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TAXATION OF INCOME OF THE RECONSTRUCTION

FINANCE CORPORATION

TUESDAY, FEBRUARY 11, 1936

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to call, at 10:30 a. m. in room 301, Senate Office Building, and having considered another subject, proceeded at 11:20 a. m. to consider S. 3978, Senator Robert F. Wagner presiding.

Present: Senators Wagner (presiding), Glass, Barkley, Bulkley, Gore, Costigan, McAdoo, Adams, Maloney, Radcliffe, Norbeck, Townsend, Carey, and Couzens.

Senator WAGNER (presiding). I see Mr. Jones and Mr. Alley here. The committee will now take up oonsideration of S. 3978, introduced by the chairman, and which bill is as follows:

(S. 3978, 74th Cong. 2d sess.) A BILL Relating to taxation of shares of preferred stock, capital notes, and debentures of banks while

owned by the Reconstruction Finance Corporation and reaffirming their immunity Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 304 of the Act entitled "An Act to provide relief in the existing national emergency in banking and for other purposes”, approved March 9, 1933, as amended, be further amended by adding at the end thereof the following:

“Notwithstanding any other provision of law or any privilege or consent to tax expressly or impliedly granted thereby, the shares of preferred stock of national banking associations, and the shares of preferred stock, capital notes, and debentures of State banks and trust companies, heretofore or hereafter acquired by Reconstruction Finance Corporation, and the dividends or interest derived therefrom by the Reconstruction Finance Corporation, shall not, so long as Reconstruction Finance Corporation shall continue to own the same, be subject to any taxation by the United States, by any Territory, dependency, or possession thereof, or the District of Columbia, or by any State, county, municipality, or local taxing authority, whether now, heretofore, or hereafter imposed, levied, or assessed, and whether for a past, present, or future taxing period."

Sec. 2. If any provision, word, or phrase of this Act, or the application thereof to any condition or circumstance, is held invalid, the remainder of the Act, and the application of this Act to other conditions or circumstances, shall not be affected thereby.

RECONSTRUCTION FINANCE CORPORATION,

Washington, February 7, 1936. Hon. DUNCAN U. FLETCHER, Chairman Committee on Banking and Currency,

United States Senate, Washington, D. C. DEAR SENATOR FLETCHER: Attached is a proposed bill designed to clarify the exemption from all taxation of preferred stock, capital notes, and debentures of banks and trust companies acquired by this Corporation pursuant to section 304 of the Emergency Banking and Bank Conservation Act.

1

Section 10 of the Reconstruction Finance Corporation Act, as originally passed on January 22, 1932, exempts “the Corporation, including its franchise, its capital, reserves, and surplus, and its income” from all taxation, both State and Federal. The Corporation has consistently construed this section as an intention of Congress to exempt the assets of the Corporation from taxation, except to the extent expressly permitted. This construction has been supported by opinions of the supreme courts of several States, by an opinion from the United States District Court for the Western District of Kentucky, and by opinions from the attorney generals of many of the States. The Supreme Court of the United States, however, in an opinion handed down on February 3, 1936, in the case of Baltimore National Bank v. State Tax Commission of Maryland has held that the shares of preferred stock of national banking associations owned by the Corporation are subject to State taxation, notwithstanding the provisions of section 10.

As the Corporation was created to give relief to financial institutions in a national emergency and for other kindred ends, it has been its policy to keep its charges at the lowest rates possible. Accordingly, the rate on its capital investments in banking institutions has been reduced from an original rate of 6 percent to the current prevailing rate of 372 percent. On February 1, 1940, this rate is increased to 4 percent. Since the Corporation pays the Treasury 234 percent for the funds procured from it, a very small margin is left to take care of operating expenses of the Corporation and individual losses.

The taxation of its shares of preferred stock, capital notes, and debentures will not only encroach upon this margin in all cases, but in many, wipe it out entirely, leaving the Corporation with an actual substantial loss.

The total tax, State, county, and municipal, payable on shares issued by banks in the city of Baltimore, in which the Baltimore National Bank above referred to is located, is 1.22 percent. Since the dividend rate is only 342 percent, the Corporation will, after paying taxes and deducting the 234 percent paid to the Treasury, have a net loss on its investinent in that bank of 0.47 percent. It will have a loss on its investments in the capital of banking institutions in all cases where the rate is in excess of 0.75 percent.

There are approximately 15 States in which preferred shares of banks are not taxed. The shares are taxed in the remaining States but there is considerable variation between the rates in the different States and also between the rates in the various cities and counties in the same State. The following estimates of the average rates in certain of the States will illustrate the extent of the variation: Missouri, 2.77 percent; Georgia, 3 percent; Montana, 2.1 percent; Minnesota, 1.36 percent; Virginia, 1 percent; West Virginia, 0.5 percent; Indiana, 0.25 percent; Ohio, 0.2 percent; and Florida, 0.1 percent. It is estimated that the net rate in the city of Chicago will be approximately 1.6 percent of the Corporation's investment.

If my understanding of the intention of Congress in enacting section 10 of the Reconstruction Finance Corporation Act is correct, the proposed bill does nothing more than to reaffirm that intention and should not, therefore, be controversial. Anything you can do toward its early adoption will be greatly appreciated. Very truly yours,

Chairman.

SUPREME COURT OF THE UNITED STATES—No. 283.

OCTOBER TERM, 1935

Baltimore National Bank, petitioner, v. State Tax Commission of Maryland,

respondent. On Writ of Certiorari to the Court of Appeals of the State of

Maryland. February 3, 1936
Mr. Justice Cardozo delivered the opinion of the Court.

This case presents the single question whether shares in a national bank, subscribed for and owned by the Reconstruction Finance Corporation, may be taxed by a state.

The Baltimore Trust Company closed its doors in February 1933, and was unable to reopen. It was reorganized in August of the same year as a national banking association under the name of the Baltimore National Bank with a place of business in Baltimore, Maryland. To set the business going, the Reconstruction Finance Corporation subscribed for the entire issue of preferred stock, 10,000 shares of the par value of $1,000,000. Following a provision of the Maryland Code (1935 Supp., Article 81, § 15e :), the State Tax Commission upheld a tax upon the shares, overruling thereby the protest of the bank, which made a claim of immunity under the Federal Constitution for the benefit of the shareholder as well as for itself. The order made by the Commission was reviewed upon appeal by the Circuit Court of Baltimore City, which canceled the assessment. In accord is a ruling of a District Court of the United States for the Western District of Kentucky. United States v. Lewis, 10 F. Supp. 471. Upon an appeal by the Commission to the Court of Appeals of Maryland, the order of the Circuit Court was reversed and the assessment reinstated. 180 Atl. Rep. 260. To settle an important question as to the taxing power of a state, a writ of certiorari issued from this court.

The Reconstruction Finance Corporation was organized in 1932 to give relief to financial institutions in a national emergency and for other and kindred ends. Act of January 22, 1932, 47 Stat. 5; Act of July 21, 1932, 47 Stat. 709; 15 U. S. C., c. 14. At the time of its creation and continuously thereafter the United States has been and is the sole owner of its shares. The purpose that it has aimed to serve is not profit to the government, though profit may at times result from one or more of its activities. The purpose to be served is the rehabilitation of finance and industry and commerce, threatened with prostration as the result of the great depression. We assume, though without deciding even by indirection, that within McCulloch v. Maryland, 4 Wheat. 316, a corporation so conceived and operated is an instrumentality of government without distinction in that regard between one activity and another. Even on that assumption taxation by state or municipality may overpass the usual limits if the consent of the United States has removed the barriers or lowered them.

We think consent has been so given where shares in a national bank are the property to be taxed, though an agency of government is the owner of the assets subjected to the burden. By § 5219 of the Revised Statutes (12 U. S. C., § 548; cf. Act of June 3, 1864, 13 Štat. 99, 112; Act of February 10, 1868, 15 Stat. 34) “all” the shares of a national banking association whose principal place of business is within the limits of a state are made subject to taxation at the pleasure of the legislature with conditions as to form and method not important at this time. This court has held that Congress in saying “all” meant exactly what it said, and that shares in a national bank belonging to another national bank were taxable to the same extent as if they belonged to anyone else. Bank of Redemption v. Boston, 125 U. S. 60, 69, 70; Bank of California v. Richardson, 248 U. S. 476, 483; Bank of California v. Roberts, 248 U. S. 497; Des Moines National Bank) v. Fairweather, 263 U. S. 103. “The manifest intention of the law is to permit the State in which a national bank is located to tax, subject to the limitations prescribed, all the shares of its capital stock without regard to their ownership.” Bank of Redemption v. Boston, supra, at p. 70. True, as we have assumed, the Reconstruction Finance Corporation is a governmental agency, but so also is a national bank. McCulloch v. Maryland, supra. The question thus reduces itself to this, whether there is sufficient reason to believe that immunity from taxes of this kind has been given to the one agency, though by long accepted decisions it has been denied to the other.

In such a situation the burden is heavily on the suitor who would subject the word "all” with its uncompromising generality to an unexpressed exception. The petitioner reminds us that the ends to be served by the Reconstruction Finance Corporation are even more predominantly public than those of a national bank, since the bank, while promoting the fiscal needs of the government, is acting at the same time for the profit of its stockholders. The suggestion has it force, but force inadequate, We think, to carry to the goal. Its inadequacy is the more apparent when the capacity of the corporation to become a subscriber to the stock is followed to the sources. Until March 1933 there was no power on the part of national banks to issue preferred shares. Act of March 9, 1933, Title III, 48 Stat. 5; amended June 15, 1933, 48 Stat. 147; 12 U.S. C., § 51 (a). Until then there was no power on the part of the Reconstruction Finance Corporation to subscribe for such shares or indeed for any others. Act of March 9,

1 "Shares of stock assessable under this section shall be taxed to the several owners thereof and the taxes thereon shall be debts of such owners but may b collected in each case from the bank or other corporation, which shall be bound to pay the same for account of its stockholders whether or not dividends are declared thereon as if such corporations were the ultimate taxpayer, but may obtain reimbursement therefor from the respective stockholders and may charge the same in reduction of any amounts due to the several share. holders as dividends or otherwise.

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