Tradesmens Nat Bank of Olkahoma City v. Oklahoma Tax Commission

• Decision Date: 25 March 1940
• Docket Number: No. 596,596
• Citation: 309 U.S. 560,84 L.Ed. 947,60 S.Ct. 688
• Parties: TRADESMENS NAT. BANK OF OLKAHOMA CITY v. OKLAHOMA TAX COMMISSION
• Court: U.S. Supreme Court

309 U.S. 560

60 S.Ct. 688

84 L.Ed. 947

TRADESMENS NAT. BANK OF OLKAHOMA CITY

v OKLAHOMA TAX COMMISSION.

No. 596.

Submitted March 6, 1940.

Decided March 25, 1940.

Mr. E. A. Walker, of Oklahoma City, Okl., for appellant.

Mr. F. M. Dudley, of Oklahoma City, Okl., for appellee.

Mr. Justice MURPHY delivered the opinion of the Court.

This is an appeal under § 237 of the Judicial Code, 28 U.S.C.A. § 344, from a judgment of the Supreme Court of Oklahoma, denying recovery of taxes alleged to have been exacted from appellant, a national banking corporation, in violation of the provisions of R.S. § 5219, 12 U.S.C.A. § 548, and the Constitution of the United States.

Section 16 of the Oklahoma Income Tax Law of 1935, S.L.1935, c. 66, art. 6, 68 Okl.St.Ann. § 887,¹ lays a tax upon every national banking association located or doing business within the state 'according to, or measured by, its net income' at the rate of six per centum. Section 17, 68 Okl.St.Ann. § 888, provides for a similar tax upon state banks and Morris Plan Companies.

The net income used as the measure of the tax under §§ 16 and 17 is determined by subtracting from gross income, as defined in § 18, certain deductions allowed by § 9, 68 Okl.St.Ann. §§ 880, 889. Section 18 defines gross income for the purposes of 'national banking associations, state banks, trust companies and other financial corporations' (§ 8(c), 68 Okl.St.Ann. § 878(c)). It specifically includes in gross income 'interest upon the obligations of the United States, or its possessions, or upon securities issued under the authority of an Act of Congress, the income from which is tax free.'

All other types of corporations are taxed at the flat rate of six per centum upon the net income allocable to business transacted within the state (§ 6, 68 Okl.St.Ann. § 876). Net income for this purpose is determined by making certain specified deductions from gross income (§§ 7, 9, 68 Okl.St.Ann. §§ 877, 880), which is defined expressly so as to exclude interest on taximmune federal securities (§ 8(b)(4)).

The appellee Oklahoma Tax Commission, in assessing appellant's tax for the year 1936 under § 16, included in gross income the dividends received by appellant on stock owned by it in a federal reserve bank and the interest received on bonds and notes issued pursuant to acts of Congress declaring the income from such securities tax exempt.² The present suit was brought by appellant to recover that portion of the tax, paid under protest, which resulted from including such dividends and interest in the computation.

R.S. § 5219, 12 U.S.C. § 548, 12 U.S.C.A. § 548, copied in the margin,³ authorizes four alternative methods whereby a state may impose a tax on national banking associations located within its limits. Method numbered (4) provides for a tax on such associations 'according to, or measured by' 'the entire net income received from all sources' subject only to certain restrictions as to the rate. This method was added to the three previously authorized under R.S. § 5219 by an amendment of March 25, 1926, c. 88, 44 Stat. 223, 12 U.S.C.A. § 548. The plain meaning of the amendment is confirmed by its legislative history showing beyond doubt that Congress intended to authorize a franchise tax measured by net income including interest on tax-immune federal securities.⁴

Oklahoma in the 1935 act expressly followed and adopted the method thus authorized in the amendment. See First National Bank v. Oklahoma Tax Commission, 185 Okl. 98, 90 P.2d 438. Subsection (b) of § 16 expressly declares that the state thereby adopts method numbered (4) authorized by R.S. § 5219, 12 U.S.C. § 548, 12 U.S.C.A. § 548.

The power of Congress to authorize a state to impose a tax on the franchise of a national banking association can not now be doubted. Van Allen v. Assessors, 3 Wall. 573, 18 L.Ed. 229. Compare Keifer & Keifer v. R.F.C., 306 U.S. 381, 389, 59 S.Ct. 516, 517, 83 L.Ed. 784; Helvering v. Gerhardt, 304 U.S. 405, 411, 412n, 58 S.Ct. 969, 971, 82 L.Ed. 1427; Federal Land Bank v. Priddy, 295 U.S. 229, 234, 235, 55 S.Ct. 705, 707, 708, 79 L.Ed. 1408. Any immunity attaching to the franchise by virtue of R.S. § 5219 as it read prior to the 1926 amendment, compare Pittman v. Home Owners' Corp., 308 U.S. 21, 60 S.Ct. 15, 84 L.Ed. 11, 124 A.L.R. 1263, could be withdrawn by Congress and the franchise subjected to state taxing power, just as national bank shares were so subjected by the Act of June 3, 1864. Van Allen v. Assessors, 3 Wall. 573, 18 L.Ed. 229; See Des Moines National Bank v. Fairweather, 263 U.S. 103, 44 S.Ct. 23, 68 L.Ed. 191; Peoples National Bank v. Board of Equalization, 260 U.S. 702, 43 S.Ct. 98, 67 L.Ed. 471.

The power of a state to levy a tax on a legitimate subject, such as a franchise, measured by net assets or net income including tax-exempt federal instrumentalities or their income is likewise well settled. Society for Savings v. Coite, 6 Wall. 594, 18 L.Ed. 897; Provident Institution v. Massachusetts, 6 Wall. 611, 18 L.Ed. 907; Home Insurance Company v. New York, 134 U.S. 594, 10 S.Ct. 593, 33 L.Ed. 1025; Educational Films Corp. v. Ward, 282 U.S. 379, 51 S.Ct. 170, 75 L.Ed. 400, 71 A.L.R. 1226. Thus state laws taxing the shareholders of national banks in accordance with R.S. § 5219 on the full net value of their shares, although the banks owned tax- exempt federal securities, have been consistently upheld. Des Moines National Bank v. Fairweather, 263 U.S. 103, 44 S.Ct. 23, 68 L.Ed. 191; People's National Bank v. Board of Equalization, 260 U.S. 702, 43 S.Ct. 98, 67 L.Ed. 471; Van Allen v. Assessors, 3 Wall. 573, 18 L.Ed. 229. The rule that a tax upon a legitimate subject, measured by net income, including that from tax-immune federal instrumentalities, is not an infringement of the immunity, was affirmed in Flint v. Stone Tracy Co., 220 U.S. 107, 147, 165, 31 S.Ct. 342, 347, 354, 55 L.Ed. 389, Ann.Cas.1912B, 1312; and followed in Educational Films Corp. v. Ward, 282 U.S. 379, 51 S.Ct. 170, 75 L.Ed. 400, 71 A.L.R. 1226. Compare Pacific Co. v. Johnson, 285 U.S. 480, 490, 52 S.Ct. 424, 426, 76 L.Ed. 893. The tax-immunity conferred on the securities owned by appellant has not been shown to be any greater in extent than that conferred on the federal securities included in the measure of the taxes sustained in the cited cases.

Sections 16 and 17 of the 1933 act, Laws Okl.1933, c. 195, 68 Okl.St.Ann. Appendix, were for present purposes identical with the corresponding sections of the 1935 act, but § 18 of the prior act contained a provision expressly excluding from gross income the interest on tax-immune federal securities.

Appellant contends that the act of 1935, by expressly including in the measure of the tax the interest on federal securities which before had been expressly excluded from the measure, must be regarded not as a valid franchise tax but as an unconstitutional levy on the tax-immune income itself. In support of its position, its main reliance is placed upon our decision in Macallen Co. v. Massachusetts, 279 U.S. 620, 49 S.Ct. 432, 73 L.Ed. 874, 65 A.L.R. 866.

A similar contention was urged against the California franchise tax measured by net income, including tax-exempt income on state bonds, which was upheld in Pacific Co. v. Johnson, 285 U.S. 480, 52 S.Ct. 424, 76 L.Ed. 893. In rejecting the claim, the holding in the Macallen case was referred to as follows (285 U.S. at page 494, 52 S.Ct. at page 427, 76 L.Ed. 893): 'There the commonwealth, which had long imposed a tax on corporate franchises measured by taxable income of the corporation, amended its statutes, so as to add the income from tax exempt bonds of the federal government to the measure of the tax. It was held that this change of taxation policy, embodied in the statute and 'adopted, as though it had been so declared in precise words, for the very purpose of subjecting these securities pro tanto to the burden of the tax,' was invalid. Thus the legislative abandonment of a policy which had previously discriminated in favor of tax exempt securities was treated as a discrimination against them, and the tax, although in fact nondiscriminatory, was condemned as analogous to the discriminatory tax held invalid in the Miller Case (Miller v. Milwaukee, 272 U.S. 713, 47 S.Ct. 280, 71 L.Ed. 487).' See also Educational Films Corp. v. Ward, 282 U.S. 379, 392, 393, 51 S.Ct. 170, 173, 75 L.Ed. 400, 71 A.L.R. 1226.

It cannot be said that the Oklahoma tax in question here was aimed at tax-exempt federal securities in the manner thus disclosed and condemned in the Macallen case. The history of the Oklahoma legislation on this subject discloses only that it sought to change its policy pursuant to the express authorization conferred by R.S. § 5219. It has effected its purpose by including within the measure of its franchise tax on national banks the entire net income without respect to source and without discrimination against tax-exempt federal securities. See First National Bank v. Oklahoma Tax Commission, 185 Okl. 98, 90 P.2d 438.

We do not now decide just what circumstances, if any, would bring a situation within the precise scope of the Macallen case, assuming that case still has vitality. It is sufficient to hold, as we do, that the statute in the instant case merits the test stated in Pacific Co. v. Johnson, viz.: 'Since the mere intent of the legislature to do that which the Constitution permits cannot deprive legislation of its constitutional validity, * * * the present act must be judged by its operation rather than by the motives which inspired it. As it operates to measure the tax on the cor- porate franchise by the entire net income of the corporation, without any discrimination between income which is exempt and that which is not, there is no infringement of any constitutional immunity.'

Appellant finally contends that the tax here in question violates the restriction in R.S. § 5219 that 'the rate shall not be...