State v. President, Directors & Co. of Bank of Smyrna

7 Del. 99

• Court: Supreme Court of Delaware
• Decided: June 5, 1859
• Status: Published

Opinion

Harrington, Chancellor,

delivered the opinion of the Court: This case involves the question of the constitutionality of an act of the legislature of 1855, taxing the surplus earnings of the Banks ; the Bank of Smyrna contending that by its charter it is exempt from taxation, otherwise than to the amount of one fourth of one per cent, of its capital. Some of the Banks having accumulated a large surplus fund, the legislature thought proper to impose a tax on these surplus funds, as a part of their . banking capital, which the Bank of Smyrna resists under a claim of exemption, and a case was agreed upon to settle the question, which involves several fundamental questions touching the powers of the legislature to impose additional taxes on corporations; the power of one legislature to bind subsequent legislatures not to impose further taxes; the immunities of corporations generally, and the particular exemptions of this Company under the terms of its charter.

The Bank of Smyrna was incorporated on the condition of paying a tax of one half of one per cent, on its capital. The other Banks of the State at that day paid but one fourth of one per cent.; and because, probably, of this discrimination, the amount of stock required to be subscribed for its organization, was not taken. At the next session, the legislature repealed the tax of one half of one per cent., and enacted that “ in lieu of other taxes,” the Bank should pay one fourth of one per cent, on its capital; and with this change the Bank'went into operation. It was several times renewed, and it continued to do business without further taxation until 1855, when in the act renewing its charter, the legislature imposed a tax of one half of one per cent. The Bank submitted to this; but by a subsequent general law, all the Banks were required to pay tax also on seventy-five per cent, of their surplus earnings, which was the tax now objected to by the defendants.

Since the' decision of the Supreme Court of the United States in the case of The Bank of Ohio v. Knoop, 16 How. 369, 21 Curtis 190, and the many eases which have succeeded it, the question cannot be considered open for argument, whether the legislature can hind the State by contract with a corporation created by its charter, not to tax for a given time, the franchise, or property of such corporation further than is agreed on in the charter. It was long before that case, settled that such a charter was a contract between the State and the corporators, which was protected by the constitution of the United States, and was inviolable. And it is now settled that an agreement to limit or restrain the power of the State to impose further taxes on the franchise of a corporation during the continuance of its charter, may enter into such a contract and have binding force. The argument that the power of taxation, being an essential attribute of State sovereignty, cannot be limited by the legislature, has been fully considered and refuted by the Supreme Court of the "United States ; and the theory revived again in this case, which supposes there are restrictions on legislative power not to be found in the constitution, but existing above it and to be enforced by the courts, is also exploded. Every power of government may be said to be a sovereign power ; most of them are essential to its sovereignty; all of them are liable to be abused ; yet it cannot be said that because they may be abused, they shall not be used ; and the proper use of many of them requires prospective arrangement that shall not be liable or subject to change at each succeeding legislature. The power to make contracts is equally a sovereign attribute with the power to tax; and yet a contract which is to be subject to change or annulment by one of the parties at pleasure, is no contract ; and unless the State can restrain its own power so to change its will in this respect, the power of making contracts essential to sovereignty, is destroyed. The exemption of property from taxation is a question of policy, and not of power. Such an exemption would generally be impolitic, and should not be granted except for great public objects; but the legislature is the proper judge of this. It selects the subjects of taxation and arranges the basis and the amount of taxes. Practically, it is always exempting some species of property or other from taxation, or preferring one mode of raising revenue by taxation to another, as policy dictates; and if such policy in the judgment of the sovereign taxing power dictates the entire exemption of any species of property from taxation for a given time, it is the proper exercise of such power so to exempt it; and as the State has the power also to make contracts, it is the proper exercise, and not the relinquishment of the power of taxation, to stipulate for exemption in a given case and on a sufficient consideration. Such a contract for exemption, however, will not be implied; though it will be enforced when clearly expressed. It will not be presumed that the State has lightly parted with the power of taxation. The State may own and sell in fee simple an estate in land. While so owned it would not be taxed. When sold, though for its full value, it would be subject to tax as other property of the same kind; and the purchaser could not claim that because he bought of the State at its full value, it was exempt as before from taxation ; but if in the contract of sale the legislature should think fit to agree that it should for a limited time be exempted from taxation, it would be perfectly competent for it to make such a contract which would then be under the protection of the federal constitution.

Corporations are the creatures of the legislatures, created for public and useful objects, and are often the only means of effecting these objects. Their character and extent, their powers and immunities, as well as their duties and obligations, are just such as the legislature pleases to make them; but when made, like natural persons they are capable of making contracts even with the power that creates them, or with subsequent legislatures, and their contracts when made are under the same protection as other contracts. Their property in the case of Banking corporations, is their franchise, or right to do banking business within the limits of their charter ; their capital invested in such business, their surplus earnings set apart undivided and such other property, real and personal, as they may be authorized to have. All this is liable to taxation just as the property of individuals is liable to taxation, unless otherwise agreed upon in their charters. They may trust, as all others on acquiring property trust, that the legislature will not tax them beyond certain limits; but this imposes no obligation on the legislature. It is a mere calculation of chances, or reliance on public justice, or policy, and affords no legal immunity beyond what is expressly stipulated in the charter. The bonus is the price paid for the franchise—the power to do banking business. Whether measured by tax on capital stock, or by a specific sum stipulated, it is the price paid for doing business as a bank; and unless otherwise stipulated and agreed upon, it no more exempts other property, such as the surplus accumulation of earnings derived from that business while in its hands undivided, than it does the dividends in the hands of the stockholders, or the banking house, or any other real property which it holds. These views are fully sustained by the Supreme Court in Gordon v. The appeal Tax Court, 3 How. 133, 15 Curtis 388. In that case the Court says “The franchise is their corporate property which like any other property would be taxable if a price had not been paid for it, which the legislature accepted as the consideration for allowing them to use the franchise during the continuance of their charters. The capital stock is another property, corporately associated for the purpose of banking; but its parts is the individual property of the stockholder in the proportions they may own them. Being their individual property they may be taxed for it, as they may be for any other property they may own.”

We have then only to look at the several laws constituting the charter of the Bank of Smyrna, to see if the legislature has by contract exempted its surplus earnings from the common liability of all other property to taxation, having ascertained that it was competent for the legislature by contract binding on subsequent legislatures, to exempt this, or any other part of its property from taxation. It was incorporated in 1821 for twenty years, and by the 18th section of its charter it was provided that if the sum of $75,000 should not be subscribed for in its capital stock by the 1st of September 1822, the charter should cease and be of no effect; and by the 20th section it was enacted “That as a condition of the passing of this act” the company should pay to the State Treasurer semiannually for the use .of the State “at the rate of one half of one per centum per annum on the stock actually paid in for and during the continuance of the present charter.” But before the organization of the company pursuant to this provision of the charter, a supplement to it was passed by the legislature on the 7th of February 1822, continuing its corporate powers until 1843, repealing the 20th section of the original charter and enacting “that in lieu of other taxes, the said President, Directors and Company of the Bank of Smyrna shall pay the treasurer of the State for the use of the State, a tax semi-annually at the rate of one fourth of one per centum on the whole capital stock of the said Bank actually paid in for and during the continuance of the said Bank from and after the 1st day of September next.” In 1837 the corporation was extended to February 1857 with “all its rights, powers, privileges, franchises and immunities vested in it by any law of the State;” and on the 13th of February 1855, the charter was again renewed and extended for twenty years. But it is to be remarked that in this last act of renewal, the act of 1822 which contains the expression relied on in the argument of the counsel for the defendants,as conferring an immunity from further, or future taxation, “in lieu of other taxes,” is not referred to, nor are the words “rights and immunities” occuring in the renewal and extension of the charter in 1837, contained in this act; the second section of which provides that “The tax to be hereafter paid by the said Bank shall be one half instead of one quarter of one per centum per annum; Provided that no tax shall be required on any stock held for the benefit of the School Fund.”

The question therefore is whether under this act of the 13th of February 1855 which now constitutes its charter, incorporating as it does, all the previous acts to the extent to which it proposes to incorporate them, the Bank of Smyrna has any right, or immunity to be exempt from any other taxation than that imposed by the act of 1822, which was one fourth of one per cent, on its capital stock ? The powers of the company are derived, exclusively, from the act of extension. That act might adopt by reference, the language of any other, but the exemption must be expressed at the time of renewal. In the case before referred to in 3 Howard 133, it is said the exemption lasts only during the continuance of the charter and when extended without any such promise, the power to tax revived. In that case the exemption was in the most formal terms, as follows : “and the faith of the State is hereby pledged not to impose any further tax, or burden upon them during the continuance of their charters under this act,” yet these words being omitted in the act of extension, it was held that they were after that liable to further taxation-. And this is peculiarly the case in our State, since by constitutional limitation these charters are restricted in the grant and duration of them, to a period not exceeding twenty years, and the power of the legistature to confer such immunity, must have the same limit. The exemption in question must therefore be shown to exist by the express grant of the legislature in the act of 1855. But, as we have before remarked, the legislature in that act of renewal, not only omitted to extend the rights and immunities granted in the previous act, but wholly omitted to notice the particular act under which the exemption is now claimed. It extends only the “ powers, privileges and franchises” belonging to, or vested in the Bank created by the act of 1821 and renewed and continued by the act of 1837; whilst this assumed immunity is by force of a supplement passed in 1822.

The court might properly rest its judgment on the failure to repeat in the last renewal of the charter a supposed pledge given in a former act which by its own limitation, as well as by constitutional necessity, has expired; but the words “ in lieu of other taxes” used in the act of 1822, are an insufficient foundation for the surrender of the taxing power. They are capable of explanation otherwise and without any forced construction of the act. The previous act of 1821 imposed, though not by the name of tax, as a condition for the grant of the Banking franchise, an obligation to pay the State one half of one per cent, on the capital paid in ; the act of 1822 repealed this, and added that in lieu of other taxes the Bank should pay one fourth of one per cent, on its capital. The one half per cent, is the thing in the law repealed, in whose place was substituted by the law repealing it, the one fourth of one per cent, in lieu thereof; and it would be rather a strained inference to draw a solemn agreement by the State not thereafter to impose any other tax on this, or any other property of the Bank. For the act of the 24th of February 1855 taxing the surplus fund of all the Banks, is not a tax upon their stock; and the objection to it goes to the full extent of denying the power to tax any property of the Bank other than its stock, and might as well extend to its real property as to its surplus fund. „ On the contrary, the tax upon stock which would come within the exemption, if there was an exemption, was imposed, not by the act of the 24th of February 1855, which is now objected to, but by the act of the 13th of February 1855, which is not objected to; and that too, notwithstanding the renewed charter of 1837 was not to expire until 1857, two years after the latter act was passed. The latter act was therefore more clearly a violation of the contract of 1822, if there was such a contract not to lay any other tax on the capital stock of the Bank, than is the former act now under consideration, for imposing a tax on a distinct species of property, its surplus dividends.

The Court is therefore of opinion that the act of February 24th 1855, entitled “an act to tax the surplus, or contingent fund of the Banks of the State of Delaware “is, as to the Bank of Smyrna, a constitutional law, and that the defendants are liable by virtue of that act to pay to the State semi-annually, a tax at the rate of one fourth of one per centum per annum upon the surplus, or contingent fund of said Bank exceeding twenty-five per cent, of said fund; and it is ordered that this opinion be certified to the Superior Court in and for Kent County.