Syllabus. NEW JERSEY REALTY TITLE INSURANCE CO. v. DIVISION OF TAX APPEALS OF NEW JERSEY ET AL. APPEAL FROM THE SUPREME COURT OF NEW JERSEY. No. 147. Argued December 13, 1949.-Decided February 6, 1950. Under § 54:4-22 of the Revised Statutes of New Jersey, as amended by Laws of 1938, c. 245, a taxing district of the State levied against the intangible property of a stock insurance company an assessment for the taxable year 1945 in the amount of 15 per cent of the company's paid-up capital and surplus, computed without deducting the principal amount of certain United States bonds and accrued interest thereon. Held: The assessment was invalid as in conflict with § 3701 of the Revised Statutes of the United States, which provides that "All stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority." Pp. 666-676. (a) The tax authorized by the state statute, whether levied against capital and surplus less liabilities or against entire net worth, was in practical operation and effect a tax upon federal bonds. Pp. 672–673. (b) Tradesmens National Bank v. Oklahoma Tax Comm'n, 309 U. S. 560, and Educational Films Corp. v. Ward, 282 U. S. 379, distinguished. Pp. 673-674. (c) A tax on corporate capital measured by federal securities may be invalid even though imposed without discrimination against federal obligations. Pp. 674-675. (d) If the amount here assessed be viewed as levied exclusively on the corporation's net worth remaining after deduction of government bonds and interest, the assessment would be discriminatory because it would be levied at the rate of over 79 per cent of the corporation's assessable valuation rather than at the rate of 15 per cent prescribed by the state statute. P. 675. (e) The result here reached is consonant with the legislative purpose of R. S. § 3701 "to prevent taxes which diminish in the slightest degree the market value or the investment attractiveness of obligations issued by the United States in an effort to secure necessary credit." P. 675. Opinion of the Court. 338 U.S. (f) The legislative purpose of R. S. § 3701 also requires the exemption from assessment under the state statute of interest on federal securities which had accrued but had not yet been paid. Pp. 675–676. 1 N. J. 496, 64 A. 2d 341, reversed. An order of a state tax agency dismissing appellant's appeal from an assessment was reversed by the former New Jersey Supreme Court. 137 N. J. L. 444, 60 A. 2d 265. The Supreme Court of New Jersey as established under the present state constitution reversed. 1 N. J. 496, 64 A. 2d 341. On appeal to this Court, reversed, p. 676. Walter Gordon Merritt argued the cause for appellant. With him on the brief were H. Gardner Ingraham and Charles B. Niebling. Vincent J. Casale argued the cause for appellees. With him on the brief for the City of Newark, appellee, was Charles Handler. MR. JUSTICE CLARK delivered the opinion of the Court. A taxing district of New Jersey has levied against the intangible personal property of a domestic corporation an assessment for the taxable year 1945 in the amount of 15 per cent of the taxpayer's paid-up capital and surplus, computed without deducting the principal amount of certain United States bonds and accrued interest thereon. This appeal challenges the validity of the assessment and of the tax statute under which it was levied, on the ground of conflict with Art. I, § 8 of the Federal Constitution, by which Congress is authorized "To borrow Money on the credit of the United States," and with § 3701 of the Revised Statutes (1875), 31 U. S. C. § 742, which generally exempts interest-bearing obligations of the United States from state and local taxation. 665 Opinion of the Court. The assessment in question was levied under § 54:4-22 of the Revised Statutes of New Jersey (1937), as amended by Laws of 1938, c. 245.' N. J. Rev. Stat. Cum. Supp., Laws of 1938, 1939, 1940, § 54:4-22. That section provided as follows: "Every stock insurance company organized under the laws of this state, other than a life insurance company, shall be assessed and taxed in the taxing district where its office is situated, upon the full amount or value of its property (exclusive of real estate and tangible personal property, which shall be separately assessed and taxed where the same is located, and exclusive of all shares of stock owned by such insurance company and exclusive of nontaxable property and of property exempt from taxation), deducting from such amount or value all debts and liabilities certain and definite as to obligation and amount, and the full amount of all reserves for taxes, and such proportion of the reserves for unearned premiums, losses and other liabilities as the full amount or value of its taxable intangible property bears to the full amount or value of all its intangible property; provided, however, the assessment against the intangible personal property of any stock insurance company subject to the provisions of this section shall in no event be less than fifteen per centum of the sum of the paid-up capital and the surplus in excess of the total of all liabilities of such company, as the same are stated in the annual statement of such company for the calendar year next preceding the date of such assessment and filed with the department of banking and insurance of the state of New Jersey, after deducting from such total of capi 1 Section 54:4-22 is included under "Title 54. Subtitle 2. Taxation of Real and Personal Property in General." Opinion of the Court. 338 U.S. tal and surplus the amount of all tax assessments against any and all real estate, title to which stands in the name of such company. "The capital stock in any such company shall not be regarded for the purposes of this act [section] as a liability and no part of the amount thereof shall be deducted, and the person or persons or corporations holding the capital stock of such company shall not be assessed or taxed therefor. No franchise tax shall be imposed upon any insurance company included in this section." (Italics added.) 2 A corporation subject to this section was taxable at the rate of the local taxing district. Appellant is New Jersey Realty Title Insurance Company, a stock insurance company of New Jersey with its office in the City and taxing district of Newark, County of Essex, New Jersey. For the year 1945 the City of Newark levied an assessment of $75,700 on appellant's intangible personal property and collected from it a tax of $3,906.12 computed thereon. 3 Appellant had filed a return based on its balance sheet at the close of business September 30, 1944, showing total assets of $774,972.98, the entirety of which was declared to be intangibles. In calculating its "total taxable intangibles" appellant deducted the following from its total assets: United States Treasury Bonds of the face amount of $450,000; accrued interest thereon in the amount of $1,682.25; and other nontaxable or exempt property valued at $318,771.95. The aggregate amount 2 By an amendment adopted in 1945, but not operative on the assessment date here involved, the last sentence of § 54:4-22 as quoted above was deleted. N. J. Rev. Stat. Cum. Supp., Laws of 1945, 1946, 1947, § 54:4-22. 3 The return was on a form furnished by the taxing district and entitled "Personal Property Return of Stock Insurance Company for Year 1945 Under Section 54:4-22 of Revised Statutes." 665 Opinion of the Court. of the property thus excluded was $770,454.20. The remainder, $4,518.78, was entered on the return as the total taxable intangibles. From this amount appellant deducted: $25,756.63 as "debts and liabilities certain"; $28,175.46 as "reserves for taxes"; and $758.13 as "proportion of loss and premium." There is no disagreement with these computations. As observed by the highest court below, these deductions "left no balance of assessable property subject to tax." The taxing district therefore assessed appellant's property under the proviso in § 54:4-22 which directed an assessment of not less than 15 per cent of "the sum of the paid-up capital and the surplus in excess of the total of all liabilities" of appellant as shown by its annual statement for the preceding calendar year filed with the state department of banking and insurance. The manner of computation of the assessment is not explicit in the record. Moreover, the opinion of the highest court of New Jersey is subject to several interpretations as to the proper method of computing the assessment. The court stated that the assessment "may not be less in amount than 15 percent of the paid-up capital and surplus as defined by the statute." (Italics added.) If by the phrase "as defined by the statute," the court referred to the language of the proviso in § 54:4-22, "paid-up capital and the surplus in excess of the total of all liabilities" (italics added), it would seem necessary to deduct liabilities from capital and surplus in determining the basis for the 15 per cent computation. The basis of computation would then be $496,999.70,* and the 15 per cent sum, $74,549.95. The financial statement for 1943 reflected the following items: paid-up capital $250,000; paid-in surplus $250,000; earned surplus $47,462.93; liabilities $50,463.23; United States Treasury Bonds and accrued interest of $452,526.06. Reserves amounted to $161,047.74, not including reserves for federal income tax which are not shown in the record. It seems probable that if the New Jersey 860926 0-50- -49 |