A question, though novel itself, may be solved by the
application of principles long established.
The entire independence of the general government from any
control by the respective states is fundamental, and states may not
tax agencies of the federal government. M'Culloch
4 Wheat. 316.
Territories are instrumentalities established by Congress for
Page 232 U. S. 517
of the people within their respective borders, with authority to
sub-delegate the governmental power to the municipal corporations
therein, and the latter are therefore instrumentalities of the
A tax upon the exercise of the function of issuing bonds is a
tax upon the operations of the municipal government, and to tax the
bonds as property in the hands of the holder is in effect a tax
upon the right of the municipality to issue them.
A tax to any extent on bonds issued by a government or
subdivision thereof, however inconsiderable, is a burden on the
operation of that government. If allowed at all, it may be carried
to an extent which shall entirely arrest such operations.
4 Wheat. 316.
A state may not tax bonds issued by a municipality of a
Territory of the United States. And so held
as to an
attempt by the State of Minnesota to tax bonds issued by
municipalities of the Indian Territory and the Territory of
Oklahoma held by corporations in Minnesota.
There is no provision of law that makes obligations of
municipalities within the Indian Territory or the Territory of
Oklahoma obligations of the Territory, nor were such obligations
assumed by the State of Oklahoma on admission to statehood.
Exemption from taxation is a material element in the obligation
of a bond issued by a municipality, and it will not be presumed
that Congress would enact legislation that would impair that
obligation by eliminating the exemption without the clearest
legislative language expressing it.
Where bonds are exempted from state taxation under the federal
Constitution, they cannot be included as assets in ascertaining the
surplus of the corporation owning them for the purpose of imposing
a state property tax thereon.
When a state statute is attacked as denying equal protection of
the law by one class of those excepted from its benefits, the
question of constitutionality can be confined to the particular
class attacking it, and if there is reasonable ground for the
classification as to that class, it will be upheld to that extent,
without inquiring whether it is constitutional as to the other
classes affected by it.
A provision in a state tax statute excepting from an exemption
banks, savings banks, and trust companies is not unconstitutional
under the Fourteenth Amendment as discriminating against savings
banks as a class and denying them the equal protection of the law.
The state court having held that there were reasonable grounds for
Page 232 U. S. 518
classification, this Court so holds in regard to the statute of
Minnesota involved in this action.
114 Minn. 95 reversed in part.
The facts, which involve the constitutionality of certain tax
statutes of Minnesota as applied to bonds issued by municipalities
in Indian Territory and the Territory of Oklahoma, are stated in
Page 232 U. S. 520
MR. JUSTICE PITNEY delivered the opinion of the Court.
This writ of error brings under review a judgment of the Supreme
Court of Minnesota (114 Minn. 95) affirming the judgment of a lower
court, in proceedings for the collection of taxes assessed against
plaintiff in error for the year 1908. Plaintiff in error is a
savings bank, having no capital stock, and was taxable under § 839,
Rev.Laws 1905, which provides for ascertaining the surplus
remaining after deducting from its assets (other than real estate,
which is separately assessed) the amount
Page 232 U. S. 521
of the deposits and of all other accounts payable; the surplus
to be taxed as "credits." The Supreme Court of Minnesota held that
this section imposes not a franchise, but a property tax, and that
the surplus of savings banks as thus determined is taxable
property. This construction is not questioned here -- perhaps is
not open to question.
Two federal questions are raised.
First, the savings bank insisted in the state courts, and here
renews the insistence, that certain bonds issued by municipalities
in Indian Territory and in the Territory of Oklahoma held by the
bank, amounting to about $700,000 in value, should have been
omitted from the list of its personal assets for the reason that
bonds of this character are not taxable by the state.
This question, although novel, is to be solved by the
application of principles long established.
It was laid down by Mr. Chief Justice Marshall, speaking for
this Court in M'Culloch v.
4 Wheat. 316, 17 U. S. 436
that the state could not constitutionally impose taxation upon the
operations of a local branch of the United States Bank, because the
bank was an agency of the federal government, and the states had no
power, by taxation or otherwise, to hamper the execution by that
government of the powers conferred upon it by the people. The
supremacy of the federal Constitution and the laws made in
pursuance thereof and the entire independence of the general
government from any control by the respective states were the
fundamental grounds of the decision. The principle has never since
been departed from, and has often been reasserted and applied.
Osborn v. Bank of United
9 Wheat. 738, 22 U. S. 859
Home Savings Bank v. Des Moines, 205 U.
, 205 U. S. 513
Grether v. Wright,
75 F. 742, 753.
State taxation of national bank shares, as permitted by the Act
of Congress, without regard to the fact that a
Page 232 U. S. 522
part or the whole of the capital of the bank is invested in
national securities which are exempt from taxation
(Van Allen v.
3 Wall. 573, 70 U. S. 583
4 Wall. 459; National
Bank v. Commonwealth,
9 Wall. 353, 76 U. S. 359
is an apparent, not a real, exception. The same is true of taxes
upon the mere property of agencies of the federal government
(Thomson v. Pacific
9 Wall. 579, 76 U. S. 589
18 Wall. 5, 85 U. S. 32
Indeed, these exceptions rest upon distinctions that were
recognized in the decision of M'Culloch v. Maryland.
Justice Marshall said, in closing the discussion:
"This opinion . . . does not extend to a tax paid by the real
property of the bank, in common with the other real property within
the state, nor to a tax imposed on the interest which the citizens
of Maryland may hold in this institution, in common with other
property of the same description throughout the state. But this is
a tax on the operations of the bank, and is, consequently, a tax on
the operation of an instrument employed by the government of the
Union to carry its powers into execution. Such a tax must be
For a fuller discussion of the Van Allen
Home Savings Bank v. Des Moines, 205 U.
, 205 U. S.
The government of the respective territories in question was
that provided by the Act of Congress of May 2, 1890 (26 Stat. 81,
93, c. 182), of which the first 28 sections created a temporary
government for the Territory of Oklahoma, while § 29 (p. 93) and
subsequent sections established laws for the government of what was
thereafter to be known as the Indian Territory, but without
conferring general powers of local self-government. To the
territorial government of Oklahoma legislative power was granted (§
6), extending to "all rightful subjects of legislation not
inconsistent with the Constitution and laws of the United States."
Municipal corporations were in contemplation. Sec. 7 provided
Page 232 U. S. 523
the legislative assembly should not authorize the issuing of any
bond or evidence of debt by any county, city, town, or township for
the construction of any railroad, thus recognizing that the
borrowing power might be employed for other purposes. By § 11,
certain provisions of the Compiled Laws of Nebraska in force
November 1, 1889, so far as locally applicable, were extended to
and put in force in the territory until after the adjournment of
the first session of its legislative assembly, among these being
Chapter 14, entitled, "Cities of the Second Class and Villages,"
which contains provisions for the organization of municipal
corporations, with power to borrow money for public purposes. The
Indian Territory was not made an "organized territory," but, by §
31, certain general laws of the State of Arkansas, as published in
Mansfield's Digest (1884), were put in force there until Congress
should otherwise provide, among these, the chapter relating to
municipal corporations (§§ 722-959).
It is not disputed that the municipal bonds now in question were
lawfully authorized and are in every respect valid obligations of
the respective municipalities. Except as such obligations they
would hardly be treated as taxable property in the hands of the
The relation of the organized territories to the United States
has been frequently adverted to. In National Bank v. County of
Yankton, 101 U. S. 129
101 U. S. 133
which had to do with the organic act of the Territory of Dakota (12
Stat. 239), the Court, speaking by Mr. Chief Justice Waite,
"All territory within the jurisdiction of the United States not
included in any state must necessarily be governed by or under the
authority of Congress. The territories are but political
subdivisions of the outlying dominion of the United States. Their
relation to the general government is much the same as that which
counties bear to the respective states, and Congress may
Page 232 U. S. 524
legislate for them as a state does for its municipal
organizations. . . . Congress may not only abrogate laws of the
territorial legislatures, but it may itself legislate directly for
the local government. It may make a void act of the territorial
legislature valid, and a valid act void. In other words, it has
full and complete legislative authority over the people of the
territories and all the departments of the territorial governments.
It may do for the territories what the people, under the
Constitution of the United States, may do for the states."
The Territory of Oklahoma therefore was an instrumentality
established by Congress for the government of the people within its
borders, with authority to sub-delegate the governmental power to
the several municipal corporations therein. These corporations were
established for public and governmental purposes only, and
exercised their powers and performed their functions as agents of
the central authority. With respect to Indian Territory, the
situation under the Act of 1890 was somewhat different, and the
municipal corporations derived their authority directly from the
Act of Congress.
No doubt, as is usual in such cases, the people of the
respective municipalities had a more immediate and direct interest
than others in the local government, and in the local improvements
that presumably may have been constructed with the proceeds of the
municipal bonds. But this interest was that of citizens and
taxpayers, not that of proprietors. And the policy of Congress, as
manifested in its legislation upon the subject, had regard not
merely, nor even chiefly, for the particular and immediate
interests of the several municipalities. It looked to the promotion
of the prosperity and welfare of the whole people of the United
States, through the development of organized self-governing
communities -- afterwards to become states of the Union --
throughout the whole of the public domain. With statehood as the
ultimate aim and
Page 232 U. S. 525
purpose, the organic acts were consciously framed. They were
frequently, if not always, entitled: "An Act to Provide a Temporary
government for the Territory," etc., and so reads the title of the
Act of May 2, 1890.
In our opinion, therefore, the municipalities of the Territory
of Oklahoma and of Indian Territory were instrumentalities and
agencies of the federal government, with whose operations the
states were not permitted to interfere by taxation or otherwise,
and the issuing of municipal bonds was the performance of a
governmental function within the established doctrine. And we deem
it immaterial that these bonds were not guaranteed by the United
States, or even (in the case of the Oklahoma bonds) by the central
government of the territory.
The Supreme Court of Minnesota, conceding that the
municipalities were federal agencies in the performance of
governmental functions, yet deemed that a material narrowing of the
doctrine of M'Culloch v. Maryland
was to be inferred from
an expression contained in the opinion of this Court in
National Bank v.
9 Wall. 353, 76 U. S. 362
where it was said:
"The principle we are discussing has its limitation -- a
limitation growing out of the necessity on which the principle
itself is founded. That limitation is that the agencies of the
federal government are only exempted from state legislation so far
as that legislation may interfere with or impair their efficiency
in performing the functions by which they are designed to serve
And from a like expression contained in the opinion in
Railroad Company v.
18 Wall. 5, 85 U. S. 36
"It is therefore manifest that exemption of federal agencies
from state taxation is dependent not upon the nature of the agents,
or upon the mode of their constitution, or upon the fact that they
are agents, but upon the effect of the tax -- that is, upon the
question whether the tax does in truth deprive them of power to
serve the government as they were intended to
Page 232 U. S. 526
serve it, or does hinder the efficient exercise of their power.
A tax upon their property has no such necessary effect. It leaves
them free to discharge the duties they have undertaken to perform.
A tax upon their operations is a direct obstruction to the exercise
of federal powers."
But we deem it entirely clear that a tax upon the exercise of
the function of issuing municipal bonds is a tax upon the
operations of the government, and not in any sense a tax upon the
property of the municipality. And to tax the bonds as property in
the hands of the holders is, in the last analysis, to impose a tax
upon the right of the municipality to issue them. In
2 Pet. 449, 27 U. S.
-468, which involved the right of the city, acting
under the authority of the State of South Carolina, to ordain a tax
upon United States stock in the hands of the owner, Mr. Chief
Justice Marshall, speaking for the Court, after reaffirming the
principles settled in M'Culloch v. Maryland,
27 U. S.
"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 restraining 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."
It is on this ground that United States bonds have always been
held exempt from taxation under authority of the states. By like
reasoning, it has come to be recognized
Page 232 U. S. 527
that bonds issued by the states are not taxable by the federal
government, and it was upon this ground that this Court held, in
Pollock v. Farmers' Loan & Trust Co., 157 U.
, 157 U. S. 584
that the income tax provisions of the Act of August 27, 1894 were
unconstitutional in that they imposed a tax upon the income derived
from municipal bonds issued under the authority of the states.
It is contended by defendant in error that the situation was
changed by the admission of Oklahoma as a state, combining both the
Territory of Oklahoma and the Indian Territory. This was
accomplished under the Enabling Act of June 16, 1906, 34 Stat. 267,
c. 3335, and was evidenced by the proclamation of the President,
issued November 16, 1907. By § 4 of Art. I of the Oklahoma
Constitution, the debts and liabilities of the Territory of
Oklahoma were assumed by the state.
The argument is that, at the time of making the assessment for
taxes against plaintiff in error, the Indian Territory and the
Territory of Oklahoma had ceased to exist as such for nearly six
months, and that the bonds of the municipalities of those
territories, being the obligations of the territorial government,
were, by the Constitution, assumed by the state. There seems to be
no provision of law that constitutes the bonds of the
municipalities obligations of the territorial governments, and so
the argument falls to the ground at once.
But we are unwilling to intimate a concession that an assumption
by the State of Oklahoma of the obligation to pay these bonds would
operate to deprive the bondholders of the exemption from taxation
previously enjoyed. Presumably the municipal credit was enhanced,
and the terms of the municipal borrowing rendered more favorable,
by the understanding that the bonds, being obligations of an agency
of the federal government, would be exempt from taxation by the
several states. The value of the bonds in the market was presumably
Page 232 U. S. 528
Indeed, the state court in the present case very plainly
declares (114 Minn. 109) that bonds of the municipalities of the
territories, if not taxable by the state, command a higher price on
the market than bonds of the municipalities of the states. To
deprive bonds of the former description of their immunity from
state taxation, and this because of the subsequent action of
Congress in erecting the territories into a state, with or without
an assumption by the new state of the obligations of the former
federal agency, would be in effect to impair the obligation of the
contract, and this is so inconsistent with the honor and dignity of
the United States that such an intent should not be presumed
without the clearest legislative language requiring it.
It is, however, further suggested that the judgment under review
does not sustain a tax upon the bonds as property, but only a tax
upon the surplus of the savings bank, computed by taking into the
account all of its assets, amounting to about $12,000,000, of which
the bonds were only about $700,000, and deducting therefrom its
liabilities. But, as the surplus is treated as property and taxed
as such, it is obvious that some portion of the burden of the tax
is attributable to the ownership of the municipal bonds. In
Bank of Commerce v. New York
2 Black 620, it was held that the State of
New York, in taxing the capital of banks according to its
valuation, must leave out of the calculation that portion of the
capital invested in the stocks, bonds, or other securities of the
United States not liable to taxation by the state. And see
69 U. S.
Wall. 200; Home Savings Bank v. Des Moines, 205 U.
, 205 U. S.
It results that the inclusion of the bonds now in question in
the list of the assets of plaintiff in error, in ascertaining its
surplus for the purpose of imposing a state property tax thereon,
was repugnant to the Constitution of the United States.
Page 232 U. S. 529
The second federal question arises out of the insistence of the
savings bank that it was entitled to have omitted from the
computation of its surplus for purposes of taxation certain notes
held by it, amounting to about $161,000, and secured by mortgages
upon Minnesota real estate, upon which mortgages a registry tax had
It appears that the Minnesota Legislature, by c. 328, Laws of
1907, provided a registry tax upon debts secured by mortgages
covering real property in the state, the amount of the tax being
fifty cents upon each $100, payable at or before the filing of the
mortgage for record or registration. By § 3, it was enacted
"all mortgages upon which such tax has been paid, with the debts
or obligations secured thereby and the papers evidencing the same,
shall be exempt from all other taxes; but nothing herein shall
exempt such property from the operation of the laws relating to the
taxation of gifts and inheritances, or those governing the taxation
of banks, savings banks, or trust companies,"
with a further proviso not now pertinent.
It was and is insisted that this section, in subjecting banks,
savings banks, and trust companies to double taxation upon their
mortgages covering real estate in the State of Minnesota, while at
the same time relieving mortgages upon such real estate when
otherwise owned, from all taxation except the registration tax, is
in contravention of the "equal protection" clause of the Fourteenth
Although the clause limiting the exemption includes banks and
trust companies, the Supreme Court of Minnesota declined to
consider whether the classification was proper with respect to
those institutions, and so declining dealt with the status of
savings banks only. Holding that this class of institutions under
other laws enjoyed privileges respecting taxation that were
accorded to no other person or corporation subject to taxation, the
Page 232 U. S. 530
held that savings banks might properly be treated as a class by
themselves, and required to include such mortgages in the
computation of their assets for purposes of taxation.
If there is no unconstitutional discrimination against savings
banks, it is for present purposes unnecessary to inquire whether
the act discriminates against other banks and trust companies.
Tyler v. Judges, 179 U. S. 405
179 U. S. 409
Hooker v. Burr, 194 U. S. 415
194 U. S. 419
Hatch v. Reardon, 204 U. S. 152
204 U. S. 160
Southern Railway Co. v. King, 217 U.
, 217 U. S. 534
Standard Stock Food Co. v. Wright, 225 U.
, 225 U. S. 550
Rosenthal v. New York, 226 U. S. 260
226 U. S.
The Supreme Court of Minnesota lucidly summarized the state of
the law which furnished, in its judgment, a sufficient reason for
the classification as follows:
"Section 839, Rev.Laws 1905, treats of savings banks, for the
purposes of taxation, in a special manner. They have no capital
stock, yet their property is not taxed in the same way as the
property of individuals or of other corporations. By § 838, the
value of the stock of corporations having capital stock is
ascertained by deducting the value of the real and personal
property from the market or actual value of the stock, and the
amount of the difference is taxed as stocks and bonds, and the real
estate and personal property are taxed in the ordinary way. Section
839 places all banks without capital stock (except savings banks),
brokers, and stock jobbers in one class, and savings banks in
another class. The former are taxed by ascertaining the difference
between the amount of money on hand or in transit, the amount of
money in the hands of others, subject to draft, the amount of
checks or cash items, etc., the amount of bills receivable and
other credits, and from the total of these amounts the deposits and
accounts payable are deducted. The balance, if any, is assessed as
money under § 835. The bonds and stocks and personal and real
property are assessed separately
Page 232 U. S. 531
in the ordinary way. But, in the case of savings banks, no
specific property is taxed separately except real property. Its
money, checks, bills receivable, bonds, and stocks, and all
personal property appertaining to the business are listed for the
purpose of ascertaining whether there is a surplus, and the surplus
is found by deducting the total of the deposits and accounts
payable from the total value of the costs."
For these and other reasons pointed out in the opinion, it seems
to us the court was justified in holding that there was reasonable
grounds for the discrimination so far as savings banks were
concerned, and that plaintiff in error had therefore not been
deprived of the equal protection of the laws. In lieu of further
discussion, we refer to the oft-quoted language employed by Mr.
Justice Bradley, speaking for this Court in Bell's Gap Railroad
Co. v. Pennsylvania, 134 U. S. 232
134 U. S.
But, because of the error in subjecting the bonds of the
municipalities of the territories to taxation, the judgment must be
reversed, and the cause remanded for further proceedings not
inconsistent with this opinion.