Applicability of Doctrine to Federal Securities.

The first significant extension of the doctrine of the immunity of federal instrumentalities from state taxation came in Weston v. Charleston,111 where Chief Justice Marshall also found in the Supremacy Clause a bar to state taxation of obligations of the United States. During the Civil War, when Congress authorized the issuance of legal tender notes, it explicitly declared that such notes, as well as United States bonds and other securities, should be exempt from state taxation.112 A modified version of this section remains on the statute books today.113 The right of Congress to exempt legal tender notes to the same extent as bonds was sustained in Bank v. Supervisors,114 over the objection that such notes circulate as money and should be taxable in the same way as coin. But a state tax on checks issued by the Treasurer of the United States for interest accrued upon government bonds was sustained since it did not in any way affect the credit of the National Government.115 Similarly, the assessment for an ad valorem property tax of an open account for money due under a federal contract,116 and the inclusion of the value of United States bonds owed by a decedent, in measuring an inheritance tax,117 were held valid, since neither tax would substantially embarrass the power of the United States to secure credit.118 A state property tax levied on mutual savings banks and federal savings and loan associations and measured by the amount of their capital, surplus, or reserve and undivided profits, but without deduction of the value of their United States securities, was voided as a tax on obligations of the Federal Government. Apart from the fact that the ownership interest of depositors in such institutions was different from that of corporate stockholders, the tax was imposed on the banks which were solely liable for payment thereof.119

Income from federal securities is also beyond the reach of the state taxing power as the cases now stand.120 Nor can such a tax be imposed indirectly upon the stockholders on such part of the corporate dividends as corresponds to the part of the corporation’s income which is not assessed, i.e., income from tax exempt bonds.121 A state may constitutionally levy an excise tax on corporations for the privilege of doing business, and measure the tax by the property of net income of the corporation, including tax exempt United States securities or the income derived therefrom.122 The designation of a tax is not controlling.123 Where a so-called “license tax” upon insurance companies, measured by gross income, including interest on government bonds, was, in effect, a commutation tax levied in lieu of other taxation upon the personal property of the tax-payer, it was still held to amount to an unconstitutional tax on the bonds themselves.124

Footnotes

111
27 U.S. (2 Pet.) 449 (1829), followed in New York ex rel. Bank of Commerce v. New York City, 67 U.S. (2 Bl.) 620 (1863). [Back to text]
112
Ch. 73, 37th Cong., 3d Sess., 12 Stat. 709, 710 (1863). [Back to text]
113
31 U.S.C. § 3124. The exemption under the statute is no broader than that which the Constitution requires. First Nat’l Bank v. Bartow County Bd. of Tax Assessors, 470 U.S. 583 (1985). The relationship of this statute to another, 12 U.S.C. § 548, governing taxation of shares of national banking associations, has occasioned no little difficulty. American Bank & Trust Co. v. Dallas County, 463 U.S. 855 (1983); Memphis Bank & Trust Co. v. Garner, 459 U.S. 392 (1983). [Back to text]
114
74 U.S. (7 Wall.) 26 (1868). [Back to text]
115
Hibernia Savings Society v. San Francisco, 200 U.S. 310, 315 (1906). [Back to text]
116
Smith v. Davis, 323 U.S. 111 (1944). [Back to text]
117
Plummer v. Coler, 178 U.S. 115 (1900); Blodgett v. Silberman, 277 U.S. 1, 12 (1928). [Back to text]
118
Accord, Rockford Life Ins. Co. v. Illinois Dep’t of Revenue, 482 U.S. 182 (1987) (tax including in an investor’s net assets the value of federally-backed securities (“Ginnie Maes”) upheld, as it would have no adverse effect on Federal Government’s borrowing ability). [Back to text]
119
Society for Savings v. Bowers, 349 U.S. 143 (1955). [Back to text]
120
Northwestern Mut. Life Ins. Co. v. Wisconsin, 275 U.S. 136, 140 (1927). [Back to text]
121
Miller v. Milwaukee, 272 U.S. 713 (1927). [Back to text]
122
Provident Inst. v. Massachusetts, 73 U.S. (6 Wall.) 611 (1868); Society for Savings v. Coite, 73 U.S. (6 Wall.) 594 (1868); Hamilton Company v. Massachusetts, 73 U.S. (6 Wall.) 632 (1868); Home Ins. Co. v. New York, 134 U.S. 594 (1890); Werner Machine Co. v. Director of Taxation, 350 U.S. 492 (1956). [Back to text]
123
Macallen Co. v. Massachusetts, 279 U.S. 620, 625 (1929). [Back to text]
124
Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U.S. 136 (1927). [Back to text]