Society For Savings In the City of Cleveland, Ohio v. Bowers First Federal Savings and Loan Association of Warren, Ohio v. Bowers

• Decision Date: 16 May 1955
• Docket Number: 220,Nos. 204,s. 204
• Parties: SOCIETY FOR SAVINGS IN THE CITY OF CLEVELAND, OHIO, Petitioner, v. Stanley J. BOWERS, Tax Commissioner of Ohio. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN, OHIO, Petitioner, v. Stanley J. BOWERS, Tax Commissioner of Ohio
• Court: U.S. Supreme Court

349 U.S. 143

75 S.Ct. 607

99 L.Ed. 950

SOCIETY FOR SAVINGS IN THE CITY OF CLEVELAND, OHIO, Petitioner,

v Stanley J. BOWERS, Tax Commissioner of Ohio.

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARREN,

OHIO, Petitioner,

v. Stanley J. BOWERS, Tax Commissioner of Ohio.

Nos. 204, 220.

Argued March 28, 1955.

Decided May 16, 1955.

Mr. Robert F. Maskey, Cleveland, Ohio, for appellant Society for Savings in City of Cleveland.

Mr. Robert G. Day, Warren, Ohio, for appellant First Fed. Savings and Loan Assn.

Mr. Joseph S. Gill, Columbus, Ohio, for appellee.

Mr. Justice HARLAN delivered the opinion of the Court.

In 1829 this Court decided in Weston v. City Council of Charleston, 2 Pet. 449, 7 L.Ed. 481, that obligations of the Federal Government are immune from state taxation. This rule, aimed at protecting the borrowing power of the United States from state encroachment, was derived from the 'Borrowing' and 'Supremacy' Clauses of the Constitution,¹ and the constitutional doctrines announced in McCulloch v. State of Maryland, 1819, 4 Wheat. 316, 4 L.Ed. 579. It was subsequently embodied in a succession of federal statutes, the existing statute being R.S. § 3701, 31 U.S.C. § 742, 31 U.S.C.A. § 742.² The rule has been carried forward to embrace indirect taxation of such obligations through their inclusion in a tax imposed on all the property of a taxpayer. It is quite immaterial that the state tax does not discriminate against the federal obligations. People of State of New York ex rel. Bank of Commerce v. Commissioners of Taxes of New York City, 1863, 2 Black 620, 17 L.Ed. 451; In re Bank Tax Case, 1865, 2 Wall. 200, 17 L.Ed. 793; Farmers and Mechanics Savings Bank of Minneapolis v. State of Minnesota, 1914, 232 U.S. 516, 34 S.Ct. 354, 58 L.Ed. 706; New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 1950, 338 U.S. 665, 70 S.Ct. 413, 94 L.Ed. 439.

The two cases now before us involve the application of that rule, in a somewhat novel situation. Society for Savings in the City of Cleveland and First Federal Sav- ings and Loan Association of Warren,³ two mutual savings banks having no capital stock or shareholders, and located in Ohio, attack the validity of an Ohio property tax, as assessed against them, on the ground that they were required to include in the property values upon which the tax was computed United States bonds held in their security portfolios. Had these bonds been excluded, the entire tax would have been wiped out in both instances.⁴ The Ohio Tax Commissioner thought these government bonds were not excludable. The Ohio Board of Tax Appeals reversed. The Supreme Court of Ohio sustained the Commissioner in each instance. The two banks are here by appeal from the judgment of the Ohio Supreme Court in each case.⁵ The cases were argued together, and are so treated in this opinion.

The tax in question was assessed in the names of these banks under §§ 5408, 5412 and 5638—1 of the Ohio General Code,⁶ upon the book value of their 'capital em- ployed, or the property representing it', § 5408, 'at the aggregate amount of the capital, the surplus or reserve fund and the undivided profits', § 5412. The tax was at the rate of two mills on the dollar, § 5638—1. No claim is made that the taxes constituted a franchise tax or some other kind of privilege tax. Cf. Educational Films Corp. of America v. Ward, 1931, 282 U.S. 379, 51 S.Ct. 170, 75 L.Ed. 400.

The Supreme Court of Ohio recognized that this tax, based as it was upon the inclusion of federal obligations, would have to fall if directed against the banks. New York ex rel. Bank of Commerce v. Commissioners of Texas, supra; Bank Tax Case, supra. This tax, though, was not considered to be against the banks. Holding that the depositors of a mutual savings bank have an interest similar to that of shareholders of other banks, the Ohio court found instead that the tax was imposed upon the 'intangible property interests' (161 Ohio St. 122, 118 N.E.2d 661) of the depositors as the owners of each bank. The banks' capital, surplus fund and undivided profits, which we will refer to as their surplus, were regarded as not themselves the subject matter of the tax, but as simply the measure of the tax against the depositors, and the banks were treated as tax-collecting agents rather than as taxpayers.

In so deciding the Ohio court relied upon a gloss on the rule of immunity stated above. It has been held that a state may impose a tax upon the stockholders' interests in a corporation, measured by corporate asset values, without making any deduction on account of United States securities held by the corporation. This doctrine had its origin in cases involving national bank stock. There, congressional consent to state taxation of the stock of national banks, upon certain conditions, was held, over strong dissent, to permit such taxes to be assessed without the exclusion of federal obligations owned by the banks. Van Allen v. Assessors, 1866, 3 Wall. 573, 18 L.Ed. 229; National Bank v. Commonwealth of Kentucky, 1870, 9 Wall. 353, 19 L.Ed. 701; Des Moines National Bank v. Fairweather, 1923, 263 U.S. 103, 44 S.Ct. 23, 68 L.Ed. 191. This result was reached in part on the theory that the stockholders' interests in a corporation represent a separate property interest from the corporation's ownership of its assets, so that a tax on the stockholders' interests is not a tax on the federal obligations which are included in the corporate property. This rationale has been carried over to cases involving stock of state-created banks, and thus a tax on their shareholders, though measured by corporate assets which include federal obligations, is held not to offend the rule immunizing such obligations from state taxation. Cleveland Trust Co. v. Lander, 1902, 184 U.S. 111, 22 S.Ct. 394, 46 L.Ed. 456. Further, in levying a tax on shareholders, a state may require its payment by the corporation, as a collecting agent. Corry v. Baltimore, 1905, 196 U.S. 466, 25 S.Ct. 297, 49 L.Ed. 556. The result is that when, as is usually the case, the shareholder tax is measured solely by corporate asset values, such a tax is difficult to distinguish from a tax imposed upon the corporation itself, so far as the practical impact of the two types of taxes upon corporate-owned federal obligations is concerned. Nevertheless, this exception to the general rule of immunity is firmly embedded in the law.

The focal point of these appeals is thus whether we are to regard this tax as imposed on the banks or, as the Ohio court held the legislature intended, on their depositors. Were we free to construe Ohio's statute de novo we might have difficulty in reaching the conclusion which the Ohio court did. Suffice it to say at this point: The statute is barren of any language expressly imposing this tax on the depositors, and contains no provision giving the bank any right to recover the tax from the depositors, as might be expected if the bank had been regarded as a mere tax-collecting agent. By contrast, the taxes laid by the Ohio General Code on (a) the shares of incorporated financial institutions whose capital is divided into shares, (b) the shares of unincorporated institutions whose capital is divided into shares, and (c) deposits, are imposed on the shares 'of the stockholders', § 5408, and on the deposits 'as taxable property of its depositors'. § 5673—2.⁷ In the case of those taxes, not here involved, the bank is given full rights of reimbursement from the stockholders or depositors, as the case may be, and it is clear that the institution in paying such taxes is acting only as a collection agent. Ohio Gen.Code §§ 5672, 5673, 5673—1, 5673—2.⁸

And beyond these considerations, one might not have expected the legislature to tax the ownership interests of the depositors of these banks on the same basis as stock- holders are taxed. The asserted interest of the depositors is in the surplus of the bank, which is primarily a reserve against losses and secondarily a repository of undivided earnings. So long as the bank remains solvent, depositors receive a return on this fund only as an element of the interest paid on their deposits. To maintain their intangible ownership interest, they must maintain their deposits. If a depositor withdraws from the bank, he receives only his deposits and interest. If he continues, his only chance of getting anything more would be in the unlikely event of a solvent liquidation, a possibility that hardly rises to the level of an expectancy. It stretches the imagination very far to attribute any real value to such a remote contingency, and when coupled with the fact that it represents nothing which the depositor can readily transfer, any theoretical value reduces almost to the vanishing point. Cf. Collett v. Springfield Savings Society, 13 Ohio Cir.Ct.Rep. 131, affirmed, 1897, 56 Ohio St. 776, 49 N.E. 1109.

The Ohio court, however, has held that this tax is imposed on the depositors. ⁹ But that does not end the matter for us. We must judge the true nature of this tax in terms of the rights and liabilities which the statute, as construed, creates. In assessing the validity of the tax under federal law, we are not bound by the state's conclusion that the tax is imposed on the depositors, even though we would be bound by the state court's decision as to what rights and liabilities this statute establishes under state law. The court's mere conclusion that the tax is imposed on the depositors is no more than a characterization of the tax. 'Where a federal right is concerned we are not bound by the characterization given to a state tax by state courts or Legislatures, or relieved by it from the duty of considering the real nature of the tax and its effect upon the federal right asserted. Carpenter v. Shaw, 1930, 280 U.S. 363, 367, 50 S.Ct. 121, 123, 74 L.Ed. 478. See also New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, supra, 338 U.S. at page 674, 70 S.Ct. at page 418...