personal property to any amount not exceeding in value two hundred dollars for each individual liable to taxation." The legislature in pursuance of this constitutional authority passed a general statute. Section 1484, Sub-division 8: "exempting personal property of each individual subject to taxation to the amount of ten dollars." It seems clear that the statute exempting an amount of surplus, reserve and undivided profits equivalent to five per cent of loans and discounts cannot be legally defended as a valid exemption law, first, because the exemption may or may not amount to more than the constitutional limit, second, the statute is only applicable to owners of bank stock and is not an exemption to "each individual liable to taxation," provided by general law.

It is not likely, however, that this provision was inserted in the statute with a view of creating an exemption. Whether or not it operates as an exemption is another matter. The reduction has probably been allowed on the theory that since the surplus, reserve and undivided profits are created with a view of protecting depositors against consequences of mistaken judgment in the matter of loans and discounts, and, since experience demonstrates that there will be occasional losses due to inadequacy or shrinkage of security, it is only just in estimating the value for taxation to subtract such a sum as will care for the burden directly chargable against these funds. So considered the law is on a par with laws that have been passed in other states, authorizing debts to be subtracted from credits. These laws have universally proved unsatisfactory. Furthermore, there is not another provision to be found in our statutes authorizing a reduction in the taxable value of property on account of the liabilities of the owner of the property. Even in assessing real estate, we assess the mortgaged land to the owner, presumably, though not actually, at full value, and the assessment is not reduced by the amount of the mortgage that there may be against the land. If the propriety of subtracting a percentage of loans and discounts for taxation purposes be conceded then justice should require that the percentage subtracted be only that necessary to care for the bad loans. All the information that this Commission has been able to obtain points to the conclusion that in practice the percentage of bad loans is much less than five per cent of the entire loans. This is the testimony, not merely of officials, but of many of the bankers. After all it must be remembered that the statute aims primarily to arrive at the value of bank stock and it cannot be said that the saleable value of bank stock generally is under the book value to an extent equal to five per cent of the loans and discounts.

In practice this provision of the statute has been productive of inequality of tax burden between the banks. In a number of

instances where the surplus, reserve and undivided profits was less than five per cent of the loans and discounts the surplus, reserve and undivided profits have been added to the capital and from this sum five per cent of the loans and discounts have been subtracted, with the result that in these instances the assessment basis has been less than the capital stock. On the other hand, many banks in filling out their statements for assessment purposes have indicated in the statement that the surplus, reserve and undivided profits did not exceed five per cent of the loans and discounts and consequently they did not add surplus and capital and subtract five per cent of the loans and discounts. The procedure in the latter cases was undoubtedly correct and the one that should be universally followed. The statute very clearly does not purport to give an absolute right to subtract five per cent of the loans and discounts. (A recommendation with regard to this provision of the statute is made in another part of this report).

THE PROVISION AUTHORIZING THE SUBTRACTION OF THE NET INVESTMENT IN REAL ESTATE.

Our law is not peculiar in allowing a subtraction for the investment in real estate, and it would seem that such procedure is necessary in order to avoid double taxation. However, the priv ilege of reducing the value of the stock for assessment purposes by the full amount of the net investment in real estate is one which readily lends itself to abuse. This provision of the statute is a most fertile source of dissatisfaction. It is unsatisfactory both to the tax officials of the state and to the banks. It is unsatisfactory to tax officials because of the difficulty in administering the law in such a way as to prevent abuses. It is unsatisfactory to the hanks because it tends to, and does produce inequality of tax burden between those engaged in the same business. Good banking frowns upon the practice of tying up bank capital in real estate investments, yet the law which authorizes the full net investment in real estate to be subtracted from the assessment basis of the bank holds out a constant temptation to the banks to retain real estate investments upon their books which they can use as an effective weapon to avoid high taxation upon bank stock. It is of course. provided that banks may legitimately invest in real estate sufficient capital to provide for a suitable site and structure and in addition to this banks may from time to time, in the interest of self protection, be compelled to take real estate to protect them from the consequences of loss through loans. Wherever real estate is acquired in the latter manner, however, good banking policy requires that it be converted as soon as possible without loss. A law of this character cannot

but prove a source of annoyance to those intrusted with the administration. It is possible, however, to very materially improve the administration under this provision of the law and the tax commission will undertake measures of improvement that ought to reduce, in some degree, the ill effects of the law.

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To

show how the law may operate in such a way to produce an inequality of tax burden between banks, we we may test its application under its application under circumstances which very frequently exist. Banks A and B do business in a city. They are competing institutions. Owing to the high state. of development of community life, the tax rate in the city is high. Bank A has presumably one-fifth of its capital invested in its site, banking house and fixtures. Bank B has the same investment in these items, but also has a substantial investment in real estate situated in remote country districts where the rate of taxation is low. It will, nevertheless, subtract from what would otherwise be its assessment basis the full investment in real estate. Thus while the law aims to tax bank stock at the place where the bank does business and at the rate obtaining in that taxing district, the valuation of bank stock for assessment purposes is reduced by the net investment in real estate in another taxing district, (even in other counties, states or foreign countries) where the rate of taxation is much lower. The statement of one bank gives an instance of the inequality above described. It does business in a city where the tax rate is between 65 to 70 mills and returns one-fifth of the capital invested in real estate in a county where the average rate outside of cities and villages is 31 mills. It will readily be seen that while the law aims to give to the community where the bank is situated the benefit of the assessment of the bank stock, it is deprived of a substantial portion of the value in this instance, and that the attempt to prevent double taxation has in this instance resulted in but half taxing that portion of the capital invested in country real estate.

At the last session of the legislature an act was passed (Chapter 54, Laws of 1911) limiting the investment in real estate to thirty per cent of the total capital, and further providing that in case real estate should come to the bank as a result of foreclosure, or other transaction, made for the protection of the bank against loss, the real estate in excess of thirty per cent of the capital stock should be converted within a limited time. A rigid execution of this provision of the law will go a long way toward preventing such inequalities as result from the practices above indicated.

In Minnesota and Wisconsin little or no difficulty is experienced in the matter of assessing bank stock. In neither of those states, however, may banks subtract from the sum of the capital, surplus, reserve and undivided profits real estate investments

to an unlimited amount. In Minnesota they are restricted to the legal investment, and in Wisconsin to the amount invested in banking house and site. In view of the fact that most of the conflict between banks and local authorities is due to the reduction of the assessment basis by the subtraction of an amount representing real estate investments, which in many instances almost equals and sometimes exceeds the capital. A limitation upon the amount of real estate investments, which, to prevent double taxation, may be subtracted from the assessment basis, would reduce friction to a minimum. (Recommendations in accordance with the views herein expressed will be found on Page 157 of this report.)

A careful study of the statements upon which the assessment for 1912 was based reveals still another source of inequality that may well be mentioned. The statements reveal a lack of uniformity in practice in regard to the item of furniture and fixtures. In many of them the investment in furniture and fixtures is subtracted in the same way as though it were real estate, while in others it is apparent that this investment has not been subtracted. There should be uniform practice in this respect and the Tax Commission will undertake to establish a rule of universal application, which shall be in accord with the intent of the law.

REFORM IN METHODS OF ASSESSING
BANK STOCK.

Not a little of the difficulty experienced in assessing bank stock is due to our methods of assessment. Under the law local assessors are required to make the assessment upon the statement furnished by the bank. While it would seem to be an easy matter to make the assessment upon the basis of the statement rendered, nevertheless it very often turns out that the local assessor fails to do the work properly. If there is more than one bank in the taxing district under the jurisdiction of the assessor and he should fail to make an assessment that would be equitable as between the different banks, there is no legal way in which the error could be corrected after the assessment gets beyond the district authorities. Our statutes providing for the review and equalization of assessments have been so interpreted (First National Bank of Casselton vs. Lewis, County Auditor, et al, 18. N. D. 390) as to preclude the board of county commissioners from changing individual assessments, except in unorganized townships. It can only equalize between the various assessment districts. All inequalities there may be within a taxing district will remain unless some extra legal procedure is had to change the assessment.

In practice the county commissioners, with the assistance of the county auditor, practically determine the assessment of bank stock within the county. In most instances this is done without legal authority. In some instances assessors have purposely omitted to return bank stock in order to lay a foundation for the assessment of the bank stock by the county auditor and board of county commissioners as escaped property-a procedure of doubtful propriety. It would seem that the difficulty experienced in making a proper assessment of bank stock would justify a change in the administrative measures. We believe it would be well to expressly confer upon board of county commissioners, acting as a board of review and equalization, the power to review individual assessments of bank stock. This would legalize what is already, to a great extent, the practice and would greatly facilitate the administrative work of the tax commission in procuring a proper assessment. Such a measure is not open to the criticism of its being "special legislation." It is wholly warranted by circumstances and needed in the interest of equality. (See Recommendation on page 157 of this report).

SAVINGS BANKS.

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Since the statute quoted at the beginning of this chapter was adopted the legislature has authorized the creation of savings banks under a charter provided in chapter 56, Laws of 1911. It would seem that there could be little doubt that savings banks created under the charter provided for in the legislation of 1911 are assessable under the statute above referred to in the same way as banks organized under the general bank law. There would seem to be no reason why savings banks should not be assessed under the same rules as other banks and it will be the policy of this commission to advise their assessment accordingly.

TRUST COMPANIES.

There are already organized in this state several trust companies having the charter powers granted under Chapter 22, the Code of 1905. The powers granted to these trust companies are very broad; they being authorized, among other things, to accept and receive deposits of money for general savings account, and "to loan money upon such securities as may be deemed advisable by the board of directors, and to borrow money in like manner upon the security of its own property or credit." In brief, they may do much of the business that a bank may do and,