Louisville Gas Electric Company v. Coleman/Dissent Brandeis
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.C.t. 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.  In Citizens' Telephone Co. v. Fuller, 229 U.S. 322, 329, 33 S.C.t. 833, 57 L. Ed. 1206, it was said that in taxation there is a broader power of classification than in some other exercises of legislation. The cases dealing specifically with classification for purpose of taxation, on a basis similar to that here employed, are not discussed in the opinion of the court, and only one of them is cited. It seems desirable to call attention to some of them, as the rule which they declare is embodied in the tax systems of the nation and of many states.

In Magoun v. Illinois Trust & Savings Bank, 170 U.S. 283, 299, 300, 18 S.C.t. 594, 42 L. Ed. 1037, the inheritance tax, in the case of strangers to the blood, exempted estates of $500, but did not allow that exemption to larger estates.  Moreover, it prescribed progressive rates, rising in steps with the amount of the gift and applying to the entire gift and not merely to the excess.  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.'

The court has likewise sustained a statute which imposed an ad valorem tax upon telephone companies with annual earnings of $500 or more, while exempting others similarly situated whose earnings were less than $500, Citizens' Telephone Co. v. Fuller, 229 U.S. 322, 329, 33 S.C.t. 833, 57 L. Ed. 1206; a statute which imposed a license fee upon 'all persons' engaged in the laundry business, but exempted concerns employing not more than two women, and steam laundries, Quong Wing v. Kirkendall, 223 U.S. 59, 62, 32 S.C.t. 192, 56 L. Ed. 350;  an ordinance under which a $5 tax was laid upon merchants whose gross sales were $1,000, and a tax of $10 upon those similarly situated whose sales were $1,001, Clark v. Titusville, 184 U.S. 329, 331, 22 S.C.t. 382, 46 L. Ed. 569;  an ordinance which laid a tax of $1,000 upon theaters whose admission was $1 or more, but only $400 upon those similarly situated whose admission prices were less than $1 and more than 50 cents, Metropolis Theater Co. v. Chicago, 228 U.S. 61, 69-70, 33 S.C.t. 441, 57 L. Ed. 730. 

In the light of these decisions, I should have supposed the validity of the classification made by the Legislature of Kentucky to be clear. Recognizing that members of 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.C.t. 83, 67 L. Ed. 237; State of Ohio ex rel. Clarke v. Deckbach, 274 U.S. 392, 397, 47 S.C.t. 630, 71 L. Ed. 1115. 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.C.t. 1, 51 L. Ed. 78; Sligh v. Kirkwood, 237 U.S. 52, 61, 35 S.C.t. 501, 59 L. Ed. 835, 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.  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 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.  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.  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.  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,  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 years, in which event the tax was to be 25 cents.  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.  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.'  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.

The second commission filed its report in 1916. Like the first commission, it adverted to the fact that 'even in the case of mortgages numerous ingenious and decidedly reprehensible methods are resorted to, in order that the real owner of such securities may escape his lawful portion of the burden of taxes,' and it recommended, among other things, the imposition of a mortgage recording tax.  This was passed at an extraordinary session of the Legislature, called 'for the sole purpose of considering the subject of revenue and taxation,' which remained in session from February 14 to April 25, 1917. The legislation subjected different classes of intangible property to widely varying rates, and supplemented the property taxes by license fees, including the mortgage recording tax here in question. It subjected credits secured by mortgage to the annual general property tax of 40 cents per $100 for state purposes, but exempted them from local taxation, imposed the mortgage recording tax, and retained a statute then in force laying a flat recording tax of 50 cents on all mortgages (except chattel mortgages for less than $200). Kentucky Statutes, Carroll's 1922 Edition, § 4238. We are told that the commission and the Legislature concluded that the taxes imposed by the several statutes would, in view of facts to be stated, approximately equalize the pro rata amount of taxes to be paid on loans secured by mortgage, taking account of the difference in the dates of maturity. In determining whether the equal treatment required by the federal Constitution has been afforded we must, of course, consider all the statutes operating upon the subject-matter. Farmers' & Mechanics' Savings Bank v. Minnesota, 232 U.S. 516, 529, 34 S.C.t. 354, 58 L. Ed. 706; Interstate Busses Corporation v. Blodgett, No. 197, 276 U.S. 245, 48 S.C.t. 230, 72 L. Ed. 551, October term, 1927.

In Kentucky, local reasons exist for treating long-term mortgage loans somewhat differently from those for a 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.  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.

At what point the line should be drawn between short-term and long-term loans is, of course, a matter on which even men conversant with all the facts may reasonably differ. There was much difference of opinion concerning this in the Kentucky Legislature. The bill, as recommended 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.  In the House, the bill was amended so as to exempt loans maturing in less than five years.  In the Senate, the House bill was amended so as to reduce the period to three years.  The House refused to concur in the Senate amendment.  The Senate receded;  and thereupon the bill was passed granting the exemption of loans maturing within five years, but with the rate reduced to 20 cents.  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.C.t. 424, 426 (69 L. Ed. 884, 44 A. L. R. 1454). Whether the exercise was a wise one is not our concern.

That it was permissible for Kentucky, in levying its mortgage recording tax, to take account of the probability that certain types of mortgage would escape further taxation, is not open to doubt. Watson v. State Comptroller, 254 U.S. 122, 125, 41 S.C.t. 43, 65 L. Ed. 170. There is abundant proof that the Legislature was justified in thinking that the bulk of the long-term loans would escape the general property tax, while most of those for a short-term would not. That the statute taxes certain long-term loans which, because of their similarity in other respects to those for a short-term, are likely to be subjected to the state property tax, would not render the statute invalid even as applied to them. Compare Citizens' Telephone Co. v. Fuller, 229 U.S. 322, 332, 33 S.C.t. 833, 57 L. Ed. 1206. Wherever the line might be drawn, the statute would sometimes operate unjustly. But such occasional instances of injustice would not render the classification arbitrary. As was said in Metropolis Theater Co. v. Chicago, 228 U.S. 61, 69, 70, 33 S.C.t. 441, 443 (57 L. Ed. 730):

'The problems of government are practical ones and may      justify, if they do not require, rough      accommodations-illogical, it may be, and unscientific.'

Moreover, the deed of trust here in question is not similar to the Kentucky mortgages maturing within five years. It is a deed of trust given by a public service corporation to secure $150,000,000 in thirty-year 5 per cent. coupon bonds of $1,000 each, the bonds to be issued from time to time, the initial issue being $18,805,000. The equality clause would not prevent a state from confining the recording tax to deeds of trust given to secure bonds of a public service corporation. Compare Kentucky Railroad Tax Cases, 115 U.S. 321, 338, 6 S.C.t. 57, 29 L. Ed. 414; Bell's Gap Railroad Co. v. Pennsylvania, 134 U.S. 232, 237, 10 S.C.t. 533, 33 L. Ed. 892; Pacific Express Co. v. Seibert, 142 U.S. 339, 351, 12 S.C.t. 250, 35 L. Ed. 1035; American Sugar Refining Co. v. Louisiana, 179 U.S. 89, 92, 21 S.C.t. 43, 45 L. Ed. 102; New York ex rel. Hatch v. Reardon, 204 U.S. 152, 158, 27 S.C.t. 188, 51 L. Ed. 415, 9 Ann. Cas. 736. The characteristics of this deed of trust clearly furnish a basis for reasonable classification as compared with probably every mortgage exempted from the recording tax. If the statute as applied does not in fact discriminate in favor of any property of a like nature, there is not inequality in treatment. A 'tax is not to be upset upon hypothetical and unreal possibilities, if it would be good upon the facts as they are.' Pullman Co. v. Knott, 235 U.S. 23, 26, 35 S.C.t. 2, 3 (59 L. Ed. 105). See Crescent Oil Co. v. Mississippi, 257 U.S. 129, 137, 138, 42 S.C.t. 42, 66 L. Ed. 166.

As Kentucky might lawfully have levied the recording tax only on deeds of trust securing bond issues like that 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, 20 S.C.t. 284, 44 L. Ed. 392; Aluminum Co. v. Ramsey, 222 U.S. 251, 256, 32 S.C.t. 76, 56 L. Ed. 185; Murphy v. California, 225 U.S. 623, 630, 32 S.C.t. 697, 56 L. Ed. 1229, 41 L. R. A. (N. S.) 153; Darnell v. Indiana, 226 U.S. 390, 398, 33 S.C.t. 120, 57 L. Ed. 267; Mountain Timber Co. v. Washington, 243 U.S. 219, 242, 37 S.C.t. 260, 61 L. Ed. 685, Ann. Cas. 1917D, 642; Roberts & Schaefer Co. v. Emmerson, 271 U.S. 50, 54, 55, 46 S.C.t. 375, 73 L. Ed. 827, 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, 19 L. Ed. 224, and definitely stated in Albany County v. Stanley, 105 U.S. 305, 314, 26 L. Ed. 1044, 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. 

Notes