Louisville Gas Electric Company v. Coleman/Opinion of the Court
The plaintiff in error, a Kentucky corporation, executed a deed of trust of property in that state to secure bonds amounting in the aggregate to $150,000,000, of which $18,805,000 were issued, bearing date November 1, 1922, and maturing November 1, 1952. The deed was presented to the clerk of the Jefferson county court for record and payment made of the lawful recording fee required by the state statute, but the clerk refused to record the deed unless plaintiff in error paid to him a tax of 20 cents on each $100 of the $18,805,000, as required by section 4019a9 of the Kentucky Statutes, Carroll's Edition 1922, the pertinent portions of which follow:

'A tax of twenty cents (20¢) is hereby imposed upon each one      hundred dollars ($100.00) or fraction thereof of indebtedness      which is, or may be, in any contingency secured by any      mortgage of property in this state, which mortgage shall be      lodged for record after this act goes into effect where the      indebtedness does not mature within five years. * * *

'* * * Provided, however, the provisions of this section      shall not apply to mortgages executed to building and loan      associations.'

It is provided by another Kentucky statute that no deed or deed of trust or mortgage shall be valid against a purchaser for a valuable consideration without notice thereof or against creditors until such deed or mortgage shall be lodged for record. Ky. Stats. § 496. In view of this statute, plaintiff in error concluded that it was absolutely necessary to place the deed of trust of record, and thereupon, unwillingly and under protest, paid the amount demanded in addition to the lawful recording fee.

Subsequently, plaintiff in error brought this action in the proper state court to recover the amount of the tax so paid upon the ground that the quoted provisions of section 4019a9 were contrary to the Kentucky Constitution requiring uniformity of taxes upon all property of the same class, and upon the further ground that these provisions denied the equal protection of the law and deprived plaintiff in error of its property without due process of law, in contravention of the Fourteenth Amendment of the federal Constitution. A demurrer to the petition was sustained by the court of first instance, and the petition dismissed. Upon appeal to the state Court of Appeals, the judgment was affirmed, sub nom. Louisville Gas & Electric Co. v. Shanks, Auditor, 213 Ky. 762, 281 S. W. 1017. upon the authority of Middendorf v. Goodale, 202 Ky. 118, 259 S. W. 59.

The state Court of Appeals, in disposing of the contention that the statute violated the state Constitution, held that the tax imposed was not a property tax but a privilege tax; that is, a tax imposed upon the privilege of recording mortgages, etc., the payment of which, it was said, was entirely optional with the owners or holders thereof. This determination of the state court, in so far as it affects the challenge under the state Constitution, we accept as conclusive, in accordance with the well-settled rule. Merchants' & Mfrs. Nat. Bank v. Pennsylvania, 167 U.S. 461, 462, 17 S.C.t. 829, 42 L. Ed. 236. But the state court further held that the statute was not in conflict with the equal protection clause of the Fourteenth Amendment, and this presents a different question calling for our independent consideration and decision.

The contention on behalf of plaintiff in error is that the equal protection clause is contravened by the provisions exempting from the operation of the tax, first, indebtedness which does not mature within five years; and, second, mortgages executed to building and loan associations.

The equal protection clause, like the due process of law clause, is not susceptible of exact delimitation. No definite rule in respect of either, which automatically will solve the question in specific instances, can be formulated. Certain general principles, however, have been established, in the light of which the cases as they arise are to be considered. In the first place, it may be said generally that the equal protection clause means that the rights of all persons must rest upon the same rule under similar circumstances, Kentucky Railroad Tax Cases, 115 U.S. 321, 337, 6 S.C.t. 57, 29 L. Ed. 414; Magoun v. Illinois Trust & Savings Bank, 170 U.S. 283, 293, 18 S.C.t. 594, 42 L. Ed. 1037, and that it applies to the exercise of all the powers of the state which can affect the individual or his property, including the power of taxation, County of Santa Clara v. Southern Pac. R. Co. (C. C.) 18 F. 385, 388-399; Railroad Tax Cases (C. C.) 13 F. 722, 733. It does not, however, forbid classification; and the power of the state to classify for purposes of taxation is of wide range and flexibility provided always that the classification 'must be reasonable, not arbitrary, and must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike.' Royster Guano Co. v. Virginia, 253 U.S. 412, 415, 40 S.C.t. 560, 561 (64 L. Ed. 989); Air-way Corp. v. Day, 266 U.S. 71, 85, 45 S.C.t. 12, 69 L. Ed. 169; Schlesinger v. Wisconsin, 270 U.S. 230, 240, 46 S.C.t. 260, 70 L. Ed. 557, 43 A. L. R. 1224. That is to say, mere difference is not enough; the attempted classification 'must always rest upon some difference which bears a reasonable and just relation to the act in respect to which the classification is proposed, and can never be made arbitrarily and without any such basis.' Gulf, Colorado & Santa Fe Ry. v. Ellis, 165 U.S. 150, 155, 17 S.C.t. 255, 257 (41 L. Ed. 666). Discriminations of an unusual character especially suggest careful consideration to determine whether they are obnoxious to the constitutional provision. Compare Martin v. District of Columbia, 205 U.S. 135, 139, 27 S.C.t. 440, 51 L. Ed. 743; Bell's Gap R. Co. v. Pennsylvania, 134 U.S. 232, 237, 10 S.C.t. 533, 33 L. Ed. 892.

While, for the purpose of determining whether the statute assailed violates the federal Constitution, we are not bound by the characterization of the tax by the state court, St. Louis Cotton Compress Co. v. Arkansas, 260 U.S. 346, 348, 43 S.C.t. 125, 67 L. Ed. 297, the matter is here of little importance. The application of the equal protection clause does not depend upon what name is given to the tax. Whether the tax now in question be called a privilege tax or a property tax, it falls in effect upon one indebtedness and not upon another where the sum of each is the same; where both are incurred by corporations or both by natural persons; where the percentage of interest to be paid is the same; where the mortgage security is identical in all respects; where, in short, the only difference well may be that one is payable in 60 months and the other in 59 months. No doubt the state may take into consideration as an element in fixing the amount of the as an element in fixing the amount of the to be paid; for, since the tax is a flat sum covering the entire life of the lien, the privilege of recording the short-time lien and that of recording the long-time lien have different taxable values. But classification good for one purpose may be bad for another; and it does not follow that, because the state may classify for the purpose of proportioning the tax it may adopt the same classification to the end that some shall bear a burden of taxation from which others under circumstances identical in all respects save in respect of the matter of value, are entirely exempt.

Here it seems clear that a circumstance which affects only taxable values has been made the basis of a classification under which one is compelled to pay a tax for the enjoyment of a necessary privilege which, aside from the amount of the recording fee which is paid by each, is furnished to another as a pure gratuity. Such a classification is arbitrary. It bears no reasonable or just relation to the intended result of the legislation. The difference relied upon is no more substantial, as the sole basis for the present classification, than a difference in value between two similar pieces of land would be if invoked as the sole basis for a like classification in respect of such property. Certainly one who is secured by the state in the priority of his lien for a period less than five years enjoys a privilege which in kind and character fairly cannot be distinguished from a like privilege enjoyed by another for a longer period of time. The former reasonably may be required to pay proportionately less than the latter; but to exact, as the price of a privilege which, for obvious reasons neither safely can forego, a tax from the latter not imposed in any degree upon the former produces an obvious and gross inequality. If the state, upon the same classification, had reversed the process and taxed indebtedness maturing within a shorter period than five years, and exempted such as matured in a longer period, the inequality probably would be readily conceded, but the constitutional infirmity, though more strikingly apparent, would have been the same.

We are not dealing with a charge made for services rendered or a fee for regulation, but a tax in the strict sense of the term. It is said that it is a tax upon a privilege which the owner or holder of the instrument creating a lien is free to accept or reject. But for practical purposes there is not such option, for, as this court recently held, there is a practical necessity to record such instruments because, if not recorded, the statute overrides them in favor of purchasers without notice and creditors; and the choice is like one made under duress. 'The state is not bound to furnish a registry, but, if it sees fit to do so, it cannot use its control as a means to impose a liability that it cannot impose directly, any more than it can escape its constitutional obligations by denying jurisdiction to its courts in cases which those courts are otherwise competent to entertain. Kenney v. Supreme Lodge of the World, 252 U.S. 411, 415, 40 S.C.t. 371, 64 L. Ed. 638, 10 A. L. R. 716.' Federal Land Bank v. Crosland, 261 U.S. 374, 377, 378, 43 S.C.t. 385, 386 (67 L. Ed. 703, 29 A. L. R. 1).

The exemption of building and loan associations from the operation of the tax is a different matter. The equal protection clause of the Fourteenth Amendment does not preclude a state in imposing taxes from making exemptions, provided the power is not exercised arbitrarily. It may exempt the property of churches, charitable institutions, and the like; and it does not admit of fair doubt that, under the circumstances disclosed by the opinion of the court below in the Middendorf Case, it has lawfully exempted building and loan associations. That court points out that a building and loan association under the Kentucky statutes must receive payments from members only and make loans to members only, in pursuance of a plan set forth. Money accumulated is to be loaned to members according to a rule of priority. The essential principle of such an association is mutuality. The purpose of the statute, the court below says, was to provide the members of the associations with the means of borrowing money for the acquisition of homes, in recognition of the duty of the state to encourage the acquisition of homes by its citizens. Such associations are also placed by the state statute in a separate class for purposes of ad valorem taxation. It is made clear by the lower court that the purpose of the exemption was to enable these associations, by relieving them of a burden, more completely to carry out the quasi public purpose which the Legislature designed in providing for their creation. This exemption, therefore, must be upheld; but, since the effect of the exemption first considered is to deny plaintiff in error the equal protection of the law in violation of the equality provision of the Fourteenth Amendment, the court below erred in sustaining the validity of the tax and affirming the action of the trial court in dismissing the petition.

Judgment reversed, and cause remanded for further proceedings not inconsistent with this opinion

Mr. Justice HOLMES dissenting. 

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