Tax Exemptions

Tax Exemptions: When Not “Contracts”

From a different point of view, the Court has sought to distinguish between grants of privileges, whether to individuals or to corporations, which are contracts and those which are mere revocable licenses, although on account of the doctrine of presumed consideration mentioned earlier, this has not always been easy to do. In pursuance of the precedent set in New Jersey v. Wilson,1 the legislature of a state “may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation, to which such property shall be subjected,” and such an exemption is frequently a contract within the sense of the Constitution. Indeed this is always so when the immunity is conferred upon a corporation by the clear terms of its charter.2 When, on the other hand, an immunity of this sort springs from general law, its precise nature is more open to doubt, as a comparison of decisions will serve to illustrate.

More about When Not “Contracts”

In State Bank of Ohio v. Knoop,3 a closely divided Court held that a general banking law of Ohio, which provided that companies complying therewith and their stockholders should be exempt from all but certain taxes, was, as to a bank organized under it and its stockholders, a contract within the meaning of Article I, § 10. The provision was not, the Court said, “a legislative command nor a rule of taxation until changed, but a contract stipulating against any change, from the nature of the language used and the circumstances under which it was adopted.” 4 When, however, the State of Michigan pledged itself, by a general legislative act, not to tax any corporation, company, or individual undertaking to manufacture salt in the state from water there obtained by boring on property used for this purpose and, furthermore, to pay a bounty on the salt so manufactured, it was held not to have engaged itself within the constitutional sense. “General encouragements,” the Court wrote, “held out to all persons indiscriminately, to engage in a particular trade or manufacture, whether such encouragement be in the shape of bounties or drawbacks, or other advantage, are always under the legislative control, and may be discontinued at any time.” 5 So far as exemption from taxation is concerned the difference between these two cases is obviously slight, but the later one is unquestionable authority for the proposition that legislative bounties are repealable at will.

When Not “Contracts”: Developments

Furthermore, exemptions from taxation have in certain cases been treated as gratuities repealable at will, even when conferred by specific legislative enactments. This would seem always to be the case when the beneficiaries were already in existence when the exemption was created and did nothing of a more positive nature to qualify for it than to continue in existence.6 Yet the cases are not always easy to explain in relation to each other, except in light of the fact that the Court's point of view has altered from time to time.7

Resources

References

This text about Tax Exemptions is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 1] 11 U.S. (7 Cr.) 164 (1812).

[Footnote 2] The Delaware Railroad Tax, 85 U.S. (18 Wall.) 206, 225 (1874); Pacific R.R. v. Maguire, 87 U.S. (20 Wall.) 36, 43 (1874); Humphrey v. Pegues, 83 U.S. (16 Wall.) 244, 249 (1873); Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 438 (1869).

[Footnote 3] 57 U.S. (16 How.) 369 (1854).

[Footnote 4] 57 U.S. at 383.

[Footnote 5] Salt Company v. East Saginaw, 80 U.S. (13 Wall.) 373, 379 (1872). See also Welch v. Cook, 97 U.S. 541 (1879); Grand Lodge v. New Orleans, 166 U.S. 143 (1897); Wisconsin & Michigan Ry. v. Powers, 191 U.S. 379 (1903). Cf. Ettor v. Tacoma, 228 U.S. 148 (1913), in which it was held that the repeal of a statute providing for consequential damages caused by changes of grades of streets could not constitutionally affect an already accrued right to compensation.

[Footnote 6] See Rector of Christ Church v. County of Philadelphia, 65 U.S. (24 How.) 300, 302 (1861); Seton Hall College v. South Orange, 242 U.S. 100 (1916).

[Footnote 7] Compare the above cases with Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 437 (1869); Illinois Cent, R.R. v. Decatur, 147 U.S. 190 (1893), with Wisconsin & Michigan Ry. Co. v. Powers, 191 U.S. 379 (1903).

Strict Construction of Charters, Tax Exemptions

Long before the cases last cited were decided (see the Right to Alter Corporate Charters entry), the principle that they illustrate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the state, or as it is otherwise often phrased, “nothing passes by implication in a public grant.”

More about Strict Construction of Charters, Tax Exemptions

The leading case was Charles River Bridge v. Warren Bridge,8 which was decided by a substantially new Court shortly after Chief Justice Marshall's death. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the state's permitting another company of later date to operate a free bridge in the immediate vicinity. Because the first company could point to no clause in its charter specifically vesting it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story presented a vigorous dissent in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circumstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the ensuing transaction.

Strict Construction of Charters, Tax Exemptions: Developments

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the police power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney's opinion evinces the influence of both these developments. The power of the state to provide for its own internal happiness and prosperity was not, he asserted, to be pared away by mere legal intendments, nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines.9

Other Aspects

The Court has reiterated the rule of strict construction many times. In Blair v. City of Chicago,10 decided nearly seventy years after Charles River Bridge, the Court said: “Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privileges may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed. . . . The principle is this, that all rights which are asserted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.” 11

Other Issues

An excellent illustration of the operation of the rule in relation to tax exemptions was furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence, in the absence of express permission by the state, may not be passed on to a successor. 12 Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate, the new corporation was held to be subject to taxation.13 Again, a statute that granted a corporation all “the rights and privileges” of an earlier corporation was held not to confer the latter's “immunity” from taxation. 14 Yet again, a legislative authorization of the transfer by one corporation to another of the former's “estate, property, right, privileges, and franchises” was held not to clothe the later company with the earlier one's exemption from taxation.15

More

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly entitled to it. Thus, the exemption conferred by its charter on a railway company was held not to extend to branch roads it constructed pursuant to a later statute.16 Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business.17 And, the charter exemption of the capital stock of a railroad from taxation “for ten years after completion of the said road” was held not to become operative until the completion of the road.18 So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation.19 Provisions in a statute that bonds of the state and its political subdivisions were not to be taxed and should not be taxed were held not to exempt interest on them from taxation as income of the owners.20

Resources

References

This text about Tax Exemptions is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 8] 36 U.S. (11 Pet.) 420 (1837).

[Footnote 9] 36 U.S. at 548-53.

[Footnote 10] 201 U.S. 400 (1906).

[Footnote 11] 201 U.S. at 471, 472, quoting The Binghamton Bridge, 70 U.S. (3 Wall.) 51, 75 (1866).

[Footnote 12] Memphis & L.R. R.R. v. Comm'rs, 112 U.S. 609, 617 (1884). See also Morgan v. Louisiana, 93 U.S. 217 (1876); Wilson v. Gaines, 103 U.S. 417 (1881); Louisville & Nashville R.R. v. Palmes, 109 U.S. 244, 251 (1883); Norfolk & Western R.R. v. Pendleton, 156 U.S. 667, 673 (1895); Picard v. East Tennessee, V. & G. R.R., 130 U.S. 637, 641 (1889).

[Footnote 13] Atlantic & Gulf R.R. v. Georgia, 98 U.S. 359, 365 (1879).

[Footnote 14] Phoenix F. & M. Ins. Co. v. Tennessee, 161 U.S. 174 (1896).

[Footnote 15] Rochester Ry. v. Rochester, 205 U.S. 236 (1907); followed in Wright v. Georgia R.R. & Banking Co., 216 U.S. 420 (1910); Rapid Transit Corp. v. New York, 303 U.S. 573 (1938). Cf. Tennessee v. Whitworth, 117 U.S. 139 (1886), the authority of which is respected in the preceding case.

[Footnote 16] Chicago, B. & K.C. R.R. v. Guffey, 120 U.S. 569 (1887).

[Footnote 17] Ford v. Delta and Pine Land Company, 164 U.S. 662 (1897).

[Footnote 18] Vicksburg, S. & P. R.R. v. Dennis, 116 U.S. 665 (1886).

[Footnote 19] Millsaps College v. City of Jackson, 275 U.S. 129 (1927).

[Footnote 20] Hale v. State Board, 302 U.S. 95 (1937).

Tables of Contents

• Tax Exemptions and other Topics in the Contents – Article 1 of the U.S. Constitution
• U.S. Constitutional Law Category
• List of amendments to the U.S. Constitution
• Tax Exemptions and other Topics in the Constitution Contents
• Interpretation of the U.S. Constitution (Table of Contents)
• Clauses of the Constitution (Table of Contents)