City of Shelbyville v. Citizens Bank of Shelbyville

• Decision Date: 01 February 1938
• Parties: CITY OF SHELBYVILLE et al. v. CITIZENS BANK OF SHELBYVILLE.
• Court: Kentucky Court of Appeals

114 S.W.2d 719

272 Ky. 559

CITY OF SHELBYVILLE et al. v. CITIZENS BANK OF SHELBYVILLE.

Court of Appeals of Kentucky

February 1, 1938

Appeal from Circuit Court, Shelby County.

Action by the Citizens Bank of Shelbyville against the City of Shelbyville and others to enjoin the collection of a license tax. From a judgment enjoining defendant from collecting the tax, the named defendant appeals.

Judgment reversed with directions.

William H. Hays, of Shelbyville, for appellant.

Todd &amp Beard, of Shelbyville, for appellee.

REES Justice.

An ordinance of the city of Shelbyville, a city of the fourth class, imposed a license tax of $50 a year on "each bank and trust company combined and engaged in business under the same management." On each bank not conducted in connection with a trust company and on each trust company not conducted in connection with a bank the tax is $30. There are five state banks in Shelbyville. The appellee, Citizens Bank of Shelbyville, brought this action to enjoin the collection of the license tax. It alleged in its petition that the ordinance levying the tax violated sections 171 and 202 of the Kentucky Constitution and the Fourteenth Amendment to the Federal Constitution, and was void. A demurrer to the petition was overruled, and, after the defendant declined to plead further, a judgment was entered enjoining and restraining it from collecting the tax. The city appeals.

It is conceded that the city cannot collect a license tax from a national bank. That neither a state nor a subdivision thereof can impose a license or franchise tax on a national bank is firmly established by decisions of the Supreme Court of the United States. In McCulloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579, it was held that a state had no power to tax the business of a branch of the bank of the United States located within its limits. National banks were first established by Congress in 1864, and by an act passed in 1868, Congress granted a qualified permission to the states to tax them. This act, with slight changes, has continued in force to the present time, and is now section 5219 U.S.Rev.St., as amended, U.S.C.A. title 12, § 548. The statute reads in part:

"The legislature of each State may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits. ***

"(b) In the case of a tax on said shares the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks: Provided, That bonds, notes, or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or investment business and representing merely personal investments not made in competition with such business, shall not be deemed moneyed capital within the meaning of this section. ***

"2. The shares of any national banking association owned by nonresidents of any State, shall be taxed by the taxing district or by the State where the association is located and not elsewhere; and such association shall make return of such shares and pay the tax thereon as agent of such nonresident shareholders.

"3. Nothing herein shall be construed to exempt the real property of associations from taxation in any State or in any subdivision thereof, to the same extent, according to its value, as other real property is taxed."

The Supreme Court of the United States has construed this statute in numerous decisions, and invariably has held that the states are wholly without power to levy any tax upon national banks, save as permitted by Congress, and that taxation in any other manner than that allowed by the federal statutes is void. Owensboro National Bank v. Owensboro, 173 U.S. 664, 19 S.Ct. 537, 43 L.Ed. 850; Des Moines National Bank v. Fairweather, 263 U.S. 103, 44 S.Ct. 23, 68 L.Ed. 191.

"National banks are not merely private moneyed institutions, but agencies of the United States, created under its laws to promote its fiscal policies; and hence the banks, their property, and their shares cannot be taxed under state authority, except as Congress consents, and then only in conformity with the restrictions attached to its consent." First National Bank v. Anderson, 269 U.S. 341, 46 S.Ct. 135, 138, 70 L.Ed. 295.

It is first insisted by appellee that section 4077 of the Kentucky Statutes authorizes the assessment of a franchise tax against every corporation having or exercising any special or exclusive privilege or franchise not allowed by law to natural persons; that this includes banks; that the tax imposed by section 4092 of the Kentucky Statutes on shares of banks and trust companies is a franchise tax, and therefore a license tax cannot be imposed on banks in view of section 4189-1 of the Kentucky Statutes which excepts from the payment of a license tax corporations which, under existing laws, are liable to pay a franchise tax. It is also argued that section 4189-1 expressly excludes banks and trust companies from the payment of a license tax.

The tax imposed by section 4092 is not a franchise tax on banks, but is an ad valorem tax on the shares of stock. The act provides that the tax shall be paid by the banks and trust companies for and on behalf of the owners of the shares of stock, shall be for state purposes only, and in lieu of all other taxes "upon said shares" by the state, or any county, city, town, or other taxing district, except that the county and city in which the bank or trust company is located may each impose a tax of not exceeding 20 cents on the $100 of the fair cash value of such shares, and that a tax of not exceeding 40 cents for school purposes may be levied in the district in which the bank or trust company is located. This section merely limits the rate of taxation that may be levied by subdivisions of the state on the fair cash value of shares of stock of banks and trust companies. The tax is not upon the bank or its capital, but upon the shares of stock as personal property in the hands of the individual shareholders. The bank is merely the agent for the collection of the tax. The pertinent part of section 4189-1 of the Kenucky Statutes reads:

"Every corporation organized by or under the laws of this or any other state or government, owning property or doing business in this state, except *** banks and trust companies, *** shall pay to this State, to be credited to the general expenditure fund, an annual license tax based upon the asset value of its capital stock, as hereinafter provided."

It is argued that this section exempts banks and trust companies from the imposition of license taxes by cities, but it is plain that the exemption is limited to the state. There is nothing in the act indicating that the Legislature intended to deprive municipalities of their right to impose license taxes....