Popular Science Monthly/Volume 52/March 1898/Principles of Taxation: Taxation of Choses in Action XXV

Popular Science Monthly Volume 52 March 1898  (1898) 
Principles of Taxation: Taxation of Choses in Action XXV by David Ames Wells


By DAVID A. WELLS, LL. D., D. C. L.,



IN addition to the review of the celebrated Foreign-held Bond Case (see Popular Science Monthly, vol. lii, No. 3, pages 354373), decided by the United States Supreme Court in 1893, it is proposed to call attention here to additional and interesting features of this case which have not been hitherto noticed in this connection.

The court having decided the situs for taxation of negotiable instruments—railroad bonds, etc.—took occasion also to affirm the taxable situs of such other personal property, or evidence of indebtedness, as is generally included under the term of choses in action, using in so doing the following language:

"But other personal property, consisting of bonds, mortgages, and debts generally, has no situs independent of the domicile of the owner, and certainly can have none where the instruments, constituting the evidence of debt, are not separated from the possession of the owner."

As thus expressed, the reasons given by the court for separating for taxation the situs of the two classes of personal property under consideration are so clear, and so in accordance with common sense, as hardly to require any further explanation; and, therefore, it seems only necessary to assist the reader, who, if a taxpayer, is certainly interested in knowing the tax liability of his property, by recalling that while, in the case of negotiable instruments, the title to the property runs with the instrument and passes by delivery, in the case of bonds, mortgages, and sales made to particular persons, and thus non-negotiable, the title, on the other hand, does not run with the instrument, but exclusively with the person of the owner; so much so, that the attachment of a mortgage, or the possession by theft or finding of a note payable to a person, does not in any degree alienate or impair its original and legitimate ownership. The decision of the court, therefore, brings all classes of personal property under one harmonious and consistent rule for the purpose of taxation, legal attachment, and protection, by affirming that their situs as property is only where they are; which in the case of visible and tangible objects and negotiable instruments, is dependent, from the very nature of things, upon actual and not constructive presence, and in the case of choses in action upon the domicile of the owner; and in thus deciding, the court simply followed English precedents of long standing and the highest character.[1]

It may, however, be objected that the practical effect of this decision has been to relieve all negotiable instruments from taxation, inasmuch as, removed beyond the territory and jurisdiction of the State in which their owner resides, they will not, by reason of easy concealment (for which safe-deposit companies in the larger cities of most of the States now offer great facilities), be easily cognizable by the assessors of the locality in which they are deposited. But admitting the objection in full force, as in all reason we must, what then? The Supreme Court has given its opinion clearly and unmistakably; and until this opinion is reversed, it constitutes the legitimate rule of action for both assessors and taxpayers. But suppose it were possible to reverse the opinion in question, would it be expedient to do so? Would it be desirable to abandon the plain common-sense view that the situs for the taxation of all personal property is where the law protects it, and where alone an assessment and a legal attachment against it can be enforced, and in its place make situs depend on visibility? And if visibility, what degree of visibility? Shall a diamond, a bar of gold, or a railroad bond, belonging to A. B., residing in Boston, but openly displayed in a jeweler's or broker's window in Philadelphia, be taxable in Pennsylvania, and a similar diamond, gold bar, or bond of the same owner, deposited in a drawer of the same shop or office and not so readily visible, be taxable in Massachusetts? Shall we make the situs of property for taxation depend upon the keenness of perception or visual organs of an assessor? Or shall we not rather, admit that the attempt to raise revenue by taxing such property as negotiable instruments which from their very nature are in a high degree intangible and invisible, and thus easy of concealment; which, passing by delivery, are here to-day and somewhere else to-morrow; which are not taxed in any other highly civilized country, and which are in great part, even in this country, specifically exempted by law—i. e., United States bonds, legal tender, national bank notes, etc.—is in itself an absurdity and a wrong; inasmuch as to enforce a levy from one man for one species of property, because through his honesty, ignorance, or inability to escape he can be laid hold of, and allow identically the same description of property in the possession of another man to escape because of varying circumstances beyond the control of the assessors, is not taxation in any sense, but simply arbitrary taking. The court itself, in referring to the tax under consideration, said with great point and truth: "It is only one of many cases where, under the name of taxation, an oppressive exaction is made, without constitutional warrant, amounting to little else than an arbitrary seizure of private property. It is, in fact, a forced contribution levied upon property held in other States, where it is subjected, or may be subjected to taxation upon an estimate of its full value."

Decision of the Supreme Court of California on the Taxation of Mortgages.—Any review of the history of local taxation in the United States would be imperfect which failed to notice a notable and interesting decision given in May, 1873, by the Supreme Court of California in regard to the taxation by its State authorities of real-estate mortgages. The question was one that for a considerable time had greatly interested the people of California, and the drift of popular sentiment of San Francisco seems to have been most unmistakably in favor of their taxation. But how to do it, and at the same time not increase the burden on the borrower, who had mortgaged his land as security for a loan of capital to improve or stock it, was a problem that not a little troubled the lawmakers in Legislature assembled. One proposition brought forward contemplated a deduction from the amount of land tax of the assessment on the mortgage; but as the lands of California were found, as a rule, to be taxed far below their value, and the mortgages for a value far in excess of the assessor's appraisement of the land they covered, it became soon apparent that this scheme was to a greater or less extent equivalent to exempting the land and taxing the mortgage. Another proposition, embodied in a bill introduced into the Assembly, was to make void all contracts by which borrowers agreed to reimburse lenders in the amount of the mortgage tax; while others again were exceedingly strenuous in favor of trying the pleasing little experiment—which no community having once tried ever desires to repeat—of providing that the person giving the mortgage should pay the taxes upon it, but be at the same time authorized to deduct the tax from the principal, or interest, in settling with his creditor. Pending these discussions, however, the Supreme Court, which had the question before it on a suit to which one of the savings banks of San Francisco was a party, rendered a decision, that in virtue of a clause in the Constitution of the State requiring all taxation to be equal and uniform, the taxation of mortgages was unconstitutional and illegal; inasmuch as to tax a given property and then tax a mortgage on it, which mortgage is not in itself property, but, like a deed or lease, is a species of conveyance or acknowledgment of a conditional interest or right in the property, is not equal and uniform taxation, but an unequal and double tax on the property mortgaged.

The importance of this decision, considered as an act reformatory of the popular theory of local taxation, does not require to be proved and illustrated; but as it was unquestionably a step in advance of any heretofore taken by either our Federal or State courts, and as, by reason of it, not only were mortgages exempted from taxation in California, but also all promissory notes and other evidences of indebtedness, it is desirable briefly to ask attention to the reasoning by which the court was led to its conclusions.

The opinion was given by the Chief Justice—Crockett—who, after reviewing the history of the case, is reported to have used the following language:

"I come now to the point, whether a tax on land at its full value, and a tax on a debt for money loaned, secured by a mortgage on the land, is in substance and legal effect a tax on the same property. We all know, as a matter of general notoriety, that almost universally, by a stipulation between parties, the mortgagor is obliged to pay the tax both on the land and on the mortgage. Practically he is twice taxed on the same value, if he has still in his possession the borrowed money to secure which the mortgage was made. The law taxes in his hand both money and land; and by his stipulation he is required to pay tax on the mortgage debt, and also, if the money has pased out of his hands into the possession of some other taxpayer, it is taxed in the hands of the latter, so that the money bears its share of taxation, and the land its share, in the hands of whomsoever they may happen to be.

"It is very true that a voluntary agreement on the part of the mortgagor to pay the tax on the mortgage debt can not improve its situs. The State was no party to the contract, and is not bound by stipulation inter alias. The burdens of taxation can not be shifted from those on whom the law imposes them by stipulations between private persons; but in the absence of such a stipulation, an inexorable law of political economy would impose upon the mortgagor the burden, in a different form, of paying the tax on the mortgage debt. Interest on money loaned is paid as a compensation for the use of the money, and a rate of interest as agreed on is the amount which the parties stipulate will be the just equivalent to the lender. If, however, by the imposition of a tax on the debt, the Government diminishes the profit which the lender would otherwise receive, the rate of interest will be sufficiently increased to cover the tax, which in this way will be ultimately paid by the borrower. The transaction would be governed by the same immutable, inflexible law of trade by reason of which import duties on articles for consumption are ultimately paid by the consumer, and not by the importer. The rate of interest on money loaned is regulated by the supply and demand which govern all articles of commerce; and the burdens imposed by law in the form of a tax on the transaction, which would thereby diminish the profits of the lender, if paid by him, will prompt him to compensate for the loss by increasing to that extent the rate of interest demanded. If his money would command a given rate of interest without the burden, he will be vigilant to see that the borrower assumes the burden, either by express stipulation, or in the form of increased interest. This is the law of human nature, which statute laws are powerless to suppress, and which pervades the whole of trade governed by the law of supply and demand. Nor would the enactment of the most stringent usury laws produce a different practical result. Human ingenuity has hitherto proved inadequate to the task of devising usury laws which were incapable of easy evasion; and wherever they exist they are, and will continue to be, subordinate to that higher law of trade which ordains that money, like other articles of commercial value, will command just what it is worth in the market, no more and no less. Assuming these premises to be correct, and I am convinced that they are, it results that it is the borrower, and not the lender, who pays the tax on borrowed money, whether secured by mortgage or not; but if secured by mortgage, he is taxed not only on the mortgage and property, but on the debt which the property represents and which is held as a security for the debt."[2]

Subsequently the Hibernia Savings Society of San Francisco having resisted under the provisions of the Constitution of California the taxation of mortgages given to secure the loan of property, the Supreme Court again met the case fairly and squarely—its language by Justice Wallace being reported as follows: "Mere credits are a false quantity in ascertaining the sum of wealth which is subject to taxation as property, and so far as that sum is attempted to be increased by the addition of these credits, property based thereon is not only merely fanciful, but necessarily the imposition of an additional tax upon a portion of the property already once taxed. The taxation thus imposed, nominally upon credits, having resulted in the double taxation of money, the additional tax must be paid by some one. And here all experience, as well as all settled theories of finance, concur that it is not the lender who pays, but the borrower. The borrower is the consumer; the interest that he pays to the lender is the prime cost of the delay for which he has contracted. If the Government, by the imposition of additional taxes, increase the cost, the borrower, being the consumer, must pay for it."

The court, through Justice McKinstry (the Chief Justice's opinion being in concurrence), enumerated, as follows, some of the absurdities to which an attempt to include choses in action in the definition of property would necessarily lead:

"Supposing," he said, "that the necessities of Government required a tax of one hundred per cent on all values, or, what would be the result of such a tax, an appropriation of all the property in the State—it is plain that the State would receive no benefit from evidences of debt due by some of her citizens to others, and payable out of the tangible property which the State had already taken.

"The Legislature may declare that a cause of action shall be taxed, but a cause in action can not pay the tax; and this because it has, and can have, no value independent of the tangible wealth out of which it may be satisfied.

"It may be possible in every case to show that the debtor has paid the tax assessed to his creditor. But it admits of mathematical demonstration—if other property in the State has been assessed at its value—that the money which shall ultimately satisfy the debt (if it ever is satisfied) has paid the tax. If it were practical to assess all the property in the State at the same moment of time, it would be clear to every mind that an assessment of a credit was an attempt to transfer to it a value elsewhere assessed. If a debtor was found to be the owner of one thousand dollars, and is assessed for that sum, and his creditor is found to be the owner of his note for one thousand dollars, and is assessed for a like sum; and if the day after the visit of the assessor to the creditor the debtor shall pay his note, it is clear that this same value has been twice taxed; since the debtor has parted with his money, and received only that which is certainly not taxable property in his hands, and which can never afterward be assessed. When a debtor pays his debt, he does not abstract or destroy any portion of the taxable property of the State; the aggregate of values remains the same."—Opinion of Justice McKinstry.

Suppose, "were such a thing possible, that the entire tax rolls exhibited nothing but indebtedness. Taxation under such circumstances would, of course, be wholly fanciful, as having no actual basis for its exercise."—Opinion of Chief-Justice Wallace.

  1. Lord Ellenborough, in King's Bench (Neilage vs. Holloway, Barnwell and Allison's Reports, 318), having decided that a negotiable note was a chattel personal and not a chose in action; Lord Abinger, that all foreign government bonds payable to bearer have a situs where they are actually situated; and the House of Lords, that registered stocks and bonds of the United States and of the several States not passing by delivery, are not negotiable instruments, and therefore not taxable as goods and chattels.
  2. Of the soundness of this decision there could probably be no more convincing illustration than the statement that upon its announcement the savings banks of San Francisco gave notice that they would immediately reduce the rate of interest on their loans secured by mortgages by the amount of the tax on the mortgage. And the Alta-California of May 9th, in commenting upon the decision, says: "When the news arrived here yesterday morning" (that the Supreme Court had given a decision) "it was not unexpected; and the idea conveyed by the false rumors set afloat, that the decision was adverse to the savings banks, was accepted as a decision measured by expediency, and not based on sound legal principles. Special dispatches received changed the result; and when it became evident that the banks and the mercantile community had triumphed, a general feeling of satisfaction was everywhere noticeable. Merchants, bankers, and taxpayers generally received the news with the feelings of men who felt relieved from a terrible incubus."