The legislation of the State of Connecticut in respect to the
taxation of shares of stock in a local corporation held by
nonresidents, which is set forth in the statement of facts, is not
in conflict with paragraph 1 of section 2 of Article IV of the
federal Constitution or the Fourteenth Amendment to that
Constitution.
Section 2 of chap. 153 of the Public Acts of Connecticut, passed
in 1897, reads as follows:
"The cashier or secretary of each corporation whose stock is
liable to taxation, and not otherwise taxed by the provisions of
this title, shall, on the first day of October annually, or within
ten days thereafter, deliver to the comptroller a sworn list of all
its stockholders residing without this state on said day, and the
number and market value of the shares of stock therein then
belonging to each, and shall, on or before the twentieth day of
October annually, pay to the state one and one-half percent of such
value, and if any such cashier or secretary shall neglect to comply
with the provisions of this section he shall forfeit to the state
one hundred dollars in addition to said one and one-half percent so
required to be paid."
This method of assessment and taxation of nonresident
stockholders in insurance corporations has been in force in
Connecticut since 1866, although at first the rate of tax was only
one percent. Public Acts 1866, chap. 29.
By section 1 of chap. 50 of the Public Acts of 1899, it is
provided:
"Section 1923 of the General Statutes is hereby amended to read
as follows:"
" When not otherwise provided in its charter, the stock of every
corporation shall be personal property, and be transferred only on
its books in such form as the directors
Page 185 U. S. 365
shall prescribe, and such corporation shall at all times have a
lien upon all the stock owned by any person therein, for all debts
due to it from him, and any corporation desiring to enforce such
lien may give notice to such stockholder, his executor or
administrator, and if there be none, his heir at law, that, unless
he shall pay his indebtedness to said corporation within three
months it will sell said stock, and such corporation may prescribe
by its bylaws the manner of giving notice required by this section,
but the notice of sale shall in no case be given until the
liability has become fixed."
The original section in the General Statutes, enacted in 1888,
is precisely the same as the first half of the amended section, and
secured to the corporation a lien upon the stock for debts due to
it by the stockholder, the amendment consisting in the addition of
the last half, which provides the method of enforcing such
lien.
Section 3836 of the General Statutes, as amended by chap. 63 of
the Public Acts of 1889, reads:
"SEC. 3836. Shares of the capital stock of any bank, national
banking association, trust, insurance, turnpike, bridge, or
plankroad company, owned by any resident of this state, shall be
set in his list at its market value in the town in which he may
reside; but so much of the capital of any such company as may be
invested in real estate, on which it is assessed and pays a tax,
shall be deducted from the market value of its stock, in its
returns to the assessors."
This action was commenced by the State of Connecticut to recover
of the Travelers' Insurance Company, under the first of the
statutes quoted, taxes due for the year 1898, from nonresident
stockholders. The defendant answered, alleging that its capital
stock consisted of 10,000 shares, of which 8,201 were owned by
residents and 1,799 by nonresidents of the state; that it was the
owner of a large amount of real estate on which it had been
assessed and had paid a tax, and adding these averments:
"7. The market value of the stock of the defendant company on
the 1st day of October, 1898, was $250 per share."
"8. All of the said resident owners of said stock were
assessed
Page 185 U. S. 366
upon the stock owned by them respectively on the first day of
October, 1898 at an assessed valuation equal to the said market
value of said stock less a large deduction therefrom by reason of
the company's said investments in real estate."
"9. The amount per share sought to be collected from the
defendant in this action as a tax upon the stock owned by said
nonresident shareholders is far in excess of the amount per share
paid and required to be paid as a tax by the several resident
shareholders aforesaid on the stock owned by them on the said 1st
day of October, 1898."
A demurrer to this answer was sustained and judgment entered for
the state, which was affirmed by the supreme court of the state, 73
Conn. 255, and thereupon the case was brought here on error.
MR. JUSTICE BREWER delivered the opinion of the Court.
The single question presented for our consideration is whether
this legislation of the State of Connecticut in respect to the
taxation of the shares of stock in a local corporation held by
nonresidents is in conflict with paragraph 1 of Section 2 of
Article IV of the federal Constitution, or the Fourteenth Amendment
thereto. It is alleged that there is such discrimination between
resident and nonresident stockholders as works a denial of the
equal protection of the laws, and to the prejudice of citizens of
other states. The stock of the nonresident stockholder is assessed
at its market value, without any deduction on account of real
estate held by the corporation. The stock of the resident
stockholder is assessed at its market value, less the proportionate
value of all real estate held by the corporation upon which it has
already paid a tax. As thus stated, there would appear to be a
wrongful discrimination, and that the nonresident stockholder was
subjected to a larger burden of
Page 185 U. S. 367
taxation than the resident stockholder, and this not as a result
of the action of any mere ministerial officers in making
assessments, but by reason of the direct command of the statute to
include the real estate in the valuation in the one case and to
exclude it in the other.
But this apparent discrimination against the nonresident
disappears when the system of taxation prevailing in Connecticut is
considered. By that system, the nonresident stockholder pays no
local taxes. He simply pays a state tax -- contributes so much to
the general expenses of the state. While, on the other hand, the
resident stockholder pays no tax to the state, but only to the
municipality in which he resides. In other words, the state imposes
no direct taxes for its benefit upon the property belonging to
residents, but collects its entire revenue from corporations,
licenses, etc. The rate of state tax upon the nonresident
stockholder is fixed, fifteen mills on a dollar, applying equally
to all, while the rate of local taxation varies in the several
cities and towns, according to the judgment of their local
authorities as to the amount necessary to be raised for carrying on
the municipal government. Obviously the varying difference in the
rate of the tax upon the resident and the nonresident stockholders
does not invalidate the legislation. How, then, can it be that a
difference in the basis of assessment is such an unjust
discrimination as necessarily vitiates the tax upon the
nonresident? The resident stockholder does not pay the fifteen
mills to the state which is demanded of the nonresident, and the
nonresident stockholder does not pay to any locality the sum,
greater or less than fifteen mills, which may be imposed by the
authorities of that locality. In respect to this the supreme court,
in its opinion, said (p. 281):
"It is unnecessary to consider whether or under what
circumstances the limitations imposed by a state in respect to the
mutual relations of members of its corporations in the matter of
taxation may transform legislation for that purpose into a denial
of rights secured to citizens of other states; it is enough for
present purposes that a mere inequality in the stress of taxation
cannot produce that effect."
"But the claim that in this case the inequality operates
Page 185 U. S. 368
against nonresidents or citizens of other states as a class is
unfounded. While the admissions of the demurrer assume the tax in
respect to the defendant for this year to bear more heavily on
nonresidents than on residents, the general effect of the law is
matter of common knowledge. The average rate of taxation for
municipal purposes for the 168 towns approximates fifteen mills,
which is the rate for the special tax imposed in respect to
nonresident shares; but the average rate for municipal taxation in
the ten larger towns (representing much more than half the grand
list of the state) is about twenty-one mills. The clear purpose of
the legislature in fixing the mode of valuation for the property
subject to a single rate for special taxation, and the valuation
for the property subject to widely varying rates for municipal
taxation, was to approximate a general equality in the burden that
should fall on the two classes of property, and it well may be that
the rule objected to in respect to the valuation of the interests
of resident shareholders in corporations investing in taxable land
still leaves, as a whole, a lighter burden of contribution resting
upon nonresident shareholders."
In other words, the state, dealing with the question of taxation
of the shares of stock in a local corporation, found two classes --
one, shares held by residents, and the other, those held by
nonresidents. It was believed that a resident in a city or town,
enjoying all the benefits of local government, should be taxed for
the expenses of that government upon all the property he possessed,
whether that property consisted in part or in whole of shares of
stock. On the other hand, the nonresident, enjoying little or none
of the benefits of local government, was exempted from taxation on
account of the expenses of such local government. At the same time,
it was not right that he should escape all contribution to the
support of the state which created and protected the corporation
and the property of all its stockholders, and so a tax was cast
upon the nonresident stockholder for the expenses of the state.
This, with kindred taxes, has been found sufficient to pay the
running expenses of the state government. The resident is not
called upon to pay any of the expenses of the state, but only to
bear his proportional
Page 185 U. S. 369
share of those of the municipality. The nonresident is called
upon to pay no share of the expenses of the municipality, but only
to contribute to the support of the state.
The legislature, with these inequalities before it, aimed, as
appears from the opinion of the supreme court, to apportion fairly
the burden of taxes between the resident and the nonresident
stockholder, and the mere fact that, in a given year, the actual
workings of the system may result in a larger burden on the
nonresident was properly held not to vitiate the system, for a
different result might obtain in a succeeding year, the results
varying with the calls made in the different localities for local
expenses. If it be said that equality would be secured by imposing
upon the resident stockholder a uniform tax for local purposes of
fifteen mills, without any reduction on account of real estate held
by the corporation, a gross inequality might result in many towns
between the resident stockholder and other taxpayers of that
locality in that they might be called upon to pay much more than
he. On the other hand, if it be contended that inequality might be
avoided by holding the situs of nonresident stockholders to be that
of the city in which the corporation has its principal office (in
this case Hartford), then unjust discrimination between that city
and other localities would follow in that to the one was given the
total benefit of property which in fact belonged to parties living
outside of the state. So, while there may result from year to year
a variance in the amount of the burden actually cast upon
nonresidents as compared with that cast upon residents, yet it is
also true that a like inequality will exist between residents of
different localities in the state by reason of the different rates
of taxation in those localities. You cannot put one resident
against one nonresident stockholder, and by a comparison of their
different burdens determine the validity of the legislation, any
more than you can place a stockholder resident in one municipality
over against a stockholder resident in another municipality, and by
comparison of their different burdens determine the validity of the
tax law in respect to resident stockholders. It does not seem
possible to adjust with unerring certainty all the varying burdens
which grow out of the fact that some of the stock of
Page 185 U. S. 370
the various state corporations is held outside of the state and
some within the state, and the latter in separate municipalities
with different rates of taxation.
It may also be said that, apparently, equality would be more
certainly secured by making the assessment in each case upon the
market value of the stock, diminished by the value of the real
estate upon which taxes have been paid. But here again a difficulty
is presented. Many of the taxable corporations own no real estate,
and much of the real estate which belongs to corporations who have
investments therein is located outside of the state. According to
the returns made by this particular corporation, out of a holding
in real estate amounting in value to $1,778,662.05, upon which it
had paid taxes, that which was situated in Connecticut was valued
at only $137,965.81. Now it may be true that, as to the real estate
held outside of the state, the title and possession of the
corporation are protected not by Connecticut, but by the state in
which such real estate is found. But can it be said that there was
any unjust discrimination between the different nonresident
stockholders in the various corporations, or even between all the
nonresident and resident stockholders, when the state, ignoring
this matter of real estate and considering that the corporation as
a state institution was protected in all its corporate rights by
the state, provided that nonresident stockholders should pay upon
the market value of their investments in the property of that
corporation? In respect to this, the Supreme Court of Connecticut
said (p. 280):
"This change as to the valuation of the property and franchise
of a corporation owning taxable real estate, for the purposes of
municipal taxation, may produce in some instances more inequality,
may be uncalled for or unwise (upon such considerations the action
of the legislature is conclusive), but it certainly does not
transmute the legislation in question from permissible taxation to
a denial to citizens of other states of that common right in the
use and enjoyment of property secured to our own citizens. The plan
of taxation remains the same; after the change in valuation, as
before, it is simply a mode of securing to towns for purposes of
municipal taxation
Page 185 U. S. 371
the benefit of that part of the corporate property represented
by shares owned by their inhabitants, and subjecting to state
taxation that part represented by shares owned by nonresidents, and
which cannot be thus subjected to municipal taxation. Here is no
hidden purpose to attack the rights of citizens of other states --
no evidence that the underlying intention and real substance of the
legislation is to hinder citizens of other states in acquiring and
holding property. The alleged hindrance is confined to those who
buy stock in corporations paying taxes on real estate. Only a small
number of the corporations within the scope of the act own taxable
real estate to any appreciable amount. Can it be said that the law
regulating the taxation of half a dozen different kinds of
corporations is really intended to hinder citizens of other states
from owning stock in the small number of these corporations that
may from time to time invest in taxable real estate, or that the
real substance of the law changes from legitimate taxation to
hostile and forbidden discrimination with each change of its
investments by a corporation? Clearly the legislature is free from
any sinister motive in this legislation."
But, further, the validity of this legislation does not depend
on the question whether the courts may see some other form of
assessment and taxation which apparently would result in greater
equality of burden. The courts are not authorized to substitute
their views for those of the legislature. We can only consider the
legislation that has been had, and determine whether or no its
necessary operation results in an unjust discrimination between the
parties charged with its burdens. It is enough that the state has
secured a reasonably fair distribution of burdens, and that no
intentional discrimination has been made against nonresidents.
This Court has frequently held that mere inequality in the
results of a state tax law is not sufficient to invalidate it.
Thus, in
Tappan v. Merchants' National
Bank, 19 Wall. 490,
86 U. S. 504,
it was said:
"Absolute equality in taxation can never be attained. That
system is the best which comes the nearest to it. The same rules
cannot be applied to the listing and valuation of all kinds
Page 185 U. S. 372
of property. Railroads, banks, partnerships, manufacturing
associations, telegraph companies, and each one of the numerous
other agencies of business which the inventions of the age are
constantly bringing into existence, require different machinery for
the purposes of their taxation. The object should be to place the
burden so that it will bear as nearly as possible equally upon all.
For this purpose, different systems adjusted with reference to the
valuation of different kinds of property are adopted. The courts
permit this."
Again, in
State Railroad Tax Cases, 92 U. S.
575,
92 U. S.
612:
"Perfect equality and perfect uniformity of taxation as regards
individuals or corporations, or the different classes of property
subject to taxation, is a dream unrealized. It may be admitted that
the system which most nearly attains this is the best. But the most
complete system which can be devised must, when we consider the
immense variety of subject which it necessarily embraces, be
imperfect. And when we come to its application to the property of
all the citizens, and of those who are not citizens, in all the
localities of a large state like Illinois, the application being
made by men whose judgments and opinions must vary as they are
affected by all the circumstances brought to bear upon each
individual -- the result must inevitably partake largely of the
imperfection of human nature and of the evidence on which human
judgment is founded."
And in
Merchants' Bank v. Pennsylvania, 167 U.
S. 461,
167 U. S.
464:
"This whole argument of a right under the federal Constitution
to challenge a tax law on the ground of inequality in the burdens
resulting from the operation of the law is put at rest by the
decision in
Bell's Gap Railroad v. Pennsylvania,
134 U. S.
232."
For these reasons, we are of opinion that the act challenged
cannot be held to conflict with either of the clauses of the
federal Constitution referred to, and the judgment of the Supreme
Court of Connecticut is
Affirmed.
MR. JUSTICE HARLAN did not hear the argument, and took no part
in the decision of this case.