279 U.S. 620 (1929), 578, Macallan Co. v. Massachusetts

Docket Nº:No. 578
Citation:279 U.S. 620, 49 S.Ct. 432, 73 L.Ed. 874
Party Name:Macallan Co. v. Massachusetts
Case Date:May 27, 1929
Court:United States Supreme Court
 
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Page 620

279 U.S. 620 (1929)

49 S.Ct. 432, 73 L.Ed. 874

Macallan Co.

v.

Massachusetts

No. 578

United States Supreme Court

May 27, 1929

Argued April 25, 1929

APPEAL FROM THE SUPREME JUDICIAL

COURT OF MASSACHUSETTS

Syllabus

1. A state tax on federal securities, or on the interest therefrom, is invalid, regardless of the amount of the tax. P. 624.

2. In determining whether a tax is an excise on the privilege of doing business as a corporation, or is in reality a tax on income from tax-exempt securities, this Court must inquire independently, and is not bound by the designation of the tax in the taxing act or the opinion of the state court as to its nature. P. 625.

3. In the decisions of this Court holding that a tax lawfully imposed on the exercise of corporate privileges within the taxing power may be measured by income from the property of the corporation, although a part of such income is derived from nontaxable property, it is implicit that the thing taxed in form was in fact and reality the subject aimed at, and that any burden put upon the nontaxable subject by its use as a measure of value was fortuitous and incidental. P. 627.

4. The fact that a tax ostensibly laid upon a taxable subject is to be measured by the value of a nontaxable subject at once suggests the probability that it was the latter, rather than the former, that the lawmaker sought to reach. If inquiry discloses persuasive grounds for the conclusion that such is the real purpose and effect of the legislation, the tax cannot be upheld. P. 628.

Page 621

5. A state cannot tax the bonds of the United States, or the income therefrom, directly or indirectly, in any form. Words which, literally considered, import a tax on something else -- e.g., a tax upon the privilege of doing corporate business measured in part upon the amount of nontaxable interest received -- may nevertheless be adjudged to lay a tax upon the interest if that purpose be fairly inferable from a consideration of the history, the surrounding circumstances, or the statute itself, considered in all its parts. P. 629.

6. A liberal application of the foregoing principles is essential to the preservation of the constitutional limitations imposed upon the taxing power of the states. P. 631.

7. The Massachusetts Legislature, having provided for a tax on corporations measured in part by net income, but exempting from consideration as part of the measure all interest upon nontaxable securities, passed an amendment, presumably based on a report of a special committee, which had the effect of repealing this exemption and of thereby imposing a burden on the securities from which, by express language, they had theretofore been free. Held, upon a consideration of the legislation and the contents of the report, that the purpose of the change was to tax the income of the securities. P. 631.

8. Assuming that the states are authorized by Act of Congress to tax income of national banks derived from United States bonds, this would not justify imposition of like taxes in the case of an ordinary corporation. P. 633.

9. A state tax on the income of United States bonds held by an ordinary corporation cannot be upheld upon the ground that it was necessary in order to avoid discriminating against national banks contrary to Acts of Congress. P. 634.

10. State taxation of the income of county and municipal bonds which were exempt by statutory contract of the state held invalid under the contract clause of the Federal Constitution. P. 634.

264 Mass. 396 reversed.

Appeal from a judgment of the Supreme Judicial Court dismissing a petition for abatement of a tax.

Page 622

SUTHERLAND, J., lead opinion

MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

A statute of Massachusetts, G.L. c. 63, § 32, as amended by St.1923, c. 424, § 1, provides:

Except as otherwise provided in sections thirty-four and thirty-four A, every domestic business corporation shall pay annually, with respect to the carrying on or doing of business by it, an excise equal to the sum of the following, provided that every such corporation shall pay annually a total excise not less in amount than one twentieth of one percent of the fair cash value of all the shares constituting its capital stock on the first day of April when the return called for by section thirty-five is due:

(1) An amount equal to five dollars per thousand upon the value of its corporate excess.

(2) An amount equal to two and one half percent of that part of its net income, as defined in this chapter, which is derived from business carried on within the commonwealth.

By G.L. c. 63, § 30, par. 5, as amended by St.1925, c. 343, § 1A, "net income" is defined:

"Net income," except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal Revenue Act applicable for the period, adding thereto any net losses as defined in said federal revenue act that have been deducted, and all interest and dividends not so required to be returned as net income except dividends on shares of stock of corporations organized [49 S.Ct. 433] under the laws of the commonwealth and dividends in liquidation paid from capital.

Page 623

Before this amendment, the definition embodied in G.L. c. 63, § 30, par. 5, as amended, shortly before the passage of the last-quoted amendment, by Stat. 1925, c. 265, § 1, provided:

"Net income," except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal revenue act applicable to the period, adding thereto any net losses as defined by said federal revenue act that have been deducted, and, in the case of a domestic business corporation, such interest and dividends, not so required to be returned as net income, as would be taxable if received by an inhabitant of this commonwealth; less, both in the case of a domestic business corporation and of a foreign corporation, interest, so required to be returned, which is received upon bonds, notes and certificates of indebtedness of the United States.

Thus, under the original definition of net income, there was expressly excluded from the net income taxable at 2 1/2 percent all interest received upon bonds, notes, and certificates of indebtedness of the United States. And the definition had the effect of excluding, in the same respect, interest on state, county, and municipal bonds.

Appellant, a business corporation organized under the laws of Massachusetts, owned a large number of United States Liberty bonds and Federal Farm Loan bonds. The Liberty bonds, by statute of the United States are, expressly made exempt from all taxation imposed by any state except estate or inheritance taxes. C. 56, 40 Stat. 288, 291, § 7. Federal Farm Loan bonds are issued under authority of c. 245, 39 Stat. 360, and by § 26, p. 380, declared to be instrumentalities of the United States and both as to principal and income exempt from all state taxation.

Page 624

The corporation also owned a large number of bonds of Massachusetts counties and municipalities which, when issued and acquired by the corporation, were exempt from taxation by the terms of a state statute. G.L. c. 59, § 5, par. 25. Of course, in respect of United States securities, the statutory exemption is superfluous. A state tax, however small, upon such securities or interest derived therefrom interferes or tends to interfere with the constitutional power of the general government to borrow money on the credit of the United States, and constitutes a burden upon the operations of government and, carried far enough, would prove destructive. The principle set forth a century ago in Weston v. Charleston, 2 Pet. 449, 468, has never since been departed from by this Court:

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 on the contract. The extent of this influence depends on the will of a distinct government to any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely.

Home Savings Bank v. Des Moines, 205 U.S. 503, 513.

The taxing authorities of the state assessed against appellant, for the year 1926, a tax under the provisions of the then existing statute as first above quoted, adding, for the purpose of computing the assessment, to the amount of the net income of appellant as determined by the federal income tax returns of appellant, all sums of interest received by...

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