multiple levies thaii it may legally impose on
national banks, or the .taxation of other corporations at a higher rate
than is imposed on State banks. Under such conditions fiscal necessity
may be the deciding issue, in which case the State bank is generally
brought within the scope of the income tax."
He added the following comment: 86
"The preceding pages bear persuasive testimony to the contention.
that section 5219 has in the past modified the tax structures of several
States with respect to other tax subjects. Whether its circumscribing
influence constitutes an abridgment of the taxing power of the State,
obviously the court alone can determine. The layman can only salute
the position taken in the Alabama case and hope for an interpretation
of the restrictive provision of the Federal statute which, within the
limits of that law, will allow the State the maximum freedom."
I. Comparative tax burdens
Perhaps more important than substantial uniformity of taxing
methods and tax .rates is the achievement of comparative equality in
the tax burdens of different classes of banks and in the burdens borne
by banks in comparison with other enterprises.
83 See tabulations of supplementary taxes on State banks in Woosley, op. cit., pp. 121-22; Kimmel, op..
cit., pp. 40, 42. [For differences in types of tax payments reported in 1969, see above, appendix 3 of this
report-Ed.]
84 Kimmel, op. cit., p. 41. Cf. Woosley, op. cit.; p. 120.
85 Ibid., pp. 122-23.
86 Ibid., p. 123. The Alabama case referred to in the quotation is Union Bank and Trust Co. v. Phelps~
288 U.S. 181 (1933), in which the Supreme Court upheld the authority of States to tax State-chartered banks
by methods which could not he applied to national banks under section 5219.
PAGENO="0443"
423
Tax burden comparisons are difficult to make and often inconclusive.
Data presented in several studies suggest that on thewhole and over a
long period national banks have enjoyed a preferential position in State
and local taxation.87
`Without reviewing the assumptions and details of those studies, it
may be remarked that any such preferences probably were beyond the
expectations or intentions of Congress in enacting and amending sec-
tion 5219. In the initial provisions, in 1864, Congress sought to put
national banks on an equality with individuals and businesses under
thc property tax system which prevailed throughout the nation. In
the 1923 amendment, Congress intended to prevent the use of low-rate
taxes on individually-owned intangibles (taxes that had been adopted
to overcome deficiencies of the general property tax) from causing the
taxes on national banks to be declared invalid. Likewise, in the 1926
amendment, Congress relaxed to some extent the restraints that had
grown more pressing upon the States as tax systems developed and
diversified.
It may well be asked, does national policy call for preferential tax
treatment of national banks by the States? Time was when it was
generally believed that this was necessary. That was during the Civil
War, when the national banks were created not only to help finance the
Union Government but also to provide the nation with a stable circu-
lating currency. To accomplish the latter objective, currency issues of
State banks were taxed out of existence. Fear of reprisal by the States
was advanced as a reason for preventing discriminatory action by the
States in their taxation of national banks. The terms of section 5219,
however, were adopted prior to the enactment of the prohibitive tax
on State bank notes in 1865. Such prevention as was said to be needed
was, therefore, retroactive. What the Act of 1864 attempted was
equality of taxation as then practiced, not tax preferences for national
banks. Over the years that intended equality turned out to be a pref-
erential status.
In the light of this history, it has even been suggested at times that
national banks, or commercial banks generally, might reasonably be
expected to carry tax burdens additional to those imposed on other
business corporations.
The national banks once performed profitable currency-issuing
functions of which State banks were deprived. But that function has
now been taken over by the Federal Reserve System, so that neither
State nor national banks have an advantage here. The national banks
also had the use of government funds serving as depository and fiscal
agents of the U.S. Treasury. This, too, has changed for national as
well as State member banks, both classes being able to receive govern-
ment deposits and assist in fiscal operations. It is now difficult to
distinguish between State and national banks in functions and opera-
tions, perhaps even in prestige, in many communities.
Differences between banks and other businesses are great. Only
commercial banks create money, through loans and deposits. Mainly
for this reason, banks have high ratios of intangible property to total
assets, especially when compared with corporations engaged in mer-
cantile, manufacturing, or general business. These other enterprises
87 Cf. Woosley, op. cIt., pp. 125-26; Welch, op. cit., pp. 209-15; Heimberger, op. cit., pp. 44-98, ch. III.
PAGENO="0444"
424
require inventories of goods and raw materials, machinery, and other
tangible property to carry on their business, whereas banks are pre-
dominantly personal-service enterprises with inventories of intangibles.
Whatever might be an equitable relationship between the tax
burdens of banks and those of other business generally, it cannot be
argued today that taxes on national banks should differ from those on
State banks. Equality of burdens is the only appropriate policy, and it
is this policy of nondiscrimination between State and national banks
that is enunciated in the "permanent amendment" of section 5219.
This has long been a goal of State taxing officials and others who have
been concerned with the question. It seems a reasonable standard of
taxation.
EVANSTON, ILLINOIS, June 10, 1971.
PAGENO="0445"
APPENDIX 7
Economic Impacts of Particular State and Local Taxes on Banks
With Special Reference to Neutrality
CARL S. SHOTJP
Professor of Economics, Columbia University
1. SUBJECT AND SCOPE OF THE PRESENT STUDY
(a) Tax Impact: Neutral or Unneiitral, for Banks?
The present study examines the economic impact on banks of each
major tax imposed by state and local governments in the United
States. The impact is analyzed to answer two questions.
First, is the tax neutral or unneutral (and if unneutral, in which
direction), with respect to (a) banks as compared with other businesses,
(b) interstate as compared with intrastate flows of funds, especially
from banks, (c) techniques of producing banking services, for example,
mechanization, and ratio of equity capital to loan capital?
Second, if unneutrality is found, how important in practice does it
appear to be at the present time, and how important may it become
if states are given the powers to tax national banks that are found in
the "permanent" part, the post-1971 part, of Public Law 91-156?
As just suggested, three aspects of economic neutrality are of par-
ticular importance for bank taxation. The first is labe'ed here, indus-
trial neutrality: does the tax induce a flow of labor and capital from
or to the banking industry, to or from other industries? The second
aspect is geographical neutrality, especially as between interstate and
intrastate banking activities: does the tax impede the flow of banking
capital and services across state lines, or possibly, stimulate such flows,
relative to what would occur without the tax? The third aspect is
technical neutrality: does the tax tend to affect the financial structure
and operating methods of a bank? For example, the tax may affect
the proportion of profits retained in the firm, the bank's method of
obtaining capital, or the degree of mechanization of banking op-
erations.
A tax is economically neutral if the taxpayer does not change his
conduct in order to reduce his tax bill. Thus a retail sales tax would be
neutral as between banking and other lines of business if it induced
no migration of capital or labor from the banking industry into other
industries, or, conversely, from other industries into banking in order
to save tax. This would be industrial neutrality. A bank tax is geo-
graphically neutral if it does not induce a bank to expand or contract
its geographic sphere. of activity in order thereby to save tax. An
analogous test defines technical neutrality: A bank tax is technically
neutral if the bank's capital structure and its mechanics of operation
are the same as they would be if the bank bad to pay a lump-sum tax
of the same amount, i.e., a kind of tax that could not be reduced by
(425)
PAGENO="0446"
426
changing the capital structure or mode of operation of the bank. Here,
"same" means the same tax liability, under the tax being studied-say,
a sales tax-as that liability would have been if the bank had not made
those tax-induced changes. Of course no tax is completely neutral,
either industrially, geographically, or technically. But some taxes
are much more unneutral than others in one or more of these aspects.1
(b) How to Distinguish the Effects of a Tax from the Effects of the Use
Made of Its Revenue
The effects of a tax must be distinguished from the effects of gov-
ernment services made possible by the tax revenue, and, similarly,
from the effects of debt retirement, increase in the government's
cash balance, or reduction in some other tax. To separate out the
effects of the use of its revenue requires that we concentrate on the
pressures exerted by the tax itself. We shall not thereby obtain a
complete answer to a question like "What will happen to banks if
we repeal (say) the retail sales tax?" for then some other tax would
be raised, or introduced, or other changes would be forced in the
public finance sector, and the banks would feel the impact of the
combination of these measures. But it is still useful to ask, what
pressure to do this or to do that does the tax itself put on the tax-
payer, i.e., to change his conduct in an endeavor to reduce his tax
bill? 2
(c) The Three Aspects of Unneutrality Important to Ban/cs
Industrial unneutrality is usually less if a certain bank tax is im-
posed by only one or a few states. Capital and labor can then flow
to other states without leaving the banking industry. But of course
this flow is an instance of geographical unneutrality.
The outflow will never be complete. As banking capital and labor
in the taxing state are reduced, the capital and labor reniaining will
be able to obtain a somewhat higher price for their services in that
state; supply will have been restricted, and demand is presumably
unchanged. Moreover, some of the capital and labor hitherto in
banking will accept a somewhat lower reward than before, rather
than move to another state. To be, sure, some capital and labor will
move out of the banking industry into other industries, perhaps
in that same state.
At some point the supply of banking service in the state will have
become so restricted that the remaining banks can raise their charges
by enough to give them what they need to remain in the banking
industry there. This new level of charges may not be enough to re-
coup the tax (see section (d) below). If a tax were unneutral in favor
of banking, the same arguments would apply, in reverse, as capital
and labor would flow from other industries into banking, until a
new equilibrium was reached. "Banking service" may include cer-
tain operations that can be conducted by a separate legal entity,
owned by the bank, yet not subject to a tax on banks as such: e.g.,
a bank might separately incorporate its real estate loan department.
In this event the "migration" is, in one sense, only nominal.
`There are additional aspects of economic neutrality. A tax may be unneutral as between
work and leisure, and so affect the supply of labor. It may be unneutral as between con-
sumption and saving, and so affect the supply of capital. But the three aspects of unneu-
trality described in this paragraph appear to be the ones of chief concern to banking.
2 The point of view of the present writer on this issue is presented in Carl S. Shoup, Public Finance
(Chicago: Aldine, l~)69), i 7-15. The results of the pressure may be thought of, in the language of the
calculus, as the instantaneous rate of change, plus or minus, in the amount of assets that the taxpayer keeps
in the banking Industry-or the instantaneous rate of chenge in some other relevant economic quantity.
PAGENO="0447"
427
Migration of bank capital and labor to another state is somewhat
hampered by the fact that commercial banks are restricted to their
state of domicile, and sometimes even to their city of domicile. On
the other hand, banking capital is relatively liquid and therefore
relatively mobile, at least over the years. Moreover, the question
is not usually one of existing capital's moving or not moving. In a
growing country capital is continually being accumulated, and the
total labor force is increasing, so that the tax usually influences
simply the directions taken by these increments of capital and labor.
Under a tax unneutral against banking, less of the new flow of capital
and labor will go into the banking industry than would otherwise.
Geogr-aphical tax neutrality has not been as important for banks as
in some other industries, in view of the governmental restrictions on
the geographical expansion of any one bank, noted above. But these
restrintions are not as severe as they were formerly. Charles Conlon,
executive secretary of the National Association of Tax Admini-
strators, notes that "More recently, national banks have been ac-
corded a greater scope of* operations outside the domiciliary state
by virtue of the loan production office rulings. This extension of na-
tional bank operations geographically has been accompanied by an
even greater expansion in the kinds of activities conducted by na-
tional banks. These include data processing services; leasing of per-
sonal property; ownership of subsidiary corporations performing
mortgage servicing, factoring, warehousing and similar functions;
credit cards; collective investment accounts; the sale of insurance and
travel agency functions."3 The geographical issues to which these
activities, as well as traditional lending, give rise are considered
under the several taxes below; some of the most perplexing of them
involve allocation of income among states for purposes of the income
tax.
Technical unneutrality has not been the subject of so much dis-
cussion as industrial unneutrahity or geographical unneutrality. To
the economist it is equally serious, since it implies, prima facie, a
waste of resources. For example, if a business firm uses more labor
and less machinery because in that way it can reduce its tax bill,
there is a presumption that this new pattern of inputs is less efficient
than the initial one, else the firm would have been using it in the first
place.4 Total product could be increased if a technically neutral
tax were substituted so that firms would be free to use the most effi-
cient techniques of production, without tax penalty. This question
is particularly important under a retail sales tax that taxes purchases
of capital equipment.
Moreover, technical unneutrality always causes a certain amount
of industrial unneutrality. Some industries necessarily use capital-
intensive methods of production, and a sales tax that taxes machinery
will be unneutral against such industries.
(d) Relation Between Tax Shifting and Tax Neutrality
complete shifting of a tax sometimes does not, and sometimes does,
imply industrial neutrality of the tax. Let us consider a clearly dis-
3 Letter from Charles F. Conlon to Hon. Wright Patman, reproduced in Testimony Received in Con-
sideration of H.R. 7491 and Related Bills, Hearing before the Coniinittee on Banking and Currency, House
of Representatives, Ninety-First Congress, May 26, 1969 (Washington: U.S. Government Printing Office,)
p. 31. These remarks apply, to a somewhat similar degree, to state banks.
4 If the initial pattern of inputs were sOcially inefficient, perhaps because it was Imposing costs on others
for which the firm did not have to pay ("negative externalities"), a tax might be devised especially for the
purpose of inducing the firm to change that pattern. None of the taxes this paper is concerned with are of
that type, and it would be pure coincidence if any of them reduced negative externalities.
PAGENO="0448"
428
criminatory tax, one imposed only on the industry in question. It
might be thought at first that this discriminatory tax could escape
the charge of unneutrality if it ~ere shown to be fully shifted to buyers
of the industry's products. If the industry can recoup the entire tax,
how can the tax be labelled unneutral with respect to that industry?
Yet it will be unneutral, by the definition given in section (a) above
for that term, if the shifting is accomplished only by driving some
capital and labor out of the industry. Such emigration reduces the
industry's output. Customers, bidding against one another for the
reduced supply, push the price up. If the supply in this taxed industry
is so reduced that the price rises by the full amount of the tax, com-
plete forward shifting has occurred. Capital and labor remain in the
industry in this extreme case, only because the price does rise by
enough to recoup the tax. This case is a combination of a perfectly
elastic supply with a demand that is neither perfectly elastic nor per-
fectly inelastic.
On the other hand, it is theoretically possible for complete shifting
to denote industrial neutrality. Let us consider the same discrimina-
tory tax as above, but let us suppose that the taxed industry's cus-
tomers can find no substitute whatever for the product of that indus-
try. They are willing to take a fixed amount of that product at any
price within a range that covers the old price plus the tax. The price
rises by the full amount of the tax, but now no capital or labor leaves
the industry. This combination is one of a perfectly inelastic demand
coupled with a supply that is not perfectly inelastic.
Similarly, a discriminatory tax that is not shifted may nevertheless
be neutral as among industries. It will be so if inability to shift the
tax is explained by an extreme specialization of labor and capital to
the taxed industry. In this case, labor and capital in the taxed indus-
try have nowhere else to go; they are able to produce nothing but the
taxed product. They must therefore accept whatever is left to them
after tax. Here we have perfectly inelastic supply, while demand is
not perfectly inelastic. The result, no shifting at all, may well be
deemed inequitable, but it does represent complete industrial neu-
trality; there is no flow of labor or capital out of the industry.
But if inability to shift the tax is explained by an unwillingness of
all customers to pay a cent more for the product than they were paymg
before the tax was imposed, industrial unneutrality exists. The cus-
tomers can turn to some untaxed good or service that they consider
to be a perfect substitute for the taxed one. In this rare case, there
must occur some migration of capital and labor from the industry.
Migration continues until only very low cost producers are left. This
is the combination of a perfectly elastic demand with a supply that is
neither perfectly elastic nor perfectly inelastic.
(e) Supply and Demand in the Banking Industry
Commercial banking does not exemplify any of the four extreme
cases just discussed. Commercial banking services form a hetero-
geneous group of products. Let the main products be considered the
lending function and the demand deposit and time deposit handling
functions. As to the demand for these products, although the commercial
banks' customers may have no good substitute for the handling of
their demand deposits, they can turn elsewhere for the handling of
time and savings deposits and for loans.
On the supply side, neither labor nor capital in banking is so ir-
PAGENO="0449"
429
revocably specialized to that industry that they will not move out of
it under substantial tax pressure. Indeed, as suggested in section.
1(c) above, banking capital, and presumably banking labor, are
more likely than most other capital and labor to move into other
industries, if their earnings in the banking industry become relatively
depressed.
Neither banking demand nor banking supply, therefore, is likely
to correspond with any of the extremes given in section (d) above,
except that the supply of banking services may be not far from
perfectly elastic over the long run, chiefly because the ratio of fixed
assets to total assets is fairly low in the banking industry. A tax
discriminating against banking is therefore likely to prove substan-
tially unneutral against banking over the long run, and perceptibly
so in the short run.
Again, in a growing economy, the long run may not be very long.
Actual emigration of capital and labor from the banking industry
may not occur; perhaps all that will be needed to shift some of the
unneutral tax is a slowing down of the rate of entry of capital and
labor into the banking industry, relative to their rates of entry into
other industries.
Accordingly, if complete shifting of a discriminatory tax on banking
does occur, it will reflect, not a rigid (perfectly inelastic) demand for
ba.nking services but, rather, an almost perfectly elastic supply of
capital and labor to the banking industry over the long run. Complete
shifting in this fashion implies, we have seen, industrial unneutrality
on the part of the tax, since it can be achieved only by tax-induced
migration of capital and labor from the industry or, in a growing econ-
omy, by a tax-induced relative decline in the rate of growth of the
banking industry.
The same reasoning applies of course to a tax that is unneutral in
favor of banking. Banking then grows faster, relative to other in-
dustries, than it would under a neutral tax, and consumers' choices
among the various goods and services of the economy as a whole are
correspondingly distorted.
(1) Taxes Included in the Present Study ~
The sections to follow, Numbers 2 to 9, consider each major state
and local tax as it would affect banks if imposed under the "per-
manent" (post-1971) section of Public Law 91-156, which requires
only that national banks be treated for tax purposes the same as state
banks.
Sections 2, 3, and 4 deal with taxes directly affecting equity capital
or the return from equity capital: the corporation income tax, the tax
treatment of dividends, and the franchise taxes on capital employed
in the taxing state. Section 5 covers retail sales taxes and gross re-
ceil)ts taxes. Section 6 analyzes taxes on bank assets, and Sections 7
and 8 deal with the other side of the balance sheet by considering
taxes on bank shares and on bank deposits. Unemployment com-
1)ensation taxes are noted briefly in Section 9.
`The classic study ~f bank taxation In the United States is that by Ronald B. Welch, State and Local
Taxation of Banks, Special Report of the FNew York State] Tax Commission, No. 7 (Albany: New York
State Tax Commission, 1934). Other studies include: John B. Woosley, State Taxation of Banks (Chapel
lull, N.C.: University of North Carolina Press, 1935); Lewis H. Kimmel, The Taxation of Banks (New
York: National Industria] Conference Board, 1934); John D. Helmberger, State and Local Taxation of
Banks (Minneapolis: University of Wisconsin, unpublished doctoral dissertation, 1960). See also Simeon
Leland, The Classified Property Tax in the United States (Boston: Houghton Muffin, 1928), pp. 203-221
and 277-78, and Dick Netzer, The Economies of Property Taxation (Washington, D.C.: Brookings, 1966),
pp. 140-43.
79-421 0 - 72 - 29
PAGENO="0450"
430
Other taxes of interest to banks are summarized in Section 10, and
Section 11 describes in-lieu taxation and built-up rates. Some con-
cluding remarks are offered in Section 12.
2. CORPORATION INCOME TAX
The state corporation income taxes analyzed here include of course
both those corporation income taxes that are applied directly to
bank income either through ordinary or built-up rates (a concept
that is discussed briefly in Section 10 below) and corporation franchise
or excise taxes "measured by" net income, which allow the states to
include in the tax base interest on federal obligations.
(a) Industrial Neutrality
An increase in the rate of ~a state or local corporation income tax,
or of a tax measured by corporate net income seems likely to affect
banks somewhat less than industrial and mercantile corporations,
but more than most other financial institutions. In this sense the
corporation income tax is unneutral in favor of financial institutions,
including banks, but unneutral against banks vis-a-vis other financial
institutions.6
This conclusion is based chiefly on the facts that (a) in most states
banks commonly hold a considerable part of their assets in the form
of securities that are exempt from the State tax,7 but (b) certain
other financial institutions, notably insurance companies, often
benefit from the difficulties of defining their net income (though,
to be sure, insurance companies commonly pay a tax on their pre-
miums). The tax-exempt securities are not likely to rise in price by
enough fully to offset exemption from the tax, since the total volume
of such securities is so large that part of it must be absorbed by
holders who receive less benefit from the exemption than do the
banks and hence require a higher interest yield than the banks might
accept.
As of 1968, twenty-six states imposed an income tax on commercial
banks. The rates ranged from 2 per cent in Nebraska to 13.64 per cent
in Miimesota, but the true tax burden imposed by the state tax is
much less than those statutory rates, and to a degree that differs
among the several states. This is because the federal income tax allows
deduction of the state tax in computing the base for the federal tax,
and some of the state income tax laws similarly allow deduction for
the federal income tax in computing the base for the state income tax.
This latter group of states, where both deductions are allowed, is
6 The corporation income tax, viewed in isolation from the personal income tax, of course tends to drive
capital and labor from fields in which incorporation is necessary (including commercial banks) into real
estate activities, fanning, services, some branches of trade, and other industries where partnerships and
proprietorships flourish. But taxation to the proprietors of all the current profit of the enterprise may, for
high-income entrepreneurs, be more burdensome than the corporate tax rate plus subsequent taxation of
whatever part of the profits is distributed. In any event the corporation income tax cannot be appraised
with respect to the economy as a whole without taking account of the manner in which the individual
income tax applies.
Interrelationships of the two taxes may be further complicated to the extent that states follow the Internal
Revenue Code, subchapter 5, in permitting a limited class of corporations to elect to be treated as if they
were partnerships, so that corporate income, whether distrihuted or not, is taxed as ordinary income to
the shareholders in these companies.
See Table 2 below for data as of November 1, 1963. From various sources, including the Commerce Clearing
House State Tax Guide (the single-volume summary service), it appears that the tax provisions as of 1970
differ from those in Table 2 in that there is now no exclusion of either federal, home-state, or other-state
interest payments on securities with respect to taxes "measured by" bank income in Alaska, Hawaii,
Kansas, Missouri, New Mexico, North Dakota, South Carolina, South Dakota, and Wisconsin. Also, income
taxes on banks have been imposed since 1968 in Iowa, Montana (1971), New Mexico, and Tennessee and,
for State banks only at present, in Illinois, Maine, and New Hampshire. [See also table 20A in app. 6
at pp. 406-408, above-EdT
PAGENO="0451"
431
referred to hereafter as "double deduction states." To be sure, the
federal government also allows consumers to deduct the state and local
sales taxes in computing their,taxable income, and similarly for real
estate taxes, but there is no double deduction feature, since the federal
government does not impose such taxes. (The information On double
deductibility does not bear directly on the issue of unneutrality, since
the double deductibility, where it exists at all, is not limited to banks;
but this information is helpful to an understanding of the absolute
amount of the cumulated burden.)
Eleven of the states imposing a corporation income tax on banks
in 1968 were double deduction states (in Wisconsin, however, de-
ductibility is limited). Given a federal corporation income tax with
a marginal rate of 48 per cent for large corporations, the double
deduction feature reduces the burden of the state tax considerably
from what the statutory rate indicates. Thus Alabama's 6 per cent
tax adds to the bank's total federal and state tax bill an amount equal
to only 1.7 per cent of income before federal or state tax (hereafter
termed "pre-tax income"). The Alabama tax is itself not really 6 per
cent of the pre-total-tax profit, since it applies only to profit after
federal tax, and, in addition, the federal tax is not really 48 per cent
of pre-total-tax profit, since it applies only to profit after the Alabama
tax. Arizona's 5 per cent tax is really but a tax of 1.4 percent on pre-
tax income-and so on. Table 1 shows the statutory rates in column
(2), and the net additional burden imposed by the state tax, expres-
sed as a percentage of pre-tax income, in column (3) ~8
TABLE 1.-NET ADDITIONAL BURDEN FROM STATE TAX ON NET INCOME OF COMMERCIAL BANKS
Net additional Net additional
burden as per- burden as per-
centage of pretax centage of pretax
income, given a income, given a
Federal corpora- Federal corpora-
Statutory tion tax of 48 Statutory tion tax of 48
State rate 1 percent 1 State rate 1 percent 1
(1) (2) (3) (1) (2) (3)
Alabama 2 6 1. 7 Nebraska 2 1. 0
Alaska (3) 0. 5 New York 6 3. 1
Arizona' 5 1.4 North Carolina 4. 5 2.3
California 4 7 to 11 1967. 4. 9 North Dakota 2 5 1. 4
Colorado 6 3. 1 Oklahoma 2 4 1. 1
Connecticut 5.25 2.7 Oregon 8 4.2
Hawaii2 11.7 3.4 Rhode Island 7 3.6
Idaho 6 3.1 South Carolina 4.5 2.3
Kansas2 5 1.4 South Dakota 2 4.5 1.2
Maryland (1968) 7 3. 6 Utah 2 6 1. 7
Massachusetts ~11 35*7 Vermont 5 2.6
Michigan 7 3.6 Wisconsin 2 n 2 to 7 1. 6 to 5. 7
Minnesota 2 13.64 3.9 District of Columbia~.. `4.0 82.1
Missouri' 7 2.0
1 Significance of rate depends largely on treatment of government obligations; see table 2.
2 Indicates a double-deduction State: see text.
16 percent of Federal tax plus license tax, 2 percent of net income.
4 Rate computed annually; in 1967, 9.5.
3 Maximum.
6 Deductibility of Federal taxes in limited to 10 percent of net income before Federal taxes.
Tax is 4 percent of gross earnings less earnings paid to depositors.
SIt the tax base is assumed to equal net income.
Source: Federation of Tax Administrators, State Taxes on the Income, Dividends, and Shares of NatIonal Banks (RM-411
Nov. 1968), and supplementary note for sec. 2, below.
8 The formula for this net additional burden is, when the state does not allow deduction of the federal tax,
s-Is, where s is the rate of the state tax and I is the rate of the federal tax. In the double deduction states
the net additional burden of the state tax is given by: (s~_.2fs+f2s)/(l_fs). See Supplementary note to this
section, below at pp.436-437.
PAGENO="0452"
432
Some of these state rates are "built-up" rates, that is, they include
additions to the general corporation income tax rate to allow for the
fact that corporations'in general, in the state in question, pay cer-
tain taxes that banks do not, primarily because of the inhibitions of
Section 5219.
The true net burden of thestate tax also depends on its treatment
of interest on government bonds (see Table 2 below), but there is no
practicable way of allowing for this in Table 1.
Interest on state and local obligations is exempt under the federal
income tax. Such interest is taxable in some states, exempt in others, or
is exempt as to obligations of the domiciliary state or its subdivisions,
but taxable as to obligations of other states or their subdivisions.
Interest on federal obligations is taxable in some states, exempt in
others. The state income tax laws on this point, for corporations in
general, as of November 1, 1963, are given in columns 2, 3, and 4 of
Table 2.
When a bank increases its holdings of state or municipal obligations
that are taxable by the domiciliary state but not by the federal govern-
ment, it does not increase its federal tax bill at all, and deductibility
of the federal tax, in computing the base for the state tax, has no
TABLE 2.-INTEREST ON GOVERNMENT OBLIGATIONS AND INTERCOI~PORATE DIVIDENDS-
TREATMENT UNDER STATE CORPORATION INCOME TAXES AS OF NOV. 1, 1963 (WITHOUT SPECIAL REFERENCE
TO BANKS)
Federal obligations
Obligations of this
State and its
subdivisions
Obligations of other
States and their
subdivisions
I ntercorporate
dividends
(1) (2)
(3)
(4)
(5)
Federal Taxable with exceptions Exempt 15 percent taxable.
Alabama Exempt Exempt Taxable Taxable status uncer-
tain or unclear.
Alaska Taxable with excep- do 1 Exempt 1 15 percent taxable.'
tions.'
Arizona Exemot Exempt Taxable Exempt.'
Arkansas do do Taxable status uncer- Taxable 3.
fain or unclear.
California Exempt-Direct in- Taxable Taxable Exempt 4.
come tax; Taxable-
franchise or excise
measured by net
income.
Colorado Exempt do do 15 percent taxable.'
Connecticut Taxable do do Do.'
Delaware Exempt' Exempt' Exempt' Exempt.
District of Columbia Exempt Exempt Exempt Taxable status un-
certain or unclear.
Georgia do do Taxable Exempt.'
Hawaii do do do 15 percent taxable.'
Idaho Exempt-Direct Taxable do Do.'
income tax;
Taxable-Franchise
or excise tax
measured by net
income.
Indiana Exempt Exempt Exempt Do.'
Iowa do Taxable Taxable Do.'
Kansas do do do Exempt."
Kentucky do Exempt do Taxable."
Louisiana do Taxable-Exempt lx do Exempt."
Maryland do Exempt Exempt'4 Exempt.
Massachusetts Taxable Taxable Taxable Taxable.
Minnesota Taxable-Direct Exempt-Direct do 15 percent taxable."
income tax; 5 income tax;
Taxable-Franchise Taxable-Franchise
or excise tax or excise tax
measured by net measured by net
income, income.
Mississippi Exempt Exempt do Taxable."
Missouri do do do Exempt.'~
Montana Taxable Taxable do Taxable.
See footnotes at end of table.
PAGENO="0453"
433
TABLE 2.-INTEREST ON GOVERNMENT OBLIGATIONS AND INTERCORPORATE DIVIDENDS-
TREATMENT UNDER STATE CORPORATION INCOME TAXES AS OF NOV. 1, 1963 (WITHOUT SPECIAL
REFERENCE TO BANKS)-Continued
Federal obligations
Obligations of this
State and its
subdivisions
Obligations of other
States and their
subdivisions
Intercorporate
dividends
(1) (2)
(3)
(4)
(5)
New Jersey do do do 50 percent taxable.
New Mexico Exempt Exempt Exempt 15 percent taxable.'
New York Taxable Taxable Taxable Exempt.'6
North Carolina Exempt Exempt do Do.20
North Dakota do do do Do.2i
Oklahoma do Taxable do Do.22
Oregon Exempt-Direct do do Do.23
income tax;
Taxable-Franchise
or excise tax
measured by net
income.
Pennsylvania Exempt Exempt Exempt Exempt.
Rhode Island do do Taxable 15 percent taxable.' 24
South Carolina do do do Taxable.
Tennessee Taxable Taxable do Exempt 25
Utah Exempt-Direct do do Taxable 26,
income tax:
Taxable-Franchise
or excise tax
measured by net in-
come.
Vermont Taxable with excep- Exempt I Exempt I 15 percent taxable.'
tions.'
Virginia Exempt do Taxable Exempt.27
Wisconsin do Taxable do Dow
Follows Federal provision.
2 If received from corporations taxed upon at least 50 percent of their income in Arizona for the year preceding payment.
3 Dividends from State banks and truxt companies and national banking associations are exempt.
4 Only to extent declared from income which has been taxed in California.
° Except interest earned in connection with the corporation's regular and usual course of operations on obligations
not traded on an exchange or over the counter.
6 Exempt only if corporate recipient is engaged in business in Georgia and subject to Georgia income tax. Dividends from
Georgia and Federal banko and trust companies are exempt.
7 If received from a (1) corporation subject to income tax of another State and of which 95 percent of stock is owned
by corporations doing business in Hawaii; (2) bank or insurance company organized and doing business in Hawaii; (3)
corporation with at least 15 percent of income for taxable year preceding dividend payment attributed to and taxable by
Hawaii. Dividends from a national banking association are completely exempt.
8 Except that interest on certain bonds issued by Idaho municipalities is exempt. -
If received from corporation taxable by Idaho on more than 50 percent of its taxable income for year preceding dlvi.
dend declaration. Otherwise, fully taxable.
10 That portion of dividends representing earnings of the payer corporation on which Kansas income tax has been paid
is exempt if payer corporation derives at least 15 percent of its net income from Kansas sources. Dividends from banks
and trust companies are totally exempt.
11 Dividends on stock of Kentucky banks and trust companies are fully exempt.
12 Louisiana exempts interest on certain obligations of Louisiana and its subdivisions issued under statutes specifically
exempting the interest on the obligations.
13 To the extent earned in Louisiana and to the extent that the income from which they are paid has been taxed under
Louisiana law.
14 Exempt as "investment income." -
15 Taxable under the direct income tax to the extent permitted by Federal law.
16 In proportion to income assigned to Minnesota if recipient Owns at least 80 percent of voting stock. Fully taxable
if stock is being held as inventory.
17 Exemot if dividends have already borne a Mississippi tax as dividend income; this relief provision is for stockholders
of holding companies. Dividends received from certain national banks are exempt
IS If received from a corporation that has paid Missouri tax on that part of income subject to Missouri tax. Case law
indicates, perhaps, exemption of dividends from foreign corporation deriving no income from Missouri.
19 Only 50 percent of dividends from nonsubsidiaries is exempt.
xs To extent of percentage of issuing corporation's income taxed by North Carolina.
29 To extent of percentage of declaring corporation's income taxed by North Dakota.
25 If received from a corporation that was taxable in Oklahoma on 5 percent or more of its entire gross income for im-
mediately preceding taxable year. Otherwise, fully taxable.
23 On!y if both received by corporation not a holding company, and taxpayer holds 50 percent or more of issuing cor-
poration's stock. -
Si Completely exempt if received from banks subject to the Rhode Island bank tax, corporations liable to the business
corporation tax, or public service corporations liable to the public utility tax.
23 Only if received from wholly owned subsidiary corporations that pay an income tax to Tennessee; otherwise, fully
taxable. -
26 But "corporations subject to the direct income tax are isot taxed on dividends [paid?] from earnings prior to Jan. 1,
1959," and ` Corporations subject to the franchise tax are not taxed on dividends [paid?] from earnings prior to Jan. 1,
1931." See source cited below, p. 428. .
27 Dividends from national banks and Virginia banks and trust companies; and other dividends, to the extent of the
percentage of the issuing corporation's income that is taxed by Virginia.
24 Only if from a corporation taxed on over 50 percent of its total net income by Wisconsin in year preceding payment
Otherwise, taxable in full.
Source: 88th Cong., 2d sess., House report No. 1480, State taxation of interstate commerce, Report of the Special Sub-
committee on State Taxation of Interstate Commerce of the Committee of the Judiciary, vol. 2 (Washington, D.C.: Gov-
ernment Printing Office, June 15, 1964), app. L, pp. 367-434-.
PAGENO="0454"
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significance with respect to that increment of investment by the bank.
In this case, then, double deductibility is no different from deductibil-
ity for the federal tax alone, and the net additional burden caused by
the state tax on this increment of investment income is understated in
Table 1, column 3, for the double deductibility states. Again, double
deductibility is not limited to the banking industry.
Certain other increments of income to a bank may incur a federal
tax, if not of zero as in the case above, at least of less than 48 per
cent. Certain types of capital gain and loss give rise to this I)henom-
enon, and by and large such gains and losses have probably been of
more consequence for banks than for other industries, at least non-
financial industries. This lower effective federal tax rate causes the
figure in column 3 of Table 1 to be an understatement for the double-
deductibility states.
If a. bank incurs a certain incremental expense, rather than ex-
periencing an incremental gain as in the examples above, the reasoning
above applies in reverse. The net cost, after all income taxes, is greater
in the double deductibility states than in the others.
(b) Geographical Neutrality
Under the restraints of Section 5219, income taxation of national
banks has been geographically neutral in one respect, namely, in the
sense that no double taxation of income and no zero taxation of
income could occur through differences in states' formulas for allocat-
ing a portion of a bank's income to the taxing state, or through dif-
ferences in states' laws regarding deductibility of outlays or other
differences in definition of taxable net income. The income, wherever
earned, could be taxed by, and only by, the bank's home state.
V\Tith recent growth of banks' interstate activities the potentiality
for impairing that aspect of geographical neutrality has increased,
and if no restrictions are placed on the states, i.e., the post-1971
provisions of Section 5219 are retained, we may expect them to differ
among themselves in formulas for geographical allocation and in
definitions of net income for banks, just as they have done, and
continue to do, with respect to non-bank firms. If the permanent
part of the new bank tax legislation stands as passed in 1969, a certain
amount of duplicate taxation of bank income among the states will
doubtless develop. No doubt, also, some gaps will open up where a
part of a bank's income escapes state tax entirely or is given, in-
advertently, preferential treatment.
Activities for which allocation-of-income problems probably will
arise are numerous, but the following are illustrative: loans by a bank
in State A to a borrower in State B, where the closing takes place in
State C, the funds to be spent in State D; purchase of consumer
merchandise in A by a resident of B through use of a credit card
issued by a bank in C; a working capital loan by a bank in A to a
corporation in B, the funds to be spent by the corporation in C, D
participation and overline loans in which a bank in A acts as
the lead bank for, or cedes portions of loans to, banks in B, C, . . .
reserve loans by a money-market bank to a correspondent bank to
satisfy state reserve requirements for the latter bank; leasing of
PAGENO="0455"
435
equipment by a money-market bank to a correspondent bank; partner-
ship operation with a correspondent bank in leasing equipment to
others or in factoring.9 In the leasing-factoring instances it has been
argued that states other than the domiciliary state of the money-
market bank might claim that that bank is doing business in those
other states through an agency relationship with the correspondent
bank. It has also been argued that certain other activities by the
money-market bank might attract taxation of the correspondent bank
by the home State of the money-market bank: securities handling
and safekeeping service, transit service, collections, foreign drawing
and remittance service, broker loan participations, factoring and
accounts receivable~ financing, issuance and redemption of commercial
paper, and provision of bank facilities and services.10
Duplicate state taxation and gaps in state taxation are of course
geographically unneutral; a bank that channels its activities in a
certain geographical pattern will minimize its effective combined rate
of state income taxes. That pattern may or may not be one of restrict-
ing all activity to the home state; a bank may continue to operate
outside its home state because of low state tax rates elsewhere, in the
face of a certain amount of duplicate taxation on some of its out-of-
state income. Moreover, it may not be easy for a bank to discern
accurately the alternative tax patterns, in a complex world of changing
tax regulations, court decisions, and other uncertainties.
On balance, then, given the almost certain emergence of duplicate
taxation and possible tax gaps under the permanent features of the
present bank tax legislation, and given the continuance of the rather
low levels of net additional burden imposed by any one state's income
tax (see Table 1), the problem may be not so much one of distortion
of flow of funds as one of nuisance and social waste of manpower and
equipment devoted to the task of complying with, and attempting to
minimize tax liabilities under, a number of somewhat differing state
income tax laws. To be sure, state tax rates will almost surely rise
further, so the distortion problem will become more important. On
the other hand, because banks are so closely supervised, the compliance
problem is also more important to them than to firms in many other
industries.
(c) Technical Neutrality
The technical unneutralities of the corporation income tax are
probably not very significant for banks, which, for various reasons,
including regulatory restrictions and the nature of their business a~s
a deposit-holding mechanism, cannot respond readily to the pres-
sures that that tax exerts to increase the ratio of borrowed capital to
equity capital, or to disincorporate. Or perhaps we should say that
since banks are, from one point of view, in the business of borrowing
capital (to lend it out), the pressure exerted by the income tax is of
relatively secondary consequence.
`These examples are paraphrased from a memorandum by Mayer, Brown, & Platt, Chicago, accompany-
ing a letter from John E. Allen, of this firm, to the Continental Bank, Chicago, November 18, 1970, and from
First National City Bank, New York, Report on the National Bank Tax Act as Directed by Congress in
Public Law 91-156 [no date], pp. 18-15. (Both source documents are in the Federal Reserve Board file for
the bank tax study.)
10 First National City Bank, icc. cit., pp. 16-17.
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436
(d) Supplementary note to Section 2: Derivation of Formula for Net
Additional Burden of State Income Tax."
Letf=federal statutory rate of corporate income tax.
Let s=state statutory rate of corporate income tax.
Let y=corporate net income before either federal or state tax.
Let t1= amount of federal corporation income tax, in dollars, payable
by corporation.
Let t~= amount of state corporation income tax, in dollars, payable
by corporation.
If the state does not allow the federal income tax as a deduction,
we have:
t3=sy;
t1=f(y-t5) =f(y-sy) =fy-fsy
t~ +t~= sy+fy-fsy
(t5 +t1)/y= s +f-fs= rate of two taxes together
(`s +ffs) -f excess of combined rate over federal statutory
rate=~s-fs
If the state does allow deduction of the federal corporation income
tax,.we have:
t5(ytf)S (1)
tf=(y-tS)f (2)
expand (1) t~= sy- Stf (3)
expand (2) tf=fy-ftS (4)
substitute from (4) in (3) t5=sy-s(fy-ft5) (5)
from (5) t8=~"~~~ (6)
1-fs
t~ s-fs (7)
divide (6) by ~ ~=1-fs
substitute from (6) in (4) tf=fy-~~----~-~ (8)
f fy(l-fs)-f(sy-fsy) (9)
rom (8) t1- ~ 1-fs
d~ ~d (9'~ b tff(1-fs)-f(s--fs)_f-fS (10)
ivi e ~ y y~ 1 -fs - 1-fs
add (7) and (10) t+t1f±s2fs (11)
"In practice, taxpayers commonly avoid the use of algebra by subtracting last year's tax from this year's
Income. The results are not quite the same as with instantaneous deduction, but are not capable of being
generalized as simply in algebraic formulae.
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The excess of (11), combined effective rate of federal tax and state
tax, over federal rate alone, is given by:
(11~_~_L+82f8 ~_j+s-2fsj(1-fs)
" ~` - 1 -fs ~` - 1 -fs 1 -fs
- s- 2fs +f2s
- 1-Js (12)
3. TAXATION OF BANK DIVIDENDS
(a) Under individual income Taxes
As of 1968, of 26 states that taxed the income of national banks,
17 also required inclusion of national bank dividends in shareholders'
individual income tax returns for the state, along with other divi-
dends.12 Eight states did not require such inclusion, most or all of
them because they did not impose an individual income tax. A ninth
state, Rhode Island, now (1970) has a personal tax on dividends,
interest, and capital gains. Before 1970, no state, apparently, taxed
national bank dividends without also taxing national bank income.
Of the eleven "double deduction" states that taxed the income
of national banks (including Wisconsin in this number), five were
among those states that did not impose an individual income tax.
Four of the double deduction states did tax bank dividends to stock-
holders (on two states there is no information available as this is
written). On the other hand, of those states that did not allow double
deduction, all but one did impose an individual income tax that
included dividends. In none of these states, of course, do the facts
imply discrimination against or in favor of banks as such, as distinct
from corporations in general. -
State "taxation of dividends" to shareholders, like state taxation
of corporate income, is softened by the federal income tax deduc-
tibility of state income tax in computing the federal tax base for
the dividend recipient. The degree of softening depends on the re-
cipient's marginal bracket rate (and lower rates, too, if the dividend
is large relative to his total income). Lacking data on ownership of
national bank shares by income class, we can only say that the soft-
ening is sometimes more, sometimes less, than the softening of the
corporation tax rate. If the state allows double deduction to the
individual taxpayer, that is, deduction of the federal personal in-
come tax in computing the base for the state personal income tax,
the softening is increased, as shown by the analysis above for the
corporate income tax.
* Taxation of dividends to individual shareholders in banks adds
to the industrial unneutrality of the income tax system, since certain
industries are largely corporate (including commercial banks) and
others not. Such taxation probably does not contribute much to
geographical unneutrality, but does exert pressure on the bank to
expand its undivided profits in place of raising new equity capital
12 Federation of Tax Administrators, "State Taxes on the Income, Dividends, and Shares of National
Banks," RM-411, November 1968. In Mississippi, where State and national banks were exempt from
corporate net income tax, dividends from Mississippi national banks became taxable to shareholders
January 1, 1970.
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or perhaps in place of accepting a ]ower ratio of equity to debt (tech-
nical unneutrality).
The fact that some states give preferential treatment to dividends
received from domestic corporations does tend to inhibit interstate
flows of capital, and thus makes for geographical unneutrality.
In general, then, the taxation of dividends creates unneutrality,
not against banks as such, but, when coupled with corporate income
taxation, against the corporate sector, in which commercial banks,
as a rule, find themselves.
(b) Under Corporation Income Taxes
If state income taxes apply to dividends received by corporations
from subsidiaries, the corporate form of organization is further
penalized relative to unincorporated business. This would have an
unfavorable, but presumably rather weak, effect on the flow of capital
and labor into the banking sector, which with rare exceptions is
incorporated and has recently experienced a rapi4 expansion in the
creation of holding companies.
The facts on this score for corporations in general, as of November
1963, are given in column 5 of Table 2 above, and in the footnotes to
that table. For the most part, intercorporate dividends paid by
United States (domestic) corporations are exempted or included only
as to 15 per cent (the federal provision), but most of these instances are
coupled with a requirement that the paying corporation be subject
to the state's corporation income tax to some degree. Only seven
states follow the federal provision without exception. A few states
specify an exemption for banks that is not entirely available to oth
corporations (see footnotes 7 and 24 to Table 2).
The parent corporation pays federal income tax on only 15 per cent
of dividends. Hence the impact of a state or local income tax on
dividends received from a subsidiary is cushioned much less by de-
ductibility of that tax than is the impact of a tax on profits. In other
words, for a given increment of state revenue, a state tax on inter-
corporate, dividends is relatively damaging, and is correspondingly
more likely to check the formation of holding companies.
4. FRANCHISE TAXES ON CAPITAL EMPLOYED IN TAXING STATES
A low-rate annual franchise tax on capital, or capital stock, employed
in the state is imposed by some 35 states, as Table 3 indicates. In a
few of these states the maximum tax is so low that it might almost be
lumped with the mostly flat-rate license fees charged for the same
privilege, not shown in Table 3.
These taxes seem to pose no threat of unneutrality against banks
under the permanent provisions of Public Law 9 1-156. Where the
tax applies only to capital stock, banks would be favored, since
they commonly have a low ratio of capital stock, or even total equity,
to total assets. On the other hand, these taxes are unneutral against
industries that turn their capital over slowly (such industries must
raise the prices of their products by a larger percentage than the
fast-turnover industries to recover the tax), and if bank assets turn
over relatively slowly, a matter on which the present writer is not
well informed, there is `unneutrality against banks.
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The franchise tax on out of state ("foreign") corporations generally
applies to that part of the capital stock that is employed in the state,
as measured by selected~apportionment factors. This has significant
implications for post-1971 taxation under P.L. 91-156, insofar as
banks qualify in "foreign" states.
TABLE 3,-FRANCHISE TAXES BASED ON CAPITAL EMPLOYED INTHE
TAXING STATE, AS OF OCTOBER 1, 1970
[Numbers in parentheses refer to pages of source: Commerce Clearing House,
State Tax Handbook, as of October 1, 1970 (New York)]
Alabama.-Franchise tax: (Prorated on a half-yearly basis.) Domes-.
tic-$2.50 per $1,000 of capital stock. Foreign-$2.50 per $1,000,
measured by actual amount of capital employed in the state less loans
secured by real estate mortgages on which Alabama recording tax has
been paid. No par stock valued at $100 per share unless a different
value is shown. (461)
Arkansas.-Corporatioii franchise tax: Domestic-i 1/100 of 1%
of proportion of subscribed capital stock employed in the state. Doing
no business in state, $5. Foreign-ii/iOO of 1% of proportion of
capital stock representing property owned and used in business
transacted in the state. No par stock valued at $25 per share. Min-
imum, $11.
Colorado.-Franchise tax: Domestic corporations-less than $50,000
of authorized capital stock, $10; $50,000 but not exceeding $150,000,
$20; $150,001 but not exceeding $250,000, $40; $250,001 but not
exceeding $500,000, $65; $500,001 but not exceeding $1,000,000,
$100; $1,000,000 or more, $250. Foreign corporations-$i00 annual
license fee in lieu of franchise tax. (480)
Delaware.-Franchise tax: Up to. and including 1,000 authorized
shares, $20; 1,001-3,000, $24.20; 3,001-5,000, $30.25; 5,001-10,000,
$60.50; over 10,000, $60.50 plus $30.25 per each additional 10,000
shares or fraction. Alternative rate, $121 per $1,000,000 of assumed par
value capital based on average asset value, but not less than par
50% reduction for inactive corporations. Maximum-$i 10,000
($55,000 for regulated investment companies). Minimum-$20. (486)
Ftorida.-Corporation franchise tax: Graduated from $20 for
$10,000 or less, on domestic issued capital stock not including treasury
stock, and on foreign outstanding capital stock representing capital
allocated for use in Florida, to $2,000 for over $2,000,000. No-par
stock valued at $100 per share unless a different, value is shown.
Financial corporations, if qualified, may elect to pay a $1,000 annual
franchise tax in lieu of intangibles taxes. (492)
Georgia.-Corporation' franchise tax: Graduated from $10 for
$10,000 or less, based on net worth, including capital stock and paid
in and earned surplus of domestic corporations, and on the proportion
of issued capital stock and surplus employed in the state of foreign.
corporations, to $5,000 for over $22,000,000. (496)
Idaho.-Corporation franchise tax: $20 for $5,000 stock or less
based on domestic and foreign authorized capital stock, to~ $300
for stock over $2,000,000. No par stock valued at $100 per share.
(501)
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Illinois.-Corporation franchise tax: Initial domestic and foreign
corporation franchise tax is 1/12 of 1/10 of 1% per month, or fraction,
between date of issuance of certificate of incorporation or filing
application for certificate of authority, respectively, and July 1
following; minimum, $25; maximum, $1,000,000. Additional franchise
tax of 1i12 of 1/10 of 1% per month between date of each respective
increase in sum of stated capital and paid-in surplus and July 1
following.
Annual franchise tax payable by domestic and foreign corporations
is 1/20 of 1% for 12 months beginning July 1 of year in which payable,
plus supplemental annual franchise tax of 1/20 of 1% for 12 months
beginning July 1 of year in which payable. Minimum combined annual
and supplemental annual tax, $25; maximum, $1,000,000. Minimum
annual franchise tax for domestic corporations ranges from $10 if
stated capital and paid-in surplus is $50,000 or less to $500 if over
$10,000,000. (504)
Iowa.-Franchise tax: Domestic-from $5 for less than $20,000
of stated capital to $3,000 for over $500 million of stated capital.
Foreign-Same as domestic based on stated capital in state or total
stated capital. (510)
Kansa&-Corporation franchise tax: Graduated from $10 for
$10,000 or less based on domestic paid-up capital stock, and on foreign
issued capital stock representing property and business in Kansas,
to $2,500 for over $5,000,000. (513)
Kentuclcy.-Corporation franchise (license) tax: 70~ per $1,000 of
total capital employed in the business within and without the state.
Minimum, $10. (516)
Louisiana.-Corporation franchise tax: $1.50 per $1,000 based on
issued and outstanding capital stock, surplus, undivided profits,
and borrowed capital. Minimum, $10. Value of stock with or `without
par value is the value reflected by the corporation's books. (519)
Maine.-Dom estic corporation franchise tax; foreign corporations
license fees: Domestic-par value stocks: graduated from $10 for
$50,000 or less to $100 for $1,000,000 plus $50per additional $1,000,000;,
no par stock: from $10 for 250 shares or less to $100 for 10,000 shares
plus $50 per additional 10,000 shares. Foreign-s 10 flat annual
rate. (523)
Maryland.-Corporation franchise tax: Domestic-graduated from
$10 for $10,000 or less to $480 for $10,000,000 plus $30 per $2,000,000
or fraction thereof over $10,000,000. Foreign-$25. Credit unions-
$10. Real estate investment trusts-$25. (527)
Michigan.-Annual license tax on business corporations: 5 mills
per $1 based on the proportion of domestic and foreign paid-up
capital and surplus representing property in Michigan. Minimum,
$10. Value of no par stock is book value, market value, or $1 per
share, whichever is highest. (535)
Mississippi.-Corporation franchise tax: $2.50 per $1,000 of domes-
tic and foreign book value of capital, consisting of capital stock,
surplus and undivided profits, employed in state. Minimum, $10.
(543)
M'issouri.-Corporation franchise tax: 1/20 of 1% of domestic and
foreign-proportion of par value of outstanding shares and surplus
representing property and assets in Missouri. No par stock valued
at $5 per share or at actual value whichever is greater. (547)
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Nebraska.-Corporation franchise tax: Graduated from $10 for
$10,000 or less based on domestic paid-up capital stock, and foreign
capital employed in Nebraska, to $8,250 for over $100,000,000.
Foreign corDorations pay double; maximum, $9,000. (553)
New Hampshire.-Domestic corporation franchise tax: ~ of initial
fee plus 1,/2 of fee paid for increases in authorized capital stock. Maxi-
mum, $1,000; minimum, $30. Initial fee: Domestic-$60 for $15,000
or less to $1,500 when in excess of $500,000, but not in excess of
$1,000,000; and $100 for each $100,000 in excess. Same rates for
increase of capital stock. Minimum, $30. No par value stock valued
at $50 per share for the first 20,000 shares and $1 per share for any
additional shares. Foreign-$100 flat fee upon qualifying plus annual
maintenance fee of $70. (558)
New Jersey.-Corporation franchise net worth tax: The following
tax based on allocated net worth: 2 mills per $1 on first $100 million;
4/10 mill per $1 on second $100 million: 3/10 mill per $1 on third $100
million; and 2/10 mill per $1 on all over $300 million. Minimum tax-
greater of (1) 5/10 mill per $1 on first $100 million and 2/10 mill per $1
on excess over $100 million of the average of allocated real and per-
sonal property, or (2) $25 for domestic corporations, $50 for foreign
corporations, or (3) in the case of domestic corporations the least
of the amounts provided in (a), (b), or (c) below: (a) 5,000 shares
of authorized capital stock or less, $25; over 5,000, but not over
10,000 shares, $55; over 10,000 shares, $55 for the first 10,000 shares
and $27.50 per additional 10,000 shares; (b) 11/100 of a mill per $1 on
the total assets of the corporation; or (c) $100,000. The total mini-
mum for investment companies and regulated investment companies
is $250. (561)
New Mexieo.-Franchise tax: 55$ per $1,000, or fraction thereof,
of book value of the proportion of authorized and issued capital stock
represented by property and business in the state; minimum, $10.
(565)
New York.-Franchise taxes: Business corporations-(A) principal
tax: (1) allocated net income, 7%; or (2) business or investment capital
allocated to New York, 1 ~ mills per dollar (~ of 1 mill for cooperative
housing corporations and limited-profit housing companies); or (3) 7%
of 30% of allocated net income plus certain salaries; or (4) minimum
flat rate of $100, whichever is greater. (B) Additional tax on allocated
subsidiary capital: 5,/s mill per $1. Additional tax on omnibus cor-
porations having New York gross receipts of $500,000 and over,
5~% of business income. Real estate corporations, 2% of dividends
paid and net worth in excess of paid-in capital assets. (569-70)
North Garolina.-Corporation franchise tax: Domestic and foreign-
$1.50 per $1,000 issued and outstanding capital stock, surplus and un-
divided profits allocable to state. Minimum, $10. (574)
Ohio.-Corporation franchise tax: Domestic and foreign (including
non-profit corporations)-Y2 of 1% (investment companies and state-
chartered banks, 1/10 of 1%; public utility holding companies, from
4/100 of 1% on first $10 million of taxable value to 1/200 of 1% on
taxable value over $100 million) of value of issued and outstanding
stock based on total value, as shown on the books, of capital, surplus,
undivided profits and reserves (less certain reserves and expenses)
allocable to Ohio. i\'Iinimum, $50. (582)
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Olclahoma.-Corporation franchise tax: $1.25 per $1,000 or fraction
thereof used, invested or employed in Oklahoma. Maximum, $20,000;
minimum, $10. (586)
Oregon.-Corporation franchise tax: Domestic-giadua ted from $10
for $5,000 or less par value of authorized capital stock to $200 in
excess of $1,000,000. No par stock valued at $10 per share. Foreign-
$200 flat rate. (589)
Pennsylvania.-Foreign corporations excise tax: 3'~ of 1 % increase
of capital employed in the state. Foreign corporations franchise tax:
7 mills per dollar of taxable value of whole capital stock apportioned
to the state on the basis of tire ratio that (A) tangible property situated
within Pennsylvania, (B) wages, salaries, and commissions paid in
Pennsylvania, and (C) gross receipts from business in Pennsylvania
bear to the total of each wherever located. (592)
Rhode Island.-Domestic corporation franchise tax: $2.50 per
$10,000 authorized capital stock. Minimtim, $50. Corporations not
engaged in business in state during year-capital stock of $200,000
or less, $50; $200,000 to $1,000,000, $62.50; $12.50 per additional
$1,000,000 or part. No par stock valued at $100 per share. Domestic
corporations subject to the business corl)oration tax pay only the
amount by which the capital stock tax exceeds the bu.~~ness corpora-
tion tax. (596)
South Garolina.-Corporation franchise tax: 1 mill per $1 paid to
capital stock and surplus. Allocated for interstate corporation. Min-
imum, $10. An annual report and $5 filing fee must be submitted by
corporations not filing the annual franchise tax report. (599)
Tennessee.-Annual corporation franchise tax: i5~ rer $100 worth
of issued and outstanding capital stock J)IUS surplus and undivided
profits (or minus deficit), apportioned to state, but not less than the
value of real and tangible personal property; minimum, $10. Value of
stock in other corporations paying the tax is deductible. Annual
corporation report and tax: 3~2 of 1 % of gross receil)ts from intrastate
business during the preceding fiscal year with a minimum of $25, or
a fee graduated from $5 on actual capital stock of $25,001) or less to
$150 on $1,000,000 or more. (607)
Texas.-Corporation franchise tax: $2.75 per $1,000 stated capital,
surplus, and undivided profits pius outstanding bonds, notes, and
debentures allocated according to gross receipts from intra~tate busi-
ness; minimum, $35. An additional tax is levied per $1,000 on debt
allocable to Texas as follows: from May 1, 1969, to April 30, 1970,
$2; from May 1, 1970, to April 30, 1971, $1.50; from May 1, 1971, to
April 30, 1972, $1; and from May 1, 1972, to April 30, )973, 50~. Plus
additional tax of 18.18% of tax due for tax periods until April 30, 1973;
9.09% thereafter. (611)
Virginia.-Domestic corporations franchise tax: No par stock
valued at $100 per share. $10 on $25,000 or less maximum authorized
capital stock to $15,100 on $300,000,000; plus $10 p~r $1,000,000, in
excess thereof. (621)
Washington.-Corporation franchise tax: $30 on $50,000 or less;
decreasing from 1/20 of 1 % to 1/100 of 1 % on additional amounts of
domestic authorized capital stock, and foreign stock in proportion of
issued and outstanding capital stock representing property and busi-
ness in Washington. Maximum, $2,500. No par stock valued at the
actual value of assets represented by such stock. (626)
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West Virginia.-Corporation franchise tax: Domestic-graduated
from $20 on $5,000 or less authorized capital stock to $2,500 on
$15,000,000 or more. Foreign-75% higher than above rates. Mini-
mum, $250. No par stock valued at amount for which stock was issued
but not less than $25 per share. (630)
Wyoming.-Corporation franchise tax: Domestic and foreign-
graduated from $5 on $50,000 or less to $50 on more than $500,000
and not more than $1,000,000, plus $50 on each additional $1,-
000,000 portion of corporate property and assets located and em-
ployed in Wyoming. (638)
5. RETAIL SALES TAXES AND GROSS RECEIPTS TAXES
The present section analyzes first the effects of the so-called re-
tail sales taxes, the sales taxes that are limited to taxing the "final
sale" to the consumer or other "final" user. The word "final" is
put in quotation marks here because there is nothing economically
final about machine tools, paper used in an office, and the like. The
fact that the article does not go physically into the firm's product
does not in an economic sense make it a final good, except in the
limited sense in which investment goods are sometimes said to be
final.
Following this analysis, the broader-based gross receipts tax that
a few states employ will be briefly considered.
Only three states use neither a retail sales tax nor a gross receipts
tax: Oregon, Montana, and New Hampshire.
(a) Retail Sales Taxes
The discussion to follow will refer to the effects of imposing sales
and use taxes, assuming full advantage to be taken by the states of
the provisions of Public Law 9 1-156, relative to the effects that
would occur if Section 5219 were continued as it was prior to that
Public Law. It is here assumed that in this latter instance (i.e., the
old law) banks would pay higher prices for taxable goods or services
under those types of vendor sales taxes the laws for which do not
evidence a legislative intent to have the tax rest on the vendee, and
hence can be collected on sales to banks, under the latest Supreme
Court decisions. Economic forces, it is here assumed, would over-
power implied legislative intent. Under vendor sales taxes that do
imply such an intent, the old law evidently did not permit taxation
on sales to national banks.'3 Sales to state banks have of course always
been taxable, at least so far as Section 5219 is concerned, and in some
instances national banks have acceded to such taxes even when in
fact they were exempt.
Accordingly, the comparison is not quite one between full sales
taxation of banks and no sales taxation of them at all, directly or
indirectly.
(i) Industrial Neutrality.-A retail sales tax probably exerts some
pressures on capital and labor to flow into the banking industry, from
certain other industries. The effect may not be pronounced, but it is
almost surely in the direction just indicated, for two reasons.
`3 See Charles F. Conlon, "Repeal of National BankTax Immunity," L\ational Tax Journal, June 1970,
note 24, p. 227; the Massachusetts sales tax is a vendor tax, but the United States Supreme Court, in the
Agricultural 1',ational Bank-case, said the statute clearly showed intent that the tax be passed on to the
purchaser.
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First, much of what appears as a sale in most ordinary businesses is
never shown as such in the banking business, and so would not be
subject to retail sales tax. This would be so, even if that tax were
defined to cover retail sales of all services. Check handling services 14
and savings deposit services are examples. In general, banks commonly
supply services like these either free of charge or below cost, and more
than cover the loss by the excess of the interest, dividends, and
rentals they receive from the investment of moneys left with them
on deposit over the interest they pay on time deposits.
Second, retail sales taxes in fact cover only services specified in the
law, and in the United States these lists of taxable services apparently
have thus far never included banking charges for use of checking
accounts. They similarly appear always to have excluded fees for
many other banking services: Managing trust funds, servicing mort-
gages, and like activities. Of course the taxes can be changed, under
P.L. 91-156, to include such services. Iowa, for example, imposed
sales tax on bank service charges, effective in 1970. Banking services
may not be very good substitutes for taxed services and goods, so the
consequent industrial unneutrality may not be very significant, but
there exists some degree of competition for the consumer's dollar
among virtually all products.
An offsetting factor is that banks, by virtue of not being taxed
on what they sell, are cornmcnly regarded as "final buyers" of much
of what they purchase.15 Accordingly, the retail sales tax could
commonly apply under P.L. 91-156 to banks' purchases of tangible
goods, ranging from the checkbooks that they supply to their cus-
tomers to materials going into buildings. This was, to be sure, already
the case under the pre-1969 version of section 5219 in all or most of
the states that imposed vendor sales taxes that imply no intent of
forward shifting. On or since December 24, 1969, some 29 or 30 states
have made their sales and use taxes (or sales or use taxes) applicable
to banks by repeal of previous exemptions or by revision of administra-
tive interpretations.
On balance, it seems likely that a quantitative study would show that
a retail sales tax places a lighter burden on the banking business than
on business in general, and would do so even under P.L. 91-156,
although certain heavily taxed activities, leasing for example, may
become more important for banks. The taxation of materials going
into buildings, and of equipment, and tangible personal property
would not place the banking business at a relative disadvantage, since
such sales to other industries are, in general similarly taxed.
As to banks relative to other financial institutions, the answer
with respect to the burden of a retail sales tax is not a priori evident.
It would take an intensive quantitative study to ascertain whether an
increase in a retail sales tax rate would tend to induce capital and
labor to move from banking into these other financial fields, or vice
14 "* . the servicing of . . [demand] deposits con~titutes the largest portion of a commercial bank's
operating expense. . . . At the present time, the cost of servicing the demand deposit function in commer-
cial banks is approximately 4% of the net demand deposits available for investment." Bland W. Worley,
President, North Carolina Bankers Association, in American Banker, July 24, 1970. Service charges col-
lected by insured commercial banks for checiring account services in 1960 amounted to only $1.1 million,
accounting for only a little over 33~% of total operating income in that year. 1969 Report of Income; Assets
and Liabilities; Commercial and Mutual Savings Banks: December 31, 1969, published by Federal Deposit
Insurance Corporation (1970), p. 114.
15 Still, "bank purchases subject to sales tax as a proportion of total expenses are substantially less than
those of other industries." Worley, bc. cit.
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versa. General observation suggests that there might well be little
tendency either way.
It has been asserted that banks are less able to shift taxes to their
customers than are business firms in general because they are heavily
regulated, especially with regard to "the amount that they may charge
for their services, particularly their principal service, loans."16 But a
sales tax is clearly not intended by the legislator to be absorbed by the
profit of either the seller or the buyer. To be sure, the tax seems un-
likely to come in full out of wages, or out of rates paid on time and
savings deposits or borrowings. To this extent, therefore, a sales tax
may be somewhat more significant for banks relative to other enter-
prises than the analysis above would indicate. A mitigating factor
is that the sales tax is deductible in computing federal taxable income,
hence the net burden imposed by an unshifted sales tax is not much
more than half the amount of that tax, at least for a profitable bank.
But of course other industries benefit from this deductibility, too.
(ii) Geographical Neutrality.-Siiles and use taxation is relatively
neutral geographically in the sense that the states are not permitted
to discriminate against interstate commerce. Differences in sales
tax rates and definition of tax base could create some pressure for
migration of banking capital and labor, including decisions on where
to engage in leasing (unless the higher taxing jurisdiction rendered
correspondingly more governmental service). But the existing tax-rate
differentials would exert only a mild pressure, if any, apart from the
compliance problems always encountered by multistate firms.'7
(iii) Technical Neutral ity.-T he retail sales taxes, as currently
imposed by the states and their subdivisions, penalize capital-intensive
methods of production. Banking is perhaps not a capital-intensive
industry. Still, insofar as the value added at the banking stage comes
from the use of capital equipment that the bank has purchased or
leased, that value commonly would bear retail sales tax. It has done
so, under the old Section 5219, through certain vendor sales tax laws;
and, as of 1971, under Public Law 91-156, "both the vendor and the
vendee states are for the most part taxing capital equipment the banks
purchase."8 Accordingly, a bank's purchase of a computer, for
example, or of a bank building with respect to its materials components
(not the on-site labor) can bear a sales tax in most states, under P.L.
91-156. Indirectly, then, the sales tax would reach part of the value
added in the process of using up the computer or the building in the
rendering of banking services over the years following the year of
purchase.
In some states which exempt equipment and machinery used
* directly in "manufacturing" or "industrial processing," the exemption
might be held not applicable to purchases by banks of computers and
the like.
16 Worley, bc. cit. However, State usury laws generally do not apply on loans to incorporated businesses
or, in most States, to loans guaranteed by the Veterans Administration or insured by the Federal Housing
Administration.
17 The sales tax rate is 6 percent in one state (Pennsylvania), 5 percent in six states, 4/~ percent in one
state, 4 percent in fourteen states and the District of Columbia, 31% percent in one state, 3 percent in eighteen
states, 23'~ percent in one state, and 2 percent in two states (Indiana and Oklahoma). Local sales taxes raise
these percentages in some states. The maximum state-local rate is apparently 6 percent. These data are as
of October 1, 1970. Tax Administrators 1~ews, October 1970.
18 Communication from John F. Due.
79-421 0 72 - 30
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On occasion, the sales tax charge could be substantial. The Depart-
ment of Revenues of the State of Arkansas mentions two banks in
Little Rock that "have new buildings under construction, each of
which is to cost approximately $15,000,000. At least half of this would
be taxable for materials and furnishings and equipment that would
go into such new buildings." iS The Division of Banking in the State
of Washington refers to "capital projects such as a new fifty-one s.tory
building being built by the Seattle-First National Bank on which
they are expected to pay $1 .7-$2 million in sales taxes." 20
Taxes on gross receipts from rentals of producers goods, for example
those in some of the southern states, have the same tendency to
penalize capital-intensive methods of production as do taxes on sales
of such goods. Taxes on safety deposit rentals are inherently somewhat
discriminatory against banks.
In summary, if states and their local units increase their sales tax
rates considerably, the net effect would probably be to favor banking
relative to non-financial industries, though not necessarily relative to
other financial institutions.
(b) Gross Receipts Taxes
Several states 21 impose broad-based taxes on gross receipts at rates
commonly less than 1 percent. These taxes differ so much in the
particular rates they carry and in the ground they cover that no
generalization is very useful. Yet to study each one in detail would be
tedious. Contrast the Alaska and West Virginia rate structures. In
Alaska, the tax on business generally is $25 plus 3/~ of 1 percent of
gross receipts in excess of $20,000 and 3~ of 1 percent of the excess over
$100,000; but the rate applicable to banks is 2 percent of net income
(with specified adjustments of net income). The West Virginia law
divides business taxpayers generally into 18 categories, subject to
rates ranging from ~ of 1 percent to 5.2 percent (all in addition to a
3 percent retail sales tax).
As far as can be known from the brief summaries at hand as this is
written, the only gross receipts or turnover taxes that apply to sales by
banks under P.L. 9 1-156 (apart from the retail sales tax element in the
Arizona and Mississippi taxes) are those of Alaska, Indian a (where
financial institutions and insurance companies pay 2 per cent on gross
earnings, not on gross income), and Washington.
The gross receipts, or turnover, taxes seem less unneutral in favor of
banks than the retail sales taxes. They may even be unneutral against
the banking industry, since so much can be included under "gross
receipts", but the more likely result appears to be a mild degree of
unneutrality in favor of banks, as things now stand~.
"Hearing, bc. cit., p. 6.
20 Hearing, bc. cit.. p. 8.
21 Alaska and Delaware and, together with a retail sales tax, Washington and West Virginia. Arizona,
New Jersey and Mississippi use the term "gross receipts", but their taxes are retail sales taxes that include
some services and a few other items in addition to tangible goods. Indiana's gross income tax is an alterna-
tive to the corporation income tax, and is for most firms the effective alternative, since the firms must pay
the higher of the two taxes. Hawaii combines a retail sales tax of universal coverage of services and retail
sales of tangible goods with a 0.5 percentage turnover tax on non-retail business. Information on these taxes
has been drawn primarily from Commerce Clearing House, State Tax Handbook as of October 1, 1970.
[Editorial note: West Virginia has extended its business and occupation tax to banking and financial busi-
nesses i11 the state, at a rate of 1.15 percent of gross income, effective April 1, 1971.]
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6. TAXATION OF BANK ASSETS
(a) Real Estate
Bank real estate has always been taxable by states and localities.
Only from 3 to 5 per cent of banks' assets consisted of real estate in
1934,22 and probably not more than 2 per cent in 1970.23 An increase
in a real estate tax rate seems unlikely to put any pressure on capital
and labor to move out of the banking industry, and might even induce
a slight reverse flow from industries that are heavy users of real estate.
The true tax rate of banks' real estate, as with that for other business
firms, is likely in many cities to be higher than on dwellings, by delib-
erate misassessment. But there seem to be no studies on over- or
underassessment of bank real estate relative to real estate of other
industries.
Geographical unneutrality is caused by differences in rates of the
real estate tax, at least, insofar as these differences do not represent
differences in level of governmental services, and insofar as they have
not been capitalized in the price of land or long-lived improvements.
Again, this unneutrality must be a minor factor in a decision where to
open a bank, in most cases.
Technical unneutrality is a decided feature of the real estate tax, no
matter what the industry, but here, too, the impact on banking must
be relatively small.
(b) Tangible Personal Property
As to taxation of tangible personal property, geographical differences
are much greater than under the real estate tax. Some states do not tax
personal property at all, and some of the others limit taxation of
tangible personal property to categories that are of little or no concern
to banks. Also, capitalization of this tax is rare. Otherwise, the con-
clusions reached above on the relative importance of taxation of banks'
real estate apply also to the tangible personal property tax.
(c) Intangibles
An intangibles tax that reached banks' holdings of currency, mort-
gages, notes, and other claims was the oldest of bank taxes, but it had
virtually disappeared, at least for incorporated banks, by 1934.24
Under the permanent provisions of P.L. 91-156, such taxation could
readily reappear, but it would do so in a geographical pattern even
more mixed than that of taxation of tangible personalty (see Table 4,
on taxation of intangibles). Eighteen States 25 and the District of
25 Welch, op. cit., p. 74.
23 Worley, bc. cit., states that "banks would rarely have more than 5% of their resources invested in real
estate and tangible personal property and would probably average only 2% to 2Y2%." Worley notes that
banks commonly lease office space and data processing equipment. To this degree, the importance of the
real estate tax and personal property tax for banks is understated in data dealing with taxes paid directly
by banks. An increase in the rates of those taxes will sooner or later push up the lease charges. See also Fed-
eral Deposit Insurance Corporation, et. al., 1969 Report of Income, Assets and Liabilities, Commercial
and Mutual Savings Banks, December 31, 1969, p. 12: for all insured commercial banks-Total assets,
$530,715 million; Real estate owned other than bank premises, $651 million; Bank premises, furniture and
fixtures, and other assets representing bank premises, $8,070 million.
24 Welch, op. cit., p. 72.
25 California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Nebraska. New
Mexico, New York, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Vermont, Washington,
and Wisconsin. See also table 5 in section 8 below on taxation of bank deposits. Entries iii table 4 indicate
that Arizona and Iowa might belong in this group for all practical purposes; these two States are, however,
counted among the classified property-tax States named in the next footnote. In a few other States, intan-
gibles are legally subject to taxation but exempt in practice. Information on the treatment of intangibles
in the several States seems to differ, depending on the source one uses. The 1970 Census of Goveraments,
vol. 2, Taxable Property Values, indicated in the introduction, p. 6, that in 1966 theme were 15 States with
"no property taxation which applies to intangibles." (Editorial note: See also the staff report accompanying
the report of the Board of Governors of the Federal Reserve System in part II, p. 12, footnotes 5 and 6.)
(Committee Print, May 1961), part II, p. 12, footnotes 5 and 6.)
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Columbia now exempt from their property taxes for either state or
local purposes all personal property or all intangibles. It seems
unlikely that they would resort to such taxation either generally
or in a discriminatory manner on banks, so unpopular has general..
property taxation of intangibles become, because of grossly uneven
enforcement and the economic consequences that would attend full
enforcement at general property tax rates. Each of 21 states 26 classi-
fies some or all types of intangibles for special treatment, normally
preferential treatment, under one or more specified rates. Under the
post-1971 provisions of P.L. 91-156, some of these states could subject
banks' intangible assets to these special rates. As to the remaining Ii
States: these purportedly tax some or all intangibles uniformly with
other property,27 but in those States which include all intangibles
in the general property tax there are in fact varying degrees of non-
enforcement of this part of the tax.
Banks would offer a tempting target for a unique degree of enforce-
ment. They would even be a source of embarrassment to assessors
who desired to implement a policy of undertaxation, so easy is it to
list and establish a money value for bank-held intangibles. On the
other hand, legislators would find it embarrassing to exclude banks
from the general property tax on the grounds that administration
and compliance would here be exceptionally good. Information on
current treatment of non-bank financial institutions, not available
as this is written, would help in predicting what would happen to
banks.
TABLE 4.-TAX RATES ON INTANGIBLES IN STATES EMPLOYING
CLASSIFIED PROPERTY TAXES
[Numbers in parentheses denote page of source of data: Commerce Clearing
House, State Tax Handbook as of October 1, 1970, unless another source is
specified.~
Arizona.-Property is assessed at 60 percent, 40 percent, 25 percent,
or 18 percent, depending on classification. But intangibles are appar-
ently not taxed, at least not in practice, according to various sources
of information. (470)
Florida.-Money, bank deposits, certificates of deposit, cashier's
and certified checks, bills of exchange, and drafts-1~o of 1 miii per $1.
Stocks, bonds, and lien instruments dated prior to January 1, 1942-
1 miii per $1. Notes, bonds, and other obligations dated after Decem-
ber 31, 1941, securing liens upon realty in or outside of Florida-
2 mills per $1, payable before recordation or within 30 days after
acquisition in lieu of annual tax. All other intangibles-i mill per $1.
(492)
Georgia.-State maximum on bank shares is 5 mills. Intangibles-
fair market value of intangible personal property. Amount of debt of
26Arizona, Delaware, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Missouri,
Montana, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South
Dakota, Virginia, and West Virginia. As to Arizona and Iowa, see the prcceding footnote.
27 Intangibles are included in the general property tax in Alabama, Alaska, Arkansas, Idaho, Illinois,
Tennessee, Texas, and Wyoming. Selected categories of intangibles are taxable at regular property tax
rates in Louisiana, Mississippi, and Nevada. In Illinois, the voters approved in 1970 a constitutional amend-
ment exempting all personal property of individuals and a new constitution that provides for exempting
all personal property, individual and corporate, after 1979.
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long term notes. Rates per $1,000: intangibles not otherwise provided
for-10~; long-term secured obligations, $1.50 per $500. Maximum,
$10,000. Loans held by brokers, 25~. Accounts receivable and notes-
10~. Bonds and debentures and foreign corporation shares, $1. (497)
Indiana.-Intangibles-current intangibles-5~ per $20 based on
face or actual value of all intangible property except 25~ per $100 in
shares and deposits of banks and trust companies and shares of
building and loan associations. Intangibles not maturing within
1 year-5ç~ per annum o~n each $20.
Financial institutions-25~ per $100 measured by the value of
capital, surplus, undivided profits and deposits, less assessed value of
real estate.
Public utility-all utility property, real and personal, including
rights, franchises, and privileges of communications, transportation,
electricity, gas, steam, light, heat, or power, and water distributing
companies, by "unit method of valuation." Railroad car companies-
current average state levy. (507-508)
Iowa.-Intangibles generally are exempt as a result of 1970 legisla-
tion, but a 5-mill tax on moneys and credits continues to apply to
capital employed in Iowa by foreign corporations doing business as
loan agencies and to certain reserves of credit unions. (CCII Iowa
State Tax Reporter, 1971, par. 20-340)
Kansas.-3 percent of gross earnings (514)
Kentucky.-Intangibles-Bank deposits, 1/1000 of 1% of the
amount of the deposit; broker's accounts receivable, 10ç~ on $100;
rights to receive future income, 5~ per $100; 1 3/~ per $100 on the
following intangibles when a taxable situs outside Kentucky has not*
been acquired: (a) accounts receivable, notes, bonds, credits, etc.; (b)
patents, trademarks, copyrights and licensing or royalty agi eements;
and (c) shares of capital stock of affiliated companies and inter-
company intangibles; bank and financial institutions' stock, state
473/i, county and city 19~, school 38~; public utility franchises are
apportioned to local taxing districts for taxation; freight car companies
on franchise and rolling stock, $1 per $100; domestic life insurers, 40~
per $100 of taxable capital and 1/10 of 1ç~ per $100 of taxable reserves.
Retirement plans and credit unions savings accounts, 1/10 of 1~ per
$100. (517)
M'ichigan.-Intangibles-income producing property-33'~% of
income hut not less than 1/10 of 1% of face or par value. A credit
(deduction from tax) of $100 is allowed (maximum of $200 for a
married couple filing jointly). This credit does not apply to tax on
moneys. Non-income producing property-i/b of 1 %. Moneys *on
hand, in transit, or on deposit in a bank, and stock in building and
loan associations-50~ per $1,000. (536)
Mississippi.-Most intangibles are exempt. Bank shares are
assessed on the basis of net worth, subject to specified deductions
("earned surplus" is exempt), and taxable at general property tax
rates. (CCII IViiss. State Tax Reporter, 1971)
Missouri.-Intangibles-4% of aggregate proceeds from the follow-
ing intangibles having a taxable situs in Missouri: money on deposit,
bonds, certificates of indebtedness, notes, debentures, accounts
receivable, conditional sales contracts, and real estate and chattel
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mortgages. Building and loan associations, farmers' cooperative
credit associations and credit union dividends-2%. (548)
Montana.-Moneys and credits assessed at 7% of value; bank shares
and moneyed capital, at 30%. Taxed at general property tax rate
(aggregate of State and local levies; State rate for 1971 and 1972,
3.6 mills). (CCII N'iont. State Tax Reporter, 1971, pars. 20-329,
20-335)
North Oarolina.-Intangibles tax-Rates per $100: (a) money on
deposit including funds on deposit with insurance companies, 10~;
(b) money on hand, accounts receivable, bonds, notes and other
evidence of debt, shares of stock and beneficial or equitable interests
in foreign trusts having a situs in the state, 25~. (575)
Ohio .-Intangibles-produc tive investments, 5% of annual income
yield; unproductive investments, deposits, and shares in and capital
employed by financial institutions, 2 mills; shares in and capital em-
ployed by dealers in intangibles, 5 mills; money, credits, and other
taxable intangibles, 3 mills.
Sleeping car, freight line or equipment compames-3.5% of capital
stock representing capital and property owned and used within the
state. (583)
Pennsylvania.-Intangibles tax-4 mills per $1 value of intangible
personal property in hands of individuals. This is a county tax.
Corporate loans tax-4 mills per $1 state tax on the nominal value
of all scrip, bonds, certificates and other evidences of indebtedness
held by residents of Pennsylvania, on which interest is paid by a
domestic private corporation or by a foreign private corporation doing
business and having a resident treasurer iii Pennsylvania.
* Capital stock tax (domestic corporations)-7 mills per $1 of actual
value of whole capital stock represented by taxable property and
assets within the state. Domestic corj)orations, except regulated
investment companies, may elect to use the property, payroll and
sales apportionment formula provided for foreign corporation fran-
chise tax purposes.
Financial institutions tax-national and state banks, savings insti-
tutions having capital stock, title insurance and trust companies, 13
mills per $1 actual value of shares ascertained by adding together
paid-in capital stock, surplus, and undivided profits. Mutual thrift
institutions, e.g., savings banks without capital stock, building and
loan associations and federal and state savings and loan associations,
1 1~% of net earnings or income. Private bankers, 1% of gross receipts.
(593)
Rhode Island.-Financial institutions tax-40~ per $100 of deposits
after exclusions. Rates on banking institutions, maximum, 17~;
minimum, 13~ per $100 of savings deposits which bear interest or are
entitled to dividends; building and loan and savings and loan asso-
ciations, maximum, 14~, minimum, 10~ per $100 of outstanding shares
and dividend earnings applicable to such stock; credit unions, maxi-
mum, 7~, minimum, 5~ per $100 stock and interest-bearing or divi-
dend-bearing deposits less exemption of $100,000. Other intangibles
are taxed under the general property tax. (597)
South Dalcota.-Money and credits: 4 mills per $1 of true and full
cash value in excess of $15,000. Other intangibles are taxed under the
general pioperty tax. (604)
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Virginia.-Moneyed capital in competition with national banks, $1
per $100; capital used in trade or business, 30~ per $100; bank stock,
$1 per $100. Intangible personal property of utilities, 50~ per $100;
money of utilities, 200 per $100. (622)
West Virginia.-General property tax is applied, with four maximum.
rates. Lowest maximum [presumably, for intangibles] is Class 1, 50ç~
per $100 actual value. (631)
(i) industrial Neutrality.-A general tax imposed by a state on all
business firms' holdings of intangibles would of course affect chiefly
banks and other financial institutions. Banks might recoup a small part
of this tax by increasing their service charges. As to interest rates
charged on loans or earned on investments, the problem is more
complex.
If the intangibles tax were imposed in only one or a few states, the
taxed banks' power to recoup the tax by obtaining higher interest rates
on their security holdings would be severely limited. They would be
encouraged to invest in Federal obligations and other tax-exempt
securities in preference to taxable assets. If obligations of other states
and their localities were subject to the tax, banks in the taxing states
might be discouraged from holding these securities. Their partial with-
drawal from the market might not be important enough to affect the
rate of interest on these obligations. But if the obligations of a bank's
domiciliary state also were taxed, the effect might be more pronounced.
Reluctance of banks to continue to purchase their domiciliary state's
obligations at prevailing prices might well cause some softening in
those prices. Thus the banks of a taxing state might recoup part of the
state's tax from the state itself, in higher interest rates.
As banks raised charges on deposit accounts, and raised interest
rates on loans, increased compensating-balance requirements, and took
other similar actions, while withdrawing somewhat from the market
for securities, all in order to counter their liabilities under the intangibles
tax, many would-be bank borrowers would presumably seek other
creditors. The search would be fruitless if the intangibles tax were quite
comprehensive geographically and over all types of creditors and equity
owners, and everywhere equally well enforced. These conditions, how-
ever, would almost surely not exist, at least as between financial insti-
tutions and individual creditors. Individuals, then, might be expected
to increase their lending somewhat, by activating relatively idle deposit
accounts, or, if the Federal Reserve adopted an accommodating policy,
by converting some of their holdings of government bonds into bank
deposits.
It is assumed, in this analysis (perhaps unwarrantedly), that the
intangibles tax as applied to banks would not reach the banks' reserves.
with the Federal Reserve Banks. If it applied to banks' uncollected
funds-checks drawn on other banks and in process of collection-it
would be reaching a form of non-income earning asset.
In any event, taxation of intangibles in the hands of banks or other
financial institutions would pose a substantial burden on these firms.
Can intangibles taxation be condemned in general, quite apart from
whatever discriminatory effect it may have on banks?
Intangibles are only representative wealth, apart from patents,
copyrights, good will, franchises, and the like-and even these are
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452
oniy a capitalization of future flows of monopoly income. Creation of an
intangible, at least a representative intangible, creates no new wealth
in real terms. It either (a) puts in certificate form a title that already
existed, as when a partnership incorporates and the partners thereupon
receive stock certificates, or (b) creates an offset to itself in the form of
some one else's debt, as when a loan is made. To tax both the under-
lying property and the title to it (stock certificate) is therefore to tax
the same thing twice. To tax the debt instrument to the creditor
without allowing the debtor a corresponding reduction is to tax a zero
increment to real wealth.
But, if the corporate property lies in one jurisdiction while the owner
of the stock certificate resides in another, or if the creditor's jurisdiction
cannot grant the debtor a deduction because he resides elsewhere,
there is some excuse for taxing representative intangibles, despite the
resultant double taxation or the taxation of a zero wealth increment.
The stockholder's state, or the creditor's state, has a right to ask the
stockholder or the creditor to help support the government that renders
him services. The state can do so, aside from consumption taxes, only
by a tax levied directly or indirectly on his intangible wealth (he may
be receiving no salary or wages, and may even be using little real
estate). Such a tax may take the form of an income tax on investment
income rather than an intangibles tax, but the principle is the same.
The state wherein the corporation operates may reasonably require
the corporation to contribute, perhaps through a corporate income tax
or a tax on property held by the corporation, to the support of the
services it enjoys. The state of residence of the debtor is certainly under
no obligation to reduce its revenues, and hence its ability to render
governmental services, merely because the debtor has opted to borrow
from someone whose creditor interest the state cannot reach, owing to
jurisdictional limitations. Accordingly, taxation of intangible wealth
cannot be ruled out completely just on the grounds that it is repre-
sentative wealth, if ownership interests and creditor-debtor relation-
ships cross jurisdictional lines.
But this accommodation to legitimate jurisdictional interests is
purchased at the cost of some decrease in economic efficiency as follows:
The representative intangibles do still represent no net accretion to the
economic base of the economy as a whole. Taxing them therefore puts
unusual pressure on the private sector to find ways, relatively in-
efficient ones presumably, of doing without these non-wealth creating
instruments. And an industry like the banking industry that deals
almost entirely in intangibles is especially vulnerable to the efforts of
firms and households to minimize the use of intangibles in order to
reduce the impact, direct or indirect, of intangibles taxation.
If states were planning to rely heavily on taxation of intangibles, a
weighing of their jurisdictional interests against economic efficiency
might lead to a conclusion that the federal law should not prohibit or
specifically restrict taxation of intangibles held by national banks. But
in fact no marked departure from the present uneven and generally
weak taxation of intangibles in general is to be expected, and some
states might well decide to apply their intangibles tax laws quite
effectively against banks, which are especially vulnerable with respect
to full value assessment, for reasons given above. These facts have two
PAGENO="0473"
453
implications, with respect to unrestricted taxation of banks'
intangibles.
First, such taxation of banks' intangibles in some but not all states
would give rise to wasteful interstate flows of funds as banking capital
would seek out non-taxing states or low-rate states. Second, restriction
of taxation of banks' intangibles would not noticeably affect present
or prospective levels of state or local revenues.
(ii) Geographical Neutrality.-In principle, taxation of banks' intan-
gibles would probably prove geographically unneutral under the
permanent provisions of P.L. 91-156, because of the marked differ-
ences among states, indicated in the preceding paragraphs. In practice,
the effective tax rates might be so low, and the difficulties of borrowing
out-of-state so severe for most firms or individuals, that the tax-
induced flow of existing funds across state lines, or tax-induced dis-
placement of new funds, to low-rate or nil-rate states, might prove
minor. But this result is by no means assured. If certain states did
indeed apply their intangibles taxes quite effectively against banks,
banking would almost surely grow appreciably more slowly in these
states than it would have done otherwise.
(iii) Technical Neutrality.-Insofar as certain types of assets are
taxable and others non-taxable (reserves with a Federal Reserve Bank,
float, federal securities, the home state's securities) under a bank
assets tax, there is some tax-induced pressure to change the relative
amounts of such assets; the marginal opportunity cost of holding the
non-taxable assets would be correspondingly less.
7. BANK SHARES TAX
(a) Industrial Neutrality
An increase in the rate of a tax on bank shares will of course put
some pressure on capital, and with it, labor, to flow out of the banking
business. But the share tax, being in principle but one part of a tax
on property, will normally not be raised without an increase in the
rates of at least some other parts of the property tax. Indeed, in those
states where bank shares are taxed at a special mill rate fixed by stat-
ute, it is possible that general property tax rates will increase over
time, without a corresponding increase in the mill rate. On the other
hand, discriminatory increases directed at bank shares will doubtless
occur here and' there. Insofar as all forms of investment are almost
equally taxed by the rate increases, there will probably be little tend-
ency therefrom for capital and labor to flow into or out of the banking
business.
In practice, it seems that the intangibles part of the property tax is
likely to be whittled down further in the years ahead. In part this
will occur legally, as with the six states that in the past few years
have replaced their bank-share taxes with income taxation of banks
(Iowa {1970], and Kansas, Maryland, Michigan, Nebraska, and New
Mexico {1969}) 27
27 Federation of Tax Administrators, "State Taxes on the Income, Dividends, and Shares of National
Banks," RM-411, November 1968. Changes in 1969 and 1970, from Commerce Clearing House, State Tax
Guide.
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In part it will reflect continued illegal deterioration of assessment
or compliance. The danger to banking may lie more in the possibility
that the bank share tax will not be reduced, or will not deteriorate
administratively, pan passu with the other parts of the intangibles
tax. But the rates of the share taxes are in most jurisdictions so low
than even if the rates on other intangibles sank to zero, l)roba.bly not
much capital and labor would move out of the banking industry, with
the exception of some three or four states. As. of November 1970, 13
states imposed classified 1)rOl)erty taxes that, as applied to bank
shares, carried the following rates: 28 1 mill (Florida.); 2 mills (Delaware
and Ohio); 2~ mills (Indiana); 4 mills (South Dakota); 5 mills
(Georgia); 5 mills plus taxes for debt service (West Virginia.); 10 mills
(New Hampshire); 10.45 mills (Kentucky); 13 mills (Pennsylvania);
15 mills (New Jersey and Maine) 29; and 10 mills plus up to 4 mills
city or 8 mills county bank tax (\irginia). A 10 mill tax on book
value is equivalent to an income tax of 20 per cent if the bank is
earning 5 per cent on book value, and to a 10 per cent inconie tax
if the bank is earning 10 percent on book value.
In 9 other States in which bank shares were taxable in November,
1970, 3 (Louisiana, Mississippi, and Nevada) imposed a selective
property tax under which bank shares were taxed at the same rate
as other taxable property. In the other 6 States,3° bank shares were
taxable under the general property tax.
Deductibility of part or all of certain types of bank assets, notably
domestically ta.xed real estate, and obligations of the state or its
localities, seems to be the chief statutory method of reducing the
burden from the level that the tax rate alone would inthcate. The
effect of using book value rather than market value in assessing the
shares, in the jurisdictions where that technique is followed, may
be rather small in the aggTegate, if in most cahes the (Iffereflces are
small, or if minuses in some cases are partly offset by piuses in other
cases, although the effect could be sizable in 1)articular instances.31
Conceivably, the bank-share taxing states could place the banks in
a difficult position by raising the tax rate on uch shares while reducing
the rates on other financial institutions and on intangibles generally.
Such action, however, seems quite unlikely, and at some point, of
course, the courts would declare such a procetlure iiivalid.
(b) Geographical Neutrality
After 1971, under P.L. 91-156, a state will no longer be restricted.
to taxing the shares only of national banks located in. that state.
Hence shares in a bank located in State A that are held by residents
of StateB may come to.be taxed twice, i.e., not only by State A but
also by State B, if none of the Section 5219 restraints remain. Banks in
certain states would thereupon be under some pressure, perhaps slight,
to draw new equity capital only from residents of the bank's home
state. In this sense, interstate flows of capital would be impeded.
2SFor 1968, Federation of Tax Administrators. ibid.
29 Writing in 1934, Welch, op. cit., p. 99, remarked that "The highest flat tax rate now in existence is the
1.5 percent rate in Maine, though this rate is tempered by underassessment."
`~ These States are Alaska (where national hank shares presumably are exempt because of section 5219
but State bank shares are not expressly exempted), Arkansas (where the shares tax is paid on a voluntary
basis), Illinois (where shares owned by corporations remain taxable although individually owned shares
are now exempt), Tennessee, Texas, and Wyoniing. Thus, 22 States in all were taxing shares in 1970. In
1934, the number was 37 (Welchop. cit., table 1, \`, opposite p. 82).
~` This was the case in 1934, when Welch wrote; ibid., pp. 83-7.
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If, on the other hand, bank shares came to be taxed only in the
state of residence of the owner, they might on the average pay higher
or lower rates of tax than at present; a priori, there seems no reason
to think one or the other outcome the more probable.
(c) Technical Neutrality
Bank earnings that are added to surplus or undivided profits rather
than being distributed in dividends are included in the base for
the share tax unless that tax is applied only to par value, an unusual
provision. The share tax thus puts some pressure, perhaps only mild,
on a bank to do business with a somewhat smaller capital and surplus
and undivided profits than it would under no tax. Accordingly, the
tax may induce a mOre liberal dividend policy. Given the generally
low rates of the tax, the reduction in this effect that could be obtained
by excluding surplus and undivided profits in valuing the bank shares
is probably as unimportant today as Welch estimated it to be in 1934.32
8. TAXATION O~ BANK DEPOSITS
Bank deposits are taxable in some states as intangible property of
the depositors. Welch, in 1934, listed 16 states that subjected bank
deposits to their general property taxes (two of them only partially)
and 21 states and the District of Columbia that classified deposits
for preferential tax rates (six of the states, and the District of Columbia,
only partially). The rates in these 38 taxing jurisdictions ranged from
~ mill to 6 mills.33
Eleven states completely exempted deposits from property taxa-
tion.34 In the 16 general-property taxing states, certain deposits were
exempt, and some states allowed deduction of debts, while as to the
taxable deposits WTelch estimated that not more than 10 per cent, in
many states, were in fact taxed.35 Those states applying a classified
property tax to bank deposits apparently did not in fact reach a
much larger proportion of taxable deposits in many if not most cases
than those that employed the general property tax, unless they
collected the tax from the banks, not the depositors.
As of 1970 this legal state of affairs seems to be much the same.
Table 5 has been constructed by the present writer from information
in Commerce Clearing House's latest State Tax Handbook. Signifi-
cantly, the Hearings and other recent material giving banks' views on
the reform of Section 5219 have not, apparently, mentioned taxation
of bank deposits. If this apparent lack of concern is based on the legal
distinction between a tax on a bank and a tax on its depositors with
respect to their deposits, it is ill-founded, since the economic conse-
quences will be much the same. It is an accepted theorem in tax
analysis that the incidence, the final resting place of the tax burden,
does not depend on which side of the market the tax is legal]y imposed
upon-aside from friction and imponderable psychological factors.
More likely, the lack of expressed concern reflects a widespread
failure of enforcement and compliance with respect to taxation of
32 Welch, op. cit., pp~ 83-90.
`3 Ibid., pp. 125-126.
3~ Rid., pp. 117-20.
"Ibid., p. 124.
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bank deposits. The following analysis therefore has a certain unreal
air about it, necessarily.
(a) Industrial Neutrality
A tax on deposits tends to drive capital and labor out of banking,
but the causal chain is a little more complex than under the share tax.
First, a tax on non-interest bearing deposits in any one state will
presumably induce the deposit holders either to purchase non-taxable
United States Treasury obligations 36 or to move some of their de-
posits into other states, at least for the assessment dates. Permanent
removal of deposits may be checked by the banks' assuming part of
the burden of the tax. For non-interest bearing depcsits the banks
can do so by remitting service charges or by rendering special services
free of charge. Alternatively, in states where the banks are required
to pay the deposits tax on behalf of their depositors, they may refrain
from recouping part or all of the tax, as they might do by increasing
service charges, reducing the amount of free services rendered, or
charging the tax against depositors.
TABLE 5.-STATUS OF STATE-LOCAL TAXATION OF BANK DEPOSITS,
AS OF OCTOBER 1, 1970
[Numbers in parentheses are page numbers in State Tax Handbook (Commerce
Clearing House, New York) as of October 1, 1970]
States not included in this list are general-property-t ~c st~ttes, and
no information is available from CCII book on how bank deposits are
in fact taxed in those states.
Arizona-See Table 4.
California-Intangibles exempt. (478)
Colorado-Intangibles exempt. (480)
Delaware-Personalty exempt, except for bank shares. (487)
District of Colurnbia-Intangibles exempt. (490)
Florida-Money, bank deposits, certificates of deposits, etc.: 1/10 of
1 mill per $1. (492)
Georgia-Apparently 10 cents per $1,000. (497)
Hawaii-Personalty exempt. (499)
Indiana-25 cents per $100. (507)
Kansas-3 percent of gross earnings (1971 if.). (514)
Kentucky-1/1,000th of 1 percent [sic]. (517)
Maryland-Intangibles exempt. (528)
Michigan-SO cents per $1,000. (536)
Minnesota-Intangibles exempt. (540)
Miss'ouri-4 percent of aggregate proceeds. (548)
Nevada-Intangibles exempt (but not bank shares). (556)
New Hampshire-Intangibles exempt, with exceptions; bank deposits
apparently not taxable in general. Interest paid or credited on
deposits is taxable in part, under excise tax on financial institutions.'
(559)
New York-Personalty exempt. (571)
North Carolina-lO cents per $100. (575)
1 Communications from bankers.
`~ Dick Netzer, Economics of the Property Tax, p. 141.
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457
Ohio-2 mills. (583)
Oregon-Intangibles exempt. (590)
Pennsylvania-4 mills per $1. (593)
Rhode Island-40 cents per $100 after exclusions; 13 cents-17 cents
on income-earning savings deposits; tax collected from bank. (597)
South Dakota-4 mills per $1 over $15,000 of money and credits;
deposits that do not bear interest are exempt. (604)
Utah-Intangibles exempt. (616)
Virginia-Deposits apparently exempt. (622)
Washington-Intangibles exempt. (627)
West Virginia-Apparently 50 cents per $100. (631)
Wisconsin-Intangibles exempt. (635)
General property tax states, not in above list: Alabama, Alaska,
Arkansas, Connecticut, Idaho, Illinois, Iowa, Louisiana, Maine,
Massachusetts, Mississippi, Montana, Nebraska, New Jersey, New
Mexico, North Dakota, Oklahoma, South Carolina, Tennessee, Texas,
Vermont, and Wyoming. Of these States, the following do not tax
intangibles: Connecticut, Massachusetts, Nebraska, New Mexico,
North Dakota, Oklahoma, South Carolina, and Vermont. Bank
deposits are not taxable in Alabama, Idaho, Louisiana, Maine, and
Mississippi.
With respect to a tax on savings and time deposits that bear interest,
the banks can react by attempting to change the rate of interest paid.
But there must be limits to what the banks can do to absorb part.
or all of a deposits tax, since banks in the taxing states will be com-
peting for loans and investments with banks in other states and with
other types of financial institutions.37
If the state to which a depositor would move his deposit increases
its own tax on deposits, the depositor's only mode of escape, short of
sending his money abroad, is to convert the deposit into cash, or to
reduce the deposit by paying off some or all of a loan he may have
obtained from the bank or by using it to purchase some non-taxable
intangible.
Although all of these escape devices are more or less inconvenient,
they would surely be employed to some degree. If the intangibles tax
could be imposed on all competing intangibles, including cash, various
forms of business paper, or long term debt, then bank deposits would
shrink by less. If the taxing state allows a deposit holder to deduct
indebtedness, he gains nothing by paying off his bank loan. If it does
not, a substantial discriminatory tax on bank deposits would induce
depositors to reduce their debts to banks, with a consequent tendency
for interest rates to fall. In this manner the tax on deposits would rest
in part on banks, that is, on their shareholders.
To be sure, the Federal Reserve System could counter this tendency
to deposit shrinkage by its open market operations. If it did so, interest
rates would fall still further. They would have to fall so low that
borrowers from banks would decide not to pay off debt to banks,
371f the bank assumes a deposits tax that is legally on the depositor, it deducts this tax it pays when it
computes its taxable income. The depositor is treated as receiving income in the amount of the tax thus
assumed by the bank, but is allowed a deduction of the same amount. Tax Administrators News, January,
1970, p. 6 (Rhode Island deposits tax).
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despite the deposits tax, in view of the profits to be made with low-cost
bank loans.
If deposits did shrink, banks might find that they had to maintain
about the same labor force and capital equipment as before, since the
reduced volume of deposits would doubtless exhibit an increased
velocity of circulation. This fact, together. with the decline in interest
rates, and the reduced volume of earning assets, would reduce banks'
profits considerably, and would lead ultimately to some exodus of
capital and labor from banking to other fields.
Some of the capital and labor flow would be into other financial
sectors, say insurance, unless taxation were made effective against
claims on those financial institutions too, e.g., cash surrender values,
or more broadly, reserves. Even so, there would be some shrinkage in
total bank deposits unless the central bank intervened to drive interest
rates down.
All in all, taxation of intangibles that includes bank deposits may
well offer a greater threat, in principle if not in practice, to banks than
does any other tax. Admittedly, this statement is largely conjecture,.
based on a supposition by the present writer that the community
could, and would, do without a more sizable proportion of its bank
deposits than of its cash or non-deposit evidences of indebtedness.
Further study might show that this supposition is unwarranted.
Demand deposits and currency held by households has been esti-
mated, as of the end of 1963, to account for $75 billion out of an esti-
mated $1,208 billion total holdings of intangibles by households.
Savings accounts held by households (including personal trusts and
nonprofit organizations) were estimated at $229 billion. Thus, if
deposits taxation were limited to households' intangibles (to avoid
still further double taxation), savings accounts would constitute 75
percent of the nation-wide tax base (as of 1963), of total household
deposits. Of households' total holdings of intangibles, savings de-
posits, demand deposits, and currency made up an estimated 25
per cent.38
(b) Geographical Neutrality
As to interstate flows of funds, they should not, in principle, be
influenced by a tax on depositors levied on all residents of the state
regardless of where the deposits were held. In practice, deposit
taxes may both induce and impede such flows, since that residence
principle is not universally applied. Some states tax deposits at the
source, that is, collect the tax from the banks, regardless of domicile
58 John 0. Blackburn, "Intangibles Taxes: A Neglected Revenue Source for States," National Tax
Journal, June 1965, p. 217. Professor Blackburn's three alternative plans for taxing intangibles all keep the
rate on currency and demand deposits at 1 mill (highest rate on 9thers: 3 mills). All three plans exempt
U.S. Government securities ($75 billion held by households) and pension fund reserves ($122 billion). The
other intangibles categories, held by households, were: life insurance reserves ($103 billion), State and local
government securities ($33 billion), corporate and foreign bonds ($6 billion), corporate stocks ($514 billion),
mortgages ($44 billion), and "others" ($8 billion). For objections to Blackburn's proposal, see J. Richard
Aronson, "Intangibles Taxes: A Wisely Neglected Revenue Source for States," National Tax Journal,
June 1966, especially p. 184, on taxation of bank deposits and currency.
[Editorial note: At the end of 1970, total financial assets of the sector designated "households, personal
trusts, and nonprofit organizations" were estimated at $1,883 billion, of which $529 billion, or 28 percent,
was in demand and savings deposits and currency. If deposits taxation were lkmited to intangibles of this
sector, savings accounts would constitute 77 percent of the nationwide tax base of total household deposits
in 1970. The total of $1,883 billion offinancial assets of this sector comprised (in billions): Demand deposits
and currency, $122; savings accounts at commercial banks, $175, and at savings institutions, $232; U.S
Government s~curitics, $96; pension fund reserves, $231; life Insurance reterves, $130; State and local govern-
ment securities, $38; corporate and investment company shares, $748; mortgages, $43; other assets, $68.
(Data are from the Federal Reserve Bulletin, March, 1971, p. A71.15, table 8.)]
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of depositor, and at the same time make no effort to reach their
residents on their out-of state deposits. If the bank passes the tax on
to its depositor by reducing interest paid to him or increasing service
charges, he will be inclined to escape the tax by moving his deposit
to some state that does not collect the tax at the source. Interstate
flow of funds will to this degree tend to be artificially stimulated by
the tax system, although of course other factors, notably differences
in interest rates, may overwhelm the tax differentials. The reverse
effect is found with regard to a resident of State B who would ordinar-
ily, let us assume, keep his deposits in A. Such residents of B, no
doubt not large in number, would be under pressure to open accounts
in their home state, to escape double taxation. Interstate flows of
funds would to this degree be artificially impeded. On balance, there
would no doubt be much more money represented in the first case
than in the second, so the net effect would be an artificial stimulation
of interstate flows of funds. But these are probably no more than
unimportant tendencies, given the generally weak state of deposit
taxation in the United States.
(c) Technical Neutrality
If heavy enough, taxation of bank deposits would presumably
lead to some changes in banks' methods of doing business, but in no
state does such taxation, as suggested above, appear to have reached
a level that would induce changes of this kind. Again, this conclusion
is based largely on the absence of any reference to such changes in
the literature on bank taxation. The changes would presumably
reduce the efficiency of the payments systems (an example of excess
burden.)
9. UNEMPLOYMENT COMPENSATION PAYROLL TAXES
The payroll taxes imposed on employers to finance unemployment
compensation reserves are mentioned here simply because they amount
to a considerable sum of money. In a sense they do not belong in this
paper, since they are basically a federal tax: the federal government
levies a tax and gives credit for similar state taxes paid, offsetting a
considerable part of the federal tax. Complete uniformity has not ex-
isted among states, however, in view of the experience rating plans
whereby the tax rate has been lowered for industries with good em-
ployment records. Banks are probably fairly labor-intensive compared
with most other industries, but they also, it may be conjectured, show
a better record of steady employment than most other industries.
In any event, there seems to be nothing in the permanent provisions
of Public Law 9 1-156 that would lead to more, or different, taxation
of banks' payrolls for the unemployment compensation funds.
10. OTHER TAXES
The remaining state and local taxes can be mentioned briefly, for,
excepting the user taxes, their rates are almost always so low that
their lack of neutrality is of little practical importance.
Taxes on execution or recordation of documents, for example the
Florida tax that was declared invalid as to banks in the Homestead
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case, seem to pose no threat to banks if levied on them at the same
rate as on others. Motor vehicle taxes and fees are commonly user
taxes, and banks benefit along with the rest of highw~y and street
users. An occupancy tax, for example that of New York City, is
unneutral in certain respects, but probably not against banks as such.
A stamp tax on checks, on the other hand, would be decidedly Un-
neutral against banks, unless it were at so low a rate that this dis-
criminatory tax did not in fact reduce the use of checking accounts
at all.
11. IN-LIEU TAXES AND BUILT-UP RATES
If, upon removal of Section 5219 restrictions on national bank tax-
ation, states repealed the "in lieu" part of their corporation income
tax rates and of their bank share taxation, which they presumably
would do, there would probably be a gain in terms of economic neu-
trality. These in-lieu taxes differ markedly from the taxes they sub-
stitute for, with respect to the kinds of economic pressures they
exert. Thus the banks are set off from the rest of the business com-
munity and are correspondingly advantaged or disadvantaged, as
the case may be. Admittedly, an increase in the rate of a uniform tax
does not have uniform repercussions over all industries, but an
increase in the rates of a non-uniform tax regime is rather more certain
to cause movements of capital and labor among industries, as well as
to cause a more random distribution of final incidence. At any rate,
it is surely true that, whatever may have been the reasons that led
to adoption of, say, a sales tax, they are not likely to be implemented
by an increase in an income tax that is being applied to a certain in-
dustrial sector as a second-best substitute for the sales tax.
12. CONCLUDING REMARKS
Will state taxation of banks turn out to be more nearly neutral,
economically, under the post-1971 provisions of Public Law 91-156
than under the old Section 5219?
The answer to this question is a compound of intuition, judgment,
and prediction of what the states and local units would do under the
post-1971 provisions of P.L. 9 1-156, and, above all, a rough weighting
of the importance of the several taxes and the degrees of their nfl-
neutralities. The chief factors appear to be the following.
State corporation income tax laws would very likely be amended
to reach in-state activity of out-of-state banks, with a possible
impairment of geographic neutrality and perhaps some discrimination
against the banking industry.
Dividends taxation would probably remain about as it has been.
If the new tax freedom offered the states led them to reduce or
eliminate the in-lieu elements in their corporation income tax rates
(and their share taxes, too), economic unneutrality might thereby
be reduced.
Putting banks under the retail sales tax would be a step toward
industrial neutrality but a step away from technical neutrality, owing
to the inclusion of capital goods in the sales tax base.
A maj or threat of unneutrality against banks is the possibility that
some states would tax intangibles owned by banks, which they
cannot do at all under the old Section 5219.
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Taxation of bank deposits would probably not change much, and
the damage that could be done under the post-1971 provisions of P.L.
91-156 could be done anyway under the old Section 5219.
Imposition of motor vehicle taxes, documentary taxes, and the like,
upon banks, would tend to reduce industrial unneutrality.
An intuitive weighing of these various outcomes leads, in the piesent
writer's opinion, to the conclusion that the post-1971 regime provided
by P.L. 91-156 would create a more nearly neutral treatment of
banks than did the old Section 5219, which was somewhat unneutral
in favor of banks. This conclusion is subject to the caveat that taxation
of intangibles in the hands of banks might throw the balance the
other way, and that taxation of interstate activities under the corpora-
tion income tax could prove at least a nuisance and, if substantial, a
further impairment of neutrality.
Finally, although the 1969 Act calls only for a study of the economic
effects of the changes made by its post-1971 provisions (and then
only with respect to "income taxes, intangible property taxes, so-
called doing business taxes, and any other similar taxes which are or
may be imposed on banks," (Sec. 4(a) of P.L. 91-156)), it seems
appropriate here to ask whether the temporary provisions of that Act
allow a tax system that is more nearly neutral, for banks against the
rest of the economy, than does the permanent provision.
Again, the answer involves a subjective weighing of the un-
neutralities of the several taxes. If the temporary provisions had
prohibited only intangible personal property taxation, the answer to
the question above might well have been yes. But those provisions
also, by implication, prohibit a state from applying to a bank "not
having its principal office located within the jurisdiction of such State"
an income tax~ or a tax on capital used within the state (capital-
stock, franchise, or doing-business tax). This limitation, in the present
writer's view, probably throws the tax system, on balance, back to
appreciable unneutrality in favor of banking, though of course not
to the extent found under the old section 5219.
Admittedly, these conclusions on over-all, or average, degree and
direction of unneutrality of the entire state-local tax system are con-
jectural or at least reflect a high degree of personal weighting. It is
hoped, however, that the tax-by-tax analysis in the body of this
paper may assist the reader to make up his own mind on this difficult
problem with respect to th~ state-local tax system as a whole.
NEW YORK, February 16, 1971.
79-421 0 - 72 - 31
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APPENDIX 8
Treatment of Intangible Personalty in the State-Local
Taxation of Banks
LYNN A. STILES
Vice President and Economist, Federal Reserve Bank of Chicago
Certain spokesmen for commercial banking have urged the Federal
Reserve Board to recommend to Congress that the "permanent
amendment" to section 5219 be modified to continue indefinitely
the present ban on State (and local) taxation of intangible personalty
held by national banks. They argue that the imposition of State
intangibles taxation on bank holdings could be unneutral in its
effects on banking vis-a-vis other sectors of the economy. Among
specific reasons advanced in support of continued exemption are
these:
(1) Bank assets are (relatively) easy to identify and to evaluate,
at least in terms of book value. While this may also be the case
with intangibles held by nonfinancial businesses, it seldom
is true of the holdings of individuals. Here then would be a possible
source of unneutrality in the tax treatment of banks.
(2) Banks conduct their operations within individual states,
so that unlike individuals and many nonfinancial enterprises
they are not in a position to arrange the state-by-state distribution
of their assets in the interest of minimizing tax liabilities.
(3) There is the traditional multiple-taxation argument, in
one of its forms: the real or tangible assets underlying formal
claims upon them, that is, representative intangibles, are subject
to taxation as a matter of course and to tax the intangibles as
well, and further, to tax claims to these intangibles as the
multiple "layering" of claims proceeds, would be to tax doubly
(or multiply) the same thing, or a single underlying source of
value.'
(4) Because intangibles constitute the overwhelming bulk of
commercial bank assets, while looming much less importantly
among the holdings of nonfinancial businesses, the banks would
be particularly vulnerable under concerted attempts to tax such
property effectively. The position of the banks might be especially
difficult, moreover, if intangibles were made subject to tax rates
at the levels applicable to real estate, as would be true under
general property taxes.
Vulnerability of ban/c a&sets.-The balance sheets of commercial
banks are routinely published in such readily accessible media as news-
papers of general circulation in the banks' service areas. Although the
I Set aside as not within the scope of this statement is the prob~ein of double taxation arising out of conflict-
ing or overlapping claims by separate governments to tax a given base, as when both the domiciliary State
and nondomiciliary States assert the right to tax corporate net income, sales, or assets.
(463)
PAGENO="0484"
464
detail provided by this source would not always suffice to enable a tax
assessor to compile a definitive listing of a bank's taxable intangibles-
e.g., it might not separately identify holdings of Treasury or other
tax-exempt securities-it could be useful in establishing a presumption
that taxable assets were on hand to be returned. Comparable listings of
the assets of certain nonfinancial businesses also are often available, if
in less accessible form than the statements of banks. But similar in-
formation on holdings of individuals is not available. The possibility of
discriminatory treatment of banks (and other financial institutions,
such as mutual savings banks and savings and loan associations, for
which balance-sheet information also is freely available) vis-a-vis non-
financial business and individuals is clearly apparent.
Although it is true that the book values shown for bank assets in
published statements may depart from current market value-com-
monly the standard in ad valorem taxation-they will reflect adher-
ence to a consistent method of asset appraisal prescribed by an official
regulatory agency, one that probably generates valuations above mar-
ket as frequently as it does valuations below the market, with the
deviations seldom exceeding tolerance limits typically acceptable in
property tax practice.
These considerations appear to offer support for continued exemp-
tion of bank-held intangible assets, but it is support of a negative
sort: bank-owned intangibles, which may be readily identified and
appraised, nevertheless should be immune to taxation simply because
comparable assets in the hands of other holders, and therefore not so
readily identified a.nd assessed, are in practice partially or wholly
exempt. To prevent discrimination against banks (and nonbank
financial intermediaries), it follows, the present exemption of this
class of property should be continued.
Territorial confinement of banking.-The argument that banks,
owing to their confinement to "doing business" in individual states
only, are not able to move intangible assets about in the interest of
avoiding (or evading) tax liability has a somewhat peculiar ring. It
appears to rest on a tacit acceptance of tax avoidance (evasion)
strategies undertaken to thwart the will of the legislatures and taxing
authorities. Yet, it probably is true that the exposure of bank-owned
intangibles to State and local tax jurisdiction would lead to consider-
ably more effective, heavier taxation of these holdings than of intangi-
bles in the hands of nonfinancial corporations-at least the larger
ones engaged in interstate operations. Intangibles in their nature are
mobile and the establishment of business situs in more than a single
location ordinarily presents no great problem to firms conducting
their operations over broad areas. Clearly, banks would be at a relative
disadvantage compared to larger firms in nonfinancial business if
barriers to the state-local taxation of intangibles were eliminated.
The issue of double taxation.-It is sometimes contended that the
taxation of intangibles, or more specifically those of a representative
sort, means taxing more than once a single ultimate source of taxable
capacity or potential tax liability. Tangible personal property and real
estate are subject to taxation routinely in virtually all jurisdictions.
The premise underlying this practice appears to be that physical
property per se is benefited by the availability of governmental
PAGENO="0485"
465
services and therefore should be expected to make tax contributions
toward their support. In this view, it obviously is irrelevant if claims
to underlying physical property are divided between ostensible equity
owners and the suppliers of credit used to acquire and hold such
property. Thus, if one of two identical houses is mortgaged to the
fullest extent while the other is held debt free by its owner, the liability
of the two properties for support of local government services "benefit-
ing" the two properties should be roughly equal. It would be inappro-
priate, under these circumstances, to allow any deduction of the debt
in assessing the value of the mortgaged house.
Still within the framework of the traditional rationale of property
taxation, the mortgage loan on the house in the example constitutes
part of another stock of property benefiting by governmental activity
and therefore also under obligation to make a tax contribution. That
the house `itself has already been fully listed for assessment and
taxation without regard for the existence of the mortgage debt is
irrelevant. The mortgage loan is an item of property on all fours with
tangible personalty or real estate and deserves to be included among
the assets of its holder that are exposed to property taxation.
The "ability-to-pay" doctrine, which is sometimes invoked as a
justification for property taxation, appears to offer some support for
the exemption of representative intangibles. The possession of prop-
erty is regarded as conferring taxpaying ability. Property, in this
view, is essentially a form of individual wealth, closely related to the
present and prospective ability of the holder to enjoy income. Ob-
viously, any claims of "outsiders" to property in the hands of the
nominal owner must be regarded as impairing the taxpaying capacity
associated with the property in question. In short, it is "net" property
*or the net equity in property that is associated with taxpaying capa-
city. The totality of interests in a given underlying property must
necessarily sum to neither more nor less than the value of the property
underlying those claims that are layered upon it.
Under the ability theory, therefore, a case can be made for exclusion
of representative intangibles from the tax base. Yet, the relevance
of all this to the question of taxing intangibles held by banks or other
businesses is not clear. Ability-to-pay seems most appropriately an
attribute of individuals, rather than of business units. To regard
business firms as possessing or lacking the ability to pay taxes in
anything like the sense in which individuals may be so regarded seems
clearly contrived. If, then, the ability doctrine, which affords support
for exclusion of representative intangibles from taxation, is really not
applicable to business taxation, this doctrine cannot be cited to support
the case for exemption of business intangibles.
On balance, the double-taxation case for exemption of representa-
tive intangibles lacks persuasiveness, whereas a good case can be made
for inclusion in the ad valorem tax base of representative intangibles
in the hands of any holder-whether an individual, a bank or a
nonbanking business. This conclusion, however, rests upon the prop-
osition that ad valorem taxation of such property m ay be justified
on benefit grounds.
Large holdings of intangibles.-The objection to taxing bank-held
intangibles on the ground that the banks' holdings are relatively
PAGENO="0486"
466
larger than those of most other businesses seems unpersuasive at first
blush. Intangibles-cash, deposits, loans, and investments-make up
the bulk of the banks' earning assets; tangible properties-buildings,
land, inventories, equipment, and machinery-are the counterpart
holdings of other businesses. If the two classes of property are dealt
with similarly, it is not obvious that the banks will suffer discrimina-
tion.
Because tangible property is generally subject to ad valorem tax-
ation, while intangible property is not, being taxed only in certain
jurisdictions-and then commonly at effective rates that are prefer-
entially low either by law or by administrative practice-the indif-
ference of holders as between the two classes of property finds expres-
sion in the rough equivalence of after-tax yields on tangible assets and
the (virtually) untaxed yields on intangibles. If taxation of intangibles
at the same rate as tangibles were to become universal, the presump-
tion is that before-tax yields of intangibles would be driven up so as
largely to cover the tax liability. If, however, intangibles taxation
were to occur only selectively, the attendant adjustment in before-tax
yields would only partially compensate for the tax liability in those
jurisdictions imposing such taxation, while tending to produce wind-
falls to holders of intangible assets in those jurisdictions that do not
tax intangibles. The result could be disturbing to credit markets and
a source of pronounced unneutrality in terms of its state-to-state
impact on the banking system.
In practice, the taxation of intangibles held by others than banks
means the application of either special, low-rate ad valorem taxes or
else the extension of relatively high nominal rates applicable to prop-
erty in general to assessments on intangibles scaled to arbitrarily low
fractions of full value. Deliberate undervaluation frequently has been
resorted to simply in order to encourage the listing of intangible
property. Such undervaluation, however, often is extra-legal and there-
fore of no assured permanence. It would seem distinctly undesirable
to expose intangibles (or any other class of property) to the possibility
that the tax authorities might elect abruptly, for whatever reason, to
discard a pragmatically defensible practice in favor of literal ad-
herence to a statutory full-value standard, with effects on property
yields or income that could have disturbing allocational and equity
implications. Perhaps no less undesirable, of course, is the exercise of
administrative classification or debasement itself, because of the pos-
sibilities it presents for abuse.
Moreover, in the absence of a general move toward ad valorem
taxation of all intangibles, uncertainty over the possibility that some
intangibles might be made subject to the nominal rates applicable to
real estate and other classes oftangible property-rates in a range of,
say, 2 to 4 percent of full value, or a sizable fraction of before-tax
yields on intangible assets-could hamper significantly the smooth
and efficient functioning of the credit market.
The existence of wide variations among States in methods of taxing
businesses other than banks and of considerable dispersion of rates
under common tax forms obviously has had no profoundly destructive
effects. But, the differentials presently observable have developed
slowly, over a period of many years. Their effects have become deeply
PAGENO="0487"
467
embedded in the business structure, as by the process of tax capital-
ization, registering subtly in the existing pattern of investment alloca-
tion among firms and industries, as well as among taxing jurisdictions.
Now to expose the (national) banking system to an essentially new
form of taxation that came to apply only selectively and even then at
widely varying effective rates would almost inevitably have a host of
arbitrary equity and allocational impacts.
This argument may be put in another way. Suppose that the ques-
tion under consideration were the desirability of imposing a uniform
ad valorem tax nationwide on all those classes of intangible personalty
not enjoying inherent immunity from such taxation, and that this tax
were to be in lieu~ of any local or State taxes presently imposed on
int~ngible personalty. There appears a strong presumption that yields
on intangible assets, including the implicit yields on cash, demand de-
posits, and other intangib]es not bearing explicit yields, would tend
in time to adjust to the presence of the tax. One.result no doubt would
be some discouragement of the process of intangibles creation, or of
the layering of claims to physical assets. The wisdom of such a move is
beside the point in this context. Because the universality of such a
levy would tend to minimize differential effects it is not clear that
such a tax measure would prove noticeably discriminatory in impact.
In this hypothetical circumstance it would be difficult to envision
any special problem that would confront the banking system in
rBspect to the application of such a uniform nationwide tax to intan-
gibles that they held. But, the most significant aspect of the now
scheduled withdrawal of the tax immunity presently held by bank
intangible personalty is the strong probability that the new authority
to tax would come to be exercised on no more than a selective basis,
and then at varying effective tax rates. Moreover, without explicit
guidelines relating to the range of admissible effective rates, the
banking community could be exposed to troublesome uncertainty
with respect to its current and prospective status under the taxing
statutes.
It may be judged quite unlikely that any but a minority of the
States would elect now to impose taxes on intangible personalty held
by banks, in light of the general drift away from the taxation of
intangibles in recent years. Yet, the accessibility of information on
the banks' holdings, the existence in certain communities of hostility
toward banking and finance, and the inability of banks to manage
the deployment of their assets among the States in order to minimize
tax liabilities all could be factors serving to enhance the appeal of
this form of taxation. To the banking community as a whole, the
removal of barriers to State and local taxation of bank-held intangibles
could well mean an extended term of uncertainty concerning the
profitability and value of intangible assets of a wide variety. It is this
possibility that argues most persuasively for preservation of the tax
immunity now enjoyed by the banks' intangibles.
Summary and conclusions.-Authorizing the State and local govern-
ments to tax bank-owned intangibles could have disturbing alloca-
tional and equity effects. The difficulty that banks, which "do busi-
ness" within individual States only, would encounter in attempting
to avoid tax liability in the manner open to multistate nonfinancial
PAGENO="0488"
468
firms could be Prejudicial to the 1)OsitiOfl of banks as intermediaries
holding intangible assets. The double-taxation argument against the
taxation of intangibles is found to have little merit, given that prop-
erty taxation is rationalized on benefit grounds. Because withdrawal
of the present immunity possessed by bank-held intangibles could
open the door to a wide variety of possible responses by the States-
with some electing not to tax intangibles, some electing to tax at
preferentially low rates and others choosing to tax at relatively high
general property levels-the resulting uncertainty could have pro-
foundly unsettling effects on the banking community and on the
process of financial intermediation, it is this last argument that
probably is most persuasive in supporting the case for continuation of
the present immunity.
CHICAGO, March 22, 1971.
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APPENDIX 9
Comparing State anti Local Taxation of Banks and Other
Business Enterprises
HARVEY E. BRAZER
Chairman, Department of Economics, University of Michigan,
and MARJORIE C. BRAZER
INTRODuCTION
Inter-industry, inter-corporate, and inter-personal comparisons of
state and local taxes paid have long been the subject of much interest.
They have taken on rather special significance in the case of the bank-
ing industry, however, because of the restrictions that the Congress
has placed upon the states and their local subdivisions in the taxation
of National banks. Section 5219 of the Revised Statutes (12 U.S.C.
548) and judicial interpretations of it, in fact, frequently have re-
quired comparisons, in order to ascertain whether or not the banks
have been taxed more heavily relative to "other moneyed capital"
and non-financial corporations than the federal statutes permitted.
Comparisons have been inspired as well by interest in the question
as to how much revenue, if any, is being lost by taxing jurisdictions
and saved by banks as a consequence of the constraints imposed by
Section 5219 and the extension by the states of similar treatment to
state-chartered banks. Moreover, many of the states employ tax
rates under income taxes, or taxes measured by net income, that are
designed to be sufficiently higher for banks than for other corpora-
tions to "equalize tax burdens."
At first glance it would appear that tax burden 1 comparisons for
banks present no real problems other than those involved in obtain-
ing the desired data, even when it is recognized that they must be
seen in the context of the issues involved in comparing tax burdens
generally. The slightest reflection, however, soon reveals the exist-
ence of some very serious difficulties. These difficulties may be illu-
minated more readily if, at the outset, we avoid the complexities
introduced by the corporate entity and examine the case of inter-
personal tax burden comparisons. Furthermore, recognition of the role
of individuals or households as taxpayers should sharpen under-
standing of and give meaning to the notion of business or corporate
tax burden.
INTERPERSONAL COMPARISONS
We are interested, say, in comparing taxes paid by rich people with
taxes paid by poor people, or taxes paid by residents of State A with
those paid by residents of State B, or large families versus small
1 The word "burden" Is used in this pa~per for convenience in expression merely as a synonymfor "amount
paid" or "liability"; it is not meant to be read as Implying that taxes are necessarily any more (or less)
"burdensome" than other charges or prices paid by the individual or corporate taxpayer.
(469)
PAGENO="0490"
470
families. Clearly the possibilities for drawing comparisons are abun-
dant. What is not so clear is how we ought to go about developing
the necessary commensurable numbers.
Bases for Comparison
Commensurability requires that we relate taxes paid by each of our
units of observation to something that will serve, to our satisfaction
(even if not to everyone's satisfaction), as a standard of comparison.
That is, we are not interested merely in knowing how much in taxes is
paid by each of any given set of individuals. Rather, our comparison,
to be meaningful, must relate taxes paid to income, wealth, expendi-
ture, perceived value of public goods "consumed," or whatever we
choose to designate as the relevant (perhaps "appropriate") base or
"norm." Thus if income is selected this implies that we believe that,
or at any rate accept the idea that, income defines the individual's
role as taxpayer. We should wish, then, to express taxes paid as a per-
centage of income, and equal, more than, and less than are defined in
terms of this ratio.
But which of the alternative bases or norms of taxation are we to
select? None is self-evidently better than any other until we specify the
criterion or criteria by which we are to evaluate the tax system,2 and
even then doubts may reasonably be entertained. If we select income
as our base we may do so because we believe that taxes should be
apportioned among individuals, families, or households according to -
ability to pay and that this ability is some function of income.3 But one
may also assert, quite plausibly, that ability to pay is more accurately
a function of expenditure or of net worth. Irrespective of this choice,
however, the notion of ability to pay is entirely subjective in nature
and its use implies interpersonal comparisons of utility. One can only,
therefore, select income or wealth or expenditure, or some such
measure, as an objective proxy for ability to pay and hope that it is a
good proxy.
What have we then accomplished? As a criterion for tax distribution
ability to pay appears to involve nothing more than the use of a high-
sounding phrase having some persuasive moral force to support one's
position with respect to that distribution. Far more straightforward,
meaningful, and therefore useful, is the approach that simply states a
given objective to be achieved through allocation of tax shares and
then selects the tax base best suited to the attainment of that objec-
tive. Thus, if it is our objective to use the tax system as an instrument
for redistributing income toward greater equality, it follows that
whatever the nature of the actual taxes levied, interpersonal tax
comparisons must relate taxes paid to income~ Then, when we compare
taxes as percentage of income among individuals or groups of individ-
uals wre may draw conclusions about relative tax levels and about the
gap between our oblectives and accomplishments. The same exercise
might be carried out with respect to other tax bases and policy
obj ectives.
2For extensive discussions of the issues surrounding the choice of tax base see Richard Goode, The
Individual Income Tax (Washington, D.C.: The Brookings Institution, 1964), chs. II and III, and the refer
ences cited therein.
3 It may also be argued that demand for public goods and services is a function of income and that the
income base for taxation is appropriate to a benefit as well as an ability basis for apportioning tax contribu-
tions. The two functions may be expected, of course, to be very different.
PAGENO="0491"
471
To this point we have simply opted for the use of an objectively
measurable base for interpersonal tax comparisons. Unfortunately,
however, "objective" and "measurable" can only be used as relative
terms. We cannot, for example, find agreement among economists,
attorneys, and accountants as to how properly to define income, let
alone measure it once defined. The definitional questions may differ
somewhat in substance but they are not avoided by shifting to bases
other than income, and the shift will, of course, raise new questions:
Measuring Taxes Paid
Moreover, the difficulties encountered in defining and measuring
the base for use in tax comparisons are joined by truly formidable
ones involved in measuring the taxes paid by the individual, family, or
household. What is meant by the term "paid by"? Surely this cannot
mean simply the tax payments made directly to the various taxing
jurisdictions. Quite obviously what we really want to measure is the
dollar amount of taxes "borne." By "borne" we mean paid in the
sense that the tax incidence is such as to reduce that individual's or
unit's income. Thus, of course, taxes an individual actually pays to a
governmental jurisdiction may be shifted elsewhere and not "really
paid" by him at all, and taxes of which the individual may be quite
unaware may, in fact, be borne by him.
We are therefore confronted with the thorny subject of tax inci-
dence. Taxes get shifted from those who are initially responsible for
paying them to those on whom their incidence falls through the
complex process by which the imposition of taxes gives rise to changes
in the prices of factors, products, and assets. Our knowledge of the
way in which the relevant interactions occur and how individuals and
families are affected as suppliers of labor and capital, as consumers,
and as asset holders is, at best, sufficient to permit only rough approxi-
mations of the answer to the question as to how much in taxes is borne
by them.4
Another difficult, but quantitatively less important, problem relates
to the definition of "taxes" to be included. `Where the charge or tax
is in the nature of a price paid in exchange for a specified good, service,
or present or future claim, value is received for the amount paid and
there is no more reason to count it among "taxes" paid than there is
for counting other prices, public or private, paid for goods, services, or
claims of whatever kind. Social security taxes, for example, are
"contributions" for social insurance, and there is a rough correspond-
ence between the amount paid by and on behalf of a given individual
and the value of the benefits he may realize. But the correspondence
is only rough and, in greater or lesser degree, all taxes may be said
to bear some relation to public service benefits of one kind or another.
There is no clean line between taxes "pure and simple" and other
governmentally imposed charges. At most we can visualize a con-
tinuum along which we may move from one extreme, at which there
is a close relation between the amount paid and benefits realized, as in
the case of a charge for water service or admission to a public swimming
pool, through social security taxes, user taxes or charges like motor fuel
For extensive discussion of incidence theory see Richard A. Musgrave, The Theory of Public Finance
(New York: McGraw-Hill Book Co., 1959), chs. 10, 15, and 16.
PAGENO="0492"
472
taxes, to general sales and income taxes. For purposes of comparing
tax burdens we can only select rather arbitrarily a point on the con-
tinuum at which we draw the line between taxes and other charges;
there is no demonstrably "correct" location for it.
In short, we recognize the obstacles in the way of developing inter-
personal comparisons of tax burdens, yet acknowledge that such com-
parisons serve useful and highly relevant public policy purposes. Just
as it makes sense as an economic-political choice to tax people accord-
ing to income, or wealth, or expenditures, so it makes at least as good
sense to attempt to measure the relationship between taxes borne by
people under a diversified tax system and the base or criterion selected.
INTERCORPORATE COMPARISONS
Can we, now, extend this conclusion with respect to individuals or
families or "people" to banks and, more generally, corporate enter-
prises and corporations grouped by industrial classification? At one
level of response the answer is "no." for all taxes, whether initially
paid by individuals or corporate enterprises, have been assigned,
through incidence analysis, to individuals. There is, in consequence,
nothing left~ to assign to corporations and hence no intercorporate
tax comparisons are possible. Taxes paid by corporations are borne
by individuals in their capacities as suppliers of capital, labor, or other
inputs, or as consumers of corporate products. Thus it does not make
sense to speak of corporate measures or indices of "ability to pay;"
the analogy with individuals simply does not hold. Ronald B. Welch
put it well many years ago when he said, ". . . ability is an attribute
of animate beings, and with all the sovereignty of the State it cannot
be injected into the fictitious personality of a corporation."
Corporate Tax Incidence and Tax Burdens
It must be quickly pointed out, however, that it does not follow
that taxes imposed on corporations "do not matter" because they are
borne by individuals. They do indeed matter for, as we have noted, in
the process of tax shifting relative prices change and the allocation of
economic resources is, therefore, different from what it would have
been under alternative tax schemes. Thus one may expect that when
taxes imposed on industry A are raised relative to those imposed on
industry B resources will flow from the more heavily to the less heavily
taxed industry, relative prices will follow the direction of tax change,
and the new consumption mix will favor the output of the more
lightly taxed industry.6 The nature and extent of the consequences of
relative tax changes will depend, of course, on the structure of factor
and product markets, on technology, and on the kinds of taxes in-
volved. The main point to be made here is that relative tax loads and
changes in them induce important consequences which may be re-
garded as the intermediate steps or effects giving rise to ultimate
incidence changes among individuals.
6 Ronald B. Welch, State and Local Taxation of Banks in the United States (Albany, N.Y.: State of New
York, Special Report of the State Tax Commission, 1934), p. 146.
6 This is not the place to develop in detail and with analytical rigor the analysis underlying these assump-
tions or assertions. See Arnold C. Harberger, "The Incidence of the Corporation Income Tax," Journal of
Political Economy, June, 1962.
PAGENO="0493"
473
By and large the literature on the incidence and effects of taxes
imposed on corporate enterprises tends to be rather abstract. It tells us
that taxing industry A more heavily than industry B will shift capital
and labor from A to B, but this is typically pictured as a smooth, cost-
less kind of transfer of resources that should not hurt anyone, except
insofar as the prices paid for the use of his capital, or for his labor, or
which he pays in markets for products, change to his disadvantage.
This hardly explains corporate management's very obvious concern
about the level and kind of taxes imposed on the firm or its industry. Is
that concern genuine, rationally based, and warranted, or does it stem
from a misguided view of the "truth"? Bankers, for example, and at
their behest or perhaps even independently, some legislators, appear to
worry deeply about the level of taxes paid by such direct competitors
as mutual savings banks and savings and loan associations relative to
taxes paid by commercial banking corporations. We believe that this
concern is indeed real and that it is warranted, thus calling forth quite
legitimately the need to develop meaningful measures of relative
corporate tax "burdens."
Analysis of the incidence of corporate taxes is commonly conducted
in a world quite alien to the corporate executive. It is a world of perfect
com])etit~Ofl, with its many sellers and many buyers of homogeneous
products and factor input, perfect knowledge, and perfect mobility
of' capital and labor. And the solution described, the outcome of
differential tax changes, is one arrived at under conditions of long
run equilibrium in this perfectly competitive world. Unfortunately,
however, corporate management must endure the painful short run
steps on the way to the long run, neither labor nor capital i~ "perfectly"
mobile, and both owners of capital and workers, including manage-
ment, are likely to suffer windfall losses in the process of adjustment
to unfavorable tax changes. Contraction in the volume of activities
of a given firm is hardly a matter of indifference to workers laid off,
or stockholders whose dividends are cut, or management forced to
"retire early," even when they are assured that employment of labor
and capital and the returhs to each of them will, in the aggregate, and
in the long run, be more or less as before. At the same time the
industry or industries experiencing relatively favorable tax treatment
and thus expansion will offer unexpected gains, in the short run, to
labor, management, and capital. But unlike offsetting statistical
* changes, where gains cancel losses, different sets of people are in-
volved, and the gains of one set offer slight comfort to those who
lose.
Intercorporate tax comparisons have significance as well for the
efficiency with which resources are allocated within the economy as a
whole. Departures from tax neutrality give rise to excess burdens.7
That is, they result in economic costs that are greater than the tax
liability by an amount equal to the loss in output due to the in-
efficiency in resource allocation induced by the tax. Practically
speaking, all taxes are unneutral in this broad sense. But in a narrower
sense we may observe more or less neutrality in the application of a
`For an extensive discussion of tax neutrality, partiaularly as it relates to the taxation of banks, see
Appendix 7 by Carl 5. Shoup, "Economic Impacts of Particular State and Local Taxes on Banks with
Special Reference to Neutrality," pp. 425-461 above.
PAGENO="0494"
474
given tax or a tax system as a whole if we measure neutrality in terms
of differences among firms or industries in the tax burden imposed.
Thus, for example, a tax such as the corporate income tax is clearly
unneutral in the broad sense; its unneutrality is exacerbated if it is
so imposed that the effective rate on net income varies capriciously
and widely among firms and industries.
If we grant, then, that the kinds and levels of taxes paid by cor-
porate enterprises do matter, and that rntercori)orate and inter-
industry comparisons are important, we confront questions as to
how such comparisons should or can be made and how meaningful
they are likely to be.
Defining Taxes Paid by Corporations.
In the case of corporate tax comparisons, unlike that Df inter-
personal comparisons, our concern is with taxes l)aid by the corpora-
tion, irrespective of incidence. This follows from the fact that, as we
have seen, corj)orate entities as such do not bear taxes. But they do
pay taxes, and those payments represent additions to costs or dis-
positions of income which, in turn, give rise to changes in relative
income distribution among individuals that are directly traceable as
economic consequences of the imposition of corporate and other tax
1)aylfleIltS.
For purposes of inter-industry tax comparisons, therefore, because
we are concerned with tax payments rather than incidence, both the
conceptual and empirical problems involved should be far simpler
than those encountered in interperson al comparisons. Nevertheless,
some problems do remain. Quasi-public prices or user charges, for which
the corporation is simply purchasing goods or services, such as water
or sewage disposal, from public authorities do not in any meaningful
sense constitute tax "burdens." They should be excluded from our
calculations. The same may be said for special assessments, under
which there is a general expectation that the beneficiaries of a public
improvement who are subject to the assessment will realize direct
benefits worth at least as much to them as the amount paid. But, as
noted in our discussion of interpersonal tax comparisons, such taxes
as those imposed on motor fuel purchased for use on the highways are
not sufficiently distinguishable, in the sense relevant here, from other
general taxes, particularly local property taxes, to warrant their
exclusion.8
Another group of taxes that presents some conceptual difficulties
for interinclustry comparisons consists of the severance taxes em-
ployed by many of the states. To the extent that these taxes may be
imposed in lieu of, or are in the nature of, royalties we should exclude
them, but frequently they are, in the opinion and intent of the taxing
jurisdiction, in lieu of real property taxes. The case for exclusion is far
from clear. Where, as in Western Canada, the government retains all
mineral rights and is the lessor of the right to exploit them, it is clear
that severance taxes and royalties are indistinguishable in substance,
We are inclined to this view for the general case, although we would not be willing to defend it strongly,
but we would insist on departing from it where the industries subject to comparison included those for which
the services provided by the publichighways and paid for through highway user taxes comprise a substantial
production input. These would include firms engaged in over-the-road transportation of passengers and
freight and the auto leasing companies. IIighway user taxes paid by these corporations are much more
closely akin to prices paid for production inputs than they are to general taxes.
PAGENO="0495"
475
if not in form. In the U.S., however, most actively exploited mineral
deposits are privately owned and severance taxes are not alternatives
to royalties but may be regarded as additional to them. We would,
therefore, include them for tax comparison purposes.
Of far greater quantitative importance are the selective and general
sales taxes. Such excises as those imposed on trucks, automobiles,
motor fuels, cigarettes, beer, liquor, and wine, are typically paid by
the manufacturer, wholesaler, or retailer to the levying jurisdiction.
Irrespective of legislative intent with respect to shifting, or actual
shifting, these taxes appear to be conceptually indistinguishable, for
our purposes, from other taxes that add to the costs of goods or services
sold or that reduce net receipts from their sale. A basic objective of
interindustry tax comparisons is to obtain a measure of the relative
tax impact among industries. Given this objective, it is difficult to
justify the exclusion of the specific excises. rfo exclude the liquor
excise, for example, is to suggest that this tax is of no consequence for
the level of output of the affected industry, for its demand for labor
and capital, or for the relative prices of its products. Much the same
may be said for the more general sales taxes.
The other major state and local taxes paid by corporations in general
are the property, corporate income, and corporate or business privilege
taxes, the latter commonly being imposed on corporate capital,
variously defined. These taxes offer no conceptual problems in the
present context. Of the taxes authorized by Section 5219 clearly the
real property and net income taxes (whether directly on or measured
by net income) offer no peculiar difficulties. The same may be said
for the tax on bank shares, unless it is paid by stockholders and it is
simply part of a uniform tax on corporate shares. In the latter case
attributing the tax to banks would be no more justifiable than similar
attribution for all other corporations. Similarly, whether or not a tax
levied on dividends paid by banks should be counted as part of the
banks' taxes would seem properly to turn on the test suggested for the
bank shares tax. Bank dividends taxable to stockholders under state
and local general income or intangibles taxes are not bank taxes, but
in the absence of such general taxes they would be. The implied
criterion is one which asks whether or not the tax may be expected
to influence to any appreciable extent the allocation of resources to
the banking (or any other) industry. For example, a tax on bank divi-
dends levied by a State that does not otherwise tax corporate dividends
may be expected to increase the price or cost of capital to banks in that
State, and thereby reduce the allocation of resources to banking. If,
on the other hand, all dividends were uniformly taxed in the State, no
such effect would occur.
Thus we would include virtually all taxes actually paid by corpora-
tions in our comparisons of tax "burdens," excluding, in general, only
clear-cut user charges. This seems to us to be a reasonable, "common
sense" approach. It is based on the premise that all taxes paid by
corporations are ultimately "borne" by individuals in their capacities
as consumers and/or as suppliers of labor and capital. For purposes of
identifying taxes that are properly includable in interindustry com-
parisons, it is irrelevant, therefore, whether taxes are shifted forward
or backward, nor does the form taken by the tax or the definition of
its base matter.
PAGENO="0496"
476
Some observers may prefer an alternative approach that excludes
all taxes that are meant to be, or are widely believed to be, shifted
forward. Among these excluded taxes would be found the selective and
general sales taxes. All other taxes paid by corporations would be
included. But any such line of demarcation appears to us to be rie~es-
sarily arbitrary. Moreover, given existing uncertainties about the
direction of shifting with respect to such major taxes as property and
corporate income taxes, any observer may pick and choose taxes for
exclusion or inclusion to suit his own objectives. At this point, how-
ever, the game of comparing tax burdens among industries would
descend to an all too obvious absurdity, losing sight entirely of the
fundamental reason for the tax comparison exercise.
A more reasonable and potentially productive approach might
involve confining intercorporate or interindustry tax comparisons
to corporations subject to similar sets of taxes or functioning in closely
related industries. Thus, for example, for purposes of evaluating the
relative level of taxes paid by commercial banks, the severance taxes
paid by iron ore mining or crude petroleum producing companies,
or the excises paid by tobacco and liquor producers or distributors,
or the sales taxes paid by retail establishments, are not immediately
relevant because the comparisons may not be particularly relevant.
In a broad, general way, the banking industry no doubt has some
interest in taxes paid by all industries, but its immediate interest,
and that of the U.S. Congress and State legislative bodies, lies in the
comparison between taxes paid by banks and those paid by close
competitors such as mutual savings banks, savings and loan associ-
ations, consumer and commercial credit companies, life insurance,
and mortgage companies.9 If tax comparisons were to be confined
within such limits the difficulties, uncertainties, and ambiguities
attaching to the inclusion or exclusion of various taxes would lose
much of their importance. On the other hand, however, confining
interindustry tax comparisons within such narrow limits would
imply ignoring the fact that banks and other financial institutions
compete for resources and markets in the economy at large.
Bases for Comparison ~°
There remains the problem of selecting the appropriate base or
bases against which taxes paid may be related for purposes of corn-
parisons among corporations or industries. Obviously taxes paid by~
one firm or industry relative to another cannot be said to be either'
high or low without reference to some common base. There are a
number of bases that might be selected, of which four appear to be
most promising: net income; net worth; gross receipts; and value
added.
Once the base for tax comparisons has been defined, tax "burdens"
may be stated in terms of ratios, the numerator of which is taxes
5 The range of industries immediately and directly competitive with the banks has, apparently, been,
increasing in recent years. National banks have expanded their activities to include data processing services,
leasing of personal property, ownership of subsidiaries `engaged in mortgage servicing, factoring, and ware--
housing, handling of collective investment accounts, sale of insurance, travel agency functions, and the
issue of credit cards. This listing is drawn from a letter dated May 23, 1969, from Charles F. Cordon to the
Honorable Wright Phtman and printed in Hearings Before the Committee on Banking and Currency, House
of Representatives, Ninety-First Congress, First Session, on H.R. 7491, May 26, 1969, pp. 30-31.
10 The issues relating to the choice of base for tax comparisons are discussed in Ronald B. Welch, Carrier-
Taxation (79th Congress, 1st seas., House doe. 160, Sept. 19, 1944; Washington, D.C.: U.S. Government.
Printing Office, 1945), pp. 382-6; and John D. Helinberger, State and Local Taxation of Bank8 (Minneapolis:
unpublished doctoral dissertation, 1960), pp. 46-49.
PAGENO="0497"
477
paid and the denominator is the selected base. The function of the
denominator is to provide a norm that can be regarded as a common
measure of relative tax contribution. Its choice implies a judgment on
the "appropriate" or preferred business tax base. But appropriateness
of the selected denominator for purposes of tax comparisons need not
rest on its acceptability as the sole or even major business or corporate
tax base. Considerations of administrative and compliance costs, of
entrenched institutions, and of political feasibility, as well as of hard-
dying notions on the virtues of diversity in taxation, may mean that
the preferred base for tax comparison purposes is not even a strong
candidate for use as the one base for state-local taxation of business
enterprises.
In the discussion that follows of the four "candidates" for use as our
base for comparison of taxes paid, we are acutely conscious of the fact
that the relative tax "burden" of any firm or industry will depend
crucially on the choice of base or denominator. Thus the criteria for
evaluation of the alternatives should be clear at the outset. The essen-
tial criteria appear to us to be the following: availability of required
data; absence of capricious or controllable variance in the value of the
base for any firm or industry; commensurability between firms and
industries engaged in widely divergent kinds of activities; and the
denominator in the tax "burden" ratios should permit these ratios to
provide reasonably clear indications of whether and to wh~tt extent
state and local taxes tend to depart from neutrality with respect to
particular firms or industries. This latter criterion contains, in our
view, the principal justification for any business tax coniparisons.
Net Income. Net income has been widely used as the base for com-
paring state and local taxes paid by banks with those paid by other
corporations.11 The use of net income foi this purpose implies both that
state-local taxes are in fact a charge against the corporation's profits
or net income, and that the net income of the corporation is closely
analogous to the income of the individual or the family. The first of
these implications suggests that state and local taxes are shifted neither
forward to customeis nor backward to suppliers of labor services, but
are borne solely out of profits and thus by suppliers of capital. This
may or may not be the case, but we doubt that anyone strongly believes
that it is.
For the corporation net income is in no really pertinent sense analo-
gous to income of individuals. It is a measure of the amount earned by
the corporation after contractual and other obligations have been met.
It is the amount available as return to equity capital. The fact that
state and local taxes paid represent a high or a low portion of that
amount, which at least in the short run may be regarded as a "residual,"
tells us nothing of very special significance. A high ratio of taxes to net
income, for example, may mean either that taxes are relatively high or
net income is low. And whether the impact is likely to be, or to have
been, large or small with respect to various measures of the size of the
firm's operations or level of activities is not revealed at all. That
impact may be large where the taxes to net income ratio is low, because
the ratio of net income to sales, output, or value added is very high.
Alternatively, of course, it may be small even where the taxes to net
income ratio is high, because net income relative to output, sales, or
11 See, for example, the studies by Iielr~berger, op. cit. and Welch, op. cit.
79-421 0 - 72 - 32
PAGENO="0498"
478
value added is low. It follows, therefore, that the ratio of taxes paid to
net income may tell us little or nothing about the direction of the influ-
ence of taxation on resource allocation.
Thus, unless we are prepared to view corporate net income as analo-
gously representative of "ability to pay," tax comparisons expressed in
terms of the taxes to net income ratio are not likely to be either informa-
tive or useful as a policy guideline. And if one were to accept the
analogy it would be necessary, as in the case of interpersonal compari-
sons, to distinguish between taxes shifted forward to purchasers and
backward to labor on the one hand, and those that can be estimated to
impinge directly and immediately on net income distributed or
attributable to stockholders. The task, as we see it, is impossible. The
fact that such comparisons have been drawn frequently in the past and
no doubt will continue to be drawn in the future in itself adds nothing
to their usfulness.
If, nevertheless, one still finds that the net income base for tax
comparisons retains some appeal we suggest that the concept of
corporate net income be examined carefully. It is defined in the federal
Internal Revenue Code and in the income tax laws of the states as
well. It is also defined in terms of so-called "generally accepted
accounting principles."12 Unfortunately, however, these definitions
are not consonant with each other and the differences appear to have
vastly different consequences for different industries.
For all corporations ffling returns with positive net income for 1966,
as may be seen in Table 1, the net income after tax reported as per
the federal Internal Revenue Code was $47.5 billion, $6.7 billion or
14.2 percent less than the after-tax net income reported in the corpo-
rations' books of account. The corporations' accounts presumably
present management's best judgment as to the amount of income
earned in 1966. Differences between this judgment and income as
defined by the I.R.C. arise from such sources as differences in depre-
ciation, depletion, and bad debt allowances taken for "tax" and for
"book" purposes, and in the treatment of state-local bond interest.
As the data in the table clearly indicate, these differences vary widely,
even among such closely related industries as banking, insurance,
and credit agencies other than banks. The relevant data, purely by
way of* illustration, are also presented for petroleum refining and
chemicals. For our purposes the most startling fact is that the banks'
accounts show net income after taxes as being substantially more than
twice as large as the amount shown under I.R.C. rules. On the other
hand, for insurance carriers the difference is less than 5 percent, while
for the chemical industry it is less than 6 percent. Even in petroleum
refining, where percentage depletion and expensing of certain capital
outlays are so important for tax purposes, the corporations' books
record net income after taxes as being "only" twice as large as the
figure arrived at in tax returns.
The actual federal corporate income tax paid by banks and trust
companies for 1966 was $757.6 million.13 Pre-federal income tax net
income was $1,865.4 million according to I.R.C. rules, and $3,275.9
12 On which committees of the. American Institute of Accountants have frequently been observed to
disagree.
13 U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income, 1906, Corporation
Income Tax Returns (Washington, D.C.: Government Printing Office, 1969), P. 113.
PAGENO="0499"
479
TABLE 1.-NET INCOME AFTER TAX i PER INTERNAL REVENUE CODE AND PER BOOKS OF ACCOUNT, BY MAJOR
SELECTED INDUSTRY, 1966
[Dollars in millions[
Per Internal Per books Difference
Revenue Code of account (2)-(1)
Industry (1) (2) (percent)
Banks and trust companies $1, 107.8 $2, 518. 3 127.3
Credit agencies other than banks 753. 1 1, 180. 8 56. 8
Insurance carriers 1, 658.9 1,579.0 -4.8
Petroleum refining, etc 1,533.3 3,103.5 102.4
Chemicals and allied products 2, 151. 7 2, 277. 9 5.9
All industries 47, 465. 5 54, 190. 6 14. 2
I For returns reporting net income only.
Source: U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income, 1966, Corporation Income
Tax Returns(Washington, D.C.: U.S. Government Printing Office, 1969), table 7, pp. 112-113.
million according to the corporations' books.14 Thus where the statu-
tory rates of the federal corporate income tax were 22 per cent on the
first $25,000, 48 per cent on all income in excess of $25,000, and 25
per cent on long term capital gains, the average effective rate of federal
corporate income tax paid by banks and trust companies was either
40.7 or 23.1 per cent, depending on which measure of "net income"
the observer chooses to use.
Irrespective of the merits of present rules governing the definition
of corporate net income for federal and state tax purposes, the tax
law definitions are clearly unacceptable for purposes of tax "burden"
comparisons. In a recent study the staff of the U.S. Treasury Depart-
ment has offered, with particular reference to banks and other financial
institutions, ". . . a measure of their income which would encompass
what the organizations really earned after payments to depositors." `~
This measure, labeled "economic income," is defined as taxable income
plus tax-exempt interest, 85 per cent of domestic dividends received,
the excess of deductions for bad debts over actual bad debt losses,
and the excluded 50 per cent of long-term capital gains.'6
The Treasury estimated that in 1966 the economic income of all
commercial banks was $3,643 million, compared with $2,092 million
reported for federal income tax purposes.'7 Of the difference of $1,551
million, more than three-quarters was accounted for by exempt inter-
est, almost one-quarter by the excess of~ deductions for bad debts
over actual losses, and the remainder, amounting to less than $50
million, was nearly evenly divided between excluded dividends and
excluded long-term capital gains.'8
The usefulness of the concept of "economic income" for inter-
industry tax comparisons depends, in the first instance, on whether or
not it is possible to define it satisfactorily. We may agree that "excess"
14 These amounts are arrived at by adding corporate net income tax paid of $757.6 million to after-tax
income, as shown in columns (1) and (2) of Table 1.
15 U.S. Treasury Department, Tax Reform Stndies and Proposals (91st congress, 1st sess., committee
print; Joint publication, House Committee on Ways and Means and Senate Committee on Finance; Wash-
ington, D.C.: U.S. Government Printing Office, 1969), part 3, p. 459.
16 Ibid. The text (page 459) appears inadvertently to omit 50 percent of long-term gains, but this item
appears in Table 5, page 475, which lists tax exempt income, whereas "the net operating loss carryover"
does not appear in that Table although it is suggested as part of economic income in the text.
17 The difference between $2,092 million and tile $1,865 million shown above is due to the fact that the
Treasury figure is for all commercial banking corporations, whereas ours is for corporations showing not
income after tax only, and we were unable to separate banks, mutual savings banks, and trust companies.
18 Derived from U.S. Treasury Department, op. cit., Tables 1 and 5, pp. 470 and 475.
PAGENO="0500"
480
bad debt deductions and excluded interest, dividends, and capital
gains should be included in income for comparison purposes, but are
these the only adjustments that are desirable? Depreciation in excess of
actual reduction in value appears to be an obvious candidate for in-
clusion, as may various "fringe benefits" for executives, such as sub-
sidized dining rooms, "jumbo" insurance policies, and so forth. If
interindustry comparisons are to be drawn the importance of depre-
ciation is very much enlarged, and certainly depletion in excess of
cost depletion and expensing of drilling and development costs in
petroleum and other mineral operations must be cut back in order to
obtain a measure that fits the Treasury staff's concept of "economic
income."
It seems to us, however, that the objectives to be served by using
net income, no matter how defined," as the base for comparison are
elusive, to say the least. The ratio of state and local taxes to net income
tells us, at best, something about the level of taxes paid relative to the
return to equity capital. But a high ratio is compatible with either a
heavy or a light tax load on the firm or industry's capital. The high
ratio clearly signifies a heavy tax load if the rate of return oil equity is
high, but not if it is low. To illustrate, suppose that the ratio of taxes
paid to net income is .30 for corporations A and B, and suppose further
that the rate of return (before taxes) on net worth for A is 40 percent
and for B 10 percent. Taxes, therefore, amount to 12 percent of net
worth for A, but only 3 percent for B. Rather than falling with equal
weight on the two corporations, it would appear that they tread far
more lightly on corporation B than on A.
This suggests more than the obvious observation to the effect that
the tax "burden" ratio will vary widely and perhaps even capriciously
with our choice of denominator. In our judgment it casts further serious
doubt on the usefulness of net income, defined narrowly or even
broadly, as a base for tax comparisons.
Net Worth. This brings us to consideration of corporate net worth.
as a base for tax comparisons. The ratio of taxes paid to net worth is a
direct measure of the relative weight of taxes on equity capital and
their influence, therefore, on the attractiveness of investing funds in
one industry compared to others.
Data for net worth are readily available. Unfortunately, however,
they reflect wide differences in income and asset accounting practices,
generally do not distinguish between differences in amounts attribut-
able to price changes a.nd those due to "real" changes, and the use of
net worth as the denominator in tax ratios involves drawing a sharp
and arbitrary line between equity and borrowed capital. Thus the
initial appearance of attractiveness attaching for our purposes to net
worth seems to wane rapidly on examination. Although it seems to
offer a base that is capable of providing significant insights for policy
purposes, its defects of measurement, being cumulative over the years,
are not as readily corrected as in the case of net income.
Adding borrowed capital to the net worth base would appear to
avoid the distortion otherwise introduced by differences among firms
and industries in their capital structures. Some question remains,
19 For some alternative definitions see Heimberger, op. cit., pp. 46-49. Tn order to avoid allowing the cor-
poration's capital structure to influence its tax burden ratio Heimberger suggests, as a base for comparison,
net income plus interest and rents paid.
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481
however, as to how to define "borrowed capital." Should it include
all liabilities having maturities of more than one year? But why the
arbitrary line drawn at 12 months? Or should we include all liabilities,
current and long-term, interest bearing as well as non-interest bearing?
At the extreme, then, we approach very close to total liabilities plus
net worth as our base and this, of course, is total assets as well.
A base such as total assets, or total liabilities plus net worth, is not
intuitively attractive for tax comparison purposes. And yet any point
between what is ordinarily understood to be net worth and total assets
can be selected only arbitrarily, for the basis for rational choice is not
at all evident. This consideration suggests that net worth and modifica-
tions thereof are not likely to offer promising means of achieving tax
"burden" comparisons that are likely to command widespread atten-
tion and respect in tax policy debates.
Gross Receipts. Gross receipts from sales of goods and services as
a basis for tax comparisons has much appeal. In this context "receipts
from sales of services" are, of course, to be broadly construed so as to
include rental receipts and interest, dividends, and royalties. Some
problems would arise in connection with the desirability of distinguish-
ing between sales that represent "ordinary" business and those that
involve partial liquidation of the firm's capital. Alternatively one may
view the problem as one of distinguishing between the firm's in-
ventories or stock-in-trade and its "assets held for the production of
income." In some industries, and especially in commercial banking,
millions of dollars worth of services may be offered "free," as in the
case of maintenance of checking accounts, check clearing and collec-
tion, and other services provided to demand depositors. The con-
sideration involved is the availability to the banks of the non-interest
bearing deposits. Would the banks' gross receipts tend to be sub-
stantially understated and their tax ratios thereby overstated if such
"barter" transactions are ignored? The answer is undoubtedly "yes",
but it does not seem to us to provide a tellingly negative argument
against the usefulness of gross receipts in the present context.
Apart from these problems, the definition and accounting for gross
receipts or gross revenue is straightforward and requires no record
keeping beyond that which all corporations now maintain. Moreover,
it enables us to avoid the problems presented by some corporations
having negative bases, as will occur when the base used for compara-
tive purposes is net income.
In addition to simplicity and certainty, the use of the gross receipts
base offers the virtue of relating the amount of state and local taxes
paid to the value of output sold, thus telling us directly what the
relative size of the tax element is relative to the prices of the products
of various industries. This, one need hasten to add, is not to imply
anything about shifting or incidence of the taxes. It merely tells us that
for each dollar of goods or services sold the corporation or the industry
paid X cents in state and local taxes. Surely for purposes of judging
whether a given industry's taxes are high or low that information is
more directly useful than the ratio of taxes to net income which, at
best, can by itself only tell us something about the relative shares of
the firm's or the industry's receipts going to state and local govern-
ments on the one hand, and available for distribution to stockholders
or addition to equity capital on the other.
PAGENO="0502"
482
The major flaw associated with gross receipts in the present context
arises from the fact that corporations and industries differ widely in
the degree to which they are vertically integrated. For example, sup-
pose that industry A is fully integrated, so that it purchases nothing
from other industries, industry B's purchases from industry C equal
50 per cent of its gross receipts, and industry C purchases nothing
and sells all of its product to industry B. Now if for each of the three
industries the ratio of state and local taxes to gross receipts were, say,
3 per cent, it would be wrong to conclude that the ratios of taxes to
the value of the products of industries A and B were equal. In fact, of
course, the ratio for A is 3 per cent, but for B it is 3 per cent plus the
3 per cent of half the value of its product paid by industry C, or a
total of 4.5 per cent.
Value Added. Correction for this problem, long familiar in the dis-
cussion of turnover taxes, may be found in recourse to an alternative
base in the form of value added. Comparison among firms or industries
of state and local taxes paid as a percentage of value added will provide
a clear, meaningful set of numbers. Value added is the product of the
labor and capital of the firm or industry, and state-local taxes may be
said to be non-federal governments' share in this product, assuming
that it is valued at prices inclusive of all taxes.2° Then, if we assume
that we begin in a state of long-run equilibrium, it is unambiguously
clear that an increase in an industry's tax payments that raises its
tax ratio relative to that of other industries should be expected to give
rise to a shift away from it of labor and capital and a reduction in its
output.
Unlike the alternative bases for use in drawing tax comparisons,
value added permits the obtaining of measures of relative tax "bur-
dens" that are independent of such things as differences in rates of
capital turnover and differences in degrees of vertical integration
among firms or industries, and relative to net income it can be defined
in simple, unambiguous fashion.
It is possible to define value added in a variety of ways.2' In Pro-
fessor Shoup's terminology we may distinguish "Gross Product Value
Added" (GNP), "Income Type Value Added" (NNI), and "Con-
sumption Type Value Added" (C) *22 The first of these is defined as
GNP=C+I=W+P+D, where C is consumption, I is gross invest-
ment, W is wages, P is profits, and D is depreciation. We neglect
external trade and the government sector. For the individual firm, as
for the economy as a whole, gross value added is simply the sum of
factor payments, W and P, and depreciation.
Income Type Value Added is GNP less depreciation, or
NNI=C+I-D=W+P.
Finally C=W+P+D-I gives us the Consumption Type Value
Added.
20 If value added is net of taxes paid ourlanguage becomes less neat, but the same general conclusions hold.
21 For a discussion of the conceptual issues relating to the use of value added as a tax base see Carl S. Shoup,
Public Finance (Chicago: Aldine Publishing Company, 1069), pp. 250-255. The Office of Business Economics
of the U.S. Department of Commerce has long been concerned with the specific problems involved in
measuring value added by commercial banks. See National Income, 1954 Eddion, A Supplement to the Survey
of Cnrrent Business.(Washington, D.C.: U.S. Government Printing Office, 1054), pp. 46-47.
22 Public Finance, pp. 251-2.
PAGENO="0503"
483
Where, as in several European nations, the value added tax is
employed, the consumption type is favored. This form seems to
present fewest complexities for compliance and administration and
now enjoys the advantage of widespread familiarity. Since it exempts
saving, it enjoys the support of those who argue that it is wrong from
the standpoint of efficiency in resource allocation to tax income in-
clusive of saving and who fail to see redeeming equity gains in doing
so. Our objective here, however, is to evaluate the alternative forms
of value added in terms of their merits as a base for interfirm and
interindustry tax comparisons, and not necessarily as a tax base or
subject of taxation. Thus even if we grant the case for the C-type as
a tax base, for our purposes it suffers from the fact that allowing the
deduction of capital outlays (I) would be likely, particularly in the
case of smaller firms, to give rise to values for the denominator in
tax ratios that fluctuated from year to year to an extent far greater
than the fluctuation in resource using activities.
The Income Type Value Added would provide a base for comparison
purposes that would more closely reflect each period's level of activities
for the firm or industry, but it involves subjecting the base to all of the
uncertainties associated with the problems of estimating depreciation.
There is much to be said for an approach that avoids the kinds of
artibrary rules and decisions that govern tax depreciation or, where it
differs, depreciation as "booked" by the firm.
This brings us to the GNP version of value added, where
GNP=W+P+D.
The firm may view value added so defined either as the sum of its
wages, profits, and depreciation or, alternatively, as its net proceeds
from sales of goods and services, plus additions to stock in trade and
less purchases from other firms. The virtues of this version of value
added are that it seems to minimize difficult or arbitrary decisions,
and it does reflect broadly the resource using activities of the firm
or industry.
It does not appear to us that. the choice between W+P and
W+P+D is easily made. The former requires that we rely on arbi-
trary decisions which, under newly proposed Treasury rules, appear
to be departing further than ever from reflecting "true" depreciation.
But if we disallow the deduction or exclusion of depreciation we are
undoubtedly choosing an alternative, that discriminates against the
capital intensive as compared with the labor intensive firm. That is,
heavy capital users will be required to show a relatively high value for
the denominator in their tax ratio, thus appearing to be lightly taxed
compared with others.
Irrespective of our choice in this matter, however, other problems
must be solved. How are we to deal with interest.and rent paid? Our
choice, though admittedly it is subject to some argument, is to regard
interest and rent as being akin to wages and profits, representing
prices paid for factor inputs and therefore part of value added by the
paying firm. Our expanded version of value added is, then,
W+P+R+K,
where R is rent paid and K is interest paid, or W+P+R+K+D.
PAGENO="0504"
484
It has been argued that value added for commercial banks is difl~cult
to estimate because of the "free" services rendered to depositors. This
is, admittedly, the case for the Department of Commerce, concerned
with estimating that part of consumption that consists of such serv-
ices.23 For our purposes, however, using the additive approach sug-
gested, value added appears to be as unequivocal conceptually and
from an accounting standpoint for banks as it is for other industries,
even manufacturing, in which it has long been a familiar and widely
used concept.
It appears to us that value added most closely meets the criteria
stipulated at the outset of our discussion of the choice of a base or
bases for tax comparisons. The data are available from income tax
returns, although they are not now published in adequate detail. If
either of the favOred versions of value added is accepted there is not
likely to be large capricious or controllable variance in the size of the
base for any firm or industry. The value added base will provide for
commensurability between firms and industries engaged in widely
divergent kinds of activities. And, finally, with value added as the
denominator, tax "burden" ratios will clearly reflect unneutralities
*where and to the extent that they exist.
CONCLUSIONS
That there are conceptual problems associated with efforts to com-
pare tax burdens is clear enough, even in the case of interpersonal, as
opposed to intercorporate or interindustry, comparisons. It is equally
clear that these problems are unlikely to be soluble in a manner that
will be satisfactory to all interested parties.
Nevertheless, the first step inevitably involved in the effort to
produce informative tax comparisons must be agreement on the
objectives we seek in drawing these comparisons. We may, with the
skeptic, hold that the only appropriate base for comparison purposes
is that one which best makes the case for tax relief for the industry
in which we are interested. This is to suggest that those responsible
for minimizing the tax burdens of their specific industries or firms are
unlikely ever to agree that one base is clearly superior to another.
Tax minimization for a given industry or the effort to stave off tax
increases for that industry are not the kind of objectives that will
produce the agreement we have in mind. If, however, our comparative
tax measures are to be so designed as to inform us about the relative
weight of taxes among industries, the comparative measure that
appears to us to be far superior to alternatives examined is value
added. Given other objectives, however, it is conceivable that there
may also be a useful role for such bases for comparison as net income
or gross receipts, despite their quite obvious shortcomings.
Much as we should like to believe otherwise, it is probably still
true that ". . . the tax burden ratio method of testing for overtaxation
is not a simple and objective process from which impartial and in-
formed investigators are bound, or even likely, to emerge with a
single answer." 24
ANN ARBOR, MICH., March 3, 1971.
23 See Office of Business Economics, U.S. Department of Commerce, op. cit., p. 47.
24 Welch, Carrier Taxation, p. 394.
PAGENO="0505"
APPENDIX 10
Liability of National Banks for Generally Applicable State and
Local Taxes
CHARLES F. CONLON
Executive Director, Federation of Tax Administrators
Under the interim provisions of P.L. 91-156, in addition to presently
authorized taxes, any state or political subdivision may impose on
national banks a sales or use tax, a real estate tax or a tax on the
occupancy of real estate, documentary taxes, tangible personal
property taxes (except on cash or currency), and various license,
registration and transfer fees or taxes imposed with respect to the
ownership, use or transfer of tangible personal property. Provided the
usual jurisdictional requirements are met, these taxes may also be im-
posed on a national bank not having its principal place of business
within the taxing state. Existing taxes of the types mentioned become
effective as to national banks without further state legislative action so
long as (1) there is nothing in the existing law to bar its imposition, for
example, a specific statutory exemption in favor of national banks, and
(2) the state or political subdivision did not already impose another
tax or an increased rate of tax in lieu thereof.1
The interim provisions of the new law also permit the imposition of
any generally applicable state or local tax on a national bank except a
tax on intangible personal property. However, save for the taxes
enumerated above, the imposition of other generally applicable taxes
are subject to two limitations. First, a tax of this type may be imposed
only by affirmative legislative action subsequent to December 24,
1969, the effective date of P.L. 91-156. Second, such a tax may be
imposed only by the state or political subdivision in which the national
bank has its principal place of business.
If the permanent provisions of P.L. 9 1-156 become effective without
further amendment by Congress, a state and its political subdivisions
would be free to impose any type of tax or combinations of taxes on
national banks conducting business activities within the state or
political subdivision, whether or not the principal office of the bank
were located in that state. In short, the status of a national bank for
state and local tax purposes would be the same as any other business
corporation.
No special problems are foreseen in connection with time imposition
of the taxes unconditionally authorized in the interim provisions of
P.L. 91-156, such as sales and use taxes, taxes on tangible personal
property, documentary taxes, motor vehicle fees and taxes, and the
like. Accordingly, the comments which follow deal only with those
potential new dimensions to the taxation of national banks which
involve:
`For a brief review of developments preceSing the enactment of P.L. 91-156, see Conlon, Repeal of
National Bank Tax Immunity, National Tax Journal, June 1970, p. 223.
(485)
PAGENO="0506"
486
1. The "doing business" types of taxes from which, save for taxes
on or measured by net income, national banks have hitherto been
exempt under R.S. Sec. 5219;
2. Taxes on intangible property other than the share tax authorized
by R.S. Sec. 5219;
3. Exposure of a national bank to liability for "doing business"
types of taxes, including taxes on or measured by net income, in a state
other than the one in which its principal office is located; and
4. The division, apportionment or allocation of income, assets or
other taxable base attributable to business activities in two or more
states.
Presumably the states generally will continue their usual practice of
taxing state banks compr~rab1y to national banks in which case these
comments are equally applicable to the taxation of state banks. In any
event, constitutional principles would no doubt prohibit a state from
discriminating against a national bank by taxing state chartered
banks on more favorable terms than national banks.
"DOING BUSINESS" TYPES OF TAXES
Aside from taxes on or measured by net income, the major "doing
business" types of taxes authorized by P.L. 91-156 are (1) those on.
or measured by the value of issued or authorized capital stock or the
use of capital or property within the state, and (2) those, other than
retail sales taxes, imposed on or measured by gross receipts or gross
income from business activities within the state.
CAPITAL STOCK TAXES
Taxes on or measured by capital stock or the use of capital or
property in the state are imposed in 32 or so states. These taxes
variously referred to as corporation franchise taxes, corporation license
taxes but perhaps more frequently as capital stock taxes, are con-~
ceptually a type of property tax. However, from a legal standpoint,
they are usually imposed in the form of an excise and thus are not.
subject to the uniformity requirement which might be applicable to a
property tax.
The legal incidence of this type of tax differs somewhat from state
to state, but generally speaking, it is imposed on the privilege of doing
business as a corporation, on the privilege of exercising the corporate
franchise or of conducting business activities including the use or
ownership of property within the state, or as a license to do business.
in corporate form. The kinds of activities that constitute doing busi-
ness may be spelled out in some detail.
Capital stock-type franchise taxes may be classified in three groups
in respect to their application to domestic and foreign corporations.
In one group of states, a domestic corporation is taxed on the total
amount of its authorized or issued stock and a foreign corporation on
that proportion of its capital stock representing capital employed or
business done in the state. Alabama, Florida, Georgia, Kansas,
Nebraska, Washington, and West Virginia are in this category. In
the second group, domestic and foreign corporations alike are taxed
on that proportion of the capital employed or business done in the
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state. Arkansas, Illinois, Kentucky, Louisiana, Michigan, Mississippi,
Missouri, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Texas and Wyoming are
in this group. In a third group of states, the capital stock of a domestic
corporation is subject to a tax graduated by brackets while foreign
corporations pay a low flat fee. The states in this group are Colorado,
Maine, Maryland, Oregon, Rhode Island, Virginia, and the District
of Columbia. New Hampshire probably should be classed with this
group since a foreign corporation pays only an annu al "maintenance
fee."
Delaware taxes the capital stock of domestic corporations only and
there are alternative invested capital provisions in the general cor-
poration taxes measured by net income in Connecticut, New Jersey
and New York, and a property element in the general corporation
excise (income) tax in Massachusetts. Idaho taxes both domestic and
foreign corporations on the full amount of authorized capital stock.
For the most part, capital stock taxes are imposed at a mill per
dollar (or equivalent basis) or at bracket rates graduated according to
the value of the capital stock or the amount of capital employed in the
state. The use of minimum and maximum rates is not uncommon.
For example, in Florida, the minimum tax is $20 and the maximum
is $2,000.
The maximum is imposed in respect to $2,000,000 or more in capital
stock issued by a domestic corporation or a similar amount of capital
employed in the state by a foreign corporation. Examples of rates in
other states are: Alabama, $2.50 per $1,000 of capital employed;
Michigan, $5 per $1,000; Ohio, classified rates ranging up to $5 per
$1,000, and Pennsylvania, $7 per $1,000.
The bases of capital stock or franchise taxes also vary considerably.
In some states, the value of a corporation's caj)ital stock is the stated
value of the authorized or issued stock or the stated value of the stock
1)lus paid in surplus. In others, the value of the capital stock for cap-
ital stock or franchise tax purposes may include the stated value,
undivided surplus, reserves and borrowed capital.
In most states, capital stock and franchise taxes are generally
applicable to business corporations although there are exceptions, for
example, an insurance company which pays a gross premium tax in
lieu of other taxes except those on real estate. Banks are also expressly
exempt from capital stock and franchise taxes of this kind in some
states.
As to a corporation conducting all its busmess operations in a
single state, the capital stock or franchise tax involves no unusual
problems of compliance or administration and the amount of tax paid
will depend on the combination of rate and base in effect in the state.
As indicated above, the tax paid might range from a nominal amount
to the equivalent of a substantial property tax on the assets repre-
sented by the share capital.
Where a corporation has some business activity in two or more
states imposing capital stock or franchise taxes or uses property in
two or more such states in the conduct of its business, it probably
will be subject to a capital stock or franchise tax in those states. The
jurisdictional rules which determine whether a corporation is taxable
in two or more states and the methods used to divide the tax base
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among the states in which the corporation is "doing business" are
discussed below.
GROSS RECEIPTS TAXES
Another type of doing business tax is one imposed on or measured by
the gross income or gross receipts of a business conducted in the state.
It is difficult to categorize these gross receipts taxes neatly, but in
general, as the term is used here, it means any tax on or measured by
the gross receipts of a business except a tax which is, for all practical
purposes, a retail sales tax or a use tax complementary thereto. A
gross receipts tax of the kind under discussion may be imposed on
business generally or limited to a particular function or combination of
functions, for example, manufacturing, wholesaling, retailing, process-
ing, service industries, and the like. The tax may be imposed independ-
ently; or as one schedule of a series of related excises which includes a
conventional retail sales tax; or as an adjunct to or extension of a con-
ventional retail sales tax.
The names of these taxes vary from state to state. They may be
called license or occupation taxes, business and occupation taxes,
gross income taxes, or gross receipts taxes.
The legal incidence of these taxes also varies; they may be imposed
with respect to the privilege of doing business or conducting business
activities, or as a license tax or simply as an excise on receipts from
sales or on the value of specified activities.
Most of the gross receipts taxes employ a classified rate structure
with rates varying according to the specific type of business (mining,
contracting, printing, etc.) or the different stages in the manufacturing
and distributive functions (wholesaling, retailing, manufacturing,
etc.). Public utilities aside, tax rates are mostly in the range of one-half
of one percent to two percent of gross receipts with a few lower and
some higher.
Gross receipts taxes are imposed in a limited number of states and,
except in the States of Indiana and Washington, banks are either
exempt from a general gross receipts tax or not included among the
types of businesses subject to selective gross receipts ttxes.
The major gross receipts taxes in effect in the several states may be
summarized as follows:
Alaslca.-The gross receipts privilege tax is a generally applicable
tax imposed for the privilege of engaging in business in Alaska. Ex-
emptions are numerous. The composite tax rate consists of a fiat fee
plus 0.5% of gross receipts in excess of $20,000 and 0.25% above
$100,000. Banks are subject to a 2% net income (license) tax in lieu of
the gross receipts privilege tax.
Arizona.-The transaction privilege tax in Arizona consists essen-
tially of two parts; one, a 3% retail sales and use tax (sale of tangible
personal property at retail); and the other, a tax at classified rates, 1.5
to 2.0%, on the gross receipts from specific business activities-
utility services, publishing, printing, advertising, contracting, timber-
ing, mining, oil and gas production, meat packing and the wholesale
feed business. (There are also several other categories of taxable re-
ceipts, e.g., from leasing or renting tangible personal property which,
although separately classified, are basically part of the retail sales tax
base and taxed at the same rate as retail sales.)
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The transaction privilege tax does not apply to sales of intangible
property; nor with the exceptions noted above to any professional or
personal service occupations or businesses which involve the sale or
transfer of tangible personal property only as inconsequential elements
thereof. L. 1970, Ch. 170 provides that all banks including national
banks and investment companies and savings and loan associations are
subject to all taxes imposed generally on a nondiscriminatory basis to
the same extent as such taxes are imposed on other corporations.
Delaware.-The gross receipts tax is a low rate tax (flat fee plus
rates of from 0.1% to 0.8%) and is imposed only on contracting,
manufacturing, wholesaling, and retailing businesses.
Hawaii.-The general excise (gross income) tax is imposed on the
gross income of businesses and professional activities. The rates range
from 0.5% on manufacturing to 4% on receipts from the sale of
tangible personal property and receipts from service businesses and
professions. Banks subject to the income tax are expressly exempt
from the general excise (R. S. Sec. 237-23). Section 241-2(b) of the
bank tax act provides that nothing in it shall exclude the application
of other taxes imposed by the state or its political subdivisions on
national banks when such taxes may be imposed in addition to those
authorized by R. S. Sec. 5210 or other similar laws.
Jndiana.-The gross income tax is a generally applicable levy on
businesses. The rates range from 0.5% on. wholesale sales and sales of
retail merchants to 2.0% on income from most service businesses and
professions. Individuals subject to the net income tax are exempt
from the gross income tax. Corporations are subject to both the gross
income and net income taxes but pay only the higher of the two.
For banks and other financial institutions, the base of the tax is
"gross earnings." The tax rate of 2.0% applies to such "gross earnings"
of banks as commissions, interest, carrying charges, dividends, fees,
rentals, etc. The gross income tax does not apply to national banks
because, according to an opinion of the attorney general, it is in con-
sistent with B. S. Sec. 5219. (1936 OAG 132; see also Inst. 4-145.)
Banks, including national banks, are expressly exempted from the
corporation net income tax. (Adjusted Gross Income Tax Act, Sec.
205 as amended by L. 1965, Ch. 233.)
Mississippi.-In addition to sales of tangible personal property at
retail (rate 5.0%), the Mississippi sales tax applies also to gross
receipts from wholesaling (0.125%), from mining and the production
of some natural resource products (5.0%), public utilities (5.0%),
contracting (2.5%), and a variety of service businesses (5.0%). The
tax does not apply to banking and finance functions.
New Mexico.-The Gross Receipts and Compensation Tax Act is a
genera] levy on gross receipts from the sale or lease of property in
New Mexico or from the performance of services in New Mexico.'
Because it does not apply to wages and salaries and by `virtue of a
series of interrelated exemptions and deductions, this tax is in effect
a tax on receipts from the snie of tangible personal property at retail
and on~ receipts from a variety of business and professional services.
The tax rate is 4.0%.
The receipts of banks and other financial corporations from selling
or leasing property or services in the course of their regular banking
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or financial corporation functions are exempt from the tax. (Sec.
72-16A--14. 16)
The Bank and Financial Corporation Tax Act (income tax), L. 1969,
Ch. 151, provides that the income tax is in lieu of all other taxes
imposed by the state on banks and financial corporations except real
estate taxes and taxes arising from activities not in the course of the
regular banking and financial corporation functions (Sec. 72-15B-6).
Washimgton.-The business and occupation tax is one of a series of
excises which includes a tax on the sale of tangible personal property
at retail, plus some services such as contracting (rate 4.5%) and on
public utilities (rates 0.6% to 3.6%). The B & 0 tax applies to gross
receipts from businesses and professions at classified rates ranging
from 0.01% to 1.0%. The rate on receipts from manufacturing, whole-
saling and retailin.g is 0.44%. The rate on business activities not
otherwise classified and on professional and service activities (not
taxed under the retail sales tax) is 1.0%. L. 1970, Ch. 101 repealed,
effective March 1, 1970, the exemption for national banks and trust
companies under the ~B & 0 tax. Banks are now taxable at the rate
of 1.0% in the service category. In general, as applied to banks, the
base of the tax includes interest, commissions, dividends, fees and
carrying charges, rentals from safe deposit boxes, and charges for
bookkeeping or data processing. Banks and other financial businesses
may deduct the following items in arriving at taxable receipts:
dividends received by a parent from its subsidiary, interest received
from obligations of the State of Washington, its subdivisions, *and
municipal corporations organized under Washington law. Gross pro-
ceeds from sales or rentals of real estate are not regarded as items
of gross income as defined in the statute.
West Virginia.-The business and occupation tax and its relation to
other excises is quite similar to the Washington B & 0 tax except that
in West Virginia some public utility services are subject to the B & 0
tax while others are included in the measure of the utilities gross
receipts tax. The B & 0 tax applies to business generally at classified
rates ranging from 0.25% (wholesaling), 0.5% (retailing), 0.8%
(manufacturing) up to 5.2% (sales of electricity for domestic purposes).
Service businesses or activities not otherwise classified are taxed at
1.05% of gross receipts. Banks are exempt from the tax except with
respect to receipts from rentals of real property other than in the
banking house.1'~ (Code, Ch. 11, Art. 13, Sec. 3).
Substantially similar taxes are imposed by local governments in
some states.
From the administrative and compliance standpoints, these gross
receipts taxes do not present any particularly difficult problems. Most
of them have been in force for a number of years and questions relating
to the classification of a specific type of income or a specific business
activity have been mostly resolved. Questions regarding the taxability
of receipts derived from business activities in two or more states
occasionally arise, but the principles governing here are also fairly
Well settled. Presumably these settled administrative and judicial
determinations would be equally applicable if receipts from banking
la [Editorial note: Effective April 1, 1971, West Virginia extended the business and occupation tax to
banking and financial businesses at a rate of 1.15 per cent of gross income. Laws 1971, H.B. 1078.]
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were subject to gross receipts taxes. However, as noted above, with
the exception of Indiana (state banks) and the recently enacted
legislation in Washington, banks have either been exempted from
gross receipts taxes or not included in the selective categories of
business subject to this type of tax.
Jurisdictional and division of receipts problems in the gross receipts
tax field are discussed in more detail below.
INTANGIBLES
The treatment of intangibles (including cash and currency) for
state and local property tax purposes falls into four groups, as follows:
1. Intangibles are exempt from property taxes.
2. Intangibles are classified separately and taxed at an effective
rate that is less than the effective rate applied to other types of
property. This classification may involve either assessment at a lower
percentage of value than other property or a low tax rate. Also, the
effective tax rate may vary depending on the kind of intangible.
3. Intangibles are taxed at a percentage of yield in lieu of property
tax. In those states, non-income yielding intangibles are usually taxed
at a low effective rate, for example, 1/10th of one percent of value.
4. Intangibles are treated the same as any other property and taxed
at prevailing property tax rates.2
In general, where intangibles are classified separately or taxed at
a percentage of yield, the effective property tax or property tax
equivalent is usually well below $3.00 per $1,000 of full value of the
intangible (less than 0.3% of full value).
In states where intangibles are subject to general property tax
rates, the nominal tax rates on intangible property might be sub-
stantial-$50 or more per $1,000 (5% of full value)-and very high
even after adjustment to the prevailing assessment level. While there
is no evidence to indicate that intangible property is in fact broadly
and effectively subjected to nominal general property tax rates in any
state, nevertheless in these states the owners of intangible property
are legally subject to taxation on this basis.
One reason that is generally accepted as having an important
bearing on the administration of general property taxes on intangibles
is the implicit recognition that the combination of the federal income
tax on interest and dividends and the nominal general property tax
rate amounts to more than the yield from the intangible. Another
reason is the difficulty of enforcing the general property tax on
intangibles against a large number of individual owners, many of
whom own a relatively modest amount of such property. Considered
strictly from an administrative standpoint, however, it would be no
great problem, even for local officials, to enforce a general property
tax on intangibles against a very small number of owners, say, banks
and other financial institutions, with relatively large amounts of
intangible property.
The repeal of the present restrictions in R. S. 5219, therefore,
raises two practical problems for national banks in those states where
2 The basic provisions of state and local intangible tax laws currently in force have been digested and
compiled in another study paper in the bank tax project and are not repeated here. See appendix 7, section
6(c), including Table 4 therein at pp. 448-451, above.
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intangibles are taxable on the same basis as property generally. The
first is the possibility that national banks might be subjected to a
substantial amount of tax on their intangibles. The second is that
the administration of such a tax might, in fact, discriminate against
national banks and other financial institutions even though the tax
law on its face applies to every owner of intangibles.
Intangibles taxes imposed at general or special tax rates are prop-
erty taxes and cannot be imposed on Federal securities. Where a yield
tax is imposed in lieu of a property tax, the income from Federal
securities is likewise exempt. The provisions of 31 U.S.C. § 742 do not
itpply to this type of in-lieu tax.
Bank financing may result in a proliferation of intangibles related
to the same basic security, for example, where a group of separate
loans are combined in one package and participating interests in the
package are sold to other banks or investors. The net effect here is
that a new layer of intangible property has been created. Analogous
problems arise where the parent corporation and a subsidiary are
both taxable in the same jurisdiction although special rules may be
provided in this situation. See, for example, Florida Statutes, Sec.
199.102 as amended L. 1970, Ch. 70-185.
rfhe possibility that the same intangible may be taxed in more than
one state is discussed below in connection with jurisdiction.
LIABILITY FOR TAXES IN TWO OR MORE STATES
On the assumption that the provisions of B. S. Sec. 5219, effective
January 1, 1972, dispose of any question that might otherwise be
raised in respect to the implied constitutional immunity of a national
bank, as a federal instrumentality, from state and local taxes, it seems
clear that with the repeal of the present restrictions in the statute, a
national bank will be subject to tax liability in a state other than its
headquarters state on the basis of the same rules applicable to corpo-
rations generally.
As noted above, the legal incidence of "doing business" types of
taxes on corporations varies both by state and by type of tax. How-
ever, the requirements of practically all these tax laws will be met and.
constitutional due process tests satisfied if the corporation maintains
an office or other place of business in the state, or if in the conduct of
its business it uses tangible property which has a situs in that state.
Even if the corporation has no office or tangible property in the
state, constitutional due process requirements are met if the corpora-
tion has employees or agents permanently located in the state. These
requirements would undoubtedly be satisfied also if the corporation's
nonresident employees or agents regularly negotiate and make binding
contracts within a state, assuming, of course, that there is a tie be-
tween some incident of the contract and the place where the contract
is negotiated and made, for example, that the borrower or the prop-
erty which secures the loan is located in that state, or the contract is
to be performed there.3
3 The case law has been extensively analyzed in studies commissioned by the Board and there Is no need
to go over the same ground here. For purposes of this discussion, it is sufficient to state generally the juris-
diction and apportionment rules that apply in the circumstances outlined. (See appendixes 11 and 12.)
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In a situation differing from the foregoing oniy in that the contrac-
tual negotiations are subject to formal acceptance or approval at the
corporation's office in another state, the same rule would probably
apply even though at first glance it might seem that the jurisdictional
basis or nexus is not quite as substantial as it is in the cases where
binding contracts are made within the state. However, to decide
otherwise as a matter of general principle would mean that the parties
could render substantial business activities meaningless from a juris-
dictional standpoint by providing for the formality of approval or
acceptance outside the state. Concededly, questions of fact could
arise in these situations.
Transient or occasional activities by nonresident employees and
agents on behalf of a corporation which does not maintain a place of
business, permanent employees nor property within a state, might or
,might not, by themselves, meet constitutional due process require-
ments. For example, good will calls, missionary activities, "showing
the flag," institutional visits and similar activities by themselves
probably would not be sufficient for that purpose nor is it likely that
there would be any attempt to assert jurisdiction under these cir-
cumstances.
It has been suggested that if the permanent provisions of P. L.
91-156 become effective without amendment, a bank will be subject at
least to an income tax in any state where it has a loan customer. This
is extremely doubtful. By itself, the residence of the borrower does
not appear to have any bearing on state tax jurisdiction and certainly
this would be true of the location where the borrower might spend the
proceeds of a loan. In any event, so far as can be determined, state
income tax jurisdiction is not, in fact, asserted solely on the basis that
a resident of the state pays interest to a lender in another state, nor
does it appear that the situation would be any different, at least in
many states, if the lender filed `a financing statement in the state to
give notice of his security interest or recorded a mortgage to secure
his loan.4
From a jurisdictional standpoint, this situation is not analogous
to the presence of income producing tangible property within a state
because intangible property generally is attributed to the domicile or
business domicile of the owner. Neither is this a case where an intangible
acquires a business situs as that term is commonly understood.
There are a variety of other transactions of a contractual nature
which, by themselves, do not appear to subject a bank to the tax
jurisdiction of another state. Participation in overline loans, the
purchase of accounts receivable and the making of reserve loans to
correspondent banks are examples of such transactions. By themselves,
such transactions would not appear to constitute the doing of business
in the debtor's state any more, than transactions by mail with savings
depositors by themselves would constitute doing business in the state
where the depositor resides.
The application of these general jurisdictional rules would probably
dispose of the potential out-of-state tax problems of many banks or
at least limit them to adjoining states.
~ See Supplementary note, below, p. 503.
79-421 0 - 72 - 33
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For the money market banks and other very large banks whose
business transactions involve a number of states, the analogy to the
jurisdictional rules applied in the case of general business corporation
is not too helpful. Two maj or points of difference are that banks
seldom maintain offices or other places of business outside the home
state nor do they maintain inventories of tangible personal property at
various locations. Thus, two factors that constitute fairly certain and
easily identifiable jurisdictional criteria in the case of a general business
corporation are not characteristic of the operations even of the money
market banks.
Another important and complicating point is that these large banks
do not limit their out-of-state relationships to some single activity
which, by itself, would not be jurisdictionally significant, for example,
receiving deposits by mail. To the contrary, their out-of-state activ-
ities and transactions considered in the aggregate are substantial
even though not nearly so visible as the general business corporation
with its office or warehouse. rflleir field representatives regularly visit
customers and potential customers even though they are not perma-
nently located in a single state; their correspondent banks constitute
a permanent point of contact both for originating business and for
servicing loans; they have loan customers in the state from whom
they receive interest and both time and demand deposits from busi-
nesses and individuals within the state.
From the constitutional standpoint,, there is little doubt that
operations of this type meet due process requirements even though
the bank does not maintain a permanent 1)]ace of business in the state.
Accordingly, in the case of a bank, it seems appropriate to conclude
that if its officers or other representatives regularly solicit the use of
its facilities and the bank does make loans to or conducts other busi-
ness activities with individuals and corporations located in that state,
then the bank is subject to the tax jurisdiction of that state. For the
money market banks, this would unquestionably involve an exposure
of the entire net income of the bank to taxation in a number of states.
For the small bank, this jurisdictional statement might initially
pose some borderline questions, for example, whether an occasional
visit, or regular but infrequent visits, to a customer in another state
constitutes the regular solicitation of business in that state. Questions
involving factual situations of this kind and the interpretation of
state tax laws as applied to these situations have to be expected
initially simply because national banks, and perhaps most state-
chartered banks, have not hitherto been subject to any of the doing
business types of taxes in a state other than the headquarters state.
However, as noted previously, a sm all bank or a bank located near
the border of a state might likely be concerned with jurisdictional
problems only in one state other than its home state.
Tangible property.-If a bank leases out business equipment or
other tangible property within a state, it probably is subject to the
general tax jurisdiction of the state although it is not certain that
jurisdiction would be asserted universally on that basis. If jurisdiction
is asserted and the leasing of tangible property is really one element
in a generally integrated banking business, then the bank's operating
income will be subject to taxation (in the case of an income tax) on an
PAGENO="0515"
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apportioned basis. If, on the other hand, the leasing business is con-
ducted independently through a subsidiary or a division of the bank
so that for all practical purposes it is separately operated and managed,
the income of the leasing business might be regarded as the unit
subject to apportionment rather than the operating income of the
bank. This type of situation is not unusual and it is well recognized
that one corporation may conduct two or more completely unrelated
businesses, each of which is treated as a separate business for purposes
of jurisdiction and apportionment. The determination here depends
on a question of fac1~. Partnership operations and joint ventures by
themselves would ordinarily involve similarly restricted jurisdiction.
Subsidiaries.-Where interdependent and complementary functions
of what is essentially a single integrated business enterprise are divided
among a number of subsidiaries, it is quite likely that the resulting
fragmentation of income will not be recognized for purposes of juris-
diction and apportionment. A not uncommon example of such frag-
mentation is the operation of what is really a single, integrated
manufacturing and selling business through a series of subsidiaries,
one of which purchases raw materials, another which processes and
manufactures them into a product for the market, a third which
provides the sales organization, and a fourth which finances the sale
of these products.
It would, of course, be advantageous to the taxpayer if each of the
subsidiaries were treated as an independent business and taxable in a
state only on some portion, say, of the sales "profit" or the purchasing
activity "profit." But it would also be highly unrealistic to disregard
the fact that the income of this enterprise is the product of a number
of interrelated and interdependent activities. Accordingly, in order to
m ake a fair and equitable apportionment of the income of the enter-
prise among the states in which it conducts business, the tax adminis-
trator might be expected to require that the operations of the parent
and the subsidiaries be combined in a single return and the apportion-
ment made on the basis of the combined net income of the whole
enterprise.
Since banks have not been subject to tax on their out-of-state
activities, there is little in the way of tax precedents relating spe-
cifically to the interdependence of the various functions and operations
carried on by them. Certainly no one would suggest that the loan and
deposit functions could be considered separately from each other or
from the operations of the bank as a whole. At the other extreme, no
doubt a strong case could be made for the separate treatment of a
bank subsidiary carrying on an essentially independent business, just
as in the instance of a separate business conducted by a division of a
single corporation. In between, there are undoubtedly some situations
that would have to be decided on a case by case basis, depending on
the facts and circumstances and the general principles already out-
lined. These same principles would likewise apply to activities in-
volving the subsidiaries of one-bank holding companies. Edge Act
subsidiaries are discussed below in connection with foreign income.
At this point, about all that can be said is that there is no indication
that the banking industry would encounter any unique or insoluble
problems in this area.
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Foreign operations.-Comments on the treatment of income from
foreign branches or from subsidiaries of banks operating in foreign
countries must be limited due to the lack of experience. In a few
instances, the state policy has been to exclude the foreign income of
a state-chartered bank from the state tax base. In these cases, the
amount of foreign income to be excluded is established on a direct
accounting basis.
Federal law permits national banks to maintain foreign branches
but it also stipulates that the profit and loss of foreign branches
must be established on an independent accounting basis for each
branch and separately from the home office. (12 U.S.C. § 604.)
If a state uses federal taxable income as the starting point for the
determination (with modifications) of taxable income for state pur-
poses, and income from foreign branches is included in the federal
figure, there would appear to be no constitutional objection to the
inclusion of such income for state tax purposes. Presumably, in such
a case, the apportionment formula would include all the factor data
relating to the foreign branches.
Federal law also authorizes the organization of corporations for
the purpose of engaging in international or foreign financial operations
and a national bank may be a shareholder in, or may in fact control,
such a corporation. (Edge Act, 12 U.S.C. § 611-631.)
The activities of an international financial corporation of this
kind are limited by the statute which expressly provides that it shall
not carry on any part of its business in the United States except such
as in the judgment of the Board of Governors of the Federal Reserve
System shall be incidental to its international or foreign business.
An Edge Act corporation may be taxed by the state within which
its home office is located in the same manner and to the same extent
as other corporations organized under the laws of that state which
are transacting a similar character of business. Shares of stock in the
corporation are subject to tax as the personal property of the owners
or holders of the stock in the same manner as shares of stock in similar
state corporations are taxed. (12 U.S.C. § 620.)
Although an Edge Act corporation may be taxed only by the state
where its home office is located, in fact, it is probably taxed there only
in respect to its incidental income earned in the United States. Since
the corporation is taxable in a foreign country, it would come withm
the category of businesses taxable in two or more jurisdictions and
hence entitled to apportion its income.
A final comment on foreign income involves the question whether
the operations of an Edge Act corporation might be considered to be
an integral part of the business of an out-of-state national bank with
which it is affiliated. The point here is whether the state where the
Edge Act corporation is headquartered may require a combined tax
return reflecting the operations of both the out-of-state bank and the
international corporation so as to bring some part of the bank's income
within the reach of the state where the Edge Act corporation is taxable.
That a combined return could be required in those circumstances is
doubtful in view of the fact that the federal statute prohibits the Edge
Act corporation from carrying on any business in the United States
except that which is incidental to its foreign business. In the face of
PAGENO="0517"
497
this prohibition, it would be difficult to sustain the position that the
Edge Act corporation's operations were an interdependent and inter-
related part of an integrated banking business carried on in the
United States.
Intangibles.-The risk of double taxation of the same intangibles due
to conflicting jurisdictional concepts seems minimal. The standard
rule that intangibles are attributed for property tax purposes to the
domicile of the owner (the commercial domicile or principal place of
business of a corporation) is generally recognized. The state of incor-
poration could assert jurisdiction to tax intangibles owned by a cor-
poration, but apparently none of them do so. It was the practice some
years ago in a few states to impose an inheritance tax on the transfer
of corporate stock owned by nonresident decedents. The states have
since adopted the policy, believed to be universal, of exempting in-
tangibles owned by nonresidents from inheritance or estate taxes.
The state where the debtor resides does not, at least ordinarily,
assert jurisdiction to tax the nonresident owner on the intangibles
representing the debt. Florida is an exception as to one class only of
intangible property. The law there provides that intangibles arising
out of the sale, lease, or servicing of tangible personal property in the
state are taxable in Florida.
Under the business situs concept, intangible property arising out of
or principally connected with a business conducted in the state is
deemed to have a situs there rather than in the state where the owner
of the property is domiciled. However, this concept may be more
widely used as the standard for assigning the value of intangibles or
the income from intangibles in the numerator of an apportionment fac-
tor than as a jurisdictional rule for the imposition of an ad valorem
property tax on intangibles. One example of such use is an apportion-
ment formula for capital stock purposes where business receipts is one
of the factors; another is in connection with the receipts factor of a
corporation income tax where the taxpayer's incon'ie includes interest
or dividends.
To be certain about the extent to which the business situs concept
is used as a jurisdictional rule for the ad valorem taxation of intangible
property and the possibility of instances of double taxation where the
application of that concept conflicts with the domiciliary basis of taxa-
tion, a careful check of all the state intangible laws would be required.
There are, however, two practical considerations which indicate that
instances of double taxation of intangibles are minimal, if any do
exist. First, the states which use the business situs concept recognize
its application in respect to property owned by its domiciliaries and
used in similar circumstances in other states. See, for example, Ohio, R.
C., Section 5709.03. Second, multistate general business corporations
have complained of conflicts in state laws and practices in several
respects, but none appear to be concerned with the double taxation of
intangibles. Accordingly, subject to a state by state check definitely
indicating the occurrence of double tax situations, it seems reasonable
to assume that, considered solely from the standpoint of the risk of
double taxation of the same intangible property, the elimination of all
restrictions on the taxation of national banks by state and local
government does not appear to pose any serious problem.
PAGENO="0518"
498
Capital stock and gross receipts taxes.-Generally speaking, the
jurisdictional concepts already discussed are applicable for capital
stock and gross receipts tax purposes. Under some of the older cases,
the "doing business" test for capital stock purposes would not he met
in the absence of some kind of business location in the state. It is
doubtful that this would be required today. At any rate, this would
seem to be primarily a question of state law.
As noted previously, banks, including state banks, are usually
expressly exempted from capital stock or franchise taxes measured by
capital stock or assets employed in business in the state and that in
most of the states imposing general or broadly applicable gross receipts
taxes, banks are also exempt. These exemptions, of course, may be
nothing more than an express recognition of the fact that under R. S.
Sec. 5219 such a tax could not be imposed on a national bank. However,
in respect to gross receipts taxes particularly, the bank exemption
might well reflect the policy that taxes of this type are better suited to
mercantile and manufacturing activities or activities generally in-
volving the production and sale of tangible personal property than to
the activities of financial corporations and banks which primarily
involve services and activities connected with intangible personal
property. It might be pointed out also that. in some states, the conduct
of specified activities by a bank or investment corporation organized
in another state does not constitute "doing business" in the state.
These activities include making investments and loans of money and
purchase of notes secured by mortgages on real property located in
the state, etc.5
Interstate cominerce.-For all practical purposes, it may be assumed
that a corporation whose business activities with in a state are wholly
in interstate commerce is not by that fact alone protec.ted from state
taxation. While it has been held that a tax imposed solely in respect
to the privilege of doing business may not be imposed on a corporation
whose only business activities in a state are in interstate commerce,
it seems clear that this technical distinction may be avoided simply
by specifying some additional incident to which the tax might be
tied, for example, the ownership or use of property or capital within
the state in the conduct of a business.
DIVISION OF INCOME
In all but two or three states, the income of a general business
corporation derived from activities in two or more states is appor-
tioned among them by the use of a three factor formula. There is sub-
stantial uniformity in the apportionment method in the 25 or so states
where the Uniform Division of Income for Tax Purposes Act promul-
gated by the National Conference of Commissioners on Uniform
State Laws is in effect and the practice does not differ greatl~ in the
additional dozen or so states which also use a three factor formula.
UDITPA also provides in certain circumstances for the direct alloca-
tion of specific types of income.
The Uniform Act is by its terms inapplicable to banks and financial
business presumably because the drafters thought that modifications
See Supplementary note, below, p. 503.
PAGENO="0519"
499
in both the property factor (real and tangible personal property in-
cluding inventories) and the receipts factor (which emphasizes re-
ceipts from the sale of tangible personal property) would be desirable
for banks and other financial institutions. Public service enterprises
are also excluded from UDITPA.
Hitherto, the lack of a standard formula for apportioning bank
income among the states has not constituted an urgent problem
because national banks are not subject to income taxes outside the
home state. Consequently, state experience in dealing with the division
of financial income among the states has been limited to state banks
and nonbank financial companies.
In view of these circumstances, there are, as might be expected,
considerable differences among the formulas presently in use among
the states to apportion bank and finance company income.
A recent review by the Federation of Tax Administrators indicates
that in 14 states bank income is not apportioned at present. Six
States use a direct accounting approach; nine use the standard three
factor formula (property, payroll, receipts) ; four use a modified version
of the three factor formula with loans in the property factor; eight
use receipts as the single apportionment factor; and one state uses a
combination receipts and payroll factor.
There are further differences among the states in the rules for
determining the composition of a factor, for example, the receipts
factor and also the property factor where loans have been included.
Of the four states which include loans in the property factor, one
includes loans in the numerator of the state where the borrower is
located; one includes them on the basis of the location of the office
from which the loan is serviced and two on the basis of the location
of the office from which the loan was negotiated. Perhaps in practice
the service office and the negotiating office are the same, in which
case the differences in these rules of attribution are less than appear
at first glance.
A similar question arises in respect to the receipts factor in con-
nection with the inclusion of interest in the numerator of the fraction.
In four states, interest is attributed to a state on the basis of the
location of the property securing the debt, and in three others, on
the basis of the location of the borrower. In many cases these two
locations may be the same.
In six states, interest is attributed to a state on the basis of the
location of the office where the loan was negotiated, in another ac-
cording to the location of the office from which the loan is managed
or serviced, and in two others according to the location of the office
at which the interest is received.
Prospects for standardization.-The N~tional Conference of Com-
missioners on Uniform State Laws has indicated that it would supple-
ment UIDITPA with modified formulas appropriate for application
to banks, financial institutions and public service enterprises, but
up to the present time, no specific proposals have been presented
for discussion
A bill for an interstate taxation act has passed the House in the
90th and 91st Congress, but it, too, excludes banks and public service
enterprises from its coverage. Moreover, this bill makes no provision
PAGENO="0520"
500
for a standard apportionment or division of income formula. It does
prescribe a formula which, in effect, constitutes a ceiling on the
amount of income which may be apportioned to a state. Tinder this
approach, a state could use any formula it desired as long as it did
not apportion more income to the state than the ceiling amount fixed
by the formula in the bill.
There is no doubt that the most effective way to establish a uniform
apportionment formula on a natiOnwide basis is by Congressional
action. However, Congress has not acted to prescribe such a formula
for mercantile and manufacturing corporations which constitute a
considerably larger number of business entities than the number of
banks which would be substantially affected by the permanent pro-
visions of P.L. 91-156 as presently enacted. Moreover, as noted
above, in the one bill that has passed the House, the uniform standard
formula approach has been rejected in favor of the ceiling approach.
Under the circumstances, the chances for state action looking
toward uniformity in the apportionment of bank income may be
more promising than any other. While it is probably unrealistic to
expect absolute uniformity as the result of state action, substantial
uniformity in the reasonably near future might be achieved. The
prosPects may be appraised about as follows.
While as indicated above, there are several states which use a
single factor (receipts) to apportion bank income, most of the states
use a three factor formula, either UDITPA or a modification of
UDITPA. In addition, several states where bank income has not
been apportioned previously have indicated that a three factor formula
probably would be used for that purpose. Finally, all the states now
using a single receipts factor for bank income employ UDITPA or a
reasonably similar three factor formula to apportion the income of
general business corporations.
All this suggests that the basic structure of UDITPA with modifica-
tions to deal specifically with banking and financial companies prob-
ably would find a high degree of acceptance among the states. It is
likely also that in a number of states these modifications could be
prescribed by regulation as long as there is no substantive provision
of law contrary to the modifications that would be made. A com-
mittee recommendation on the specific modifications to be made
probably could be forthcoming in a matter of a few months.
In addition to the standard language in the statute, there is the
further need for uniform interpretation of that, language. Under a
federal statute, uniform regulations or interpretations might be
prescribed on a national basis by an appropriate agency, but it is
possible that substantial uniformity in regulations might also be
achieved under a state statute. The National Association of Tax
Administrators has had a committee working on proposed uniform
regulations under UDITPA for the past two years. After considerable
study and discussion, the committee has now proposed for adoption
by the state tax departments a series of regulations covering various
key sections of UDITPA, including the composition of each of the
three factors used in the formula. Additionally, a committee of the
Multistate Tax Commission has recommended that an identical
series of regulations be formally approved by the Commission.
PAGENO="0521"
501
To what extent these proposed regulations will be adopted by the
state tax departments remains to be seen. With one exception, the
few comments received to date have been favorable. The most im-
portant point about the project is that it shows that the importance
of uniform interpretations is recognized and that there is machinery
through which this type of regulation can be worked out and proposed~
to the tax departments for adoption.
Capital stock.-There are also differences, although perhaps not so
marked, in the formulas used to apportion capital stock tax bases
among the states in which a corporation is doing business. According
to a survey made some years ago, most of the states used a combina-
tion of property and gross receipts; a few used property alone or gross
receipts alone; and a few states used a three factor formula (property,
payroll, receipts) similar to the formula commonly used to apportion
income.
There probably has been some movement toward the use of the
three factor formula in the capital stock field simply to provide a
standard basis for apportioning these two business taxes. Neverthe-
less, some state tax people remain of opinion that since a capital stock
formula essentially involves an apportionment of property values, a
payroll factor is irrelevant.
From a practical~ standpoint, the differences in capital stock appor-
tionment formulas are not as immediately important as those in the
income tax field because in most states the capital stock tax does not
apply to banks.
Gross receipts.-In the gross receipts tax field there are provisions for
apportionment or separation of receipts from interstate commerce in
some states. On the whole, however, these taxes are usually so imposed
that either the full amount of the gross receipts is taxable or none at
all. Again speaking generally, where a transaction involves a sale of
tangible personal property shipped to the buyer in another state, the
state of origin cannot impose its gross receipts tax on the proceeds of
the transaction. However, a vendor within a state is generally liable
for the tax on receipts from the sale of goods shipped on his order to a
buyer in the state even though the order was sent to a point outside
the state for acceptance and the goods were shipped directly to the
purchaser from a point outside the state.
This general statement is subject to the qualification that the trans-
action could not be subjected to a similar tax by another state. For all
practical purposes, the applicatioii of the Supreme Court's risk-of-
multiple-burdens rule in interstate commerce is avoided by imposing
the tax at the last stage in the transaction where a tax of the kind
involved, for example, a tax on the privilege of engaging in a wholesale
business, could be imposed. The same principle can be utilized to
localize receipts from a service function, for example, the inclusion in
taxable receipts of interest paid on loans secured by real property
within the state, assuming, of course, that the lender is otherwise sub-
ject to the jurisdiction of the state.
Thus, from a practical standpoint, potential administrative and
compliance problems in the gross receipts tax field do not appear to be
very serious because banks are not usually included among the busi-
nesses subject to classified gross receipts taxes and also because of the
all-or-none character of the gross receipts tax as it works in practice.
PAGENO="0522"
502
VERIFiCATION OF BANK TAX RETURNS
One concluding point of importance should be mentioned, the verifi-
cation of state and local tax returns made by national banks. While,
strictly speaking, this point is perhaps not within the terms of reference
of the study, it is of great practical significance, particularly in view of
the extensive tax powers which states and local governments may
exercise following the enactment of P. L. 91-156.
The Comptroller of the Currency, as administrator of national
banks, has consistently taken the position that, save for inspection of a
list of shareholders, state and local tax officials may not audit the books
or records of a national bank to verify the accuracy of tax returns
filed by the bank. The Comptroller construes the inspection of the
books and records of a national bank by a state or local tax official as
an exercise of visitorial powers which are exclusively vested in the
Comptroller of the Currency. This policy is stated in paragraph 6025
of the Comptroller's Manual for National Banks. The Comptroller
also has indicated that the enactment of P. L. 91-156 makes no change
in the situation.
Whether or not the Comptroller's position that state tax audits are
tantamount to the exercise of visitorial powers can be sustained,6
these restrictions on the examination of a national bank's books and
records are unwarranted. It is not sound policy to subject a person,
whether it be a bank, a general business corporation, or an individual,
to a tax liability and at the same time to deny the officials charged
with the administration of the tax the practical power to determine
whether the taxpayer has requited his liability in accordance with
the law.
It is no answer to say that the income tax liability of a national
bank is established by audits conducted by the Internal Revenue
Service and that the results of these audits are available to state tax
departments. In the first place, the Internal Revenue Service cannot
possibly audit all corporations, including banks. Second, the states and
their local governments impose several taxes which the federal govern-
ment does not impose, and IRS audits would not cover these taxes in
any case. Third, it simply does not make sense, nor is it fair to tax-
payers generally, to permit one group of taxpayers to determine their
respective tax liabilities at their own discretion without any review or
verification whatsoever by the state or local officials commissioned to
administer and enforce the tax.
CHICAGO, February 26, 1971.
`See First Nalional Bank of Yov~nqstown v. Hughes, 6 F. 737(CC); Guthrie v. Harkness, 199 U.s. 148 and
Bank of America National Trust and Savings Assse. v. Douglas, 105 F. 2d 100.
PAGENO="0523"
503
SUPPLEMENTARY NOTE
Transacting Business in the State
The general corporations laws of a number of states describe several
types of activities carried on by a foreign corporation that do not
constitute the transaction of business in the state so as to require
qualification. Among these are making loans, taking mortgages on
real property in the state, and enforcing security rights. Sections
6450-52 of the California Corporation Code afford one example of an
extremely broad provision of this type; Section 12:302 of the Louisiana
Revised Statutes is another.
Section 106 of the Model Business Corporation Act drafted by the
Committee on Corporate Laws, Section of Corporation, Banking and
Business Law of the American Bar Association, provides that a foreign
corporation shall not be considered to be transacting business in a
state, for purposes of the business corporation act, by reason of carry-
ing on the following activities (among others): (a) maintaining or
defending any action or suit. . . . (c) maintaining bank accounts;
(g) creating evidences of debt, mortgages or liens on real or
personal property; and (h) securing or collecting debts or enforcing
any rights in property securing the same
According to the American Bar Association, the Model Business
Corporation Act has been adopted in the States of Alaska, Arkansas,
Colorado, Georgia, Iowa, Mississippi, Montana, Nebraska, New
Mexico, North Dakota, Oregon, Rhode Island, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Wyoming
and the District of Columbia; and it has been substantially adopted
in the states of Alabama, Connecticut, Louisiana, Maryland, Massa..
chusetts, New Jersey, New York, North Carolina, and South Carolina.
Of these two groups of states, the transacting business exemptions
in three states, Mississippi, New Jersey, and New York, are narrower
than most of the others and do not specifically refer to creating
evidences of debts and security interests therein. The Mississippi
exemption is expressly limited to investments in nonoperating mineral
interests made outside the state.
The Model Business Corporation Act Annotated lists an additional
group of states where foreign corporations are permitted to lend money
and enforce security provisions on local real estate without qualifying.
Those states include Arizona, Florida, Hawaii, Idaho, Illinois, Kansas,
Michigan (Federal Housing Administration and Veterans Adminis-
tration loans only), Missouri, Nevada, Ohio, Oklahoma, and West
Virginia. (MBCA Annotated (1960 ed.) p. 577; 1966 Supp. p. 182-183.)
In addition, California has the broad provision noted above (Corpo-
ration Code, Sees. 6450-52); Minnesota has a special provision
applicable to savings and loan associations organized in an adjoining
state, and Pennsylvania has a special provision in respectto loans and
security (PSA, Title 15, Sec. 1001)~
Six states, Delaware, Indiana, Kentucky, Maine, New Hampshire,
and Vermont, do not appear to have any comparable provisions in
respect to foreign corporations making loans secured by local real
estate.
PAGENO="0524"
504
The "transacting business" exemptions in general corporation laws
are not necessarily decisive of the status of the exempted activities
for tax purposes and with few exceptions these statutes do not make
any reference to tax laws. One exception is in the California Corpo-
ration Code, Sec. 6452, which does provide for tax exemption. The
Nebraska law expressly states that the corporation qualification
standards do not establish standards for those activities which may
subject a foreign corporation to taxation; the North Dakota and
Pennsylvania statutes provide that these standards are not necessarily
the standards governing taxation, and the Tennessee statute declares
that the corporation law activity standards relate solely to qualifica-
tion. However, where a tax is imposed on or in respect to the conduct
of business activities in a state, these statutory definitions relating
to the transaction of business for qualification purposes probably do
have some bearing on the application of the tax laws.
PAGENO="0525"
APPENDIX 11
Federal Constitutional Limitations on State Taxation of
Multistate Banks
JEROME R. HELLERSTEIN
Professor of Law, New York University Law School
INTRODUCTION
SUMMARY OF MAJOR FACTS AS TO HOW MULTISTATE BANKS OPERATE
OUTSIDE THEIR HOME STATES*
Lending money and providing other forms of financing are the
central business of banks, along with providing the depository fa-
cilities-demand and time-through which they obtain the maj or
portion of their funds. Banks also furnish a variety of other services
closely related to these traditional banking functions, including serv-
ices as correspondent banks, fiduciary, securities underwriting and
distribution, equipment leasing, credit cards, and data processing.
Although banking normally is oriented toward the local market, a
substantial part of the business of commercial banks is conducted
with customers located in states other than the home State of the
bank. This is particularly true of large banks located in national and
regional financial centers, which serve large national corporations or
other sizable businesses whose banking needs cannot be met ade-
quately by their local banks. For purposes of this paper, these banks
are referred to as "multistate banks." However, many smaller banks
located in close proximity to state borders also attract appreciable
amounts of out-of-state business, mainly because of locational and
other advantages they offer for customers in their areas. Such banks
are here referred to as "state border banks".
In this summary, the major facts are outlined covering the manner
in which multistate banking activities are conducted. The discussion
first takes up multistate banks and examines the manner in which they
conduct each of the above listed major types of banking activity.
After that, brief consideration is given to the out-of-state activities
of state border banks.
LOANS AND FINANCING ACTIVITIES
Loans and other types of financing of out-of-state customers ac-
count for a substantial part of the business of multistate banks, par-
ticularly the larger institutions. While no recent data are available,
a study made as of October 1955 disclosed that 29 percent of all loans
*1 want to acknowledge my indebtedness to James B~ Eckert, Assistant Adviser, Division of Research
and Statistics, Board of Governors of the Federal Reserve System, for valuable assistance in the prepara-
tion of this factual summary.
(505)
PAGENO="0526"
506
made to businesses by member banks of the Federal Reserve System
outstanding at that time, totaling $30.8 billion, were made to out-of-
state borrowers.1 Member banks then accounted for more than 90
percent of the business loans outstanding at all commercial banks;
and the percentage of out-of-state loans increased with the size of the
bank. Thus, member banks with deposits of under $100 million made
less than 8 percent of their business loans to out-of-state bOrrowers,
while banks with deposits of $1 billion or more made 44 per cent of such
loans out-of-State.
Since October 1955, not only has the outstanding volume of business
loans quadrupled, but also the ratio of out-of-state lending is believed
to have increased appreciably, particularly at large banks.2 Moreover,
multistate banks extend large amounts of other types of credit to
out-of-state borrowers, including real estate mortgage credit and loans
to nonbank financial institutions. Thus, the larger banks currently
make or participate in substantial amounts of out-of-state loans and
financing arrangements covering customers in virtually every State in
the Union.3
While the maj or part of the lending and financing activities of multi-
state banks is in the form of direct extensions of credit to out-of-state
as well as local customers, an appreciable part of bank lending to
business involves some kind of participation or joint arrangement with
other banks. The patterns of activity of the banks involved in loans
made to out-of-state customers directly and under participation ar-
rangements naturally vary. We consider first the loans made directly
by the multistate banks without any participation.
The initial contact with the multistate bank loan customer may, of
course, have been made in any number of ways-by request by the
customer to the bank at its home office in person, by telephone, or by
mail. On the other side, it may result from solicitation by the bank
through advertising in trade and other journals, or by personal visits
by a representative of the bank to the customer's place of business.
The larger banks regularly send officers to the States in which they
have a substantial volume of loan business; contact is maintained with
the customer, and new loan business may be generated in this manner.
Some large banks in recent years have been adertising that their loan
officers are organized into divisions according to industrial classifica-
tion, such as aviation, oil and gas, electronics, etc. Such advertise-
ments appear regularly in national trade publications, and at times
in the popular press. The suggestion is that a customer relationship
with the bank will be beneficial to the borrower, because this source
of expertise can be utilized by the borrower as an aid to making sounder
business decisions. It is often stressed that the bank's experts will make
an on-site inspection of the customer's operations, regardless of their
location, in order that they may better counsel the customer on his
general credit needs. These activities also provide the bank with
information useful in its decision-making processes.
1 This summary is based on unpublished data from a survey made by the Federal Reserve System and
reported in part in "Business Loans of Member Banks", Federal Reserve Bulletin, April 1916, p. 327.
2 This statement is based on conversations with staff of the Division of Research and Statistics of the
Federal Reserve Board.
See the facts concerning First National Csty Bank of New York in "Report on the National Bank Tax
Act," p. 13, submitted by First National City Bank to the Board of Governors.
PAGENO="0527"
507
Precise information as to the magnitude of these out-of-state "con-
tact" or solicitation efforts, the number of people involved, the
territories covered, the time spent, and the scope of their activities
while on their trips, is not available. But it does appear that there is
regular, systematic visitation by personnel of the banks at the responsi-
ble officer level to the areas in which the bank does substantial business,
in order to maintain contact with the customer, to keep and expand
business; and doubtless, to some extent, to make at least a superficial
check-up on the general status and condition of borrowers.
Most traveling loan officers of multistate banks have substantial
lending authority and are able to commit the bank up to the limits of
that authority, but ordinarily they do not make legally binding
commitments during their out-of-State visits to customers. Generally,
they solicit business, negotiate deals, and work out the major terms of
the loans while in the field, but the preparation of the loan documents
is typically done at the home office, and the signing of the papers by
the bank is also generally done there or completed by mail. Moreover,
the proceeds of the loan are made available to the borrower by crediting
his account at the home office, where repayments on the loan are mad~.
All reports and steps required to be taken during the course of the
loan ordinarily are localized, so far as possible, at the bank's home
office. These procedures have been dictated in part by the desirability,
from a legal point of view, of avoiding activities which would consti-
tute "doing business" in a multiplicity of jurisdiction
Before a loan is made, the bank, of course, investigates the credit
standing of the borrower. For this purpose, the bank usually, par-
ticularly in the case of large national corporations, relies on reports
that are received and analyzed at the home office-financial state-
ments certified by a certified public accountant, legal opinions, etc.
In some cases, however, the bank sends its own investigators, or
retains local investigators, to check the credit of the prospective
borrower, to inspect the plant, or check inventory, or the like, in
making specific loans. i\'Ioreover, in the case of certain secured loans,
there are steps which the banks are legally required to take locally
in order to perfect their liens, such as recording mortgages on real
or personal property, or other security instruments, in the appro-
priate office in the area where the customer does business. These
may be handled directly by the bank by mail from its home office,
or by local counsel.
During the period the loan is outstanding, it appears that the
multistate banks ordinarily do not use local agents, lawyers or others
in the customer's area to look after their interests, to check up on the
condition of the borrower, or to warn of impending difficulties. The
bank relies principally on documents, inventory reports, certified
financial statements, legal opinions, proof of payment of taxes, in-
surance, and the like, which are received at the home office. The costs
of these reports are borne by the borrower. As suggested above,
however, this information is supplemented by visits of the bank's
traveling representatives to the area, at which time they visit the
borrowers' plants, warehouses, stock rooms, etc., in order to appraise
methods of operation and the adequacy of control procedures.
When a borrower defaults on the loan, the bank's representative
may visit the customer, or local counsel may be retained to try to
PAGENO="0528"
508
salvage the loan or to bring suit, steps which are likely, of course, to
be taken in the customer's State. If the loan is secured, the proceedings
may involve foreclosure or local property, or enforcement of other
liens on property in the State. The bank may take title to real property
acquired on foreclosures through a separate local corporation, an
agent, or in its own name. In enforcing judgment, the bank, through
local counsel, will use the courts, sheriff and other appropriate au-
thorities of the State.
A few banks maintain representative offices in major out-of-state
cities, such as New York, Chicago or San Francisco, to serve customers
in those areas. Also, in rare instances, banks have set up "loan produc-
tion" offices in States other than the home State, staffed by their
own employees, who represent the bank in obtaining loan business
within the State. `Where they exist, such offices do not ordinarily
qualify to do business in the State.
Multistate banks, as indicated earlier, also extend appreciable
amounts of credit involving participation with other banks. While
such loans accounted for 18 per cent of total member bank loans to
business in October 1955, the proportion was niuch higher, 34 per
cent, in the case of out-of-state loans, the bulk of which were made
by large multistate banks.4
Participation loans are of two general types. One type involves a
joint loan arrangement between a large multistate (correspondent)
bank and another (respondent) bank.~ For the most part, these
participations are the overline type-loans which exceed the legal
or policy lending limit of the initiating (respondent) bank, but re-
spondents also participate in loans initiated by their correspondents.
In October 1955, 11.5 per cent of all out-of-state participations of
member banks were overlines. The second major type of participation
relates to unusually large loans made by a group of multistate banks
to a major enterprise. These pool arrangements accounted for 22
per cent of all out-of-state lending of member banks in late 1955.
In the typical overline situation iii which the local bank obtains the
assistance of its correspondent in a large financial center, the loans
are originated by the respondent for a local business. Although the
negotiations and dealings are likely to be handled by the respondent
in its home State, the correspondent may play an active role in
setting the terms and conditions of the loan and, in exceptional
cases, may take the lead in preparing the supporting documents. It
may also supplement the respondent's credit check by its own investi-
gation. The transaction may take the form of separate loans by the
originating respondent bank and the correspondent bank, with each
having direct claims against the borrower, or it may be a loan by
the respondent bank alone to the customer, followed by an assignment
of part of the loan to the correspondent bank. The servicing of over-
line participations, i.e., receipt of interest and principal payments,
checking on payments of taxes and maintenance of insurance, etc.,
generally is done by the respondent bank, although loan agreements
may require that the borrower send duplicates of such information,
See Note 1 for source of data reported here and in the next paragraph.
`The term "correspondent bank" or "correspondent", as used in this report, refers to the bank accepting
deposits from other banks, which in return offers its services to those banks. The term "respondent" refers
to the bank making the deposits and receiving services.
PAGENO="0529"
509
together with financial data needed for continuous credit checks,
directly to the correspondent bank. In case of a default, the respondent
bank normally takes the laboring oar in trying to collect, whether
by negotiation, suit or otherwise, on behalf of its correspondent and
itself.
Loan participations by correspondents with their respondent banks
were analyzed in some detail in a 1969 survey of over 2,100 banks, made
by the Federal Reserve Banks of Kansas City and St. Louis.6 Almost
60 per cent of the banks covered by the survey had loans outstanding
in which their correspondents were participating.7 These participations
constituted a substantial part of the loans originated by respondent
banks; they amounted to 5-10 per cent of originations in the case of
total loans and from 10-28 per cent of commercial and industrial loans.
The percentages vary inversely with the size of the respondent banks.8
The respondent banks also participate in loans originated by their
correspondents. In these cases, the procedures outlined above are
reversed and it is generally the correspondent bank that conducts the
negotiations, administers and services the loans and, in case of default,
takes the lead in trying to collect, by negotiation, suit, or other-
wise, on behalf of its respondents and itself. In the 1969 survey, over
36 per cent of the banks surveyed reported that they had acquired
participations in such loans made by their correspondents.9
There is a wide variety of types of loans involving joint participa-
tions, including not only traditional loans for general corporate
purposes but also unusual or special types of loans. These include loans
to finance construction of local private and public housing projects,
office buildings, shopping centers and other large local projects; ac-
counts receivable financing of a substantial borrower; the purchase of
mortgages by the respondent bank from a mortgage company and an
assignment of a part of the acquisition to the multistate bank.
The second major type of participation, those not involving re-
spondents, may be used where a very large loan is made to a major
business. These involve joint arrangements of major banks over the
country. While each bank ordinarily makes its own credit check of the
borrower, the negotiation of the terms may be done by a committee
representing all participants or by a manager bank acting for the
whole group. This bank also is responsible for preparation of the
documents and servicing of the loan. And these acts may take place
in Chicago, Philadelphia, St. Louis, San Francisco, or other cities, by
personnel acting for banks whose home States are scattered over the
country. Presumably, counsel to the banks try to see that each bank
signs the papers and takes official action only in its home State, but
this may not be feasible where a number of banks are involved in a
complex loan. The recording of security, collections, foreclosure and
other legal actions to recover the debt necessarily involve steps taken
in. various States on behalf of all the banks in the pool; such actions
are generally taken by local legal counsel under the direction of the
manager bank or a committee of two or three banks.
~ survey covered all banks in Colorado, Kansas, Missouri and Nebraska, most of the banks of Wyo.
milig and about half of those in New Mexico. The data here cited are taken from an article on the survey
by Robert B. Knight, entitled "Correspondent Banking, Part II: Loan Participations and Fund Flows",
Monthly Review, Federal Reserve Bank of Kansas City, December 1970, pp. 12-24. .
Jdem, Table 1, p. 14.
8 Idem, Table 2, pp. 18-19.
~ Ideen, p. 20.
79-421 0 - 72 - 34
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510
SERVICES TO RESPONDENT BANKS
The role played by the respondent banks on behalf of the multi-
state financial center bank is indicated by the foregoing recitation
of its activities in connection with participation loans. The financial
center correspondent bank expects and receives from the respondent
bank one other major benefit-the respondent bank usually maintains
deposits with the multistate bank in a dollar range commensurate
with the services it expects to receive, thereby giving the multistate
bank an additional source of funds for loans. These deposits are held
without interest, and constitute consideration for the services the
correspondent renders to the respondent bank.'° However, to an
increasing extent, correspondent services are also being provided on a
fee basis.
The correspondent bank provides, in addition to its participation
in loans, the clearing of checks and transit services, collection of notes
and other debt instruments, and general bank management technical
services, such as periodic reports on general business conditions and
continuous reports on current money market developments, recom-
mendations as to the purchase and sale of securities, and advice on
loan transactions of an unusual nature. It also provides safekeeping
facilities and credit information and a variety of miscellaneous serv-
ices, including the development of specialized lending programs, such
as equipment leasing, arranging international transactions and as-
sisting in a general portfolio review and analysis.1'
FIDUCIARY AND RELATED ACTIVITIES
l\'fultistate banks, to the extent permitted by the laws of the various
States, render extensive services as fiduciaries, acting as executor or
trustee under wills and trusts, and thereby hold and manage property
located in various States. They also act as trustees under corporate
indentures securing bond issues, and render services as corporate
registrar, transfer agent, and custodian, and as corporate paying
agent. They also perform similar services for corporations in connec-
tion with stock and bond rights offers, mergers, and the like. Finally,
banks sometimes act as paying agent for State or local governments or
governmental agencies, typically within the home State of the bank.
The work of multistate banks in the pension trust area includes
advising State and local authorities and acting as trustee under
employee pension plans, both of which may involve out-of-home-State
activities. New business is generally solicited through personal calls on
prospective customers, or by telephone or mail. In addition, certain of
the multistate banks do a good deal of national advertising by news-
paper, in journals, and otherwise, to obtain business as pension trustee,
for this is an area of large and growing importance in handling huge
amounts of investment funds. While most of the bank's work as
pension trustee is done at its home State office, nevertheless, par-
10 For a full description of the correspondent banking system, see Knight, "Correspondent Banking,
Part I: Balances and Services", Monthly Review, Federal Reserve Bank of Kansas City, November 1970,
pp. 3-14 and Part II, Note 6, supra. Some indication of the magnitude of the network of respondent banks
may be gleaned from the fact that one New York City bank alone is reported to have relationships with
more than 3,500 respondent banks located in all 50 States and the District of Columbia.
11 Ibid.
PAGENO="0531"
511
ticularly in the case of a pension plan for a company with offices
located over the country, or a system-wide plan in the case of a business
conducted through a group of affiliated companies, some of the bank's
work may take place outside the bank's home State, such as out-of-
State meetings with company management, its pension board, its
actuary, or counsel.
UNDERWRITING AND DISTRIBUTION OF SECURITIES
Banks play a substantial role in the underwriting of billions of
dollars of State and local securities sold annually throughout the
country. In 1970, they handled about three-fifths of all general obliga-
tions sold by State and local governments and over two-fifths of total
State and local obligations sold, aggregating $18 billion. The issuer,
i.e., a State, city, school district, etc., sells its securities to a syndicate,
often selected via competitive bidding, which resells the securities to
investors throughout the country. Banks located in all sections of the
country participate in this market as maj or underwriters, distributors,
and purchasers of State and local securities.
In underwriting securities, banks operate in a manner similar to
nonbank dealers. In almost all instances there is a mix of dealers and
dealer banks in an account; a bank may or may not be the active
manager, or several members of the syndicate may be designated as
joint managers. The syndicate is treated for Federal income tax pur-
poses as a partnership; and there is normally a j oint venture agreement
entered into by the members of the syndicate to buy the bonds from
the issuer. When the syndicate is formed, the agreement is mailed to,
and returned signed by, syndicate members before the date of sale.
Price, profit margin and offering terms are decided in one or two
syndicate meetings with the active participation of all members.
Syndicate meetings almost always take place in New York. However,
when the manager is located outside New York, e.g., Chicago, there
may be simultaneous meetings in Chicago and in New York, at the
office of one of the syndicate members. On smaller issues, the New
York member may approve the terms by telephone. The terms and
the actual participation of each member are agreed upon at the last
syndicate meeting, although in the case of a small issue, members
may give their approval by telephone. A lawyer is usually designated
by the issuer to act on behalf of the syndicate, although in some cases
he may be retained by the syndicate at its own expense.
The mechanical details of preparing, figuring and submitting the
bid to the issuer are handled by the manager. A syndicate member
which is dissatisfied with the proposed bid or the terms of the issue
may withdraw from the syndicate before the bid is submitted. When
the bid is accepted by the issuer, a letter detailing the terms, percentage
of participation, and the like, is mailed to each member. Each bank
member of the syndicate usually provides its own funds in payment of
its share of the issue, and some members may provide funds for
non-banking members. The manager receives the securities and de-
livers them to the member, as they are sold. Delivery of the securities
by the issuer may be made in New York, in the locality of the issuer,
or in the home State of the manager bank.
PAGENO="0532"
512
The sale of securities acquired by the banks in the syndicate on an
underwriting generally is handled from the home offices of the banks.
Sales to customers outside the bank's home State are usually made
by telephone or letter solicitation to respondents and other outlets
throughout the country.
EQUIPMENT LEASING
Economically, equipment leasing is essentially a form of lending or
financing the purchase of equipment by business and industry.
Because the transaction takes the form of ownership of the equipment
by the bank (or its nominee), the tax consequences of this form of
financing warrant special consideration.
The leasing of computer equipment, airplanes, railway equipment,
industrial machinery, trucks, turbine generators, and other capital
goods has increased substantially in recent years. It has been estimated
that there was approximately $30 billion of equipment on lease by.
bank and nonbank lessors in the country as of December 31, 1969, of
which $20 billion was in computer leasing, and that the annual volume
of leasing is about $2 billion.'2 The consequence is that many multi-
state banks are owners of large amounts of tangible personal property
being used by their lessees in various States in the country. As of
December 31, 1970, 390 national banks reported direct lease financing
totaling $790 million." Some of the property, such as transportation
equipment of utilities and bakeries, is probably used principally in a
single State, but other property, such as railroad cars, is used all
over the country, and airplanes all over the world.
In equipment leasing, ordinarily the negotiations for the design of
the equipment, the price, delivery dates, and the like, are handled
entirely by the company that will use the equipment. The bank-lessor
normally does not participate in these negotiations, and, with the
possible exception of granting prior credit approval, is usually brought
into the picture only after the contract for purchase has been executed:
The bank's economic role is that of providing the funds to pay for
the equipment, although part of the funds may be provided by non-
bank sources. Many banks participate in "leveraged-leasing" trans-
actions, a device whereby other long-term lenders furnish a substantial
portion of the cost of equipment-perhaps up to 80 percent-and a
bank or group of banks advances the balance of the cost in the form
of equity funds. The bank, either singly or jointly with others, takes
title to the equipment~ and leases it to the intended user. The bank-
lessor recovers its investment, including any loans made by others,
plus interest and profit, in the form of periodic lease rental payments.
Maintenance and repair of the leased equipment are the obligation
of the user-lessee, and at the end of the leasehold or useful life, .the
property is supposed to revert to the bank. At the termination of the
lease, the property is returned to the possession of the bank or its
designee. The lessee is usually given an option to purchase the equip-
ment at the fair market value at the termination of the lease. As
12 Leasing JVorld, Kansas City, Missouri. Lease rentals totaled $137 million in 1969 for equipment of United
States trunk and international airlines. As of June 30, 1970, leased aircraft operated by those airlines had an
imputed value of about $2.6 billion. N~Y. Times, Dec. 27, 1970, p. F-3.
13 Press release, Comptroller of the Currency, April 13, 1971.
PAGENO="0533"
513
indicated above, the bank may take title to the leased equipment in
the name of a nominee or trustee, in order to avoid various kh~ds of
liabilities. However, for tax purposes, ownership by the trustees or
nominee would, at least in many States, be treated as ownership by
the bank.
CREDIT CARDS
The development of credit card (or charge card, as they are often
called) and check credit plans "has recently been one of the more
publicized aspects of commercial banking." `~ As recently as Sep-
tember 1967, only 197 banks offered credit card plans, with total credit-
card balances of $633 million. This amounted to less than 1 percent
of total consumer installment credit, and only 8 percent of the con-
sumer loan portfolio of banks engaged in credit card operations.
By June 30, 1970, about 1,350 commercial banks reported credit card
balances totaling more than $3 billion.'5 Credit card programs are
still expanding rapidly, although the rate of increase has slowed since
plans came into operation in most major marketing areas.
The operation of any credit card program requires agreements be-
tween a bank and its customers allowing them to use the cards, and
between the bank and merchants agreeing to accept the cards. As these
charge card plans have spread in recent years, interchange arrange-
ments have developed, which permit holders to use their cards in
making purchases from merchants who have no direct dealings with
the customer's bank. These arrangements also permit customers of
one bank to obtain cash advances from other banks belonging to the
same interchange system.
At the present time, there are two large credit card systems, Na-
tional BankAmericard, Inc., and Interbank Card Association, which
facilitate nationwide interchange. They include banks operating in all
50 States and many foreign countries. In this country, there are cur-
rently over one million merchant outlets that honor these cards,
"BankAmericard" and Interbank (usually "Master Charge"). Banks
affiliated directly or indirectly with these two systems flOW hold close
to 95 percent of all U.S. bank credit card receivables.
A few banks with credit card programs remain outside the two
major plans, some completely independent, operating without inter-
change, and some affiliated with a larger bank. The major example of
the latter type is Uni-Card of Chase Manhattan. This group performs
the same general functions as the major systems, and its operations are
similar, but it is mainly confined to the States of New York, Massa-
chusetts, and New Jersey. Operations of the few completely inde-
pendent banks are similar to the other plans, except for the absence of
interchange.
The growth of national systems has been facilitated by a flexibility
of organization allowing for considerable variation in an individual
bank's credit card operations, which makes the interchange systems
suitable for a diversity of banks. For example, in the Interbank Card
Association, banks may participate as direct members, as affiliates of
14 The summary description of credit card plans contained in this section ic largely drawn from a Federal
Reserve System report, "Bank Credit-Card and Check-Credit Plans" (July 1968) and updated by the
Consumer Credit Section of the Board's Division of Research and Statistics.
"In addition, about 1,185 banks reported that they had outstandings under check credit and revolving
credit plans totaling nearly $1.2 billion. Assets and Liabilities, Commercial and Mutual Savings Banks,
June 30, 1970, published by the Federal Deposit Insurance Corporation, p. 2.
PAGENO="0534"
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a member, or as members of an association of banks with the associa-
tion as the member.
Affiliate status permits a bank to engage in card operations without
the need to assume directly all of the functions and responsibilities
of a card plan. The role that each affiliate plays is determined directly
by the banks involved. In some cases the affiliate's name will appear
on the card; in others the member bank's name. Usually an affiliate
relies on computerized help with accounting and billing services and
authorizations for credit covering sales that exceed a prescribed
amount.
The affiliate may carry out all the functions of the credit card plan,
or it may act merely as an agent for a principal bank. In the latter
case, it may do little more than forward customers' card applications
to the principal bank, which may issue its own card after such credit
investigations as it Lonsiders necessary; and sign agreements with
merchants authorizing use of the principal's card, in turn agreeing to
accept sales slips thus generated. However, such an agent bank does
not hold these receivables; it simply forwards them to its principal,
which extends any credit and assumes the risks. Agent banks usually
are smaller banks, which receive payment for their services and obtain
the benefits of a charge plan for their customers.
Associations include groups of banks that operate or support special
facilities or services, such as computer processing, credit sales author-
ization, and promotion, in order to obtain efficiencies of joint opera-
tion. These associations vary in size; in the case of Interbank they
range from a single market, such as greater New York, to a nine-state
area served by the Mid-West Bankcard Association in Omaha.
The relationships within the National BankAmericard, Inc., system,
and the functions it performs, are generally similar to those within
Interbank. Associations of banks for the joint operation of service
functions and facilities exist within the BankAmericard system, but
all participants must also belong directly to National BankAmericard,
Inc., instead of obtaining the advantages of membership in the system
indirectly through the association.
Income to banks from credit card operations comes from two sources;
an interest charge of usually 1~ percent per month on any unpaid
balance after a grace period of about 30 days from the statement
date, and a merchant discount on credit card transactions. The
merchant discount normally ranges from a low of about 1~ percent
to a high of about 53~ percent, depending on factors such as the aver-
age dollar amount of sales slips and total volume generated by the
merchant. This discount is deducted from the face value of the sales
slip at the time that the merchant's bank credits his account. In the
case of an interchange transaction, the merchant's bank then sends the
sales slip to the cardholder's bank along with a transmittal and sum-
mary draft to cover the reimbursement made to the merchant, and
*the cardholder's bank bills the cardholder periodically for his pur-
chases.
The way in which the merchant discount is distributed varies with
the system and with the type of bank relationship. Out of this dis-
count, a specified amount generally goes to the cardholder's bank
to cover cost, including processing costs, risk, and the cost of money,
with the merchant's bank retaining any residual. Interest charges on
PAGENO="0535"
515
any unpaid balance go to the card-issuing bank (or its principal),
whichever holds the receivables.
A nationwide interchange system enables a credit cardholder to
obtain credit from any participating merchant anywhere in the
country, including those located outside his own bank's area of opera-
tions. Consequently, a sale of merchandise made by a retailer in
Denver, Colorado, may obligate a bank in New York to pay the
charges indirectly to the Colorado retailer through the retailer's local
bank, and the customer to pay the New York bank. The New York
bank earns a share of the discount on the Colorado purchase made by
its cardholder; that transaction creates a claim of the retailer against
his local bank and a claim of the retailer's bank against the New York
bank, and it effects a loan by the New York bank to its credit card-
holder. The New York bank is thus the lender for this local retail
sale; and the Colorado bank will be rendering handling services to its
merchant and the New York bank, for which it retains any balance
of the merchant discount. This transaction has its counterpart daily
thousands of times over the country. Interchange credit cards have
opened to banks a new method of broadening their national banking
services.16
ACCOUNTING, DATA PROCESSING AND MISCELLANEOUS ACTIVITIES
There are other activities of banks, such as the furnishing to their
customers of accounting, data processing, loan and mortgage servic-
ing, and the like. It is understood that these activities are usually
confined to the bank's home state, although a few banks have orga-
nized or acquired out-of-state affiliates to render accounting and data
processing services in neighboring states.'7
BANK AFFILIATES
The rapid growth of bank holding companies has enabled banks to
utilize corporate affiliates to handle some of their activities. This is
now the case with a number of the largest multistate banks in the
country.'8 Thus, the holding company may organize or acquire a
subsidiary to handle equipment leasing, the credit card business,
fiduciary functions, or other activities related to banking.
The banks themselves may be directly and intimately involved in
such activities; thus, in equipment leasing and credit card operations,
the banks may provide the funds, within the established legal limits,
and their affiliated corporations may act as their agents in carrying
18 It has been suggested that the bank credit card system may be a limited substitute for branch banking.
See "Bank Credit-Card and Check-Credit Plans," p. 37 (note 14, supra).
17 First National City Corporation. the parent company of New York's largest bank, with over $25 billion
in assets, has recently acquired one of the nation's leading management consultants, Cresap, McCormick
& Paget. New York Times, Jan. 5, 1671. The acquisition is subject to approval by the Federal Reserve
Board, under the standard established by the Federal Bank Holding Company Act, as not being anticorn-
petitive and as being "so closely related to banking or managing or controlling banks as to be a proper inci-
dent thereto."
18 See "The One Bank Holding Company" in Business Conditions, July 1970, Federal Reserve Bank of
Chicago. On Dec. 31, 1969, 9 of the 10 largest banks in the country were owned by one-hank holding com-
panies, and 43 of the 100 largest commercial banks were among those with one-bank holding companies in
existence or in the planning stage. Idem, pp. 2 and 6. As of June 30, 1970, Federal Reserve Board staff esti-
mate that more than 1,100 commercial banks were affiliated with one-bank holding companies and those
banks accounted for about one-third of total commercial bank deposits. In addition, there were about
800 banks affiliated with multi-bank holding companies and they accounted for an additional 16 percent of
deposits. In view of the liberalized holding company powers authorized by the Congress in the Bank Hold-
ing Company Act Amendments of 1970. approved December 31, 1970 (Public Law 91-607), the volume of
interstate banking and bank related activities administered through holding company affiliates is likely to
expand substantially. Banks are also able to utilize so-called Edge Act corporations to carry out some of
their junctions with respect to international finance.
PAGENO="0536"
516
out these financial activities. Also, a good deal of interplay between
banks and their affiliates develops as banks combine their operations
with activities closely related to banking in the holding company
systems.
STATE BORDER BANKS
As indicated earlier, there is a considerable number of banks over
the country, many of them comparatively small, local banks, that do
not carry on out-of-state activities of the magnitude or character of
the multistate banks described above, which, nevertheless, conduct
business that reaches beyond their home State. These are typically
banks whose offices are located in communities near the border of their
States. They have depositors located in the neighboring State who
come to the bank's office to deposit or withdraw funds from their
accounts with the bank or who may handle their accounts by mail.
Likewise, the bank makes loans to borrowers in the neighboring States,
typically negotiated at the office of the bank. Where the loans are
secured, the mortgages or other security documents are recorded by
the bank in the appropriate recording office of the customer's State.
Investigation of the credit of the prospective borrower may be made
by the bank's own employees by phone or mail or by its agents or
tepresentatives in the customer's State. In the event of default on the
loan, collection efforts and suit may be brought in the customer's
State and in the latter case, by lawyers in that State acting for the
bank.
There are other activities of such banks that frequently extend to
the neighboring State, which may include advertising and the issuance
of credit cards to residents of that State.
PART I
JuRIsDICTIoN To LEVY INcoME, FRANCHISE, CAPITAL STOCK, AND
OTHER BUSINESS TAXES
This portion of this report deals with the question of how far
Federal constitutional provisions limit the power of the States and
local governments to subject multistate banks to income, franchise,
capital stock, or other taxes on doing business.'
A. THE COMMERCE CLAUSE: GUIDING PRINCIPLES
1. Whether banking constitutes interstate commerce
Banks cannot, of course, obtain the protection of the Commerce
Clause with respect to state taxation, in the silence of Congress, unless
multistate banking constitutes interstate commerce. Traditionally,
"commerce" was narrowly construed under the Constitution to en-
compass essentially the selling of goods across State lines and trans-
portation and communication between the States. In the leading early
case of Paul v. Virginia, the Supreme Court upheld the constitutional-
ity of a Virginia statute regulating insurance companies, resting its
decision on the premise that "Issuing a policy of insurance is not a
transaction in commerce"; 2 and the same view was expressed in
I The term "business taxes" is sometimes used in this report to refer to excise taxes on the privilege of
doing business, or the actual conduct of business, within the State. Such levies may be measured by net
income, capital stock, gross receipts, or otherwise.
2 8 Wall. (U.S.) 168, 183 (1869).
PAGENO="0537"
517
later decisions, including tax cases.3 This restiictive conception of inter-
state commerce was repudiated in the 1944 case of United States v.
South-Eastern Underwriters Association,4 in which the Court held that
the Sherman Anti-Trust Act could be applied to a group of fire
insurance companies. In part, the decision was grounded on the
principle that "legal formulae devised to uphold state power cannot
uncritically be accepted as tiustworthy guides to determine congres-
sional power under the Commerce Clause".5 But the Court went
further and rejected the Paul v. Virginia view that, because insurance
policies "are not commodities to be shipped or forwarded from one
State to another", or that "insurance policies are mere personal
contracts subject to the laws of the state where executed", the in-
surance business does not constitute interstate commerce.6 It held that
"a nationwide business is not deprived of its interstate character
merely because it is built upon sales contracts which are local in
nature".7
The Court traced the "commanding position" of the modern
insurance business "in the trade and commerce of our . nation".
Observing that a large share of the insurance business is concentrated
in comparatively few companies located, for the most part, in the
financial centers of the East, the Court declared:
"This business is not separated into 48 distinct territorial compart-
ments which function in isolation from each other. Interrelationship,
interdependence, and integration of activities in all the states in
which they operate are practical aspects of the insurance companies'
methods of doing business." 8
On these facts, the Court held that the insurance business constituted
interstate commerce, and sustained the indictment.
The foregoing characterization of the insurance business closely
fits the multistate banking business. Given the nationwide lending
activities of major multistate banks, their penetration of the financial
markets of virtually every State in the Union through direct lending,.
loan participations, their network of respondent banks, equipment
leasing, credit card operations, the marketing of securities, etc., it
is no longer seriously open to debate that they carry on an interstate
business. Although the decision in *the South-Eastern Underwriters
case dealt with the regulatory power of Congress under the Commerce
Clause, which presents different problems from the powers of the
State to tax interstate businesses in the silence of Congress, never-
theless, the Court's broad conception of the scope of "commerce"
and "interstate commerce" is equally apposite to State taxation of
interstate businesses.
t?. The effect of Federal legislation on the Commerce Clause protection
afforded banks
(a) The Federal regulation of banks goes back to 1863, when it
resulted from the chartering of commercial banks by the Federal
3 New York Life Insurance Co. v. Deer County Lodge, 231 U.s. 495, 510 (1913), in which the Court said,
in sustaining a Montana tax against an out-of-state insurance company, "contracts of insurance are not
commerce at all, neither state nor interstate".
4 322 U.S. 533 (1944).
5 322 U.S., at p. 545.
6 Idem, pp. 546-547.
Idem, p. 547.
8 Idem, at pp. 541-542. This case is discussed in Robert L. Stern, "The Commerce Clause and the Na.
tional Economy: 1933-1946" (part II), 59 Harvard Law Review 883, 917, et. seq. (1946).
PAGENO="0538"
518
government. The establishment of the Federal Reserve System in 1913
broadened the supervision by the national government, and extended
it to those state banks which chose to enter the Federal Reserve
System. Following the bank failures during the 1930s, the Federal
Deposit Insurance Corporation was added to the regul~atory structure
and was extended to state banks not within the Federal Reserve
System. To complete the picture of banking regulation, there is, of
course, the comprehensive regulation by the States of their own
chartered banks.9
The constitutional foundations for the chartering and regulation of
national banks lie in the "ordinary and necessary" Clause of the Con-
stitution, granting Congress authority to implement its enumerated
powers and its power over the monetary system of the nation.'° This
legislation was not grounded in the power of Congress to regulate
interstate commerce, although that is not to say that the commerce
power could not be relied on to sustain Federal banking regulation."
Consequently, the comprehensive Federal regulation of national
banks would appear not to have affected state taxation of banks under
the Commerce Clause, as distinguished from the immunities of the
national banks as Federal instrumentalities. Accordingly, the tax
status of national banks is to be approached in the context of the
silence of Congress in exercising its powers under the Commerce
Clause, vis-a-vis state taxation.
(b) Does P.L. 91-156 restrict or broaden the powers of the States
to tax national banks insofar as the Commerce Clause is concerned?
The impact of P.L. 91-156, considered as an exercise by Congress of
its powers over national banks as Federal instrumentalities, is dis-
cussed in Part III, infra. The narrower question we consider here is
whether the legislation either narrows or broadens the protection
otherwise afforded multistate national banks by the Commerce
Clause, for it is established that Congress, under its power to regulate
interstate commerce, has plenary power to broaden or narrow the
effects of state taxation or regulation of the commerce.'2
The language of P.L. 91-156 does not specify the base of the
congressional power being exercised. It provides:
"For the purposes of any tax law enacted under the authority of
the United States or any State, a national bank shall be treated as a
bank organized and existing under the laws of the State or other
jurisdiction within which its principal office is located." (Sec. 2(a)).
This language seems inappropriate to action under the Commerce
Clause; it does not refer to interstate commerce and it draws no dis-
tinction by reference to whether a bank is engaged in interstate or
intrastate commerce. Instead, the provision appears to be designed
to waive only intergovernmental tax immunity of national banks.
Reference to the language and techniques used in legislation in which
Congress has exercised its power under the Commerce Clause to effect
state taxation reenforces this conclusion. Thus, when Congress sought
`The history and status of national and state banking regulation are discussed extensively in Symposium
on Banking: Part I. Banking Regulation, 31 Law and Contemporary Problems (Autumn, 1966), 635 et.
seq. For a summary of the dual system of regulation, see Archie K. Davis, "Banking Regulation Today: A
Banker's View," id., at p. 639, et. seq.
10 See Emmette S. Redford, "Dual Banking: A Case Study in Federalism", in Symposium on Banking,
Note 9, supra, at pp. 749-753.
11 The power to regulate commerce is suggested by Professor Redford as one possible basis for congres-
sional action to bring all state banks completely under Federal supervision and regulation. See Note 10,
supra.
12 International Shoe Co. r. Washington, 326 U.S. 310 (1945); Prudential Insurance Co. v. Benjamin, 328
U.S. 408 (1946).
PAGENO="0539"
519
to assure or broaden the power of the States to impose unemployment
insurance taxes on multistate businesses generally, it explicitly
referred to interstate commerce.
"No person required under a State law to make payments to an un-
employment fund shall be relieved from compliance therewith on the
ground that he is engaged in interstate or foreign commerce.
Likewise, in authorizing state taxation of insurance companies, Con-
gress, while not referring explicitly to interstate commerce, used the
term, "the silence of Congress", a phrase that was developed and is
frequently used in the Commerce Clause area:
". . . The continued regulation and taxation by the several
States of the business of insurance is in the public interest and
silence on the part of Congress shall not be construed to impose any
barrier to the regulation or taxation of such business by the several
States." 15
Again, P.L. 86-272, which embodies the 1959 restrictions on the
taxation of interstate vendors, makes explicit reference to "interstate
commerce".16 Finally, the legislative history of P.L. 91-156 likewise
indicates that Congress was working within the framework of inter-
governmental immunities, not the Commerce Clause. The Act is an
amendment to Section 5219, which had its origin in McG~ilIoch v.
Maryland 17, the landmark immunity case, and the Committee Re-
ports on P.L. 91-156 speak entirely in immunity terms.18
Accordingly, I conclude that Congress did not purport to exercise
its Commerce Clause powers in enacting P.L. 91-156, but relied on
its sweeping powers to waive state tax immunities for its instrumen-
tality, national banks. As a consequence, insofar as the Commerce
Clause is concerned, we approach the power of the States to tax na-
tional banks in the "silence of Congress", treating national banks as
if they had been organized under the law of the States of their respec-
tive principal offices.
3. The interrelation of the subject and measure of taxes on doinq business
There is one other preliminary constitutional principle to be noted.
Under the Commerce Clause and the Due Process Clause, once a
locally taxable activity has been found, i.e., a taxable subject, the tax
may be measured by property, income, or other bases, which are not
themselves directly taxable. rphus the Court has held:
"A franchise tax imposed on a corporation, foreign or domestic,
for the privilege of doing a local business, if apportioned to business
done or property owfied within the state, is not invalid under the
commerce clause merely because a part of the property or capital
included in computing the tax is used by it in interstate `~
~`53 Stat. 1391; 26 U.S.C., Sec. 3305 (a).
14 See Henry W. BikiS, "The Silence of Congress", 41 Harvard Law Review 200 (1927).
`-° McCarran Act, 59 Stat. 33, 15 U.S.C., Sec. 1011.
16 73 Stat. 555, 15 U.S.C., Sec. 381. The key provision restricts the power of the States to impose certain
taxes dn the "income derived . . . from interstate commerce
`~ 4 Wheat. 316 (1819).
18 "There may have at one time been justification for giving national banks privileges and immunities
which were denied State banks, under the theory that national banks are peculiarly an instrumentality of
the Federal Government, and, as such, hold a unique and distinct position from th~t of other institutions.
Without specifically addressing the question of whether national banks remain, in substance, such a Federal
instrumentality, the committee is agreed that there is no longer any justification for Congress continuing
to grant national banks immunities from State taxation which are not afforded State banks." Report of
the Senate Committee on Banking and Currency, "State Taxation of National Banks" page 2 (Rep. No.
91-530, 91st Cong., 1st Sess.).
19 International Shoe Co. v. Shartel, 279 U.S. 429, 433 (1929); see Spector Motor Service, Inc. v. O'Connor,
340 U.S. 602, p. 610 (1951).
PAGENO="0540"
520
"Nor does the fact that a computation such as that used under
Ohio's law includes receipts from interstate sales affect the validity
of a fair apportionment." 20
The effect of these decisions is that once a bank is doing some
intrastate business within a State and is in consequence subject to
a tax on doing business, the measure of the tax may include income,
properly apportioned, that is attributable to interstate business done
in the State; and the same is true with capital stock and other meas-
ures. The measure is not limited to the activities or property that
gives rise to taxability.
4. The power of the States to impose direct net income taxes on income
derived from an exclusively interstate business
The landmark cases of Northwestern Portland Cement Company and
Stockham Valves furnish the most recent guidelines for defining the
Commerce Clause limitations on State business taxation.2' In both
cases, foreign corporations, not authorized to do business in the taxing
States, conducted interstate selling of their manufactured products
through local salesmen, working out of offices maintained in the State
by the corporations. They conducted the business in the traditional
pattern that has grown up over the years for avoiding local taxes-the
salesmen were merely solicitors, taking orders that were accepted at
the manufacturer's out-of-state headquarters; all orders were filled
by shipment from outside the State directly to the customer, with no
inventory or warehouse located in the State. All payments for the
merchandise were made directly to the home office of the seller.
The Supreme Court stated, in its opinion, that "there is need for
clearing up the tangled underbrush of past cases", observing that the
Court in its history had handed down more than 300 full-dress opinions
in the area, and declared that, "From the quagmire there emerge, how-
ever, some firm peaks of decision which remain unquestioned." 22
First, the grant to Congress by the Constitution of the "power to
regulate Commerce among the several States" 23 by its own force
imposes some restrictions on State taxation of interstate commerce;
in the silence of Congress, the constitutional effect of the Commerce
Clause is that "interstate commerce shall be free of any direct restric-
tions or impositions by the States." Second, the Commerce Clause
does not "immunize such commerce from carrying its fair share of
the costs of State government in return for the benefits it derives from
the States." As summed up in a.nother opinion by Mr. Justice Rut-
ledge; whose contributions to the development of a thoughtful and
realistic approach to State taxation under the Commerce Clause were
notable:
"The long history of this problem boils down in general statement to
the formula that the States, by virtue of the force of the commerce
clause, may not unduly burden interstate commerce." 24
Early in the history of the Commerce Clause, in giving content to
the yardstick of "undue burden", and in reconciling the conflicting
interests of maintaining a national economy and the needs of the
20 International Harvester Co. v. Evatt, 329 U.s. 416, 421 (1947); compare, also Cheney Brothers Co. v.
Massachusetts, 246 U.S. 147 (1918).
21 Northwestern States Portland Cement Co. v. Minnesota and Williams v. Stockham Valves and Fittings,
Inc., both decided in a single opinion, 358 U.S. 450 (1959).
22 358 U.S.~ at p. 458.
28 Art. 1, Sec. 8, Clause 3.
24 International Harvester Co. v. Department of Treasury, 322 U.S. 340, 358 (1944). See, generally, Paul 3.
Hartman, State Taxation of Interstate Commerce (1953).
PAGENO="0541"
521
States for revenue, the Supreme Court had sustained State and local
property taxes on the real and personal property of interstate rail-
roads, telegraph companies and express companies, and other instru-
mentalities of commerce,25 while at the same time striking down levies
imposed on the privilege of conducting an exclusively interstate busi-
ness and taxes on gross receipts derived from interstate commerce.26
In so doing, it had drawn the line between "direct taxes" and "in-
direct taxes", holding that property taxes on interstate business were
indirect, hence did not impose undue burdens on the commerce.
The net income taxes involved in the cases before the Court did not
suffer from ~tny constitutional infirmity. As }evies on the profits de-
rived from the enterprise, unlike taxes on gross receipts, they were in-
direct taxes and, therefore, imposed no undue burden on the commerce.
~ * * J~ is too late in the day to find offense to that (Commerce)
Clause because a State tax is imposed on corporate net income of an
interstate enterprise which is attributable to earnings within the
taxing state." 27
`While the Court thus established the law of the land, for the first
time-with clarity, at least-in our constitutional history, that the
Commerce Clause does not debar the States from imposing net income
taxes on income derived from an exclusively interstate business car-
ried on within the State,28 at the same time it explicitly reaffirmed i~ts
traditional holding that "the privilege of engaging in interstate com-
merce cannot be granted or withheld by a State, and * * * the as-
sertion of state power to tax the `privilege', is, therefore, a forbidden
attempt to `regulate' interstate commerce." 29
The rationale and distinctions thus drawn by the Supreme Court
are less than satisfying, and, indeed, there have been several recent
state court decisions that have cut away at, or sought to undermine,
the holding that the Commerce Clause proscribes state franchise
taxes levied on exclusively interstate businesses.30 Nevertheless, current
highest court doctrine remains that, in the silence of Congress, the
Commerce Clause prohibits such levies on the privilege of carrying on
interstate commerce, but it does not prevent the States from imposing
a direct net income tax on an exclusively interstate business, provided
the tax base is fairly apportioned.3'
The Delaware Railroad Tax, 18 Wall. 206 (1874); Pullman's Palace Car Co. v. Pennsylvania, 141
U.s. 18 (1891); Cleveland, Cincinnati & Chicago St. Louis Railway v. Backus, 154 U.S. 439 (1894).
~ Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203 (1925); Cheney Bros. Co. v. Massachusetts,
246 U.S. 147 (1918); Crew Levick Co. v. Pennsylvania, 245 13.5. 292 (1917).
27 358 U.S., at p. 462. The Court was quoting from its earlier opinion in State of Wisconsin v. Minnesota
Mining & Mfg. Co., 311 U.S. 452, 453 (1940).
23 The outcry by business interests which greeted this holding was largely responsible for the prompt
enactment by Congress of P.L. 86-272, 15 U.S.C., Sec. 381, the first congressional legislation in our history
that imposed Commerce Clause restrictions on State taxation of manufacturing and mercantile businesses.
20 358 U.S., at p. 463. This holding is supported by longstanding authority. Alpha Portland Cement Co.
v. Massachusetts, 268 U.S. 203 (1925); Cheney Brothers Co. v. Massachusetts, 246 U-S. 147 (1918); Leloup v.
Port of Mobile, 127 U.S. 640 (1888).
In 1951, the Court had rejected an opportunity to overrule this doctrine when it reviewed the powerful
opinion of the Second Circuit (139 F. 2nd 809 (1944)), holding that a state tax on the privilege of doing an
exclusively interstate business, when measured by fairly apportioned net income, was valid; the highest
Court reversed this holding and reaffirmed traditional doctrine. Spector. Motor Service, Inc. v. O'Connor.
340 U.S. 602 (1951).
30 Roadway Express, Inc. v. Director, Division of Taxation, 50 NJ. 471, 236 A. 2d 577 (1967), appeal dis-
missed for want of a substantial federal question, 390 U.S. 745 (1968); Mid-Valley Pipeline Co. v. King, 221
Tenn. 724, 431 SW. 2d 277 (1968), appeal dismissed for want of a substantial federal question, 393 U.S. 321
(1969). There is a thoughtful analysis of this problem in Comment, "State Taxation of Interstate Com-
merce: Roadway Express, The Diminishing Privilege Tax Immunity, and the Movement Towards Uni-
formity in Apportionment", 36 University of Chicago Law Review 186 (Autunm 1968).
31 The fluid and changing course of judicial decision in the Commrce Clause area needs to be recognized,
particularly in view of the fact that four of the nine Justices dissented from the holding in the Northwestern-
Stockham Valves cases, and that there has been a significant change in the Court's personnel since 1959.
Perhaps this factor emphasizes the need for congressional action in the area.
PAGENO="0542"
522
B. THE TAXABILITY BY THE DEBTOR'S STATE OF. INCOME REALIZED BY
OUT-OF-STATE CORPORATIONS FROM LOANS TO PERSONS OR CORPORA-
TIONS DOMICILED WITHIN THE STATE
Before dealing with the power of the States to apply either direct
net income taxes or doing business or other excises measured by net
income, capital stock, gross receipts or otherwise, to out-of-state banks,
which would typically involve a tax on an allocated or apportioned
part of the entire tax measure, there is a narrower issue, albeit impor-
tant to banks, that needs to be considered. May the States levy direct
net income taxes on interest or other income derived by out-of-state
banks from loans made to persons residing in the State or corporations
there domiciled, regardless of the extent or magnitude of the business
carried on in the State?
When the Supreme Court sustained income taxes on non-residents
with respect to income derived from sources within the State, it met
the Due Process objection by declaring that:
"The States have general dominion . . . over all persons, property
and business transactions within their borders; they assume and per-
form the duty of preserving and protecting all such persons, property,
and businesses, and, in consequence, have the power normally pertain-
ing to governments to resort to all reasonable forms of taxation in order
to defray the governmental expenses." 32
it is not uncommon for State statutes to contain general provisions
taxing income derived from "sources within the State",33 or from
"property located or business done in the Sthte".34 Prior to the adop-
tion of the uniform act referred to below, interest income was allocated
or apportioned under State corporate income and business taxes in a
variety of ways. In some States interest was allocated to the State of
legal domicile,35 whereas others allocated the income to the business
situs of the debt outside the creditor's State, if the obligation had
acquired such a situs.36
The widespread adoption of the Uniform Division of Income for
Tax Purj~oses Act (UDITPA) since 1957, when it was promulgated by
the National Conference of Commissioners on Uniform State Laws,.
particularly after embodiment of its provisions in the Multistate Tax
Compact, has produced a greater uniformity in the treatment of
interest income in corporate taxation.37 Under UDITPA, interest,
along with dividends, is allocated entirely to the State of the taxpayer's.
commercial domicile, if the item constitutes "non-business income";.
otherwise, it is apportioned under the three-factor formula embodied
in the act.38 The uniform act does not, however, apply to banks.39
32 Shaffer v. Carter, 2.52 U.S. 37, 50 (1920); see, also, Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920).
"See, e.g., Calif. Revenue and Taxation Code, Sec. 17041.
34 See, e.g., Wise. Stat., ch. 71.01(1).
~ An enumeration of the 10 states that followed this rule is set out iii "State Taxation of Interstate Corn-
merce", Report of Special Subcommittee on State Taxation of Interstate Commerce, House Committee~
on the Judiciary, vol. 1, p. 204 (1964), H.R. No. 1480, 88th Cong., 2d Sess.
"Nine states fell into this category. Ibid. See United Gas Corp. v. Fontenot, 241 La. 488, 129 So. 2d 748,
759 (1961), in which the Court discussed the Louisiana statute which provides that "interest on customer's
notes and accounts shall be allocated to the state in which customers are located".
`~ As of June 30, 1970, there were 20 States that had enacted the Multistate Tax Compact, and 14 other
States had become associate members of the Multistate Tax Commission. See Third Annual Report, Multi-
state Tax Comm., p. 1.
`~ Sees. 4 and 7. There is considerable doubt among state tax men as to what constitutes "non-business'~
income under UDITPA, and there is a movement to eliminate this qualification altogether and allocate
interest income in all cases to the State of the commercial domicile.
~° The activities of "financial organizations", Including banks and trust companies, are excluded from.
UDITPA, Sec. 2.
PAGENO="0543"
523
In considering the question as to whether a State has the power to
tax an out-of-state bank on interest income derived from loans made to
persons or businesses residing or domiciled in the State, where little
or no connection with the States is present other than the existence of
the loan,40 the key decisions are those that have arisen under intangible
property and inheritance taxes. In those cases, the Supreme Court
has determined that the State in which the individual debtor resides,
or the corporate debtor maintains its domicile, may levy property
taxes on the out-of-state lender's loan.4' The rationale behind the
decisions, namely, that because the State has dominion over the debtor
and furnishes the benefits and protection of its laws to the creditor
in enforcing his claim, the debt has a tax situs in the State, would
appear equally to justify taxation by the debtor's state of the lender's
income from the loan. Since the debt has a tax situs within the State,
the tax would be levied on property located in the State-one of the
traditional bases for jurisdiction to tax income under the Due Process
Clause 42
There is another jurisdictional string which State tax administrators
will frequently have to their bows, in asserting that the income from
loans made to individual or corporate debtors domiciled within their
territories is taxable by them, namely, the taking and recording
within the State of security instruments by the out-of-state bank.
The security documents may take various forms, such as a mortgage
or trust instrument in the case of real property, a chattel mortgage or
conditional sales agreement in the case of tangibles, or assignments
in the case of accounts receivable and other intangibles. These instru-
ments, when recorded in the appropriate state office, provide liens, or
a priority in claim for the secured creditor; the security may be
foreclosed or otherwise enforced by resort to the Courts of the re-
cording state.43 Thereby, the creditor bank obtains the benefit of the
protection of the laws of the State; it will not only be able to enforce
its claims by resort to the Courts of the State, but it may also utilize
the ancillary machinery of the State to foreclose, levy execution, and
collect the debt.
At least one Court has made the benefit and protection afforded
by a State to holders of secured loans made to debtors located within
its borders the basis for jurisdiction to tax the creditor. In State ex rd.
United States Sugar Gorp. v. Gay, an intangibles property tax was
imposed on notes held by a New York corporation, secured by a
mortgage on the debtor's real estate located in Florida.44 Although the
creditor conducted an insurance business in Florida., the Court
found that the loan had no relation to that business and that neither
the creditor corporation, in relation to the loan, nor the note had a
business situs in the State. The creditor corporation contended that
the tax violated the Due Process Clause, but the Court held that the
Florida mortgage justified the levy, saying:
* * It may be fairly said that the transaction * * * would not
have been entered into without the security afforded by the mortgage
4~ The "business situs" doctrine is discussed in Part II, pp. 471-75, infra.
41 See ibid.
42 See the income tax cases cited in Note 32, supra.
~ For the protection granted to the creditor, whose claim is secured by personal property, by state law,
see the Uniform commercial Code, Art. 9; the recording provisions are set out in Sec. 9-301, et seq. This
Cods has been adopted by all the States. See, generally, Gi,lmore, Security Interests in Personal Property,
vol. 1, Ch. 15 (1965).
~ 46 So. 2d 165 (Fla. 1950).
PAGENO="0544"
524
on Florida realty and the protection afforded by our recording statutes,
and others, relating to the rights of a mortgagee. And the `practical
fact of our power' or sovereignty over such security is obvious.
It is the fact of our sovereignty which gives life to such security-
which transforms it from a worthless piece of paper into a valuable
legal right * * * *
"It appears, therefore, that if the question is `whether the state has
given anything for which it can ask return', State of Wisconsin v.
J. C. Penney Co., supra, or whether the state can demonstrate `the
practical fact of its power or sovereignty', Blackstone v. Miller,
supra, the tax here in question could satisfy the test, and that there is
ample justification for the tax." ~
Accordingly, it is my view that there is no Federal constitutional
barrier to the imposition by the debtor's state of an income tax on
the creditor, with respect to income derived from loans to debtors
residing or domiciled in the State. In the case of a bank loan, the
State of the bank's principal place of business likewise has the con-
stitutional power to tax the income to its domictharies on all income
from whatever sources derived; and since double taxation of intangi-
bles is not proscribed by the Due Process Clause, both the debtor's
and the creditor's State have the power to tax the interest income.46
C. THE DUE PROCESS CLAUSE: NEXUS
In the i'Jorthwestern-Stockham Valves cases; the taxpayers, in addi-
tion to relying on the Commerce Clause, contended that the taxes
violated the Due Process Clause. The Due Process issue was whether
the activities carried on in the taxing states "form a sufficient nexus
between such a tax and transactions within a state for which the
tax is an exaction." ~
"Nexus"-a term now familiar to corporate executives, as well
as to law vers and accountants-was delineated as meaning "`some
definite link, some minimum connection' sufficient to satisfy due
process requirements"; the controlling question is whether in im-
posing the tax " `the state has exerted its power in relation to 01)-
l)OItimnities which it has given, to protection whicli it has afforded,
to benefits which it has conferred . . .` "n This question was given
an affirmative answer by the Court:
"The record is without conflict that both corporations engage in
substantial income-producing activity in the taxing states. in feet in
No. 12 (the Minnesota case) almost half of the corporation's income is
derived from the taxing State's sales which are shown to be promoted
by vigorous and continuous sales campaigns run through a central
office located in the State. While in No. 33 (the Georgia ease) the
percent of sales is not available, the course of conduct was largely
identical." ~
The operations of interstate merchants are, of course, different froni
those of multistate banks. Indeed, the key fact on which the Court
relied in holding that there was an adequate Due Process nexus to
45 46 So. 2d, at p. 168; Compare, also, Kelly v. Bastedo, 70 Ariz. 371, 220 P. 2d 1069 (1950), in which the Court
said: "The right to tax exists in the State because the owner of intangibles needs the aid of the State, its
laws and Its courts to acquire and enforce his rights to his property." 220 P. 2d at p. 1069.
46 See Part II, pp. 471-75, mIre.
4~358 U.S., at p. 464.
48358U.S., atp.465.
~`358 U.S., at p. 465.
PAGENO="0545"
525
the State in the Northwestern-Stoc/cham Valves cases, the maintenance
of a place of business in the State to which were attached the com-
pany's employees who conducted its business in the State, is usually
missing in the case of the banks. There has, however, been a series -
of insurance cases in which no out-of-state offices were maintained,
in which the activities bear a good (heal of resemblance to those of
banks. We turn to those cases and consider their facts in some detail,
because of their relevance to multistate bank tax Problems.
1. The insurance tax cases
Historically, as is set out above, insurance had not been regarded
as interstate commerce until the Supreme Court in 1944 held that the
business of insurance is within the Federal regulatory power, under the
Commerce Clause.5° Responding to the possible threat of this deci-
sion to the validity of State regulation and taxation of insurance,
Congress enacted the McCarran Act, which waived any Commerce
Clause barrier to such state action.51
Subsequently, the Court was faced iii State Board of Insurance v.
Todd Shipyards with the question whether the Due Process Clause
i)recluded Texas from taxing the insured on l)remiurns paid to insurers
who were not licensed to do business in Texas, where the "only
connection between Texas and the insurance transactions is the fact
that the l)roperty covered by the insurance is physically located in
`fexas"52 `There the entire transaction leading to, and the issuance
of the insurance, had been handled outside the taxing State; the
insurer did not solicit business in Texas, it had no employees, agents
or place of business in the State; the adjustment and payment of
losses took place outside the State. The Court held that the tax was
repugnant to the Due Process Clause, and, relying on the Congres-
sional Committee Report accompanying the McCarran Act, which
stated that the legislation was not intended to abrogate the limita-
tions set out in three specifically cited earlier decisions dealing with
the Due Process issue, it found that Todd Shipyards fitted neatly
into those cases.
Two recent decisions of State courts, in each of which the Supreme
Court dismissed the insurance company's appeal for "want of a sub-
stantial Federal question", have, however, severely limited the Todd
Shipyards case.53 In People v. Umted National Life Insurance Company,
the California Insurance Commission sought an injunction against
three out-of-state lie insurance companies carrying on mail order
solicitation of policies among California residents; the State sought
to prevent the solicitation and issuance of insurance, unless the corn-
panie~ obtained certificates of authority to do business in California.°4
The insurance companies maintained offices only in the States of their
incorporation outside California; and they solicited business by mailing
their literature and application forms to prospects. After receipt of the
`° United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
~l 59 Stat. 33, 15 U.S.C., Sec. 1011; Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946).
s2370 U.S. 451, 455 (1962). The Court said: "Congress, of course, does not have the final say as to what
constitutes due process under the Fourteenth Amendment. And while Congress has authority by Sec. 5
of that Amendment to enforce its provisions, . . . the McCarran-Ferguson Act does not purport to do so."
(370 U.S., at p. 457).
13 The importance of the decisions lies in the fact that, unlike the denial of a writ of certiorari, a dismissal
for "want of a substantial Federal question" is a determination of tile Supreme Court on the merits. Ohio
ex rd. Eaton v. Price, 360 U.S. 246, 247 (1959); see Note "The Insubstantial Federal Question", 62 Harvard
Law Review 488 (1949).
~ 58 Cal. Reptr. 599, 427 P. 2d 199 (1967), appeal dismissed for want of a substantial Federal question, 389
U.S. 330 (1967). Justices Harlan and Stewart were of the opinion that probable jurisdiction should be noted.
79-421 0 - 72 - 35
PAGENO="0546"
526
application, together with the first premium, the policy is then issued
at the insurer's home office and mailed to the applicant. Premiums are
received by mail from the policyholder.55
The Court sustained the tax, finding that the activities in the State
went beyond those involved in Todd Shipyards. In considering the
question as to whether "California can constitutionally regulate the
transaction of the mail order business", the Court considered the Due
Process Clause thesis of the defendant, that:
* * * the issue * * * must turn on the presence of agents in the
regulating state; that where agents are present, regulation is permis-
sible but where, as in the instant cases, agents are not present, regula-
tions cannot be upheld even though other contacts between the insurer
and the insured have been established through the mails." 56
In rejecting this contention, the Court said:
"Applying due process criteria which give recognition to the sub-
stantial interest of the regulating state in the insurance transactions
involved, we are satisfied that in the circumstances of the instant
cases there are sufficient contacts with California to justify regulation.
The insureds are, of course, residents of California. The solicitation of
insurance actually takes place in California where the advertising
material and other forms are received by the individual addressees.
Thus realistically viewed the insurer through the instrumentality of
the mail is for all practical P~l)OS~S soliciting insurance here as
manifestly as if it were to carry on such solicitation through representa-
tives physically present within this state. . . . In response to this
solicitation, California residents complete and sign in this state the
applications for insurance. Indeed, defendant United sends to the
California addressee a pre-indorsed policy which becomes effective in
this state when the policyholder deposits in the mail here the com-
pleted `ownership application' for return to United's home office. In
all instances payment of premiums is made by California residents
from funds or bank accounts located in California. It is clear that any
claims made under the policies will most likely be investigated in this
state and that any litigation in connection with the policies will un-
doubtedly be commenced in California courts. It is also foreseeable
that should defendants for any reason fail to perform their obliga-
tions in accordance with the policies, California might be called upon
to provide assistance for the persons within its borders who were in-
tended to be financially assisted by the benefits under the policies.
"In short, these defendants have `realistically entered the state
looking for and obtaining business' (Ministers Life and Casualty
Union v. Haase, supra, 141 N.W. 2d at p. 295); the main aspects of
their insurance transactions are in this state; and to say that they are
not doing business here `is to completely ignore the facts of life and
reality.' (People v. Fairfax Family Fund, Inc. 235 Cal.
App. 2d 881, 885, 47 Cal. Reptr. 812, 815). We think the substantial
interest of California in these transactions is obvious." ~
In Ministers L~fe ~ £as~ialty Union v. Haase, an insurance com-
pany organized in Minnesota and conducting a mail order business
in life, accident and health insurance, brought a declaratory judgment
55 In the case of one of the companies, the procedure was somewhat different. United, in soliciting policies
on the lives of recently inducted servicemen, mailed pre-endorsed policies to the parents of the servicemen,
requesting them to fill them out and mail back tne applications with the first premium; the policy becomes
effective on deposit of the completed application and the required premium in the mails in California.
`5 427 P. 2d, at P. 207.
`7 427 P. 2d, at p. 209; footnote omitted.
PAGENO="0547"
527
suit attacking the constitutionality of the Wisconsin comprehensive
insurance regulatory and tax law.58 The statute imposed a 3% tax
on the premiums on insurance business done in the State by unauth-
orized insurers, as compared with a 2% tax on authorized insurers,
with secondary liability for the tax (with some exceptions) on the
insured. On facts much like those involved in the California case, the
statute was sustained. The Court distinguished Todd Shipyards on
the ground that there the insurance company "carried on no activities
within the taxing or regulating state either by mail, by agents, by
independent contractors, or otherwise, in connection with the in-
surance transaction involved",59 and held that:
". . . systematic solicitation of insurance by mail, not sporadic but
continuous, coupled with the use of local doctors and investigative
agencies for underwriting and claims settlement purposes, as well as
the group leaders' solicitation (even if they are not to be considered; as
Ministers contended, its agents) established that the Company `has
realistically entered the state looking for and obtaining business'
The activities essential to the conduct of this insurance business, both
prior to and subsequent to the making of the contract and which are
part of the organic whole, take place in Wisconsin and, in addition,
the subjects of the insurance are in this state. In common parlance and
in any enlighted sense, it cannot be said that Ministers does not do
business in Wisconsin." °°
To these cases should be added one other insurance decision of a
sta e court, which was not appealed to the Supreme Court but which
is significant for our purposes. In Howell v. Rosecl~ff Realty Go., an
action was brought by the Commissioner of Banking and Insurance to
collect the New Jersey 3% tax on insurance premiums paid to under-
writers of New Jersey risks. Rosecliff, a New Jersey corporation with
its principal place of business at Fort Lee, New Jersey, owns and
operates Palisades Amusement Park in New Jersey; the insurance
risks at issue related to the ownership of the property covering the
amusement park and the operation of the business at the park, in-
cluding public and garage keeper's liability, fire and extended cover-
age, burglary, theft and employee security ~61
The insurers are all of London, and are unauthorized to write
insurance on New Jersey risks (except in limited circumstances not
here relevant to issue certain insurance through a "licensed surplus
agent"); they maintain no offices, employees or property in the State.
The contracts of insurance on which the tax was levied were nego-
tiated in New York City, through a New York broker, and the
premiums were paid in New York by Rosecliff's check on a New York
bank.
When a loss occurs, other than in the case of public liability, Rose-
cliff notifies the broker at the latter's New York City office, who, in
turn, informs the insurer; the latter then assigns an adjuster to the
loss. The only major claim of any kind during the year at issue grew
out of a fire at Fun House. The adjuster assigned by the insurer was
an independent contractor, located in New York, who went to the
amusement park to inspect the damage with the broker. Thereafter,
5~ 30 Wis. 2d 339, 141 N.W. 2d 287 (1966), appeal dismissed for want of a substantial Federal question, 385
U.S. 205 (1966). Justices Harlan and Stewart were of the opinion that probable jurisdiction should be noted.
Petition for rehearing denied, 385 U.S. 1033 (1967).
`~ 141 N.W. 2d, at p. 293.
60 Idem, at p. 295.
61 52 NJ. 313, 245 A. 2d 318 (1968).
PAGENO="0548"
528
negotiations with the adjuster followed in New York City, with the
broker and a New York accountant retained by Rosecliff acting for
the company. The loss, when finally determined, was paid in New York
to Rosecliff's broker by check on a New York bank; the broker then
issued its check to Rosecliff (presumably by mail from New York to
Fort Lee, but this fact is not stated). The same procedure as to pay-
ment was followed when minor losses occurred.
To deal with accidents occurring at the amusement park, Rosecliff
maintains a register of each occurrence, in which it records relevant
information. During the park season, a representative of the adjust-
ment firm designated by the insurer, an independent contractor
located in New York, visits the park at least once or twice a week, and
copies the information set out in the register. The adjuster visits or
telephones the victim of the accident at his home, and he, of course, is
frequently a New Jersey resident. Many claims are settled by the
adjuster directly with the claimant, some at the latter's home in
New Jersey, and, in those cases, releases may be executed by the claim-
ant at his home. `Where a lawyer represents the claimant, Rosecliff
turns all "lawyer letters" over to the adjuster, and the adjuster picks
up the dealings with counsel. When litigation ensues, the insurer
undertakes the defense of the case, through attorneys who will or-
dinarily be New Jersey lawyers; and the legal proceedings will take
place in that State. Public liability accounts for the largest part of the
premiums at issue-approximately $100,000.
Chief Justice Weintraub, one of the most highly regarded State
Supreme Court judges in the country, writing for the New Jersey
Supreme Court, reviewed the facts relating to the public liability
policy and said:
"The insurers are obliged to investigate, to settle, to defend, and
to pay. The stipulation of facts . . . reveals intensive activity in
that regard. It is no answer to say, as Rosecliff does, that the insurers
engage `independent contractors' to perform contracts for them; the
fact remains that the obligation is the insurer's to perform, and it is
irrelevant to the subject of taxation whether they perform through
employees or through individuals who, as to the insurers, have the
status of contractors." 62
The other policies involved no such extensive activity on the
insurer's part, but the Court noted that the adjuster came to the
amusement park in connection with the fire loss, a practice which it
observed would be normal, and concluded that "such acts within the
State would themselves be enough to support the tax." Chief Justice
Weintraub concluded:
". . . Rosecliff is a New Jersey corporation, earns in this State
the money with which it pays the premiums, draws its premium
checks here, and . . . realistically, the policies are an integral part
of the total business operation conducted in this State alone." 63
These decisions, as will be seen below when we apply the authorities
to the operations of multistate banks, are among the forefront cases
dealing with a business that presents many of the crucial questions
involved in state taxation of banks, and they lend strong support
to the constitutionality of state corporate net income and d oing
business taxes as applied to multistate banks.
~2 245 A. 2d, at p. 325.
"Idem, at p. 326.
PAGENO="0549"
529
~?. Equipment lea~ses as a basis for jurisdiction to levy income or business
taxes
The ownership of real estate, inventory, or other tangible personal
property located in a State, and used by a taxpayer in its business,
is typically made the .basis for an income or business tax.64 The power
of the States to tax income from realS or personal property located
within their borders is well established.65 Consequently, rents from
real estate located in a State, and from personal property having its
situs in the State, at least if there used by the taxpayer in its business,
are taxable. The conduct of a business in a State, based on the owner-
ship of real or personal property having a more or less permanent
location there, would thus warrant the levy of an income or doing
business tax.66
An issue was presented to the Oregon Supreme Court in a case
having important bearing on equipment leasing by banks. In American
Refrigerator Transit Go. v. State Tax Gommission, the taxpayer (ART)
owned refrigerator cars, which it leased to operating railroads for use
by them in rendering transportation service.67 ART had no rental
agreement with any railroad operating in Oregon, but under railroad
interchange practice, some of ART's cars aie interchanged with rail-
roads that operate in that State. Servicing and light repairs are done
by the railroads, but all major repairs are handled by ART outside
Oregon. The refrigerated cars are delivered to the railroads by ART at
various junction points outside Oregon, and ART has no control over
their routing, movement, interchange or use.
The State Tax Commission applied Oregon's net 8% income tax to
ART on "its net income derived from sources within the State". That
term as defined includes "income from tangible or intangible property
located or having a. situs in this state". The tax was assessed on the
rental income received by ART for the use of its cars while in Oregon;
the rental is a fixed rate per mile of use.
`While conceding that the presence of its cars in Oregon warranted
the imposition of a property tax-which ART pays without objec-
tion 68-the Oregon Tax Court had invalidated the net income tax
under the Due Process~Clause, because of a lack of sufficient nexus
between ART and the State, saying:
"A review of the cases brings forth, from those cases in which
sufficient nexus has been found, the presence of one salient and deter-
minative feature which is not found in this case. In each of those cases
finding sufficient nexus, there was, within the borders of the taxing
state, a person or persons connected with, and engaged in business
activities and transactions on behalf of, the proposed taxpayer. In the
instant case there is no such person or activity in Oregon. . . . Thus
the required nexus between tax and transaction fails for want of one of
the elements which due process requires.
* * * * * * *
° See, e.g., New York Tax Law, Sec. 209; 72 Pa. Purdon's Statutes, Sec. 1901.
65 Shaffer v. Carter, 252 U.S. 37 (1940).
° Cheney Brothers Co. v. Massachusetts, 246 U.S. 147 (1918). See, also, the emphasis placed on property
In the State, in sustaining a doing business tax measured by gross proceeds of sales, in General Motors
Corporation v. Washington, 377 U.S. 436 (1964).
67 238 Ore. 340. 395 P. 2d 127 (1964).
68 Apportioned property taxes on railroad moving stock regularly moving in and Out of a State were early
sustained by the Supreme Court. Pullman's Palace Car Co. v. Pennsylvania, 141 U.S. 18 (1891). For a more
recsnt case in that general line, applied to boats and barges, see Ott v. Mississippi Valley Barge Line Co.,
336 U.S. 169(1949).
PAGENO="0550"
530
"There is nothing that this state does or provides which has a con-
nection with that income as such and for which it can exact its tax,
especiafly having already exacted its property tax for the protection of
the plaintiff's income-producing property." 69
The Oregon Supreme Court rejected this view of the nexus require-
ment, saying:
"We cannot accept the lower court's concept of nexus necessary to
sustain the constitutionality of the tax imposed upon plaintiff. We
do not regard it as essential to the existence of a nexus that the tax-
payer, through its agents, directly engage in some form of physical
activity within the state in furtherance of a business purpose. The
connection between the taxing state and the out-of-state taxpayer
necessary to establish nexus is essentially an economic rather than a
physical relationship.
"The nexus exists whenever the corporation takes advantage of the
economic milieu within the state to realize a profit. The state is en-
titled to tax if the benefits it provides are a substantial economic
factor in the production of the taxpayer's income. These benefits are
found in the maintenance of conditions essential to the pro.duction or
marketing of goods. They may be realized simply in the protection of
the taxpayer's property used in the production of income.
Nexus may be found even where neither property nor per-
sonnel of the taxpayer is employed within the taxing state if it can be
said that the state substantially contributes to the production of the
taxpayer's income." 70
The holding of the Oregon Court that the presence of leased `equip-
ment in a State, used by the lessees in their business, affords a basis
for imposing an income tax on the lessor, measured by the rentals, has
the support of the Supreme Courts of Arkansas and Oklahoma,7' but a
contrary decision has been re,ached in Kentucky.72 The question has
not yet reached the Supreme Court of the United States.
3. The exploitation of a local market as a jurisdictional basis for imposing
an income tax on an out-of-state corporation
The. opinion in the Oregon case gives credence to the view that the
exploitation of a local market by a corporation, not doing business in
the State, establishes the constitutional power to impose an income
tax, regardless of the presence or absence of employees, agents or
property within the State. This general approach is likewise given some
SUpl)ort by the opinions in the insurance premium tax cases. How far
has the Supreme Court gone to accept or reject this viewpoint?
69 395 P. 2d, at pp. 129-130.
70 395 P. 2d, at pp. 130-131. The Court evoked the following comments from Professor Paul Hartman:
Should not the exploitation of a state's markets for the capture of profits be enough for that state to
demand something in return, thus satisfying the requisites of the due process clause? Several hundred
travelling salesmen, no matter how avidly they hawk their wares, are not nearly as effective a `nexus' for an
exploitation or invasion of a consumer market as a Dinah Shore or a Pat Boone as they croon their sponsor's
products into the hands of thousands of purchasers on interstate television and radio. Is the state of market
to be denied a tax from either the out-of-state seller or the broadcasting company because the contacts of
such out-of-state sellers and broadcasters are ethereal only? Or, should a well-known milk company be
permitted to milk the consumer market with the sonorous singing of ballads by hillfolk and western singers
without paying its tithe to tne state of market on the ground that the interstate radio and television milking
process is too ethereal?" Hartman, "State Taxation of Corporate Income from a Multistate Business",
13 Vanderbilt Law Review 21, 43 (1959).
7' Commissioner of Revenue v. Pacific Fruit Express Co., 227 Ark. 8, 296 SW. 2d 676 (1957); Oklahoma
Tax Comm. v. American Refrigerator Transit Co., 349 P. 2d 746 (Okla., 1960).
72 Kentucky Tax Comm. v. American Refrigerator Transit Co., 294 SW. 2d 554 (Ky.. 1956). The Georgia
Court held the rentals not taxable on statutory grounds in Williams v. American Refrigerator Transit Co.,
91 Ga. App. 522, 86 SE. 2d 336 (1955).
PAGENO="0551"
531
The Court has had to deal with this general contention in a different
tax area from that here under consideration-the duty of the inter-
state merchant to collect use taxes on sales made to persons residing
in the taxing state. In National Beilas Hess v. Department of Revenue,73
a direct mail order merchandise house, a Delaware c'orj)oration, with
its principal l)lace of business in Kansas City, Missouri, solicited sales
of its wares by catalogues and fliers sent by mail to residents of Illinois.
it maintained no office, warehouse, or other place of business in Illinois,
and owned no proJ)erty there; it had no salesmen, representatives or
other agents or employees in that State. All goods are mailed or sent
by common carrier to the customer in Illinois from outside the State;
all ~)ayments are made directly to National at its office in Kansas City.
In considermg National's contention that the imposition of the duty
to collect the use tax would violate the Interstate Commerce or the
Due Process Clause, the Court began by observing that the two
claims are closely related.74 It pointed out that the earlier (lecisions
sustaining the power of the States to make an interstate seller a use
tax collecting agent had been cases in which the sales were arranged by
local agents in the taxing State,75 or in which a mail order seller
maintained local retail stores in the State.76 in those cases, said the
Court, "the out-of-state seller was plainly accorded the l)lotOction
and services of the taxing state." n The farthest constitutional
reach that the Court had approved up to that point was in 8cr ipto,
Inc. v. Garson, where independent contractors, as distinguished from
em~)loyees-therG were 10 wholesalers, jobbers or salesmen-con-
ducted continuous solicitation of orders within the State.78 To extend
this duty to collect use taxes to the mail order business, in the absence
of such employees or agents, or retail stores in the State, would, the
Court held, unduly burden interstate commerce. It stated that the
"resulting impediments upon the free conduct of interstate business
would neither be imaginary nor remote," referring to the numerous
local taxes, the variations in rates and exemptions, and the book-
keeping and filing of returns that would be required, which:
"~ * * could entangle National's interstate business in a virtual
welter of complicated obligations to local jurisdictions with no legiti-
mate claim to impose `a fair share of the costs of the local government'.
"The very purpose of the Commerce Clause was to ensure a national
economy free from such unjustifiable local entanglements." n
Using this Commerce Clause language, the Court held that the
imposition of the duty to collect the tax was beyond the power of the
State.
The dissent by Justice Fortas, joined in by Justices Black and
Douglas, reflects the genera.l l)oint of view~ of the Oregon court and of
~3 386 U.S. 753 (1967).
~ "For the test whether a particular state exaction is such as to invade the exclusive authority of Congress
to regulate trade between the States, and the test for a State's compliance with the requirements of due proc-
ess in this area are similar. . . . As to the former, the Court has held that `State taxation falling on interstate
commerce . . . can only be justified as designed to make such commerce bear a fair share of the cost of the
local government whose protectionit enjoys'. Freeman v. Hewit, 329 u.S. 249, 253. . . . And in determining
whether a state tax falls within the confines of the Due Process Clause, the Court has said that the `simple
but controlling question is whether the state has given anything for which it can ask return'. Wisconsin v.
J. C. Penney Co., 311 U.S. 435, 444". Compare Mr. Justice Rutledge's comments on the interrelations of
the Commerce and Due Process clauses in International Harvester Co. v. Department of Treasury, 322
U.S. 340, 353 (1944).
~` General Trading Co. v. Tax Commission, 322 U.S. 335 (1944).
Th Nelson v. Sears Roebuck & Co., 312 U.S. 359 (1941).
~ 386 U.S., at p. 757.
~ 362 U.S. 207 (1960).
~` 386 U.S., at pp. 759-760.
PAGENO="0552"
532
some commentators, that the "large-scale, systematic, continuous
solicitation and exploitation of the consumer market is a sufficient
`nexus' " to permit a State to impose the duty to collect a use tax,'°
and to warrant the levy of a tax on the income derived from the State
in such market exploitation; and that neither the Commerce Clause
nor the Due Process Clause debars that result.8'
D. THE CONTOURS OF "INTRASTATE BUSINESS", THE JURISDICTIONAL
FOUNDATION FOR A DOING BUSINESS TAX
In the insurance premium and interstate selling cases considered
above, the question as to whether the business being conducted within
the taxing State was interstate or intrastate was not a central issue.
The issue was whether there was a sufficient nexus to the State to
satisfy the Due Process Clause.
We must now come to grips with the delimitation of the scope of
interstate, a.s compared with intrastate, business. This distinction is
of particular importance in the taxation of banks, because of its bear-
ing on the taxation of income from Federal securities and the use of
the securities themselves in the tax base.
The problem arises out of another conceptual distinction-some
commentators have categorized it as "metaphysical"-between the
subject and the measure of taxes. The States are debarred by the
intergovernmental immunity doctrine and by Federal statute from
applying their income taxes to the interest on Federal securities or
from subjecting the securities to an ad valorem tax.'2 Nevertheless,
the States may include in a net income measure of an excise, such as a
doing business tax, the interest that Federal securities throw off, or,
in a capital stock measure, the securities themselves.'3
Because "banks hold a large proportion of their total assets in
federal, state and local government bonds, the base of a direct income
tax on banks is probably less than half as large as that of an excise
tax on net earnings from all sources".'4 The result is that most States
that tax banks with respect to their net income use excise taxes."
Unless Congress should modify the existing rules of immunity, the
question as to whether a multistate bank is doing an intrastate busi-
ness within the taxing State can have a very significant effect on both
State revenues from banks and the magnitude of the liability of mdi-
vidual multistate banks.
We therefore consider the scope of the "intrastate business" as it
relates to banking activities. In approaching this matter, the conclusion
reached above becomes relevant, namely, that once a foreign corpora-
tion is found to be engaging in a locally taxable activity, the tax
0 386 U.S., at pp. 760-766.
`1 See Hartman, op. cit., supra, Note 70.
82 Weston v. charleston, 2 Pet. 449 (1829); 31 U.S.C. Sec. 742; see Pollock v. Farmers' Loan & Trust Co.,
157 U.S. 429. 524 (1895); Thomas Reed Powell, "The Waning of Intergovernmental Tax Immunities",
58 Harvard Law Review 633 (1945), and "The Remnant of Intergovernmental Immunities", id., at p. 757
(1945).
83 Flint v. Stone Tracy Co., 220 U.S. 108 (1911); Plummer v. Cole, 178 U.S. 115 (1900); see Helvering V.
Gerhardt, 304 U.S. 405, 418-419 (1938). For a list of States that currently impose taxes on, or measured by,
net income, see Sally Hey, "Information and Opinions Supplied by State Bank Tax Administrators",
Part III, Report of the Bank Tax Study, appendix 4, at pp. 74-89, 126, and 127.
84 See Samuel B. Chase, Jr., "State Taxation of Banks," 32 Law and Contemporary Problems (Winter
1967), Symposium on Banking: Part II. Developments in Banking, 149, 157; also the paper by Harvey E.
Brazer and Marjorie C. Brazer, appendix 9, at pp. 399-414, supra.
85 See Chase, Note 84, supra, at p. 155.
PAGENO="0553"
533
measure may include income, assets, and the like, which are used
exclusively in interstate commerce.86
The maintenance of a sales office within the State, to which are
attached salesmen who carry on regular and continuous solicitation
of orders in the State, was treated as interstate activity in the North-
western-Stocicham Valves cases, and, hence, would iiot lay a foundation
for a franchise or other excise tax on doing business (although it did
furnish the Due Process nexus requisite for the direct net income taxes
there sustained) 87 Other longstanding decisions of the Court have,
however, perm itte(l corn paratively minor ancillary activities carried
on locally to be used as the basis for finding an intrastate business,
which lays the foundation for an excise on doing business, that in turn,
sweeps into the measure of the tax the income from, or capital dedi-
cated to, interstate business. 88
The principle is illustrated by the 1918 decision in Oheney Brothers
Go. v. Massachusetts, decided in an era when Supreme Court (loctrine
was interpreting the Commerce Clause as imposing far stiffer barriers
to State taxation than now prevails.89 The tax at issue was a Massa-
chusetts excise on doing business, measured by authorized capital
stock; the opinion treats with seven taxpayers, three of which are here
relevant. Cheney Brothers was a Connecticut corporation that manu-
factured silk outside Massachusetts, and maintained an office in
Boston, to which were attached salesmen who solicited orders and
transmitted them to Connecticut for acceptance; the orders were filled
by shipment to the customer across State lines. The tax was invali-
dated because the Court found that the corporation was engaged ex-
clusively in interstate commerce.
Lanston Monotype Corn pany likewise rn anufactured its product,
typesetting machines, outside the State, "and sells them in interstate
commerce". Lanston had a place of business in Massachusetts "where
it keeps on hand a stock of the several parts of its machines likely to
be required for purposes of repair . . . and the parts are sold exten-
sively to those who use the machines in that and adjacent States'~.
Because the Court found that "a considerable portion"of the business
of selling and supplying the repair parts is "purely local and subject to
local taxation", it sustained the doing business tax.9°
In the case of Locomobile Company, which manufactured auto-
mobiles in Connecticut and sold them in "interstate commerce", the
"extensive local business in M assachusetts" in repairing Locorn obiles,
and reselling other cars in trade, was held to constitute intrastate
86 The discussion and the problems are not limited to net income and capital stock measures. Some States
use gross income or gross receipts measures for their privilege or other doing business taxes. See, e.g., New
Mexico Stats. Ann., Sec. 72-16A--4 (1953, Repi. Vol. 2, Part 2, and Supps.); and the Business and Occupation
Tax of the State of Washington, which is considered in General Motors Corp. v. Washington, 377 U.S. 436
(1964). While direct gross receipts taxes encounter Commerce Clause barriers that are not present in direct
net income taxes (Adams Manufacturing Co. v. Storen, 304 U.S. 307 (1938)), once an intrastate business is
being carried on, the States have the power to impose doing business taxes, measured by gross receipts or
gross income, in essentially the same circumstances as such levies measured by net income. See General
Motors Corp. v. Washington, supra. The apportionment and allocation of gross receipts may, however,
present their own special problems.
87 It is interesting to observe that in enacting P.L. 86-272, 15 U.S.C., Sec. 381, Congress apparently
regarded the maintenance of an office, including a sales office, as justifying state taxation of the income
of an interstate vendor.
88 There is a New York State court decision in wnich some of the ancillary activities that in other cases
would probably have laid the basis for a doing business tax, were disregarded as de minimis. United Piece
Dye Works v. Joseph, 282 App. Div. 60, 121 N.Y.S. 2d 683 (1st Dept. 1953), aff'd 307 N.Y. 780, 121 N.E. 2d
617 (1954), certiorari denied, 348 U.S. 916 (1955). The Supreme Court, however, has not enunciated such
a doctrine.
89 246 U.S. 147 (1918).
90246 U.S., at p. 154.
PAGENO="0554"
534
business, on the basis of which the State was empowered to impose the
tax. The Court rejected the argument that because the local (repair)
business had some influence on the volume of interstate business
done by the Company in the State, the tax was invalid.9'
E. THE APPLICATION OF THE CONSTITUTIONAL PRINCIPLES TO THE
BUSINESS OF MULTISTATE BANKS: INCOME AND BUSINESS TAXES
In applying the Commerce Clause and Due Process guiding prin-
ciples, developed in the foregoing materials, to corporate net income
and business taxation of banks, I propose to consider both clauses
together, because, as set out above, the two clauses are closely related,
and the judicial tests developed in interpreting the two clauses are
similar."
The presence of l)ersonnel within a State, on a regular and con-
tinous basis, was a key element in establishing nexus in the interstate
vending cases in which direct net income taxes were sustained. The
traveling representatives of multistate banks, who periodically visit
various States in order to look after the bank's existing business,
if not to solicit loans, to solidify relations for future loans and other
business, and to maintain and develop relations with respondent
banks, may in part be analogized to traveling salesmen in the inter-
state vending cases. The analogy to cases such as Northwestern-
Stockham Valves is not complete, because in those cases the salesmen
had offices in the taxing State, which the multistate banks typically
do not maintain. The insurance cases, however, in which services
were rendered by persons who were not attached to any office of the
taxpayer in the State, indicate that clue process requirements may
be satisfied even though no office is maintained and no personnel are
regularly stationed in the taxing State.93
The use by out-of-state banks of local agents, includii~g lawyers, to
file security and enforce liens and collect on defaulted loans is very
much akin to the use of lawyers, investigators and doctors in the
insurance cases; and the holding in tile Rosecliff Realty case that juris-
diction to tax attaches through the activities in the State of an agent
who is an "independent contractor" has the imprimatur of the Supreme
Court.'4
The correspondent banking system adds another important dimen-
sion to tile presence of tile multistate banks in the States in which their
respondent banks are located. Where the legal form is that of joint
lending, the respondent bank may be acting as agent for the multi-
state bank in the negotiation of the loan, the investigation of the
borrower's credit, and the preparation and execution of the loan agree-
ment and security instruments. Typically, these documents are signed
by the customer in the respondent bank's office. Servicing of the loan,
the receipt of payments, examination of reports of compliance with
conditions of the loan, steps to collect in the event of delay or default
in_payment-these are also likely to involve actions in the local State
91 246 U.S., at p. 154.
~ Sea Note 74, p. 4t1, supra.
`~ Periodic visits by out-of-state divisional representatives of General Motors to the!State of Washington
tofacilitate and promote local sales and improve service and relations with local dealers, was a factor relied
ollby the Court in upholding the huriness tax in General Motors Corp. v. Washington, 377 U.S. 436 (1064).
~ Scripto, Inc. v. Carson, 362 U.S. 207 (1960).
PAGENO="0555"
535
by the respondent on behalf of the multistate bank. The servicing of
account receivable loans, construction mortgage, and other compli-
cated lending transactions may produce a considerable amount of
local activity on behalf of an out-of-state participating bank.95
This presence is further augmented by the variety of sporadic and
irregular activities carried on directly by the bank's employees in
States away from the home office and by other banks acting as its
agents. This area includes bids made on behalf of an underwriting
syndicate of banks with respect to bond issues, and participations in
large loans made by a group of banks. Here again, the out-of-horn e-
state actions may include negotiations, the preparation and execution
of legal documents, closings, servicing in the case of a loan, actions on
defaults, modifications of the loans, and the like.
Then, there is the modern development of leased equipment, which
has vested in banks, or their nominees, large amounts of tangible prop-
erty scattered over the country. While I am dubious that the Su-
preme Court would be likely to hold that the location in a State of
leased equipment, used there by the lessee in its business, constitutes
the doing of business in the State by an out-of-state bank which owns
the equipment,96 nevertheless, this factor could readily be thrown into
the hopper as part of the larger complex, and be given some weight in
deciding whether an intrastate business is being conducted.
On the contrary, I do not put much stock in the likelihood that the
Supreme Court would accept an argument that the mere existence of a
large amount of loans to residents or corporations within the State
constitutes property in the State that would justify a doing business
tax.97 Nor are the extensive holdings over the country of stocks, bonds
and real estate by banks as executors of wills, trustees of inter vivos
and testamentary trusts, and under employee pension plans likely to be
taken into account in deciding whether the banks, qua banks, are tax-
able in the State. At the outset, it is to be noted that there are state
statutes that exonerate banks from being deemed to be doing business
~` There are state statutes which provide that an out-of-state bank may make loans in the State, acquire
and hold mortgages and other security on real and personal property, on its own behalf or as trustee, inspect
the property, bring suit to collect on the loans and foreclose on security, etc., without being deemed to be
doing business in the State. See, e.g., California Corporations Code, Sec. 6450; Illinois Business Corporations
Act, 32 Smith Hurd, Ill. Annotated Statutes, Sec. 212. (For a review of these statutes, see supra, supple-
mentary note to appendix 10 of the Bank Tax Study.) These statutes are designed to exempt the out-of-state
banks irons the requirement of registering to do business in the State and to prevent their being barred from
collecting on the loans in the Courts of the State for failure to register. Of course, if the States should decide
to rely on the lending activities and the taking and holding of security to support a doing business tax on
out-of-state banks, these statutes would have to be amended so as to be inapplicable to tne taxing statute.
The existence of such statutes is not relevant to the constitutional power of the States to tax out-of-state
banks, which is the concern of our inquiry. Nevertheless, the repeal of such safeguards for banks, built over
the years into corporate statutes, may in fact be both undesirable and extremely difficult to accomplish
in State legislatures.
56 W'hat constitutes "doingbusiness" by a foreign corporation in a State is not the same issue as to whether
income has been derived from "sources within the State", although the questions are not unrelated. It is
for that reason that it is by no means clear that, if the Supreme Court were to accept the rule of the American
Refrigerator case and uphold direct income taxation of rentals from leased equipment used by a lessee in
the State, it would also hold that the lessor is thereby doing business in the State. The same doubts would
be applicable to the consequences of the Court's following State cx rd United States Sugar Corp. v. Gay,
Note 44, supra.
97 The argument would run as follows: The existence of a large amount of loans, owed by debtors located in
the State, establishes that the multistate bank is maintaining property in the State, relying on the reinstate-
ment of Blackstone v. Miller to establish that the debts have a situs within the State. (See Part II, infra.)
And just as the ownership of inventory or real estate in a State warrants the levy of a franchise or doing
business tax, so the locus of the intangible debts justifies the levy. This appears to me to be pressing the im-
pact of Blackstone v. Miller too far; it would mean that every interstate merchant who has customers in the
State who owe him for goods purchased. would be subject to a doing business tax. I doubt that the Supreme
Court is ready to push the law to that point, See, also, the statutes referred to in Note 95, supra.
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536
in the State by reason of such fiduciary activities. 98 Although the trust
or estate itself may be taxable in the State,99 and conceivably the bank
may be subject to income tax for any trustee's or executor's fees it
may be deemed to earn from sources within the State, none of this
would be likely to have much bearing on the treatment of other aspects
of the bank's activities in the State so as to subject it to a general
income tax, or in deciding whether the bank is doing business in the
State.
To be sure, theoretically, the States have the power to modify these
statutes, by declaring that they are to have no application in deter-
mining whether the out-of-state bank is taxable, but such a develop-
ment is highly unrealistic. It is extremely unlikely that the States will
be moved to disrupt these long-standing safeguards, which have been
built up at the behest of banks in order to enable them to accommodate
to the needs of the country's mobile wealth that winds up in estates and
trusts, and more recently, in pension plans. Consequently, in my
judgment, the fiduciary activities of banks and their holdings as
fiduciaries ought to be disregarded in evaluating the taxing jurisdiction
of the State over banks.10°
Promotion and advertising to obtain loan business and deposits
from residents of other States, and to develop the credit card business,
are, I believe, activities to be taken into account. While we do not have
data as to the amount of expenditures for these purposes, there appears
to be a considerable amount of advertising and promotion in news-
papers, magazines, over television and radio, and by mail order that
transcend State lines. The competition for depositor's funds in recent
years, given the tight money market, has also seen vigorous newspaper
and other advertising that reaches beyond State lines. `While such
exploitation of a State's market, taken alone, has not been accepted
by the Supreme Court as warranting taxing jurisdiction, it is unlikely
that it would he ignored when it is part of an overall package of other
activities in a State, in judging whether an intrastate business is being
conducted.
In the analysis made of the judicial decisions, I reached the con-
clusion that, once the permanent provision of P.L. 91-156 becomes
effective, the States in which debtors to whom multistate banks have
loans outstanding reside or maintain their dorniciles, will be empowered
to levy income taxes on the income realized by the banks from the
° State statutes over the country authorize banks to act as executors or trustees within the State on com-
plying with stated conditions, such as the filing of copies of the will or trust instrument with the state author-
ities. These statutes do not require compliance with the laws of the State relative to qualification of foreign
corporations to do business in the State. See, e.g., Illinois. 32 Smith-Hurd Annotated Statutes, Sec. 304.2.
The statutes of the various states are collected in 4 Prentice-Hall, Wills, Estate and Trust Service, Par.
17,101. Thus, in Massachusetts a bank organized under the laws of another State may obtain a certificate
authorizing it to act in a fiduciary capacity within the State, provided the bank's home state grants a recip-
rocal privilege to Massachusetts banks. Mass. General Laws Annotated, Ch. 167. Sec. 45A. The certificate
will not be issued unless the bank agrees to "pay any such taxes. . . as may be levied or imposed upon it in
the commonwealth." It also provides that: "Such a corporation . . . to the extent only that it acts a~ fiduciaì-y
as hereinbefore authorized, shall not be deemed to transact business in the commonwealth for purposes of
sections thirty-seven to forty-five inclusive", which prohibit out-of-state banks from transacting business
without a certificate of authorization.
99 See Greenough v. Tax Assessors of City of Newport, 331 U.S. 486 (1947).
1® The taxation of the business of banks, because of their activities in a State as fiduciaries, presents
different problems from taxing banks on account of their lending activities. In the former case, the trusts
and estates or the distributee-beneficiaries are already typically subject to income tax on income derived
from sources within the State, and the corpus to property taxes. But the borrower's State collects no revenue
from the out-of-state lender's loans. hence, although we are here, of course, speculating, the States are, in
my view, more likely to be moved to provide that the exoneration statutes applying to out-of-state lending
are not to be taken into account, in determining whether an out-of-state bank is doing business in the State
for tax purposes or is to be subjected to the State's general corporate income tax, than in the case of fiduciary
activities.
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loans. No more need he established to warrant the imposition of a
direct net income tax than the existence of the loans to local debtors.
When we treat with corporate franchise or other excise taxes on
doing business, whether measured by net income, gross receipts,
capital stock, or otherwise (and with general corporate net income
taxes), more activity and more localized connections within the State
are required to justify the levies. The judicial test in the doing business
tax cases is whether an intrastate business is being done, for which
the state may exact the levy. The character of this tax appears to
require, inter alia, that the out-of-state corporation carry on a more or
less continuous business which, to use the tantalizingly vague stand-
ard established by the Supreme Court, is "apart from the flow of
commerce", or is "sufficiently separate from the interstate commerce"
to he treated as a local activity.'9'
The requisite regularity and continuity of the business carried on
by at least many multistate banks *outside their home States are
clearly present. We are not here dealing with banks that occasionally
make a loan to a customer in another State, but with a continuous
flow of banking activities regularly carried on in various States, in-
duced by a considerable amount of advertising and promotion. That
the multistate banks maintain a "presence" in the States in which
they operate likewise appears from the foregoing summary of the
activities of their employees and agents within such States. The
crucial question is: Is this an "interstate" presence, like that of the
salesman who takes orders that in form at least must be approved
by the home office, or do the activities of the employees a.nd agents
of the multistate bank add up to an "intrastate" presence in the
various States?
The States can, in my opinion, make out a persuasive case for the
view that a local, intrastate business is being carried on by the em-
ployees and agents of the multistate bank. The visitations by the
multistate bank's representatives to confer with customers and cor-
respondents, to maintain and develop business, to iron out problems,
and to visit the customer's plants are not unlike the maintenance in
the State of properties used in interstate commerce,'°2 or the rendition
of ancillary services to customers who purchase goods shipped into
the State from out-of-state l)lants; 103 these have been held to constitute
the conduct of an intrastate business. And the activities of the re-
spondent banks on behalf, or as agents, of their out-of-state correspond-
ents in handling participation loans, take on a distinctly local charac-
ter; the making of contracts within a State has traditionally been
regarded as local commerce. `When to this is added the servicing and
collection of loans, and the use of the local courts by the bank's repre-
sentatives to collect debts and foreclose on security, the case is very
strong, indeed, for the conclusion that at least many multistate banks
maintain a considerable "presence" in the local States through em-
ployees and agents, who are conducting on behalf of the banks, a local
business that is "apart from the commerce itself".
Ill See Memphis Natural Gas Co. v. Stone, 335 U.S. 80, 87, 90 (1948).
`°` See Memphis Natural Gas Co. v. Stone, Note 101, supra; West Publishing Co. v. McColgan. 328 U.s.
823 (1946), affirming per curiam, 27 Cal. 2d 705, 166 P. 2d 861 (1946).
103 Cheney Brothers Co. v. Massachusetts, 246 U.S. 147 (1918).
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Finally, the sheer magnitude of the lending and other services
provided by at least the larger multistate banks in the markets over
the country may add weight to the conclusion that intrastate business
is being carried on by them.'°4 Given the fact that an estimated nearly
30% of all business loans outstanding by member banks were made to
customers located outside the home States of the banks, it is apparent
that a very substantial loan business is being handled over the country
by multistate banks.105
Viewing the overall presence of personnel, the entire range and
magnitude of activities being carried on by, or on behalf of, multistate
banks in States outside their home states, I conclude by paraphrasihg
one of its opinions that the Supreme Court is likely to "approve"a
"State's decision to regard such a rivalry with its local merchants
(here merchants of banking) as equivalent to being a local
merchant".'°t The authorities, and particularly the decisions of the
Supreme Courts of California and Wisconsin sustaining the taxation
of out-of-state mail order insurance companies, decisions which were
certified by the Supreme Court as within the constitutional powers of
the States, are highly persuasive precedent for sustaining the power
of the States to impose doing business taxes and, a fortiori, general net
income taxes on multistate banks.107
Accordingly, it is my opinion that in the event the permanent
provisions of P.L. 91-156 should come into effect unamended, the
States would be empowered to impose doing business taxes or general
corporate net income taxes on the typical multistate banks here
described; that the doing business taxes could be measured by net
income, capital stock, gross receipts, or other base properly
apportioned or allocated to the State, embracing the segments of the
base involving interstate, as well as intrastate, business.
F. THE STATE BORDER BANK
Taxation of the State border banks, as that term is described in the
summary of facts set out above, presents somewhat different problems
from those of the type of multistate bank to which our attention has
been directed up to this point. The State border bank's business is
conducted largely through its home office; while at times its employees
go into the neighboring State to negotiate loans or investigate
borrowers, this is likely to be on a sporadic and irregular basis. Th
bank is, however, likely to engage in promotion and advertising that
reach the market in the neighboring State for loans, deposits, credit
cards, and the like.
Under the cases discussed above, there is no Due Process or
Commerce Clause barrier to the imposition on State border banks by
their neighboring States of a direct net income tax on income~ derived
from sources within the State, such as interest on loans to residents or
businesses domiciled in the State; and, if the American Refrigerator
Transit case should be followed, rentals attributable to the use of the
equipment in the State likewise would be taxable.
`°` There is an intimation in Field Enterprises, Inc. v. State of Washington, 47 Wash. 2d 852, 289 P. 2d
1010 (1955), affirmed per curiarn 352 U.S. 806 (1956), that interstate selling, if carried on at a sufficiently
large scale within a State, may take on an intrastate character. This is considered in Jerome R. 1-lellerstein
State and Local Taxation: Cases and Materials, 184-185 (3rd ed. 1969). For a comment on the case see
Richard L. Strecker, "Local Incidents of Interstate Business", 18 Ohio State Law Journal 69 (1957).
`°` See Summary of the Major Facts, pp. 435-36, supra, in this appendix.
`°° See Miller Brothers Co. v. Maryland, 347 U.S. 340, 346 (1954).
107 While the insurance cases cited deal only with the Due Process and not the Commerce Clause, I have
set out above the view of the Supreme Court that essentially the same considerations govern both clauses.
PAGENO="0559"
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Credit card income presents somewhat complicated and perhaps
novel l)roblems in determining the "source" of the income, but one
way to look at the transaction is that every time a customer uses the
border State bank's credit card in the neighboring State in buying
goods, or renting a car, or the like, he acts as agent for the State
border bank in creating an obligation by the bank to pay the merchant
or car rental agency.108 Likewise, the credit card holder at the same
time is thereby borrowing from the bank, so that a loan is made in the
State where the transaction takes place. While there may be other
ways of analyzing the legal consequences of a credit card transaction,
however one views the matter, legal relations, including a debt and a
loan, are created by acts taking place in the State of the purchase or
rental, and ultimately the State border bank will derive income from
the transaction, which might well justify the levy by that State of a
properly apportioned net income tax on this income.109
There may be other miscellaneous income derived by State border
banks from the neighboring States which might be taxable under a
direct net income tax. For example, if a bank renders electronic data
service to customers in the adjoining State and sends its employees
into that State to carry on some of this work, a J)art of this service
income would be derived from sources within that State, and wou1d~
be taxable by it. In general, however, if the bank conducts its business
as outlined above, particularly if it is not a large institution, has no
respondents in the State, and its employees (10 not spend any consid-
erable amount of time in the neighboring State, it appears unlikely
that the Supreme Court would hold that the neighboring State may
subject it to a. franchise or other excise tax for the ~)rivilege of doing
business there.
Nevertheless, the state of the law in this area is by no means neat
and clear, and the innumerable variety of particular transactions and
banking services involved could result in State court decisions adverse
to l)articular State border banks. In view of the fact that we are here
considering banks that would ordinarily not he large institutions-if
they fall into the latter category, they are likely also to be multistate
banks, as we have used that term, and be subject to the principles
outlined above-and inasmuch as the State revenues at stake would
be comparatively small, it is, I believe, wise to recommend congres-
sional action proscribing income or doing business taxation of such
banks by the neighboring States. The costly controversies that would
thereby be avoided in cases in the penumbra between taxability and
non-taxability and the sheer administrative expense of taxpayer
compliance with the tax laws and of audit by the States, given the
comparatively small amounts of revenues involved, would, in my
opinion, adequately justify this recommendation. To accomplish that
result, the most appropriate technique, in my view, would be to impose
a quantitative minimum standard of receipts or income that must be
derived from the State before it would have jurisdiction to impose
income or doing business taxes on an out-of-state bank.
108 For a consideration of the proper legal treatment of credit card transactions, see Thompson, "The
Applicability of the Letter of Credit to Modern Bank Card Systems", 18 University of Kansas Law Review
871 (1970).
100 It is my understanding that the bank issuing the credit card frequently interposes a separate wholly-
owned corporate entity-a credit card subsidiary-between itself and the customer. However, since the
funds are provided by the bank, which winds up with this income, if there is a profit, it is likely, in many
States at least, that the separate entity of the credit card affiliate would be ignored, or that its income would
be combined or consolidated with that of the bank.
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G. CONCLUSIONS WITH RESPECT TO JURISDICTION TO IMPOSE NET IN-
COME AND BUSINESS TAXES ON OUT-OF-STATE BANKS
1. Many banks are engaged in businesses outside their home states
which, it is be]ieved, would be held by the Supreme Court to con-
stitute, in part at least, interstate commerce.
2. Under the current doctrine of the Supreme Court, the Commerce
Clause does not prohibit the imposition by the States of a direct net
income tax, properly apportioned or allocated to the State, on an
out-of-state corporation conducting an exclusively interstate business
within its borders. However, the Commerce Clause does prohibit
excise taxes imposed on a foreign corporation for the privilege of doing
an exclusively interstate business within the State. This principle
extends to excise taxes measured by net income, capital stock, grOss
income, gross receipts taxes, and the like.
3. A foreign corporation (which is not an instrumentality of inter-
state commerce, such as a railroad or an airline) conducting within
the State an intrastate business, along with its interstate business,
may be subjected to a franchise tax or, other excise tax on doing
business. Although the subject of such taxes is the privilege of doing
an intrastate business, they may, nevertheless, be measured by income,
capital stock, gross income, gross receipts, or otherwise, from all
aspects of the business conducted in the State, interstate as well as
intrastate.
4. The Due Process Clause proscribes extraterritorial taxation, by
requiring that there be a "nexus", or "some definite link", between the
out-of-state corporation, its personnel, its activities, its income, its
receipts or property, and the taxing State, as a basis for State income
or business taxes.
5. Net income taxes may, in my opinion, be levied on out-of-state
banks, including national banks, unless protected by immunity from
state taxation, with respect to interest or other income derived from
loans made to residents of the State, or *to businesses maintaining
their commercial domiciles within the State. Moreover, although the
Supreme Court has not yet Passed on the issue, the highest courts of
some States have upheld the application of corporate income taxes to
rentals derived by an out-of-state corporation from leased equipment,
owned by it and used by the lessee within the taxing state.
6. The permanent provisions of P.L. 91-156, which are designed to
waive the immunity of national banks from state taxation, would
place out-of-state national banks, vis-a-vis state taxation, in the
same position as other foreign corporations. As a result, once the
permanent provisions become effective, the constitutional principles
outlined above will be applicable to national banks.
7. The established doctrine, that once a foreign corporation engages
in the conduct of an intrastate business within a State, it may be
subjected to an excise tax measured by income, property, receipts, and
the like, from its interstate as well as its intrastate business within
the State, has particular significance in bank taxation. This grows out
of decisions of the Supreme Court dealing with the immunity from
taxation of Federal securities. Under the authorities and the Federal
statute, neither the Federal bonds themselves nor the income they
throw off may be taxed directly by the States, but the bonds and the
income are includible in the measure of excise taxes, including taxes
PAGENO="0561"
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on doing business. The consequence of these decisions is that a sub-
stantial part of the income of banks would be excluded from the tax
base of a direct State net income tax, but if the bank is engaged, in
part at least, in an intrastate business, this income could be included
in the base of a doing business tax, measured by net income; and the
securities could be included in the base of a doing business tax,
measured by capital stock.
8. A review of the banking activities conducted by typical multi-
state banks in States other than their home States, leads me to conclude
that the Due Process nexus requirements for a direct State income tax
would be met in the case of the typical multistate bank. Multistate
l)anks that carry on lending or other activities outside their home
States, on a more or less regular or continuous basis, act as correspond-
ents for banks in other States and engage in loan participations with
them, and carry on the miscellaneous activities in such States that
are a normal part of the business of regional and nationwide banking
institutions, would, in my opinion, be held to be doing an intrastate
business in such States. Consequently, they would also be subject to
doing business taxes in those States.
9. The smaller State border banks that do not engage in the mag-
nitude or variety of out-of-state business of the multistate bank, as we
have used that term, but regularly make loans to residents and busi-
nesses of the neighboring State, receive deposits and issue credit cards,
1)rovide some miscellaneous banking services to them, and utilize adver-
tising that reaches into the neighboring State in order to solicit this
business, would, in my opinion, be subject to income tax by the neigh-
boring State with respect to income from loans, and probably on some
income from the miscellaneous activities. On the other hand, the case
for the imposition by the neighboring State of a doing business tax on
such a State border bank appears to me to be considerably weaker and
open to question und er the Due Process Clause, unless the bord er
bank's activities begin to loom sufficiently large as to link it to the
neighboring State in a manner that begins to push the bank into the
category of a multistate bank.
PART II
PROPERTY TAXES
National banks have long been subject to real property taxes im-
posed by state and local governments under R.S. 5219, and P.L.
91-156 leaves this power unchanged. There appears to be no reason
for recommending Federal legislation in this area to alter existing
practices. Likewise, shares of stock in banks are subject to intangible
property taxes under Section R.S. 5219, and continue to he taxable
under P.L. 91-156. There are thirteen States which tax bank shares,
and no good reason has been advanced for congressional limitation
of State taxation in this area.'
The controversial issues with respect to property taxation relate
to intangible property held by banks, i.e., taxes on credits, bonds,
stocks and other intangibles, for these are levies that the States have
been denied as to national banks under R.S. Section 5219; they will
be empowered to impose such a tax if the section remains in its
1 See supra, appendix 4; chase, "State Taxation of Banks," in Symposium on Banking, 32 Law and Con.
temporary Problems (Winter, 1967), 149, 154.
79-421 0 - 72 - 36
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present amended form. These levies, which have diminished in use
over the years, are not now widely employed and have never been
effectively enforced. Where such intangible property taxes are still
used, they are frequently imposed at rates lower than those applied
to real property.2
The Supreme Court's treatment of State taxation of intangibles
under the Due Process Clause has come full cycle during this century.
In 1903, Mr. Justice Holmes handed down a decision upholding the
power of the State of New York to include in its inheritance tax on
the estate of a resident of Illinois, a debt due him by a New York firm
and a large deposit in his account with a New York bank. The Court
sustained the tax against the contention that New York had no
jurisdiction to include the debt in its inheritance tax, and that to do
so would violate the Due Process Clause.3 Recognizing that Illinois
could tax the intangibles owned by a decedent domiciled in that State,
the Court, nevertheless, sustained New York's tax. The rationale was
that the Due Process Clause does not debar taxation of the same
property by more than one State; what the Due Process does forbid
is extraterritorial taxation; and here the jurisdictional basis for the
tax (viz., "nexus", the term developed in later cases) was explained
as follows:
"If the transfer of the deposit necessarily depends upon and involves
the law of New York for its exercise, or, in other words, if the transfer
is subject to the power of the State of New York, then New York may
subject the transfer to a tax. But it is plain that the transfer does
depend upon the law of New York, not because of any theoretical
speculation of the whereabouts of the debt, but because of the prac-
tical fact of its power over the person of the debtor. . . . What gives
the debt validity? Nothing but the fact that the law of the place
where the debtor is will make him pay.
"Power over the person of the debtor confers jurisdiction, we
repeat. And this being so, we perceive no better reason for denying
the right of New York to impose a succession tax on debts owed by
its citizens than upon tangible chattels found within the State at the
time of the death." ~
In 1930 the Supreme Court repudiated Blackstorte v. Miller and
enunciated the doctrine that the Due Process Clause does generally
forbid double taxation of intangibles. It followed the ancient maxim
of mobilia sequuntur personam, with the consequence that the State
of the domicile of the owner could tax intangibles, and not the domi-
cile of the debtor. Accordingly, it held unconstitutional a ~\`1innesota
inheritance tax imposed on a non-resident decedent, with respect to
bonds held by him that had been issued by the State of Minnesota.5
That set of constitutional precepts prevailed for less than ten years.
The rule of Blaclcstone v. Miller that the Due Process Clause does not
proscribe double taxation, was reinstated in 1939, with respect to the
2 See supra, Shoup, appendix 7, 377-83; also appendix 4.
3 Blackstone v. Miller, 188 U.S. 189 (1903).
Idem, at pp. 205-206. It is to be observed that Mr. Justice Holmes was of the view that in the case of
tangible personal property, as well as intangibles, there is no constitutional proscription on taxation both
by the State of the owner's domicile and the State where the tangible is more or less permanently located.
This view was rejected by the Supreme Court as to tangibles, and that rejection still prevails today, so
that under the Due Process Clause, only the situs of tangible personal property may impose property taxes,
or include such property in a death tax. Frick v. Pennsylvania, 268 U.S. 473 (1925); Treichler v. Wisconsin,
338 U.S. 251 (1949). See Professor Boris Bittker's dissent from this holding in "The Taxation of Out-of-
State Tangible Property", 56 Yale L. J. 640 (1947).
Farmers Loan & Trust Company v. Minnesota, 280 U.S. 204 (1930).
PAGENO="0563"
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taxation of intangibles.6 The rule, which still obtains at present,
was described by the Court in a later case in these words:
"We held that the power to tax intangibles was not restricted to one
State, whether `we regard the right of a state to tax as founded on
power over the object taxed . . . through dominion over tangibles or
over persons whose relationships are the source of intangible rights;
or on the benefit or protection conferred by the taxing authority,
or both.' " `
Under these guiding principles, the Supreme Court has also sus-
tained inheritance taxes on shares of stock owned by a decedent that
were levied by the State of incorporation of the company, even though
the decedent had no other connection with that State.8 The same rules
apply to ad valorem taxes on shares of stock.9
During the earlier era in which the more restrictive view of the
taxing powers of the States governed, the Court had carved out two
important exceptions to the rule that intangibles have a single situs
for tax purposes. If intangibles have become an integral part of a
business carried on in a State, they acquire a "business situs", and may
be taxed in that State, while still remaining taxable by the State of
the owner's domicile.'° And if the State of incorporation is essentially
only a formal, legal domicile, and the principal seat of the corpora-
tion's activities is in another State, as often happens with Delaware
incorporations, the latter becomes its "commercial domicile" and may
tax all the intangibles." At the same time the State of incorporation,
having given the corporation its legal existence, appears to retain its
full power to tax the intangibles, despite the corporation's out-of-state
commercial domicile.'2
The business situs cases are of particular relevance to State taxa-
tion of loans and credits of multistate banks, because they arose largely
out of lending activities of out-of-state corporations, carried on in*
jurisdictions in which they were not qualified to do business.1' Those
were cases in which the out-of-staters, frequently northeastern banks
and insurance companies making loans to residents of southern States,
carried out more or less continuous loan activities, acting through local
agents who handled the business for them. As indicated above, property
taxes on the loans levied by the local jurisdictions were upheld, under
"the principle that choses in action may acquire a situs for taxation
other than at the domicile of their owner if they become parts of som e
local business".'4
The reinstatement of Blaclcstone v. Miller and its holding that the
State in which the debtor resides, or has its principal seat of business,
6 Curry v. McCanless, 307 U.S. 357 (1939); Graves v. Elliott, 307 U.S. 383 (1939); State Tax Commission
of Utah v. Aldrich, 316 U.S. 174 (1942). The history is traced in Jerome R. Hellerstein and Edmund B.
Hennefeld, "State Taxation in a National Economy", 54 Harvard Law Review 949 (1941). As to tangibles,
see Note 4, supra.
State Tax Commission of Utah v. Aldrich, Note 6, supra.
8 See Note 7, supra.
Greenough v. Tax Assessors of Newport, 331 U.S. 486 (1947).
15 First Bank Stock Corp. v. Minnesota, 301 U.S. 234 (1937); see Thomas Reed Powell, "Business Situs
of Tax Credits", 28 W. va. L.Q. 89 (1922). For a more recent case discussing and applying the business
situs doctrine, see John Hancock Mutual Life Insurance Co. v. Neill, 219 P. 2d 195 (Idaho, 1957).
ii Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936); see also. Southern Pacific Co. v. McColgan, 68 Cal.
App. 23,156 P. 2d 81(1945), and United Gas Corp. v. Fontenot. 241 La. 488, 129 So. 2d 748 (1961), which
contain extensive discussions of both the doctrines of "business situs' and "commercial domicile".
12 Cream of Wheat Co. v. Grand Forks, 253 U.S. 325 (1920); see the concurring opinion of four Justices in
Newark Fire Insurance Co. v. State Board, 307 U.S. 313 (1939); and Commonwealth of Pennsylvania v.
Universal Trades, 392 Pa. 3271, 141 A. 2d 204 (1958).
13 New Orleans v. Stempel, 175 U.S. 309 (1899); Bristol v. Washington County, 177 U.S. 133 (1900); Board
of Assessors v. Comptoir National D'Escompte, 191 U.S. 388 (1903); Metropolitan Life Insurance Co. v.
New Orleans, 205 U.S. 395 (1907).
14 Wheeling Steel Corp. v. Fox, 298 U.S. 193, 210 (19361.
PAGENO="0564"
544
has the power to include the debt in the measure of an inheritance tax
levied on the nonresident creditor, and subsequent decisions of the
Supreme Court indicate that the existence of a debt owed to an out-of-
state corporation provides an adequate Due Process basis for the im-
position by the State of the debtor of an ad valorern tax on the debt.'5
And this power probably does not impair the authority of the State
of the creditor's legal domicile, or the principal seat of its business, like-
wise to impose a property tax on the intangible.
In point of fact, however, most of the States have not reached out to
exercise this full taxing power. Instead, the statutes are drawn or
administered by reference to the now-rejected constitutional premise
that intangibles may not be taxed outside the State of the creditor's
domicile, unless they have a business situs or, in the case of a corpora-
tion, the latter has a commercial domicile within the State.16 And some
State courts are still deciding cases by reference to Supreme Court
doctrine as it prevailed during the period 193O-1939,'~ aided and abet-
ted by misleading statements of the law in standard commercial legal
reference works.'8 Consequently, the current doctrine in this area of
law, albeit 30 years old, has been slow to affect the actual taxing
practices of the States, a lag that is not unknown elsewhere in the
constitutional history of State taxation.'9 Some State courts have, how-
ever, understood and accepted the implications of the cases, with the
result that their opinions and decisions are beginning to reflect the
broadened taxing power of the States under the Due Process Clause,
as enunciated by prevailing Supreme Court decisions.20
The conclusion that I draw from this analysis of the authorities is
that the Due Process Clause would not stand as a barrier to the impo-
sition by the States of property taxes on loans or credits held by out-
of-state banks having no connection with the taxing State other than
the fact that the debtor resides there, or in the case of a corporation,
has its commercial domicile in the State.2' The same rule would obtain
15 See, however, the summary and extensive listing of the cases by Mr. Justice Jackson in Miller Brothers
Co. v. Maryland. 347 U.S. 340, 345 (1954), and the appendix at p. 347. et seq. The opinion implies, although it
does not explicitly state, that an intangible has a taxable situs in a State only if it has a business situs there or
the taxpayer has its commercial domicile within the state.
16 See, e.g., Fla. Statutes Annotated, Sec. 109.11, and the cases and rulings in Prentice-Hall State and
Local Tax Service, Fla. Par. 34,355; Georgia Code, Sec. 92-121; West Virginia Code, Sec. 719, and In re
United Carbon Company Assessment. 118 W. Va. 348. 190 SE. 546 (1937).
" Green v. Burroughs Corporation. 137 So. 2d 595 (Fla. 1962): Suttles v. Northwestern Mutual Life In.
surance Co., 193 Ga. 495, 19 SE. Id 396 (1942); see Commercial Credit Co. v. O'Brien, 115 Mont. 199, 146 P-
2d 637 (l944~. In the Suttles case, the Court used as its premise the proposition that unless anintangible has a
"business situs" in the State, or in the case of an out-of-state corporation, the owner has its "commercial
domicile" there, the intangible is not within its taxing jurisdiction.
In Davis v. Penn Mutual Life Insurance Co., 198 Ga. 550, 32 SE. 2d 180 (1944), the Court refused to follow
the Supreme Court, and held that, under its own interpretation of the Due Process Clause of its state con-
stitution, promissory notes executed by Georgia residents and secured by mortgages on property in the State,
when held by an out-of-state insurance company, cannot be subjected to the ad valorem tax on intangibles.
In Humble Oil & Refining Co. v. Calvert, 414 SW. 2d 172 (Texas, 1967), the Court took an even more
restrictive view of the power of the States to tax intangibles, by refusing to accept the "business situs" or
"commercial domicile" jurisdictional bases for taxing a foreign corporation.
iS In 51 American Jurisprudence, Section 463 (1944; Cumulative Supplement, 1970). the authors refer to the
business situs and commercial domicile rules, and then state that "the general rule of very extensive applica-
tion is that the situs of intangibles for the purpose of property taxation is the domicile of the owner. and only
there. Ordinarily, a State has no right to tax intangible property of a nonresident owner". And they add the
assertion that "for the purposes of property taxation, it is settled. both as a matter of constitutioiial law and
statutory construction, that a debt or credit cannot be assigned a situs for property taxation in a particular
state . . . other than the domicile of the creditor merely because the debtor is domiciled or resides there."
Idem., Section 464.
19 See the history of the flouting by the States for nearly a quarter of a century of a Supreme Court decision,
holding that a widely used State procedure, which limited challenges to discriminatory real property taxa-
tion, violated the Equal Protection Clause of the 14th Amendment, set out in Jerome H. Hellerstein,
"Judicial Review of Property Tax Assessments", 1958 National Tax Ass'n Procs. 429, 14 Tax Law Review
327, 346 (1959).
20 See John Hancock ?i'Iutual Life Insurance Co. v. Neill, 79 Idaho 385, 319 P. 2d 195 (1957); Commonwealth
of Pennsylvania v. Universal Trades, Note 12, supra; United Gas Corp. v. Fontenot and Southern Pacific
Co. v. McColgan, Note 11. supra.
21 This principle presumably could be applied to the taxation of deposits made by a respondent bank
with its out-of-state correspondent.
PAGENO="0565"
545
as to taxes on bonds issued by the taxing State or its local
subdivisions.22
CONCLUSIONS AS TO INTANGIBLE PROPERTY TAXATION
1. The State in which a bank maintains its principal office may
impose an ad valorem tax on intangibles, such as loans, bonds, de-
posits in other banks, and credits held by the bank.23
2. The States in which borrowers from banks reside, or maintain
their commercial domiciles, may impose ad valorem taxes on the out-
of-state lending banks with respect to the loans.
3. Corporate stock owned by a bank is subject to property taxation
both by the bank's home State and the State in which the corpora-
tion whose stocks are held is incorporated; and conceivably, also, at
the commercial domicile of the corporation, if it has one outside the
State of incorporation.
PART III
THE POWER OF THE STATES To IMPosE DISCRIMINATORY LiCENSE
OR OTHER DoiNG BUSINESS TAXES ON OUT-OF-STATE NATIONAL
BANKS UNDER THE PERMANENT PROVISIONS OF P.L. 91-156
A. DISCRiMINATORY LiCENSE TAXES ON FOREiGN CORPORATIONS
The question arises as to whether, once the permanent provisions
of P.L. 91-156 come into l)lay, the States may be empowered to impose
discrnnrnatory license taxes on out-of-state national banks, or levies
that are more onerous than those applied to their own domestic
banks. By way of background, we start with the recognized po~ver of
the States to impose on foreign corporations, as a condition to the
grant of a license or privilege of conducting an intrastate business
within the jurisdiction, annual taxes that are n~t levied on domestic
corporations, or employ higher rates or bases than those ap~lied to
domestic corporations.' The theory ba( k of t.hese holdings is that the
States have a right to exclude foreign corporations from conducting
intrastate bu~ir1ess within their borders, and in consequence, they
may exact conditions on the grant of the privilege-a nonsequitur
which has been criticized by commentators.2 This doctrine has led to
the holding in some cases that "unconstitutional conditions", such as
discrinunatory taxes, may be imposed OP the grant of the license to
enter the State,3 while other cases have limited ~liscrimninatory taxes
to those imposed before the corporation commenced its intrastate
business in the State and not thereafter.4 The latter qualification on
22 Property taxes on intangibles are a comparatively insubstantial factor in State and local tax revenues-
Indeed, there are 20 States which have exempted intangibles entirely from the property tax. Netzer, Eco-
nomics of the Property Tax, 140 et seq (1966). There are 15 States that impose the property tax on a compara
tively broad basis of intangibles, whereas 20 additional States have either narrowed the coverage of the
tax or use low flat rates, usually of less than one-half of one percent. Idem, at p. 143. Because of the wide-
spread evasion of the tax and the high mobility of intangibles, the yield tends to be very lOW where the
levy is imposed. Professor Dick Netzer estimated the 1962 yield from intangible property taxes over the
country at no more than $180 million from special types of property taxes and $120 million from general
property taxation. Ibid. See also Shoup, appendix 7, supra in this volume at pp. 447-448.
23 It is standard practice for banks to maintain their principal offices in the State of incorporation. Hence,
no consideration is given to the problem of a commercial domicile of banks outside the State of incorporation.
1 Philadelphia Fire Association v. New York, 119 U.S. 110 (1886); Lincoln National Life Insurance Co.
v. Read, 325 U.S. 673 (1945).
2 See Paul v. Virginia, 8 Wall. 168, 181 (1869); Note, "Unconstitutional Conditions", 73 Harvard Law
Review 1595 (1960).
3 Lincoln National Life Insurance Co. v. Read, Note 1, supra.
Hanover Fire Insurance Co. v. Harding, 272 U.S. 494 (1926).
PAGENO="0566"
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the power of the States to levy discriminat iry taxes on foreign cor-
1)oratiofls was shorn of most of its force when the Corrt held that
post-entry discriminatory taxes are valid in States in which the
corporation, on obtaining its license to do an intrastate business, had
agreed to "pay all such taxes and fees" as the State Legislature may
impose on such companies.5 The Supreme Court's 1944 decision in
Lincoln National Life Insurance Go. v. Read went far to affirm broad
powers of the States to levy discriminatory taxes on foreign corpora-
tions. There, the Court eistained a 4% tax on gross premiums received
by on t-of-state insurance companies from Oklahoma policies, although
no similar tax was levied on domestic inst~rer~. Mr. Justice Douglas
wrote for the Court:
"It has been held both before and after the Fourteenth Amendment
that a State may impose on a foreign corporation for the privilege of
doing business within its borders more onerous conditions than it
imposes on domestic companies. Paul v. Virginia, 8 Wall. 168, 19 L.
Ed. 357. . . . But it is said that a State may not impose an unconsti-
tutional condition-that is it may not exact as a condition an infringe-
ment or sacrifice of the rights secured to the corporation by the Consti-
tution of the United States. The argument apparently is that since
appellant is entitled to the equal protection of the laws, a condition
cannot be imposed which results in its unequal and discriminatory
treatment.
"But that argument proves too much. If it were adopted, then the
long established rule that a State may discriminate against foreign
corporations by admitting them under more onerous conditions than
it exacts from domestic companies would go into the discard. More-
over, it has never been held that a State may not exact from a foreign
corporation as a condition to admission to do business the payment of
a tax measured by the business done within its borders. See Continental
Assurance Co. v. Tennessee, 311 U.S. 5, 61 5. Ct. 1, 85 IL. Ed. 5.
"And the equal protection clause does not require the tax or rate of
tax exacted from a foreign corporation as a condition of entry to be
the same as that imposed on domestic corporations." 6
It is by no means clear, however, that this holding would justify
the levy of a discriminatory entry or license tax on a foreign corporation
conducting a mixed interstate-intrastate business. In the first place,
it is to be observed that the doctrine that discriminatory levies may
be enacted from foreign corporations seeking authorization to conduct
a local business within a State had its origin, and was piincipally
developed, in insurance cases during the reign of Paul v. Virginia,
when insurance was not regarded as commerce.7 In the recent Lincoln
National Life Insurance case, quoted above, the company raised no
issue under the Commerce Clause; it did not contend that it was
engaged in interstate commerce.8 And there is a paucity of cases
presenting the discriminatory tax issue, where the taxpayer was, and
contended that it was, engaged in interstate commerce.9
`See. Lincoln National Life Insurance Co. v. Read, Note 1, supra, 325 U.S., at pp. 677-678.
325 ITS., at pp. 676-678.
See Notes 1-4, supra.
8 325 U.S., at p. 678.
9 Atlantic Refining Co. v. Virginia, 302 U.S. 22 (1037), has been cited for the holding that a foreign cor-
poration engaged in a mixed intrastate-interstate business may be subjected to more onerous taxes than
domestic businesses. when it seeks a license to conduct a local business in the State. See "Unconstitutional
Conditions", Note 2, supra. However, Mr. Justice Brandeis, who wrote the opinion in the case, did not
view the facts as involving discriminatory taxation against a foreign corporation. See 302 U.S., at p. 31.
PAGENO="0567"
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Accordingly, the law is unsettled as to whether a State has the
power to impose on an out-of-state bank, conducting both an intra-
state and interstate business within its borders, a license or entry
tax for the privilege of doing intrastate business that is more onerous
than its taxes on banks which it has incorporated.'0 Nevertheless,
given the uncertainty in the law, particularly in the light of the
sweeping dicta in the Court's opinions over the past 100 years sup-
porting the state taxing powers, the multistate banks cannot, in my
opinion, rely comfortably on the notion that the States are powerless
to impose upon them discriminatory license or entry taxes. Theie is
a risk, which cannot be dismissed as insubstantial, that. intergovern-
mental immunities aside, the States may ultimately be found by the
highest Court to have that power to impose on out-of-State banks,
whether national or State, annual doing business taxes more onerous
than those applied to their own chartered banks.
B. THE EFFECT OF P.L. 91-156 ON DISCRIMINATORY LICENSE TAXES
ON OUT-OF-STATE NATIONAL BANKS.
The celebrated case of McCulloch v. Maryland," decided 150 years
ago in an opinion handed down by Chief Justice Marshall, "a principal
architect of our federalism",'2 was the fountainhead of the complete
immunity from state taxation that national banks enjoyed until
Congress waived immunities. Hence, no tax on national banks was
within the constitutional power of the States prior to the enactment
of IRS. 5219, which authorized the States to levy real estate taxes
on national banks and any one of four other specified taxes on national
banks or their shareholders." The tax immunities of national banks
as Federal instrumentalities will be terminated on December 31, 1971,
unless P.L. 91-156 has the effect of preserving some residue of im-
munity. We turn to the question as to whether that statute prevents
the States from imposing on foreign national banks more burdensome
license, privilege, or doing business taxes than those applied to their
own chartered banks.
The provision of P.L. 91-156 dealing with this matter declares:
"For the purposes of any tax law enacted under authority of the
United States or any State, a national bank shall be treated as a bank
organized and existing under the laws of' the State or other jurisdiction
within which its principal office is located." `~
The contention by the States that this language authorizes license
or doing business taxes on multistate national banks, although equiva-
lent taxes are not levied on domestic banks, might run along the
following lines. By declaring that "a national bank shall be treated
as a bank organized and existing under the laws" of a sister State,
Congress has placed out-of-state national banks on a level of complete
10 There is another doctrine that the Supreme Court developed to protect "instrumentalities" of inter-
state conimerce from paying any license or similar tax for the privilege of doing a local business in the State.
It applies to telegraph companies, railroads, and other instrumentalities of commerce, whose interstate
and intrastate business are so inseparably interconnected that the court felt that any such levy, although
non-discriminatory, would unduly burden the commerce. See Western Union Telegraph Co. v. Kansas, 216
U.S. 1 (1910); City of Chicago v. Willett Co., 344 U.S. 574 (1953); and Jerome R. Hellerstein, State and Local
Taxation 244-247 (3rd ed. (1969)). It seems unlikely that this doctrine would be applied to multistate banks.
114 Wheat. 316 (1819).
12 These are the words of another Justice Marshall, Mr. Justice Thurgood Marshall. in First Agricultural
National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339,. 350 (1968).
13 The history of R.S. 5219, first enacted in 1864, the amendments and some of the eases arising under the
statute are considered in the First Agricultural National Bank of Berkshire County case, Note 12, supra,
and in appendix 6, supra, pp. 145-354.
l45ection 2(a).
PAGENO="0568"
548
tax parity with foreign State banks. ]If national banks were organized
under State instead of Federal law, and "exist", that is to say, carried
out their functions and conducted their business under State super-
vision and regulation (together with such Federal regulation as may
apply to the State bank), the entire underpinning of their immunity
as Federal instrumentalities would have been eliminated. Conse-
quently, by declaring that national banks should be "treated" as
"organized" and "existing" under State law, Congress consented to
the stripping of national banks of all tax immunity as Federal in-
strumentalities. Since, as it would be contended, a State organized
bank which seeks to conduct intrastate business within the territory
of a foreign State may be subjected to license or doing business taxes
that are not levied, or are more onerous than those levied, on domestic
banks, it follows that by P.L. 91-156, Con~ress has consented to such
taxation, and there is no constitutional infirmity in the levy.
That the purpose of the P.L. 91-156 was to waive all Federal tax
immunity of national banks and put them on complete parity with
State banks for tax purposes, is indicated by the legislative history
of the statute. In the Report of the Senate Committee on Banking
and Currency, it is stated:
"Without specifically addressing the question of whether national
banks remain, in substance, such a Federal instrumentality, the corn-
mittee is agreed that there is no longer any justification for Congress
continuing to grant national banks immunities from State taxation
which are not afforded State banks." `~
This language supports the view that the congressional purpose was
to eliminate all immunity from taxation enjoyed by national banks
as Federal instrumentalities, since State banks never possessed such
immunity. Moreover, the Congressional Committees were fully
aware of the problem of taxation of national banks by States other
than the home State, when they recommended this sweeping waiver
of immunity.'6 Paul W. Eggers, General Counsel of the Treasury
Department, in a letter to the House Committee on Banking and
Currency, referred to the fact that the "so-called `doing business'
question raises different issues from that involved in the sales tax
controversy" and recommended that "the question of taxation of
national banks by States other than the home State, be considered
and treated separately".'7
Congress, apprised of this problem, nevertheless, authorized the
States, after December 31, 1971, to treat out-of-state national banks
for tax purposes in the same way as banks chartered by other States.
The House Managers of the bill summarized the effect of the permanent
amendment to Section 5219 as follows:
"Likewise, any State will be free to impose taxes on income derived
within its borders by the operations of a bank having its principal
office in a different State, regardless of whether the foreign bank is
State or National. This has always been the law with respect to state
banks." 18
15 Rep. No. 91-530, 91st Congress, 1st Sess., p. 2 (Nov. 12, 1969).
16 Idem, at pp. 3-4.
17 Hearing, House Committee on Banking and Currency, H.R. 7491, 91st Congress, 1st Sess., p. 2 (May 26,
1969). Seethe letter of Chairman William McC. Martin, Jr., of the Federal Reserve Board, quoted in Senate
Committee Report, Note 15, supra, at pp. 3-4.
18 See Conference Report, H.R. 7491, Rep. No. 91-728, 91st Congress, 1st Sess., p. 5 (Dee. 9, 1969).
PAGENO="0569"
549
Hence, Congress has completely accommodated the out-of-state
national bank to the tax position of the foreign State bank, and has
thereby brought into piay the doctrine of the Lincoln National Life
Insurance company and related cases.
The conclusion that Congress did not seek to prohibit taxes on out-
of-state banks, whether national or state, that are more burdensome
than those applied to the State's own chartered banks is further evi-
denced by the fact that the possibility of discriminatory taxation of
banks was considered by the Committees,19 and, indeed, provisions
~)roscribing discriminatory taxation were adopted in other parts
of P.L. 91-156. Thus, in the temporary provisions of the statute,
which authorized the States to tax national banks having their prin-
cipal office in the State, Congress explicitly limited the taxes authorized
to those "imposed generally on a nondiscriminatory basis throughout
the jurisdiction", and it specified that they could be levied only "in
the same manner and to the same extent" as taxes levied on banks
incorporated by the State.2° And in authorizing taxes on sales and use,
real and personal property, documentary stamp and recording levies,
and the like, applicable to out-of-state national banks, once again
Congress explicitly required that they be "imposed generally through-
out such jurisdiction on a nondiscriminatory basis".21 But when it
came to the permanent l)roviSions here at issue, Congress did not
require that the levies be nondiscriminatory. The conclusion is thus
warranted that in the permanent provisions waiving intergovern-
mental tax immunity for national banks beginning in 1972, Congress
imposed no requirement that the taxes authorized be nondiscrimina-
tory. Instead, in carrying out its clearly expressed objective of putting
national and State banks on full tax parity, Congress was content to
remit national banks to whatever constitutional protection State banks
enjoy, no more and no less.
Accordingly, as counsel for a State taxing authority would argue,
since State banks seeking to do, or carrying on, an intrastate business
within a State, may be subjected to license, privilege and doing busi-
ness taxes that are more onerous than those levied on domestic State
banks, the effect of P.L. 9 1-156 is to empower the States to levy sim-
ilar taxes on out-of state national banks. Of course, the power of
Congress to waive the tax immunities of Federal instrumentalities is
indisputable.22
The foregoing outline of an argument that national and State
banks are now on a parity in respect to this taxing power of the States
is an impressive one. Perhaps the most persuasive argument to the
contrary is that it seems unlikely that Congiess intended to put its
own chartered national banks, which had theretofore enjoyed broad
tax preferences, at a possible tax disadvantage vis-a-vis domestic
banks operating within the taxing State. It is also relevant to point
out that the Supreme Court historically has been quick to ferret out
and strike down State taxes that even remotely discriminate against
19 The Committees were much concerned with discriminatory taxation of intangibles. See the statement 0
Chairman William McC. Martin, Jr., of the Federal Reserve Board. Hearing, Senate Committee on Banking
and Currency, S. 2095, 5. 2906, HR. 7491, 91st Congress, 1st Sess., pp. 57-58 (Sept. 24, 1969). Moreover,
the concern of hankers was reflected in the proposal of the American Bankers Association which recom-
mended a "specific. requirement that the additional taxes imposed under the new A.B .A. provision be
generally applicable to State banks and business corporations on a non-discriminatory basis." Idem, p. 59.
20 Subsection 5(a).
21 Subsection 5(b).
22 Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946).
PAGENO="0570"
550
Federal instrumentalities 23 Nevertheless, given the language of the
statute and its legislative history, there is, in my opinion, a risk that
P.L. 91-156, if not modified, will be held to authorize the States to
levy discriminatory license, privilege and doing business taxes on
national banks maintaining their principal offices outside the taxing
State, if the Court should hold that the States have the power gener-
ally to discriminate against foreign corporations doing a mixed inter-
state-intrastate business 24
In the event that it should be determined that FL. 9 1-156 should
be amended to prohibit the types of discriminatory taxation against
out-of-state national banks described above, the provision should,
in my opinion, be drawn so as to extend the same protection to out-
of-state banks chartered by the States. No good reason has been ad-
vanced that would justify less. advantageous tax treatment of multi-
state State banks than of multistate national banks. indeed, the
history of P.L. 9 1-156 is instinct with the reiterated purpose of putting
State and national banks on a level of full tax parity. Given the plenary
power of Congress over interstate commerce, its constitutional power
over money and credit, the extensive Federal legislation dealing with
the nation's banking system, and the role that multistate state banks
play in that system, Congress, in my opinion, has adequate con-
stitutional power to prohibit discriminatory taxation of State as well
as national banks.25
C. CONCLUSION WITH RESPECT TO DISCRIMINATORY TAXATION OF
OUT-OF-STATE BANKS
There is a risk that once the permanent provisions of P.L. 91-
156 become effective, the States may have the power to levy dis-
criminatory or more onerous taxes on out-of-state banks, including
national banks, for the privilege of doing business in the State, than
they impose on their own domestic banks.
~`EW YORK, April 30. 1971.
23 Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376 (1960); Moses Lake I-Tomes
iflC. v. Grant County, 365 U.S. 744 (1961); compare Comptroller v. Pittsburgh-Des Moines Steel Co., 231
Md. l:t2, 189 A. 2d 107 (1963), certiorari denied, 375 U.S. 821 (1963).
24 Some concern has been expressed that P.L. 91-156 may permit the States to tax out-of.state national
banks at a higher rate, or on a more burdensome basis, than foreign state banks. The language of the statute
and its legislative history seem to me to make such a construction of P.L. 91-156 unlikely. Moreover, such
tax differentials between two classes of out-of-state corporations, each seeking licenses to conduct intrastate
business within the State, or doing an intrastate business in the State, would probably be held to be an
unreasonable classification, in conflict with the Equal Protection Clause of the 14th Amendment.
25 For a discussion of the congressional power under the Commerce Clause to limit State taxation, see
Jerome B. Hellerstein, "The Power of Congress to Restrict State Taxation of Interstate Commerce", 12
Journal of Taxation 302 (1960).
PAGENO="0571"
APPENDIX 12
Multiple State Taxation of National Banks: Division of Tax
Base-Income Taxes and Doing Business Taxes
J. NELSON YOUNG
Professor of Law, University of Illinois
INCOME TAXES
Development of underlying constitutional doctrine
One of the major concerns in appraising the impact of P.L. 91-1156.
is the extent to which the net income of national banks may become
subject to multiple state taxation) Under the provisions of section
5219 of the Revised Statutes as amended by P.T~. 91-156, national
banks on January 1, 1972, will be in the same position as other business
corporations with respect to the risk of multiple state taxation of net
income.2 Evaluation of this risk, which is imposed for the first time
upon national banks, turns upon the answer to two critical questions.
First, do the business activities of a particular bank in a state outside
the state in which it has its principal offices constitute local activities.
which form a "sufficient nexus" to support imposition of an income
tax by such other states? ~ Assuming an affirmative answer to the
first question, the next question is one as to the appropriate basis for
allocation or apportionment of the bank's income to such other state.
The first question is essentially one of due process under the fourteenth
amendment and the test is "whether the taxing power exerted by the
state bears fiscal relation to protection, opportunities and benefits
given by the state." In other words, has the taxing state "given any-
thing for which it can ask return"? The second question involves
both due process and commerce clause considerations. To state it
differently, does the tax reach income earned in other states and
result in the imposition of a multiple burden upon interstate com-
iThe issues dealt with in this part relate to direct income taxes and not to franchise or privilege taxes
measured by income. The distinction is important in that a state cannot impose a franchise or privilege
tax upon the privilege of engaging solely in interstate commerce within the taxing state even though the tax
is nondiscriminatory and is based upon a fair apportionment of income derived from such commerce. Spector
Motor Service v. O'Connor, 340 U.S. 692, 71 S. Ct. 528 (1951), di~cu~ced nfra at pp. 503-4.
2 Under the permanent amendment, section 5219 reads as follows: "For the purposes of any tax law enacted
under authority of the United States or any State, a national basik shall be treated as a bank organized and
existing under the laws of the State or other Jurisdiction within which its principal office is located."
3 Provisions of the United States Code governing the organization of national banking associations require
that the organization certificate for an association shall state "the place where its operations of discount and
deposit are to be carried on, designating the State, Territory, or District, and the particular county and city,
town, or village." 12 U.S.C. § 22 (1959). National banks are limited in the operation of branches to the city,
town, or village and to other points within the State in which the bank is situated, a.s may be permitted
state banks under the law of the State. 12 U.S.C. § 36 (1962). No national bank may establish (and with the
exception of only one or two older institutions, no national bank now maintains) a branch in a state other
than that in which its principal office is located;
(551)
PAGENO="0572"
552
merce? ~ These issues are not. wholly separable and the cases which
have established the legal doctrines in this area have often dealt
with both.
Development of the law with respect to the taxation of the income
of interstate manufacturing and mercantile businesses is important
in an appraisal of the vulnerability of national banks to multiple state
taxation. As a review of the cases illustrates, the basic constitutional
framework was erected during the period 1918 to 1931. The first case
to reach the United States Supreme Court, United States Glue Go. v.
Town of Oak Greek,6 presented the question as to whether the state of
corporate domicile could validly tax the net income of a manufacturing
business to the extent derived from goods manufactured within the
state but sold to out-of-state customers. Sales giving rise to the income
in question were of two types: sales made upon orders received from
out-of-state customers, the goods being delivered from the company's
Wisconsin factory; and sales made upon orders received from out-of-
state customers at out-of-state branches with the goods, which had
been manufactured in Wisconsin, being delivered from such branches.
The specific issue was whether taxation of net income derived from
these interstate transactions constituted the imposition of an un-
constitutional burden upon interstate commerce. In sustaining the
validity of the tax imposed by the domiciliary state, the court stressed
the point that a tax on net income is not a direct and immediate
burden upon interstate commerce since the tax is occasioned not by
reason of the commerce itself but by reason of the fact that the trans-
actions in interstate commerce proved to he piQfitable. Thus the tax
was held not to he inherently discriminatory with respect to such
commerce. With this decision the Court established the validity of a
tax upon the net income of a domiciliary corporation irrespective of
the source of such income, whether derived from intrastate or inter-
state commerce.7 Upon the basis of this early doctrine a.nd the per-
manent amendment of section 5219, a state in which a national bank
1511 Fisconsin `. .1. C. Piincy Co., 7.11 U.S. 435. 61 S. Ct. 246 (1940) the question was whether Wisconsin,
a iion-domieil~arv stat, could impose a tax of 2i~% upon "the privilege of declaring and receiving (lividends.
out of income derived from property located and bueinees traneacted in" Wisconsin. Taxpayer, a 1)elawace
(orporatiOs, voted and paid dividends from ifs principal office in New York with checks drawn upOn New
York bank art'ossnrs. In sustaining the tax in the face of the taxoayer's challenge that it violated due process
concepts of jurisdiction, the Court mad~ the following observation:
`Taxable event', `j .irisdiction to tax'. `business sit.us', `extraterrilorialitv', ace all compendious ways of
implying the impotence of state Power because state power has nothing on which to operate. These tags
are not instruments of adjudicasion but statements of result in applying the sole constitutional test for a
case like the present one. That test is whether property was taken without due process of law, or, if para-
phrase we must, whether the taxtng power exerted by the state bears fiscal relation to protection, opportu-
nities and benefits given by the state. The simple hut controlling question is whether ttse state has given
anything for which it san ask return. The substantial privilege of carrying on business in Wisconsin, which
has here been given, clearly suoports the tax, and the state has not given the less merely because it has con-
ditioned the demand of the exaenon upon happenings outside its own bordeis. The fact that a tax is contin-
gent upon events brought to pass without a state does not destroy the nexus between such a tax and trans-
actions within a state for which the tax is an exaction," (Ill U.S. at 444-45, 65 5. Ct. at 250).
For purposes of this part relating to direct income taxes, it is assumed that the nationwide activities of
major banks and the straddle.state transactions of small banks located in border communities constitute
interstate commerce. See Hellerstein. Federal constitutional Limitations sn State Tax.otion of.ifaltistate Banks,
Introduction [appendix 11]. at pp. 435-40 above.
6 247 T.J.S. 321, 38 S. Ct. 499 (1918).
7 This decision was foreshadowed by Peck & Gb. v. Lowe, 247 U.S. 165, 38 S. Ct. 432 (1918) which field that
the imposition of the federal income tax upon net income derived from foreign exports did not violate the
constitutional proscription of a duty upon exports. Two years later, the Court sustained an income tax
upon an individual domiciled within the taxing state with respect to income received by him as a beneficiary
of an out-of.state trust. Maguire v. Trefry, 253 U.S. 12, 40 S. Ct. 417 (1920).
PAGENO="0573"
553
has its principal office could constitutionally impose a tax upon the
entire net income of the bank.8
Two years later, in Underwood Typewriter Co. v. Chamberlain,9
the Court first considered the question as to the validity of an appor-
tioned state income tax imposed upon a foreign corporation engaged
in interstate commerce. Underwood Typewriter Co. was a Delaware
corporation with its principal office in New York and all of its manu-
facturing facilities in Connecticut. Under the applicable statutory
provisions, net income of the corporation was allocated to Connecticut
upon the basis of a single factor property formula, namely, the ratio
of the fair cash value of corporate real estate and tangible personal
property located in Connecticut to the total of all its real and tangible
personal property. This formula resulted in an allocation of 47% of
the corporate income to Connecticut. It was the taxpayer's contention,
apparently based upon the volume of sales consummated within the
state, that only 3.3% of its net mcome was received in Connecticut.
Underwood Typewriter Co. challenged the statute as imposing an
undue burden upon interstate commerce and as an attempt to tax
income arising from business conducted outside the taxing state. The
first argument was given only brief attention and was brushed aside
on the basis of United States Glue Co.
With respect to the second, the Court found that the taxpayer had
failed to sustain the burden of proving "that the method of apportion-
ment . . . was inherently arbitrary, or that its application . . . pro-
duced an unreasonable result." 10 On this issue, the Court alluded to
the unit rule of valuation relating to the imposition of property taxes
upon property employed as an integral part of an interstate trans-
portation system and made the following observation:
"The profits of the corporation were largely earned by a series of
transactions beginning with manufacture in Connecticut and ending
with sale in other States. In this it was typical of a large part of the
manufacturing business conducted in the State. The legislature in
attempting to put upon this business its fair share of the burden of
taxation was faced with the impossibility of allocating specifically the
profits earned by the processes conducted within its borders. It, there-
fore, adopted a method of apportionment which, for all that appears
in this record, reached, and was meant to reach, only the profits
earned within the State. `The plaintiff's argument on this branch of
the case,' as stated by the Supreme Court of Errors, `carries the
burden of showing that 47 percent of its net income is not reasonably
attributable, for purposes of taxation, to the manufacture of products
from the sale of which 80 percent of its gross earnings was derived
after paying manufacturing costs.' The corporation has not even
attempted to show this; and for aught that appears the percentage
of net profits earned in Connecticut may have been much larger than
8Acaveat should be stated on this point. In Northwestern States Portland Cement Co. v. Minnesota, 358 U.S.
450, 79 S. Ct. 357 (1959), reference was made to the possibility that a domiciliary state might tax all the
income of a corporation engaged in interstate commerce and that a tax imposed by a non-domiciliary state
upon apportioned income would result in double taxation of a portion of the same income. In a footnote on
this point, the Court cited the fact that in Standard Oil Co. v. Peek, 352 U.S. 382, 72 S. Ct. 309 (1952), it
had struck down an ad valorem property tax imposed by the domiciliary state upon a fleet of barges plying
in interstate commerce because it was not apportioned. 358 U.S. at 463, 79 S. Ct. at 364. For a discussion
of the decision in Northwestern States Portland C'einent C's., see p. 487.
9254 U.S. 113, 41 S. Ct. 45 (1920).
"Id. at 121,41S. Ct. at 47.
PAGENO="0574"
`554
47 percent. There is, consequently, nothing in this record to show
that the method of apportionment adopted by the State was inherently
arbitrary, or that its application to this corporation produced an
unreasonable result." ~
By this decision, multiple state taxation of net income derived from
interstate commerce was assured, with the Court bestowing its blessing
upon a statutory formula method of apportionment.
During the next decade, the Court decided two additional cases
which involved the validity of a tax upon apportioned net income of
a foreign manufacturing corporation where the apportionment was
made upon the basis of a single factor property formula. In Bass,
Ratcl?ff cQ~ Gretton v. State Tax Commission,'2 decided in 1924, the
Court sustained a formula for allocating net income which included
not only real and tangible personal property but also accounts and
bills receivable and investments in the capital stock of other corpora-
tions. The taxpayer, a British corporation, was engaged in manu-
facturing ale in England which was sold both in England and in the
United States. Sales in the United States were made through branches
located in~ New York and Chicago. The Court sustained the validity
of the apportionment relying principally upon its prior decision in
Underwood Typewriter Co. In its opinion the Court observed that the
"company carried on the unitary business of manufacturing and selling
ale, in which . . . profits were earned by a series of transactions
beginning with the manufacture in England and ending in sales in
New York and other places . . . [and] the State was justified in at-
tributing to New York a just proportion of the profits earned by the
Company from such unitary business." 13 From the record, it was
concluded that the method of apportionment was not "inherently
arbitrary or a mere effort to reach profits earned elsewhere."
There are two aspects of the decision in Bass, Ratcliff cQ~ Gretton
which are of some significance with respect to the matter of taxation
of the income of national banks. The first is the inclusion of intangible
property in the allocation formula. The second is the fact that the
Court specifically referred to the unit rule concept relating to the
allocation of interstate property values as "directly applicable to
the carrying on of a unitary business of manufacture and sale partly
within and partly without the State." 14 Thus, the stage was set for
subsequent articulation of the unitary concept with respect to the
allocation of net income from interstate business.
The last case during this period of development of constitutional
doctrine was decided in 1931. In Hans Rees' Sons v. North Carolina,'5
a New York corporation was engaged in the business of tanning,
manufacturing and selling belting and other heavy leathers. Its
manufacturing operations were conducted exclusively in North
Carolina. The company maintained its sales office and a warehouse in
New York and sold its products both at wholesale and retail. Sales
of the company products were made throughout the United States,
Canada and Western Europe. Approximately 40% of the output of
11 Id. at 121-22, 41 S. Ct. at 47.
12 266 U.S. 271, 45 5. Ct. 82 (1924).
13 Id. at 282, 45 S. Ct. at 84. It is of interest to note that the corporation reported no net income for the
year from its operations in the United States for purposes of the federal income tax. Thus, the income appor-
tioned to New York was based upon the world-wide income of the corporation.
14 266 U.S. at 282, 45 5. Ct. at 84.
15 283 U.S. 123, 51 S. Ct. 385 (1931).
PAGENO="0575"
555
its manufacturing plant in North Carolina was shipped to the New
York wi~rehouse and the balance was shipped direct to customers
upon order from the New York sales office. Under the statutory
property formula, approximately 80% of the corporate income was
allocated to North Carolina. In the trial court, the taxpayer offered
evidence to show that its net income was comprised of buying profit,
manufacturing profit, and selling profit and that income having its
source in the manufacturing and tanning operations within North
Carolina was 17 percent. This evidence was stricken by the trial
court. The state supreme court sustained the ruling of the trial court
but proceeded to hold that even if the evidence were deemed to be
competent it would not change the result. On the basis of this record,
the United States Supreme Court viewed the case as if the evidence
had been received by the state court as true and* accurate but as
having no bearing on the validity of the statute in the particular
circumstances.
The taxpayer's objection was premised upon both due process and
the commerce clause. In reaching its decision, the Supreme Court
observed that with respect to an interstate business where different
states each have jurisdiction to impose an income tax on the basis
of what is done within its own borders, the question becomes one of
apportionment. In these circumstances, "evidence may always be
received which tends to show that a state has applied a method, which
albeit fair on its face, operates so as to reach profits which are in no
just sense attributable to transactions within its jurisdiction." 16
reliance upon the assumption made. by the state court with respect to
the facts shown, it was concluded that the taxpayer had sustained
the burden of proving that the statutory method as applied to it
"operated unreasonably and arbitraiily in attributing to North
Carolina a percentage of income out of all appropriate proportion to
the business transacted by the appellant in that state." 17
With the triumvirate of Underwood Typewriter Co., Bass, Ratcliff cQ~
Grettort, and Hans Rees' Sons, the rule was firmly established that a
non-domiciliary state could tax upon an apportioned basis the net
income of a corporation engaged in manufacturing and selling in
interstate commerce. These cases in general validated the single
factor property formula but the taxpayer's success in Hans Rees' Sons,
though attributable to a procedural aspect of the case, clearly indicated
that such a formula was highly vulnerable. At this point, the Court
not only had established the validity of the formula method of
apportioning net income from interstate business, but also had
provided an impetus for the development of a multiple-factor formula
for such apportionment.'8
In-st ate business activity sufficient to support apportionment of
income from interstate business
By 1931, the Court, in its decisions relating to apportionment of
income from interstate commerce, had dealt only with cases where the
"Id. at 134, 51 5. Ct. at 389.
17 Id. at 135, 51 S. Ct. at 389.
~B It should be noted that in 1919, Massachusetts, under its corporate franchise tax, initiated the three-
factor formula for allocation of income based upon property, payroll and sales. Mass. Gen. Acts, 1919, ch. 355,
§ 19. This tax was held invalid as applied to a corporation deemed to be engaged exclusively in interstate
commerce. Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203, 45 5. Ct. 477 (1925). In a recent de-
cision the Court indicated that a single-factor formula based solely upon sales would he an inappropriate
method of allocating net income from interstate business. See General Motors Corp. v. District of Columbia,
380 U.S. 553, 85 5. Ct. 1156 (1965).
PAGENO="0576"
556
taxpayer-corporation could be considered as having a sIgnificant
presence in the non-domiciliary state through the ownership of
property in the state coupled with the activities of full-time employees.
Fifteen years were to pass before the Court considered the question
as to whether a lesser degree of business activity within the taxing
state consisting only of the solicitation of sales was sufficient to support
an apportionment of net income. In 1946, in a per curiam decision in
West Publishing Go. v. McGolgan,19 the Court sustained the allocation
of net income where the principal and only significant activity or
~presence within the taxing state consisted of the solicitation of orders
~for law books published out-of-state and shipped to customers from
`out-of-state locations. The taxpayer, a Minnesota corporations
employed four full-time salesmen to sell law books in California.
These salesmen solicited orders, received payments thereon, collected
delinquent accounts, and handled customer complaints. The taxpayer
did not rent offices in California, but its salesmen obtained space in
the offices of certain attorneys by making available the use of the
publisher's sample books which were kept on hand in connection with
their sales activities. In legal newspapers and periodicals circulated
in California, the taxpayer advertised as its local offices these offices
which had been obtained by its employees.
Under the California statutes, a tax was imposed upon the net
income "of every corporation derived from sources within [the]
State." Income from sources withm the state was defined to include
"income from tangible and intangible property located or having a
situs in this State and income from any activities carried on in this
State, regardless of whether carried on in intrastate, interstate or
foreign commerce." The taxpayer challenged imposition of the tax
upon any of its income principally upon the ground that California
could not impose a tax on any part of the net income of a foreign
corporation which was engaged exclusively in interstate commerce.
The taxpayer also contended that the tax violated the due process
clause of the fourteenth amendment, asserting that the state was
without jurisdiction to tax.
The Supreme Court of California in a comprehensive opinion had
sustained the tax principally in reliance upon United States Glue Go.,
emphasizing the well established principle that a tax upon net income
derived from interstate commerce is not barred by the commerce
clause. In refuting the taxpayer's due process argument, the California
court made the following observation:
"The record shows without conflict that plaintiff engages in sub-
stantial income-producing activities in California. It has local offices
ihere as well as employees who devote their entire time to soliciting
orders, receiving payments, adjusting complaints, collecting delinquent
accounts, and performing other services for plaintiff. This state pro-
vides a market in which plaintiff operates in competition with local
law-book publishers. Plaintiff's agents receive the same protection
arid other benefits from the state as agents carrying on business
activities for a principal engaged in intrastate business. The state pro-
tects plaintiff's business transactions within its borders and maintains
courts in which plaintiff enforces payment for the sale of its publica.
19328 11.8. 823, 66 S.-Ct. 1378 (1946), affirming per curiam, 27 Cal. 26 705, 166 P. 26
861 (1946).
PAGENO="0577"
557
tions. In West Publishing Co. v. Superior Court, 20 Cal. 2d 720, 128
P. 2d 777, certiorari denied 317 U.s. 700, 63 S.Ct. 514, 87 L. Ed. 559,
it was held that by virtue of these activities plaintiff is present in
this state and subject to the jurisdiction of its courts." 20
With its per curiam affirmance of West Publishing Go., the United
States Supreme Court endorsed the view that the mere solicitation of
sales within the taxing state was a sufficient activity upon which to
premise an allocation of net income from interstate business. However,
a fully definitive decision upon this issue was not forthcoming until
1959 when the Court decided Northwestern States Portland Gement Go.
v. lklinnesota.2'
Two cases were consolidated for purposes of this later opinion. One
related to Northwestern States Portland Cement Co. and involved the
application of the Minnesota income tax. Minnesota imposed a general
income tax upon the "taxable net income" of residents and non-
residents including domestic and foreign corporations "whose business
within the state during the taxable year consists exclusively of foreign
commerce, interstate commerce, or both." A three-factor formula
~ras provided for allocation of income based on sales, tangible property
and payroll. Northwestern States Portland Cement Co., an Iowa cor-
poration, operated a cement manufacturing plant in Mason City,
Iowa, maintained a sales office in Minneapolis and ~licited orders in.
Minnesota through its salesmen. All orders were forwarded to Mason
City for~ acceptance, all sales were made on a delivered price basis,
and all billings and collections were made from the Iowa office. The
corporation owned some office equipment but no real estate in Minne-
sota, and did not warehouse any of its products in that state. Forty-.
eight per cent of the company's sales were made to Minnesota cus~
tomers.
The second of the two consolidated cases related to Stockham Valves
and Fittings, Inc. This case involved application of the Georgia income
tax which provided that "every domestic and every foreign corporation
shall pay annually an income tax equivalent to five and one-half per
cent of the net income from property owned or from business done in
Georgia," such income to be allocated to the state by a formula based
on inventory, wages and gross receipts. Taxpayer, a Delaware cor-
poration, with its principal office and plant in Birmingham, Alabama,
manufactured valves and pipe fittings which were sold to wholesalers
and jobbers. Taxpayer maintained a sales-service office in Atlanta,
Georgia, which served five states. Except for some office equipment,
the company owned no property in Georgia. All sales were processed
and filled by the main office in Birmingham, shipment being made
direct to the customer on an f.o.b. warehouse basis.
In each of these cases the taxpayer conceded that the particular
method of allocation of income was lair and reasonable. The challenge
to the validity of the tax in each case paralleled the position taken by
the taxpayer in West Publishing Go., namely, that the statutes violated
both due process and the commerce clause. In its opinion, the Court
focused most of its attention upon the .commerce clause issue. After
reviewing its earlier decisions, the Court concluded with the observa-
tion that "these cases stand for the doctrine that the entire income
of a corporation, generated by interstate as well as intrastate activities,
20 27 Cal. 2d at 713, 166 P. 2d at 866.
21 358 U.s. 450, 79 S. Ct. 357 (1959).
79-421 0 - 72 - 37
PAGENO="0578"
558
may be fairly apportioned among the states for tax purposes by
formulas utilizing in-state aspects of interstate affairs." 22 The Court
laid particular stress upon West Publishing (Yo. as having dispelled any
doubt as to the propriety of an income tax upon net income derived
frnm interstate commerce.
There are two notable aspects of this portion of the Court's opinion.
The first is the Court's observation that "it is significant . . . that
West had not qualified to do business in California." 23 The second
is the statement that "the [state coui't'~] opinion was not grounded on
the triviality that office space was given West's solicitors by
attorneys." 24 Thus, the Court underscored its position that mere
solicitation of sales constituted adequate "in-state aspects of interstate
affairs" to support a formula allocation of net income. Proceeding to
the due process argument, the Court observed that "the taxes imposed
are levied oniy on that portion of the taxpayer's net income which
arises from its activities within the taxing state. These activities form a
sufficient `nexus between such a tax and transactions within a state for
which the tax is an exaction'." 25 On the basis of this decision, one can
reasonably conclude that the solicitation or negotiation of loans in a
state other than that in which the principal office of a national ban.k is
located would provide a sufficient nexus to warrant apportionment of
the net income to such other state.26
The decision in Northwestern States was met with an immediate
legislative response. Congress promptly enacted Public La~ 86-272
which circumscribed the broad rule of nexus articulated by the Court.27
Under this statute, a state is prohibited from taxing income from inter-
state business where the only activity within the taxing state is
solicitation of sales orders for tangible personal property.
Division of income-Specific allocation
Turning to the question of division of net income from interstate
commerce, the various state income tax statutes generally include pro-
visions for specific allocation of certain types of income realized by
multistate corporations. 28 These provisions for specific allocation
apply to non-operating items of income such as interest, dividends and
capital gains which are incidental to the principal business income of a
corporation. Under these provisions, interest and dividends are usually
allocated to the legal or commercial domicile of the corporation.
Capital gains from real and tangible personal property are generally
allocated to the state where the property is located; and capital gains
from intangibles are allocated in the same manner as interest and
22 Id. at 460, 79 5. Ct. at 363.
23 Id. at 461. 79 S. ct. at 363. With this comment, the court emphasized the wholly interstate character
of the taxpayer's operations.
24 Id. at 461, 79 5. Ct. at 364. With this second comment, the court was apparently emphasizing that a
"place of business" within the taxing state was not a prerequisite to the apportionment of net income from
interstate commerce.
25 Id. at 464, 79 5. Ct. at 366.
26 Concurrent dispositions of other pending interstate income tax cases, all of which sustained imposition
of the tax, confirm the conclusion stated in the text. Brown-Forman Distillers Corp. v. Collector of Revenue,
234 La. 651, 101 So. 2d 70 (1958), appeal dismissed and certiorari denied, 359 U.S. 28, 69 S. Ct. 602 (1959) (only
in-state activity was solicitation of orders and goodwill services of "missionary men"); ET & WNC Trans-
portation Co. v. Currie, 248 NC. 560, 104 S.F. 2d 403 (1958), affirmed per curiam, 359 U.S. 28. 79 5. Ct 602
(1959) (trucking company engaged solely in interstate business maintained local terminals); International
Shoe Co. v. Fontenot, 236 La. 279, 107 So. 2d 640, certiorari denied, 359 U.S. 984, 79 S. Ct. 943 (1959) (only
in-state activity was solicitation of orders).
27 Public Law 86-272 is discussed infra at p. 501.
26 The Willis Committee report includes a comprehensive discussion of this matter based on the statutes
in effect at that time. House Judiciary Comm., Special Subcommittee, State Taxation of Interstate Com-
merce, House Report No. 1480, 88th Cong., 2d Sess., vol.1, pp. 197-217 (1964). For a chart summarizing the
current statutory provisions relating to specific allocation of items of income, see Prentice-Hall State and
Local Tax Service-All States Unit ¶1046.
PAGENO="0579"
559
dividends. This scheme for treatment of non-business income has been
adopted by the Uniform Division of Income for Tax Purposes Act.29
It is apparent that the existing pattern for specific allocation of
items which usually constitute non-operating income is inapplicable
to the banking industry. By contrast with manufacturing, mercantile
and most service enterprises, interest, dividends and capital gains
constitute a major portion of the operating income of a bank. Con-
sequently, it reasonably may be expected that the states in drafting
specific statutory provisions to govern the division of income of multi-
state banks will adopt comprehensive rules which parallel those applied
to the operating income of other multistate businesses.
It should be observed, however, that the debtor's state of commercial
domicile has jurisdiction as a matter of due process to impose an
income tax upon interest earned by an out-of-state bank upon loans
utilized by the debtor in the taxing state.'° Taxation of the net income
derived from these transactions presents no commerce clause issue.3'
But the determination of net income in these circumstances presents
difficult problems in the division of costs and expenses. This leads to a
consideration of formula apportionment of net income derived from
the operation of an interstate business.
Division of income-Formula method vs. separate accounting
The decision in Northwestern States illustrated the application of the
Minnesota three-factor formula, consisting of property, payroll and
sales, in the apportionment to a non-domiciliary state of net income
from an interstate business. The obvious alternative to the application
of a formula method of apportionment of net income is a separate
accounting for items of income and expense relating to the business
activities conducted within the taxing state. This leads to the question
which was squarely presented in Butler Bros. v. McOolgan,32 namely,
whether the formula method can be required by the taxing state where
the taxpayer can demonstrate a reasonably accurate determination of
in-state income by its method of separate accounting.
In Butler Bros., an Illinois corporation was engaged in the wholesale
dry goods and general merchandise business, purchasing from man-
ufacturers and others and selling to retailers only. It operated whole-
sale houses in seven states including California. Each of the seven
locations served a separate territory with its own sales force, handled
its own collections and credit arrangements, and kept its own books
and accounts. All of its sales in California were handled by its San
Francisco office. All purchases were handled by the company's home
office in Chicago with goods being shipped to the various warehouses
and charged to each location at cost plus transportation expenses.
Costs of operating the central buying division, cost of central advertis-
ing, and home office general overhead expenses were allocated to the
respective area operations.
At that time, the California statute provided that income from inter-
state businesses should "be determined by an allocation upon the basis
of sales, purchases, expenses of manufacture, payroll, value and situs
of tangible property, or by reference to these or other factors, or by
25 The Uniform Division of Income for Tax Purposes Act, which does not apply to banks, is discussed at
p. 506. infra.
3° Hellerstein, Federal Constitutional Limitations on State Taxation of Multistate Banks, supra, at pp. 452 if.
31 A tax upon the gross interest income realized by an out-of-state bank would raise the spectre of a tax
upon gross receipts derived from interstate commerce. See the discussion of gross receipts taxes infra at
p. 506.
32 315 U.S. 501, 62 5. Ct. 701 (1942).
PAGENO="0580"
560
such other method of allocation as is fairly calculated to assign to the
state the portion of net income reasonably attributable to the business
done within this state and to avoid subjecting the taxpayer to double
taxation." In the tax year in question, the taxpayer enjoyed net in-
come of approximately $1,150,000 from its entire multistate opera-
tions. In applying the three-factor formula based on property, payroll,
and sales, the tax commissioner allocated 8.1372% of the total income
or approximately $93,500 to the State of California. By contrast, the
taxpayer by its method of separate accounting for its California
operations, reported a net loss therefrom in the amount of $82,850.
The accuracy of the taxpayer's method of separate accounting for
costs and expenses allocable to its California operations was not
challenged by the tax commissioner. It was the taxpayer's contention
that the statutory formula which converted a loss of $82,850 into a
profit of $93,500 resulted in an allocation of out-of-state income to
the taxing state in violation of the due process requirements of the
fourteenth amendment.
In resolving this issue the Court relied upon the "unit rule" which
had been developed much earlier in the property tax cases involving
the valuation of property employed by businesses engaged in inter-
state transportation and communication. In its opinion, the Court
articulated the analogy to which it had alluded in Underwood Type-
writer Go. and Bass, Ratcliff c~ Gretton.
Under the property tax unit rule concept, property located within
the taxing state which is part of an interstate system may be valued
with reference to its connection with such system. Thus, ou~t-of-state
property is necessarily taken into account in arriving at the value of
the property which is physically located within the taxing state. The
unit rule of property valuation had been aptly described in one of
the Court's earlier decisions in the following manner:
"{W]hen . . . property is part of . . . [an interstate] system and has
its actual uses only in connection with other parts of. . . [such] system,
that fact may be considered by the State in taxing, even though the
other parts of the system are outside of the State. The sleepers and
rails of a railroad, or the posts and wires of a telegraph company, are
worth more than the prepared wood and the bars of steel or coils of
wire, from their organic connection with other rails or wires and the
rest of the apparatus of a working whole. This being clear, it is held
reasonable and constitutional to get at the worth of such a line in the
absence of anything more special, by a mileage proportion. The tax
is a tax on property . . . [and] is intended to reach the intangible
value due to what we have called the organic relation of the property
in the State to the whole system. . . . And this principle . . . has been
extended . . . to the lines of express companies, although those lines
are not material lines upon the face of the earth. There is the same
organic connection as in the other cases." ~
In its opinion in Butler Bros., the Court made three preliminary
observations: (1) the statutory formula by its terms was fairly calcu-
lated to assign to California that portion of the net income which
was reasonably attributable to the business conducted in that state;
(2) the burden was upon the taxpayer to show by clear and cogent
evidence that the application of the formula resulted in taxation of
33 Fargo v. Hart, 193 U.S. 490, 499, 24 S. Ct. 498, 500 (1904).
PAGENO="0581"
561
extraterritorial income; and (3) it was not necessary for the Court to
impeach the integrity of the taxpayer's separate accounting system to
establish that the taxpayer's contention was erroneous.
In sustaining application of the unitary concept to the net income
of the taxpayer, the Court pointed to the unity of ownership and
management which characterized the taxpayer's interstate business
operations. Particular stress was placed upon centralized purchasing
which admittedly resulted in obtaining more favorable prices for the
benefit of the entire enterprise. In answer to the taxpayer's contention
that its method of separate accounting for its California operations
demonstrated that none of the net income of the multistate enterprise
was attributable to California, the Court responded with the following
observation:
"If factors which are responsible for that net income are present in
other States but not present in California, they have not been re-
vealed. At least, in the absence of that proof, California was justified
in assuming that the San Francisco branch contributed its aliquot
share to the advantages of centralized management of this unitary
enterprise and to the net income earned." ~
Determining the unitary character of income of an interstate business
Butler Bros. is the only case in which the United States Supreme Court
has specifically determined the issue as to whether the entire income
of an interstate enterprise was sufficiently unitary in character to
warrant apportionment by formula to the taxing state. Subsequent
applications of the unitary rule have been made by the state courts
and the developments with respect to this aspect of the taxation of
income of interstate business are to be found in the state court de-
cisions.35
A brief summary of selected state court decisions indicates the fac-
tual patterns in which the issue as to the unitary character of an enter-
prise has arisen and illustrates that there is some diversity in the posi-
tions of the state courts. With respect to integrated wholesale. and
retail merchandising, the courts have been consistent in following the
rule of the decision in Butler Bros.3° With respect to companies en-
gaged in production of oil and gas, the cases have been inconsistent.
California has denied separate accounting with respect to in-state
operations and has required determination by formula apportionment
on a unitary basis.37 A contrary position has been taken by the Kansas
and Minnesota courts which have recognized separate accounting for
the operations conducted within each of their states.38 There is a similar
34 315 U.S. at 509, 62 S. Ct. at 705.
33 For comprehensive discussions of the problems of apportionment of income of unitary businesses, see
Hellerstein, Recent Developments in State Tax Apportionment and the Circscmscription of a Unitary Business,
21 National Tax Journal 487 (1968); Keesling and Warren Galifornia's Uniform Division of Income for Tax
Purposes Act. 15 University of California at Los Angeles Law Review 156 (1967); Keesling and Warren,
The Unitary Concept isv the Allocation of Income, 12 Hastings Law Journal (1960); Rudolph, State Taxation
of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups, 25 Tax Law Review
171 (1970).
36 Western Auto Supply Co. v. Comm'r of Tax'n, 245 Minn. 346, 71 N.W. 2d 797(1955) (combination whole-
sale and retail operations held unitary in view of centralized purchasing and centralized management);
Walgreen Co. v. Comm'r of Tax'n, 258 Minn. 522, 104 NW. 2d 714 (1960); Maurice L. Rothschild & Co. v.
Comm'r of Tax'n, 270 Minn. 245, 133 NW. 2d 524 (1965); Zale-Salem, Inc. v. State Tax Comm'n, 391 P. 2d
601 (Ore. 1965) (parent and subsidiary corporations engaged in retail jewelry business taxed as a unitary
business on an apportionment basis).
~ Superior Oil Co. v. Franchise Tax Board, 60 Cal. 2d 406, 386 P. 2d 33, 34 Cal. Rptr. 545 (1963); Honolulu
Oil Corp. v. Franchise Tax Board, 60 Cal. 2d 417, 386 P. 2d 40, 35 Cal. Rptr. 552 (1963).
3S Webb Resources, Inc. v. McCoy. 194 Kan. 758, 401 P. 2d 879 (19651 (Kansas statutes at this time made
separate accounting the preferred method); Skelly Oil Company v. Comm'r of Tax'n, 269 Minn. 351, 131
N.W. 2d 632 (1964) (out-of-state production of oil and gas deemed separate from business of refining and
marketing where only activity within taxing state was that of marketing). In a recent Mississippi decision,
it was held that exploration for and production of gas in Louisiana and Texas was a separate business and not
an integral part of an interstate gas transmission pipeline system which originated in the gas producing
areas of Louisiana and Texas. Tenneco, Inc. v. Barr, 224 So. 2d 208 (Miss. 1969).
PAGENO="0582"
562
conflict in the cases relating to construction companies. Utah has
adopted the unitary rule and has applied the statutory apportionment
formula to an Iowa corporation engaged in the general construction
business.39 In the year in question, the corporation was engaged upon a
number of projects in several states but its operations were centralized
in and directed from the home office in Sioux City, Iowa. Upon the
facts of the case, the result was advantageous to the taxpayer inasmuch
as its Utah project was more profitable than its operations in other
states. In a more recent decision, Oregon applied the separate account-
ing rule with respect to a foreign corporation which was engaged in the
construction of a dam within the state. On the evidence presented, the
court concluded that the taxpayer had sustained the burden of proof
by establishing that the separate accounting method was the only
method which would "fairly and accurately" reflect- the net income
from the business done within the state.4° This decision also operated
to the taxpayer's advantage inasmuch as its construction projects
within Oregon had resulted in a loss whereas its out-of-state projects
had produced a net gain.
Each state court must apply its own statutory provisions. A majority
of state income tax statutes provide that if the business income of a
corporation is derived from business activities conducted both within
and without the state, such income shall be apportioned, usually by a
three-factor formula consisting of property, payroll and sales.41 Certain
items in the nature of investment income may be classified as non-
business income with an exclusive tax situs. Under the Uniform Divi-
sion of Income for Tax Purposes Act, for example, items of non-
business income include capital gains, rents, royalties, interest and
dividends.42
"Business' income" is defined in the Uniform Act to mean "income
arising from transactions and activity in the regular course of the
taxpayer's trade or business." There is no clear cut delineation of
business income and non-business income. This is illustrated by the
decision in Montgomery Ward cQ~ Co. v. Commissioner ~ where the
Minnesota Supreme Court was presented with the issue as to whether
income derived from temporary investments of excess working capital
constituted income from intangibles employed in the nationwide
operations of the company. If such income reflected the unitary charac-
teristics of the company's merchandising operations, it was subject to
apportionment under the three-factor statutory formula. In the tax
year in which this issue arose, the taxpayer had accumulated approxi-
mately $300,000,000 in temporary investments with the expectation
of ultimately employing these funds in the expansion of its business
operations. The case was remanded to the Board of Tax Appeals to
enable the taxpayer to present proof that its income from temporary
investments was unrelated to the income derived from its general
merchandising bustness. However, prior to reaching its decision to
remand, the court made the following observation:
39 Western Contracting Corp. v. State Tax Comm'n. 414 P. 2d 579 (Utah 1966).
40 Utah Construction and Mining Co. v. State Tax Comin'n, 465 P. 2d 712 (Ore. 1970).
41 Prentice-Hall State and Local Tax Service--All States Unit ¶1046. Separate accounting is generally
authorized as an alternative where formula apportionment produces a distorted or inequitable result.
42 Uniform Division of Income for Tax Purposes Act §~ 4-8.
4~ Id., § 1(a). The complete definition is as follows:" `Business income' means income arising from trans-
actions and activity in the regular course of the taxpayer's trade or business and includes income from
tangible and intangible property if the acquisition, management, and disposition of the property constitute
integral parts of the taxpayer's regular trade or business operations."
44 276 Minn. 479, 151 NW. 2d 294 (1967).
PAGENO="0583"
563
"The record indicates that the intangibles were carried on the cor-
porate balance sheet as current assets and the income derived from the
investments was commingled with other corporate business income
in accounts used to pay ordinary business obligations. On the present
record, the taxpayer has failed to sustain its burden of proving that
the intangibles involved were not employed in its principal busi-
ness. . . . It is possible that the taxpayer could show that for all prac-
tical purposes some part of the amounts up to $300,000,000 held during
the period in question and invested in liquid securities was not actually
used or usable in its merchandising operation in any significant sense.
We recognize the possibility that at some point funds accumulated,
held, and invested in anticipation of expansion of a business at a future,
but indefinite, date have but a minimal relationship to the successful
day-to-day operation of a general merchandising business. Presumably,
corporate action segregating this fund was possible. But where the
fund so held is not set aside as a reserve for future expansion and made
unavailable for current operating expenses; where the management of
the investment of corporate funds in the intangibles is entrusted to the
corporate officers who manage the principal business; where the in-
come from the intangibles is commingled with ordinary business in-
come; and where the operating expenses of the business enterprise are
paid generally from such commingled funds, the taxpayer's burden of
establishing that the intangil~1es were not employed in the principal
business would seem to be an extremely difficult one." ~
The foregoing decision suggests that in the context of the banking in-
dustry, it would be unlikely that any significant part of a bank's busi-
ness operations could be isolated as lacking unitary character and thus
reduce the base of operating income subject to apportionment by
appropriate statutory formula.46
A decision markedly relevant to the question of the unitary character
of interstate banking operations is Household Finance Gorp. v. Fran-
chise Tax Board.47 The issue in this case was whether the separate
accounting method of determining income earned with respect to the
California operations of the corporation should prevail over an appor-
tionment by statutory formula of the corporation's entire net income.
It was the taxpayer's, contention that its California operations were
clearly separable from its business conducted in other states and that
there was no basis for resorting to a formula determination. The
court, following the rationale of the Butler Bros. decision, noted that
if income is derived from or attributable to sources both within and
without the state, the statutory requirement of apportionment by
formula is valid even through a separate accounting method is reason-
ably feasible.
In the tax years in question, the taxpayer operated approximately
425 branches, of which 33 offices were located in California. Strong
central management was exercised through the Chicago home office.
Funds were borrowed by the home office and allocated to the various
branches. Excess funds collected by the branches were remitted- to
4' Id. at 483-84, 151 NW. 2d at 296-97.
~` As indicatel by the quotatio from tise decision in Montgomery Ward & co., there is a serious question
as to whether any portion of the income of a business corporation can be considered non-business income
inasmuch as all economic activity of the corporation is "business." It is also illogical to suggest that capital
gains, interest, dividends, and rents are not an integral part of the whole economic fabric of the corporate
enterprise. It is likely that the "business" and "non-business" dichotomy has evolved from the accounting
concept of stating "operating income" as an item separate from gains and losses from "extraordinary items."
For an interesting observation on this point, see Dane, Taxation of Interstate Business-Three Alternate
Solutions 01 the Jurisdictional Problem, 23 Tax Executive 218, 260 (1970).
4~ 230 Cal. App. 2d 926, 41 cal. Rptr. 565 (1964).
PAGENO="0584"
564
the central office. Real estate leases, purchasing, public relations,
advertising and personnel were handled or controlled by the home
office. In all, the entire organization operated as an integrated unit.
The apportionment formula which was sustained by the California
court was based upon three factors-the monthly average of loans
outstanding, interest collected, and payroll. In rejecting the taxpayer's
objections to the application of this formula, the court drew an analogy
to the typical property, sales and payroll formula:
"Plaintiff asserts that basing the formula on outstanding loans,
interest collected, and payroll, is erroneous. But for a business dealing
in large part in tangible goods, a formula based upon the factors of
property, payroll, and sales has been upheld (John Deere Plow Go. v.
Franchise Tax Bd., 38 Cal. 2d 214, 238 P. 2d 569). The `property' of
ilbusehold Finance Corporation is its outstanding loans represented
by notes receivable. Its collections of interest appear entirely analogous
to the sales of John Deere Plow Company. The payroll factor is the
same in both cases. The formula used for the finance company is based
upon factors reasonably and fairly adapting to this different type of
business the factors found proper in Deere. We find nothing arbitrary
in using them to compare the national and California business of
plaintiff, and to determine the proportion of total business attributable
to California." 48
This decision may indicate the pattern for future statutory or ad-
ministrative fOrmulas which may be adopted for the purpose of ap-
portioning income derived from interstate banking operations. Other
formulas would be appropriate but, in view of the nature of banking
operations, the rationa.le of this decision commends the combination of
loans, interest and payrolls as particularly relevant factors in devising
a fair formula for apportionment of banking income.
Another decision which tends to confirm the foregoing pattern as a
likely basis for apportionment of income from interstate banking
operations is Equitable Savings and Loan Ass'n v. State Tax Commis-
sion.49 The taxpayer, an Oregon corporation, was engaged in the
business of making loans upon improved real estate with its principal
office in Portland. It operated twenty-two branch offices in Oregon,
four in Washington, and one in Idaho. All the business activities of
the association were centralized in and controlled through the home
office in Portland. During the years in question, the corporation made
or participated in out-of-state loans not only in the states of Washing-
ton and Idaho where it maintained branches, but also in California
and Hawaii where it had no branch offices. In addition, the association
consummated a large volume of Capehart military housing loans
which were closed in Washington, D.C. These loans related to con-
struction near military bases in a number of states.
At this time, the Oregon statute provided that "if the gross income
of a corporation . . . is derived from business done both within and
without the state, the determination of net income shall be based
upon the business done within the state, and the commission shall
have power to permit or require either the segregated method of
reporting or the apportionment method of reporting, under rules
and regulations adopted by the commission, so as fairly and accurately
to reflect the net income of the business done within the state." The
48 Id. at 930, 41 Cal. Rptr. at 568.
~ 444 P. 2d 916 (Ore. 1968).
PAGENO="0585"
565
statute further provided that the foregoing rule of apportionment
"was designed to allocate to the State of Oregon on a fair and equitable
basis a portion of such income earned from sources both within and
without the state." Under long-standing regulations, financial insti-
tutions had been taxed upon their unitary income by applying a
three-factor apportionment formula based upon wages, loans and
interest. .
It was the position of the tax commission that the association's
entire income was taxable in Oregon. The commission offered the
following alternative bases in support of its position: First, the tax-
payer's operations in other states did not provide a sufficient nexus to
warrant allocation of any of its income to such other states. Secondly,
since the taxpayer was a domestic corporation and was dealing in
intangibles, its entire income from such property was taxable by-
Oregon, the state of domicile, under the rule of mobilia sequuntur
personam. The taxpayer countered with the contention that its income
was unitary in character and that it was entitled by statute and the:
regulations to apportionment.
Both issues were resolved for the taxpayer. On the nexus issue, the
court stated its position by quoting from an earlier opinion.
" `[Niexus exists whenever the corporation takes advantage of the
economic milieu within the state to realize a profit. The state is
entitled to tax if the benefits it provides are a substantial economic
factor in the production of the taxpayer's income. * * *
It is now firmly established that a state may tax the net in-
come of a corporation engaged exclusively in interstate commerce.
We would expect the United States Supreme Court to hold, as we do,
that due process nexus is established even though the taxpayer has
no offices or agents within the taxing state if it could be shown that
Oregon's economy was a substantial economic factor in the produc-
tion of the taxpayer's income subject to tax.' (Footnotes omitted) 238
Ore. at 346, 350-351, 395 P. 2d at 130, l32."~°
On the facts, the court concluded that "there can be no doubt that the
`economic milieu' o the other states in which plaintiff engaged in
business was a substantial factor in producing plaintiff's income in
those states."
On the issue as to whether Oregon could tax the entire net income of
the association on the basis of its domicile within the state, the court
pointed to the contrary rule specifically provided by statute and
regulations:
"The regulations have provided since at least 1938 that as to finan-
cial institutions, their unitary income shall be apportioned by the
three-factor formula of wages, loans and interest. There is no dispute
in this case about the wage factor. It would be pure sophistry to now
suggest that by gross loans the commission did not mean loans made
in other states to residents thereof and secured by property in those
states. The factor of `gross interest collected' obviously was intended
to mean the interest paid on out-of-state loans.
"We think the tax court properly apportioned plaintiff's unitary
income in accordance with the statute and the plain meaning of the
commission's own regulations. If there is to be special taxation of the
income from intangibles of a domestic corporation, it should be pro-
~0 ~ at 919.
PAGENO="0586"
566
vided by the legislature and not initiated either by the commission or
by this court."5'
This decision, rendered by the court of the domiciliary state, is
significant in its recognition that loans consummated in other states in
which the corporation had no branch offices established a sufficient
nexus for apportionment of net income to such other states. These
out-of-state loans were secured, of course, by real prop~erty located in
those states. In the context of commercial banking, however, nexus
would not be tied to the geographical location of tangible security
for loans made but would be related to in-state activities of solicita-
tion and negotiation and the fact that eventual resort might be had
to the courts of the taxing state for the collection of the indebtedness.
Affiliated corporations and the unitary rule
One of the more difficult problems which has arisen in the allocation
of income from multistate business relates to the income of affiliated
corporations all of which are concurrently ~engaged in interstate opera-
tions. To what extent does the unitary rule apply to require combina-
tion of the income of each of the several affiliated corporations? There
are two types of affiliated groups to consider: (1) an affiliated group of
corporations which are engaged in the same line of business in different
geographical locations through separate corporations and integrated
either on a horizontal or vertical basis; and (2) an affiliated group
which is compiised of several corporations engaged in different and
unrelated lines of business but operating interstate either in the same
or different jurisdictions.
Edison California Stores v. McGolgan 52 probably ranks as the leading
ease involving the application of the unit rule to affiliated corporations
which are engaged in the same line of business in different states. In
that case, a multistate retail shoe business was operated through a
Delaware parent corporation with its headquarters in St. Louis. There
were fifteen wholly-owned subsidiary corporations each of which
operated in the state in which it was incorporated. All operations were
centralized in the home office of the parent corporation which provided
centralized management, centralized purchasing, centralized adver-
tising and various other centralized administrative functions. The
home office determined operating policies for the entire affiliated
group and maintained the principal accounting records for all of the
subsidiary corporations. Goods purchased by the central purchasing
division were shipped to the various stores operated by the subsidi-
ary corporations which were charged with the cost thereof plus a
specified percentage and an allocable portion of general overhead
expenses. Each subsidiary operated solely within the geographical
confines of its particular state. The manner of operation in Edison
California Stores paralleled that of Butler Bros. except that the
branches within each state were incorporated under the laws of the
state in which they operated.
In Edison California Stores, the tax commissioner took the position
that the three factor formula should be applied to allocate on a unitary
basis the income of the entire business enterprise comprising the
parent and all of its subsidiaries. The taxpayer's basic objection to
application of the unit rule was premised upon the existence of a
`~ Id. at 920.
52 30 Cal. 2d 472, 183 P. 2d 16 (1947).
PAGENO="0587"
567
separate corporate entity for the California operations coupled with a
separate accounting for its operations. In reliance upon the Butler
Bros. decision, the court brushed aside this argument, in effect stating
that the corporate veil of each separate corporation could not be u~ied
to cloak the existence of an integrated multistate unitary enterprise:
"In the present case all of the elements of a unitary business are
present-unity of ownership, unity of operation by centralized pur-
chasing, management, advertising and accounting, and unity of use in
the centralized executive force and general system of operation. The
business of the parent and all of its subsidiaries is owned and managed
under one centralized system, to the same extent as in the Butler
Brothers case and other cases considered therein. Thus the business
is unitary regardless of the fact that in the Butler Brothers case there
was but one corporation involved, owning as parts of the unitary sys-
tem seven different branches in as many states, and that in the present
case there is a parent corporation owning and controlling as units of
one system fifteen different branches organized as corporations in as
many states. No difference in principle is discernible. If the crux of
the matter is to ascertain that portion of the business which is done
within this state, then the same considerations justify the use of the
formula allocation method in the one case as in the other." ~
In a more recent case involving the Kennecott family of affiliated
corporations-a parent and five wholly-owned subsidiaries-the
California court has defined, with apparent acceptance by the United
States Supreme Court, the extent to which the unitary rule is appli-
cable to the combined income of a legally integrated group of corpo-
rations. It was the position of the tax authorities that the unit rule
shol4ld be applied to require apportionment of the total income of the
whole intercorporate group. The California court in its decision in
Chase Brass c~ Copper Co., Inc. v. Franchise Tax Board ~ refused to
apply the unitary rule in this pervasive manner. The problem pre-
sented can best be appraised by summarizing the intercorporate
structure of the Kennecott group and their respect~ive business
activities.
Kennecott Copper Corporation, a New York corporation and
parent of the group, did no business in California. Its business was
that of mining copper,~ gold, silver and molybdenite in a number of
other states. Approximately 20% of its total production of copper
was sold to Chase Brass & Copper Co., one of its five wholly-owned
subsidiaries.
Braden Copper Company, a Maine corporation, mined copper in
Chile which it regularly sold to the Chilean government and on the
world market. In the years in question, due to a general shortage of
copper, Braden sold some of its production in the United States.
Chase Brass & Copper Co. was one of its buyers.
Bear Creek Mining Company, a Delaware corporation, was engaged
in exploration for new ore deposits. In the years in question, the
corporation explored for metals in California, but it made no significant
discoveries.
Kennecott Sales Corporation, a New York corporation, handled
all the sales of copper for the parent and all United States sales for
53 Id. at 479-80, 183 P. 2d at 21.
`4 86 Cal. Rptr. 350, rehearing denied, 87 Cal. Rptr. 239 (1970);
PAGENO="0588"
568
Braden and was compensated on a commission basis, It made no sales
in California; any sales of copper by this corporatiQu which entered
California were completed outside the state.
Kennecott Wire and Cable Co., a Rhode Island corporation, pur-
chased copper from the parent and from Braden Copper which it
manufactured into copper rod, wire and cable for transmission of
electricity. None of its manufacturing operations were conducted in
California, but its products were warehoused and sold in California
by Chase Brass and Copper Co.
The taxpayer, Chase Brass and Copper Co., a Connecticut corpo-
ration, manufactured brass, bronze and copper rod, sheet, wire and
tube outside California. Its business activities in California consisted
of warehousing and selling its products and the products of Kenne-
cott Wire and Cable Co.
The OJ)eratiOflS of Chase Brass and Copper Co. were concededly
unitary in character and its income was properly subject to appor-
tionment pursuant to the statutory three-factor formula. There were
two facets to the extension of the unitary rule to the other corporations
in the affiliated group. The first concerned the treatment of Kenne-
cott Copper, Kennecott Sales and Chase Brass as a single unit in that
their operations constituted a vertical integration of mining, manu-
facturing and marketing of finished products. As to these companies,
the court concluded that the unitary rule was properly applicable.
This conclusion was premised upon the court's determination that the
test of unity of ownership, operation and use was met in this case.
Unity of ownership was clear. Unity of operation was based upon the
following findings: centraliZe(l purchasing as to some items; centralized
advertising through use of the same agency and reference in the adver-
tising materials to membership in the Kennecott group; utilization of
the same firm of public accountants; consolidation of tax accounts;
representation of Chase Brass by the staff of Kennecott Copper in
the particular tax proceedings; loans by Kennecott Copper to Chase
Brass to finance rehabilitation of its Connecticut plant~' and adminis-
tration by Kennecott Copper of a common retirement plan for salaried
employees. Unity of use was found in the integration of top level
management which was centralized in the president and board of
directors of Kennecott Copper. It was stipulated that the board of
directors of the parent was concerned with the `development and
maintenance of its fabricating subsidiaries and their basië problems
and policies. It was also noted that the executive salary scale of all
subsidiary employees earning more than $15,000 was subject to re-
view and control by the parent. Consequently, executive control at
the highest level was in Kennecott Copper. Finally, emphasis was
placed upon the fact that Chase Brass through the year's had been a
regular and substantial customer of Kennecott Copper, taking about
20% of its total copper production. On this basis, the court concluded
that Kennecott Copper, Kennecott Sales and Chase Brass constituted
a unitary enterprise with respect to copper production, manufacture
and sale. The operations of Kennecott Copper relating to gold, silver
and molybdenite metals were not included as a part of the unitary
business. `
A similar issue was whether Braden Copper should `be included
within the vertical integrated group since it had supplied Chase Brass
with raw materials during the years in question. Inasmuch as the
PAGENO="0589"
569
relationship with Braden Copper arose only by reason of the shortage'
of raw material which happened to exist in the years in question and
since Braden was not a regular part of the integrated domestic opera-
tions of the Kennecott family, the court excluded Braden Copper. The
Court also excluded Bear Creek Mining since its operations were
unrelated to the production and manufacturing operations of Chase.
Brass.
The second aspect of Chase Brass cQ~ Copper Co. was the question.
of horizontal integration with Kennecott Wire and Cable Co., a sibling
corporation, which was also engaged in the manufacture and sale of*
copper products and subject to common control by the parent,
Kennecott Copper. The element of common control and the fact that.
Chase Brass since 1944 had handled the sale of a major part of the
production of Kennecott Wire and Cable through the Chase Brass
sales organization led the court to conclude that these two corporations
were engaged in a unitary business.
The appeal of Chase Brass cQ~ Copper Co. to the United States
Supreme Court was dismissed for want of jurisdiction on December
21, 197O.~~ Implications of this decision with respect to the banking
industry do not appear serious. The question is the extent to which the
unitary rule applied in this case may be applicable to bank holding
companies. This turns, of course, upon the nature of the businesses.
conducted by the affiliated corporations. If the lines of business con-.
ducted by the non-bank corporations are wholly unrelated to banking,.
the unitary rule will not embrace the group or any portion of the
income of members of the group.56 On the other hand, to the extent
that other corporations in the affiliated group are engaged in banking
or related lines of business and to the extent that management and
operations are integrated, such corporations within the group will be.
exposed to the broader unitary concept.57
In any case, common ownership of a group of corporations engaged'
in unrelated businesses does not establish a unitary enterprise for~
purposes of apportioning net income. As indicated by the decision in.
Chase Brass cQ~ Copper Co., the operations of an affiliated group are
unitary only to the extent that the business conducted by any one of
the corporations within the taxing state is dependent upon or con-.
tributes to the out-of-state business operations of one or more other*
corporations within such group. Furthermore, as in Chase Brass ct~
Copper Co., the unitary character of the group may be determined to
exist only with respect to a part of the business operations of members..
of the group.
An interesting variation, if not inconsistency, in the application of
the unitary rule is found in the decision in Interstate Finance Corp. V.
Wisconsin Dep't of Taxation,58 where the taxpayer operated within
the state through its own branch offices and also through offices oper-.
55400 U.S. 961, 91 S. Ct. 365 (1970).
~6 Corporations affiliated through non-bank-originated one-bank holding companies would ordinarily lack
unitary charhcter. For a study and description of these groups, see: Hearings on S. 1052 (et al) and HE.
6778 Bejore the Senate Comm. en Banking and Currcncy, 91st Cong.. 2d Sess., pt. 2 at 1289-1301 (1970).
57 Corporations affiliated under the umbrella of a bank-originated one-bank holding company would usu-
ally constitute a unitary enterprise. As is true generally, the determining factor in the area of bank holding
companies is the nature of the business conducted by each of the affiliated corporations. On this point, P. L
91-607, the Bank Holding Company Act Amendments of 1970, is of interest. This act restricts the invest.
ments of a bank holding company to shares of companies "the activities of which . . . [are] so closely related
to banking or managing or controlling banks as to be a proper incident thereto." Thus, corporations subse-
quently acquired by bank holding companies will necessarily possess a unitary character.
58 28 Wis. 2d 262, 137 N.W. 2d 38 (1965).
7s-421 0 - 72 - 38
PAGENO="0590"
570 /
ated by its wholly-owned subsidiaries. Interstate Finance, an Iowa
corporation with its home office in Dubuque, operated five branch
offices in Iowa and two in Wisconsin. It also owned all the stock of
seventeen subsidiaries located in five different states, including three
which operated in Wisconsin. The parent and its subsidiaries were
engaged principally in automobile financing at both the wholesale and
retail levels. The former involved the financing of inventories of auto-
mobile dealers; the latter involved the purchase of dealers' interests in
customer sales contracts. Operations of the entire enterprise were
centralized at the home office which determined all matters of general
company policy and exercised supervisory control over all of its
branches and subsidiary operations. All the funds required in the
operation of the enterprise were obtained by the home office through
lines of credit established with major banks. Branch managers were
selected, trained, transferred and supervised by the home office. The
home office participated in loan decisions in connection with its whole-
sale financing and in all loans over $5,000; it maintained a central
accounting system, took possession of most security documents, with-
drew funds from the local branches, and processed payrolls for all
employees.
Two questions were involved. The first was whether its own branch
office operations in Wisconsin were part of a multistate unitary business
which would require apportionment of income by the formula method.
If the answer to this question were affirmative, the second question
was whether the income of the taxpayer's wholly-owned subsidiaries
should also be included in the base subject to apportionment.
On the first issue, the court rejected the taxpayer's contention that
its separate accounting method should control. On this point, the
case was substantially on all fours with the factual situation described
in Butler Bros. The taxpayer attempted to establish by its separate
accounting procedures that its Wisconsin branches were operated
either at a loss or at a lesser profit than that determined by applying
the statutory formula of apportionment on a unitary basis.
The second issue relating to the inclusion of the wholly-owned sub-
sidiary corporations as a part of a unitary business was resolved by
the court by a strict construction of the Wisconsin statute. The tax-
payer argued that if its branches were an integral part of a unitary
business, it followed that its wholly-owned subsidiaries were also an
integral part thereof. This argument was premised upon the fact that
the relationship of the parent and its home office to its subsidiary
operations was precisely of the same character as its relationship to
its branch offices. In rejecting the argument for inclusion of the sub-
sidiaries, the court relied upon the fact that the Wisconsin statute
did not specifically authorize the combination of separate corporate
entities in applying the unitary rule. There is a question as to whether
the decision was correct in recognizing statutory restraints upon
application of the unitary rule in the circumstances of this case.59
Legislative limitations upon taxation of income derived from interstate
commerce
As a review of the cases has indicated, the states have broad
constitutional power within the limits of due process and the commerce
A9~Rudolph, State Taxation of Interstate Business: The Unitary Bu8iness Concept and Affiuiated Corporate
Groups, 25 Tax Law Review 171, 199-200 (1970).
PAGENO="0591"
571
clause to tax net income from interstate commerce and this power
may now be applied to tax income derived from interstate banking
operations. What, if any, are the existing general statutory limita-
tions-either federal or state-upon the exercise of this power?
Federal limitations can be imposed by Congress in the exercise of
its power to regulate interstate commerce. At the state level, the
only limitations are those imposed by state constitutional provisions
or by self-restraint in the exercise of the taxing power.
As previously observed, there was an immediate response by Con-
gress to the decision in Northwestern States. In that case, the Court
held that mere solicitation of orders for the sale of goods within the
taxing jurisdiction provided a sufficient nexus to warrant allocation
of net income from interstate business. Prior to the end of the year
1959, Congress in the exercise of its power to regulate interstate
commerce enacted Public Law 86_272.60 Although Congress accepted
the result reached in the specific cases which were decided by the
Court (each corporation maintained a sales office within the taxing
state), it proceeded to blunt the full thrust of Northwestern States
by prohibiting an allocation of net income solely upon the basis of
solicitation of sales orders. Specifically, the statute prohibits the
imposition of an income tax if the only business activity in the taxing
state consists of "the solicitation of orders . . . in such State for sales
of tangible personal property . . . which orders are sent outside the
State for approval or rejection, and, if approved, are filled by ship-
ment or delivery from a point outside the state." Exemption is also
extended to income derived from sales made within a state through
independent contractors. This legislation, since it applies only with
respect to the sale of tangible personal property in interstate com-
merce, imposes no restrictions with respect to the allocation of income
from interstate financial or banking operations.
Concurrently with the enactment of Public Law 86-272, Congress
authorized an extensive study of state taxation of interstate commerce.
This study was conducted by a subcommittee of the House Judiciary
Committee and was completed in 1965.61 The result was a recommenda-
tion for enactment of legislation which (1) would limit allocation of
income from interstate commerce to those states in which the tax-
payer has a "business location" and (2) would require that the alloca-
tion be made solely upon the basis of a two factor (payroll and prop-
erty) formula.62 Under these proposals, a taxpayer would be deemed to
have a business location within a State if the company owned or leased
real property within the State or if the company had one or more em-
ployees located in the State.
These recommendations have been before Congress at each ensuing
session but have not been enacted. In the 91st Congress, the recom-
mendations were included in the "Interstate Taxation Act," com-
monly known as the Rodino Bill (H.R. 7906), which passed the House
but was not acted upon in the Senate. This legislation recently has been
reintroduced in the Senate with a modification which would restrict
the application of the principle enunciated in Chase Brass cQ~ Copper
60 15 U.S.C. § 381 (1959).
61 House Judiciary Comm., Special Subcommittee State Taxation of Interstate Commerce, H.R. Rep.
No. 1480, 88th Cong. 2nd Sess., Vols. 1 and 2 (1964); 1~i.R. Rep. No. 565, 89th Cong. 1st Sess., Vol. 3 (1965):
HR. Rep. No. 952, 89th Cong. 1st Sess., Vol. 4 (1965). The report of this subcommittee is generally referred
to as the report of the Willis Conmiittee or Subcommittee.
62 HR. Rep. No. 952, 89th Cong., 1st Sess., Vol.4, at 1135 (1965).
PAGENO="0592"
572
Go. relative to the apportionment of the incOme of affiliated cor~
porations.63 On the question of taxation of income from interstate
banking operations, it should be noted that the proposed legislation
would not apply to a corporation which derives 50% or more of its
ordinary gross income from banking, the lending of money, or the
extending of credit.64
In the past few years, there have been two significant developments
at the state level which have an important bearing upon the taxation
of net income from interstate business. These are the Uniform Division
of Income for Tax Purposes Act 65 and the Multistate Tax Compact.66
The former has been adopted in eleven states; 67 and the Multistate
Tax Compact now includes twenty-one member states and fourteen
associate member states.68 One of the principal objectives of both
the Uniform Act and the Multistate Tax Compact which incorporates
the Uniform Act is to promote equitable and uniform allocation of the
income tax base of interstate businesses. The Uniform Act incorporates
the three-factor property, sales and payroll formula for apportionment
of income from interstate business. Although these developments at
the state level constitute a significant step forward, neither the
Uniform Act nor the Multistate Tax Compact bears upon the issue of
taxing income from interstate banking operations. The Uniform Act
specifically provides that it has no application to the allocation of
income from "activity as a financial organization." 69 A "financial
organization" is defined to mean "any bank, trust company, savings
bank, private banker, savings and loan ~ssociation, credit union,
investment company, or any type of insurance company." 70 Thus, it
is apparent that neither existing federal legislation nor existing state
legislation will have a restrictive effect upon the exercise by the states
of their power to tax net income from interstate banking operations.
DOING BTJSINESS TAXES
In addition to the question of multiple state taxation of the net
income of national banks, there is also the question of multiple state
taxation of the capital stock and gross receipts of national banks.
By the permanent amendment of section 5219, a national bank will
be treated for the purposes of any tax law as a corporation organized
under the laws of the state in which its principal office is located.7'
63S. 317, 92d Cong., 1st Sess. § 512(d) (1971). This section provides that a state may not require a corpora-
tion with a business location in the state to consolidate its income with any other corporation which does not
have a business location within the state. Allowance is made, however, for adjustment of intercompany
transactions which have not been consummated on an arm's length basis.
64 Id. § 506(a) (1) (A) (v).
65 The Uniform Division of Income for Tax Purposes Act was approved by the National Conference of
Commissioners on Uniform State Laws and the American Bar Association in 1957. 9A Uniform Laws Annot.
448. For background and evaluations of the Uniform Act, see: Lynn, Formula Apportionment of Corporate
Income for State Tax Purposes: Natura Non Facit Saltum, 18 Ohio State Law Journal 84 (1957); Lynn, The
Uniform Division of Income for Tax Purposes Act Reexamined, 46 Virginia Law Review 1257 (1960); Pierce,
The Uniform Division of Income for State Tax Purposes, 35 Taxes 747 (1956); Wilkie, Uniform Division of
Income for Tax Purposes, 37 Taxes 65 (1959).
65 The Multistate Tax Compact was initiated as an alternative to the recommendations of the Willis
Committee that Congress enact Federal rules to govern the apportionment of income from interstate busi-
ness. The Compact, which was drafted in final form in December 1966, was prepared under the auspices
of the Council of State Governments. It was the joint product of representatives of the National Association
of Tax Administrators, the National Association of Attorneys General and the National Legislative Con-
ference. 27 Council of State Governments-Suggested State Legislation C-3 (1968). Congress has not con-
sented to the Multistate Tax Compact and some hold the view that it may be invalid absent such consent.
See: U.S. Const. art. I, § 10; Kust, A New Ventscre in Federalism-Toward a Solution to State Taxation of
Multistate Business, 23 Tax Executive 424. 426 (1971).
67 1969 Handbook of the National Conference of Commissioners on Uniform State Laws 244, Appendix
2-Table I.
68 Prentice-Hall State and Local Tax Service-All States Unit ~ 5150 and ¶ 5151.
69 Uniform Division of Income for Tax Purposes Act § 2.
7~ Id. § 1(d).
7' See note 2 supra at p. 481 for the language of section 5219 as permanently amended.
PAGENO="0593"
573
Thus, a national bank will be taxed as a domestic corporation by the
principal-office state and as a foreign corporation by all other states.
Capital stock taxes-Principal-office state
In view of the statutory presumption of paternity of a national
bank, the principal-office state will have broad constitutional authority
to impose capital stock~taxes. Capital stock taxes initially evolved as
hybrid property and excise taxes, but are treated juridically as excise
taxes upon the corporate franchise.72 There are a variety of measures
for these annual taxes, the most common being issued or authorized
capital stock, capital stock and surplus, net worth, or capital value.73
Although most states provide for apportionment of the base of a
capital stock tax assessed upon domestic corporations which are
engaged in multiple state operations,74 there is no constitutional
requirement for apportionment. The rule that there need be no
apportionment of a capital stock tax upon domestic corporations is
premised on the principle that the tax is an excise upon the privilege
of corporate existence and is not a tax upon the property represented
by the capital of the corporation.75
Although the principal-office state could impose a capital stock
tax upon the total capital of a national bank without apportionment,
whether or not the bank is engaged in interstate operations, there
could be no discrimination against national banks. By the statutory
requirement that a national bank shall be treated for tax purposes as
if it were organized under the laws of the principal-office state, both
national banks and domestic state banks are placed in the same class.
The principal-office state could, however, classify both its national
and state banks in a class separate from other domestic business
*corporations and impose a capital stock tax by a different method or
base, or at a different rate.
Capital stock taxes-Other states
Imposition of capital stock taxes by states other than the principal-
office state presents a different issue. In other states, a national bank
will be in the position of doing business as a foreign corporation. The
validity of capital stock taxes assessed by these states will turn upon
whether the bank is engaged in carrying on an intrastate business
within such other states. If the bank were engaged solely in the conduct
of interstate commerce, a capital stock tax would fail in the face of the
long-standing constitutional Princil)le that "a state may not lay a tax
on the `privilege' of engaging in interstate commerce." 76
A leading case which illustrates the application of this principle is
Spector it'Iotor Service v. O'Gonnor.77 A Connecticut statute provided
that every corporation "carrying on business in this state . . . shall
pay, annually, a tax or excise upon its franchise for the privilege of
carrying on or doing business within the state." The tax was measured
by apportioned net income. Taxpayer, a Missouri. corporation with
its principal place of business in Illinois, was engaged in the interstate
..~trucking business. It operated two terminals in Connecticut, but it
Rep. No. 565, 89th Cong. 1st Sess., Vol. 3,904-07 (1965).
`~ Jd.; Prentice-Hall State and Local Tax Service-All States Unit ¶ 1050.
74 hR. Rep. No. 565, 89th Cong. .1st Sess., Vol. 3. 908-09 (1965).
~5 }:an~a~ City, M. & B. R.R. v. Stiles, 242 kITS. 111., 37 5. Ct. 58 (1916); Kansas City, F. S. & M. Ry. v
-~~9Mn, 240 U.S. 227. 36 S. Ct. 261 (1916). Both corporations were engaged in owning and operating interstate
railroad systems and their capital was employed both within and without the state of incorporation.
~ Northwestern States Portland Cement Co. v. Minnesota, 358 kITS. 450, 458, 79 S. Ct. 357, 362 (1959).
77340 U.S. 602, 71 S. Ct. 508 (1951).
PAGENO="0594"
574
was not authorized to do intrastate trucking and it did not engage in
such business. In-coming or out-going shipments in truckload lots
were delivered directly to or picked up at the customer's place of
business. Less-than-truckload cargos were gathered by pick-up trucks
and assembled into full truckloads at the taxpayer's terminals. It was
conceded that the tax was nondiscriminatory and that the net income
was reasonably apportioned to the carrier's business in Connecticut.
Thus there was no undue burden upon interstate commerce.
In holding the tax unconstitutional, the Court observed that there-
tofore it had "struck down, under the Commerce Clause, state taxes
upon the privilege of carrying on a business that was exclusively
interstate in character. The constitutional infirmity of such a tax
persists no matter how fairly it is apportioned to business done within
the state." With this decision, the Court made clear that it is the
legal "incidence of the tax" which is~ controlling. Thus, to meet the
constitutional requirements, the taxing statute by its terms must
operate upon an incident which is an appropriate subject of state
taxation. As indicated by the subsequent decision in Northwestern
Si~ates, if the Connecticut tax had been imposed directly upon net
income, rather than upon "the privilege of carrying on business," it
would have been valid.
A subsequent case relating to the New Jersey Corporation Business
Tax illustrates how a modification of statutory language can alter the
determination of the constitutional issue. The facts in Roadway Ex-
press, inc. v. Director, Division of Taxation 78 were substantially on all
fours with Spector iVlotor an(l involved two interstate motor ctirriers
each of which maintained substantial terminal facilities in New Jersey
in connection with its interstate operations. The statute in question
read as follows:
"Every domestic or foreign corporation . . . shall pay an annual
franchise tax . . . for the privilege of having or exercising its corpo-
rate franchise in this State, or for the privilege of doing business,
employing or owning capital or property, or maintaining an office, in
this State. And such franchise tax shall be in lieu of all other State,
county or local taxation upon or measured by intangible personal prop-
erty used in business by corporations liable to taxation under this act."
(Emphasis added).
The measure of the tax was allocated net worth plus allocated net
income. In challenging the tax, the taxpayei~s relied solely upon the
decision in Spector Motor. There was no question as to the fairness of
the allocation and there was no contention that the tax discriminated
against or unduly burdened interstate commerce.
In sustaining the tax, the New Jersey court distinguished Spector
Motor by first observing that the incidence of the tax in question was
not confined to that "of carrying on or doing business within the state"
as was true of the Connecticut statute. Rather, the court noted that
the privilege subject to tax was in the alternative and included
"exercising its corporate franchise within the state or of owning or
employing capital or property in the state, or of maintaining nn
office in the state." Thus the court concluded that there was a "nexus
of localized activity within the state of a nature and extent . .
`~ 50 N.J. 471, 236 A. 2d 577 (1967), appeal dismissed, 390 13.6. 745 (1968).
PAGENO="0595"
575
where it can realistically be said that state government substantially
affords protection and gives benefits to the corporation's enterprise
within the state." But the more significant aspect of the tax accord-
ing to the court was the "in lieu" feature. On this point, the court
described at some length the history of the statute. The tax in ques-
tion had been enacted to replace a local property tax on both tangible
and intangible property of corporations and a state capital stock
tax on both domestic and foreign corporations. This background aptly
demonstrated the bona fides of the "in lieu" property tax feature. It
also brought the tax within a long line of authority which had sustained
taxes labeled as franchise taxes but imposed as "in lieu" property
taxes measured by apportioned gross receipts derived solely from
interstate commerce.79 An appeal to the Supreme Court in Roadway
Express ~ras dismissed for want of a substantial federal question. It
has been suggested that Roadway Express effectively erodes the rule
of Spector Motor.8° Although this appraisal is not without some
foundation, one cannot discount the "in lieu" aspect of the tax as
the determining factor in Roadway Express.
It is submitted that there is nothing in the recent decisions to
support a departure from the view that a state other than the principal-
office state cannot impose a valid capital stock tax upon a national
bank where the business transacted in the other state consists ex-
clusively of the conduct of interstate business. With respect to banking
operations, the cases support the conclusion that mere solicitation
and servicing of loans or other banking business within another
state would constitute interstate commerce.8' This conclusion is
premised upon the facts and decision in Northwestern States where
the Court took the position that in-state solicitation of sales with
production, shipment, billing and collection being made from an out-
of-state plant and office constituted "activities . . . exclusively in
furtherance of interstate commerce." In sum, it is unlikely that a
national bank would be deemed to be engaged in an intrastate business
in another state for purposes of a capital stock tax in the absence of
the establishment of a branch where "operations of discount and
deposit" were regularly carried on.
Assuming that a national bank were engaged in intrastate business
in a state other than its principal-office state, a capital stock tax would
be valid only if applied on an apportioned basis. Failure to apportion
the base of a capital stock tax with respect to a foreign corporation
doing business in the taxing state has been held to constitute a tax
upon values outside the taxing state and to violate both due process
and the commerce clause.82
It follows that an apportionment of the base of a capital stock
tax must be reasonable in relation to the capital employed in the
business conducted in the taxing state. Most of the established
formulas for apportionment include tangible property and gross
receipts, and some include payrolls. In some states, the property
78 E.g., Railway Express Agency, Inc. v. virginia, 358 U.S. 435, 79 S. Ct. 411 (1959).
80 Comment, State Taxation of Interstate Commerce: Roadway Express, The Diminishing Privilege Tax
Immunity, and the Movement Towards Uniformity in Apportionment, 36 University of Chicago Law Review
186 (1968).
81 Holding security interests with respect to property ohysically located within the state in coonection
with bank loans would not alter this conclusion. The security arranceinents would merely be incidental to
transaction.s which are essentially interstate in character.
82 Cudahy Packing Co. v. Hinkle, 278 U.S. 460, 49 5. Ct. 204 (1929).
PAGENO="0596"
576
*factor includes intangibles.83 For the banking industry, inclusion of
intangible property in the apportionment formula would be partic-
ularly relevant; however, a formula which excludes intangibles
would not result in an unreasonable allocation of the base of a capital
stock tax.
Gross receipts taxes
A few states have imposed general business taxes based upon gross
receipts and these taxes have engendered close scrutiny under the
commerce clause.84 By contrast with a tax upon net income, a tax
upon or measured by gross receipts derived from interstate commerce
is deemed a direct burden thereon. A net income tax al)plieS only if
the commerce is profitable, but a gross receipts tax applies solely by
reason of the fact that there is commerce.85
J. D. Adams Manvfacturing (Jo. v. Storem86 is one of the landmark
cases to deal with the validity of a gross income tax. Section 3 of the
Indiana Gross Income Tax Act of 1933 imposed a tax "upon the
entire gross income of every person engaged in the business of manufac-
turing" at the rate of one-fourth of one percent and "upon the entire
gross income of every person engaged in the business of retailing"
at the rate of one percent. The taxpayer, an Indiana corporation,
manufactured heavy road building machinery and equipment which
was sold both within and without the state. Its only manufacturing
plant was located in Indiana. After observing that the tax was not
"an excise upon the privilege of producing or manufacturing within
the state, measured by volume of production or the amount of sales,"
the Court concluded that the tax as applied to gross income derived
from interstate sales imposed an undue burden upon interstate
commerce by subjecting such receipts to the risk of multiple taxation:
"The vice of the statute as applied to receipts from interstate sales
is that the tax includes in its measure, without apportionment,
receipts derived from activities in interstate commerce; and that the
exaction is of such a character that if lawful it may in substance be
laid to the fullest extent by states in which the goods are sold as well
as those in which they are manufactured. Interstate commerce would
thus be subjected to the risk of a double tax burden to which intra-
state commerce is not exposed, and which the commerce clause forbids.
We have repeatedly held that such a tax is a regulation of, and a
burden upon, interstate commerce prohibited by article 1, section 8,
of the Constitution. The opinion of the State Supreme Court stresses
the generality and nondiscriminatory character of the exaction but
it is settled that this will not save the tax if it directly burdens inter-
state commerce." 87
In its decision, the Court pointed to the distinction between the
gross receipts tax in question and an excise tax imposed upon the
privilege of manufacturing or mining measured by the sales price of
the goods produced and concluded with the following statement:
"So far as the sale price of the goods sold in interstate commerce
includes compensation for a purely intrastate activity, the manu-
83 1-JR. Rep. No. 565, 89th Cong. 1st Sess., Vol. 3, 946-52 (1965).
81 Sales and use taxes are based upon gross receipts but such taxes apply only at the retail level. The gross
receipts tax considered here is one which applies generally at all stages of production and distribution. It
should be added, however, that subject to state constitutional provisions a state could imoose a selected oc-
cupation tax upon banks measured by gross receipts. In that case, the allocation of gross receipts as the
measure of the tax would be governed by the principles developed herein.
83 United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 38 S. Ct. 499 (1918);
83394 U.S. 307, 58 5. Ct. 913 (1938).
87 Id. at 311-12, 58 S. Ct. at 916.
PAGENO="0597"
577
facture of the goods sold, it may be reached for local taxation by a
tax on the privilege of manufacturing, measured by the value of the
goods manufactured, or by other permissible forms of levy upon the
intrastate transaction. It is because the tax, forbidden as to inter-
state commerce, reaches indiscriminately and without apportionment,
the gross compensation for both interstate commerce and intrastate
activities that it must fail in its entirety so far as applied to receipts
from sales interstate." 88
There are two aspects of this decision which warrant emphasis and
both are inherent in the multiple burden test which the court applied.
First, it will be observed that the Court subscribed to its earlier
decisions in which it had sustained excise taxes measured by gross
receipts derived from interstate commerce where the subject of the
tax was a strictly localized activity. Thus, an excise upon the privilege
of mining,89 manufacturing,90 or publishing9' measured by gross
receipts derived from the sale of goods or products in interstate
commerce is permissible. No other state can impose a tax upon the
exercise of these privileges and the tax in each of these circumstances
satisfactorily meets the requirement of apportionment to a local
activity.
The second point relates to subsequent decisions in which the
Court has sustained taxes upon gross income derived from interstate
transportation where such receipts have been apportioned upon a~
mileage basis to the taxing state.92 Again, there is no risk of multiple
taxation inasmuch as the receipts which are the subj ect or the measure
of the tax cannot be allocated to any other state.
Ar other leading case which p1 ovides background upon the con-
stitutionality of a gross receipts tax is Gwinn, White & Prince v.
Henneford.93 Washington state imposed a tax upon "the act or privilege
of engaging in~ business activities" upon every person "engagmg
within this state in any business activity" at the rate of one-half of 1
per cent of the "gross income of the business." The taxpayer, a
Washington corporation, was engaged as a marketing agent for
Washington and Oregon fruit growers and growers' cooperative or-
ganizations. As agent for the growers, it made sales and deliveries of
fruit to purchasers in other states throughout the United States,
collected the sales price, and remitted the proceeds to its principals
after deducting certain expenses and commissions. Many of the sales
and collections thereon were effected through the taxpayer's local
representatives in the other states. In holding the tax unconstitutional
with respect to the commissions earned by the taxpayer, the Court
made the following observations:
"While appellant is engaged in business within the state, and the
state courts have sustained the tax as laid on its activities there, the
interstate commerce service which it renders and for which the taxed~
compensation is paid is not wholly perfoimed within the state. A
substantial part of it is outside the state where sales are negotiated
and written contracts of sale are executed, and where deliveries and
collections are made. Both the compensation and the tax laid upon it
88 Id. at 313-14, 58 5. Ct. at 917.
89 Oliver Iron Mining Co. v. Lord, 262 U.S. 172, 43 S. Ct. 526 (1923).
9° American Manufacturing Co. v. St. Lcuis, 250 U.S. 459, 39 5. Ct. 522 (1919).
"Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S. Ct. 546 (1938).
92 Canton R.R. Co. v. Rogan, 340 U.S. 511, 71 S. Ct. 447 (1951); Central Greyhound Lines, Inc. v. Mealey,.
334 U.S. 653,68 S. Ct. 1260 (1948).
`3 305 U.S. 434, 59 S. Ct. 325 (1939).
PAGENO="0598"
578
are measured by the amount of the commerce-the number of boxes
of fruit transported from Washington to purchasers elsewhere; so
that the tax, though nominally imposed upon appellant's activities
in Washington, by the very method of its measurement reaches the
entire interstate commerce service rendered both within and without
the state and burdens the commerce in direct proportion to its
volume.
". . . {I]t is enough for present purposes that under the commerce
clause, in the absence of Congressional action, state taxation, what-
ever its form, is precluded if it discriminates against interstate com-
merce or undertakes to lay a privilege tax measured by gross receipts
derived from activities in such commerce which extend beyond the
territorial limits of the taxing state. Such a tax, at least when not
apportioned to the activities carried on within the state, . . . burdens
the commerce in the same manner and to the same extent as if the
exaction were for the privilege of engaging in interstate commerce
and would, if sustained, expose it to multiple tax burdens, each
measured by the entire amount of the commerce, to which local
commerce is not subject.
"Here the tax, measured by the entire volume of the interstate
commerce in which appellant participates, is not apportioned to its
activities within the state. If Washington is free to exact such a tax,
other states to which the commerce extends may, with equal right,
lay a tax similarly measured for the privilege of conducting within
their respective territorial limits the activities there which contribute
to the service. The present tax, though nominally local, thus in its
practical operation discriminates against interstate commerce, since
it imposes upon it, merely because interstate commerce is being done,
the risk of a multiple burden to which local commerce -is not exposed." ~
As the decision in both J. D. Adams Manvfacturing Co. and Gwinn,
White cQ~ Prince indicate, it is exceedingly difficult, if not impossible,
to apportion among the several states gross receipts derived from the
sale of goods or the rendition of services in transactions consummated
in interstate commerce. In each of these cases, the goods sold and the
services rendered originated in the taxing state. It is of interest to
compare- two more recent cases involving taxes upon gross receipts
where the goods sold originated outside the taxing state. The question
in each case was the propriety of allocating these receipts to the market
state in view of the interstate aspects of the transactions.
As in Gwinn, White cf~ Prince, these later cases also involved the
application of the Washington "business activities" tax. In Field
Enterprises v. State,95 a Delaware corporation, with its principal
office in Chicago, was engaged in the business of publishing and selling
encyclopedias throughout the United States. It maintained a division
office in Seattle with a division manager and four employees. This
office was used as a headquarters to train salesmen and there were
175 salesmen within the state. Orders for books, which were obtained
through personal calls by salesmen, were submitted with the dow~i
payments thereon to the division office in Seattle and forwarded by
that office to Chicago. Shipments pursuant to these orders were made
directly from Chicago to the customer and billings and collections of
the unpaid balance of the purchase price were made by the Chicago
94 Id. at 438-39, 59 S. Ct. at 327-28.
~` 47 Wash. 2d 852, 289 P.2d 1010 (1955), affirmed per curiam, 352 U.S. 806, 77 S. Ct. 55 (1956). -
PAGENO="0599"
579
office. On these facts it was held that the tax upon the gross receipts
from sales in Washington did not impose an unconstitutional levy
upon interstate commerce.
The most recent case in point is General Motors Corporation v.
Washington 96 in which the Court dealt with the issue as to whether
it was constitutional to apply the Washington business activities tax
to the taxpayer's gross receipts from wholesale sales of motor vehicles,
parts and accessories delivered to independent retail dealers in the
state of Washington. Under the GM organizational structure, distribu-
tions of its products were supervised through geographical offices.
Chevrolet, Pontiac and Oldsmobile divisions maintained a zone office
in Portland, Oregon which serviced GM operations in Oregon, Wash-
ington, Idaho, Alaska and portions of Montana and Wyoming. GM
offices and employees located in the State of Washington consisted
of the following: (1) The Chevrolet division maintained a branch
office in Seattle to service a major part of the state of WTashington by
expediting deliveries and performing some promotional work. This
office was under the jurisdiction of the Portland zone office. (2) GM
Parts Division maintained a warehouse in Seattle, employed 20 to 28
employees, and supplied all of the Chevrolet, Pontiac and Oldsmobile
dealers in Washington with parts and accessories most often called for.
(3) Each district manager of the Chevrolet, Pontiac and Oldsmobile
divisions resided in Washington and each regularly visited the dealers
under his supervision for the purpose of establishing and maintaining
sales~ of GM automobiles. Each district manager's home served as his
office for the transaction of GM business.
With the exception of automobile parts sold from the Seattle office
and warehouse of the GM Parts Division, all sales within Washington
were consummated on the basis of orders mailed by dealers to out-of-
state offices of GM and filled by shipment of goods into the state. The
challenge to the tax related to gross receipts from out-of-state ship-
ments to Washington dealers. After carefully summarizing all the
facts relating to GM business activity in the state of Washington, the
Court concluded that GM had so mingled its taxable business with that
which it claimed to be not taxable that, in light of all the evidence, at-
tribution of all its Washington sales to its local activity was justified.
The decision in General Motors and the affirmance in Field Enter-
prises were both premised upon the Court's earlier decision in Norton
Go. v. Department of Revenue.97 In the Norton case, a Massachusetts
corporation with its principal office in `Worcester maintained a place
of business in Illinois, where it stocked and sold certain of its prodticts.
The Illinois office also processed orders for items not in stock. Goods
for various orders were assembled in Worcester and shipped in carload
lots to the Illinois office where they were reconsigned to the respective
customers. In addition, Norton also filled orders received directly
from Illinois purchasers by direct shipments to the customers.
The issue in Norton was whether the Illinois Retailers' Occupation
Tax "upon persons engaged in the business of selling tangible per-
sonal property at retail in this State" applied to all the sales made by
Norton to Illinois customers. In its decision the Court concluded that
the company could not "channel business through a local outlet to
gain the advantage of a local business and also hold the immunities of
96 377 U.s. 436, 84 S. Ct. 1564 (1964).
340 U.S. 534, 71 S. Ct. 377 (1951).
PAGENO="0600"
580
an interstate business." 98 The oniy sales which the Court excluded
from the Illinois tax were those made upon orders received in Massa-~
chusetts directly from the purchaser and filled by direct shipment to
the customer. These transactions were deemed to be clearly interstate'
in character and disassociated from the local business outlet.
With this datum point, the Court proceeded in General Motors'
Corporation to emphasize "the bundle of corporate activity" and found
that the business of G~vI was so enmeshed in local connections-so
channelled through local activity-that all GM sales within the state
were sufficiently localized to warrant imposition of the gross receipts
tax. The test is one of degree. In Norton, Field Enterprises and
General Motors, there were local offices staffed to provide substantial
and continuing services in the promotion, sale, or actual delivery of
the taxpayer's products within the taxing state.
With the background of these decisions, the application of gross
receipts taxes to national banks appears reasonably clear. The
principal-office state can tax the gross receipts of a national bank
except to the extent that such receipts are derived from banking
activities localized in another state. In the absence of branch banking
facilities in other states with which the out-of-state loans and other
banking services could be associated, the principal-office state is
likely to be sustained in the imposition of a tax U~Ofl total gross
receipts.99 It is equally clear that if a national bank were to operate
branches in other states, such other states could tax the gross receipts
derived from banking services rendered therein. But where the
activity in another state consists only of solicitation or servicing of
loans and other business, there is little risk that a gross receipts tax
by such other state would be sustained in the absence of the rnainte-
nance of a local office or local branch.
CONCLUSIONS AND SUMMARY
With the permanent amendment of section 5219 of the Revised
Statutes, national banks for the first time are faced with the prospect
of multiple state taxation of net income, capital stock and gross
receipts. By the permanent amendment, each national bank is subject
to taxation as if it were incorporated in the state in which its I)rin(ipal
office is located. Thus, a national bank is taxable by the principal-
office state as a domestic corporation, and by all other states as a
foreign corporation.
The risk of multiple taxation of a national bank arises only if it
engages in carrying on an interstate banking business. If the bank is
engaged exclusively in intrastate business, it will be taxable only by
the state in which it operates. The scope of the risk of multiple state
taxation of national banks U~OR net income, dapital stock and gross
receipts and the requirements for allocation of the tax base of each
type of tax are summarized below.
NATIONAL BANKS ENGAGED EXCLUSiVELY IN "INTRASTATE" BUSINESS
If a national bank is engaged in conducting an exclusively intra-
state business, the Princil)al-office state could impose the following
98 Id. at 539, 71 5. Ct. at 381;
~ It is of interest to note that under Rule 194 of the Washington Department of Revenue, a financial
institution which has no place of business outside the slate must include for purposes of the business activi-
ties tax gross income received from loans placed without the state. CCII Wash. State Tax Reporter ¶68-594;
PAGENO="0601"
581
taxes: (1) a net income tax measured by total net income; (2) a capital
stock tax measured by the total capital stock base; and (3) a gross
income tax measured by total gross receipts.
For purposes of a net income tax, the bank would be in the position
of a domestic corporation deriving all of its income within the state.
For purposes of a capital stock tax, the bank would be utilizing all of
its capital in a local business. Existing state statutes applicable to
general business corporations provide various bases for measurement
of capital stock taxes. rllhe base may consist of authorized or issued
stock, capital stock plus capital surplus, net worth, or capital value
and the valuation may be determined by par value, book value or
market value. Since national banks are to be taxed as domestic corpo-
rations in the Principal-office state, there could be no discrimination
against such banks relative to domestic state banks. Consequently,
the principal-office state would be required to tax the capital stock
of domestic national banks and domestic state banks in the same
manner. The principal-office state could, however, place domestic
national banks and domestic state banks in a class separate from other
domestic business corporations and impose a capital stock tax upon
these banking corporations by utilizing a different tax base, or by
taxing at a different rate.
A gross receipts tax imposed by the principal-office state could be
either a general business tax or a selective tax applicable only to the
business of banking. For the reasons indicated with respect to capital
stock taxes, the principal-office state would be required to apply a
gross receipts tax uniformly to both domestic national banks and
domestic state banks.
NATIONAL BANKS ENGAGED IN "INTERSTATE" BANKING OPERATIONS
A national bank which is engaged in multistate banking operations
will be exposed to income, capital stock and gross receipts taxes not
only by the state in which its principal office is located, but also by
other states in which it transacts banking business. The principal-
office state can impose all three taxe~. Other states can impose a net
income tax even though the bank is engaged solely in interstate com-
merce within the taxing state, but these states can impose capital
stock and gross receipts taxes only if the bank is engaged in intrastate
business therein.
Net income taxes
TaxatioL of the net income of national banks engaged in interstate
banking presents the same problems in the division of income which
arise with respect to other multistate business corporations. Although
the state of incorporation (principal-office state of a national bank)
has the constitutional power to tax the total net income of its corpora-
tions, it is the established practice under state income tax statutes to
divide the net income of interstate corporations among the states to
which the income is attributable. Generally, this division is effected by
application of a statutory formula for apportionment on the ground
that the income of the enterprise is unitary in character-i.e., that the
business operations in the respective states are interdependent and
contribute to the net earnings of the whole enterprise. rI~here is no
apparent reason to anticipate that the income of an interstate banking
79-421 0 - 72 - 39
PAGENO="0602"
582
business would be divided by a different method by either the principal-
office state or by other states.
The statutory formula utilized by most states in the division of the
net income of non-bank multistate businesses is based upon three
factors, property, payroll and sales. This or any other formula for
the apportionment of net income from interstate business is valid pro-
vided it is fairly calculated to assign that portion of the net income
which is reasonably attributable to business conducted in the taxing
state. In view of the adaptations which have been made under state
income tax laws in the apportionment of interstate income of lending
institutions other than banks, it is likely that a formula for the ap-
portionment of net income of interstate banks will be developed which
would utilize outstanding loans, payroll and interest receipts.
Under state income tax statutes, the unitary rule for apportion-
ment of net income from interstate operations has been applied not
only to the net income of individual corporations operating in inter-
state commerce, but also to the combined incomes of affiliated groups
of corporations engaged in interstate operations. The rule has been
held applicable to the extent that the income of each corporation
within the group partook of a unitary character. National banks which
are engaged in interstate operations and which are members of an
affiliated group would be subject to the same rule to the extent that
the income of the affiliated corporations is interdependent~ and thus
possesses a unitary character.
There are two alternatives to formula apportionment of net income
from interstate banking operations. One is specific allocation of cer-
tain items of income. Under state income tax statutes, it is customary
to distinguish between "business" income and "non-business" income.
Where a corporation is engaged in multistate operations, business in-
come is generally divided by formula apportionment; and non-business
(non-operating) income such as interest, dividends and capital gains,
is subject to specific allocation. Interest, dividends, and capital gains
upon intangible property are generally allocated to the state of com-
mercial domicile; capital gains upon real estate and tangible personal
property, to the state in which the property is located. This pattern,
which may be suitable for general business corporations, is wholly in-
appropriate for the banking industry inasmuch as interest, dividends
and capital gains constitute a maj or portion of the regular operating
income of a bank.
Constitutionally, interest income earned by an out-of-state bank
upon loans made to in-state debtors could be taxed by the state of the
debtor's domicile.'°° It would be necessary, however, to allocate
against such income the related costs and expenses incurred by the
lending bank to avoid an invalid tax upon gross receipts derived from
interstate commerce. The practical difficulties of accounting and
administration are readily apparent.
The second alternative to formula apportionment is separate
accounting for net income derived from operations in the taxing
state. Under most state statutes, this method is provided where the
formula method of apportionment fails to effect a fair and equitable
attribution of income in relation to the operations in the taxing
`~° Hellerstein, Federal GonslitutiOflal LimitatiOfl~ on State Taxation of Multi8tate Banks, (appendix 11), pp.
452-54, supra.
PAGENO="0603"
583
state. Since the burden is usually upon the taxpayer to demonstrate
that formula apportionment operates unfairly, separate accounting is
not general]y utilized. An overall evaluation of the several alternatives
leads to the prediction that the income of banks engaged in interstate
banking operations probably will be divided among the states by
formula apportionment.
Capital stock taxes
The principal-office state can impose a capital stock tax without
apportionment upon the total capital stock of a national bank engaged
in interstate banking operations. Most states apportion the capital
stock tax upon domestic corporations engaged in multistate business,
but a considerable number of states do not. It is difficult to predict
the pattern which may emerge with respect to the apportionment of
capital stock taxes upon domestic national banks which conduct
multistate banking operations.
As indicated with respect to national banks engaged exclusively in
intrastate business, the base of a capital stock tax may vary. A likely
base for banks would be total capital or net worth determined either
by book or market value. It is significant that a capital stock tax
imposed by a principal-office state could not discriminate against
domestic national banks relative to domestic state banks and that the
principal-office state could place both in a class separate from other
domestic business corporations and tax them by a different base or
at a different rate.10'
A state other than the principal-office state could not impose a
capital stock tax for the privilege of carrying on business therein
unless the bank were engaged in conducting an intrastate business.
It is doubtful that the mere solicitation and servicing of bank loans
would constitute an intrastate business. If a national bank were
engaged in intrastate business in another state, however, it would be
taxable as a foreign corporation and could be subjected to a capital
stock tax only by apportionment.
Most statutory formulas for apportionment of the base of a capital*
stock tax include tangible property and gross receipts, and some in-
clude payroll. Some states also include intangibles in the property
factor. Since intangibles are a significant asset in the banking business,
it could be expected that the formulas which might evolve for alloca-
tion of capital stock taxes upon national banks would include intan-
gibles in the property factor.
Gross receipts taxes
Gross receipts of a national bank which is engaged in multistate
banking operations may be taxed by the principal-office state except
to the extent that such receipts are derived from the conduct of
intrastate business in another state and are taxable by such other
state. The degree of local business activity sufficient to qualify as
intrastate business in another state is not entirely clear. On the basis
of the decided cases, however, it is unlikely that a national bank would
be deemed to be engaged in intrastate business in another state in the
absence of the establishment of a branch where "operations of discount
and deposit" are regularly carried on. On the constitutional issue, it
would make no difference whether the gross receipts tax were a general
101 There is a risk that states could impose discriminatory capital stock or gross receipts taxes upon out-
of-state national banks seeking entry to carry on intrastate bankingToperations. Hellerstein, Federal consti-
tutional Linsitations on State Taxation of Multistate Banks, (appendix 11), pp. 452-54, and 475-80, supra.
PAGENO="0604"
584
business tax or a selective tax applicable only to the business of
banking.
CHAMPAIGN, ILLINoIS, April 30, 1971~.
PAGENO="0605"
APPENDIX 13
Repeal of Restrictions on State Taxation of National Banks:
Effects on Multi-Corporate Banking Organizations
WILLIAM R. BOLLOW
Assistant to the Vice President and General Counsel, Federal Reserve Bank of
San Francisco
The prospective termination, effective January 1, 1972,' of Federal
statutory restrictions on the taxation of national banks by the states
may bring to light some special problems with respect to the tax treat-
ment to be afforded multi-corporate organizations engaged in banking.
For purposes of this study, the term "multi-corporate banking organi-
zation" refers to business corporations related as to ownership and
control within a bank holding company structure.
Consideration of the potential treatment of multi-corporate banking
organizations ib warranted in view of the recent and extensive pro-
liferation of such businesses throughout the country, and in view of the
eX~)anding power and practice of the states to tax related and multi-
state enterprises as unitary businesses. In this latter connection, a bank
WThiCh is part of a multi-corporate banking organization having opera-
tions in a i)artiCular state conceivably could be taxed in a manner
which takes into account all related business activities and assets
wherever performed or located. The tax problems involving multi-
corporate banking organizations, which are likely to arise as a result of
the new law, lie largely in this area and are discussed below. ]n addition
it appears probable that questions may arise respecting the tax treat-
ment of intercorporate dividends. These also are discussed.
Foreseeable problems lie primarily in the area of income taxation.
rfhe principal change from present and earlier law is that under the
new law, effective January 1, 1972, a national bank will be subject to
tax by states outside of its home state provided there is foreign activity
sufficient in character and extent to justify the imposition of the tax in
question.2
DEVELOPMENT OF MULTI-CORPORATE BANKING ORGANIZATI ONS
The growth of multi-corporate banking organizations has accelerated
rapidly in the last five years with the emergence of bank-originated
one-bank holding companies. Between June 30, 1966, and April 1,
1 P.L. 91-156, approved December 24, 1969, amending 12 U.s.c. 548, R. S. Sec. 5219. See appendix 1,
above, for statutory texts.
2 Prior to the 1969 amendment to section 5219, national banks were subject to tax only in the state in which
their principal offices were located and the types of taxes that might be imposed were specifically designated
in section 5219. Under interim legislation which expires January 1, 1972. national banks are subject to limited
taxation by foreign states: (1) sales and use taxes, (2) taxes on the execution, delivery or recording of docu-
ments, (3) taxes on tangible personal property (excluding cash or currency), and (4) liëense, registration
transfer. excise, or other fees or taxes on the ownership, use, or transfer of tangible personal property. Until
January 1, 1972, intangible personal property is exempt from taxation. After January 1, 1972, all federal
statutory restrictions on the taxation of national banks are removed except that such banks are subject to
taxation by the states in the same manner that the states may choose to tax state banks.
(585)
PAGENO="0606"
586
1970, the number of banks controlled by one-bank holding companies
increased by 475, or 74 percent.3 As a result of this trend and during
this period, deposits of one-bank holding company banks were
increased by 123 billion dollars, placing almost one-third of the nation's
commercial bank deposits inthe hands of one-bank holding companies.
Significantly, also during this period, nine of the ten largest banks in
the country set up. and became owned by one-bank holding companies.
In addition to bank-originated one-bank holding companies, there
exist other categories of multi-corporate banking organizations. These
may be roughly described as including the older type of one-bank
holding companies and multi-bank companies registered pursuant
to the Bank Holding Company Act of 1956.~ All bank holding
companies are now subject to registration as a result of the Bank
Holding Company Act Amendments of 1970 (Public Law 9 1-607,
approved December 31, 1970). All in all, multi-corporate banking
organizations represent a highly significant and increasing percentage
of the nation's banking resources and activities.
The development of bank ownership by multi-corporate organiza-
tions prior to the trend toward bank-originated one-bank holding
companies resulted in congeneric and conglomerate corporations
which engaged in a wide range of business activity generally considered
to be of a non-banking nature.6
The recent trend toward the development of bank-originated one-
bank holding companies was motivated to some degree by the need*
and desire of commercial banks to expand the traditional range of
activities permitted banks. Under the recently enacted legislation
amending the Bank Holding Company Act of 1956, Congress has
placed the responsibility of regulating all bank holding company
activity in the hands of the Federal Reserve Board. Under this legis-
lation any company acquired by a bank holding company must be
"so closely related to banking or managing or controlling banks as
to be a proper incident thereto." Thus, the contours of future expansion
of multi-corporate banking organizations will be limited. Non-banking
activities conducted by certain of these organizations before June 30,
1968 will be permitted to continue unless the Federal Reserve Board
finds divestiture necessary because of undue concentration of resources,
unfair or decreased competition, conflicts of interest, or unsound
banking practices.
"The One-Bank Holding Company-History, Issues, and Pending Legislation," Business Conditions,
published by the Federal Reserve Bank of Chicago, July 1970, p. 6.
4 Ibid. at p. 6. "One-bank holding companies in existence in 1967 have been classified on the basis of their
primary activities. Of 418 companies for which data were available, nine were foreign companies owning a
domestic bank. Of the remaining 409 domestic companies, 21 percent confined their activities solely to
banking. About 38 percent of the companies were engaged in activities of a non-banking, but exclusively
financial, nature. These were classified as congenerics. The largest proportion, more than 41 percent, engaged
in some non-financial activities and were classified as conglomerates."
`A bank holding company as originally defined in the Bank Holding Company Act of 1956 controlled
two or more banks and was required to register with the Board of Governors of the Federal Reserve System.
A "bank" is defined as any institution that accepts deposits that the depositor has a legal right to withdraw
on demand; this definition encompasses State-chartered commercial banks as well as national banks. 12
U.S.C. 1841.
6 Seventy-four companies in this category are described in a "Study and Description of Non-Bank-
Originated One-Bank holding Companies," prepared by the Association of Traditional One-Bank Holding
Companies, May 1970. Hearings before the Senate Committee on Banking and Currency on S. 1052, S. 1211,
S. 1664, S. 3823, and H.R. 6778 (Bills to Amend the Bank Holding Company Act of 1956), 91st Cong., 2d
Bess. (1970), p. 1289.
PAGENO="0607"
587
APPLICABILITY OF THE UNITARY BUSINESS CONCEPT BY STATES SEEKING
TO TAX THE INCOME OF MULTI-CORPORATE BANKING ORGANIZATIONS
Under the unitary business concept a taxing jurisdiction may
disregard the separate status of related businesses and lump such
entities together as if they were one business corporation for the
purpose of assessing income taxes or taxes measured by income. In
general, if a state adopts this approach, the test of applicability in
any given case is that business conducted in the taxing state is de-
pendent on or contributory to the business outside the state and the
affiliated corporations are in some sense integrated in their operations.
The concept has enjoyed increasing application by some state taxing
authorities and is likely to become even more commonplace as it
becomes more generally understood, particularly in view of the press-
ing needs and desires of state and local governments to expand their
sources of tax revenue.7
Moreover, the concept has been considered in several Supreme
Court cases and its validity appears firmly established as a matter of
law.8 Its applicability to multi-corporate banking organizations re-
mains to be established, however. Opportunity for application to
multi-corporate banking organizations will exist under the new law
beginning January 1, 1972, whenever more than one taxing jurisdiction
is in a position to tax the income of such related businesses. Such a
tax of necessity involves the application of an appropriate appoi tion-
ment formula designed to calculate that portion o~ the total i~uion~c of
a unitary business which may fairly be attributed as earned within the
taxing jurisdiction.
Application of the unitary business concept to multi-corporate bank-
ing organizations will usually involve activities performed in the taxing
state by a business entity having an out-of-state domicile. l\~iulti-
corporate banking organizations, although there are some exceptions,
are commonly composed of entities domiciled in the same state unlike
related corporations in other lines of business.9 To date well-established
practice and prohibitions have served to discourage the expansion of
banks across state lines through branching.
For the most part, the unitary concept is likely to be invoked with
respect to out-of-state multi-corporate banking organizations by taxing
states in which the out-of-state banking business performs some
activity or in some other respect has sufficient nexus to give use to the
power to tax income earned in the taxing state. In this situation an
out-of-state multi-corporate banking organization is very much like
an out-of-state single entity corporation.'° In both cases, under the
7See Peter Miller, "State Income Taxation of Multiple Corporations and Multiple Businesses," Tax
Foundation Seminar, "Taxation of Interstate Business," April 16, 17, 1970, p. 72; Frank M. Keesling aisd John
S. Warren, "The Unitary Concept in the Allocation of Income," 12 1-lastings Law Journal 42 (1960-61);
Jerome R. Heflerstein, "Recent Developments in State Tax Apportionment in the Circumscription of
Unitary Business," 21 National Tax Journal 487 (1968); E. George Rudolph, "State Taxation of Interstate
Business: The Unitary Business Concept and Affiliated Corporate Groups," 25 Tax Law Review 171
(January 1970). See also "State Taxation of Interstate Commerce," Report of Special Subcommittee on the
Judiciary, House of Representatives, 88 Cong., 2d Sess., hR. No. 1480, June 15, 1964 (hereinafter cited as
Willis Subcommittee Report). vol. 1. chap. 7, on "Division of Income," at 155-249.
United States Glue Go. v. Testis of Oak Creek, 247 U.S. 307 (1918); Underwood Typewriter Co. v. chamber-
lain, 254 U.S. 113 (1920); Bass, Ratcliff & Gretton v. State Tax Commission, 266 U.S. 271 (1924); Htiss Bees'
Sons v. North Garobna, 283 U.S. 123 (1031). See above, appendix 12.
It is probable that there will eventually be more activity across state lines as a result of Section 4(c) (8)
of the recently amended Bank Holding Company Act. It does not appear that hank holding companies
will be restricted in setting up or acquiring out-of-state non-banking subsidiaries where such subsidiarie~
are "closely related to banking."
15 See B. George Rudolph, op. cit., at pp. 194-95 "As a matter of general principle it would seem to make
little difference whether an interstate unitary business is conducted by a single corporation or by a group of
corporations under common ownership and control."
PAGENO="0608"
588
unitary business concept, the activity might permit the state in which
it is 1)eIformed to tax the income attributable to that activity through
an appropriate appoitioninent of the entire business income of the out-
of-state corporation. The difficult question of what constitutes suffi-
cient nexus or jurisdiction to tax is the same whether the unitary
business is a single bank or an multi-corporate banking organization.'1
Assuming that there is jurisdiction to tax a multi-corporate banking
organization in more than one state, the question remains whether
such a business can be regarded as unitary. The nature of a unitary
business is briefly discussed in the Willis Subcommittee Report:
"A combination of the administrative and theoretical difficulties
l)resented by separate accounting is responsible for the concept of the
`unitary business,' a concept which pervades the area of State taxation
of multi-state concerns. In essence, a `unitary business' is a business
for which it is felt that the separate accounting method does not
reasonably reflect the income attributable to each establishment. A
less conclusory statement of the concept is that a business is `unitary'
if the several business establishments of the company are mutually
dependent upon each other for their success. State tax administrators
differ somewhat in their conclusions as to what kinds of business are
unitary and what kinds are not, but it is almost universally true that
they are extremely reluctant to permit the use of separate accounting
in the case* of a business deemed `unitary'." 12
It ha~ been suggested in one study that banking, along with mining,
farming, and hotel operations is typical of businesses which are
generally not susceptible to unitary treatment, although this study
adds that the businesses in question could be conducted in such a way
as to make them unitary businesses. Unitary business is defined as
follows:
"The essential test is whether or not tire operation of the portion of
the business within the state is dependent or contributory to the
operation of the business outside the state." 13
Although it has never been established that multi-corporate banking
organizations are susceptible to unitary treatment by state tax
administrators, it is predictable that they will be beginning January 1,
1972. Generally speaking the courts have upheld the states in their
attempts to apply the unitary concept. Nonetheless, it should be noted
that the states have been relatively conservative in their attempts to
utilize the concept and, thus, the courts have not been presented with
situations in which its utilization would be clearly inappropriate.'4
Application of the concept to multi-corporate banking organizations
is not clearly inappropriate, however, in view of the fact that there
is precedent for its use with respect to other types of financial corpora-
tions. In Household Finance Corporation v. Franchise Tax Board,15 a
California district court of appeal reversed a lower court judgment
directing refund of franchise taxes paid under protest for the years
11 Theoretically the unitary concept could also be applied by different taxing jurisdictions within a given
state. Nonetheless, the concept has not been applied in such a manner. On questions of nexus, see appendixes
11 and 12, supra.
12 Willis Subcommittee Report, p. 167.
13 Altman and Keesling, Allocation of Inconse in State Taxation, 2d ed. 1950, p. 101.
14 E. George Rudolph, op. cit. at 183:
"It is worth noting that the Court has never invalidated formulary apportionment on the ground that the
business involved was not sufficiently unified. Nevertheless, as a strictly logical matter, it seems clear from
these cases that separate accounting is the basic method for determining the income subject to tax in a
particular state, and that formulary apportionment is available only when separate accounting is not appro-
priate. The logic is not impaired by the fact that a large majority of the cases may fall in the exceptional
category."
15 230 C.A. 2d 926, 41 Cal. Rptr. 565 (1964).
PAGENO="0609"
589
1951 and 1952. During the years in question, Household Finance had
operated 33 branch offices in California out of more than 400 branches
in 28 states and Canada. Operation of branches in California was
sufficient nexus to justify the state's jurisdiction to tax income
attributable to California operations. The question presented was
whether the California operations must be treated separately as the
taxpayer maintained, using as a tax base the interest income received
by the California branches, less expenses incurred by them, including
amounts charged by the company's Chicago headquarters. California
wanted to apply the unitary concept and sought to tax the share of
the company's total income attributable to California operations as
determined by a three factor apportionment formula, i.e., the monthly
average of loans outstanding, interest collected, and payroll.
The court concluded that the company's more than 400 branches
"ultimately operate as an integrated unit." 16 It based this conclusion
on three standards set forth in Butler Brothers v. McGolgan,'7 which
had involved the California operations of a Chicago based multi-
state merchandising firm. These standards were "(1) Unity of owner-
ship; (2) Unity of operation as evidenced by central purchasing,
advertising, accounting and management divisions; and (3) Unity
of use in its centralized executive force and general system of opera-
tion." The court applied the standards as follows: "The first element
is clearly present here. The second seems equally clear, although the
central `purchasing' is by the borrowing of money, which is the
`merchandise' of plaintiff. The third element, unity of use, is estab-
lished by the centralized distribution of the `merchandise' to the
several branches, and the ultimate control of the central headquarters
over operational procedures in the branches in all states. It follows
that determination of California income by an allocation formula is
required." 18
Although multi-corporate banking organizations ordinarily do not
operate through branches located in more than one state, it is not
impossible to foresee similarity between the centralized manner in
which multistate operations might be conducted by such businesses
and those of Household Finance. Each case will be decided, of course,
upon the particular circumstances and details of intercorporate
relationships and operations in the affiliated groups. The Court
described Household Finance's operations as follows:
"Plaintiff's general administrative offices are located in Chicago.
That office prepares and revises operating manuals setting out detailed
procedures which the branch offices follow. Within these limits, each
branch may make loans. Regional and district supervisors regularly
visit branch offices, review their operations, and report thereon to the
general office. On the opening of a branch, funds are furnished by the
general office. Although each branch has its own bank account, it must
forward excess funds to central headquarters, upon which it may draw
for further needs. Each branch keeps accounting records, but a central
accounting system is maintained in Chicago. Some 60 percent of the
sums loaned are from money borrowed in turn by plaintiff. The
Chicago office borrows these funds and redistributes them to the
"230 CA. 2d 926, 928.
17 17 Cal. 2d 664, 678, 111 P. 2d 334 (1941), affirmed 315 U.S. 501 (1942); see also Edison California Stores v.
McG'olgan, 30 Cal. 2nd 472, 183 P. 2d 16 (1947).
18230 CA. 2d 926, 930-31.
PAGENO="0610"
500
branches as needed. All leases of real estate are made by Chicago
headquarters, which also maintains central purchasing, public re-
lations, and personnel departments. Although most advertising is
negotiated by branch managers, it is contracted for only after approval
by the central advertising director's office, which prepares all copy and
is directly billed by the media. Expense of central administration,
national advertising (a small part of the total advertising budget),
and interest on plaintiff's borrowings, is apportioned among the branch
offices.
"It is apparent that each branch is accorded a degree of autonomy,
but that a strong central management prevails. The more than 400
branches ultimately operate as an integrated unit." 19
it is significant that th~e court in Household Finance was able to
regard the loaning of money as a kind of merchandising. In this man-
ner the court also disposed of the plaintiff's argument that application
of the unitary concept would result in California's taxing intangible
assets which did not have a taxable situs in California. Using this
case as precedent, it is conceivable that California might seek to tax
its apportioned share of the total income of an out-of-state multi-
corporate banking organization provided that business had sufficient
contacts with California to give rise to jurisdiction to tax.
Whether or not a given multistate business is susceptible to unitary
treatment is a matter asto which courts and state tax administrators
may differ from state to state.2° The standards are not clear and are
in the process of being developed.21 However, the possibility certainly
exists that the unitary concept may be held applicable to multi-
corporate banking organizations once the new section 5219 goes into
effect on January 1, 1972.
Application of the unitary concept to multi-corporate banking
organizations is, of course, more likely if the interstate activities of
these companies are interdependent. Under the new bank holding
company statute, the future development of bank holding companies
is limited to activities which are "closely related to banking"; thus it
may be expected that the interstate activities of such companies in
many instances will be interdependent and susceptible to unitary
treatment. In any specific situation, of course, an activity in another
state could be closely related to banking without necessarily being inter-
dependent with the banking activities carried on in the taxing state by
the multi-corporate group.
Under tile unitary concept a state may tax a share of the income of
multi-corporate banking organizations derived from intangibles which
`~ 230 CA. 2d 926, 928.
29 Compare Superior Oil Co. v. Franchise Tax Board. 34 Cal. Repr. 545. 386 P. 2d 33 (1963) and SIcily Oil
Co. v. C'ommissioner of Taxation. 269 Minn. 351, 131 NW. 2d 632 (1964).
21 Jerome R. Hellerstein suggests the following approach might be developed:
I have suggested that the test of a unitary business be bottomed on the interdependence of the
basic operating activities of the enterprise. This would embrace not only the typical buying or manu-
facturing of goods in one state and selling them in another, but also interstate transportation and com-
munication, mining or processing in one state and selling in others, and the like. However, centralized
management, financing, advertising the use of patents, trade marks and knowhow, the training or
furnishing of personnel and of legal or technical services, and other ancillary orsupportive activities,
important though they be to the profits of the entire enterprise, ought not ordinarily, at least, lay the
foundation formultistate unitary business approtionment by formula. Such an approach to the contours
of the unitary conception is amply justified by the broad and flexible statutory provisions for the divi-
sion of income, capital stock and other tax measures in most states. And given the recent Supreme Court
decisions. which may perhaps reflect a new approach to state tax apportionment problems, such a
circumscription of the unitary business may conceivably emerge as a requirement of the Due Process
and the Commerce Clauses in preventing extraterritorial taxation and in proscribing undue burdens
on interstate commerce." Hellerstein. op. cit., p. 503. See General Motors v. District of Columbia. 380II.S.
553 (1965); Norfolt & Western Railway Co. v. Missouri Slate Tax C'omm., 390 U.S. 317, 88 5. Ct. 995 (1968).
PAGENO="0611"
591
are situated out-of-state. Such was the case in Household Finance dis-
cussed supra. A similar conclusion was reached by the court in Mont-
gomery Ward cQ~ Co. v. Commissioner of Taxation.22 In that case Minne-
sota was able to tax a.share of income from securities purchased from
earnings retained by the plaintiff from its nationwide merchandising
business. It was held that the income from intangibles was available to
pay the company's operating expenses and thus could be regarded as
part of the company's income from its unitary business. The case does
indicate that if the intangibles had been segregated as investment
income a different result might have been reached. Nonetheless, the
implications as far as multi-corporate banking organizations are con-
cerned seem clear. Much of the income of such businesses is derived
from intangibles and since it is the business of such enterprises to deal
in intangibles, it is certainly possible that this income would be deemed
income from a unitary business.
Probably the greatest problem posed by the unitary concept is a lack
of uniformity in its application by the states. Senator Ribicoff com-
mented on this problem in introducing 5. 916 in the Senate on February
4, 1969, a bill which would prohibit the use of the unitary concept to
tax the income of corporations having no "business location" within
a taxing jurisdiction:
"At the same time, if each of the other States [States not presently
applying the unitary concept] were conceivably to adopt the unitary
practice, the result would be complete chaos, since each tax administra-
tor of each State would be called upon to exercise his own individual
discretion with respect to the circumstances in which the unitary rule
would be applied, as well as the manner of applying the rule to the
complex relationship that exists among multi-corporate enterprises." 23
Uniformity might, of course, result from Federal legislation such as
S. 916 or from court decisions based on the commerce clause or on due
process considerations. Further, there is a trend toward self-imposed
uniformity in this area among the states as evidenced by the enactment
of the Uniform Division of Income for Tax Purposes Act by nineteen
states and the Multistate Tax Compact which has been adopted by
eighteen states.24 Nonetheless, as matters now stand, there exists the
possibility that different states utilizing the unitary concept will apply
conflicting apportionment formulas and interpretations with respect
to the applicability of the concept itself which could result in double
taxation.
TAXATION OF INTERCOMPANY DIVIDENDS
Whether a multi-corporate banking organization is considered uni-
tary or whether such a -business engages in multistate activities, the
possibility of double taxation exists in those states which do not pro-
vide for a deduction for income taxes (or other taxes measured by
income) paid by a related company and which do not provide for
filing a consolidated tax return.
Prior to 1968, in California, a dividend distributed by a subsidiary to
its parent would be specifically allocated to the parent and taxed to
the parent, if its commercial domicile were in California, even though
22 276 Minn. 479, 151 NW. 2d 294 (1967).
23 Congressional Record, vol. 115, pt. 2 (91st Congress, 1st session), February 4, 1069), at p. 2597. See,
also, Senator Ribicofi's comments when he introduced a similar bill, S. 317, in the 92d Congress; Congres-
sional Record, January 27, 1971, p. 5308 (daily ed.).
24 E. George Rudolph, op. cit. at 177-180.
PAGENO="0612"
592
the parent and subsidiary were engaged in a unitary business, and the
income of the subsidiary from which the dividend was paid was
included in the combined report.25 This provision in California law
was amended to provide for the elimination of intercompany dividends
to the extent they are paid out of unitary business income.26 Thus, it
should be noted that, even in the situation where a multi-corporate
banking organization is deemed unitary, there is no guarantee against
possible double taxation of intercorporate dividends.
Under the Federal Internal Revenue Code, 85 per cent of inter-
corporate dividends received from domestic corporations are deducti-
ble.27 In the case of an affiliated group of companies, the deduction
may be 100 per cent.28 A number of states follow the federal approach
and have incorporated the Internal Revenue Code by reference in
income tax statutes.29 A few states permit no deductions for inter-
corporate dividends 30 whereas a few exempt all dividends from tax.3'
Some states permit the deduction of dividends received to some degree,
provided that the paying corporation's income is taxable by the state
in question.32
Multi-corporate banking organizations are likely to encounter
problems in this area once the 1972 version of section 5219 goes into
effect. Nonetheless, it does not appear that special considerations are
involved which would tend to put multi-corporate banking organiza-
tions in a position not shared with ordinary multi-corporate business
organizations. However, at least as far as their banking operations are
concerned, multi-corporate banking organizations are mole restricted
in terms of their ability to choose a favorable domicile for tax purposes
than are ordinary multi-corporate business organizations.
Relief from possible inequities in this area conceivably could be
sought through further amendment to section 5219. The solution,
however, could result from judicial decisions, uniform state tax laws,
or in federal legislation designed to provide tax benefits for all forms
of multi-corporate business organizations.
SAN FRANcisco, April 15, 1971.
25 Ibid. at 200; cf Keesling and Warren, op. cit., p. 60.
26 Cal. Rev, and Tax Code Sec. 25106 (Gum. Supp. 1968).
27 I.R.C. Sec. 243.
28 If. George Rudolph, op. cit. at 203.
29 H.R. Rep. No. 1480. 88th Cong., 2d Sess. (1964), p. 266, lists seven states in this category.
30 The above report lists five states in this category.
21 The above report lists four states in this category.
32 The above report lists eighteen states in this category (p. 267), including three states (Arkansas. Ken-
tucky, and Mississippi) that allowed a deduction only for dividends received from financial institutions.
PAGENO="0613"
APPENDIX 14
The Question of Possible Discrimination Against Out-of-State
National Banks
SHELDON L. AZINE
Assistant to Counsel, Federal Reserve Bank of Minneapolis
Public Law 91-156, commonly referred to as the National Bank
Tax Act, was signed into law on December 24, 1969. Effective Jan-
uary 1, 1972, section 5219 of the Revised Statutes (12 U.S.C. 548)
is permanently amended to read:
For the purposes of any tax law enacted under authority of
the United States or any State, a national bank shall be treated
as a bank organized and existing under the laws of the State or
other jurisdiction within which its principal office is located.
In removing all restrictions on the states with respect to the imj)OsitiOn
of taxes on national banks, Congress was aware of the possible ramifi-
cations that such action would have on national bank structure and
operation. For that reason, it directed the Board to study the probable
impact on the banking systems, as well as the other economic effects
of the changes made in existing law by the permanent amendment.
In connection with this study, a number of legal questions need to
be resolved. One of these is whether the permanent amendment to
section 5219 would l)ermit a State other than a State in which a
national bank has its principal office to discriminate against that
national bank with respect to the imposition of State taxes. It has
been suggested that the rationale which permits a State to impose a
discriminatory tax on a foreign insurance company would permit a
discriminatory tax on a foreign national bank. This memorandum
examines the statutory history and case law dealing with State
taxation of foreign insurance companies for the purpose of determining
Whether a legal basis* exists that would permit a State to impose a
discriminatory tax on a foreign national bank.
For many years, the business of insurance was held not to be subject
to regulation by the Federal Government because the courts had
ruled that, even when conducted interstate, insurance was not com-
merce. However, in 1944 the United States Supreme Court overturned
this rule when it held that fire insurance transactions stretching across
state lines constituted interstate commerce subject to regulation by
Congress under the commerce clause. A careful reading of that deci-
sion, United States v. South-Eastern Underwriters Association, 322 U.S.
533, 64 5. Ct. 1162, 88 L. Ed. 1440, rehearing denied 323 U.S. 811, 65
S. Ct. 26, 89 IL. Ed. 646 (1944), reveals that so long as Congress re-
frained from enacting laws regulating or taxing insurance companies
transacting business across state lines, each State was free to regulate
and tax such companies to the extent that such regulation or taxation
related to business transactions within the State. Nevertheless, it
(593)
PAGENO="0614"
594
was assumed by many that th~ effect of ~th~ South-Eastern decinon
was to remove from the states all taxing power with respect to insur-
ance business transacted in interstate commerce. In order to allay
these fears, Congress enacted the McCarran-Ferguson Act (15 U.s.c.
§~ 1011-15) in 1945. Its stated purpose was to make certain that the
decision in the South-Eastern case was not to be interpreted as pro-
hibiting the states from regulating and taxing foreign insurance
companies doing business in their states.
The McCarran-Ferguson Act provides, in part, as follows:
Section 1011: The Congress declares that the continued regu-
lation and taxation by the several States of the business of insur-
ance is in the public interest, and that silence on the part of the
Congress shall not be construed to impose any barrier to the
regulation or taxation of such business by the several States.
Section 1012(a): The business of insurance, and every person
engaged therein, shall be subject to the laws of the several States
which relate to the regulation or taxation of such business.
The legislative history of the McCarran-Ferguson Act indicates that
some insurance company executives declined to comply with State
laws in this field, fearing that if the laws were unconstitutional, they
might be exposing themselves nOt only to civil liability but also to
criminal sanctions for misappropriation of company funds. In addi-
tion, State insurance officials and other persons who came in contact
with State regulatory provisions were uncertain as to the state of
the law.
The McCarran-Ferguson Act represented a considered determina-
tion by Congress that the public interest would be served best by
permitting continued state regulation and taxation of the insurance
industry. The House Committee on the Judiciary, commenting on
the proposed legislation, declared:
It is not the intention of Congress in the enactment of this
legislation to clothe the States with any power to regulate or tax
the business of insurance beyond that which they had been held to
possess prior to the decision of the United States Supreme Court
in the Southeastern Underwriters Association case. Briefly, your
committee is of the opinion that we should provide for the con-
tinued regulation and taxation of insurance by the States, subject
always, however, to the limitations set out in the controlling
decisions of the United States Supreme Court, as, for instance, in
Allgeyer v. Louisiana (165 U~S. 578), St. Louis Cotton Compress
Co. v. Arkansas (260 U.S. 346), and Connecticut General Insur-
ance Co. v. Johnson (303 U.S. 77), which hold, inter alia, that a
State does not have power to tax contracts of insurance or rein-
surance entered into outside its jurisdiction by individuals or
corporations resident or domiciled therein covering risks within
the State or to regulate such transactions in any way. (1945 U.S.
Code Congressional Service, pp. 671-72)
In Prudential Insurance Company v. Benjamin, 328 U.S. 408, 66
S.Ct. 1142, 90 L.Ed. 1342 (1946), an insurance company challenged
the constitutionality of the McCarran-Fcrguson Act. The case involved
the right of South Carolina to levy a tax which was to be paid annually
by foreign insurance companies as a condition of receiving a certificate
of authority to carry on the business of insurance within the State.
PAGENO="0615"
595
The tax amounted to three per cent of the aggregate of premiums
received from business done in South Carolina, without reference to its
interstate or local character. No similar tax was required of domestic
corporations. The Supreme Court, partially in reliance upon the
McCarran-Ferguson Act, upheld the tax. The Court reasoned that
in passing the Act, Congress intended and, in fact, declared that
uniformity of regulation and of State taxation were not required with
respect to the business of insurance. The Court went on to point out
that while certain state taxes would have been discriminatory and
hence invalid in the absence of the McCarran-Ferguson Act, that
Act represented a determination on the part of Congress that such
taxes did not place a sufficient burden on the interstate insurance
business to warrant protection by Congress under the commerce
clause. The Court, in Prudential, dwelt at some length on the fact
that, with respect to the regulation of the insurance business by the
individual States, Congress' power under the commerce clause had
not lain dormant but had been exercised through the McCarran-
Ferguson Act. In effect, the court was saying that Congress, acting
in concert with the individual States, had sanctioned the local taxa-
tion of the insurance business, irrespective of the effect such taxation
would have on the interstate aspects of the business.
The Court also noted and was obviously influenced by the fact that
Prudential had paid the tax for a number of years prior to the South-
Eastern decision and that payment of the tax could not have been
excessively burdensome, in view of the fact that Prudential through-
out this period competed effectively with local insurance companies
which were not subj ect to the tax.
The motivation behind Congressional enactment of the McCarran-
Ferguson Act, according to the Court in Prudential, was to:
give support to the existing and future state systems for regulat-
ing and taxing the business of insurance. This was done in two
ways. One was by removing obstructions which might be thought
to flow from its [Congress] own power, whether dormant or exer-
cised, except as otherwise expressly provided in the Act itself or
in the future legislation. The other was by declaring expressly
and affirmatively that continued state regulation and taxation
of this business [the insurance business] is in the public interest
and that the business and all who engage in it "shall be subject to"
the laws of the several states in these respects (p. 1155).
The Court also noted that Congress had:
clearly put the full weight of its power behind existing and future
state legislation to sustain it from any attack under the commerce
clause to whatever extent this may be done with the force of that
power behind it, subject only to the exceptions expressly pro-
vided for (p. 1155).
Prudential had argued that the commerce clause in and of itself pro-
hibited discriminatory State taxation of interstate commerce. How-
ever, Justice Rutledge, in summarizing Congress' power under the
commerce clause, concluded that Congress had the power-
not only to promote but also to prohibit interstate commerce, as
it has done frequently and for a great variety of reasons. That
power [commerce] does not run down a one-way street or one of
narrowly fixed dimension. Congress may keep the way open,
PAGENO="0616"
596
confine it broadly or closely, or close it entirely, subject only to
the restrictions placed upon its authority by other constitutional
provisions and the requirement that it shall not invade the
domains of action reserved exclusively for the states (p. 1157).
While most of the Court's opinion was concerned with the commerce
clause, some consideration was given to the due-process and equal-
l)rotection clauses of the Fourteenth Amendment. Prudential argued
that the South Carolina tax violated both of these constitutional pro-
visions. Even though the Court summarily dismissed this argument
by Prudential, the language of the House Committee on the Judiciary
quoted earlier should be kept in mind.. The Committee there indicated
that while the McCarran-Ferguson Act was enacted to permit the
continued regulation and taxation of the insurance industry by the
individual States, such activity was to be carried out only within the
existing framework of decisions like Allgeyer, St. Louis Cotton Compress,
and Connecticut General Life Insurance. These cases had detailed the
parameters of a State's power to tax contracts of insurance or re-
insurance entered into outside its jurisdiction. Congress, in effect, had
provided that State taxation of insurance would be held invalid unless
there was sufficient nexus or connection, in fact, between the taxed
business and the taxing State.
The question of contacts between the taxing State and the business
being taxed was discussed in State Board of Insurance v. Todd Ship-
yards Corp., 370 U.S. 451, 82 S. Ct. 1380 (1962). That case involved
a suit by Todd Shipyards against the Texas State Board of Insurance
to recover taxes paid under protest by Todd on premiums paid out of
State on insurance purchased out of State. The Court found the fol-
lowing facts:
The insurance transactions involved in the present litigation
take place entirely outside Texas. The insurance, which is princi-
pally insurance against loss or liability arising from damage to
property, is negotiated and paid for outside Texas. The policies
are issued outside Texas. All losses arising under the policies are
are adjusted and paid outside Texas. rphe insurers are not licensed
to do business in Texas, have no office or place of business in
* Texas, do not solicit business in Texas, have no agents in Texas,
and do not investigate risks or claims in Texas.
The insured is not a domiciliary of Texas but a New York
corporation doing business in Texas. Losses under the policies
are payable not to rfexas residents but to the insured at its
* principal office in New York City (p. 1383).
Based on the above set of facts, the Court was obliged to hold the
Texas tax invalid as a violation of the due-process clause, in that the
only connection between the State of Texas and the insurance trans-
actions sought to be taxed was that the property covered by the in-
surance was physically located within the State of Texas. Justice
Douglas, in Todd, emphasized that the history of the MoCarran-
Ferguson Act contained an "explicit, unequivocal statement" that
Allgeyer, St. Louis Gotton Gompress and Gunnecticut General Life in-
surance had not been "displaced" by the McCarran-Ferguson Act.
The importance of this statement lies in the fact that while uniformity
of State taxation was abnegated by the McCarran-Ferguson Act, clue
process and equal protection still constituted viable checks on a
State's taxing power.
PAGENO="0617"
5.97
The California Supreme Court, in discussing the McCarran-Fergu-
son Act in People vs. United National Life insurance Compa'n~y, 58 Cal.
Rptr. 599, 427 P. 2d 199 (1967), pointed out that--
The McCarran-Ferguson Act, while validating State power. to
regulate and tax in respect to the commerce clause, did not pur-
port to circumscribe such power in the light of the due-process
clause.
That statement by the ~ui~reme Court of California is a reaffirmation
of what has been said a number of times already in this memorandum.
That i~, while. unifo~'inity .~nay not exist in vjew of the fact that Con-
gress in the McCarran-Ferguson Act has specifically allowed the
individual States to regulate and tax the busines~ of insurance, nothing
in that act purports to i)ermit di~crimination in the imposition of State
taxes nor does the act attempt in any way to circum~cribe or curtail
the right of an insurance company to challenge a State tax imposed
upofl it as a violation of the due-process and equal-protection clauses
of the Fourteenth Amendment of the Constitution.
In summary, since the contacts between the State of South Carolina
and the Prudential contracts were significant, a tax levied upon pre-
miums received by Prudential from business done in South Carolina
was upheld. However, in Todd, the, absence of significant contacts
justified the Court in invalidating the Texas tax as a violation of the
due-process clause. The McCarran-Ferguson Act and the Prudential
case go no further than affirming the right of a State to collect a tax on
business conducted within its boundaries. Neither the statute nor the
case specifically can be interpreted as sanctioning the imposition of a
discriminatory State tax.
Having reached this conclusion with respect to the McCarran-
Ferguson Act, it is still necessary to focus on the National Bank Tax
Act itself to determine the reasons for its enactment, and whether its
language, standing alone, would permit a State to discriminate against
a foreign national bank. The legislative history of the National Bank
Tax Act details clearly a desire on the part of Congress to permit a
State to impose the same taxes on a national bank as it now imposes
or will impose in the future on a State bank. The report of the House
Committee on Banking and Currency indicated that the National Bank
Tax Act says "that national banks shall be subject to the same taxation
as State banks and it means exactly what it says" (emphasis added).
Somewhat along the same lines, the Senate Ba.nking and Currency
Committee indicated that:
There is no longer any justification for Congress continuing to
grant national banks immunities from . State taxation which are
not afforded State banks.
The Conference Committee, in summarizing the effect of the perma-
nent amendment to section 5219 of the revised statutes, indicated that
on January 1, 1972:
Any State will be free to impose taxes on income derived within
its borders by the operations of a bank having its principal office
in a different State, regardless of whether the foreign bank is State
or National. This has always been the law with respect to State
banks.
At the outset, it was indicated that the reason for this memorandum
was the concern expressed by some that section 5219 would permit the
imposition of discriminatory taxes on foreign national banks vis-a-vis
79-421 0 - 72 - 40
PAGENO="0618"
598
foreign State banks. However, the clear import of the legislative history
detailed above is to the effect that national and State banks should be
treated the. same for tax purposes, regardless of whether the State
imposing the tax is the one in which the national bank has its principal
office located or some other State in which a tax is being levied on
income derived by the national bank from business carried on within
that State. If the purpose of the National Bank Tax Act is to achieve
equality between State and national banks, it makes absolutely no
sense to limit that equality to situations in which the taxing jurisdic-
tion is the one within which a national bank has its principal, office.
The Prudential decision would .be of little assistance in upholding a
State tax law which discriminates against a foreign national bank
vis a vis a foreign State bank; since in that case, the tax imposed by the
State of South Carolina applied to all foreign insurance companies
engaged in the insurance business, not just to a limited class or type of
company. In other words, all out-of-state insurance companies trans-
acting business in South Carolina were taxed equally. An analogy
to banks would logically lead to a conclusion that a State would have
to impose the same' taxes on a foreign national bank as it imposed on
a foreign State bank. Furthermore, the earlier discussion in this
memorandum indicates that the purpose behind enactment of the
McCarran-Ferguson Act and the basis upon. which the Court decided
Prudential are different from the purposes behind the National Bank
Tax Act. The McCarran-Ferguson Act represented a congressional
determination that uniform tax treatment of insurance companies
by the several States was not necessary~. This is in clear contrast with
Congress' avowed purpose in the National Bank Tax Act of achieving
equality and uniformity in the tax treatment by the States of national
and State banks. I am not aware of any basis upon which one might
argue that Congress intended national banks to be taxed the same as
State banks only by the State within which a national bank has its
principal office and that the rest of the States could discriminate
against a foreign national bank vis a vis a foreign State bank.
Having concluded that discrimination against a foreign national
bank vis a vis a foreign State bank is impermissible, there still remains
the question as to whether discrimination against foreign banks gen-
erally vis a vis other types of financial institutions is possible in view
of the language of section 5219. In that regard, the answer would
appear to be yes. The statutory amendment to section 5219 speaks
only in terms of equality between ban/cs. There is nothing in either the
statute itself or the legislative history which would indicate a con-
gressional policy in favor of treating banks and other types of financial
institutions or businesses equally for tax purposes. This is a problem to
be resolved. In addition, while both the Senate and the House alluded
to the complex problem of multistate taxation, neither body made
any recommendations as to what ought to be done in that area.
In summary, the permanent amendment to section 5219 of the
revised statutes was enacted to permit a State to impose the same taxes
on a national bank as it imposes on a State bank. This equality ought
to apply regardless ` of whether the taxing jurisdiction is the State
within which the national bank has its principal office or some other
State in which the national bank is found to be doing business.
PAGENO="0619"
599
However, the National Bank Tax Act does not attempt, in any way,
to achieve equality between the taxation of a bank and other types of
financial institutions or businesses generally.
Similarly, the Act did not direct itself to the problem of multistate
taxation. The McCarran-Ferguson Act and the Prudential case inter-
preting it did permit South Carolina to subject out-of-state insurance
companies to a tax which was not levied on domestic insurance com-
panies, but the legislative history and the reasoning behind this Act
were entirely different from those which motivated Congress in
enacting the National Bank Tax Act. In any case, the McCarran-
Ferguson Act did not actually sanction the imposition of discrimina-
tory taxes on a foreign insurance company. Finally, the protection
afforded by the due-process and equal-protection clauses of the Four-
teenth Amendment were not, in any way, restricted by the Supreme
Court's decision in Prudential. The former would limit a State to
imposing taxes on a foreign national bank only with respect to trans-
actions entered into in that State, and the latter would prevent
discriminatory treatment against a national bank vis a vis a State
bank.
It is generally admitted that the commerce clause seeks to avoid
destructive and retaliatory legislation among the states in the field of
interstate commerce. This fact should serve as a deterrent to the
court's finding an intention of Congress to sanction such state legis-
lation other than in its affirmatively expressed declarations. While the
McCarran-Ferguson Act constituted such an affirmative declara tion,
clearly the National Bank Tax Act did not. Since it appears that the
permanent- amendment to section 5219 of the Revised Statutes
cannot be interpreted as permitting discriminatory treatment against
foreign national banks vis a vis foreign state banks, additional legis-
lation to protect national banks from such treatment does not appear
to be necessary.
MINNEAPOLIS, November 9, 1970.
Acknowledgments
Papers in part III this volume were written especially for the Federal
Reserve Board study of State and local taxation of banks and were
used as reference materials for the Board's report. The contributions
of the several authors are gratefully acknowledged. Drafts of most of
the papers were reviewed by members of the Advisory Panel (named
at pp. 69-70); the comments and suggestions of these advisors were
most helpful. The papers were coordinated and prepared for publica-
tion by the Director of the Tax Study, Mr. I. M. Labovitz, Senior
Specialist in the Congressional Research Service of the Library of
Congress.
PAGENO="0620"
PAGENO="0621"
PART IV
Impact on State and Local Government Revenues From the 1-Year
Extension of the Prohibition of an Intangible Personal Prop-
erty Tax for National Banks
Report to the Congress of a Study by the Board of Governors of the Federal
Reserve System under Public Law 92-213
On December 22, 1971, the President approved a joint resolution of
the Congress postponing for 1 year, or until January 1, 1973, the
effective date for certain changes in law relating to State and local
authority to tax national banks.1 These changes, which had been en-
acted in Public Law 91-156, approved December 24, 1969, provided
for a two-stage comprehensive revision of Section 5219, revised stat-
utes, which governs State-local authority in this area.2
Public Law 91-156 included a "temporary amendment," which not
only provided broader State-local authority on an interim basis to tax
national banks, but also specifically prohibited imposition of an in-
tangible personal property tax on such banks. Initially, this amend-
ment was scheduled to terminate and be replaced on January 1, 1972,
by a "permanent amendment," which would remove all earlier spe-
cific limitations on State and local taxing authority, including the pro-
hibition of an intangible personal property tax, and substitute a simple
prescription that national banks be taxed the same as State-chartered
banks. The joint resolution postponed until January 1, 1973, both the
termination date of the "temporary amendment" and the effective date
of the "permanent amendment."
In connection with the postponement, the Congress directed the
Board of Governors of the Federal Reserve System to make a study
of the probable impact of that postponement on State and local reve-
nues from intangible personal property taxes. The results of the study
were to be reported to the Congress not later than 6 months after the
approval date of the joint resolution-that is, by June 22, 1972.~
Pursuant to this legislation the Board of Governors has made a study
of the tax structures of the various States with respect to the potential
for levying an ad valorem intangibles tax on national banks if the au-
thority had become available on January 1, 1972. In this study, con-
sideration has been given to the constitutional, legislative, and admin-
istrative requirements for imposition of such a tax on bank-owned
assets, and views have been solicited from State tax authorities regard-
`Public Law 92-213, section 4 (see p. viii of this volume).
2 The text of Public Law 9i-156 appears at p. vii of this volume.
The revelant section of Public Law 92-213 is as follows:
SEC. 4(a). The act entitled "An Act to clarify the liability of national banks for cer-
tain taxes," approved Dec. 24, 1969 (83 Stat. 434), is amended by striking out "i972
in sections 2(b) and 3(a) and inserting in lieu thereof "1973."
(b) The Board of Governors of the Federal System shall make a study of the probable
impact on the revenues of State and local governments of the extension under subsection
(a) of the termination date of interim provisions regarding intangible personal property
taxes of State and local governments on national banks. The Board shall report the results
of its study to the Congress not later than 6 months after the date of approval of this
joint resolution.
(601)
PAGENO="0622"
602
ing the likelihood of such action had the authority become available
for 1972.
The major finding of the study is that only one State, Florida, was
affected by the postponement.4 This State had definite plans to tax
intangible assets of commercial banks in 1972. The estimated yield
from application of the existing Florida intangible property tax to
all commercial banks, State-chartered as well as national, on a full-
assessment basis for all of calendar year 1972 is about $9 million. On
April 24, however, a new Florida law became effective, retroactive to
January 1, 1972, imposing on banks a franchise tax measured by net
income.5 This law might affect the future attitude of the legislature
of that State as regards the imposition of the intangibles tax on
banks.
BACKGROUND
The "permanent amendment" to Section 5219, which was incorpo-
rated in Public Law 91-156, represented a marked shift in Federal
policy regarding State and local taxation of national banks. It would
remove the detailed restrictions which traditionally have governed
State and local tax treatment of these banks and substitute a simple
broad delegation of authority that would enable those governmental
units to tax national banks in any way they choose, so long as they
tax State-chartered banks identically.
Because of uncertainties regarding potential effects of this action,
the Congress provided that the "permanent amendment" become effec-
tive about 2 years after enactment, or January 1, 1972. It directed the
Board of Governors to make a study of "the probable impact on the
banking systems and other economic effects of the change in existing
law" with respect to income taxes, intangible property taxes, and so-
called "doing business" taxes, and report to the Congress the results
of this study, including any recommendations for further legisla-
tion, by December 31, 1970. It was contemplated that any further leg-
islative action that the Congress considered desirable could be taken
prior to the effective date of the "permanent amendment." Meanwhile,
as an interim measure, the States were given authority-urgently
needed by some States-to levy several additional types of taxes on
national banks by the "temporary amendment," which was scheduled
to expire when the "permanent amendment" became effective.
The results o~f the Federal Reserve study, together with the Board's
recommendations, were transmitted to the Congress on May 4, 1971.6
The Board's major recommendations relate to two areas-(1) taxa-
tion of intangible personal property and (2) taxation by States other
than the State in which a bank's principal office is located. With
respect to intangibles, the Board recommended that the denial of
There appear to be other States that would have made changes in taxes applicable to
commercial banks if the broader authority provided by the "permanent amendment" had
become available. Since these changes did not involve taxes on intangible personal prop~
erty, they are not covered in the present study.
~ Chap. 72-278.
See parts I, II, and III of this volume.
PAGENO="0623"
603
State and local government authority to tax intangible personal
property of national banks, which was implicit in Section 5219 from
the outset and made explicit in the "temporary amendment," be con-
tinued without a time limit and that such a denial be extended to cover
State banks and other depositary institutions (recommendation 1).
The Board took cognizance of the possibility that the Congress might
not be able to complete a detailed review of the Board's recommenda-
tions and take definitive action before the January 1, 1972, effective
date of the "permanent amendment." In that event, the Board recom-
mended that the effective date be postponed.
BOUNDARIES AND FORMAT OF THE STUDY
There is considerable variation among the States concerning the
specific coverage and form of taxes that are commonly referred to as
"intangible personal property taxes." This designation is applied not
only to ad valorern taxes on intangible assets, but also to taxes on the
income from intangibles and even to the so-called shares or capital
structure taxes, which generally are levied on some measure of stock-
holder equity.
An analysis of the history of the legislation directing the Board to
make the present study (Sec. 4 of Public Law 92-213) suggests that
the class of intangibles tax that the Congress had in mind was the type
specifically covered in the Board's recommendation No. 1, namely, an
ad valorem tax on intangible personal property owned by banks. This
definition excludes any tax levied as a percentage of revenue received
from the ownership of intangible personal property, assessed against
shareholders in a corporation but collected from and absorbed by the
corporation, and any tax assessed against depositors that is collected
from and absorbed by the depository institution.
The period covered by the study is clearly defined by the legisla-
tion-that is calendar year 1972, the duration of the 1 year postpone-
ment of the termination date of the "temporary amendment" and effec-
tive date of the "permanent amendment." Nevertheless, an effort was
made to obtain information relating to a somewhat longer outlook
where that was possible.
In conducting the study, a three-stage approach was followed. First,
an examination was made of the tax structure in each of the 50 States
in order to identify those jurisdictions in which there was a significant
possibility that an intangible tax could have been imposed on banks
for all or part of the year 1972 and those jurisdictions in which the
possibility for such action appeared minimal.~ Second, these prelimi-
nary evaluations were then checked informally with a responsible tax
official in each jurisdiction. Third, for all States in which there ap-
peared to be any significant potential for the imposition of a tax on
intangible personal property of banks in 1972, a letter was directed to
the tax administ.rator requesting a statement evaluating the probabil-
ity of such a tax, had the authority become available, and certain addi-
tional information.
The District of Columbia was not covered in the study, since taxation of banks In this
jurisdiction is governed by the Congress.
PAGENO="0624"
604
CURRENT STATUS OF AD VALOREM TAXATION OF INTANGIBLE PERSONAL
PROPERTY
Intangible personal property currently is subject to an operative ad
`valoren-t tax in 16 States, and in two additional States-Arizona and
Texas-such property is legally subject to such a tax but the tax is
not implemented, as shown in the accompanying table. In nearly all
taxing States, the tax is applicable to both individuals and businesses.
Over the years the number of States retaining an intangibles tax
has been diminishing. The decline in use appears to reflect dissatisfac-
tion with the tax mainly on grounds of equity and enforcement diffi-
culties, particularly where assessments are made at the local level. This
trend is continuing, as indicated by the 1970 repeal of the ad valorem
intangibles tax in Iowa, conversion from an ad valorem~ to a gross earn-
ings tax in Kansas, and adoption of a constitutional amendment in
Illinois providing for the elimination of all personal property taxation
in that State by 1979.
PAGENO="0625"
STATUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY BY STATE AND LOCAL GOVERNMENTS AND POTENTIAL FOR TAXATION OF BANK-OWNED INTANGIBLE
PROPERTY IN 1972, BY STATE
Status of
taxation of intan
gible assets
Principal State-local
tax (other than on real
property) levied on
commercial banks
on required to ta
intangibles
x bank-owned
Probability of taxa-
tion of bank-owned
intangibles in 1972
if authority had
become available
Coverage
Princi
-~
State
pal recipient of
revenue I
Local
Type of acti
---~--
Administra-
tive action
only
New legis-
lation
-----
Consti-
tutional
amendment
State Individuals
Businesses
Bank shares
or capital
structure tax
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Alabama (2) (2) Net income X Ne~ligibIe.
Alaska do X (local) (3) Do.
Arizona (4) (4) do X Do.
Arkansas x x x X Capital structure X (local) (0) (5) Do.
California Net income x Do.
Colorado do x x Do.
Connecticut do x Do.
Delaware do x Do.
Florida )( X X X do X High.
Georgia X X X X Shares x Negligible.
Hawaii Netincome X Do.
Idaho do x Do.
Illinois )( X X Shares x (7) Do.
Indiana X X X 8 X Deposits and shares x Do.
Iowa (9) (9) (9) Netincome x Do.
Kansas (10) (10) do X Do.
Kentucky X X Shares x Do.
Louisiana )( do X Do.
Maine )( )( do X Do.
Maryland Netincome x Do.
Massachusetts do X Do.
Michigan )( do X Do.
Minnesota do x Do.
Mississippi )( Shares x x Do.
Missouri )( 11 )( Net income X x Do.
Montana x x x X Shares X Do.
Nebraska Net income x Do.
Nevada )( Shares X X Do.
New Hampshire X Ix X Capital stock x Do.
New Jersey X (13) (13) Shares x Do.
NewMexico Netincome x Do.
See footnotes at end of table.
PAGENO="0626"
STATUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY BY STATE AND LOCAL GOVERNMENTS AND POTENTIAL FOR TAXATON OF BANK-OWNED INTANGIBLE
PROPERTY IN 1972, BY STATE-Continued
Status of taxation of intangible assets
Principal recipient of Type of action required to tax bank-owned
Coverage revenue ` intangibles
-- -- Principal State-local ---
Bank shares tax (other than on real Administra- Consti-
or capital property) levied on five action New legis- tutional
State Individuals Businesses structure tax State Local commercial banks only lation amendment
Probability of taxa-
tion of bank-owned
intangibles in 1972
if authority had
become available
(1) (2) (3) (4) (5) (6) (7) (8) (9)
(10)
New York (14) Net income X X
North Carolina X X X do X
North Dakota do X
Ohio x x x x Deposits and shares X
Oklahoma Net income x x
Oregon do X
Pennsylvania x x X Shares X
Rhode Island Net income X
South Carolina do X
South Dakota X X X do X -
Tennessee X X X Shares X
Texas (15) (15) X do X
Utah Netincome X
Vermont do X
Virginia X X X Shares X
Washington Gross income X
West Virginia X )( X X Gross receipts X
Wisconsin Netincome X
Wyoming X X Shares X
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
,
Total 13 15 21 4 18 5 45 6
PAGENO="0627"
1 A distinction is made between locus of the receipt of revenue and responsibility for administration keeping personal property of businesses subject to taxation recently was held unconstitutional by
and collection of the tax. Where a tax is administered by the State and more than half the proceeds the Illinois Supreme Court and the case is being carried on appeal to the U.S. Supreme Court. How-
returned to the area of residence of the taxpayer, local government would be reported as the principal ever, this action does not impair the `existing authority (that is scheduled to expire by 1979) to apply
recipient of revenue, an intangibles tax to bank-owned assets.
2 Statute states that all property is subject to tax, but exemptions cover all intangibles. 8 Combination deposits and shares tax with a gross income tax credit (for State-chartered banks).
3 New legislation would be required to levy an intangibles tax at the State level. Local governmental 1 Shares tax on banks and intangibles tax were repealed in 1970.
units now have authority to tax intangibles but none do so. This option would be removed by a revision 10 Statute amended in 1970 to change basis of intangibles tax from ad valorem to a 3 percent tax
of the municipal code recently enacted by the legislature and now awaiting approval by the Governor on gross earnings from intangibles.
(FCCS SCS CSI-IB 208). 11 Included as part of an excise tax on the privilege of doing business in the State as measured
4 Intangibles are included in the definition of personal property subject to taxation, but the statute by the value of the assets or the par value of the stock allocable to the State, whichever is greater.
has never provided a method of equalization or a procedure for collection and enforcement. The State also has a so-called "intangibles" tax but it is measured by the income from intangibles
O Local governmental units now have authority to tax intangible property of State-chartered banks rather than being an ad valorem tax on value. In April 1972, legislation was enacted to repeal this
at the same rate as other property. A constitutional amendment would be required to authorize tax, effective Jan. 1, 1975 (H.B. 537).
taxation of intangibles at a rate differing from that on other property or to authorize taxation of 12 National banks only.
intangibles at the State level (where new legislation also would be required). 13 Shared equally by State and local governmental units.
State banks only. 14 The corporation franchise tax includes a tax on investment capital as one of the alternative
Local governmental units have authority to tax intangible property, but lack enforcement power. methods of computation, but this alternative is not applicable to national banks and rarely is the
New constitution adopted in 1970 provides for the elimination of all taxation of personal property required alternative for State-chartered banks.
by 1979, but until then, a tax could be imposed on bank-owned intangible personal property. A 15 Included by law but not enforced.
section of the constitution (art. IX-A) exempting personal property owned by individuals while
PAGENO="0628"
608
In most States, the major portion of the revenue from the intangibles
tax accrues to local governmental bodies. This includes several States
in which the tax is administered by the State, with more than half of
the proceeds being returned to local instrumentalities. In those States
where administration of the tax is largely local, there are indications
that the tax generally is not a major source of revenue. In large part,
according to some State tax officials, this is attributable to lax admin-
istration and enforcement, particularly where local assessors are
elected officials, because of the sensitive nature of the information
needed for effective assessment.
In no State are the intangible assets owned by State-chartered banks
subject to ad valorem property tax. This undoubtedly reflects the con-
tinued prohibition of State and local taxation of the intangible per-
sonal property of national banks, since the States generally try to tax
these two classes of banks alike. However, in 12 of the 16 States taxing
intangibles under either a general or a classified property tax law,
commercial banks are taxed under these laws according to their shares
or capital structure-types of tax permissible for national banks under
section 5219 from its inception. In all but two of these 12 States, this
type of tax (or a combination tax including shares as part of the base)
is the major State and local levy applicable to commercial banks
(other than a tax on real property). In most of the remaining 38 States,
the principal tax on banks is a tax on or measured by net income.
POTENTIAL FOR TAXATION OF BANK-OWNED INTANGIBLES IN 1972
The analysis of State tax structures, together with the information
supplied by State tax administrators, indicates that there was virtually
no prospect for the imposition of ad valorem taxes on bank-owned
assets during 1972 in any State except Florida. In that State, the tax
regulations had been amended in 1970 to provide that the intangibles
tax would become effective automatically for both State and national
banks on January 1, 1972, if the authority to tax intangible personal
property of national banks had become available.
The Florida intangible personal property tax currently is levied at
the rate of one-tenth of 1 mill per dollar of money and deposits of
money held and 1 mill per dollar of just valuation (market or face
value, depending on the type of asset) of all other taxable intangibles,
both assessed as of January 1 each year.8 The principal exemptions
relevant for commercial banks are U.S. Treasury and Federal agency
securities and securities issued by the State of Florida and its instru-
mentalities. Real estate mortgages also are excluded for present pur-
poses, since they are subject to a nonrecurring levy at time of recording
that often is collected from the borrower. Applying the above rate
schedule to the value of taxable intangible assets of all commercial
banks in Florida on December 31, 1971, as derived from the year-end
report of condition, the potential yield of the tax for calendar year
1972 is estimated at about $9 million.9
8 Chap. 199, P.S.
In deriving this estimate, it was assumed that 35 percent of bank holdings of State
and local securities represented exempt issues of Florida and its jns~rurnent~lities. Cash
items in process of collection were excluded from the base but the total of "other assets,"
some of which would not be taxable, was included. In January 1972, the Florida statute
was amended to exempt money from the intangibles tax beginning with the report year
1973. If this exemption were applicable in 1972, the estimated yield would be reduced by
about $211,000.
PAGENO="0629"
609
The major influences and considerations that militated against more
widespread potential imposition of an intangibles tax on banks in
1972 are discussed in the following two sections:
1. Inconsistency with prevailing tax policy.-The principal reason
for the almost universal absence of potential action to tax intangible
assets of national banks in 1972, had the authority become available,
is that the tax generally would have been incompatible with prevailing
tax structures and policies in the States. This is particularly clear for
the 34 States which levy no ad valorem~ tax on intangible assets at the
present time.'° Even among the taxing States, the intangibles tax in
many cases is held in disfavor, and there is little disposition to extend
its coverage.
Among the States which do not tax intangibles at the present time, a
considerable number never applied such a tax; in all likelihood they
would not adopt it now in the face of its limited utilization and grow-
ing unpopularity. And those States which had made use of this tax in
the past and subsequently discarded it because of unsatisfactory exper-
ience would be unlikely to give serious consideration to its reinstate-
ment simply because new authority to apply such a tax to national
banks had become available. Of all the possible subjects for such a tax,
the group exhibiting greatest potential risk of adverse effects, on
grounds of both equity and economic impact, is commercial banks and
other depositary institutions.1'
Among States that impose some form of intangible property tax,
the tax generally is not regarded as a highly desirable form of tax and
in several States there is considerable dissatisfaction with the tax and
its administration. Concern about the operation of this tax, along
with all other property taxes, recently has been intensified by court
cases challenging the financing of public schools from property tax
revenues.12 Moreover, many intangibles-taxing States already have a
satisfactory alternative tax for banks in the form of the shares tax, so
there would be little incentive to make a change. Thus, in those States
where taxation of bank intangibles would appear to have the greatest
prospect for acceptability on policy grounds, the prevailing climate
appears more conducive to the elimination of the tax generally than
to extension of its coverage to additional sectors of the community.
In Montana, a constitutional convention recently has prepared a re-
vised constitution, to be submitted to the voters on June 6, 1972, that
would empower the legislature to exempt any kind of property, in-
cluding intangibles, from taxation. In Georgia, a constitutional amend-
ment has been proposed that would empower the general assembly to
exempt most intangibles from taxation; and in Indiana, Michigan,
South Dakota, and Florida (the only State indicating that it woñld
have applied the tax to banks in 1972), bills to repeal part or all of
the intangibles tax recently have been introduced.
In several intangibles-taxing States, a number of additional policy-
related considerations would have restricted the possibilities for ex-
10 While nine of these States impose a tax on hank shares which is generally collected
from and absorbed by the bank, it is considered a tax on the shareholders and is not char-
acterized as an ad valorem tax on assets of the bank.
11 The shortcomings of the intangibles tax, particularly as it applies to banks, were
discussed at various places in the Board's report of a study under Public Law 9i-i56:
Part I, pp. 2-4; Part II, pp. 22-23, 43-44 and 54-57; Part III, pp. 447-453 and 463-468
in this volume.
12 Serrano v. Priest, 5 Cal. 3d 584, 487 P.2d 1241 (Aug. 30, 197i) and similar cases in
other States.
PAGENO="0630"
610
tension of the intangibles tax to banks in 1972 if the authority had
become available. In a few States the Governors had earlier an-
nounced that no new taxes would be requested. In several other States,
tax administrators reported that their tax structures had been under-
going major reviews by special task forces, legislative committees, or
other bodies. Pending completion of those studies, tax policy in large
measure is indeterminate and tax legislation is being held in abeyance.
In no case, however, were such groups expected to endorse an intan-
gibles tax. And in Pennsylvania, where the existing intangibles tax
applies only to individuals, application of the tax to commercial banks
would represent a marked change in tax structure and thus would
appear unlikely.
2. Implementation and timing dif/i culties.-St ate and local tax struc-
tures generally are complex and interrelated. They cannot be signifi-
cantly altered with respect to any major sector of the community with-
out careful consideration first being given to the ramifications of the
change, including its impacts on relative tax burdens, economic activ-
ity, administration, and the distributio~i of revenues among the vari-
ous taxing jurisdictions within the States. Moreover, creation of the
legal and administrative framework for a new tax might raise diffi-
cult problems of drafting, negotiation, and coordination. Such pro-
cedures take time and resources, and they are not likely to be launched,
nor is the necessary legal framework likely to be provided, unless there
is considerable pressure and support for the change. This would be
particularly true in the case of a proposal to levy a new tax on a major
industry, as would be involved in the application of an intangibles
tax to banks.
In 45 States, new legislation would be required to apply an intangi-
bles tax to banks, and in six of those States a constitutional amend-
ment also would be necessary, as shown in columns 8 and 9 of the
table. While an intangibles tax could be imposed on banks through
administrative action alone in five States, two of those States do not
currently tax intangible property.
In addition to the basic legislation establishing the coverage, level,
and procedures for adthinistration of the tax, other tax laws in many
States would need to be amended in order to remove restrictions
against the new tax or to permit it to apply as intended. For example,
the bank shares tax statutes in several States provide that the tax
shall be "in lieu" of certain other taxes; where that exclusion covered
taxes on intangibles, it would need to be amended. Moreover, any~
State which already levied a shares tax on banks might feel impelled
to remove that tax if an ad valorem tax on bank assets were adopted,
since the shares tax generally is imposed as part of the property tax,
and the combination might be regarded as double taxation. This is par-
ticularly likely in view of the policies that have been followed by
numerous States in determining taxable values of bank shares-that
is, the policy, generally applied, of deducting from the aggregate
value of the shares in each bank the assessed value of certain assets,
particularly real property owned by the bank within the State.
Aside from technical drafting problems and lack of strong support,
timing difficulties would have precluded action in most States to levy
an intangibles tax on banks for the year 1972. To assure adequate
advance notification to taxpayers and to provide necessary forms,
PAGENO="0631"
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regulations, and other administrative arrangements well in advance
of the assessment date, which usually is early in the year (frequently
January 1), legislation would have had to be enacted in 1971. Most
State legislative bodies that convened in 1971 adjourned relatively
early in the year, while there was still uncertainty as to whether the
authority to tax intangible personal property of national banks would
become effective the following January 1. Since the Board's report
to the Congress, released on May 4, recommended not only continued
prohibition of that form of tax on national banks, but also extension
of that prohibition to State-chartered banks and all other depositary
institutions, it seems highly improbable that many States would have
been willing to push forward in 1971 with a legislative program that
would have been in such large measure a form of contingency planning.
CONCLUSIONS
In view of the many difficulties that would have been encountered
in attempting to levy an intangibles tax on banks, including the need
to overcome strong industry opposition, it appears that inauguration
of such a tax in 1972 would have been feasible only in those jurisdic-
tions where intangible property already was subject to taxation, where
there would be no serious administrative complications in extending
the tax to banks, and where this could be accomplished by administra-
tive action along or by relatively simple legislation. Such requirements
could have been met in only a few States, and in most of these, there
has been no desire thus far to take such action.
While there are a few intangibles-taxing States that over a longer
period might consider the possibility of applying an intangibles tax
to banks if that authority becomes available, the prospects appear
remote that the tax would actually be adopted in the foreseeable future
in more than a very few cases. Among most States which do not tax
intangibles at the present time, views expressed by State tax officials
indicate that there is little prospect that such a tax upon banks would
even be considered.
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