U.S. Supreme Court LOUISVILLE GAS & ELECTRIC CO. v. COLEMAN, 277 U.S. 32 (1928)

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run of cases a possible exception here and there would not make the law bad. All taxes have to be laid by general rules.

I think that the judgment should be affirmed.

Mr. Justice BRANDEIS, Mr. Justice SANFORD, and Mr. Justice STONE concur in this opinion.

Mr. Justice BRANDEIS dissenting.

Pursuant to power conferred by the Constitution of Kentucky, its Legislature imposed a recording tax of 20 cents per $100 upon mortgages given to secure loans which do not mature within five years from the date of the mortgage. The statute discriminates between long and short term loans as subjects of taxation. A loan maturing in 60 months or more would be subject to the tax, whereas one maturing in 59 months or less, but otherwise similar in all respects would not be. The distinction between long-term and short-term loans-with differences in yield for securities otherwise identical in character-is one familiar to American investment bankers and their clients. Did the Kentucky Legislature, in adopting that classification for purposes of the mortgage recording tax, exceed the bounds of that 'wide discretion in selecting the subjects of taxation' which this court sanctions, as declared in Lake Superior Mines v. Lord, 271 U.S. 577, 582, 46 S. Ct. 627 (70 L. Ed. 1093), so long as the state 'refrains from clear and hostile discrimination against particular persons or classes'?

Classifications based solely on factual differences no greater than that between a loan maturing in 59 months or less and one maturing in 60 months or more, have been sustained in many fields of legislation. [Footnote 1] In Citizens' Tele-

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In Magoun v. Illinois Trust & Savings Bank, 170 U.S. 283, 299, 300 S., 18 S. Ct. 594, the inheritance tax, in the case of strangers to the blood, exempted estates of $500, but did not allow that exemption to larger estates. [Footnote 2] Moreover, it prescribed

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progressive rates, rising in steps with the amount of the gift and applying to the entire gift and not merely to the excess. [Footnote 3] Under the law a legatee of $10,000 being subject to a 3 per cent. tax, would receive net $ 9,700, whereas a legatee of $10,001, being subject to a 4 per cent. tax on the entire legacy, would receive net only $9,600.96. The court held the classification reasonable, saying: 'The condition is not arbitrary because it is determined by that value (of the inheritance); it is not unequal in operation because it does not levy the same percentage on every dollar; does not fail to treat 'all alike under like circumstances and conditions, both in the privilege conferred and the liabilities imposed.' The jurisdiction of courts is fixed by amounts. The right of appeal is. As was said at bar, the Congress of the United States has classified the right of suitors to come into the United States courts by amounts. Regarding these alone, there is the same inequality that is urged against classification of the Illinois law. All license laws and all specific taxes have in them an element of inequality, nevertheless they are universally imposed, and their legality has never been questioned.'

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the Legislature of the state which made the classification, and members of the court which sanctioned it, necessarily possessed greater knowledge of local conditions and needs than is possible for us, I should have assumed that this classification, which obviously is not invidious, was a reasonable one, unless some facts were adduced to show that it was arbitrary. Compare Heisler v. Thomas Colliery Co., 260 U.S. 245, 255, 43 S. Ct. 83; State of Ohio ex rel. Clarke v. Deckbach, 274 U.S. 392, 397, 47 S. Ct. 630. No such facts have been adduced by the company. On the other hand, facts called to our attention by counsel for the Commonwealth, and of which we may take judicial notice, New Mexico ex rel. McLean v. Denver & Rio Grande R. R. Co., 203 U.S. 38, 50, 27 S. Ct. 1; Sligh v. Kirkwood, 237 U.S. 52, 61, 35 S. Ct. 501, show that the classification was adopted by the Legislature of Kentucky in an effort to equalize the tax burden incident to loans.

The mortgage recording tax is a feature of the revenue system of at least nine states. [Footnote 7] Its purpose in all is substantially the same-to supply an effective means for reaching this form of intangible property, which is likely to evade taxation under the general property tax. The recording tax is commonly accompanied either by a complete exemption of mortgage securities from other property taxation or, as in Kentucky, by exemption of such

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securities from local taxation alone. As imposed in Alabama and New York, the states which first adopted it, the tax is levied at the same rate irrespective of the length of the loan. The obvious unfairness of such an arrangement, both to the short-term borrower and to the state, has been one of the chief objections to adoption of the tax. [Footnote 8] Other states, impressed with the general efficiency of the tax, have attempted to eliminate the unfairness produced by the flat rate. Thus, in Oklahoma, the rates are 2 cents per $100 for loans of less than 2 years, 4 cents where the loan is for 2 years or more, 6 cents where for 3 or more, 8 cents where for 4 or more, and 10 cents where for 5 or more. [Footnote 9] In South Dakota, the tax was 10 cents per $100 per year or fraction thereof, with a proviso that in no event should the tax be more than 50 cents per $100. 10 Such taxes obviate only in part the objection urged against the flat rate tax; namely, that mortgages for a long term are taxed proportionally at a lower rate than those for a short. In Minnesota, which had originally enacted the flat rate tax,11 a different expedient was devised. In 1913 it was provided that the tax should be 15 cents per $100 unless the loan was for more than 5

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years, in which event the tax was to be 25 cents. [Footnote 12] In Minnesota the discrimination between long and short term securities is thus 10 cents per $ 100; in Kentucky it is 20 cents. But the distinction and the reasons for it are substantially the same.

The mortgage recording tax adopted in Kentucky only after the most serious consideration. It was part of the general system of taxation enacted in 1917 after investigations by two special tax commissions appointed to inquire into the particular needs of the state. In the reports of both commissions, the fact that theretofore mortgage loans had largely escaped taxation was a subject of much consideration. [Footnote 13] The first commission, which was appointed in 1912, submitted a preliminary report recommending an amendment to the state Constitution so as to permit the classification of property for purposes of taxation and the application of different methods of taxation to different classes. The amendment proposed was submitted to the people and adopted. Kentucky Constitution, 171. In December, 1913, the commission submitted its final report. It recommended, among other things, that mortgages, bonds and other choses in action 'be taxed by a method which will bring them out of hiding.' [Footnote 14] It submitted with the report a draft of a bill for the taxation of intangibles, but recommended that the bill should not be passed until the subject had received further study by another commission.

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short term. There is among those loans which are secured by mortgages of real or personal property, and hence require registration, commonly a marked difference in the character of the short-term and the long-term loans. Probably 90 or 95 per cent. of the short-term loans are evidenced by promissory notes payable to the lender. The larger part are for amounts less than $300, many of them maturing within a few months and providing for the payment of interest in advance. Another large part consists of loans secured by mortgage upon the residence of the borrower and made for domestic purposes. On the other hand, the long-term loans are commonly evidenced by coupon bonds, are issued for large amounts, and represent borrowings for business purposes. The rate of interest on short-term mortgage loans is generally higher than that on long-term loans of equal safety, in part for the following reason: Because the short-term loans are usually evidenced by promissory notes payable to the lender, the registration of the mortgage discloses the identity of the holder of the notes; and he is commonly subjected to the tax of 40 cents per $100 imposed by law upon all mortgage loans. [Footnote 16] Because the long-term loans are commonly represented by negotiable coupon bonds and are secured by a deed of trust, registration does not disclose to the assessors who the holders of the securities are, and they frequently escape taxation thereon. Laying the mortgage recording tax only upon the long-term loans tends in some measure to reduce the disadvantage under which the short-term borrower labors.

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mended by the tax commission, and as introduced in the House, exempted from the tax here in question only such mortgages as secured indebtedness maturing within three years; and it imposed a tax of 25 cents for $100.17 In the House, the bill was amended so as to exempt loans maturing in less than five years. [Footnote 18] In the Senate, the House bill was amended so as to reduce the period to three years. [Footnote 19] The House refused to concur in the Senate amendment. [Footnote 20] The Senate receded;21 and thereupon the bill was passed granting the exemption of loans maturing within five years, but with the rate reduced to 20 cents. [Footnote 22] Thus we know that in making this particular classification there was in fact an exercise of legislative judgment and discretion. Surely the particular classification was not such as to preclude (in law) 'the assumption that (it) was made in the exercise of legislative judgment and discretion.' See Stebbins v. Riley, 268 U.S. 137, 143, 45 S. Ct. 424, 426 (69 L. Ed. 884, 44 A. L. R. 1454). Whether the exercise was a wise one is not our concern.

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here involved and as there is no showing that there exist any similar deeds of trust securing loans for less than five years, no constitutional right of the plaintiff is invaded because the statute may also include loans actually similar to those exempted except in regard to their term, and which, because similar in fact, could not be treated differently from those exempt. Clark v. Kansas City, 176 U.S. 114, 117, 118 S., 20 S. Ct. 284; Aluminum Co. v. Ramsey, 222 U.S. 251, 256, 32 S. Ct. 76; Murphy v. California, 225 U.S. 623, 630, 32 S. Ct. 697, 41 L. R. A. (N. S.) 153; Darnell v. Indiana, 226 U.S. 390, 398, 33 S. Ct. 120; Mountain Timber Co. v. Washington, 243 U.S. 219, 242, 37 S. Ct. 260, Ann. Cas. 1917D, 642; Roberts & Schaefer Co. v. Emmerson, 271 U.S. 50, 54, 55 S., 46 S. Ct. 375, 45 A. L. R. 1495. One who would strike down a statute must show not only that he is affected by it, but that as applied to him, the statute exceeds the power of the State. This rule, acted upon as early as Austin v. Boston, 7 Wall. 694, and definitely stated in Albany County v. Stanley, , 314, has been consistently followed since that time. In my opinion, it is sufficient alone to require affirmance of the judgment.

Mr. Justice HOLMES and Mr. Justice STONE join in this opinion. Footnotes

Footnote 1 A statute which fixed the maximum rate of fare on railroads more than 75 miles long, at 3 cents but on railroads in all other respects similarly situated, at 5 cents if the line was between 15 and 75 miles

long, and at 8 cents if the line was 15 miles or less in length. Dow v. Beidelman, 125 U.S. 680, 690, 691 S., 8 S. Ct. 1028. Compare Chesapeake & Ohio Ry. Co. v. Conley, 230 U.S. 513, 522, 33 S. Ct. 958. A statute which permitted railroads less than 50 miles in length to heat passenger cars by stove or furnace, but denied such permission to lines of 50 miles or more. New York, New Haven & Hartford R. R. Co. v. New York, 165 U.S. 628, 633, 17 S. Ct. 418. A statute which permitted railroads of less than 50 miles in length to be operated without a complete crew, but denied such permission to lines of 50 miles or more. Chicago, Rock Island & Pacific Ry. Co. v. Arkansas, , 31 S. Ct. 275; St. Louis, Iron Mountain & Southern Ry. Co. v. Arkansas, 240 U.S. 518, 520, 36 S. Ct. 443. An inspection law which applied to mines employing 6 or more men, but not to those employing 5 or less. Consolidated Coal Co. v. Illinois, 185 U.S. 203, 207, 22 S. Ct. 616. A screen law which applied to mines employing 10 or more men, but not to those employing 9 or less. McLean v. Arkansas, 211 U.S. 539, 551, 29 S. Ct. 206. A statute requiring a washroom at mines where there was a request by 20 employees, but not at mines where by only 19. Booth v. Indiana, 237 U.S. 391, 397, 35 S. Ct. 617. Workmen's compensation laws which apply to employers of 4 or 5 men, but not to employers of less. Jeffrey Manufacturing Co. v. Blagg, 235 U.S. 571, 576, 35 S. Ct. 167; Middleton v. Texas Power & Light Co., 249 U.S. 152, 159, 39 S. Ct. 227; Ward & Gow v. Krinsky, 259 U.S. 503, 516, 42 S. Ct. 529, 28 A. L. R. 1207. A fire inspection law which applied to hotels with 50 or more rooms, but not to hotels with 49 or less. Miller v. Strahl, 239 U.S. 426, 434, 36 S. Ct. 147. A law which required the licensing of physicians who during the preceding year had treated 11 or less persons, but not those who has treated 12 or more. Watson v. Maryland, , 30 S. Ct. 644. An ordinance which prohibited the keeping of a private market within 6 squares of a public one but not within 7. Natal v. Louisiana, 139 U.S. 621, 11 S. Ct. 636. A statute which prohibited the herding of sheep within

2 miles of a dwelling house, but not if a yard or more beyond. Bacon v. Walker, 204 U.S. 311, 27 S. Ct. 289. A law which prohibited the establishment of a carbon black factory within 10 miles of an incorporated town, but not if a rod more remote. Walls v. Midland Carbon Co., 254 U.S. 300, 324, 41 S. Ct. 118. A statute permitting, in a suit against a corporation, a change of venue where it had more than 50 stockholders, but not if it had 50 or less. Cincinnati Street Ry. Co. v. Snell, , 24 S. Ct. 319. Statutes exempting from certain requirements banks whose transactions average $500 or more. Engel v. O'Malley, 219 U.S. 128, 31 S. Ct. 190; Dillingham v. McLaughlin, 264 U.S. 370, 44 S. Ct. 362. A tax law providing for the forfeit of tracts of 1,000 acres or more, but which does not provide for forfeiting, under like circumstances, tracts of 999 acres or less. King v. Mullins, 171 U.S. 404, 435, 18 S. Ct. 925. A statute which fixed the number of peremptory challenges to jurors at 8, but allowed 15 in cities having a population of over 100,000 inhabitants. Hayes v. Missouri, , 7 S. Ct. 350. Many other statutes involving the classification of cities according to population, under which a single resident more or less may affect vitally not only the power and duties of the municipality, but the rights and liabilities of persons resident therein. Missouri v. Lewis, 101 U.S. 22; Budd v. New York, 143 U.S. 517, 548, 12 S. Ct. 468; Moeschen v. Tenement House Department, 203 U. S. ,583, 27 S. Ct. 781; Northwestern Laundry Co. v. Des Moines, 239 U.S. 486, 495, 36 S. Ct. 206; Marcus Brown Co. v. Feldman, 256 U.S. 170, 198, 41 S. Ct. 465; Packard v. Banton, 264 U.S. 140, 143, 44 S. Ct. 257; Radice v. New York, 264 U.S. 292, 296, 44 S. Ct. 325.

Footnote 2 Compare the statutory provisions in Arkansas, Crawford & Moses' Digest 1921, 10221; Kansas, Revised Statutes 1923, 79-1501; Maryland, Bagby's Code 1924, art. 81, 124; Michigan, Complied Laws 1915, 14525; Nebraska, Session Laws 1923, c. 187. See In re Fox's Estate, 154 Mich. 5, 117 N. W. 558. The more common type of statute which taxes only the amount above the exemption, e. g., Revenue Act of 1926, 44 Stat. 9, 69 (26 USCA 1091 et seq.) likewise discriminates between different dollars. The constitutionality of such exemptions was affirmed as recently as Hope Natural Gas Co. v. Hall, 274 U.S. 284, 289, 47 S. Ct. 639. Compare Minot v. Winthrop, 162 Mass. 113, 38 N. E. 512, 26 L. R. A. 259; Gelsthorpe v. Furnell, 20 Mont. 299, 51 P. 267, 39 L. R. A. 170; State v. Alston, 94 Tenn. 674, 30 S. W. 750, 28 L. R. A. 178; In re Hickok's Estate, 78 Vt. 259, 62 A. 724, 6 Ann. Cas. 578.

Footnote 3 Compare In re McKennan's Estate, 27 S. D. 136, 130 N. W. 33, 33 L. R. A. (N. S.) 620, Ann. Cas. 1913D, 745, sustaining a similar provision in Laws 1905, c. 54. Even where such rates do not apply to the total amount but only to that over a certain excess, they seem to violate the standards now laid down by the court. But since Magoun v. Illinois Trust & Savings Bank, , 18 S. Ct. 594; and Knowlton v. Moore, 178 U.S. 41, 109, 20 S. Ct. 747, the validity of taxes of this type has no longer been open to doubt.

Footnote 4 For statutes exempting small producers, borrowers, etc., from license taxes of various sorts, compare Florida Revised Statutes 1920, 842, 843, 855; Georgia Code 1926, 993(115) and (124); Carroll's Kentucky Statutes 1922, 4224, 4238; South Carolina Code 1922, 5188; Tennessee, Public Acts 1923, c. 75, p. 258 (mortgage registration tax); Virginia, Tax Bill, 92 1/2; West Virginia, Acts Extraordinary Session 1919, c. 5. See Los Angeles Gas & Electric Corporation v. Los Angeles, 163 Cal. 621, 627, 126 P. 594; Cobb v. Commissioners, 122 N. C. 307, 312, 30 S. E. 338; Eureka Pipe Line Co. v. Hallanan, 87 W. Va. 396, 105 S. E. 506.

Footnote 5 For stepped taxes of this type, compare California Political Code 1920, 3376, 3379; Florida Revised Statutes 1920, 839, 850; Georgia Code 1926, 993 (53) and (54); Nebraska Compiled Statutes 1922, 681; New Hampshire Public Laws 1926, c. 225, 91; Oregon Laws 1920, 6883; Shannon's Tennessee Code Supp. 1926, 712, pp. 200, 206, 208, 227, 717; Utah Compiled Laws 1917, 1271, as amended by Laws 1925, c. 112; Virginia, Tax Bill, 46, 46 1/2, 109; Remington's Washington Compiled Statutes 1922, 3841, as amended by Laws Extra Session 1925, c. 149, p. 418, 3; Wyoming, Laws 1925, c. 117, 1. Compare Saks v. Mayor of Birmingham, 120 Ala. 190, 24 So. 728; In re Martin, 62 Kan. 638, 64 P. 43; Gordon v. City of Louisville, 138 Ky. 442, 128 S. W. 327; State v. Merchants' Trading Co., 114 La. 529, 38 So. 443; Wayne Mercantile Co. v. Commissioners of Mount Olive, 16s N. C. 121, 76 S. E. 690, 49 L. R. A. (N. S.) 954; Salt Lake City v. Christensen Co., 34 Utah, 38, 95 P. 523, 17 L. R. A. (N. S.) 898.

Footnote 6 Compare California Political Code 1920, 3380; Shannon's Tennessee Code Supp. 1926, 712, pp. 214, 220.

Footnote 7 Alabama, Acts 1903, p. 227; Kansas, Laws 1925, c. 273; Kentucky, Acts Special Session, 1917, c. 11, 9; Michigan, Pub. Acts 1911, No. 91, p. 132; Minnesota, Laws 1907, c. 328, as amended by Laws 1913, c. 163, and Laws 1921, c. 445; New York, Laws 1906, c. 532, and Laws 1907, c. 340, amending Laws 1095, c. 729; Oklahoma, Session Laws 1913, p. 684; Tennessee, Pub. Acts 1923, p. 258, Acts 1925, p. 472; Virginia, Acts 1910, p. 488. See State v. Alabama Fuel & Iron Co., 188 Ala. 487, 66 So. 169, L. R. A. 1915A, 185, Ann. Cas. 1916E, 752; Middendorf v. Goodale, 202 Ky. 118, 259 S. W. 59; Union Trust Co. v. Common Council of Detroit, 170 Mich. 692, 137 N. W. 122; Mutual Benefit Insurance Co. v. County of Martin, 104 Minn. 179, 116 N. W. 572; People v. Ronner, 185 N. Y. 285, 77 N. E. 1061; Trustees' insurance Corporation v. Hooton, 53 Okl. 530, 157 P. 293, L. R. A. 1916E, 602; Pocahantas Consolidated Collieries Co. v. Commonwealth, 113 Va. ,108, 73 S. E. 446; Saville v. Virginia Ry. & Power Co., 114 Va. 444, 76 S. E. 954.

Footnote 8 This objection to the flat rate tax was brought to the attention of the Kentucky commission of 1916 in a brief filed on behalf of the Louisville Real Estate Board, though the board itself favored the flat rate plan. See letter of Mr. A. E. Holcomb criticizing the New York law, p. 41; letter of Mr. George Lord criticizing the Michigan law, p. 45. See, also, Report of Committee of National Tax Association on Taxation of Personal Property, 1911; Report of Minnesota Tax Commission, 1908, p. 165; Robinson, The Mortgage Recording Tax, 25 Pol. Sci. Q. 609.

Footnote 9 Oklahoma, Session Laws, 1915, c. 105, p. 167, amending Session Laws 1913, p. 684.

Footnote 10 South Dakota, Session Laws 1919, c. 113, repealed by Session Laws 1923, c. 110.

Footnote 11 Minnesota, Laws 1907, c. 328.

Footnote 12 Minnesota, Laws 1913, c. 163. By Laws 1921, c. 445, the line of cleavage was changed from 5 years to 5 years and 60 days.

Footnote 13 Report of Kentucky Tax Commission, 1912-1914, pp. 70-97; Report of Kentucky Tax Commission, 1916, p. 6.

Footnote 14 Report, 1912, p. 10.

Footnote 15 Report, 1916, pp. 6, 10. In a brief submitted to the Tax Commission, the Louisville Real Estate Board had urged the enactment of a recording tax of 50 cents per $100, applicable only to mortgages of real estate.

Footnote 16 Acts Special Session 1917, c. 11, 1. By Acts 1924, c. 116, 1, the rate was raised to 50 cents.

Footnote 17 Report, 1916, p. 35; House Journal, 1917 Special Session, p. 219.

Footnote 18 House Journal, p. 255.

Footnote 19 Senate Journal, pp. 152, 153.

Footnote 20 House Journal, p. 550.

Footnote 21 Senate Journal, p. 257.

Footnote 22 See Senate Journal, p. 153; House Journal, pp. 645, 649, 650.