Finally, to follow the expiration of this temporary or interim period, December 31, 1971, Congress gave States full power to tax a national bank "as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." Congress had now come full circle, adopting a position that had been urged by a minority in Congress in 1864 and repeated often by State officials and some members of Congress ever since.

III. THE IMPACT OF SECTION 5219 ON THE TAXATION OF NATIONAL BANKS

A. The background

From 1864 through 1971 the methods by which national banks could be taxed were limited by section 5219 of the Revised Statutes. The terms of the statute were vague and uncertain; their meaning was clarified only by continuous litigation. "One national bank after another has challenged every type of State tax utilized." Even so, doubts about the legality of many State taxes on national banks persisted until the amendment of 1969.2 Whether that amendment has completely clarified the rights of States to tax national banks the future alone can tell. What constitutes discrimination against them may continue for some time to be a legal issue

Nevertheless over the last century section 5219 has been moved, by successive amendments, from a narrow restriction on States to a wideopen grant in the "permanent amendment" for nondiscriminatory taxation based on equality of treatment between national and State banks. The rivalry and jealousy that once existed and called for Federal protection of national banking associations from the wrath of State legislatures no longer prevails; it was not a strong influence even when the regard for banks was at its lowest ebb during times of financial crisis and severe depression, or when interest rates were at their highest points. The whole issue of State taxation of these institutions must be viewed with a long historical perspective.

It is generally agreed that in 1864 national banks probably needed the protection from discriminatory taxation provided by section 5219. That need soon passed. It was completely removed with the creation of the Federal Reserve System. Though State banks were not compelled to join the System, as were national banks, they could join easily and quickly whenever they desired to take that step. At that time, too, the national banks lost their note-issue monopoly and save for a few minor differences in powers and supervision, it became difficult to tell the two classes of banks apart. State taxes upon State and national banks, however, often differ. Those differences usually are attributable to section 5219. 3

Over the years that section of the statutes has had very little effect on the general contours of State tax systems. These developed inde

1 Helmberger, op. cit., p. 9.

2 Cf. ibid., p. 10. Woosley remarked in 1935, "The undisguised fact is that national banks cannot now be taxed with certainty and adequacy. They are, and for several years have been, a favored group in the tax system, actually in many States, potentially in other States." Woosley, op. cit., p. 127.

3 Cf. Welch, op. cit., p. 210; Gary, in Proceedings of the National Tax Association, 1921, p. 400. W. H. Blodgett, tax commissioner of Connecticut, remarked: "Time was when section 5219 was found to be necessary. It was necessary because of political conditions. Can we now with any assurance say that those political conditions will not recur... .?" Ibid., 1923, pp. 388-9. Welch, loc. cit., said: "The doubtful claim of national banks to the status of federal instrumentalities has led to criticisms of section 5219 as a serious infringement of States' rights. It is contended that Congress is forcing upon the States constitutional amendments and radical revisions of tax systems simply by way of protecting a small minority of taxpayers who have neither the need for nor the right to such protection."

pendently and tended to influence the enlargement of State tax powers over national banks as section 5219 came to be amended. What did happen was that in the taxation of national banks States had to conform to section 5219 and adapt their bank tax practices to it. This often meant that the terms of the Federal law controlled State policies toward their own chartered banks as well. Many States regarded it as unfair not to tax their own banks as they did national banks. Yet some States thought it unfair to other classes of other taxpayers to deal with State banks as they were forced to treat the national associations. So it was that the influence of section 5219 extended to the protection of banks other than those nationally organized.

For better or worse, too, the impact of section 5219 was far heavier on ad valorem property taxes than on other forms of State bank taxation. During most years since 1864, only that type of State or local taxation was permitted. It was the prevailing State tax system not only in 1864 but even into the twentieth century. Reforms in the property tax, with the adoption of classification and low-rate taxes on intangibles, made it easy to allege that there was discrimination against national banks. The resulting court decisions forced States either to reduce bank taxes to the level of the low taxes on individuallyowned intangibles or give up their classified property taxes. Litigation and the amendment of section 5219 both followed. Coincident therewith came the development of other types of State taxes to meet the growing needs for revenues, some of them inapplicable to national banks because of section 5219. Some writers have concluded that this situation was tantamount to Federal control over State tax systems and programs.

For example, Woosley, in 1935 came to this conclusion: 4

"Until the status of national bank taxation can be more definitely determined, the States cannot safely adopt schemes of classification without openly endangering the legality of their taxes on bank shares. Nor can they adopt the taxation of income from intangibles in lieu of ad valorem taxation without invalidating their share taxes on national banks.

"Moreover, the employment of the income or franchise tax methods on national banks, as now authorized by Federal law, is so restricted. as to compel the States to readjust their tax systems in essential respects in order to validate the franchise taxes on national banks. Thus, Congress, in its effort to protect the national banking system from potentially inimical taxation, has so circumscribed the methods of taxing these institutions that the States are in fact subject to a considerable degree of coercion in the construction of their entire tax structures."

A more moderate view is at least equally plausible. It hardly seems that being forced to lower bank share taxes to the level of taxes on personal intangibles involves coercion as to the form of the entire tax structure even though reduction of national bank taxes constitutes a price few like to pay. Loss of revenues through reduced bank taxes is

4 Woosley, op. cit., pp. 7-8. Cf., also, F. B. Thomas of Vermont in Proceedings of the National Tax Association, 1923, p. 377: "Now what is the effect of this law [section 5219 as amended in 1923] as it stands at this moment? A State must adopt a system of taxation which conforms to the requirements of the Federal Govment and must discri ninate against its own subjects of taxation and in favor of national banks. There is no other choice for it. Its system of taxation must be controlled by the Federal Government, and I think that is a very obnoxious feature of the present law,

painful, but it seems to the writer that the productivity of the rest of the tax system was not much affected.

An observation by Helmberger appears more realistic if less dramatic: 5

"Most State tax officials, many (if not most) State legislators, and many students of public finance consider these Federal restrictions on State and local taxation of national banks to be an infringement of the State's taxing powers and favor removal of such restrictions.” He thought section 5219 should be revised to reduce its complexity and confusion. This, of course, is an aim of the "permanent amendment" in P. L. 91-156 of 1969.

Even though the application of personal property taxes, especially taxes on intangibles, required special treatment for national banks, the successive amendments did gradually extend the methods by which States could tax these banks. The wait between extensions was long but the trend was clear. With the aborted amendment of 1923 and the further amendments of 1926 and 1969, Congress moved to enlarge the outer boundaries which it prescribed for State taxation of national banks.

B. Evolution of permissions and restrictions.

From the historical account in part I of this appendix, it is evident that the powers given States to tax national banks were extended and the restrictive conditions were elaborated in successive amendments until finally in 1969, all explicit restrictions were removed as of January 1, 1972, save for a non-discrimination requirement.

The provision for real estate taxation continued without substantive change from 1864 until 1969, when it was supplemented (though not significantly enlarged) by a provision of the "temporary amendment” relating to taxes on real property or its occupancy that might be applicable to a national bank with its principal office outside the taxing State. The "permanent amendment" drops the specific reference to taxes on real property or other types of taxation.

The share tax also continued from the beginning but became one of several exclusive options beginning with the 1923 amendment. The net income tax option which excluded income from tax-exempt securities from the tax base remained almost unchanged from the time of its introduction in 1923. The exclusion of tax-exempt income from the base of a direct tax on net income was incorporated into the law in 1926 and was not affected by the "temporary amendment" of 1969. But until 1926 a State could not tax the income of a national bank and also include dividends from such stock in the taxable income of individual owners. Under the 1923 amendment the taxation of net income to national banks precluded the taxation of such dividends to individual owners; so did the use of the share tax. After 1926 national bank dividends could be included in the taxable income of individual owners if the State, in addition to personal income taxes, also imposed a general net income tax "on or according to or measured by" net income on financial and other corporations. The "temporary amendment" of 1969 did not change these provisions. Nor was there a change in the excise "according to or measured by" net income from all sources, which had been adopted in 1926.

The 1969 amendment contains three sets of provisions: (1) those permitting additional taxes on national banks having their principal offices in the taxing State; (2) those pertaining to national banks having their principal offices outside of the taxing State; and (3) the completely new section 5219 scheduled to take effect after January 1, 1972. The first two sections of these sets of provisions are of an interim character effective only until December 31, 1971, and subject to conditions specified in a “saving provision" in section 3 of P.L. 91-156. As to national banks with a principal office in the taxing State, the States are allowed a fifth alternative—they may tax national banks on a nondiscriminatory basis in the same manner and to the same extent as they tax State banks. This resembles the general provision that is to become effective in 1972.

The 1969 provision relating to the taxation of national banks having their principal offices outside the jurisdiction of the State imposing the tax is a purely temporary arrangement. It is designed to permit the imposition of sales, use, and documentary (stamp) taxes. It carries permission also to tax tangible property, excluding cash or currency.

The act of 1864 was silent on the taxation of shares owned by nonresident stockholders, save that it specified that nothing in the act should prevent "all the shares" of a national bank "held by any person or body corporate" from being included in the assessment of personal property "of such person or corporation... at the place where such bank is located, and not elsewhere..." The act of 1868 affirmed that the words, “place where the bank is located, and not elsewhere," in the 1864 act, meant "the State within which the bank is located," and that shares owned by non-residents of the State could be taxed only in the city or town where the bank is located, "and not elsewhere.”’`1 The amendment of 1923 specified that the legislature of each State "may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits." It directed that if a State taxed the shares or the net income of any national bank owned by nonresidents of the State, the situs of taxation was to be in the taxing district where the bank was located and not elsewhere. The bank was required to report the income and pay the tax thereon as agent of the nonresident shareholders. The 1926 amendment separated the provisions relating to income tax from those relating to shares, so that the condition governing shares of nonresident owners was expressed as follows:

"The shares of any national banking association owned by nonresidents of any State shall be taxed by the taxing district or by the State where the association is located and not elsewhere; and such association shall make return of such shares and pay the tax thereon as agent of such nonresident shareholders",

This provision was not affected by the "temporary amendment”

of 1969.

In the following paragraphs, the impacts of the major provisions of section 5219 during 1864-1969 will be considered.

1 For the full texts. cf. supra, appendix 1-C, at p. 4.

2 Paragraph 2 in section 5219 (12 USC 548); cf. supra, appendix 1-A, at p. 1.

C. Taxation of national bank real estate

The act of 1864 made it clear that nothing in that act exempted real estate owned by a national bank from taxation "to the same extent, according to its value, as other real estate is taxed." From Colonial times real estate taxes had been the backbone of State and local revenues. Most governments had little else to tax and it was the one thing that was always visible to local assessors. That States and local governments had the right to tax real estate belonging to national banks never has been questioned. Even Justice Marshall in his opinion in McCulloch v. Maryland emphasized that the Court's judgment holding the Maryland tax on the Bank of the United States unconstitutional did not extend to a tax "paid by the real property of the bank, in common with the other real property in the State In any event, congressional consent to real estate taxation was explicit in the act of 1864; whether it was necessary may be debated. Of course, under uniformity provisions in State Constitutions assessors could no more put unequal and discriminatory assessments against national bank real estate than they could against any other class of property. But discrimination had to be proved, and it had to be substantial. Mere differences of opinion over values would not suffice, nor would random sampling conducted by banks be adequate to prove discrimination if the data were not sufficient to convince non-statistical judges. At first mere allegations of discrimination were often accepted in lieu of proof, but after a time the judges began to call for adequate evidence of actual discrimination.

Whether bank real estate was over- or underassessed relative to other property was a question of fact in each case that came up for trial. Sometimes bank real estate was over-assessed just because it was commercial property or because it was located in a central business district, as in Chicago, where it was valued at a higher percentage of sale value than outlying properties or than homes in areas where large numbers of voters lived. On the other hand, assessors might tend to curry favors with bankers or might have doubts about the value of bank property and therefore tend to assign relatively low values. There were many instances in which the true value of bank real estate was debatable. Sales to establish market values were not frequent. Some structures were designed only as bank premises with costly vaults and underground storage chambers. It was often argued that such premises were one-use structures of dubious market value. If a bank did not occupy them, no one else would put them to efficient use. Other bank-owned structures were multiple-use buildings in which bank floors generally occupied only a small portion of the usable or rentable space. Alternative uses for such premises were numerous, so whether bank buildings tended to be overassessed depended on the facts of particular cases.

The requirement that national bank real estate was to be taxed as other real estate was taxed did not in itself assure uniformity of taxation. Many States could classify property for tax purposes. In these States, uniformity of treatment had to prevail only within classes of property, not between classes. In such States, apart from specific constitutional differentials or prohibitions, legislatures could adopt such classifications as were logical and reasonable but not arbitrary.

34 Wheat. 316 (1819), at p. 436, quoted more fully supra, at p. 276.