First Agricultural National Bank of Berkshire County v. State Tax Commission/Dissent Marshall

by Thurgood Marshall

United States Supreme Court

392 U.S. 339

First Agricultural National Bank of Berkshire County  v.  State Tax Commission

 Argued: April 22, 1968. --- Decided: June 17, 1968

Mr. Justice MARSHALL, with whom Mr. Justice HARLAN and Mr. Justice STEWART join, dissenting.

I would make clear that the Constitution of its own force does not prohibit Massachusetts from applying its uniform sales and use taxes to, among other things, appellant's wastebaskets. ^[1] It seems to me necessary to decide that constitutional question in order properly to interpret 12 U.S.C. § 548, upon which the Court bases its decision. Moreover, the refusal to decide the issue gives further life to a largely outmoded doctrine.

Mr. Justice Brandeis rightly cautioned that '(i)n cases involving constitutional issues * * * this court must, in order to reach sound conclusions, feel free to bring its opinions into agreement with experience and with facts newly ascertained, so that its judicial authority may * * * 'depend altogether on the force of the reasoning by which it is supported." ^[2] I think that in light of the present functions and role of national banks that they should not in this day and age be considered constitutionally immune from nondiscriminatory state taxation, and that § 548 should not be construed as giving them a statutory immunity from the taxes here involved.

A. The starting point of the constitutional inquiry is, of course, M'Culloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579 (1819). That case involved a state statute applicable to any bank established in Maryland 'without authority from the State,' i.e., the Second Bank of the United States, chartered by Congress in 1816. It prohibited the circulation of notes (currency) by such a bank except on payment of a 2% stamp tax, or, alternatively, upon the payment annually to the State of $15,000. Substantial monetary penalties were provided for violations of the statute, for which the State had sued cashier M'Culloch. In a celebrated opinion Chief Justice Marshall, a principal architect of our federalism, struck down the Maryland statute.

In Osborn v. Bank of the United States, 9 Wheat. 738, 6 L.Ed. 204 (1824), M'Culloch was applied to strike down an Ohio statute that attempted to extract an annual tax of $50,000 from each branch of a business operating in the State without its authority. The statutes found unconstitutional in both of those cases were patently discriminatory against the Second Bank of the United States (the Ohio statute specifically mentioned it), for the taxes did not apply to state-chartered banks. Chief Justice Marshall, however, did not limit his opinions in the two cases to discriminatory taxation, and they were applied by the Court in Owensboro Nat. Bank v. City of Owensboro, 173 U.S. 664, 19 S.Ct. 537, 43 L.Ed. 850 (1899), with little independent analysis to hold that Kentucky could not collect a nondiscriminatory franchise tax from a national bank. There was no discussion of the possible differences between federal functions performed by the kind of national bank involved there, which existed by virtue of legislation enacted in 1863 and 1864, and the quite distinct functions performed by the Second Bank of the United States involved in M'Culloch and Osborn.

Virtually all of the later cases in which national banks have been held to be federal instrumentalities immune from state taxation depend upon these three cases. One could, and perhaps should, read M'Culloch and Osborn simply for the principle that the Constitution prohibits a State from taxing discriminatorily a federally established instrumentality. On that view, Chief Justice Marshall's statement that 'the power to tax involves the power to destroy,' M'Culloch v. Maryland, supra, 4 Wheat. at 431, did not relate to a principle entirely necessary to the decision. As Mr. Justice Frankfurter pointed out in reference to what he called that 'seductive cliche':

'The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr.

Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits." ^[3]

Absent an examination of the differences between the bank involved in Owensboro and the Second Bank of the United States involved in M'Culloch and Osborn, the Owensboro decision might be justified upon either of the following grounds: its alternative holding that the statute that is now § 548 constituted congressional delineation of the permissible scope of the power of the State to tax a national bank, or perhaps that the particular franchise tax was invalid as applied because it was based upon a valuation that included the national bank's required investment in nontaxable bonds of the United States. ^[4] Or one might view Owensboro, in holding a nondiscriminatory tax invalid, as simply incorrect.

Such a limited view of those hoary cases would, of course, require a re-evaluation of the validity of the doctrine of intergovernmental tax immunities-a doctrine which does not rest upon any specific provisions of the Constitution, but rather upon this Court's concepts of federalism. See M'Culloch v. Maryland, supra, 4 Wheat. at 426; Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 487-492, 59 S.Ct. 595, 601 604, 83 L.Ed. 927 (1939) (Frankfurter, J., concurring); T. Powell, Vagaries and Varieties in Constitutional Interpretation, c. IV (1956). I have no doubt that Congress could provide (and has provided, see infra, at 362) statutory immunity from state taxation for the federal instrumentalities it may establish. See, e.g., United States v. City of Detroit, 355 U.S. 466, 474, 78 S.Ct. 474, 478, 2 L.Ed.2d 424 (1958); Maricopa County v. Valley Nat. Bank, 318 U.S. 357, 361, 63 S.Ct. 587, 588, 87 L.Ed. 834 (1943); Railroad Co. v, Peniston, 18 Wall. 5, 37-38, 21 L.Ed. 787 (1873) (concurring in judgment.). Given that congressional power, there is little reason for this Court to cling to the view that the Constitution itself makes federal instrumentalities immune from state taxation in the absence of authorizing legislation. The disparate kinds of instrumentalities and forms of state taxation create difficulties for ad hoc resolution of the immunity issue by this Court based only upon abstract concepts of federalism. See generally Powell, Waning of Intergovernmental Tax Immunities, 58 Harv.L.Rev. 633 (1945); Powell, Remnant of Intergovernmental Tax Immunities, 58 Harv.L.Rev. 757 (1945). As the Court has sometimes realized:

'Wise and flexible adjustment of intergovernmental tax immunity calls for political and economic considerations of the greatest difficulty and delicacy. Such complex problems are ones which Congress is best qualified to resolve.' United States v. City of Detroit, 355 U.S., at 474, 78 S.Ct. 479.

B. The Court has never indicated any great desire to reconsider in toto the doctrine of the constitutional immunity of federal instrumentalities from state taxation. The Court has, however, noted the trend in its decisions toward restricting 'the scope of immunity (from taxes) of private persons seeking to clothe themselves with governmental character,' Oklahoma Tax Comm. v. Texas Co., 336 U.S 342, 352, 69 S.Ct. 561, 567, 93 L.Ed. 721 (1949). The wisdom of that trend counsels, I think, a rejection of the constitutional argument in this case.

As the Court said last Term, 'there is no simple test for ascertaining whether an institution is so closely related to governmental activity as to become a taximmune instrumentality,' Department of Employment v. United States, 385 U.S. 355, 358-359, 87 S.Ct. 464, 467, 17 L.Ed.2d 414 (1966) (holding Red Cross immune). Various formulations of the controlling test have been used to determine whether institutions or individuals are immune: whether they 'have been so incorporated into the government structure as to become instrumentalities of the United States and thus emjoy governmental immunity,' United States v. Boyd, 378 U.S. 39, 48, 84 S.Ct. 1518, 1524, 12 L.Ed.2d 713 (1964); whether they 'are arms of the government deemed by it essential for the performance of governmental functions,' and 'are integral parts of (a government department and) * * * share in fulfilling the duties entrusted to it,' Standard Oil Co. of California v. Johnson, 316 U.S. 481, 485, 62 S.Ct. 1168, 1170, 86 L.Ed. 1611 (1942) (Army post-exchanges immune); whether they have been so 'assimilated by the Government as to become one of its constituent parts,' United States v. Township of Muskegon, 355 U.S. 484, 486, 78 S.Ct. 483, 485, 2 L.Ed.2d 436 (1958); and whether the institution is regarded 'virtually as an arm of the Government,' Department of Employment v. United States, supra, 385 U.S. at 359-360, 87 S.Ct. at 467.

Under those general rubrics, the Court has looked to various specific factors and characteristics to determine the status of the specific institution: whether it is organized for private profit, and whether the Government has retained such control over it so that 'it could properly be called a 'servant' of the United States in agency terms,' United States v. Township of Muskegon, supra, 355 U.S., at 486, 78 S.Ct., at 485; whether it was organized to effectuate a specific governmental program, Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 102, 62 S.Ct. 1, 5, 86 L.Ed. 65 (1941); whether its ownership, substantially or totally, lies in the Government, Clallam County, Wash. v. United States, 263 U.S. 341, 343, 44 S.Ct. 121, 68 L.Ed. 328 (1923); Railroad Co. v. Peniston, 18 Wall., at 32, 21 L.Ed. 787 whether government officials handle and control its operations, Stanard Oil Co. v. Johnson, supra; whether its officers or any significant portion of them are appointed by the Government, Department of Employment v. United States, supra; compare Railroad Co. v. Peniston, supra; whether the Government gives it significant financial aid, whether it is charged by law with carrying out some of the Government's international commitments, and whether it performs 'functions indispensable to the workings' of a governmental unit, Department of Employment v. United States, supra, 385 U.S. at 359, 87 S.Ct. at 467.

Under any of those rubrics and applying the factors listed above-a list not intended to be exhaustive-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 governmetal function that is not performed equally by state-chartered banks. Government officials do not run its day-to-day operation 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. Railroad Co. v. Peniston, supra; cf. Broad River Power Co. v. Query, 288 U.S. 178, 53 S.Ct. 326, 77 L.Ed. 685 (1933). Similarly, a whole host of businesses and institutions are subject to extensive federal regulation and that 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 constitutional tax-immune status today only by mechanically applying the three seminal cases of M'Culloch, Osborn, and Owensboro. It is instructive, therefore, to examine the functions performed by the national banks involved in those cases.

The Second Bank of the United States, involved in M'Culloch and Osborn, would clearly be a federal instrumentality under the Court's most recent discussion of the doctrine (Department of Employment, supra): the United States owned 20% of its capital stock (the remainder being owned by private persons); the President appointed five of its 25 directors, and the Government, as a shareholder, participated in the election of the others; the Secretary of the Treasury was required to deposit all of the public funds in the bank, unless he could give reasons to Congress why he should not do so; the bank was required to transmit funds for the United States without charge; the bank issued currency which was established as legal tender for all debts owing to the Government; and the bank clearly acted as the fiscal agent of the Government, handling its foreign exchange transactions. See P. Studenski & H. Krooss, Financial History of the United States 83 88, 103-106 (2d ed. 1963); Federal Reserve System, Banking Studies 7-8, 18, 39-41 (1941).

Even the national bank involved in Owensboro might warrant tax-immune status were it in existence today. It was established pursuant to the National Currency Acts of 1863 and 1864 ^[5] which were enacted largely to bolster the Union's financial status, shaky because of the Civil War. Banking Studies, supra, at 43-46. Most importantly, from the standpoint of analyzing the federal functions such banks served, national banks under the Civil War legislation, ^[6] to which national banks today trace their history, had important and significant functions concerning currency. They were authorized to issue currency, printed for them by the Treasury Department, and such currency was established as legal tender for all debts owing to, or payable by, the Government. To insure the stability of the national currency by insuring the stability of the issuing banks, as well as to provide a ready market for the Government, each such national bank was required to secure its currency by depositing United States bonds with the Treasury Department. Banking Studies, supra, 14-16, 41-46; Studenski & Krooss, supra, 154-155.

All of this was radically changed with the passage of the Federal Reserve Act of 1913, 38 Stat. 251, as amended, 12 U.S.C. § 221 et seq., 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 agents of the United States. 12 U.S.C. § 391. By 1935, the had ceased and now Federal Reserve banks are the only banking institutions that can do so. Banking Studies, supra, at 240; Federal Reserve System, The Federal Reserve System: Purposes and Functions c. X (5th rev. ed. 1967). The disminished 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 U.S.C. § 36(c); fiduciary powers, 76 Stat. 668 (1962), 12 U.S.C. § 92a; rate of interest on loans, 48 Stat. 191 (1933), as amended, 12 U.S.C. § 85; capitalization, 48 Stat. 185 (1933), 12 U.S.C. § 51; and interest on time and savings deposits, 44 Stat. 1232 (1927), 12 U.S.C. § 371.

To be sure, the Federal Reserve System could not function without national banks, which are required to be members therein, 12 U.S.C. § 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 taximmune 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:

'With the passing of the national bank notes, the United States lost much of the difference between the national banking system and the state banking systems. Except for automatic membership in the Federal Reserve System, different examining boards, and more or less different standards of examination, appraisal, and the like, the main point of differentiation between the national banking system and any (state) * * * banking system * * * was formerly the privilege of currency issue.' J. Paris, Monetary Policies of the United States, 1932-1938, at 96 (1938).

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 U.S.C. § 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 exchanged, 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. See The Federal Reserve System: Purposes and Functions, supra, at 225-234, 274-277; Banking Studies, supra, 260-265.

In Graves v. New York ex rel. O'Keefe, 306 U.S., at 483, 59 S.Ct. at 600, Mr. Justice Stone wrote for the Court:

'(T)he implied immunity of one government and its agencies form taxation by the other should, as a principle of constitutional construction, 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 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., State of Alabama v. King & Boozer, 314 U.S. 1, 62 S.Ct. 43, 86 L.Ed. 3 (1941), but that a national bank, a private profit-making corporation, is constitutionally immune from state taxation.

The Court holds that 12 U.S.C. § 548, ante, at 341, n. 3, 'was intended to prescribe the only ways in which the States can tax national banks.' Ante, at 343. I would be less than candid not to acknowledge that that holding has the virtue of being supported by substantial precedent. But that seems to me to be its only virtue. That interpretation of § 548 has its judicial origin in the Owensboro case. Given the constitutional premise of Owensboro, that interpretation would be quite clearly correct. But since I reject the constitutional premise so far as national banks today are concerned, it seems to me § 548 ought to be examined freshly, for the 'immunity formerly said to rest on constitutional implication (should not) * * * now be resurrected in the form of statutory implication.' Oklahoma Tax Comm. v. United States, 319 U.S. 598, 604, 63 S.Ct. 1284, 1286, 87 L.Ed. 1612 (1943).

Section 548 expressly mentions four specified types of taxes: those on national bank shares, on dividends on shares in the hands of stockholders, on the income of the bank, and taxes 'according to or measured by' a bank's income. It provides that the imposition of any one of the four listed taxes 'shall be in lieu of the others.' That statement, together with language of the section omitted in the Court's note as not pertinent (ante, at 341-342, n. 3), ^[10] makes clear that the purpose of the section was to insure the competitive equality of the banks with other businesses by preventing the bank or its shareholders from being subjected to more than one of the four enumerated types of taxes, other than real property taxes, so as to prevent multiple taxation of the same income, unless the States taxed the income of other businesses in similar multiple fashion. See 12 U.S.C. § 548, subsections 1(b), (c), and (d), supra, n. 10. All that the majority can point to in the legislative history of § 548 is that the Congress was well aware of M'Culloch v. Maryland. And that decision specifically stated the following:

'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 proerty of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State.' (4 Wheat., at 436.)

I view § 548 as congressional delineation of those areas of state taxation of national banks permitted by the M'Culloch decision itself. I would hold that the section was 'merely designed to insure that the inherent taxing powers which were recognized in' that case-'e.g., the power to tax the real property of the banks as well as the privately owned shares-be exercised in a nondiscriminatory fashion.' Liberty Nat. Bank v. Buscaglia, 21 N.Y.2d 357, 370, 288 N.Y.S.2d 33, 43, 235 N.E.2d 101, 108 (1967). As this Court said in Tradesmens Nat. Bank of Oklahoma City v. Oklahoma Tax Comm., 309 U.S. 560, 567, 60 S.Ct. 688, 692, 84 L.Ed. 947 (1940), 'the various restrictions (§ 548) * * * places on the permitted methods of taxation are designed to prohibit only those systems of state taxation which discriminate in practical operation against national banking associations or their shareholders as a class.'

Moreover, whatever else may be said of the statute, it most assuredly does not provide specifically that it is the sole measure of the State's power of taxation. One could argue that, given the state of constitutional law as it then existed, Congress saw no need to say specifically in § 548 that national banks were immune from state taxation except as that section permitted. Aside from the misreading of M'Culloch that such a view entails, the constitutional immunity of federal instrumentalities was just as plain when Congress provided statutory immunity for such agencies as, e.g., the Federal Reserve banks, 38 Stat. 258 (1913), 12 U.S.C. § 531; Federal land banks, 39 Stat. 380 (1916), 12 U.S.C. § 931; many other federal banking institutions; ^[11] the Reconstruction Finance Corporation, 47 Stat. 9 (1932), 15 U.S.C. § 607; and the Public Housing Administration, 50 Stat. 890 (1937), 42 U.S.C. § 1405(e), and a host of government-owned corporations. ^[12]

It is not without relevance in construing § 548, it seems to me, that the kinds of state taxes here involved did not exist at the time the section was adopted and were not a significant factor in the raising of state revenue until the early 1930's, subsequent to the last amendment of § 548 in 1926. See generally H.R.Rep. No. 565, 89th Cong., 1st Sess., 608 (1965). I think we should be reluctant to interpret a statute having such narrow scope as § 548 as encompassing such a broad prohibitory application. It seems to me that we would do far better to recognize that the Constitution does not prohibit nondiscriminatory state taxation of national banks, and that § 548 limits only the kinds of taxes specifically set forth therein. Only in that way is Congress free to re-evaluate the situation. That is, so far as construing § 548 is concerned, in practical effect the issue is who shall bear the burden of seeking congressional action. I would put the burden where it ought to be, namely, on the private profit-making corporation that seeks exemption from nondiscriminatory state taxation.

Finally, a major national banking policy has been to foster competitive equality of national and state banks. See, e.g., First Nat. Bank of Logan, Utah v. Walker Bank, 385 U.S. 252, 87 S.Ct. 492, 17 L.Ed.2d 343 (1966); Lewis v. Fidelity & Deposit Co., 292 U.S. 559, 54 S.Ct. 848, 78 L.Ed. 1425 (1934). We ought, if other considerations are not decisive, to promote rather than retard that strong policy.

For the reasons stated, I would affirm.

Mr. Justice HARLAN: In addition to the reasons given in my Brother MARSHALL's opinion, which I have joined, I would affirm the judgment below on the basis of that part of Justice Reardon's opinion for the Supreme Judicial Court of Massachusetts which upheld the application of Massachusetts' use tax to national banks. See Mass., 229 N.E.2d 245, 251-260.

Notes

1. The reductio ad absurdum in the text is, unlike most, somewhat accurate. One item upon which, appellant informed its supplier, it should not have to pay the sales tax was a wastebasket (as will as, e.g., '1 Box 5X 7 Index Cards'). The record does not reveal the extent of appellant's liability for use taxes; appellant paid a total of $575.66 in sales taxes for the three months of the year 1966 that are specifically at issue here.
2. Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 412-413, 52 S.Ct. 443, 449-450, 76 L.Ed. 815 (1932) (dissenting opinion), quoting from Passenger Cases, 7 How. 283, 470, 12 L.Ed. 702 (1849) (Taney, C.J.).
3. Graves v. People of State of New York ex rel. O'Keefe, 306 U.S. 466, 489, 490, 59 S.Ct. 595, 603, 83 L.Ed. 927 (1939) (concurring opinion), quoting from Panhandle Oil Co. v. State of Mississippi ex rel. Knox, 277 U.S. 218, 223, 48 S.Ct. 451, 453, 72 L.Ed.2d 857 (1928) (dissenting opinion).
4. Owensboro might also be viewed simply as prohibiting a franchise tax, i.e., as holding that a State may not condition the privilege to operate within its borders granted to the bank by Congress, by exacting that kind of tax. (Such a tax is permissible under 12 U.S.C. § 548, as amended after Owensboro see Tradesmens Nat. Bank of Oklahoma v. Oklahoma Tax Comm., 309 U.S. 560, 60 S.Ct. 688, 84 L.Ed. 947 (1940).) The taxes in M'Culloch and Osborn, apart from their discriminatory aspects, might be similarly viewed: the Maryland tax was directly upon the bank's operations, and alternatively upon its privilege to operate within the State; the Ohio tax in Osborn was also a condition upon the bank's privilege to transact business there. While the language and holdings of later cases go well beyond that limited view, that view would seem preferable to me to interpreting those constitutional decisions as flatly prohibiting all forms of state taxation, aside from exceptions listed in M'Culloch, 4 Wheat., at 436 (see infra, at 361).
5. Act of February 25, 1863, 12 Stat. 665 ('An Act to provide a national Currency * * *.'); Act of June 3, 1864, 13 Stat. 99 ('An Act to provide a National Currency * * *.').
6. See n. 5, supra; see also revenue acts, Act of March 3, 1865, §§ 6, 7, 13 Stat. 484; Act of July 13, 1866, § 9, 14 Stat. 146.
7. 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, supra, at 24-25.
8. Accord, Indian Motorcycle Co. v. United States, 283 U.S. 570, 580, 51 S.Ct. 601, 604, 75 L.Ed. 1277 (1931) (Stone, J., dissenting).
9. 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 F.2d 624, 627 (C.A.9th Cir. 1942) (footnote omitted):
10. The relevant omitted portions of § 548 read:
11. E.g., federal intermediate credit banks, 12 U.S.C. § 1111; Federal Home Loan Bank, 12 U.S.C. § 1433; federal savings and loan associations, 12 U.S.C. § 1464(h).
12. E.g., Federal Deposit Insurance Corp., 12 U.S.C. § 1825. See Government Corporation Control Act of 1945, 59 Stat. 597, as amended, 31 U.S.C. § 841 et seq.