Story Case

The War Revenue Law of 1914 levies a tax upon bankers, measured according to the amount of their capital used in banking, and gives a definition of banking as used in the act. The Collector of Internal Revenue assessed the tax upon the Fidelity Trust Company, on the ground that it was conducting a banking business. The payment of the tax was refused, and a hearing requested before the Commissioner of Internal Revenue. It was then shown by the trust company that its chief business was to administer estates, manage and invest trust funds, underwrite and sell bond issues, and act as trustee in mortgages and deeds of trust. Incidental to all these functions, it did accept from its customers deposits of money or drafts, and took bills of exchange or notes which it collected through its agents. Deposits so received were held subject to check, but checks drawn upon them were never paid in cash but in checks upon banks in the city. Most of them were presented by other banks and not paid in money, but discharged by a cancellation of credits with the banks. On these facts, should the Commissioner rule that the Fidelity Trust Company is liable for the bankers' tax?

Ruling Court Case. Mcalpine Vs. Davis, Volume 10 Indiana Reports, Page 137

Davis made a note payable to Cochran or order, at the Citizens' Bank, Eichmond, Indiana. Cochran assigned it to McAlpine; McAlpine presented it to Davis for payment and the latter refused to settle it. McAlpine then sued upon the note. Davis, by way of defense, contended that the suit could not be maintained. By the law of Indiana at the time, a note was not negotiable, so that an indorsee could not sue upon it in his own name, unless it was made payable at a bank. He contended that the Citizens' Bank was not a bank, since it was not incorporated, and, therefore, he insisted, McAlpine could not sue on this note in his own name.

Decision: Generally speaking, it is not essential that a banking institution be conducted in corporate form. It may be carried on by a corporation, by a partnership, or even by a private individual.

Mr. Justice Perkins said: "Three kinds of banks have long been known to the commercial and business world, viz.: banks of deposit, banks of deposit and discount, banks of discount and circulation. The three kinds seem to have originated chronologically in the order named. The cities of ancient Asia, Egypt, Greece, and Rome had banks of deposit, and later, of discount, and so had those in the mediaeval period; and at this day there are, perhaps, upon the eastern and western continents as many and as wealthy banks of deposit and discount as there are of circulation. Charters are not requisite to banks of deposit and discount; charters seem requisite only for conferring special privileges; as, to exempt the owners of the bank from personal liability for debts; to enable them to issue paper currency, etc. These charters seem to have been a comparatively modern invention, and were granted, in the first instance, by embarrassed governments to their creditors, in return for bonuses." Thus, in this instance, the Citizens' Bank was a commercial bank of deposit and discount, even though the institution was not incorporated, and the note made payable there was negotiable. Judgment was given for McAlpine.

Ruling Law. Story Case Answer

Banking, when confined to deposits and discounts, may generally be conducted by any person; it is not necessary that it should be undertaken by corporations. But in the matter of issuing bank notes, usually this is a special privilege conferred only upon incorporated banks, by the United States or by the State. The functions of deposit, discount, and circulation, whether carried on by individual or corporation, characterize the commercial bank, as distinguished from the savings bank or safety deposit company. It is the purpose of the commercial bank to act as the instrument or means, whereby the capital of a great many people is collected in the hands of efficient men, in amounts large enough to be employed in profitable enterprises. Deposit and loan are the chief ends of commercial banking, the collection the necessary means to that end. The notes of men actually engaged in industry, the securities of corporations, the claims of one man against another, are all subjects of negotiation for banking funds. The machinery used in this process is further made profitable by employing it in the collection of claims, the transmission of money, the operation of a system of exchange, and the making of payments in distant places.

It is this sort of commercial bank which the tax was intended to reach. While some of the same functions are performed, for instance, the receiving of deposits, there is in general a wide difference in the business of a trust company. It is the chief end of that business rather to hold its funds safely than to furnish credit to business. The Fidelity Trust Company is not a bank, within a general taxing statute, and the Commissioner should rule that the assessment made by the Collector should be cancelled.