§ 69. Instrumentalities of the United States Government.-The federal government is one that, within the purview of the powers granted it by the Constitution, must be supreme, and all State laws that conflict with the proper exercise of these powers are invalid. This principle has been applied to the tax laws of the States, where they affect the instrumentalities which the federal government has thought necessary and proper to be used to carry out the powers vested in it. The federal government thought proper to create a bank with branches in the different States, to be used in carrying on the fiscal operations of the government. The State of Maryland required every bank doing business in that State, and not chartered by the State, either to pay a stamp duty on every note issued, or pay a tax of $1,500 in gross; certain penalties were imposed on all the officers of a bank violating the law, and upon every person who had any agency in circulating such notes. An action was brought for the penalty against the officers of a branch of the Bank of the United States for a violation of this law. It was held that the law was void, and that the instrumentalities of the government could not be taxed by the State. Marshall, J.: "The sovereignty of a State extends to everything which exists by its own authority, or is introduced by its permission, but it does not extend to those means which are employed by Congress to carry into execution powers conferred on that body by the people of the United States. We think it demonstrable that it does not. Those powers are not given by the people of a single State. They are given by the people of the United States to a government whose laws, made in pursuance of the Constitution, are declared to be supreme. Consequently, the people of a single State cannot confer a sovereignty which will extend over them." It is conceded in this case that the real property of the bank was liable to taxation, and the shares of the stockholders in the State were also liable; those constituted property subject to the jurisdiction of the State, to be taxed as other property in the State, But the effect of the law under consideration was to prohibit the bank from conducting its business in the State, except upon the conditions prescribed by the State. This could not be done, as it would make the federal government, in carrying out the powers vested in it, dependent upon the States in the selection of its instruments for the exercise of its powers. In a subsequent case, it was urged that this was a private corporation engaged in its own business, and the casual circumstance of its being 1 McCulloch v. State of Maryland, 4 Wheat. 316, 405 (Cond. U. S. 415–421). employed by the government in the transaction of its fiscal affairs, should not exempt it from taxation. But the court did not consider it a private corporation, whose principal object was individual trade and individual profit, but as a public corporation, created for public and national purposes. The principle is applied to a tax on the stock of the United States imposed by one of the States; this was said to be a tax on the power of the government to borrow, and inconsistent with the supreme power of that government in exercise of its vested powers. The exercise of these powers cannot be impeded, retarded or burdened in any manner whatever; they are to be wielded independent of the will of any of the States.1 Congress, on the 25th of February, 1862, passed a law which provides that "all stocks, bonds and other securities of the United States, held by individuals, corporations or associations within the United States, shall be exempt from taxation by or under State authority." By the laws of the State of New York, in force at that time, the capital of banks was taxed according to its value. The Bank of Commerce claimed that so much of its capital as was invested in stock of the United States was exempt under the act of 1862. The Court of Appeals of New York held that these stocks were not exempt. The principle involved in the cases not allowing the exemption was, that to tax such stock was to tax the borrowing power of the United States, yet that such exemption could only affect the borrowing power where it existed at the time of the loan, so as to influence the terms and conditions of the loan, to be an inducement to capitalists to part with their funds. But here the borrowing power has been executed, and the exemption confers gratuitously upon the lenders an advantage, not at the expense of the United States, but at the expense of the States. This case was reversed by the Supreme Court of the United States, at its December term, 1862, the court regarding the tax as one upon the borrowing power of the United States, and equally unconstitutional whether imposed on the stock eo nomine, or on the value of the stock as included in the aggregate of the tax-payer's property. The principle which formed the basis of the opinion of the New York court, does not seem to be noticed, except in reference to the distinction claimed between the case and that of Weston v. 2 1 Weston v. City of Charleston, 2 Peters, 448-467 (Cond. U. S. 171–175.) People v. Com'rs of Taxes, 26 N. Y. 165, 166. This court had previously held, in People v. Comr's of Taxes (23 N. Y. 192), before the passage of the act of 1862, that such stocks might be taxed by the State where there was no unfriendly discrimination to the United States as borrowers. 3 Bank of Commerce v. New York City, 2 Black, 620. Charleston; as to that the court say, that the question is one of power and not as to the limits of the exercise of the power; the former is a judicial question, the latter is not. If it is admitted that the power may be exercised by the States at all, it cannot be controlled, and is such an interference with the power of the federal government to borrow money, as is inconsistent with the supreme power vested in that government by the Constitution.1 In April, 1863, soon after the decision just noticed, the legislature of New York changed the law as to the taxation of banks, by which it was in future to be imposed " on a valuation equal to the amount of their capital stock paid in or secured to be paid in," etc. The same question was raised under this statute as to funds of the banks invested in United States securities, and the court held that a tax under this law was a tax on the property of the bank, and that the case could not be distinguished from the former case. The tax on the capital of a bank is a tax on all the property of which it is composed,2 and where several persons are associated together and doing business as private bankers, with all their capital invested in bonds and negotiable securities of the United States, for the sole purpose of reselling them at a profit, and repurchasing like securities to be sold in the same manner, the capital being constantly absorbed in some such securities, is not liable to State or municipal taxation. A tax on gross annual income from interest paid on bonds of the United States, is a tax on the means to borrow money on the credit of the United States,* and so is a tax on income from bonds, notes and other securities, if intended to reach loans to the United States, and each of them is void.5 Certificates of indebtedness issued for supplies furnished the government, and certificates given by the treasurer of the United States to secure a loan of money, stand on the same footing as bonds and other obligations of the government, and so do notes of the United States under the loan and currency acts of 1862 and 1863, usually known as greenbacks. They are issued by the government in the exercise of unquestioned powers, which cannot be controlled to any extent by the States, and are within the enumerated class of securities 'Id. 631, 632, 634. Bank Tax Case, 2 Wall. 200-209, December term, 1864. In People v. Supervisors of Otsego, 51 N. Y. 401, the history of New York legislation as to banks, and all the cases on the subject, are given. 2 Chicago v. Lamb, 52 Ill. 414. 5 Opinions of Justices, 53 N. H. 634. + Bank of Ky. v. Commonwealth, 9 Bush, 46. 6 The Banks v. The Mayor, 7 Wall. 16; State v. Haight, 34 N. J. L. (4 Vroom), 128. * Bank v. Supervisors, 7 Wal!. 28; Montgomery County v. Elston, 32 Ind. 27. exempt by act of February 25th, 1862, from taxation by State authority. So, too, it has been held that United States revenue stamps are not taxable by State authority,' on the principle of McCulloch v. Maryland. While the courts hold that any tax on the securities of the United States imposed by a State is void, and corporations whose funds are invested in such securities, are exempt whenever the tax rests upon the property of the corporation, yet where the tax is imposed on the franchise of the corporation, and is in the form of a bonus paid to the State for the privilege of doing business as a corporation, the fact that the funds of such corporation are invested in securities of the United States does not impair the validity of the tax to any extent. The laws of Connecticut require savings banks to make annual returns to the comptroller of accounts, "of the total amount of deposits" in them respectively on the first day of July of each year, and to pay annually to the treasurer of the State "a sum equal to three-fourths of one per cent. on the total deposits" in the bank on that day. One of these banks had, on the first of July, 1863, $500,161 of its deposits invested in securities of the United States, exempt under act of 1862, and it claimed that as to that portion of its deposits the tax was void. But the court held that the tax was not a tax on property, but a tax on the franchise of the bank, and valid. A shareholder cannot deduct the amount of his just debts from the value of the shares held by him.3 A statute of Massachusetts requires savings banks to pay to the commonwealth, on account of depositors, a tax of one-half of one per cent. on the amount of deposits, to be assessed one-half on the average amount of their deposits for the six months preceding the first of May, and the other half on the average amount of deposits for six months preceding the first of November. This was held to be a tax on the franchise of the banks, and not a tax on property, and therefore valid. So, too, a statute requiring corporations having a capital stock divided into shares, to pay a tax of one-sixth of one per cent. upon the excess of the market value of all such stock over the value of their real estate and machinery, is a tax on the franchise of the corporations and not a tax on property, and the funds of such corporations invested in United States securities are not exempt from State taxation. But where depositors in savings banks are taxable Palfrey v. City of Boston, 101 Mass. 329. Society for Savings v. Ccite, 6 Wall. 594; Monroe Savings Bank v. City of Rochester, 37 N. Y. 365. 3 People v. Dolan, 36 N. Y. 59. 4 Provident Ins. Co. v. Massachusetts, 6 Wall. 611. Hamilton Co. v. Massachusetts, 6 Wall. 632. for their deposits, the banks are not liable to be taxed on the investment of the deposits in national bank stock.1 National Banks.-Most of the cases in reference to the taxation of national banks by the States, arise under the act of June, 1864, which contains this proviso: "That nothing in this act shall be construed to prevent all the shares in any of 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 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 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." The act of 1863 contained no such provision. In a case arising under it, it was said that the States have no power to tax the means and instruments employed by the national government in the exercise of its constitutional functions, and though the State and Congress may exercise a concurrent power of taxation over the same subject-matter, yet it may bear such a relation to the national government that Congress, by reason of its paramount authority, may exclude the States from the free exercise of their concurrent right. But where Congress, in the latter case, does not exercise its exclusive right of taxation, the States are left free to exercise their concurrent powers. The shares of national banks were thought to come in the latter class, and to be subject to State taxation.3 Some of the State courts, while recognizing the act of 1864 as valid, and enforcing its provisions, question the authority of Congress to establish the national bank system. 2 In December, 1865, the first case requiring a construction of this act of 1864, arose out of the statute of New York, in which it was enacted "that shares in the national banks should be included in the valuation of personal property of any person or body corporate, in the assessment of taxes in the town or ward where the bank is located, 1 Augusta Savings Bank v. Augusta, 56 Maine, 176. 2 Brightley's Digest, 66, 67, § 42. 'Stetson v. City of Bangor, 56 Maine, 274. + Smith, County Treasurer, v. Webb, 11 Minn. 500, 512. |