THE NATIONAL CITY BANK OF NEW YORK, PLAINTIFF AND APPELLANT, VS. JUAN POSADAS, JR., COLLECTOR OF INTERNAL REVENUE OF THE PHILIPPINE ISLANDS, DEFENDANT AND APPELLANT.

Under section 1499 of the Administrative
Code, the defendant Collector of Internal Revenue of the Philippine
Islands assessed against the National City Bank of New York as capital
and deposit taxes for the first half of the year 1931 the sum of
P77,324.11. On October 23, 1931, the bank paid said taxes under
protest. The grounds of the protest were stated as follows:

“1. That the National City Bank of New York is a
national banking association duly organized under the United States
National Banking Act and is an agency of the United States created
under its laws to promote the fiscal policies of the United States.

“2. That the National City Bank of New York has been duly authorized by
the Federal Reserve Board to establish a branch in the Philippine
Islands, and is now operating the same under the provisions of the
United States Federal Reserve Act.

“3. That no state,
territory or possession of the United States or any subdivision thereof
has the power to tax national banks except as Congress expressly
permits; that no such power has been granted to the Philippine
Government.

“4. That under the provisions of the National
Banking Act (sec. 548, Title 12, U. S. Code) each state may tax
national banking associations in any one of four forms but the
imposition of any one of such forms shall be in lieu of the others
except that in the case of a tax upon net income, individuals may be
taxed upon dividends from national banking associations if the law of
the state provides for such a tax upon all business corporations and
dividends therefrom.

“5. That the Philippine Islands imposes
a tax upon net income and is therefore without power to impose any
capital deposit, or other tax of any kind upon such national banking
association.”

On June 7, 1932, the bank filed its suit to recover the said taxes
and alleges substantially the same grounds as those set out in the
protest when the payment was made. Upon the hearing of the cause it was
established by the evidence that the National City Bank of New York,
duly organized under the Act of Congress of June 3, 1864, is located at
No. 55 Wall Street in the City of New York with a present capital of
$110,000,000. On January 23, 1930, the Federal Reserve Board authorized
said bank to establish branches in Manila and Cebu, Philippine Islands.
These branches were in operation during the first half of the year
1931, the period covered by the taxes here in question.

On April 30, 1932, the plaintiff bank filed with the Bureau of
Internal Revenue of the Philippine Islands a return of its net income
from its branches in Manila and Cebu for the year 1931, a total of
9518,871.61, upon which, on June 3, 1932, it paid an income tax of
P15,566.15 in accordance with the Internal Revenue laws of the
Philippine Islands. This tax was paid without protest.

The trial court sustained the capital tax and ordered the deposit
tax refunded to the plaintiff bank. Both parties have appealed to this
court.

The Collector of Internal Revenue submits the following assignments of error:

“1. The trial court erred in holding that the
branch of the National City Bank of New York in Manila, Philippine
Islands, is an instrumentality of the United States Government.

“2. The trial court erred in holding that the branch of the National
City Bank of New York in Manila, Philippine Islands, is only subject to
the payment of taxes on its capital and not to the payment of taxes on
its deposits also as provided for in section 1499 of Act No. 2711 (The
Administrative Code), as amended.

“3. The trial court erred
in ordering the defendant to return to the plaintiff the amount of
P61,219.43, which represents the tax on its deposits for the first half
of the year 1931, paid under protest by the said plaintiff to the
defendant.

“4. The trial court erred in denying defendant’s motion for a new trial.”

At the outset it should be noted that the branches of the National
City Bank of New York in Manila and Cebu are not separate legal
entities. The Act of Congress of December 23, 1913 (U. S. C, Title 12,
sec. 601) provides in part:

“SEC. 601. Authorization; conditions and regulations.—
Any national banking association possessing a capital and surplus of
$1,000,000 or more may file application with the Federal Reserve Board
for permission to exercise, upon such conditions and under such
regulations as may be prescribed by the said board, either or both of
the following powers:

“First. To establish branches in
foreign countries or dependencies or insular possessions of the United
States for the furtherance of the foreign commerce of the United
States, and to act if required to do so as fiscal agents of the United
States.”

* * * * * * *

It is shown by the evidence in this case that the local branches of
the National City Bank of New York have no separate corporate
franchise, no separate capital stock, and are operated directly by the
bank through officers and managers appointed and controlled by the
National City Bank of New York. The Act of Congress, supra,
authorizing the establishment of branches clearly does not contemplate
separate legal entities for it makes no provision for their form of
organization or the amount of capital to be invested therein, as is
done with reference to investments by a national bank in other banks or
corporations engaged in banking in a dependency or insular possession
of the United-States as set out in the second paragraph of U. S. C,
Title 12, section 601, supra. In a word, a “branch” is simply
an extension of the business of a national bank to foreign countries,
dependencies or insular possessions of the United States. The branch of
the National City Bank of New York in Manila is the National City Bank
of New York doing business in Manila.

On March 19, 1930, this bank filed with the mercantile. register of
the Bureau of Commerce of the Philippine Islands copies of its articles
of incorporation, its by-laws, the power of attorney granted to its
local manager and the order of the Federal Reserve Board granting
permission to the National City Bank of New York to establish branches
in Manila and Cebu. The very taxes here in question are assessed by the
Government of the Philippine Islands against the “National City Bank of
New York” and the receipts therefore were issued to the “National City
Bank of New York”, and quite properly so, for the branch as such has
neither assets nor liabilities. It is true that the bank filed with the
Collector of Internal Revenue a statement (Exhibit J) in which it
undertook by an arbitrary calculation to furnish the collector an
estimated local capital of its Manila branch as a basis for the
assessment of the capital tax. This was computed upon the following
proportion: the capital, surplus and undivided profits of the bank
($224,554,298.54) is to its local capital as the total profits of the
bank $10,690,303.41 is to the profits of the Philippine branch
($151,851.11). This computation for the first half of the year 1931
resulted in a hypothetical local capital of P12,883,744.56. But this
computation, submitted as it was under compulsion and solely for the
purpose of estimating the tax which was paid under protest, does not in
our judgment constitute any sort of an admission on the part of the
bank, and cannot be invoked here to create a corporate entity which
does not exist in fact.

In the light of the foregoing, the collector’s first assignment of
error must be held to relate to the National City Bank of New York.
That a national bank is an instrumentality of the Government of the
United States is a proposition supported both by actual facts and by so
many decisions since the passage of the first National Banking Act,
approved June 3, 1864, that ^requires no citation of authorities and
cannot be questioned now. It makes no difference in principle whether
the bank functions as such instrumentality in its home office or in a
branch office. The very act authorizing the establishment of branches
provides that such branches may be established “for the furtherance of
the foreign commerce of the United States, and to act if required to do
so as fiscal agents of the United States.” Since the appeal in the
present case was lodged in this court, the branch in Manila of the
National City Bank of New York has performed an important fiscal
service to the United States Government as a depository of gold under
the Gold Reserve Act of January 30, 1934. There is, therefore, no merit
in the collector’s first assignment of error.

We shall consider together the collector’s second assignment of
error which relates to the payment of the tax on deposits and the
bank’s assignment of error which relates to the capital tax.

Section 1499 of the Administrative Code provides:

“SEC. 1499.—Tax on capital, deposits, and circulation of banks.—Subject
to the exemptions herein made there shall be collected from banks the
following taxes on capital, deposits, and circulation:

“(a) Upon the capital employed by the bank, for each month, one twenty-fourth of one per centum.

“(b)
Upon the average amount of deposits of money, subject to payment by
check or draft, or represented by certificates of deposit, or
otherwise, whether payable on demand, or on some future day, for each
month, one eighteenth of one per centum.

“(c) Upon
the average amount of circulation issued by the bank, including as
circulation all notes and other obligations calculated or intended to
circulate or be used as money, but not including such as may be
retained in the vault of the bank or redeemed and on deposit for said
bank, for each month, one-twelfth of one per centum.

“(d)
‘Bank’ as herein used, includes every incorporated or other bank, and
every person, association, or company having a place of business where
credits are opened by the deposit or collection of money or currency
subject to be paid or remitted upon draft, check, or order, or where
money is advanced or loaned on stocks, bonds, bullion, bills of
exchange, or promissory notes are received for discount or for sale.

” ‘Capital employed’ does not include money borrowed or received from
time to time in the usual course of business from any person not a
partner of or interested in such bank; and no tax shall be imposed on
the capital employed by any person whose sole business is lending money
on real-estate security.”

Many attempts have been made by the several states and territories
of the United States to levy taxes in one form or another upon national
banks without the consent of Congress but they have uniformly failed.
Chief Justice White, in the case of Owensboro National Bank vs. Owensboro (173 U. S., 664, 667; 43 Law. ed., 850, 852), which involved a franchise tax, stated the general principle thus:

“Early in the history of this government, in cases
affecting the Bank of the United States, it was held that an agency,
such as that bank was adjudged to be, created for carrying into effect
national powers granted by the Constitution, was not in its capital,
franchises, and operations subject to the taxing powers of a state.
(M’CulIoch vs. Maryland, 4 Wheat., 316 [4: 579]; Osborn vs. Bank of the United States, 9 Wheat., 738 [6:204]).

“The principles settled by the cases just referred to and subsequent decisions were thus stated by this court in Davis vs. Elmira Savings Bank (161 U. S., 283 [40: 701]):

“‘National banks are instrumentalities of the Federal Government,
created for a public purpose, and as such necessarily^ subject to the
paramount authority of the United States. It follows that an attempt,
by a state, to define their duties or control the conduct of their
affairs is absolutely void, wherever such attempted exercise of
authority expressly conflicts with the laws of the United States, and
either frustrates the purpose of the national legislation or impairs
the efficiency of these agencies of the Federal Government to discharge
the duties for the performance of which they were created. These
principles are axiomatic, and are sanctioned by the repeated
adjudications of this court.’

“It follows then necessarily
from these conclusions that the respective states would be wholly
without power to levy any tax, either direct or indirect, upon the
national banks, their property, assets, or franchises, were it not for
the permissive legislation of Congress.

‘The first act
providing for the organization of national banks, passed February 25,
1863, chap. 58 (12 Stat. at L., 665), contained no grant of power to
the states to tax national banks in any form whatever. Doubtless the
far reaching consequence to arise from depriving the states of the
source of revenue which would spring from the taxation of such banks,
and the error of not conferring the power to tax, early impressed
itself upon Congress; for the following year (13 Stat. at L., 99, chap.
106) power was granted to the states, not to tax the banks, their
franchises or property, but to tax the shares of stock in the names of
the shareholders. This provision subsequently was amended and
supplemented in various particulars (15 Stat. at L., 34, chap. 7), and
the result of this legislation is embodied in section 5219 of the
Revised Statutes, * * * “

In the case of the First National Bank vs. City of
Hartford (273 U. S., 548; 71 Law. ed., 767), the court held void a
discriminatory tax on shares of the capital of the bank on the ground
that any attempt to discriminate against the capital invested in
national bank shares is intended to be forbidden by R. S. 5219, and the
court again called attention to the principle involved:

” ‘National banks are not merely private moneyed institutions, but
agencies of the United States created under its laws to promote its
fiscal-policies; and hence the banks, their property and their shares
cannot be taxed under state authority except as Congress consents and
then only in conformity with the restrictions attached to its consent.
(First Nat. Bank vs. Anderson, supra, 347 [70 Law. ed., 302; 46 Sup. Ct. Rep., 135] ; Des Moines Nat. Bank vs. Fairweather, 263 U. S., 103, 106; 68 Law. ed., 191, 195; 44 Sup. Ct. Rep., 23.)”

(See also First National Bank of Guthrie Center [Iowa] vs.
Anderson, Auditor, 269 U. S., 341; 70 Law. ed., 295.) However, it is
contended by the Solicitor-General on behalf of the collector that the
principle of exemption from taxation of the instrumentalities of the
Federal Government applies only to the States of the American Union and
arises from the peculiar relation between the Federal Government and
the State Government, each being sovereign within its respective
sphere. If a State Government should have the power to tax national
banks without the consent of Congress, it would be possessed of the
power to cripple these national instrumentalities, if not entirely to
destroy them. But it is argued that no such relation exists between the
Federal Government and a dependency like the Philippine Islands, which
is under the direct and plenary control of Congress. Attention is
called to section 19 of the Act of Congress of August 29, 1916 (39
Stat, 551), which provides that “all laws enacted by the Philippine
Legislature shall be reported to the Congress of the United States,
which hereby reserves the power and authority to annul the same.”

Whatever may be said, ex hypothesi, in support of the
proposition that no such necessity for exemption from taxation of the
Federal instrumentalities exists in the Philippines as in the several
states, the contrary is definitely settled by the decisions of this
court. We said in the case of the Standard Oil Company of New York vs. Posadas (55 Phil., 715, 717, 718):

“It would further appear perfectly clear that the
principle which prohibits a State from taxing the instrumentalities of
the Federal Government applies with equal force to the Philippine
Islands. At least, that was our holding in the Post Exchange case.
Nevertheless the Attorney-General persists in assuming a difference in
tax powers between the relations of the Philippine Government to the
National Government and of a State Government to the National
Government. We are frank to say that we are unable to see eye to eye
with the Attorney-General. It would be absurd to think that a
derivative sovereignty like the Government of the Philippine Islands,
could tax the instrumentalities of the very Government which brought it
into existence. If a sovereign State of the American Union cannot
abridge or restrict the activities of the United States Government,
much less can a creature of that Government, as the Philippine
Government is, do so.”

In the recent case of Genato Commercial Corporation vs. Collector of Customs (59 Phil., 656, 661), this court said:

“Without congressional consent, no Federal agency
or instrumentality can be taxed by the Government of the Philippine
Islands.” (See also National City Bank of New York vs. Domenech, Treasurer of Puerto Rico, 71 Fed. [2nd.], 13.)

This brings us to the question whether or not the Congress of the
United States has given its consent that the National City Bank of New
York should be subjected to the capital tax and the deposit tax here
involved. The only statute in which Congress has consented that
national banks may be subjected to local taxation is R. S. 5219 as
amended by the Acts of March 4, 1923 (42 Stat, 1499 [U. S. C, title 12,
section 548]), and the Act of March 25, 1926 (44 Stat. [Chap. 88],
223). This is in part as follows:

” ‘SEC. 5219. The legislature of each state may
determine and direct, subject to the provisions of this section, the
manner and place of taxing all the shares of national banking
associations located .within its limits. The several states may (1) tax
said shares, or (2) include dividends derived therefrom in the taxable
income of an owner or holder thereof, or (3) tax such associations on
their net income, or (4) according to or measured by their net income,
provided the following conditions are complied with:

” ‘1. (a)
The imposition by any state of any one of the above four forms of
taxation shall be in lieu of the others, except as hereinafter provided
in subdivision (c) of this clause.’ “

* * * * * * *

The Solicitor-General on behalf of the collector contends that R.
S. 5219 has never been extended to the Philippine Islands and is
limited in its application to States of the American Union. The logical
conclusion of his argument is that there are no express limitations or
restrictions whatever upon the Government of the Philippine Islands as
regards the Kind or amount of taxes it may levy upon national banks. It
is not so stated but we assume the Solicitor-General would admit the
implied limitation that no tax would be valid which would impair the
usefulness of such banks as instrumentalities of the Federal Government.

The National City Bank of New York, as appellant, contends that R.
S. 5219 was in force in the Philippine Islands before the enactment of
the Act of August 29, 1916 ([The Jones Law], 39 Stat., 547), and that
it was continued in force under section 6 of said Act which provides:

“SEC. 6. That the laws now in force in the
Philippines shall continue in force and effect, except as altered,
amended, or modified herein, until altered, amended, or repealed by the
legislative authority herein provided or by Act of Congress of the
United States.”

It is further intimated that the very Act of Congress authorizing
the establishment of branches of national banking associations in the
dependencies or insular possessions of the United States makes R. S.
5219 applicable to the Philippine Islands.

It is enough to say that except as provided in R. S. 5219 supra,
Congress has not given its consent to the taxation of national banking
associations as such. The language of that statute, as amended by the
Act of March 25, 1926, is plain as to the four forms of taxation
authorized. The omission of any reference to capital and deposit taxes
in R. S. 5219 means simply that Congress has withheld its consent to
these forms of taxation of national banks.

In the recent case of National City Bank of New York vs.
Domenech, Treasurer of Puerto Rico (71 Fed. [2d], 13), decided on May
18, 1934, the Circuit Court of Appeals of the First Circuit held void a
capital tax similar to the one here in question levied by the
Government of Puerto Rico.

Insofar as the judgment of the court below orders the refund of the
deposit taxes paid under protest by the National City Bank of New York
for the first six months of the year 1931, the same is affirmed; and
insofar as it sustains the capital tax levied for the same period as
aforesaid, it is reversed and the defendant Collector of Internal
Revenue is ordered to refund to the said bank the entire amount of
£77,324.11 paid under protest as capital and deposit taxes, without
interest (section 1579, Administrative Code) or costs.

Street, Malcolm, Villa-Real, Hull, Vichers, Imperial, Goddard, and Diaz, JJ., concur.

 

---

DISSENTING

ABAD SANTOS, J.,

Upon the authority of adjudicated cases, it must be regarded as
settled that national banks are agencies of the United States and, as
such, are subject to state taxation only as Congress expressly permits.
The exemption of federal agencies from state taxation is grounded upon
the most fundamental principles which lie at the basis of the dual
system of government established in the United States. As stated by the
Supreme Court of the United States in South Carolina vs.
United States (199 U. S., 437, 448; 50 Law. ed., 261): “We have in this
republic a dual system of government,—national and state,—each
operating within the same territory and upon the same persons, and yet
working without collision, because their functions are different.”
Again: “The general government and the states, although both exist
within the same territorial limits, are separate and distinct
sovereignties, acting separately and independently of each other,
within their respective spheres. (United States vs. Railroad
Co., 17 Wall., 322; 21 Law. ed., 597.)” Furthermore: “Within the limits
of the powers granted to the federal government, it is supreme. Within
the sphere allotted to them the coordinate branches of the general
government revolve, unobstructed by any legitimate exercise of powers
by the state governments. The powers expressly given to the federal
government are limitations upon the state authority. But with the
exception of these limitations the states are supreme; and their
sovereignty can be no more invaded by the action of the general
government, than the action of the state government can arrest or
obstruct the course of the national power. (Worchester vs. Georgia, 6 Pet., 515, 570; 8 Law. ed., 483.)”

In South Carolina vs. United States, supra, it
was also said: “* * * the two governments—national and state— are each
to exercise their powers so as not to interfere with the free and full
exercise by the other of its powers. This proposition, so far as the
nation is concerned, was affirmed at an early day in the great case of
M’Culloch vs. Maryland (4 Wheat, 316; 4 Law. ed., 579), in
which it was held that the state had no power to pass a law imposing a
tax upon the operations of a national bank. The case is familiar and
needs not to be quoted from. No answer has ever been made to the
argument of Chief Justice Marshall, and the propositions there laid
down have become fundamental in our constitutional jurisprudence.
(Osborn vs. Bank of United States, 9 Wheat, 738; 6 Law. ed., 204; Weston vs. Charleston, 2 Pet, 449; 7 Law. ed., 481; New York ex rel. Bank of Commerce vs. Tax Commissioners, 2 Black, 620; 17 Law. ed., 451; Bank Tax Case [New York ex rel. Bank of Commonwealth vs. Tax & A. Comrs.], 2 Wall., 200; 17 Law. ed., 793; The Banks vs. New York [People ex rel Bank of N. Y. Nat. Bkg. Asso. vs. Connelly], 7 Wall., 16; 19 Law. ed., 57.)”

In their relation to the national or federal government, the
Philippine Islands stand in a very different position from that held by
one of the States of the Union. Their constitutional status is similar
to that of a Territory, and the reason for the doctrine of exemption of
federal agencies from state taxation, does not exist in the case of the
PhiJippine Islands. Hence the doctrine should not apply here. This view
finds support in the opinion of the Supreme Court of the United States
in Talbott vs. Silver Bow County Commissioners (139 U. S.,
438; 35 Law. ed., 210). Speaking for the court in that case, Justice
Brewer said: “Upon what principle is the power of a State to tax a
national bank, without the consent of Congress, denied? The answer to
this question was fully given by Chief Justice Marshall in the cases of
M’Culloch vs. Maryland and Weston vs. Charleston, supra.
Briefly stated, the argument was this: Two distinct sovereignties, the
State and the United States, exercise jurisdiction within the same
territorial limits. Each has the power of taxation. This power is in
its nature absolute and unlimited. Power to tax is power to destroy.
Given to the State the power to tax any of the instrumentalities which
the United States creates for the exercise of its jurisdiction, and the
former may impede, if not wholly stop, the latter in the discharge of
its duties as sovereign. Hence, by necessary implication, the absolute
exemption from state taxation of any of the instrumentalities—and among
them are national banks— which the United States creates for the
exercise of its powers and the discharge-of its duties. But the whole
argument fails when applied to a Territory. It is not a distinct
sovereignty. It has no independent powers. It is a political community
organized by Congress, all whose powers are created by Congress, and
all whose acts are subject to congressional supervision. Its attitude
to the general government is no more independent than that of a city to
the State in which it is situated, and which has given to it its
municipal organization. Who would contend, in the absence of express
legislative provision therefor, that a bank created by or under the
laws of a State, and located and doing business in a city of that
State, could claim exemption from municipal taxation upon its property?
A bank is an institution organized for private business, and with a
view to individual profit, although it may serve a public purpose and
such public purpose justify its creation; and no such private
corporation has any implied exemption from local taxation by a
municipal or political organization in which it is situated. The only
ground on which exemption from such taxation can be based, in the
absence of express legislative provision, is that the tax proceeds from
a distinct and independent sovereignty. As the reason for the rule of
exemption of a national bank from state taxation fails in respect to a
bank located in a Territory, the rule also fails.”

It is well-settled that, unless restricted by the territorial act,
the powers of a territorial legislature extend to all rightful subjects
of legislation not inconsistent with the constitution and laws of the
United States. (American Insurance Go. and Ocean Insurance Co. vs. Canter, 1 Pet., 511; 7 Law. ed., 243; Walker vs. New Mexico & S. P. R. Co., 165 U. S., 593; 41 Law. ed., 837.) In Severino vs.
Governor-General and Provincial Board of Occidental Negros (16 Phil.,
366, 383), this court has declared that “the legislative power which
was delegated by the President to the Philippine Commission and which
was later ratified by the Congress of the United States, was more
comprehensive than the legislative powers now possessed by State
governments.” And in United States vs. Bull (15 Phil., 7,
29), this court said: “The legislative power of the Government of the
Philippines is granted in general terms subject to specific
limitations. The general grant is not alone of power to legislate on
certain subjects, but to exercise the legislative power subject to the
restrictions stated. It is true that the specific authority is
conferred upon the Philippine Government relative to certain subjects
of legislation, and that Congress has itself legislated upon certain
other subjects. These, however, should be viewed simply as enactments
on matters wherein Congress was fully informed and ready to act, and
not as implying any restriction upon the local legislative authority in
other matters. (See Opinion of Atty. Gen. of U. S., April 16, 1908.)”

In the light of the foregoing authorities, it is, I think,
reasonable to conclude that national banks are exempt from local
taxation only as Congress so provides either expressly or by necessary
implication.

The Philippine Autonomy Act, otherwise known
as the Jones Law, vests in the Philippine Legislature general
legislative power, except as otherwise therein provided (sec. 8). It
also contains a specific grant of power to impose taxes and assessments
on property, and license fees for franchises and privileges, and
internal taxes, direct or indirect, for the purposes of the Philippine
Government and the provincial and municipal governments thereof (sec
11). There is no express provision either in the Philippine Autonomy
Act or in any other Act of Congress which exempts national banks from
taxation by the Philippine Government. Is there any such provision from
which such exemption is necessarily implied? I believe the answer must
be in the negative. The whole course of congressional legislation with
respect to the Philippine Islands, has been characterized by a desire
not to deprive the Philippine Government of any revenues to which it is
entitled upon moral and equitable considerations. Congress has even
provided for the payment to the Philippine Government of taxes
collected in the United States on articles coming from the Philippines.
In view of this liberal attitude of Congress, I can not persuade myself
that it could have intended to exempt the plaintiff-appellant herein
from the payment of taxes which are imposed on all banking institutions
doing business in the Philippine Islands.

I am, therefore, of the opinion that, in so far as the judgment of
the court below sustains the collection of the capital taxes here
involved, it should be affirmed; and in so far as it orders the refund
of the deposit taxes paid under protest by the appellant, the same
should be reversed.