State Tax Commission v. Baltimore National Bank

Since the decision of this court on a former appeal that the Baltimore National Bank was, in the first instance at least, required to pay the tax assessed on the shares of its preferred stock held by the Reconstruction Finance Corporation, and the affirmance of that decision by the Supreme Court of the United States, the United *Page 405 States Congress has passed an act providing that, notwithstanding any privilege or consent previously granted, the shares of preferred stock of national banks, "and the shares of preferred stock, capital notes, and debentures of State banks and trust companies," acquired by the Finance Corporation, should not be subject to any taxation by any state or local taxing authority. Act of Congress March 20th, 1936, 49 Stat. 1185 , Tit. 12, U.S. Code Ann., sec. 51d; State Tax Commission v. Baltimore National Bank, 169 Md. 65 , 180 A. 260 ; Baltimore National Bank v. State Tax Commission, 297 U.S. 209 , 56 S.Ct. 417 , 80 L.Ed. 586 . And now, another year's tax having been assessed to the bank on the same stock, an appeal was prosecuted by the bank to the lower court, and the tax there held illegal by reason of immunity conferred by that act; and from that ruling the State Tax Commission has appealed. Code, art. 81, sec. 259.

The Finance Corporation, from which any tax lawfully imposed on the bank might be collected, was permitted to intervene on the appeal below. Code, art. 81, secs. 6 (6), 10(b), and 15(e), as amended by Laws 1929, ch. 226. The question of constitutionality of any intergovernmental immunity to stock held by this particular stockholder has been argued again. It was a question which the Supreme Court did not decide "either directly or indirectly," on affirmance of the previous decision; the ground of the affirmance having been that Congress had expressly authorized the taxation of all shares of national banks.

National Banking Act, Rev. St. sec. 5219, as amended, 12 U.S. Code Ann., sec. 548. I see no reason for reconsidering the point, as I conclude the decision of it is not necessary to the disposition of the present case. I concur in the view of the lower court that a valid immunity has been granted to the stock held by this stockholder, and that the bank, primarily liable for payment, may not be required to pay the tax on it. It is taken as settled that stock in national banks may be taxed only by consent of the United States Congress.

People of New York v. Weaver, 100 U.S. 539 , 543, 25 *Page 406 L.Ed. 705; Talbott v. Silver Bow County, 139 U.S. 438 , 440, 11 S.Ct. 594 , 35 L.Ed. 210 ; Davis v. Elmira Savings Bank, 161 U.S. 275 , 283, 16 S.Ct. 502 , 40 L.Ed. 700 ; State Tax Commission v. Baltimore Nat. Bank, 169 Md. 65 , 68, 180 A. 260 . And there can be no question of the purpose of the recent act to deny that consent for taxing the stock of this particular stockholder. The act extends beyond that purpose in its attempted exemption of stock held in state banks and trust companies, but I am of opinion that the validity of the extended exemption need not be considered while passing on that of the national bank stock.

The act contains an express direction, section 51f, that: "If any provision, word, or phrase of sections 51d and 51e of the title, * * * is held invalid, the remainder of such sections * * * shall not be affected thereby." It is true that such a saving clause may not be effective when it is obvious that the remainder of the statute could not, or would not, be intended to stand as the legislative will. Carter v. Carter Coal Co., 298 U.S. 238 , 312, 56 S.Ct. 855, 873 , 80 L.Ed. 1160 . But that is an exceptional condition. The direction to sever the parts and leave the remainder in force is to be followed if it can be; and here I see no adequate reason for not following it.

Fidelity Guaranty Fire Corp. v. State Tax Commission, 172 Md. 652 , 661, 193 A. 164 . A broad question, whether the powers with which the Finance Corporation was invested by the terms of the act under which it was formed (Act Jan. 22d 1932, 47 Stat. 5 , 15 U.S. Code Ann., sec. 601 et seq .) could constitutionally be exercised at all by the federal government, was raised on the former appeal, and in the Supreme Court appears to have been taken as beyond dispute. Under the circumstances I should not be disposed to consider it again, but should leave it to be decided by the higher court, if found necessary. This appeal submits but one question, whether national *Page 407 bank stock, while owned and held by the Reconstruction Finance Corporation, may be taxed by the State.

The Baltimore National Bank issued 50,000 shares of preferred stock, having a par value of $20 each, which on August 20th, 1933, it sold to the Reconstruction Finance Company, which still owns and holds the entire issue. On April 20th, 1936, the State Tax Commission of Maryland notified the Baltimore National Bank that it had assessed that stock for purposes of taxation at $1,000,000. On May 4th, 1936, the bank filed a protest against the assessment and proposed taxation, and asked to be heard on the protest. A hearing was granted, evidence was submitted on behalf of the protestant and the commission, and on December 8th, 1937, the commission overruled the protest and made the assessment final.

From that order the bank, by its petition of December 14th, 1937, appealed to Circuit Court No. 2 of Baltimore City. That court on January 12th, 1938, for the reasons assigned in a very able opinion, reversed the order of the State Tax Commission, and annulled and set aside the assessment. From that order the commission took this appeal. The identical stock involved in this appeal was also assessed for taxation by the commission in 1934, while owned and held by the Reconstruction Finance Corporation, ( State Tax Commission v. Baltimore National Bank, 169 Md. 65 , 180 A. 260 ), and that assessment was affirmed by this court ( Ibid .) on two grounds: (1) That the United States had consented to the taxation of the capital stock of national banks, R.S. sec. 5219, as amended, 12 U.S. Code Ann., sec. 548, and (2) that that consent followed the shares even into the hands of the Reconstruction Finance Corporation and conclusively determined their taxable quality while held and owned by it.

That decision was affirmed in Baltimore National Bank v. State Tax Commission of Maryland, 297 U.S. 209 , 56 S.Ct. 417 , 80 L.Ed. 586 , on the sole ground that by R.S., sec. 5219 as amended (U.S. Code Ann., title 12, sec. 548; Cf . Act June 3rd, 1864, 13 Stat. 99 , *Page 408 112, ch. 106; Act February 10th, 1868, 15 Stat. 34 , ch. 7) the Congress had consented that "all" the shares of the capital stock of a national banking association should be subject to taxation, that "all" meant neither more nor less than all, that such shares were taxable without regard to their ownership, and consequently were taxable when owned and held by the Reconstruction Finance Corporation without regard to its status as an agency of the federal government. Following that decision, Congress, by its Act of March 20th, 1936, U.S. Code Ann., title 12, sec. 51d, provided that "Notwithstanding any other provision of law or any privilege or consent to tax expressly or impliedly granted thereby, the shares of preferred stock of national banking associations, and the shares of preferred stock, capital notes, and debentures of State banks and trust companies, acquired before or after March 20, 1936 by Reconstruction Finance Corporation, and the dividends or interest derived therefrom by the Reconstruction Finance Corporation, shall not, so long as Reconstruction Finance Corporation shall continue to own the same, be subject to any taxation by the United States, by any Territory, dependency or possession there of, or the District of Columbia, or by any State, county, municipality, or local taxing authority, whether imposed, levied, or assessed on, before or after March 20, 1936, and whether for a past, present, or future taxing period." That act effected a withdrawal of the consent to state taxation of any of the preferred capital stock of national banks (given by R.S. sec. 5219) owned by the Reconstruction Finance Company, so long as it continued to own the same. The question presented by this appeal is not whether the consent given by R.S. sec. 5219, affects such stock while owned by the Finance Corporation, as in the former appeals, but whether the Act of March 20th, 1936, which withdraws that consent as to such stock when owned by the Finance Corporation, and specifically prohibits the imposition of any tax by any taxing authority upon such *Page 409 stock when so owned, is valid.

If it is not valid, the assessment stands; if it is, it falls. In approaching that question such general rules as that an Act of Congress cannot be declared void as in conflict with some provision of the Constitution unless the violation is too clear for reasonable doubt ( Legal Tender Cases, 12 Wall. 457, 531 , 20 L.Ed. 287 ), help little, for the question is too important for either compromise or border line construction. In support of the assessment it is asserted: (1) That the stock is taxable under the tax statutes of the State, that no exemption can be implied from the nature of the Finance Corporation, because (a) it exercises no power delegated to the national government by the Federal Constitution, (b) performs no governmental function, and (c) intergovernmental immunity from taxation is reciprocal, and only extends to agencies exercising strictly governmental functions in the exercise of lawfully delegated powers, and that if the activities of the Finance Corporation are ultra vires, the shares are taxable; and (2) that the Act of March 20th, 1936, is invalid, because (a) it violates the due process clause of the Fifth Amendment of the Federal Constitution, (b) violates the Tenth Amendment because it derogates from the "State's sovereign right to tax," (c) disturbs the balance of "Federal-State relations, required by the Constitution as a whole"; and (3) that the act is not severable, and that if any part thereof is invalid, the whole falls. The bank and the Reconstruction Finance Corporation, which was permitted to intervene, in answer say that the Act of March 20th, 1936, is a valid constitutional enactment, and incidentally that the Finance Corporation is an agency of the United States lawfully created, exercising functions exclusively governmental in their nature, and no other, that as such it is exempt both under State and Federal statutes from taxation, that the capital stock of national banks is not taxable except with the consent of the national government, that by the Act of *Page 410 March 20th, 1936, that government not only withdrew its consent to the taxation of such stock while owned by the Finance Corporation, but strictly prohibited the taxation thereof while so held.

The suggestion that the stock is taxable under the laws of the State of Maryland is merely a conclusion drawn from the assumed predicate that the Act of 1936 is invalid, because Code, art. 81, sec. 7, as amended by Laws 1929, ch. 226, provides that "any property exempted from taxation by this State by the constitution of the United States or by any Act of Congress passed pursuant to and in conformity with" that Constitution, "shall be exempt from assessment and from State, county and city" taxation. If therefore the act is valid, the stock is under that provision of the Maryland Code exempt from taxation. In McCulloch v. Maryland, 4 Wheat. 316, 427 , 4 L.Ed. 579 , the State of Maryland undertook to impose a tax upon a branch of the Bank of the United States. In holding the statute imposing that tax void, the Supreme Court held that such a bank as that was a convenient, useful, and essential instrument of government.

In the course of the historic opinion filed by the Chief Justice in that case it is said: "The power of Congress to create, and of course to continue, the bank, was the subject of the preceding part of this opinion; and is no longer to be considered as questionable. "That the power of taxing it by the States may be exercised so as to destroy it, is too obvious to be denied. But taxation is said to be an absolute power, which acknowledges no other limits than those expressly prescribed in the constitution, and like sovereign power of every other description, is trusted to the discretion of those who use it. But the very terms of this argument admit that the sovereignty of the State, in the article of taxation itself, is subordinate to, and may be controlled by the constitution of the United States.

How far it has been controlled by that instrument must be a *Page 411 question of construction. In making this construction, no principle not declared, can be admissable, which would defeat the legitimate operations of a supreme government. It is of the very essence of supremacy to remove all obstacles to its action within its own sphere, and so to modify every power vested in subordinate governments, as to exempt its own operations from their own influence. This effect need not be stated in terms.

It is so involved in the declaration of supremacy, so necessarily implied in it, that the expression of it could not make it more certain. We must, therefore, keep it in view while construing the constitution. * * * "The people of all the States have created the general government, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents; and these taxes must be uniform.

But, when a State taxes the operations of the government of the United States, it acts upon institutions created, not by their own constituents, but by people over whom they claim no control. It acts upon the measures of a government created by others as well as themselves, for the benefit of others in common with themselves. The difference is that which always exists, and always must exist, between the action of the whole on a part, and the action of a part on the whole — between the laws of a government declared to be supreme, and those of a government which, when in opposition to those laws, is not supreme." The tax in that case was on the bank itself and not on its stock, and the opinion is consistent with the power of the state to tax the stock. 4 Wheat. 316 , at page 436, 4 L.Ed. 579 . Following that expression the South Carolina court held in two cases ( Bulow v. Charleston, 1 Nott McC. 527; State ex rel Berney v. Tax Collector, 2 Bailey 654 ), that stock of the Bank of the United States was taxable.

There was no federal review of those decisions, *Page 412 and shortly after that the bank went out of existence. But in 1864 the present system of national banks was organized (Act June 3rd, 1864), following an Act of 1863, to render to the national government services essential to the adequate administration of its powers and functions. Davis v. Elmira Sav. Bank, 161 U.S. 275 , 16 S.Ct. 502 , 40 L.Ed. 700 ; Mercantile Nat.

Bank v. Mayor, etc., of New York, 121 U.S. 138 , 7 S.Ct. 826 , 30 L.Ed. 895, 901 ; Farmers' Mechanics' Nat. Bank v. Dearing, 91 U.S. 29 , 33, 23 L.Ed. 196, 199 . That act, however, (chapter 106, sec. 41, R.S. sec. 5219, 12 U.S. Code Ann. 548, and note) provided that the legislature of each state might determine and direct the manner and place of taxing all shares of national banking associations located within its limits, subject nevertheless to definite restrictions and limitations. Because of the consent given by that statute, there was neither opportunity nor occasion for the courts to deal directly with the right of the states to tax the shares of a national bank, but in applying the restrictions which were imposed as essential conditions of the consent, they were called upon to decide, and did decide, that such shares could not be taxed by the states; for if the right to tax existed apart from the statute, the federal government had no power to burden the right with the restrictions, and in affirming the validity of the restrictions, the courts necessarily decided that, apart from the statute, the states had no right to tax the shares of a national bank.

In Farmers' Mechanics' Nat. Bank v. Dearing, supra, it was said: "The constitutionality of the act of 1864 is not questioned. It rests on the same principle as the act creating the second bank of the United States. The reasoning of Secretary Hamilton and of this court in McCulloch v. Maryland, 4 Wheat. 316 , 4 L.Ed. 579 , and in Osborn v. Bank, 9 Wheat. 738 . 6 L.Ed. 204 , therefore applies.

The national banks organized under the act are instruments designed to be used to aid the government in the administration of an important branch of the public service. *Page 413 They are means appropriate to that end. Of the degree of the necessity which existed for creating them, Congress is the sole judge. "Being such means, brought into existence for this purpose, and intended to be so employed, the States can exercise no control over them, nor in any wise affect their operation, except in so far as Congress may see proper to permit. Anything beyond this is `an abuse, because it is the usurpation of power which a single State cannot give'." From that premise, in People of State of New York v. Weaver, 100 U.S. 539 , 543, 25 L.Ed. 705 , the court, in applying that provision of R.S. sec. 5219, which imposes the restriction that no tax imposed by a state on such stock shall be at a greater rate than that assessed upon other money capital in the hands of individual citizens of such state, reached the conclusion: "That the provision which we have cited was necessary to authorize the States to impose any tax whatever on these bank shares, is abundantly established by the cases of McCulloch v. Maryland, 4 Wheat. 316 , [ 4 L.Ed. 579 ]; Osborn v. Bank, 9 Wheat. 738 , [ 6 L.Ed. 204 ]; Weston v. Charleston, 2 Pet. 449 [ 7 L.Ed. 481 ].

"As Congress was conferring a power on the States which they would not otherwise 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." In Des Moines Nat. Bank v. Fairweather, 263 U.S. 103 , 44 S.Ct. 23, 24 , 68 L.Ed. 191 , where the application of that same restriction was under consideration, that principle was accepted as settled law; the court there saying: "It is settled that the relation of the national banks to the United States and the purposes intended to be subserved by their creation are such that there can be no taxation, by or under state authority, of the banks, their property or the shares of their capital stock otherwise than in conformity with the terms and *Page 414 restrictions embodied in the assent given by Congress to such taxation. People of New York v. Weaver, 100 U.S. 539 , 543, 25 L.Ed. 705, 706 ; Rosenblatt v. Johnston, 104 U.S. 462 , 26 L.Ed. 832 ; Mercantile Nat. Bank v. New York, 121 U.S. 138 , 154, 7 S.Ct. 826 , 30 L.Ed. 895, 901 ; Talbott v. Silver Bow County, 139 U.S. 438 , 440, 11 S.Ct. 594 , 35 L.Ed. 210 ; Owensboro Nat.

Bank v. Owensboro, 173 U.S. 664 , 669, 19 S.Ct. 537 , 43 L.Ed. 850 , 852; First Nat. Bank v. Adams, 258 U.S. 362 , 42 S.Ct. 323 , 66 L.Ed. 661 ." First Nat. Bank v. Hartford, 273 U.S. 548 , 550, 47 S.Ct. 462 , 71 L.Ed. 767 ; First Nat. Bank v. Anderson, 269 U.S. 341 , 46 S.Ct. 135 , 70 L.Ed. 295 , and State Tax Commission of Maryland v. Baltimore Nat.

Bank, 169 Md. 65 , 180 A. 260 ; Baltimore Nat. Bank v. State Tax Commission, 297 U.S. 209 , 56 S.Ct. 417 , 80 L.Ed. 586 , accept as beyond question the conclusions stated in these earlier cases. Notwithstanding this unbroken line of decisions, it is suggested that the time has now come to reconsider the immunity of the shares of the capital stock of national banks in the light of present day conditions, even though that may involve modification of established precedents. That suggestion is, however, both too late and too early.

It is too late because the law is settled, and the precedents are established, and the deliberate and considered judgment of the highest tribunal in the nation registered again and again in actual litigation in the course of one hundred and nineteen years cannot now be repudiated, except by a dangerous and intolerable abuse of judicial power. It is too early, because the government exists today under its original constitution and the amendments thereof, and there has not been in its political or economic structure any change so drastic as to make inapplicable the reasoning in McCulloch v. Maryland which led to the conclusion that the national banking system of the United States is a useful, convenient, and essential instrument for the effective administration of the federal government under the Constitution. *Page 415 It is therefore axiomatic that shares of the capital stock of a national bank may not be taxed by a state without the consent of the national government. It is also certain that Congress, having granted the consent, may withdraw it ( Cooley on Const. Lim . 246; Stone v. Mississippi, 101 U.S. 814 , 820, 25 L.Ed. 1079 ) and that once the consent is withdrawn the stock is no longer taxable by a state.

Assuming that shares of the capital stock of a national bank may not be taxed without the consent of the national government, that Congress may give or withhold that consent, and that, having given it, it may in its discretion withdraw it, the remaining question is whether it may withdraw it in part, so as to exempt the shares from taxation while owned by such an agency as the Reconstruction Finance Corporation, but leaving it otherwise in full force and effect, or, in other words, whether such a partial withdrawal of consent violates any constitutional limitation on the legislative power of Congress. The Act of March 20th, 1936, in part provides that (1) the shares of preferred stock of national banking associations, and (2) shares of the preferred stock, notes and debentures of state banks and trust companies, acquired by the Reconstruction Finance Corporation before and after March 20th, 1936, and the dividends or interest thereon, shall not, so long as said corporation shall own the same, be taxable by any state. In considering the validity of that act in this case, we are concerned only in the validity of that part of it which relates to the taxation of the shares of a national banking association, unless (a) that part of the act which relates to the taxation of shares of the preferred capital stock, notes and debentures of state banks and trust companies is invalid, and (b) is not