tax parity with foreign State banks. If national banks were organized under State instead of Federal law, and "exist", that is to say, carried out their functions and conducted their business under State supervision and regulation (together with such Federal regulation as may apply to the State bank), the entire underpinning of their immunity as Federal instrumentalities would have been eliminated. Consequently, by declaring that national banks should be "treated" as organized" and "existing" under State law, Congress consented to the stripping of national banks of all tax immunity as Federal instrumentalities. Since, as it would be contended, a State organized bank which seeks to conduct intrastate business within the territory of a foreign State may be subjected to license or doing business taxes that are not levied, or are more onerous than those levied, on domestic banks, it follows that by P.L. 91-156, Congress has consented to such taxation, and there is no constitutional infirmity in the levy.

That the purpose of the P.L. 91-156 was to waive all Federal tax immunity of national banks and put them on complete parity with State banks for tax purposes, is indicated by the legislative history of the statute. In the Report of the Senate Committee on Banking and Currency, it is stated:

"Without specifically addressing the question of whether national banks remain, in substance, such a Federal instrumentality, the committee is agreed that there is no longer any justification for Congress continuing to grant national banks immunities from State taxation which are not afforded State banks." 15

This language supports the view that the congressional purpose was to eliminate all immunity from taxation enjoyed by national banks as Federal instrumentalities, since State banks never possessed such immunity. Moreover, the Congressional Committees were fully aware of the problem of taxation of national banks by States other than the home State, when they recommended this sweeping waiver of immunity.16 Paul W. Eggers, General Counsel of the Treasury Department, in a letter to the House Committee on Banking and Currency, referred to the fact that the "so-called 'doing business' question raises different issues from that involved in the sales tax controversy" and recommended that "the question of taxation of national banks by States other than the home State, be considered and treated separately" 17

Congress, apprised of this problem, nevertheless, authorized the States, after December 31, 1971, to treat out-of-state national banks for tax purposes in the same way as banks chartered by other States. The House Managers of the bill summarized the effect of the permanent amendment to Section 5219 as follows:

"Likewise, any State will be free to impose taxes on income derived within its borders by the operations of a bank having its principal office in a different State, regardless of whether the foreign bank is State or National. This has always been the law with respect to state banks." 18

15 Rep. No. 91-530, 91st Congress, 1st Sess., p. 2 (Nov. 12, 1969).

16 Idem, at pp. 3-4.

17 Hearing, House Committee on Banking and Currency, H.R. 7491, 91st Congress, 1st Sess., p. 2 (May 26, 1969). See the letter of Chairman William McC. Martin, Jr., of the Federal Reserve Board, quoted in Senate Committee Report, Note 15, supra, at pp. 3-4.

18 See Conference Report, H.R. 7491, Rep. No. 91-728, 91st Congress, 1st Sess., p. 5 (Dec. 9, 1969).

Hence, Congress has completely accommodated the out-of-state national bank to the tax position of the foreign State bank, and has thereby brought into play the doctrine of the Lincoln National Life Insurance Company and related cases.

The conclusion that Congress did not seek to prohibit taxes on outof-state banks, whether national or state, that are more burdensome than those applied to the State's own chartered banks is further evidenced by the fact that the possibility of discriminatory taxation of banks was considered by the Committees,19 and, indeed, provisions proscribing discriminatory taxation were adopted in other parts of P.L. 91-156. Thus, in the temporary provisions of the statute, which authorized the States to tax national banks having their principal office in the State, Congress explicitly limited the taxes authorized to those "imposed generally on a nondiscriminatory basis throughout the jurisdiction", and it specified that they could be levied only "in the same manner and to the same extent" as taxes levied on banks incorporated by the State.20 And in authorizing taxes on sales and use, real and personal property, documentary stamp and recording levies, and the like, applicable to out-of-state national banks, once again. Congress explicitly required that they be "imposed generally throughout such jurisdiction on a nondiscriminatory basis"." But when it came to the permanent provisions here at issue, Congress did not require that the levies be nondiscriminatory. The conclusion is thus warranted that in the permanent provisions waiving intergovernmental tax immunity for national banks beginning in 1972, Congress imposed no requirement that the taxes authorized be nondiscriminatory. Instead, in carrying out its clearly expressed objective of putting national and State banks on full tax parity, Congress was content to remit national banks to whatever constitutional protection State banks enjoy, no more and no less.

Accordingly, as counsel for a State taxing authority would argue, since State banks seeking to do, or carrying on, an intrastate business within a State, may be subjected to license, privilege and doing business taxes that are more onerous than those levied on domestic State banks, the effect of P.L. 91-156 is to empower the States to levy similar taxes on out-of-state national banks. Of course, the power of Congress to waive the tax immunities of Federal instrumentalities is indisputable.22

The foregoing outline of an argument that national and State banks are now on a parity in respect to this taxing power of the States is an impressive one. Perhaps the most persuasive argument to the contrary is that it seems unlikely that Congress intended to put its own chartered national banks, which had theretofore enjoyed broad tax preferences, at a possible tax disadvantage vis-a-vis domestic banks operating within the taxing State. It is also relevant to point out that the Supreme Court historically has been quick to ferret out and strike down State taxes that even remotely discriminate against

19 The Committees were much concerned with discriminatory taxation of intangibles. See the statement o Chairman William McC. Martin, Jr., of the Federal Reserve Board. Hearing, Senate Committee on Banking and Currency, S. 2065, S. 2906, H.R. 7491, 91st Congress, 1st Sess., pp. 57-58 (Sept. 24, 1969). Moreover, the concern of bankers was reflected in the proposal of the American Bankers Association which recommended a "specific requirement that the additional taxes imposed under the new A.B.A. provision be generally applicable to State banks and business corporations on a non-discriminatory basis." Idem, p. 59. 20 Subsection 5(a).

21 Subsection 5(b).

22 Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946).

Federal instrumentalities 23 Nevertheless, given the language of the statute and its legislative history, there is, in my opinion, a risk that P.L. 91-156, if not modified, will be held to authorize the States to levy discriminatory license, privilege and doing business taxes on national banks maintaining their principal offices outside the taxing State, if the Court should hold that the States have the power generally to discriminate against foreign corporations doing a mixed interstate-intrastate business.24

In the event that it should be determined that P.L. 91-156 should be amended to prohibit the types of discriminatory taxation against out-of-state national banks described above, the provision should, in my opinion, be drawn so as to extend the same protection to outof-state banks chartered by the States. No good reason has been advanced that would justify less advantageous tax treatment of multistate State banks than of multistate national banks. Indeed, the history of P.L. 91-156 is instinct with the reiterated purpose of putting State and national banks on a level of full tax parity. Given the plenary power of Congress over interstate commerce, its constitutional power over money and credit, the extensive Federal legislation dealing with the nation's banking system, and the role that multistate state banks play in that system, Congress, in my opinion, has adequate constitutional power to prohibit discriminatory taxation of State as well as national banks.25

C. CONCLUSION WITH RESPECT TO DISCRIMINATORY TAXATION OF OUT-OF-STATE BANKS

There is a risk that once the permanent provisions of P.L. 91– 156 become effective, the States may have the power to levy discriminatory or more onerous taxes on out-of-state banks, including national banks, for the privilege of doing business in the State, than they impose on their own domestic banks.

NEW YORK, April 30, 1971.

23 Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376 (1960); Moses Lake Homes Inc. v. Grant County, 365 U.S. 744 (1961); compare Comptroller v. Pittsburgh-Des Moines Steel Co., 231 Md. 132, 189 A. 2d 107 (1963), certiorari denied, 375 U.S. 821 (1963).

24 Some concern has been expressed that P.L. 91-156 may permit the States to tax out-of-state national banks at a higher rate, or on a more burdensome basis, than foreign state banks. The language of the statute and its legislative history seem to me to make such a construction of P.L. 91-156 unlikely. Moreover, such tax differentials between two classes of out-of-state corporations, each seeking licenses to conduct intrastate business within the State, or doing an intrastate business in the State, would probably be held to be an unreasonable classification, in conflict with the Equal Protection Clause of the 14th Amendment.

25 For a discussion of the congressional power under the Commerce Clause to limit State taxation, see Jerome R. Hellerstein, "The Power of Congress to Restrict State Taxation of Interstate Commerce", 12 Journal of Taxation 302 (1960).

APPENDIX 12

Multiple State Taxation of National Banks: Division of Tex Base Income Taxes and Doing Business Taxe

Derekoment
One of

is the extent

subiect to

5219 of the 3

banks 1. corporations income E

BOCH BAT

First, do

the state which fo tax by first quest alceation The irs: amendme state be

given or thing f

both 12 differentie result I

1 The issues measured

5

merce? These issues are not wholly separable and the cases which have established the legal doctrines in this area have often dealt with both.

6

Development of the law with respect to the taxation of the income of interstate manufacturing and mercantile businesses is important in an appraisal of the vulnerability of national banks to multiple state taxation. As a review of the cases illustrates, the basic constitutional framework was erected during the period 1918 to 1931. The first case to reach the United States Supreme Court, United States Glue Co. v. Town of Oak Creek, presented the question as to whether the state of corporate domicile could validly tax the net income of a manufacturing business to the extent derived from goods manufactured within the state but sold to out-of-state customers. Sales giving rise to the income in question were of two types: sales made upon orders received from out-of-state customers, the goods being delivered from the company's Wisconsin factory; and sales made upon orders received from out-ofstate customers at out-of-state branches with the goods, which had been manufactured in Wisconsin, being delivered from such branches. The specific issue was whether taxation of net income derived from these interstate transactions constituted the imposition of an unconstitutional burden upon interstate commerce. In sustaining the validity of the tax imposed by the domiciliary state, the court stressed the point that a tax on net income is not a direct and immediate burden upon interstate commerce since the tax is occasioned not by reason of the commerce itself but by reason of the fact that the transactions in interstate commerce proved to be profitable. Thus the tax was held not to be inherently discriminatory with respect to such commerce. With this decision the Court established the validity of a tax upon the net income of a domiciliary corporation irrespective of the source of such income, whether derived from intrastate or interstate commerce. Upon the basis of this early doctrine and the permanent amendment of section 5219, a state in which a national bank

4 In Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S. Ct. 246 (1940) the question was whether Wisconsin, a non-domiciliary state, could impose a tax of 22% upon "the privilege of declaring and receiving dividends, out of income derived from property located and business transacted in" Wisconsin. Taxpayer, a Delaware corporation, voted and paid dividends from its principal office in New York with checks drawn upon New York bank accounts. In sustaining the tax in the face of the taxpayer's challenge that it violated due process concepts of jurisdiction, the Court made the following observation:

""Taxable event', 'jurisdiction to tax', 'business situs', 'extraterritoriality', are all compendious ways of implying the impotence of state power because state power has nothing on which to operate. These tags are not instruments of adjudication but statements of result in applying the sole constitutional test for a case like the present one. That test is whether property was taken without due process of law, or, if paraphrase we must, whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return. The substantial privilege of carrying on business in Wisconsin, which has here been given, clearly supports the tax, and the state has not given the less merely because it has conditioned the demand of the exaction upon happenings outside its own borders. The fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions within a state for which the tax is an exaction." (311 U.S. at 444-45, 61 S. Ct. at 250).

5 For purposes of this part relating to direct income taxes, it is assumed that the nationwide activities of major banks and the straddle-state transactions of small banks located in border communities constitute interstate commerce. See Hellerstein, Federal Constitutional Limitations on Stale Taxation of Multistate Banks, Introduction [appendix 11], at pp. 435-46 above.

6247 U.S. 321, 38 S. Ct. 499 (1918).

7 This decision was foreshadowed by Peck & Co. v. Lowe, 247 U.S. 165, 38 S. Ct. 432 (1918) which held that the imposition of the federal income tax upon net income derived from foreign exports did not violate the constitutional proscription of a duty upon exports. Two years later, the Court sustained an income tax upon an individual domiciled within the taxing state with respect to income received by him as a beneficiary of an out-of-state trust. Maguire v. Trefry, 253 U.S. 12, 40 S. Ct. 417 (1920).