There were also inequalities in assessments of individual banks, just as there were in assessments of all other types of property. Such results were characteristic of the general property tax.16

Inclusion of surplus and undivided profits in the base for fixing the value of bank shares was often objected to because it might retard these accumulations so desired to increase the financial strength of individual banks. A bank with a large earned surplus or undivided profits account would be taxed more heavily than a bank without them. If they were not included in the tax base, stockholders would prefer that their banks earn a sizeable surplus instead of calling on them for larger capital contributions. At one time New Hampshire exempted both surplus and undivided profits; prior to 1927 Wyoming exempted 50 percent of surplus, and after that date all surplus. In 1932 the Tax Commission of North Dakota complained that some banks were reorganized to transfer capital to surplus so as to take advantage of the exemption of surplus, thereby reducing their tax burden.17 Such exemptions meant that the entire capital of the bank was not reached by the share tax and only part of the worth of shares was considered in determining the assessments.18 At present, none of the share taxes in force provides for deduction of surplus and undivided profits.

b. Deductions.-In the determination of assessed values for national bank shares, the laws of the States and decisions of the courts required certain deductions to be made in arriving at assessments. No deductions, however, were required by section 5219 in the original act or any subsequent amendment.19 In 1970, no deductions from the value of shares are allowed in five States-Delaware, Florida, Kentucky, New Hampshire and Ohio. The assessed value of real estate is deductible in Arkansas, Georgia, Indiana, and Texas.20 In New Jersey the assessed value of real estate equalized for selected years is deductible. Illinois limits its deduction to the assessed value of real estate in the county in which the bank is situated.21 Proportionate parts are the rule for deductions in three States. Maine itemizes real estate, vaults, and safety deposit plant. Virginia allows a deduction of the assessed value of real estate and prorated portions of real estate assessments of bank holding companies or subsidiaries. West Virginia allows a deduction of proportionate values attributable to taxed real property. Louisiana includes in its deductions for assessment purposes the value of preferred stock owned by an agency of the Government, real estate wherever located, all or substantially all the real estate acquired for debt, and the main office and branch buildings with land occupied by these buildings. Mississippi deducts the value of preferred stock issued to the R.F.C. or other Government agencies and earned surplus to the extent allowed by the State's bank equalization statute, as well as real estate. The value of real estate is deductible by national banks in Montana; State banks get additional deductions. Nebraska and Tennessee deduct separately assessed personal property as well as real estate; the personal property deductions apply to other financial

16 See Jensen, op. cit; especially ch. XII; Leland, op. cit., ch I; Seligman, op. cit., pp. 45 ff. and bibliography, pp. 63-65. 17 Welxech, op. cit., pp. 89-90.

18 The inclusion of deposits is discussed below at p. 324.

19 Cf. Helmberger, op. cit., p. 20.

20 Texas statement amounts to this: each share is taxed only for the difference between its actual cash value and proportionate amount per share at which real estate is assessed. The text discussion is based on table 18.

21 Branch banks are prohibited in Illinois.

instromus since such propETTA IČ ZAMODal banks would not be saved prior to the 1965 mendimai. Aber meing at the agile can cođa of each bank IT AZ ITHACOng process. Nerita dets a DACIA the cast man of TL Tait assessed to the bank. Passy and seeking to SubLE DELOrhood assistance pynus £** * credits of half of the amoti zrested — such programs but not more than $175.000 a year.

Permission to decort the assessed make of real estate could tasty mean itki sath ASSASSINOIS INI NEDARY ISE OLI LE ARAN ment upon back stars. To prevent this the Anzona Tax Commissio recommented in 1928 thua the deduction be limited to the banking house. The Minnesota Tax Commission complained in the same prar that over 100 banks in the State would par no share tax becau these defortions and that had of the banks would pay only $230 less." Where book values are used, the writing up of real estate on the bocks of the bank made a corresponding increase in the book value of bank capital, surplus, or undivided profits. Deductions had the opposite effect. For many years it was the practice of banks to carry their real estate at Legigible amounts. However, during severe economie depressions when security losses were large, real estate accounts were often written up. The effects of such "write up" practices do not end themselves to generalization because their effect depends on the facts of each case, the State law, the level of assessments of both real estate and stock, and the capital structure of the bank. Manipulation of these values might be profitable to some banks, of ättle value to others.

Another tendency to be noted is where different tax rates prevail. one for real estate, another for bank shares. Usually the property tax rates on real estate were high; some States applied lower rates to shares. Where that was true it was to the advantage of the bank to keep its real estate assessments as low as possible so as to transfer as much of the aggregate value as could be arranged to the shares. The extent to which this may have been done is unknown. Not all theoretical possibilities are utilized, even by profit-conscious taxpayers. The reason for deducting the value of real estate and, in some instances, other assets in the process of valuing bank shares is by no means clear. It has been said that the purpose was to avoid doublo taxation or the indirect taxation of tax-exempt assets of the bank. To be sure, bank premises are taxed, and, depending on how they are carried on the balance sheet, are included in book values of stock whether these are arrived at by adding capital, surplus, undivided profits, and certain reserves or by substracting liabilities from assots. Certainly the market value of stock will include the value of real estate owned by the bank. The purchaser of all the stock of a bank would assuredly own the bank's real estate. Each share would include its aliquot part. The taxation of bank shares, however, is legally different. from and does not rest on the taxation of bank assets.25

Even so, much bank property either is taxed (the real estate) or is representative of other property already taxed to another owner (as in the case of most intangibles). This argues for exemptions or

22 Welch, op. cit., pp. 94-5.

23 Ibid., p. 93.

24 Ibid., pp. 90-91.

25 Cf. First National Bank of Gulfport, Miss., v. Adams, 258 U.S. 362 (1922).

low preferential rates on shares.26 Section 5219 has not permitted taxation of intangibles owned by national banks.

Prior to 1864 when some States taxed banks on their capital, taxexempt securities of the United States had to be deducted. A New York law denying such a deduction was declared unconstitutional about the time Congress was passing the act of 1864.27 That act, however, did not require deduction of the value of tax-exempt securities from the value of bank shares, and section 5219 never has required deductions in the determination of the value of "all of the shares." However, some States, such as North Carolina (1913), South Carolina (1922, 1931) and Michigan did permit such deductions from the value of shares.28 Most tax-exempt securities have been purchased with deposits rather than with capital, so that more than a proportionate deduction, if any, was hardly logical. Full deduction, if allowed, would leave little in the way of stock values to tax. This was reported to have been the situation in New Jersey in 1922.29 This deduction has caused difficulty in some States. Helmberger reported that most States in practice allowed tax-exempt holdings to be deducted.30 Whatever the general practice, no such deductions are specified in the laws and regulations as reflected in the current digest of State bank tax laws in the Commerce Clearing House State Tax Guide.

To the extent that the financial statements of banks are used in finding the value of shares, a figure determined by the deduction of selected liabilities from assets would seem appropriate for a proper determination. A further deduction of tax-exempt securities (one of the assets) from capital is not only illogical but incomprehensible.31 Too liberal deductions can easily wipe out share taxes.32

c. Tax rates on shares.-In the early years of section 5219, the States taxed bank shares at general property tax rates prevailing in the locality where the bank was situated. That practice still prevails in Arkansas, Illinois, Mississippi, Tennessee, Texas and West Virginia. Fractional assessments are required in Louisiana (to be 30% by 1976), Montana (30%), Nevada (35%), and New Hampshire (1%), but the property tax rate in the locality where the bank is situated is then applied. The effective rates in all these cases can only be determined after long and careful research as to true values and applicable local tax rates. This is also true where specific rates, most of them low, are used. These rates range from 1 mill in Florida to 15 mills (12%) in Maine and New Jersey; Delaware and Ohio tax banks at 2 mills on the dollar; Indiana at 22 mills; Georgia at 5; Nebraska at 8; and Pennsylvania at 13 mills. In Kentucky, the State rate is 4.75 mills

26 Cf. Welch, op. cit., p. 91, quoting a Senate report and a comment by Harley Lutz that distinguished bank shares from other intangibles on the ground that the other intangibles as a rule represent property which is already subject to substantial taxation, whereas a national bank share does not represent such fully taxed property. Welch commented:

"The fallacy in this contention lies inthe assumption that the assets ought to be taxed. We are forced to the conclusion that the taxation of bank stocks leads to a certain amount of double taxation and that the contention of the advocates of full valuation without deduction for any other asset than real estate is devoid of logic."

27 People ex rel. Bank of Commerce v. New York City, 2 Black 620 (1863). See also People ex rel. Bank of Commonwealth v. Commissioner, 2 Wall. 200 (1865).

30 Cf. Helmberger, op. cit., p. 101.

This was Helmberger's characterization of such a computation. Ibid. Woosley (op. cit., p. 100) said, "Such deductions can hardly be defended on grounds of equitable taxation.”

32 Welch, op. cit., p. 93. He observed that, despite this result, consistency seemed to require deductions for stocks, bonds, mortgages, and similar instruments in States where such property was exempt or taxed at low rates to other owners. "Even if deduction were limited to the stockholders' equity in such assets, exemption would be practically complete. Yet logic would seem to require this course of any State which looks upon the tax on bank stock as a property tax."

but county, city, and certain districts may add 14 mills w districts may add 3.8 mills. In Virginia he State rata on vakje is 10 mills, to which cities may add mill tours may weld a

to exceeds mills vnich nav be credited status

Low rates seem to

properly measured by total net income. But this the writer is unable to do."

Welch, however, did not construct an alternative comparative measure. He thought the share tax could be improved and should be completely dissociated from the general property tax out of which it grew and that it should be recognized "as solely a business tax" with maximum rates of say 10 to 12 mills, related to but not to exceed the rates assessed against shares of other financial corporations.39

e. Inclusion of deposits.-Welch, like many other students of taxation, saw no reason why, if shares are taxed, deposits should not also be taxed on the same basis.40 Bank earnings, as a matter of fact, can be attributed more to the investment of deposits than to the investment of capital, surplus, and undivided profits. This can be seen on almost any bank balance sheet by comparing capital accounts with earning assets and investments. Historically, in individual banks the initial capital subscriptions usually were invested first in bank premises and the remainder in other assets. The earning power of commercial banks comes essentially from the profitable investment of deposits, even those created by loans.

There is no more reason for not considering a substantial portion of deposits (total deposits minus cash, for example) as capital of a bank than for not considering bonds in valuing railroads or other public utilities for taxation. Stock and bond valuations, as one of several alternatives, are in common use in the taxation of railroads in the United States. Here it was early recognized that proceeds of bonds were used to build and extend railroad properties. The contributions of bondholders was to capital just as surely as money raised from the sale of stock. To limit railroad valuations to the total worth of shares of stock outstanding would have produced only a partial valuation of these companies. The parallel with bank deposits not only fits, but the argument is even more cogent for bank deposits. Railroad bonds represented savings or wealth (sometimes loans) transferred for reinvestment in railroad company assets. Bank deposits not only represent the savings and transfers of other people to the bank but also credit created by the bank for the use of borrowers which generally is deposited with the bank until withdrawn for other uses (consumption or investment). So long as banks can manufacture deposits and can invest deposits that exceed reserves necessary for required payments, only a part of a bank's real capital is taxed unless deposits also are taxed. In its amendments to section 5219, Congress has paid little attention to this. Of course, when bank income is taxed, earnings from investments financed by deposits are taxed along with taxable income from other sources.

f. Effects of share taxes.-It has already been indicated that the primary effect of share taxes on national banks was to cause them to pay higher taxes than would have been paid had the States used the other options permitted by section 5219. These other options, however, only became available in 1923, whereas from 1864 to 1923 only share taxes were permitted, in addition to real property taxes. The rates of share taxes in comparison with other moneyed capital often were higher than section 5219 permitted but the bases utilized, deductions considered, were often less than section 5219 allowed." Nor

39 Ibid., p. 221.

40 Ibid., p. 217.

41 "The courts seem to overlook the latter, to say nothing of overlooking the comparison of a net worth tax with an assets tax in the first place," Helmberger, op. cit., p. 111.