Anderson v. Farmers' Loan & Trust Co.

• Decision Date: 13 March 1917
• Docket Number: 148.
• Citation: 241 F. 322
• Parties: ANDERSON v. FARMERS' LOAN & TRUST CO.
• Court: U.S. Court of Appeals — Second Circuit

241 F. 322

ANDERSON v. FARMERS' LOAN & TRUST CO.

No. 148.

United States Court of Appeals, Second Circuit.

March 13, 1917

The Farmers' Loan & Trust Company brought an action in the District Court for the Southern District of New York, against the former collector of internal revenue, to recover $4,809.34, the amount of taxes paid under protest. The taxes were imposed under the War Revenue Act, being chapter 331 of the Laws of 1914 (38 Stat. 745-764). Section 3, subdivision 'First' provides:

'Bankers shall pay $1 for each $1,000 of capital used or employed and in estimating capital, surplus and undivided profits shall be included. The amount of such annual tax shall in all cases be computed on the basis of the capital surplus and undivided profits for the preceding fiscal year. Every person firm, or company, and every incorporated or other bank, having a place of business where credits are opened by the deposit or collection of money or currency, subject to be paid or remitted upon draft, check, or order, or where money is advanced or loaned on stocks, bonds bullion, bills of exchange, or promissory notes, or where stocks, bonds, bullion, bills of exchange, or promissory notes are received for discount or sale, shall be a banker under this act. * * *'

The Farmers' Loan & Trust Company is authorized by the laws of New York under which it is chartered to do a banking business as well as a trust company business. While it is one of the principal companies in New York which acts as executor, trustee, guardian and depositary, it also does a very large banking business under the definition of a 'banker' given in the section of the War Revenue Act above quoted. The trial judge directed a verdict for the Farmers' Loan & Trust Company at the trial for the recovery of the tax from the former collector to whom it was paid, and upon the judgment on that verdict a writ of error has been granted.

H. Snowden Marshall, U.S. Atty., of New York City (Gordon Auchincloss, of New York City, of counsel), for plaintiff in error.

Geller, Rolston & Horan, of New York City (Frederick Geller, James F. Horan, and Edward H. Blanc, all of New York City, of counsel), for defendant in error.

Before COXE and WARD, Circuit Judges, and AUGUSTUS N. HAND, District judge.

AUGUSTUS N. HAND, District Judge (after stating the facts as above).

Three principal questions are involved: (1) Was any part of the capital, surplus or undivided profits of the trust company used or employed in banking? (2) If any part was so used or employed, did the Commissioner of Internal Revenue have any proof of the fact before him which could furnish a basis for a lawful tax? (3) If the Commissioner had no such proof, was the tax, even though in fact due, legally collectible? If the first question is answered in the negative, manifestly no tax could have been imposed in any event. The trust company held investments to an amount exceeding the capital, surplus and undivided profits. While these investments changed from time to time, they were held for long periods, and assets of the amount indicated may fairly be said to have been regularly invested. In 1906 the trust company for the first time opened a so-called 'capital investment account,' to which bonds and mortgages were debited to an amount exceeding the capital, surplus and undivided profits. These mortgages appear to have been carried from the securities account and entered in this capital account in pencil.

We do not think that the possession of securities of a value exceeding the capital, surplus, and undivided profits is proof that no part of the capital, surplus, and undivided profits is used or employed in banking. Deposits are not the property of the depositors, but of the trust company. The relation of a bank and its depositors is that of debtor and creditor, so that the deposits and the investments are all equally assets of the bank. The claims of depositors are liabilities of the bank. The capital, surplus, and undivided profits are simply what may be left after the satisfaction of the liabilities to depositors and other creditors. The creditors may be paid out of any portion of the assets of the company, and the capital, surplus, and undivided profits represent a residue which, like the claims of creditors, may be made good out of any of the securities, cash, bills of exchange, promissory notes, or other resources of the bank, including its real estate. No segregation took place, and the attempted segregation was an artificial transaction that in our opinion had no reality. The statute upon any other theory becomes futile and meaningless, and enables any bank holding investments equivalent in value to its capital, surplus and undivided profits exempt from any franchise tax under the War Revenue Act.

Judge Wallace, writing for this court in the case of Leather Manufacturers' National Bank v. Treat, 128 F. 262, 62 C.C.A. 644, said that undivided profits were taxable as part of the surplus employed in the banking business under the provisions of the War Revenue Act of 1898 (Act June 13, 1898, c. 448, 30 Stat. 448), which taxed capital and surplus employed in banking, and remarked that:

'The argument for the plaintiff in error, if carried to its logical conclusion, would enable a banking corporation to escape the tax at its volition, merely by refraining from making any distinct appropriation of the undivided profits. The tax reaches whatever has become substantially a part of the capital of the corporation, without regard to bookkeeping. Upon the facts set forth in the complaint, there is nothing to distinguish the undivided profits in controversy from the fund which many banking associations carry for years under that name, and which, though not technically surplus or theoretically capital, are actually a part of the capital of the bank. There is nothing in the circumstance that they were considered by the bank as a fund applicable to extra dividends, and to unexpected losses, and to depreciation of assets, to distinguish such accumulations from the technical surplus fund of the bank.'

Judge Lacombe, upon the trial of the cases of Central Trust Company v. Treat (C.C.) 171 F. 301, and Farmers' Loan & Trust Company v. Treat (C.C.) 171 F. 302, distinguished these cases from the case of Leather Manufacturers' Bank v. Treat, supra, by saying that in that case the company--

'was a bank engaged solely in a banking business, and presumably all the property that it had was employed in such business. But in the case at bar the plaintiff is not a bank or banker, and, although it does some of the things enumerated in the section as indicative of such business, its principal business seems to be distinctively that of a trust company. It will be observed that the 'capital and surplus,' which is subjected to the tax, is that which is used or employed by the banker; i.e., in the banking business. The evidence shows that the entire amount of these undivided profits before, during, and at the end of the fiscal year were invested in municipal and railway bonds and in the stocks of corporations, and were not in any sense employed in the business of banking, although the ownership of this large amount of securities available to make good losses in any of the enterprises which the corporation was conducting naturally increased its credit generally.'

Thus Judge Lacombe seems to have based his decision primarily on the ground that the Farmers' Loan & Trust Company's 'principal business was distinctively that of a trust company,' and upon a finding of fact that the capital and surplus were 'invested in municipal and railway bonds and in the stocks of corporations, and were not in any sense employed in the business of banking. ' This finding was based upon an affidavit of the president of the trust company in which it was stated at folio 200 of the record on appeal to this court that:

'The entire capital and undivided profits of the said the Farmers' Loan & Trust Company are invested in real estate, bonds of the government of the United States and of the city of New York, state of New York.'

Upon this record the judge writing the opinion of this court said that:

'The agreed statements show that the capital and surplus of both companies are permanently invested in stocks and bonds. ' Treat v. Farmers' Loan & Trust Co., 185 F. 760, 108 C.C.A. 98.

It is obvious that the trial judge in the present case was wholly controlled by what he conceived to be the rule laid down in Treat v. Farmers' Loan & Trust Company, supra. He said in answer to argument of counsel for the government:

'I am wholly persuaded that the ruling of the higher court was that for the purpose of avoiding the taxes under the act of 1898, it was enough if an amount of money, I care not where derived, equal to or greater than the aggregate of capital, surplus and undivided profits was kept permanently invested. * * * '

We do not think that the Treat Case justified this conclusion of the trial judge and regard the case of Canal & Banking Company v. New Orleans, 99 U.S. 97, 25 L.Ed. 409, as holding that no such application of investments to capital, surplus and undivided profits follows from the mere possession of them. In that case the Canal & Banking Company was assessed by the city of New Orleans for $700,000 as its capital, and the bank refused to pay the assessment, alleging that its capital, not invested in real estate, consisted of legal tender notes of the United States. The Supreme Court said:

' * * * There was no proof in the cause to establish the fact that these notes constituted the capital of the bank, any more than that any other equal portion of its assets constituted such capital. The nominal capital of the bank was $1,000,000,

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