Could the real estate of national banks be taxed as a separate class? Probably not, but treatment of property of financial institutions and associations as a class would be as logical as groupings of commercial, mercantile, manufacturing, or agricultural properties as classes to which different effective tax rates would be applied. The laws of Minnesota, Kentucky, Montana, North Dakota, and Arizona contain such classifications, but none of these set out bank real estate (as distinct from bank shares) for discriminatory or differential taxation. This was not done in compliance with section 5219; it simply was not the policy of the States to classify along those lines. All States and the District of Columbia tax national banks on real estate. For many years, the State of Washington, because of constitutional prohibitions, could tax national banks only upon their real estate but taxed State banks on both real estate and tangible personal property.1 D. The optional taxes 6 1. The share tax. Prior to 1923 the only taxes States could levy on national banks were those on "all the shares" and on bank real estate. Consent to levy these taxes was granted by the act of 1864, a year after enactment of the initial law establishing the system of national banking associations. By this time a number of States had begun to tax capital stock of banks and other corporations.5 In the early years, conforming to general property tax practices, national bank and other shares were taxable as personal property of the individual owners. This meant that for a considerable period the only tax paid by the bank as a corporate entity was the tax upon its real estate, usually only the bank premises. Even when the taxes on shares were returned and paid by the banks, the payments so made were regarded as a lien upon the stock and were deductible from future dividend payments. Neither the States nor Congress were ever very clear whether the share tax was a tax upon the bank or a tax upon individuals as shareholders. Even where the tax was assessed upon and paid by the bank, the shares were often assessed in the names of the shareholders. Regardless of the legal theory upon which the tax was levied, the share tax gradually became a tax upon the bank, and the payments were allowed as deductions from bank income in determining Federal income taxes.7 Where the banks paid the tax on the shares, individual owners did not have to list them with other items of property subject to taxation. Securities owned in many other corporations were supposed to be listed by and taxed to resident shareholders. These corporations generally did not pay such taxes for the shareholders, even as a condition to doing business in a State. And, until the adoption of requirements for giving information-at-the-source under income tax laws, corporations did not inform assessors or income tax officials of dividend payments made to shareholders. Thus, in the general property tax States, bank shares were in effect tax-exempt securities in the hands of the owners. Some States accorded similar exemptions to resident stockholders of domestic 4 Excise tax declared unconstitutional. Cf. Helmberger, op. cit., p. 30. 5 Cf. Seligman, Essays in Taxation, 9th ed., pp. 151ff; Welch, op. cit., pp. 12ff. Helmberger, op. cit., p. 20. In 1870, Kentucky's law requiring the bank to pay the tax on shares was upheld by the U.S. Supreme Court. Soon other States adopted this practice. Helmberger, on. cit., p. 22. Cf. Welch, op. cit., p. 81. Access ment in the names of the shareholders is still the rule in Illinois and some other States. In 1934, pract. all banks were paying the share tax (Welch, op. cit., pp. 21, 81). corporations, and a few, such as Illinois, exempted resident owners of shares in foreign corporations from personal property taxes on shares if the foreign corporations paid property taxes in the State. In the case of national banks, section 5219 provided a further advantage to owners of national bank stock. If the State elected to tax national bank shares it could not concurrently tax shareholders on their bank dividends. Under the 1926 amendment, dividends could be included in the taxable income of the shareholder if the State had a general income tax applicable also to financial and other corporations and included dividends on their shares also in the taxable income of shareholders. To the extent that national banks charged share taxes against stockholders, this left national banks with only real estate taxes to pay during the years from 1864 until 1926, assuming that after 1923 the State did not select the direct tax on net income as an alternative to the share tax. But if the State did adopt the direct tax on net income, this reduced the level of taxes on national banks below what they had been paying under the share tax option. Since only a few States ever used the direct income tax alternative, the foregoing qualifications had little effect on the general situation. Even though the national banks had a lien upon their stocks or dividends for taxes paid on behalf of stockholders, explicit charging of the share tax to the stockholder was the exception rather than the rule. Assumption of the tax by the banks made national bank stock an investment preferred to other corporate securities in situations where profits and dividends might be assumed to be approximately equal. Collection of share taxes from the bank was adopted in the early years to lessen tax avoidance and delinquency. The bank could always be found, whereas stockholders often could not be located or did not pay, or even resided in a taxing district other than the one in which the bank was located. Some shares might be the property of taxexempt institutions. Efficiency in assessment and collection dictated levying the tax on the bank and collecting the tax from the bank. But even as late as 1934, Florida, Rhode Island, and Texas had not adopted this policy. A further step in improving the assessment of bank stock was to have it valued by the central tax administration of the State. In 1934 at least 10 States were doing this. The number of States using the share tax to tax national banks has declined over the years. Prior to 1923, 48 States had share taxes; in 1934 the number had declined to 37 States; in 1958, share taxes were used in 27 States, 14 of which employed flat rates rather than rates applying to general property. On January 1, 1970, 21 States still were imposing share taxes on national banks.10 Twelve States were using specific rates; four States required fractional assessments. These and other details are shown in table 18. 9 8 Cf. ibid., p. 105-106 and table IV, p. 83 (insert). Florida and Rhode Island assessed the tax in the district where the shareholder resided. At that time Delaware, Indiana, Michigan, and North Dakota provided for collection of the tax either from the bank or the shareholder. Kimmel, op. cit., pp. 22; Helmberger, op. cit., pp. 33-36. 10 Not counting Michigan where the share tax applied only to building and loan associations. State Arkansas. Florida Georgia Illinois... Indiana. Kentucky 1 Louisiana. Maine. Michigan 2 Mississippi. Montana. Nebraska Nevada New Hampshire... New Jersey 3 TABLE 18.-BANK SHARE TAXES: 1969-70 Description of law Based on market value; assessed value of real estate deducted; general property tax rate. Applied to National, State banks, and trust companies. Based on true value; determined by total of capital, surplus undivided profits and reserves. Rate 15 of 1 percent of value. Applied to National and State banks and trust companies. Bank stock taxed at just value under intangible personal property tax, class B-rate 1 Shares taxed at full market value, determined by total of capital, surplus and undivided Based on value of shares determined by total of capital, surplus and undivided profits, less Based on financial value. Building and loan associations can deduct shares of borrowing Basis: Declared capital stock, surplus, undivided profits and capital reserves less (1) Applies only to savings and loan associations (banks subject to excise measured by net Basis: Banks estimate net worth, deduct amount of capital invested in real estate, par Basis: Par value of capital stock. Assessed at 1 percent. Rate: General property tax rate. See footnotes at end of table, p. 318. Ohio...... State Pennsylvania.... Tennessee.. Texas. Virginia.... West Virginia... TABLE 18.-BANK SHARE TAXES: 1969-70-Continued Description of law Basis: Book value of capital employed. Rate: 2 mills on dollar. Applies to all financial Basis: Actual value of capital stock, Jan. 1 preceding year, determined by adding capital Basis: True or actual value of shares, less proportion of value attributable to real property 1 Production credit associations included with savings and loan associations; shares made taxable at State rate of $1 per $1,000 of paid in capital. Effective July 18, 1970. 2 See excise tax, pp. 333-41, especially table 20. 3 New Jersey also imposes an excise tax based on net worth of all businesses which are in substantial competition with national banks and employ moneyed capital with object of profit. Tax is 11⁄2 percent of allocated net worth, less deductions, but not less than $25. Is in lieu of any franchise or local tax upon or measured by personal property entering into determination of net worth. Applies generally to industrial banks, dealers in commercial paper and acceptances, sales, finance, personal finance, small loan and mortgage finance businesses. Does not apply to State and National banks, insurance companies, security dealers and investment companies not employing moneyed capital in competition with national banks, credit unions, savings banks, building and loan associations, pawnbrokers, trust companies, production credit associations. Source: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov. 1, 1970). a. Value determination.-How has the value of bank shares been determined for assessment purposes? In 10 States the basis of valuation is actual, true, or market value of the shares, all of which seem to mean the same thing." Share values are stated to mean the value determined by the amount of capital, surplus, and undivided profits of banks in Indiana, Louisiana, New Jersey, and Virginia, although a few States that specify other standards, such as true value, use these accounts to determine the worth of shares. Ohio specifies "book value,' which should mean the same thing. "Fair cash value" is the Kentucky standard; "full cash value" arrived at by an averaging process is 11 True or market value: Arkansas, Delaware, Georgia, Illinois, Montana, and West Virginia. Actual value: Nebraska, Pennsylvania, Tennessee, and Texas. required in Nevada. A "just value" is the Florida requirement. "Par value" is employed in New Hampshire, and assessed value in Maine. In arriving at the value to be used for assessment purposes, stated deductions from true values are allowed in certain States. These are considered below. Inasmuch as national banks have been required to publish periodic statements of assets, liabilities, and capital accounts, basic information has always been available to the local assessor who cared to use it.12 These were the basis for book values used in Ohio and for values determined in other States which took into account the aggregate of capital, surplus, and undivided profits. Delaware and Louisiana added reserves. Such assessments were fairly automatic, since the assessor had data for national banks that were neither furnished by most other taxpayers nor available as to their stocks or other property. The result was that assessments of national bank stock were complete and generally nearer the true value of property to be assessed than other property, tangible or intangible.13 Welch found that in 1930 bank and trust company stock seemed to be assessed at approximately full book value or more in 18 of 32 States.1 He pointed out that the shares were subject to central assessment in six of the 18 States and to low tax rates which were conducive to full listing in 10 of the 18 States. Assessments above 100 per cent were found in Connecticut, Iowa, Kentucky, Maryland, Nebraska, New Hampshire, North Dakota, South Dakota, and Virginia. This also meant that banks were probably paying more than their proper share of property taxes. Opinion is general that bank shares were assessed at more nearly true value than real estate and most personal property. While the property tax carried no discriminatory rates against banks or bank shares, all property being supposed to be assessed uniformly, the property tax in actual operation apparently did discriminate against them in at least some jurisdictions. Whether this was so, and the degree of the discrimination, if any, could only be determined by exhaustive statistical analysis which has never been done. Presumptively the case seems conclusive. Of course, discrimination was not universal. In 6 States the ratio of assessments of shares to book values less the value of real estate was less than 50 percent in 1930.15 But under-assessment of all property was notorious, so that this did not necessarily mean the extension of favors to banks. That could only be determined on the basis of an investigation such as the one mentioned above. 12 Welch made this interesting observation: "As for determining book values, disclosing hidden reserves, and the like, it is only necessary to reflect upon the fact that many bank directors are unable to read the balance sheet of their own bank to see the folly of expecting proper assessment from the underpaid, poorly equipped, politically-minded incumbents of so many assessors' offices." Op. cit., p. 104. 13 Woosley, op. cit., pp. 94, 105. During the debates on the 1923 amendment, Mr. Stevenson pointed this out and said real estate was assessed in some States and counties at 50 percent of value. 64 CR, p. H4790. Overassessment of bank stock was reported in an article from New York Evening Mail by Henry Hazlett, reprinted in 64 CR, p. H4789-90. 14 Welch, op. cit., pp. 102-03. 15 The ratios of assessments of bank shares to book value of bank shares less value of real estate in 32 States in 1930 were as follows: |