Southern Building & Loan Ass'n v. Norman

• Citation: 32 S.W. 952,98 Ky. 294
• Parties: SOUTHERN BUILDING & LOAN ASS'N OF KNOXVILLE, TENN., v. NORMAN, Auditor.
• Decision Date: 20 November 1895
• Court: Court of Appeals of Kentucky

32 S.W. 952

98 Ky. 294

SOUTHERN BUILDING & LOAN ASS'N OF KNOXVILLE, TENN., v. NORMAN, Auditor.

Court of Appeals of Kentucky.

November 20, 1895

Appeal from circuit court, Franklin county.

"To be officially reported."

Action by the Southern Building & Loan Association of Knoxville Tenn., against L. C. Norman, auditor. From a judgment dismissing the petition, plaintiff appeals. Affirmed.

W. G Bullitt and Knott & Edelen, for appellant.

W. J Hendrick, for appellee.

HAZELRIGG J.

This appeal involves the constitutionality of the statute requiring every foreign building and loan association doing business in the state to pay into the treasury annually $2 on every $100 of its annual gross receipts. St. Ky. § 4228. The law is assailed as being (1) in violation of section 174 of the state constitution; (2) as impairing the obligation of contracts in existence when the law became operative; (3) as an unwarrantable interference with the freedom of commerce between the states; and (4) as denying to the association the equal protection of the laws. It is apparent that a brief inquiry into the nature of the business done by the association is pertinent to a proper understanding of each of these contentions, and especially in so far as the business is supposed to be affected with an interstate character. We say "brief inquiry," because the general characteristics of these associations are alike, and in recent years have become well known. The appellant's principal office is at Knoxville, Tenn. Its course of business is this: Each subscribing member contracts to contribute each month a stated sum, which the company agrees to invest on bond and mortgage; collecting the interest monthly, and reinvesting at frequent intervals the entire moneys received from all sources for the benefit of the stockholders, share and share alike. These contributions are made at the rate of 60 cents per month on each share of stock subscribed, until the time when such installments and their accumulations should amount to the sum of $100 for each share. This period is approximately seven years. Prior to the 11th of November, 1892, when the law in question became operative, none of the stock had matured, though the appellant had been doing business in the state and had made numerous contracts. From the date named until June 1, 1893 the gross receipts of the association were $93,057.60, but how much of this was old and how much was new business does not appear.

1. Is the statute in conflict with section 174 of the state constitution? The section reads as follows: "All property, whether owned by natural persons or corporations shall be taxed in proportion to its value, unless exempted by this constitution: and all corporate property shall pay the same rate of taxation paid by individual property. Nothing in this constitution shall be construed to prevent the general assembly from providing for taxation based on income, licenses or franchises." In this connection it is pertinent to read a portion of section 181 of the same instrument: "The general assembly may by general laws only, provide for the payment of license fees on franchises, stock used for breeding purposes, the various trades, occupations and professions, or a special or excise tax." It is said that the imposition of the levy of 2 per cent. on the gross receipts of the association is not in the nature of a license tax, because, as those terms imply, such a tax is enforced to obtain a license to do business in the future, and cannot, in the nature of things, be an exaction on past business. A license, it is said, is a permission, and the payment of a license tax proper is required as a condition precedent to doing a business otherwise prohibited. It is not an income tax, because the company has no property out of which an income may arise; and it is not a franchise tax, it is said, because the state has granted no franchise, that being a grant of another sovereignty. The conclusion is reached, therefore, that the statute imposes a tax on the business of the association. As this business in this state consists solely in selling shares of stock to Kentucky members, it is manifest the company can have no gross receipts, except from payments made by its Kentucky subscribers. These subscribers, under section 4093, St. Ky. are required to pay taxes on their shares of building and loan association stock as on other individual personal property. Therefore, say counsel, undisguised double taxation, and hence taxation not in proportion to its value, is imposed, not, as sometimes unavoidably happens, on the same property in the hands of different owners, but double taxation of the same property in the hands of the same owners, because the association is a purely mutual one, and the assets belong exclusively to the shareholders. The fallacy of the argument, it seems to us, lies in the assumption that this statute imposes a tax on property at all. Certainly it is not an ad valorem tax. The associations of the kind described generally have no tangible property within the state, and we do not regard the purpose of the statute to be to force an artificial situs on the obligations due the association from its members for stock, dues, etc. Indeed, those contracts cannot be said to have any certain value. The members owe the contracts of subscription, it is true, but upon notice these may retire from membership, and withdraw the value of their payments, subject to conditions not necessary to notice. The business nevertheless is a valuable one, and it is for the privilege of doing this business that the tax is imposed. It is not a tax on the corporate franchise, for the conclusive reason that the state does not grant this, but it is a tax on the franchise of doing business in this state, and in this sense a franchise tax. It is true, the amount of the gross receipts of the company are taken as the measurement of the tax, but this is only the adoption of a fair and just standard. Such taxes may be measured by dividends, by the amount of the capital stock, by the extent of the business transacted, by the net earnings, by the gross receipts, etc. In the earlier cases a tax upon the gross receipts of a railroad was held not to be a direct tax on the property, but a tax upon the franchise of the corporation, measured by the extent of its business. State Tax on Railway Gross Receipts, 15 Wall. 284. But subsequently the same court, in Fargo v. State, 121 U.S. 230, 7 S.Ct. 857, and Philadelphia & S. S. S. Co. v. Pennsylvania, 122 U.S. 326, 7 S.Ct. 1118, modified or rather denied the right of the state to thus tax an interstate agency under such a guise. With this feature of the taxing power, however, we have nothing to do here. To the extent that such a claim is urged by counsel, we shall notice it presently. ...