Society for Savings v. Coite
ERROR to the Supreme Court of Connecticut; the case being thus:
The legislature of Connecticut, in 1863, enacted that the several savings banks in the State should make annual return to the comptroller of public accounts, of the total amounts of all deposits' in them respectively, on the first day of July in each successive year; and that each should annually pay to the treasurer of the State, 'a sum equal to three-fourths of one per cent. on the total amount of deposits in such savings bank, on the days aforesaid. The statute declared that this tax should be in lieu of all other taxes upon savings banks or their deposit.
With this statute in existence, the 'Society for Savings'-one of the savings banks of Connecticut, and as such empowered by its charter to receive deposits of money, and improve them for the benefit of its depositors, but having no capital stock or stockholders-had on the 1st July, 1863, $500,161 of its deposits invested in securities of the United States, which, by the act of Congress authorizing their issue, were declared to be exempt from taxation by State authority, 'whether held by individuals, corporations, or associations.'  Upon the amount of their deposits thus invested, the society refused to pay the sum equal to the prescribed percentage.
On a suit brought by Coite, treasurer of the State, for the purpose of recovering the tax thus withheld, the Supreme Court of Connecticut decided that the tax in question was not a tax on property, but on the corporation as such, and rendered judgment accordingly for the plaintiff. 
The correctness of the judgment was the point now here on error.
Mr. Chamberlin, for the plaintiff in error:
The question is, whether the statute of Connecticut, as sought to be enforced by the State treasurer, imposed a tax upon securities of the United States? If so, it is confessedly illegal.
The language lays a tax based upon property. It is even more directly upon the 'property,' than the statute of New York which received construction in the Bank Tax Case.'  That provided for a tax upon a valuation equal to the amount of capital stock,' &c.; this for a tax on the total amount of deposits, &c. The first is on a valuation equal to the amount; the second on the amount, &c. That case goes far to conclude this. In that case the court says, that in making up a tax under the law, 'the commissioners need only look into the condition of the bank in order to ascertain the amount of the capital stock paid in or secured to be paid in, and this sum in the aggregate will constitute the basis,' &c. The New York legislature probably meant to impose a tax which should be construed as a tax upon franchise and privilege irrespective of property; but the court inquire, what is the basis of the tax? In New York the basis is found to be the amount of 'capital paid in or secured,' &c.; in Connecticut it is equally clear that 'the amount of deposits' is the basis. Deposits for all the purposes of this case sustain the same relation to this institution which capital sustains to a bank. Each represents money received by the corporation to be managed for the benefit of the owners; each is properly classe among the liabilities of the corporation; each constitutes the principal fund from which investments are made, and the difference consists in the fact that 'capital' remains with the corporation, while deposits in this institution may be withdrawn.
Where is the difference between a tax upon property, and a tax upon a person measured by the amount of his property? In either case the property is the foundation and moving cause of the tax. If a person has no property he has no tax. If he has small or large possessions his tax is small or large in proportion. Suppose a person should invest the sum of $1000 in United States securities, and the legislature of the State should say to him in the form of a law, 'Inasmuch as we cannot tax you for the money lent to the general government, you as an individual shall pay a sum equal to the tax on $1000, vested in taxable securities.' Would such a law be valid? Certainly not. But why not? The law does not tax the sum lent; it imposes the tax upon the individual. But the intent is too obvious. It is in form a tax upon the individual, but in substance a tax upon the sum lent. And so in the case under consideration. It is the duty of courts to look through the shadow to the reality. 
The tax, if not upon property as such, is measured by the extent of the property-the amount of the deposits being the measure. A tax upon 'faculty' or 'franchise,' estimating its value by the money it has secured, is the same thing in substance as taxing the money secured; and a tax upon the money secured-or with reference to it as a basis-is substantially the same thing as a tax upon the securities for which it has been exchanged. Such a tax cannot be laid while a portion of the property, the amount of which is so adopted 'as the standard of taxable liability,' is so invested as, under the protecting power of a higher authority, to be exempt. The privilege of exemption from taxation of so much property as may have been lent to the United States, ought not to depend upon the mode of estimating the property of an individual or a corporation.
A tax unpaid upon a franchise of a corporation, the power and authority of which is limited to holding, managing and investing money entirely for the benefit of depositors, and which has no corporate property distinct from that which they so hold in special trust, which has no stockholders or members interested in its profits or who can receive dividends from its earnings, necessarily operates as an assessment on the property of those for whose use the franchise is exercised. The parties for whose use the franchise is exercised being distinct from the corporation and sustaining no other than a property relation to the corporation-it becomes in its essence and operation a direct tax upon 'property,' the burden falling and resting directly and only there.
Let each individual and corporation throughout the State be required to state the amount of the cost of the personal property owned by him on the first day of January in each year, and pay three-fourths of one per cent. on such amount, and you get a tax quite similar to the one in question.
Messrs. Hubbard and McFarlane, contra:
1. That a State legislature may impose taxes on the exercise of a franchise created by itself.
2. That it may measure the tax by the measure of exercise.
3. That it may measure the exercise by an arbitrary standard, as a fixed sum, or by a more equitable standard, as the amount of money received in the exercise of the franchise, or even by the value on an appraisal of the earnings or property (including Federal stocks) owned by the possessor of the franchise.
Now the statute in this case does not impose a tax on the property of the Savings Bank, but on the corporation as such; in other words, it imposes a tax or excise on the privilege or franchise of the corporation.
The standard fixed b the statute disregards all reference to actual assets, modes of investment, accumulations, losses, profits, or valuations. If the bank have earned by use or investment of its deposits a surplus, no matter how large, above the amount of its deposits, this surplus is not taxable. Its taxes do not increase. On the other hand, if such investment has been wholly lost or destroyed, the taxes would not be diminished. Thus it is seen that the law has no reference to a valuation of assets, but to the fixed arithmetical standard of 'the total amount of all deposits.' Now to say that the corporation is entitled to a reduction of taxes because some of its assets happen for the time being to be non-taxable, and that it is not entitled to a reduction when a portion of these assets become worthless or non-existing, is absurd.
The phraseology of the act is consistent with this view. The requirement is not that the banks shall pay a tax of one-half of one per cent. on their deposits, but 'a sum equal to one-half of one per cent. on the total amount of deposits in such institution.'
A tax of a similar character to this is imposed by a Connecticut statute of 1862, on agents of foreign insurance companies, who are required to pay to the treasurer of the State two per cent. on the gross amount of premiums and assessments annually received by them. What is this tax? Obviously an excise tax on a foreign corporation, through its agent, for the privilege of doing business. What is the extent of the tax? Precisely in proportion to the business done. Would it make any difference with the amount of the tax that the foreign corporation, or the agent, had invested the year's premiums and assessments in Federal securities? Clearly not! So in the case at bar, the tax is not imposed on the property of the savings bank, but on the corporation. The extent of the tax is measured in each year by the amount of its business, the extent to which it exercises its franchise, or in other words, by 'the total amount of its deposits.'
The case of Portland Bank v. Apthorp,  which arose in the State of Massachusetts, in 1815, is akin to this. The Constitution of Massachusetts provides that the legislature 'may impose and levy proportionate and reasonable assessments, rates, and taxes upon all the inhabitants of, and estates lying within, the commonwealth; and also to impose and levy reasonable duties and excises.' With this provision in force, the State, in 1812, enacted that all its banks should pay, at times stated by the commonwealth, a tax of one-half of one per cent. on the amount of the original stock of said banks respectively actually paid in. The validity of the statute was called in question, as being repugnant to the constitutional provision for the taxation of property. The court held that the assessment was not a tax on the stock, but an excise duty on the franchise of the corporation, and as such warranted by the constitutional provision in respect to excise taxes.
But the recent case of The Commonwealth v. Five Cents Saving Bank  is in every respect parallel. That case was thus: Massachusetts, in 1862, enacted:
'That every savings bank incorporated under the laws of this commonwealth, shall pay [at times specified by the statute] to the treasurer of the commonwealth, a tax on account of its depositors, of one-half of one per cent. per annum on the amount of its deposits, to be assessed, one-half of said annual tax on the average amount of its deposits for the six months preceding the first day of May, and the other on the average amount of its deposits for the six months preceding the first day of November.'
Payment of the tax under this statute was resisted on the same ground as it was resisted on in the former case. The court sustained the validity of the law for the same reasons as before. It says:
'It appears to us that the assessment imposed by the provisions of the statute under consideration, must be regarded as an excs e or duty on the privilege or franchise of the corporation, and not as a direct tax on money in its hands belonging to depositors. . . .. In the next place, the manner in which the amount of the assessment is to be ascertained clearly indicates that the tax is designed to be a corporate charge. It is not a tax levied on each deposit at a certain rate in proportion to its amount, but it is assessed on the amount of all the deposits in the bank, ascertained and fixed by the average sums which it has had in its hands during the six months preceding a specific day. It is the extent to which the corporation has exercised the franchise conferred on it by law, of receiving deposits during a certain period, that is made the basis on which to estimate the sum which is to be paid for the enjoyment of the privilege.'
But more than all, these views have been declared anew in that same State in Commonwealth v. Provident Institution for Savings,  a case involving the issue now at bar.
The Bank Tax Case, so much relied on, has no application. There, this court had decided that an act of New York, passed in 1857, and laying a tax, did not include the Federal securities held by banks. Subsequently (A.D. 1863), the same State passed an act providing in terms for 'a valuation.' The law directed the mode of valuation. It was to be composed of two things. 1. The capital originally contributed. 2. The surplus on hand earned by that capital. In other words, the bank was not allowed to show that its capital was impaired. Accordingly this court, under the special circumstances of the case, on a question of construction of the act of 1863, in comparison with the act of 1857, and with full knowledge that the former act was passed for the purpose of avoiding the decision of this court, held that the act in question was intended to impose a tax on property, by a new and specified mode of valuation.
1. When, under the authority given by the Federal Constitution to 'borrow money on the credit of the United States,' Congress puts that credit into the market, and by express enactment, as part of the contract of borrowing, declares that the securities held by 'corporations' shall be exempt from taxation by or under State authority; it exempts from taxation by or under that authority, the franchise or privilege which such corporations had of lending to the United States, upon the faith of such contract, and of the securities so to be issued. The power to tax the franchise or privilege of lending or investing in a given case, retards, impedes, and burdens the power to borrow in that case. The position of the other side is, that the States may tax against corporations existing under and in pursuance of their laws and enjoying their protection, the privilege or franchise of lending money to the United States. If 'the power to tax implies the power to destroy,' is not this holding that the States may prohibit all persons, natural and artificial, existing under and enjoying the protection of their laws, from lending to the United States?
Suppose the tax in this case be not nominally a tax upon property if it be a tax upon the power to lend, without the exercise of which the United States can not borrow-is it not necessarily a tax or burden upon 'the power to borrow?' Does it not come within the inhibition stated by this court in Weston v. Charleston:  'the right to tax the contract to any extent when made, must operate upon the power to borrow before it is exercised, and have a sensible influence upon the contract.' Is not the contract made by Congress, that this plaintiff (a 'corporation') shall not be taxed on account of these securities, violated, if the amount it has invested in them is included in the 'measure of taxable liability?' Do not the opposite counsel then assume too much in assuming that over a tax imposed on a franchise, however the quantum of the tax may be measured, limited, or ascertained, this court has no control.
We say that whatever be the source from which the power to lend to the United States is derived, it is alike under the protection of the paramount authority of the borrower, and is beyond the power of State nullification, either legislative or judicial.
2. Most if not all the positions set up and advocated by the defendant in error, were discussed on behalf of the Tax Commissioners, in The Bank Tax Case.  It was then argued that the tax was not on the property of the bank, but on the corporation specifically. That the corporation was created by the State and ought to pay for the valuable franchise which it enjoyed. That the purpose of the act was to compel payment therefor. That the reference in the statute to 'a valuation equal to the amount of their capital stock,' &c., was only for the purpose of fixing the amount the corporation ought annually to pay for their franchise. That it had no regard to the actual capital owned by the bank, or to the securities, or to the value of the securities held by it. That the corporations being created by the State, and dependent upon the State for continued existence, could properly be compelled to aid in bearing the State burdens, as the price of their existence. But the court declared that the positions were not true.
3. The cases cited from the State courts of Massachusetts are not authority here. The case most relied on, the last of the three cited, is now here on error. 
Mr. Justice CLIFFORD delivered the opinion of the court.
^1 12 Stat. at Large, 346.
^2 Coite v. Savings Bank, 32 Connecticut, 173.
^3 2 Wallace, 207.
^4 Brown v. Maryland, 12 Wheaton, 419.
^5 12 Massachusetts, 252.
^6 5 Allen, 431.
^7 12 Allen, 313.
^8 2 Peters, 468-9.
^9 See 2d Wallace, 201, where the argument is given.
^10 The reader desiring to see further argument on both sides of this question, can refer to the arguments in the next case, pp. 613-620.