The provision in the charter of the plaintiff in error that
"said institution shall have a lien on the stock for debts due
it by the stockholders before and in preference to other creditors,
except the state for taxes, and shall pay to the state an annual
tax of one half of one per cent on each share of capital stock,
which shall be in lien of all other taxes,"
limits the amount of tax on each share of stock in the hands of
the shareholders, and any subsequent revenue law of the state which
imposes an additional tax on such shares in the hands of
shareholders impairs the obligation of the contract, and is void.
Farrington v. Tennessee, 95 U. S. 679,
affirmed to this point.
The decision by the Supreme Court of the state that this
exemption applies to new stock in the bank, created and issued
since the adoption of the Constitution of 1870, being in favor of
the exemption claimed by the bank, cannot be reviewed by this
Court.
When not otherwise exempted, the capital stock of a corporation
and its shares in the hands of shareholders may both be taxed, and
if so taxed, it is not double taxation.
The surplus accumulated by the plaintiff in error is not
exempted from taxation by the said provision of exemption in its
charter.
These are writs of error to the Supreme Court of the State of
Tennessee, sued out by the plaintiffs in error for the purpose of
reviewing the judgment of the state court in favor of the state in
each case. They are both of them suits in equity, brought by the
state, for the use of the City of Memphis in the one case, and by
the state and the County of Shelby in the other, for the purpose of
recovering the amounts of certain taxes alleged to be due the City
of Memphis and the
Page 161 U. S. 135
County of Shelby for various years, commencing in 1887. The
suits are substantially alike, and involve the same questions, and
the decision of the one will be the decision of the other. In the
further discussion, it will only be necessary to refer to the first
case.
The bill, after it was amended, set forth the material facts
necessary to raise the questions herein involved. It alleged the
incorporation of the bank in 1856, and in its charter was contained
the following provision:
"Said institution shall have a lien on the stock for debts due
it by the stockholders before and in preference to other creditors,
except the state for taxes, and shall pay to the state an annual
tax of one-half of one percent on each share of capital stock,
which shall be in lieu of all other taxes."
It alleged that notwithstanding the above provision, there had
been assessed upon the stock certain amounts, alleged to be due for
taxes, for the years 1887 to 1890, inclusive, by virtue of chapter
2 of the general tax laws of the state for the year 1887, and
chapter 104 of the Laws of 1889, and in the amended supplemental
bill an additional sum was claimed for the taxes from 1891 to 1894,
inclusive, under the above-mentioned acts. The bill also made claim
to recover the
ad valorem taxes on the surplus and
undivided profits of the plaintiff in error bank for the years
1892, 1893, and 1894, under the proviso contained in section 3 of
chapter 26 of the Extra Session Acts of 1891, the proviso
reading:
"
Provided that the surplus and undivided profits in
such bank, banking association, or other corporation shall be
assessable to said bank or other corporation, and the same shall
not be considered in the assessment of the stock therein."
All the material allegations necessary to show a valid and legal
assessment upon the stock were set forth in the bill, unless the
provision in the charter of he bank above alluded to prevents the
assessment of such stock or shares of stock in the hands of
shareholders in any other way or for any other sum than that stated
in the charter. The bill also alleged that complainant was advised
that the capital stock in a corporation and shares of stock in the
hands of shareholders were separate and distinct subjects of
taxation, and that, in the
Page 161 U. S. 136
absence of any exemption clause, it was within the power of the
state, without subjecting such legislation to the objection of
double taxation, to have taxed both the capital stock of the
corporation and the shares of stock in the hands of the
stockholders; that the charter tax, bonus, or whatever else it may
be called, or one-half of one percent to be paid to the state is a
tax upon the shares of stock, and that the language "in lieu of all
other taxes" means in lieu of all other taxes on the shares of
stock, and that it has no effect to exempt the capital stock of the
corporation from taxation. The question of law whether the capital
stock is subject to
ad valorem taxes or the shares of
stock in the hands of the shareholders was submitted to the court
for determination. The bill also sets forth that after the adoption
of the Constitution of Tennessee of 1870 (on the 4th day of May in
that year), the capital of the bank had been increased from either
$60,000, or from $200,000, to $1,000,000, and the plaintiffs allege
that the new stock, whatever may be the amount thereof, aside from
all other questions, is taxable.
To the original bill a demurrer was filed upon the ground that
the general tax laws, under which the taxes against the bank or its
shareholders were assessed and sought to be collected, were
violative of the contract provision of the Constitution of the
United States. The demurrer was overruled, with leave to the
defendants to rely on it in their answer. Thereupon a stipulation
was made, in each case fixing the basis of the reassessments for
the years 1891, to 1894, inclusive, waiving the necessity for the
discovery of the shareholders in the bank upon the bank's
agreeing
"that for the purposes of this case, the shares of stock in the
name of J. A. Omberg shall be taken as validly and legally assessed
for the years aforesaid."
It was further stipulated
"that any liability that might be adjudged against Mr. Omberg as
a shareholder in such corporation should be treated as establishing
a like liability of all the shareholders therein, and that for such
liability of all the shareholders as thus established, a decree
should be entered against the corporation, the said corporation
consenting that complainants have a decree against it for
Page 161 U. S. 137
any liability for taxes that may be herein established against
the shareholders."
The stipulation between the parties was that the defendant J. A.
Omberg should, for the purpose of testing the liability of the
shareholders for taxes, be considered and treated as a
representative of all the shareholders, and that a liability
decreed against him for taxes due as a shareholder should be
considered as the liability of all the shareholders duly
established, and that a decree in favor of complainants should be
entered against the bank and against its unknown shareholders.
The case thereupon was heard upon the amended and supplemental
bills, the stipulations above spoken of, which were filed, and the
demurrer of the defendants, which raised the question that the tax
laws under which these taxes were sought to be collected against it
and its shareholders were void because in conflict with Section 10
of Article I of the Constitution of the United States. The
chancellor before whom the case was tried was of opinion that the
demurrer was well taken, and accordingly dismissed the bill of
complaint. The Supreme Court of the State of Tennessee reversed
this decree of dismissal, and held first that the owners of shares
of stock in the Bank of Commerce were thus liable for
ad
valorem taxes to the City of Memphis, and second that the bank
was liable for
ad valorem taxes to the city for the years
1892 to 1894, inclusive, on its surplus and undivided profits.
Judgment was entered accordingly, and the plaintiffs in error the
Bank of Commerce and J. A. Omberg have sued out this writ of error
to obtain a review of the judgment by this Court.
The errors assigned were:
(1) That the Supreme Court of Tennessee erred in adjudging a
liability of the shareholders in the Bank of Commerce to pay to the
State of Tennessee, or to the County of Shelby, or to the City of
Memphis
ad valorem taxes on their shares of stock for the
years specified because, as is alleged, the shareholders are
thereby deprived of the immunity from taxes guarantied to them by
the contract contained in the charter of the Bank of Commerce, and
that the general tax laws affirmed
Page 161 U. S. 138
to be valid against them are repugnant to the Constitution of
the United States.
(2) For the like ground, error is assigned to so much of the
decree as denies to the plaintiff in error the Bank of Commerce an
exemption from taxation on its surplus and undivided profits,
notwithstanding its exemption therefrom under its charter
provision.
Page 161 U. S. 139
MR. JUSTICE PECKHAM delivered the opinion of the Court.
The claim of the state seems to have been, in the alternative,
that either the corporation was liable for the taxes assessed under
the general laws above referred to or else that the shareholders
were, and the bill was framed with the idea of obtaining a final
decision in regard to which of the two parties was liable without
making it necessary to commence two actions for that purpose. The
defendants,
Page 161 U. S. 140
the bank and shareholders, claimed entire exemption from all
taxes upon either the corporation or the shareholders other than
the taxes imposed in the charter. In support of its claim that the
correct construction of the charter clause, as now presented, is
that the charter tax was laid on the capital stock, and that it was
exempted from further taxation, and that the shares of stock were
subject to general taxation, counsel for the state refer to the
decision in the case of
Farrington v. Tennessee,
95 U. S. 679. In
that report, at page
95 U. S. 681,
Mr. Justice Swayne quotes the exemption clause of the charter in
question as taken from the record in that case, as follows:
"That the said company shall pay to the state an annual tax of
one-half of one percent on each share of the capital stock
subscribed, which shall be in lieu of all other taxes."
A full and correct quotation of the clause (which is in reality
the same in both cases) has already been given, but it may be
repeated here. It is as follows:
"Said institution shall have a lien on the stock for debts due
it by the stockholders before and in preference to other creditors,
except the state for taxes, and shall pay to the state an annual
tax of one-half of one percent on each share of capital stock,
which shall be in lieu of all other taxes."
The record from which Mr. Justice Swayne made his quotation
omitted the prior portion of the clause just set forth, and counsel
for the state herein claim that the decision in the
Farrington case by this Court, which held
"that the exemption was a contract between the state and the
bank limiting the amount of tax on each share of stock, and that a
subsequent revenue law of the state which imposed additional taxes
on the shares in the hands of the shareholders impaired the
obligation of the contract, and was void,"
was not decisive of this case. The difference between the
provision as quoted by Mr. Justice Swayne and the actual provision
is, as counsel claim, material, and must lead to different results,
because the first quotation was misleading and the record did not
state the whole clause. It was upon this assumed difference that
the Supreme Court of Tennessee in this case came to the conclusion
it did, and held that the
Page 161 U. S. 141
charter tax was on the capital stock, and the exemption from
further taxation was an exemption of that stock, and that the
shares of stock were, in the hands of the shareholders, subject to
general taxation. As this Court in the
Farrington case has
held that the charter tax was laid
on the shares of stock,
and that the same were
not subject to other or further
taxation, the Tennessee court acknowledged the controlling
force of that decision upon the case then before it, provided the
question was the same or in substance the same as was considered
and decided in the
Farrington case. The state court then
proceeded to point out in its opinion what it considered to be the
material difference between the two provisions, and it held that
the provision which gives a lien on the stock for debts due the
bank by the stockholders before and in preference to other
creditors, except the state for taxes, materially changes the
meaning from that contained in the exemption clause quoted in the
Farrington case, and that the language, as now quoted,
naturally implied that the tax referred to in the charter was upon
the capital stock, and that the lien reserved by the state for
taxes does not refer to the annual charter tax, for the reason that
the charter tax was to be paid by the corporation, but that it
referred to such other or general tax as might be levied by the
state upon the shares, thus showing that the intention of the state
was to reserve to itself the right to tax the shares in the hands
of the shareholders, and to exempt the stock as the property of the
corporation. It was also said that it was neither natural nor
reasonable to assume that the state reserved a lien on the shares
which were the property of the shareholders to pay a tax that the
corporation was required to pay. In other words, it could not be
supposed that the state required one person to pay a tax and
reserved a lien upon the property of another to secure its payment,
and that, if the lien of the state was reserved for securing the
payment of the charter tax, the state was placed in the attitude of
having voluntarily postponed itself to every other creditor of the
corporation, because all creditors must be paid before the
shareholder gets anything. These reasons, which commended
Page 161 U. S. 142
themselves to the Supreme Court of Tennessee, were sufficient in
the judgment of that tribunal to show a difference in the meaning
of the two clauses, and it therefore came to the conclusion it did
notwithstanding the decision of this Court in the
Farrington case, and the shareholders were held liable to
pay the tax claimed by the state authorities.
On the other hand, it is said that the difference in the
language used in the two quotations is wholly immaterial in any
event, and that whatever portion of the clause may have been
omitted in the record in the
Farrington case, the whole
charter of the bank was before the Court for its examination, and
it cannot be supposed that in a case of such importance, argued by
such eminent counsel as those who appeared in that case, there was
anything overlooked or omitted. The claim is therefore made that
the Court must have regarded the portion of the clause omitted in
the record as immaterial.
We do not think, under the circumstances, that we ought now to
come to a different conclusion upon the question of exemption from
that which was arrived at by this Court in the
Farrington
case. As the whole charter was then before the Court, we are not
prepared to say that its force was misunderstood, or that there was
an omission by the court to consider all the language of the
exemption clause simply because a portion of it is omitted in the
quotation from the record made in the opinion therein delivered. We
are not inclined, therefore, to overrule or distinguish the
Farrington case, and we must now hold that the charter
clause of exemption limits the amount of tax on each share of stock
in the hands of the shareholder, and that any subsequent revenue
law of the state which imposes an additional tax on such shares in
the hands of shareholders impairs the obligation of the contract
and is void. This compels us to reverse the judgments herein
against the shareholders.
Counsel for plaintiffs in error also urged in the course of
their argument before us that the
Farrington case not only
decided that the shareholders were exempt from any further taxation
by reason of this clause in the charter, but that the corporation
was also thereby exempted, so that the only tax
Page 161 U. S. 143
that could be collected from either the corporation, the
shareholders, or both, was the one-half of one percent mentioned in
the charter.
Within this general claim of exemption is embraced the right to
tax the stock in this bank issued since the adoption of the present
Constitution of Tennessee in 1870. The charter (which was granted
long before the adoption of that constitution) provides, section 2,
that the capital stock of said company shall be divided into shares
of $50 each, and, when 200 shares shall have been subscribed, and
the sum of $1 per share paid thereon, the shareholders may meet and
elect five directors. Section 4 provides that the bank
"may receive on deposit any and all sums not less than one
dollar per week offered as stock deposits, . . . and when such
deposits shall amount to fifty dollars, they may at the option of
the depositor, become stock in the institution."
The parties to this suit agreed by stipulation that on the 5th
day of May, 1870 (the day the constitution was adopted), the
capital stock of the bank was $200,000, and that on March 17, 1887,
and on sundry days prior to June 1, 1887, it was regularly
increased to $600,000, and that on the 17th day of March, 1890, and
on sundry days prior to June 1, 1890, it was again regularly
increased to $1,000,000. The supreme court allowed the claim of
exemption, and held that the stock issued since the adoption of the
new constitution stood in all respects as to taxation the same as
the stock earlier issued, notwithstanding the provision of the
constitution for the taxation of all property, and that therefore
the bank was not liable to the tax claimed by the state
authorities. The validity of the claim made by the bank for
exemption of the new as well as of the old stock was therefore
admitted by the state court as a right protected by the federal
Constitution.
The plaintiffs in error claim that, as to this portion of the
decision of the Supreme Court of Tennessee, it cannot be reviewed
by this Court, because it was in favor of the bank. The bank, by
its answer to the bill, drew in question the validity of the acts
of the assessing officer of the state acting under the authority of
the general statutes of Tennessee, providing
Page 161 U. S. 144
for the assessment of its property, on the ground that the
authority exercised by the assessing officer under the Tennessee
statutes impaired the obligation of the contract entered into
between the state and the bank in its charter, and the decision of
the Supreme Court of Tennessee was against the validity of the
authority so exercised under those general revenue laws.
The state court decided in favor of the exemption claimed by the
bank by virtue of its contract with the state. The protection of
the constitutional provision was thus accorded it.
We are of the opinion that this Court cannot in this case review
that decision.
Section 709, Revised Statutes of the United States, gives
jurisdiction to this Court, among other things, upon writ of error
to review the final judgment or decree in any suit in the highest
court of the state in which a decision in the suit could be had
where is drawn in question the validity of a statute of, or
authority exercised under, any state on the ground of their being
repugnant to the Constitution, treaties, or laws of the United
States, and the decision of the state court is in favor of their
validity. Here, the decision of the state court is against the
validity of the acts of the assessing officer acting under the
authority of the revenue laws as applied to the property of the
bank, and it is in favor of the exemption claimed under the
contract.
In
Murdock v. City of
Memphis, 20 Wall. 590, it was held that under the
provisions of the Act of February 5, 1867, c. 28, 14 Stat. 385, of
which section 709 of the Revised Statutes is substantially a
transcript, it was essential to the jurisdiction of this Court to
review a question decided in a state court that one of the
questions mentioned in the federal statute must have been raised
and presented to the state court, and that it must have been
decided by the state court against the right claimed or asserted by
plaintiff in error under the Constitution, treaties, laws, or
authority of the United States. To the same effect are
New
Orleans Waterworks Co. v. Louisiana Sugar Refining Co.,
125 U. S. 18;
St. Paul, Minneapolis & Manitoba Railway v. Todd
County, 142 U. S. 282.
Page 161 U. S. 145
We cannot, therefore, review the decision of the state court
allowing the claim of exemption from taxation of the capital stock
of the bank, although the consequence is that in these cases both
the capital stock and the shares thereof in the hands of the
shareholders escape any taxation other than the charter tax.
Accepting, as we do, the authority of the
Farrington
case for the point therein decided, which exempts the stock in the
hands of the shareholders from any further tax than that which is
provided for in the charter, and being concluded in this case by
the decision of the Supreme Court of Tennessee in favor of the
exemption of the capital stock of the corporation, we are not here
called upon to examine the validity of the claim of the bank as to
the decision of this Court in cases preceding that of Farrington,
where counsel allege it has been determined that both the
corporation and the shares of stock in the hands of the
shareholders are exempt from further taxation under clauses which
are said to be similar to those in the charter under
consideration.
In this case of
Bank v. Tennessee for Use of City of
Memphis (the first of the above-entitled actions), the supreme
court held that the bank was liable to pay the municipal taxes
under the revenue law (section 3, c. 26, Extra Session Acts 1891),
above mentioned, upon its surplus and undivided profits. Section 3
of that act has already been referred to, but the material portion
of it is here set forth, and is as follows:
"Provided that the surplus and undivided profits in such bank,
banking association, or other corporation shall be assessable to
said bank or other corporation, and the same shall not be
considered in the assessment of the stock therein."
The corporation plaintiff in error demands the same exemption
from taxation on its surplus that has been accorded it for its
capital stock, and it bases its contention upon the same clause of
exemption in its charter. We think it cannot be sustained as to the
surplus, which we believe is taxable under the law above quoted.
This whole demand of exemption from taxation made by the bank and
its shareholders must be considered
Page 161 U. S. 146
with reference to the general rule governing claims of that
nature. It is well known, has long existed, and is undoubted.
New Orleans City & Lake Railroad v. New Orleans,
143 U. S. 192,
143 U. S. 195;
Vicksburg & Pacific v. Dennis, 116
U. S. 655, and many cases there cited;
Farrington v.
Tennessee, 95 U. S. 679,
95 U. S. 686;
West Wisconsin Railway v. Supervisors, 93 U. S.
595;
Tucker v.
Ferguson, 22 Wall. 527.
These cases show the principle upon which is founded the rule
that a claim for exemption from taxation must be clearly made out.
Taxes being the sole means by which sovereignties can maintain
their existence, any claim on the part of anyone to be exempt from
the full payment of his share of taxes on any portion of his
property must on that account be clearly defined and founded upon
plain language. There must be no doubt or ambiguity in the language
used upon which the claim to the exemption is founded. It has been
said that a well founded doubt is fatal to the claim; no
implication will be indulged in for the purpose of construing the
language used as giving the claim for exemption where such claim is
not founded upon the plain and clearly expressed intention of the
taxing power.
The capital stock of a corporation, and the shares into which
such stock may be divided and held by individual shareholders, are
two distinct pieces of property. The capital stock and the shares
of stock in the hands of the shareholders may both be taxed, and it
is not double taxation.
Van Allen v.
Assessors, 3 Wall. 573;
People v.
Commissioners, 4 Wall. 244, cited in
Farrington
v. Tennessee, 95 U. S.
687.
This statement has been reiterated many times in various
decisions by this Court, and is not now disputed by anyone. In the
case last cited, Mr. Justice Swayne, in delivering the opinion of
the Court, enumerated many objects liable to be taxed other than
the capital stock of a corporation, and among them he instanced (1)
the franchise to be a corporation, (2) the accumulated earnings,
(3) profits and dividends, (4) real estate belonging to the
corporation and necessary for its business, and he adds that
"this enumeration shows the searching
Page 161 U. S. 147
and comprehensive taxation to which such institutions are
subjected where there is no protection by previous compact."
And in
Tennessee v. Whitworth, 117 U.
S. 129, at page
117 U. S. 136, Mr. Chief Justice Waite, in delivering
the opinion of the Court, says:
"That in corporations, four elements of taxable value are
sometimes found: first, the franchise; second, the capital stock in
the hands of the corporation; third, the corporate property; and
fourth, the shares of capital stock in the hands of the individual
stockholders."
The surplus belonging to this bank is "corporate property," and
is distinct from the capital stock in the hands of the corporation.
The exemption, in terms, is upon the payment of an annual tax of
one-half of one percent upon each share of the capital stock, which
shall be in lieu of all other taxes. The exemption is not, in our
judgment, greater in its scope than the subject of the tax.
Recognizing, as we do, that there is a different property in that
which is described as capital stock from that which is described as
corporate property other than capital stock, and remembering the
necessity there is for a clear expression of the intention to
exempt before the exemption will be granted, we must hold that the
surplus has not been granted exemption by the clause contained in
the charter under discussion. The very name of "surplus" implies a
difference. There is capital stock, and there is a surplus over,
above and beyond the capital stock, which surplus is the property
of the bank until it is divided among stockholders.
The case of
Bank v. Tennessee, 104 U.
S. 493, does not hold to the contrary of this doctrine.
This question was not therein discussed or decided. The question
which was decided related only to the taxation of real property not
used by the bank in its business, and it was held liable to
taxation.
The case is no authority for the proposition contended for here,
namely that the whole surplus of this bank is exempt from taxation.
No individual shareholder has any legal right to claim any portion
of this surplus. Until divided by the board of directors, it
remains the property of the corporation itself, and in the sense in
which the words "capital stock"
Page 161 U. S. 148
are used in the exemption clause, the surplus does not form any
part thereof. It is said that the purpose of incorporating a bank
is to enable the institution to accumulate profits, and to make
dividends out of them, and that the dividends cannot be made until
the profits have been accumulated, and that, under this ruling,
profits would come under the description of surplus to be taxed
before distribution in a dividend. It is true that dividends cannot
rightfully be made until profits have accumulated; but it is one
thing to accumulate profits each six months, or annually, and then
divide them among the stockholders by way of dividends, and quite
another thing to accumulate profits year after year, and, while
still declaring dividends, accumulate a surplus which is not so
divided. The sums accumulated by way of profit between the
regularly recurring dividend days might not be regarded as surplus,
provided those profits were regularly distributed in dividends. The
surplus in this case is clearly not of that kind which has been
saved for the purpose of being distributed by dividends. It may be
true that the general effect of a tax on this surplus might
indirectly operate upon the shareholder by possibly lessening the
value of his shares to some extent, but that is not the same as if
a tax had been laid upon those shares. In levying the charter tax,
it was conceded that the tax has always been measured by the par
value of the shares of stock, while the actual value of such
shares, because of the large surplus owned by the bank, may have
been very much greater, and the statute under which the surplus is
taxed provides that such surplus must not be considered in the
assessment upon the stock, so that provision is made whereby a tax
upon the surplus and the charter tax upon the shares of stock will
neither be double nor unjust taxation. Although a surplus may be
required by the National Banking Act and also by the laws of good
and safe banking, yet we do not perceive that this fact has any
material effect upon the question.
We are therefore of opinion that the surplus was properly taxed,
and that the bank's claim of exemption as to such surplus is
without foundation in law.
Page 161 U. S. 149
These views lead to a reversal of so much of the judgment as is
against the shareholders, and the cases are therefore remanded to
the state court for further proceedings in conformity with this
opinion.
MR. JUSTICE WHITE concurs insofar as the decree recognizes the
exemption of the shares of stock from all taxation except that
enumerated in the contract, but dissents from the conclusion as to
the power to tax the surplus and undivided profits.
