Iowa Loan & Trust Co. v. Fairweather

• Citation: 252 F. 605
• Parties: IOWA LOAN & TRUST CO. v. FAIRWEATHER et al.
• Decision Date: 16 September 1918
• Court: U.S. District Court — Southern District of Iowa

252 F. 605

IOWA LOAN & TRUST CO. v. FAIRWEATHER et al.

United States District Court, S.D. Iowa, Central Division.

September 16, 1918

Sargent & Gamble, of Des Moines, Iowa, for plaintiff.

H. W Byers, of Des Moines, Iowa, for defendants.

WADE District Judge.

The questions presented under the motions to remand and to dismiss are important.

1. It is contended that the court has no jurisdiction. There is no diversity of citizenship, but the plaintiff contends that the case is one in which it is necessary to construe and apply statutes of the United States. This contention must be sustained.

The plaintiff claims that a certain tax is invalid because it is a tax upon bonds of the United States (Liberty Bonds) which were issued under an act of Congress which specifically provides that such bonds 'shall be exempt, both as to the principal and interest, from all taxation,' except estate or inheritance taxes. The whole case of the plaintiff is founded in this congressional exemption of these bonds.

Counsel for defendants contend that there is no dispute between the parties as to the law or its meaning, but there is a dispute as to its application; and wherever a right is asserted or exemption claimed, based upon a law of the United States this court has jurisdiction.

It will not do to say that there is no controversy as to the meaning of the law, while the parties are in court to have determined the application of the law to a given state of facts. Cohens v. Virginia 6 Wheat. 379, 5 L.Ed. 257; Osborn v. Bank, 9 Wheat. 822, 6 L.Ed. 204; Tennessee v. Davis, 100 U.S. 257, 25 L.Ed. 648; McGoon v. Railway (D.C.) 204 F. 998. See especially as to jurisdiction, Greene v. Louisville Co., 244 U.S. 499, 37 Sup.Ct. 673, 61 L.Ed. 1280, Ann. Cas. 1917E, 88; Louisville Co. v. Greene, 244 U.S. 522, 37 Sup.Ct. 683, 61 L.Ed. 1291, Ann. Cas. 1917E, 97; Illinois Central Co. v. Greene, 244 U.S. 555, 37 Sup.Ct. 697, 61 L.Ed. 1309; Louisville v. Rice (May 20, 1918) 247 U.S. 201, 38 Sup.Ct. 429, 62 L.Ed. 1071.

2. On the motion to remand I have so fully expressed myself upon the principles involved in Re Mississippi River Power Co. (D.C.) 241 F. 194, and in supplemental opinion in C., M. & St. Paul Ry. Co. v. Drainage District, 253 F. 496, that it is not necessary to consider the same in detail.

Parties have a legal and constitutional right to a trial in the courts of the United States in cases involving the construction or application of the Constitution or laws of the United States. It will not do to say that the plaintiff instituted this litigation. As in the Ditch Cases, the litigation has its foundation in an attempt on the part of the taxing authority of the state of Iowa to levy certain taxes which the plaintiff, under the law, would be compelled to pay. In other words, a proceeding was started to take away from the plaintiff certain money for certain purposes. The state prescribed the procedure by which, under the claim of defendants, this was to be done. It authorized an appeal from the board of review, and a trial in court-- a judicial proceeding to have the rights of the plaintiff determined. If the plaintiff, asserting a right under the laws of the United States, cannot have that question tried in the courts of the United States, it is because the Legislature, while giving the plaintiff the right to a trial in court, has so prescribed the conditions, or so named the parties, that this right has been denied.

But the Legislature has no such power; having given the plaintiff the right to a trial in court, it could not limit the jurisdiction of the courts of the United States, nor the right of the plaintiff to a trial in such courts, provided the jurisdictional facts exist.

3. The magnitude of the main question involved in this case cannot be overestimated. The nation is involved in a war which is taxing the resources of the nation in men and in money. The principal means of procuring the money with which to carry on this gigantic struggle is by the issuance of bonds which are sold generally throughout the country to individuals and corporations. More than eight billion dollars worth of these bonds have already been issued, and how many more billions may be necessary before the war is won cannot even be approximated. These bonds are issued at a low rate of interest, but are made attractive to buyers by a specific provision that they 'shall be exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes imposed by authority of the United States, or its possessions, or by any state or local taxing authority. ' This language is simple, definite, and imperative.

It is fundamental that, without any express exemption, it is beyond the power of the states to impose a tax upon government bonds. The language of Chief Justice Marshall in Weston v. City Council of Charleston, 2 Pet. 449, 7 L.Ed. 481, 488, is conclusive:

'The American people have conferred the power of borrowing money on their government, and, by making that government supreme, have shielded its action, in the exercise of this power, from the action of the local governments. The grant of the power is incompatible with a restraining or controlling power, and the declaration of supremacy is a declaration that no such restricting or controlling power shall be exercised. 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 burthen on the operations of government. It may be carried to an extent which shall arrest them entirely.'

The state can levy no tax in any amount. It is not a question of excessive taxation-- it is an absence of power on the part of the state to impede in any manner the functions of the nation.

'The state cannot, by any form of taxation, impose any burden upon any part of the national public debt. The Constitution has conferred upon the government power to borrow money on the credit of the United States, and that power cannot be burdened or impeded, or in any way affected, by the action of any state. ' Home Savings Bank v. Des Moines, 205 U.S. 503, 27 Sup.Ct. 571, 51 L.Ed. 901.

If a state had the power to impose a tax upon Liberty Bonds, it might impose such tax as to impede the operations of this government in the prosecution of this war. Furthermore, if each state possessed the right to tax Liberty Bonds, the amount of taxation in the different states would vary, and, inasmuch as the tax imposed would affect the value of the bonds, no uniformity of value could be maintained in the different states of the Union.

The plaintiff charges, and upon this motion the statements of the complaint must be accepted as true, that it was, during the assessment period in 1918, the owner of $466,300 of the bonds of the United States, issued pursuant to the act of Congress and it is contended that a tax has been imposed upon such bonds by the assessor and the board of equalization of the city of Des Moines, contrary to the provisions of the act of Congress. The assessment complained of was made in the usual manner. The plaintiff made a statement to the assessor, as required by section 1322 of the supplement to the Code of Iowa, showing capital stock of the corporation, $500,000; surplus, $100,000; and undivided profits, $383,489.40; and also, pursuant to section 1321 of the supplement to the Code of Iowa, included in said statement 'the specific kinds and description thereof (bonds and stocks) exempt from taxation. ' It appears that, without reference to the claimed exemption of the Liberty Bonds, the assessor and the board of equalization made the assessment, including the value of said bonds in the sum of $466,300 as aforesaid.

The defendants do not claim that the state has any power to impose a tax directly upon these bonds, but justifies the inclusion thereof in the value of property assessed under the contention that this assessment is not an assessment of property of the bank, but is an assessment of the value of the shares owned by the stockholders of the bank.

Since the case of Van Allen v. Assessors, 70 U.S. (3 Wall.) 573, 18 L.Ed. 229, numerous states have, under the guise of imposing taxes upon shares of capital stock, actually assessed the value of government bonds, and in many cases such proceedings have been sustained upon the theory, which is now settled, that the stock of a bank and the property of the bank may be separate subjects of taxation.

The Supreme Court of the United States, in Home Savings Bank v. Des Moines, supra, settled the question that an assessment of a tax upon the property of a bank, including government bonds, is beyond the power of the state. So that the question in this case is narrowed down to the proposition as to whether or not, under the provisions of the statutes of Iowa, the tax nominally levied against the stockholders in this institution is in truth a tax upon the property held by the bank. This question cannot be settled by the mere statement that the tax is upon the stockholders, or upon the value of the stock; but it must be determined by the entire provisions of the enactments of the Legislature.

'Neither state courts nor legislatures, by giving a tax a particular name, or by the use of some form of words, can take away our duty to consider its real nature and effect. ' C.O. & G. Co. v. Harrison, 235 U.S. 292, 35 Sup.Ct. 27, 59 L.Ed. 234.

'Nor can this inhibition upon the states be evaded by any change in the mode or form of the taxation, provided the same result is effected-- that is, an impediment is thereby interposed to the...