Iowa-Des Moines National Bank v. Bennett

Supreme Court of the United States · Federal Courts

Federal CourtsFourteenth AmendmentState ActionTaxationstate actionunder color of state authorityequal protectiondiscriminatory taxation

Facts

For tax years 1919 through 1922, Polk County officials exacted taxes from the petitioners' bank shares at rates based on Iowa Code § 1322-la, while shares of competing domestic corporations were actually taxed at only 5 mills under § 1310. The assessor had initially classified the competitors' shares properly, but the county auditor later changed the assessments on the tax books to "moneys and credits," and the county treasurer collected the lower taxes accordingly. In 1923, the petitioners paid their own taxes, interest, and penalties under protest after threats of seizure. The Iowa Supreme Court found or assumed systematic discrimination and a violation of Iowa law but denied relief because the auditor's and treasurer's acts were unauthorized under state law.

Issue

Whether discriminatory tax collection by county officials, acting without authority and contrary to state law, nonetheless constitutes state action that violates federal law when a bank is taxed at higher rates than competing moneyed capital. Also, whether the banks may obtain a refund of the excess taxes rather than being forced to seek later collection of unpaid taxes from favored competitors.

Rule

For purposes of federal restrictions on state taxation and the Fourteenth Amendment, discriminatory tax exactions made by state officials under color of state authority in the course of their official duties are treated as action by the State even if the officials acted without authority or contrary to state law. A taxpayer subjected to such discriminatory taxation is entitled to equal treatment and cannot be required to secure relief by pursuing increased taxation of favored competitors or by awaiting state collection efforts; the taxpayer may obtain a refund of the excess taxes exacted.

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In Franklin County, Ohio, Lakeshore National Bank was assessed under a state tax statute at 28 mills on its shares. The county assessor correctly classified shares of several competing local finance corporations under the same statute, but the county auditor later re-entered those competitors on the tax books as "credits" taxed at 5 mills, and the county treasurer collected at that lower rate. Ohio law gave neither official authority to alter the assessment in that way.

If Lakeshore National Bank seeks a refund of the excess tax in state court, what is the strongest argument that the discriminatory taxation is attributable to the State for federal purposes?

Explanation. The majority held that discriminatory tax exactions by officials are state action when the officials act by virtue of public office, under color of state authority, and in the course of their duties, even if they exceeded authority or violated state law. The focus is on the power and conduct of the State as a whole, not on whether internal state law authorized the precise misconduct. That is why the unauthorized conduct of the auditor and treasurer is still attributed to the State.