Board of Sup'rs of City of Frankfort v. State Nat. Bank of Frankfort

Citation189 S.W.2d 942,300 Ky. 620
Decision Date19 October 1945
CourtCourt of Appeals of Kentucky

Appeal from Circuit Court, Franklin County; Colvin P. Rouse, Special Judge.

Proceeding between Board of Supervisors of City of Frankfort and others and State National Bank of Frankfort, relating to assessment of bank stock for taxes. From adverse judgment, the Board of Supervisors of the City of Frankfort appeals.


Marion Rider, of Frankfort, for appellant.

Allen Prewitt, of Frankfort, for appellee.

STANLEY Commissioner.

Pursuant to the authority granted by Kentucky Revised Statutes 136.270, the City Assessor valued the 1,000 shares of stock of the State National Bank, of Frankfort, as of September 15 1942, at $228,620, that being the book value, i. e., the net capital stock, surplus and undivided profits of all the shares. The statutory processes for review having been followed through, the Circuit Court adjudged the taxable value to be $120,000. The City insists on the appeal that the original valuation is the proper one.

We pause to observe that this is unique taxation. A banking institution pays no taxes upon its personal property including intangibles. Instead it pays this tax upon the fair cash value of its stock, less the assessed value of its real property in the state, 'for and on behalf of the owners of the shares of stock.' KRS 136.270. The tax is one against the stockholders, the bank being their agent with the right of reimbursement. City of Shelbyville v. Citizens Bank of Shelbyville, 272 Ky. 559, 114 S.W.2d 719. The bank is exempt from the imposition of any other state tax KRS 136.070, and individual shareholders make no return and pay no tax upon their shares as do the owners of stock in other corporations, except where the particular corporation pays ad valorem taxes to Kentucky on at least 75% of its total property, less tax exempt securities. KRS 136.030. But the shares of stock in a banking institution are expressly made subject to local ad valorem taxation by the respective counties and cities to a maximum of 20 cents each and by school districts to a maximum of 40 cents on the hundred dollars, KRS 136.270; Jones v. Citizens' Bank of Hartford, 228 Ky. 699, 15 S.W.2d 468, while intangibles of other owners are generally exempt from local taxation. KRS 132.200 (6). However, while the tangible personal property of a bank is subject to the maximum rates stated, that of other corporations and individuals is, generally speaking, subject to a much higher rate for local taxation; e.g in the City of Frankfort for the year involved it was $2.25. The Congress early sanctioned the imposition of a tax by a state upon shares of stock in national banks. 12 U.S.C.A. § 548; Cooley on Taxation, Sec. 992, 997. It is well settled that taxing the shares of the bank in the hands of the owners has exclusive relation to their distinct value and that they are taxable without regard to capital or the value or character of the property owned by the bank. Cooley, Secs. 974, 976; Evansville Bank v. Britton, 105 U.S. 322, 26 L.Ed. 1053. The tax, therefore, rests on the severability or independence of the shares from that property and its value. Commonwealth v. First National Bank, 67 Ky. 98, 96 Am.Dec. 285, affirmed, 76 U.S. 353, 9 Wall. 353, 19 L.Ed. 701; McFarland v. Georgetown Nat. Bank, 208 Ky. 7, 270 U.S. 995, affirmed, 273 U.S. 568, 47 S.Ct. 467, 71 L.Ed. 779.

The term 'fair cash value' of property as used in the taxation statutes is defined by Section 172 of the Constitution as being an estimate of 'the price it would bring at a fair voluntary sale.' The question is: What would the property have sold for on the day of assessment in the ordinary course of trade? The answer may be easy where there have been recent sales sufficient in number and substantial in diversity and volume, for they afford the best evidence upon which the estimate can be based. Yet, the conditions surrounding even such sales may lessen the weight. Thus, if there had been a vigorous contest for control of a particular bank, the sales and purchases would be abnormal and the values artificial. So other factors enter into the equation and must be placed in the formula and given consideration in each particular case. Exactness cannot be obtained. Indeed, it is not required, for the Constitution and the Statutes recognize that only an approximation or estimate is possible. Yet, if property of like character has been sold at a fair voluntary sale, it shows what the market value of all of it is for the market is fixed by what is sold and not be what is not sold. But where there is no active market and no satisfactory market value established, those charged with responsibility of estimating the value must struggle along and do the best they can by somewhat rough-and-ready reasoning from the available elements and factors which ordinarily enter into market values.

We have had three cases which are prototypes and precedents. In Greensburg Deposit Bank v. Commonwealth, 230 Ky. 798, 20 S.W.2d 979, the evidence of sales of shares of the bank stock was meager. It was confined to isolated transactions and related principally, if not wholly, to the book value. That was accepted as the taxable value in the absence of any other substantial criterion. On the other extreme are Board of Supervisors of Somerset v. Farmers Nat. Bank of Somerset, 293 Ky. 157, 168 S.W.2d 371, and Larue County Board of Supervisors v. Lincoln National Bank of Hodgenville, 300 Ky. 7, 187 S.W.2d 819, where the sales of bank stock over a substantial period of time and near to the assessing day were of such character, frequency and volume that the maximum prices at which the stock had sold were deemed the best evidence of market value and to establish the taxing value with reasonable certainty. This was so although the book value in the one case was two-thirds as much more and in the other one-half as much more as the sale price. Intermediate of these conditions is Dumesnil v. Reeves, 283 Ky. 563, 142 S.W.2d 132, which involved the assessment of shares of stock in commercial corporations for purposes of inheritance taxes. As to one company there were estimates of auditors varying from $90 to $150 a share, based upon book valuation (the fact of which was $231), previous assessments upon stock held by other persons, and the sale of 161 shares within seven years for the high price of $115 a share. There were only 46 shares out of a total of 6,000 sold within three years of the assessing date. We thought the fair book value was shown to be more than $150 a share and that the transactions in the stock were insufficient to establish the fair market value, although they should be considered in connection with the other evidence. The State Tax Commission upon all the evidence had valued the stock at $125 a share. That was confirmed by the Circuit Court. Since the burden had rested upon the taxpayer to establish the finding by the assessing officers to be wrong, and the mind of this court was left in doubt, the judgment fixing the valuation was affirmed.

In the case at bar the evidence presented by the bank to prove the valuation by the assessing officers to be erroneous was that the highest price ever paid during the life of the bank was $180 and over the recent period of seven years the highest price paid for the stock was $120 and the lowest $100 a share. From July 1, 1939, to December 31, 1942 there were 62 sales of an aggregate of 246 shares. Included are 38 sales of 148 shares in 1940, two sales of 180 shares in 1941, one sale of 21 in 1942, and one sale of 3 shares in 1943. The large number of transfers in 1940 seems to have been incident to the reduction of $50,000 in the capital stock, all involving numerous fractional shares. In 1934 the bank had been compelled to take considerable losses on loans and securities and to reform its capital structure. The sale in 1942 (within six weeks of this assessment date) was by another bank which had acquired the stock through default in payment of a note secured by it as collateral and which it had taken over at $120 a share. It sold the stock to an individual for the same amount. The stock of this bank is owned by 57 persons, among whom the shares are pretty well distributed. All the transactions, except three, were among the stockholders. Recently an owner, living out of Kentucky, offered to sell his stock at $150 a share, but no buyer was found who would pay that much. There had never been a sale at public auction. All of the sales were through the bank or its president, who testified that he had acted as a voluntary clearing house or mutual broker for those desiring to sell and those desiring to buy, each having made inquiry of him of a prospective buyer or seller and sought his advice as to the price and worth. He denies there was any conspiracy or agreement that the price should be definitely fixed at $120, saying that that is what the officers and all others regarded the stock to be worth. There is no implication that these sales were not genuine and bona fide, but it is argued the price was controlled. Countervailing argument is that as the dividend rate has been $6 per share for a number of years, logically the market price of the stock has likewise remained constant. The bank's cash, loans and discounts, securities and real estate exceed its deposits liability by more than $260,000. However, the average net earnings over a period of 8 years was $17.80 a share. The earnings in 1942 were only $11.36 a share. The earnings after dividends were paid were used to pay off preferred stock issued in the strengthening of the capital structure during the period of financial depression. In...

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