LANGDON, J.,
Dissenting. — I dissent.
In my opinion, this cause falls squarely within the holding in the case of
Macallen Co.
v.
Massachussets,
279 U. S. 620 [73 L. Ed. 874, 49 Sup. Ct. Rep. 432]. The decision in the Macallen case recognizes the doctrine of the earlier case of
Flint
v.
Stone Tracy Co.,
220 U. S. 107, 163 [Ann. Cas. 1912B, 1312, 55 L. Ed. 389, 31 Sup. Ct. Rep. 342], to the effect that the taxing power may with propriety include within a franchise tax base the interest received from tax-exempt bonds, but declares that a tax upon the privilege of doing business measured in part by the amount of nontaxable interest received “may, nevertheless, be adjudged to lay a tax upon the interest, if that purpose be fairly inferable from a consideration of the history, the surrounding circumstances, or the statute itself considered in all its parts”. Thus, a legislature may not by the artful use of words deprive the courts of their authority to look beyond the words to the real legislative purpose. It is for the courts to determine whether what is in form declared to be an excise tax is such a tax or, under the guise of such designation, is in substance and reality a tax on the income derived from tax-exempt property. In
Miller
v.
Milwaukee,
272 U. S. 713 [71 L. Ed. 487, 47 Sup. Ct. Rep. 280], it is held: “If the avowed purpose or self-evident operation of
[160]
a statute is to follow the bonds of the United States and to make up for its inability to reach them directly' by indirectly achieving the same result, the statute must fail even if but for its purpose or special operation it would be perfectly good. ... A tax very well may be upheld as against any casual effect it may have upon the bonds of the Unitéd States when passed with a different intent and not aimed at them, but it becomes a more serious attack upon their immunity when they are its obvious aim.”
After a careful examination of the Massachusetts tax commission’s report, which report undoubtedly led to the adoption of - the act there attacked, and following a critical study of the act itself, the United States Supreme Court in the Maeallen case,
supra,
declared the Massachusetts Franchise Tax Act to be in violation of the congressional mandate exempting federal bonds and securities from taxation, and in violation of the contract clause of the Constitution, in so far as it purported to include in the tax base, interest from tax-exempt securities. While the tax in that case was designated as a,“franchise tax”, the court concluded from the history and circumstances surrounding its enactment that it was plainly the intention of the Massachusetts legislature to include the interest from tax-exempt securities within the tax base in order that such nontaxable securities, held in large quantities by banks and other financial corporations, might, indirectly at least, be made to bear their proportionate share of the tax burden. In other words, it was held that the act in substance and effect imposed a tax upon the exempt securities themselves in violation of the constitutional inhibition — the burden falling upon them by their use as a measure not being casual and incidental.
If, therefore, it be reasonably ascertainable that interest from tax-exempt property is included within the tax base of a franchise tax measured by net income for the purpose of reaching such nontaxable property or the income therefrom, the tax, at least in this particular, is unconstitutional and void. In so deciding the Maeallen case the court did not find it necessary to overrule
Flint
v.
Stone Tracy Co., supra,
though the actual objective operation of the tax upheld in the Flint case and that condemned in the Maeallen ease is identical. There can be no question, therefore, but that the court in the Maeallen case held the tax void solely
[161]
for the reason that it was enacted with the purpose of reaching nontaxable property.
Application of that test satisfies me that the California Bank and Franchise Tax Act, supra, must fall with the Massachusetts statute in so far as it attempts to include interest from tax-exempt property in the tax base. For all practical purposes the two acts are substantially the same. Each designates the tax therein imposed as a “franchise tax”, as distinguished from a property tax, but, as we have already seen, there is no magic in those words. It is our duty to look beyond the mere form of the statute and determine what, in truth and in substance, is its purpose and effect. True, as pointed out by the attorney-general, the Massachusetts attempt to include interest from tax-exempt securities within the tax base was the result of a deliberate amendment of its taxing statute to this effect whereas our statute, as originally enacted, included such interest in the tax base. To conclude that this fact alone warrants a distinction between the two cases is to hold that Massachusetts cannot take in two bites what California can have in one. Our investigation discloses that substantially the same reasons prompted the enactment of the California statute that resulted in the adoption of the Massachusetts law. The special and final reports of the California tax commission, which undoubtedly were before the legislature when it enacted the tax law corresponding to the Massachusetts tax statute, contained in substance the same observations on the possibility of reaching exempt securities as did that before the Massachusetts legislature which is quoted by the Supreme Court in the Maeallen case as showing an intention to tax them by indirection. Both reports of the local taxing commission state: “As has been pointed out, the 1926 amendment to section 5219 [authorizing the taxing of national banks ‘according to or measured by net income’] was drafted with the avowed object of permitting the inclusion in the tax base of such income as the interest from tax-exempt bonds. In the case of corporations other than banks, the point is not of vital importance. But the banks hold such large quantities of these tax-exempt bonds that the effect of a decision holding that the state may not include them in the base would be very serious indeed. An analysis of the replies of the banks to the commissioner’s question -
[162]
noire indicates that the noninclusion of federal bond interest would reduce that base by more than one half.” With this information before it, the commission suggested to the Gov-' ernor and to the legislature the inclusion of tax-exempt interest in the tax base, arguing that otherwise “no substantial tax would be forthcoming from the banks”. The commission appreciated the fact that the validity of the plan it was recommending had not, at that time, been judicially determined, for in its report it recognized that “a suit [the Macallen case] has already been filed in Massachussets questioning the right of a state to include such interest”. The commission’s report also makes reference to the fact that New York and Massachusetts had already enacted tax statutes similar to the one proposed, thus evidencing an intention to pattern the California act after the Massachusetts statute, which has now been declared unconstitutional in the Macallen ‘ case. Then again, at the public hearing on the proposed tax measure held on January 17, 1929, before the senate and assembly sitting in committee of the whole, Professor It. M. Haig of Columbia University, who had served as technical advisor to the tax commission, while referring to the proposed tax as a “franchise tax” imposed for the privilege of doing business as a corporation, informed the legislature that “Interest from tax-exempt bonds is an exceedingly important item in a tax which is applied to banks”. (State Printing Office Publication No. 64915.) As further indicating the intent with which the California statute was proposed, and pointing out some of the difficulties confronted by the proposed act, Professor Haig, writing in the bulletin of the National Tax Association, volume XIV, pages 231, 236, under date' of May, 1929, states: “The proposal of the board of supervisors of San Francisco [to exclude from the tax base the interest on nontaxable securities] carried a threat of complete disaster. The exclusion of tax-exempt interest from the base was of importance only in the case of banks, who were the only large holders of government bonds. For them it meant practically complete exemption. Several of the largest and most prosperous banks in the state . . . would pay no franchise tax whatsoever. The banks themselves did not want this exemption and it was they who produced evidence which on the very day of the vote on the bill convinced the San Francisco
[163]
officials that its passage would not unfavorably affect the flotation of the municipal issues. Had their proposal [to exclude tax-exempt interest] prevailed the new tax would have been completely wrecked.”
I am of the view that both the form and effect of the Massachusetts and California statutes are substantially identical so far as concerns the qualities that led the Supreme Court of the United States to hold the former tax void. I am also satisfied that in enacting the California Bank and Corporation Franchise Tax Act,
supra,
it was the legislative intention and purpose to reach nontaxable securities by including in the tax base interest received thereon. Under the holdings in
Miller
v.
Milwaukee, supra,
and the Macallen case,
supra,
this feature strikes at the validity of the act. It is no sufficient answer to state that the act was an emergency measure, enacted to avert a crisis which threatened the revenues of the state, or that it was intended to give to the state a modernized system of bank and corporate taxation, for in declaring the Massachusetts statute invalid as an attempt to reach nontaxable securities, the federal Supreme Court did not find that the legislature might not have other and legitimate motives as well. There can be no doubt but that the California tax commission suggested and the legislature adopted an act including interest from tax-exempt securities in the tax base, because both were convinced that banks and other corporations held such large quantities of these nontaxable securities as to require such a tax base in order to receive a “substantial tax” from such entities. The tax was aimed directly at the nontaxable securities and the interest received therefrom. In line with the decision of the Supreme Court of the United States in the Macallen case I must, therefore, conclude that in so far as the Bank and Corporation Franchise Tax Act, of this state, attempts to include interest from federal, state, municipal or other tax-exempt bonds in. the tax base upon which the taxes of state banks and corporations are computed, the act in substance and effect imposes a tax upon such tax-exempt securities and is invalid and void. As to the federal bonds and securities, the act is in derogation of the constitutional power of Congress to borrow money on the credit of the United States, as well as in violation of the acts of Congress declaring such bonds and securities to be nontaxable. Applying
[164]
the test set up by the federal court, the same considerations that govern in the case of federal securities determine the impropriety of including the income from state, county, city and county, municipal or district bonds under the tax base measurement plan adopted in the act. If such income is included, the act impairs the obligation of the contract created by section
1%
of article XIII of the state Constitution, which provides that such bonds and securities “shall be free and exempt from taxation”. That surely must be so as to bonds and securities issued before November 6, 1928, the date on which section 16 of article XIII of the Constitution was adopted.
The decision in the case of
Educational Films Co.
v.
Ward,
282 U. S. 379 [75 L. Ed. 400, 51 Sup. Ct. Rep. 170], cited in the majority opinion, does not overrule the Macallen case but, on the contrary, is distinguishable therefrom and follows closely the earlier decisions of the United States Supreme Court. It recognizes, as does the Macallen case, that the courts must look beyond the mere form and language of a taxing statute and determine its operative effect; that is to say, the legislative characterization „ of a taxing-statute as a “franchise” tax act is not binding on the courts if it appears that the act in substance and effect imposes an
ad valorem
or property tax. It also recognizes that the doctrine announced in
Flint
v.
Stone Tracy Co.
is not overruled by the holding in the Macallen case and that under the former, a state may well include within the measure of a “franchise” tax, the interest or income from tax-exempt property, but that, under the holding in the latter case [the Macallen case] this is so
only
when such inclusion is merely “casual and incidental” and not the result of an attempt to tax indirectly what cannot be reached directly. In other words, the decision in the Educational Films Co. case, so strongly relied on in the majority opinion, merely recognizes the two lines of cases represented by
Flint
v.
Stone Tracy Co.
and
Macallen
v.
Massachusetts
and then concludes that the New York statute involved in the Educational Films Co. case includes the income from
copyrights
only as an
incident
to the imposition of a proper franchise tax upon net income and therefore falls within the category of statutes upheld in the Flint case. In distinguishing the New York act from the Massachusetts act declared unconsti
[165]
tutional in the Macallen case, the court in the Educational Films Co. case declares: “But the statute, before these amendments, was sufficiently broad to include income from copyrights within the measure of the tax; and neither before nor after the amendments did it
make any mention of copyrights or their income.
There is nothing to suggest that the legislature could at any time have had in mind the addition of income from copyrights to the measure of the tax, or that the statute or the amendments were adopted ‘for the very purpose' of subjecting’ it
‘pro tanto
to the burden of the tax’, which was declared to be the vice of the statute in
Macallen Co.
v.
Massachusetts, supra,
p. 631. That the royalties play some part in the measure of the tax is the result of the application of the general language of the statute to particular circumstances to which the statute makes no specific reference. In this respect, the present statute differs in no substantial way, from that upheld in
Flint
v.
Stone Tracy Co., supra.”
(The statute in
Flint
v.
Stone Tracy Co., supra,
made no specific reference to tax-exempt property, such property being only incidentally included in the tax base by reason of the general language of the act referring to income from “all sources”.)
From the foregoing quotation, taken from the Educational Films Co. case, it is quite clear that the New York statute there upheld made no specific reference to the income from nontaxable copyrights
but such income was included within the tax base solely by reason of the general lang-uage of the act requiring the inclusion of “income from any source”.
(Section 209 of the New York act.) In other words, the inclusion of income from nontaxable copyrights in the New York tax base was only “casual and incidental” to the imposition of the tax and not the result of any discoverable intent or purpose to include such income in order to reach the nontaxable subject itself.
Our statute, on the other hand, as already pointed out, makes specific reference to and requires the inclusion of tax-exempt interest from nontaxable bonds in the tax base, thus evidencing an intent and purpose, discoverable upon the face of the statute, to include such interest in the tax base as a means of requiring holders of tax-exempt securities to bear their proportionate share of the tax burden. Then, as further pointed out, this express purpose and intent of the
[166]
legislature is clearly evidenced by the report to the legislature of the California tax commission, which report, under the holding in the Macallen case, may properly be referred to as showing the legislative intent, and also by the quotation of statements made before the senate and assembly when sitting as a committee of the whole, and considering the enactment of the California Bank and Corporation Franchise Tax Act.
That provision of the New York statute, quoted in the majority opinion herein, which calls for the inclusion of interest from municipal and other nontaxable bonds within the tax base, though substantially the- same as our act in this particular, was not before and was not considered by the United States Supreme Court in the Educational Films Co. case. That case and the decision therein were concerned • solely with the inclusion in the tax base of the income from copyrights, which income was only casually and incidentally included therein by reason of the general language of the act requiring the inclusion of income from “any source”. However, as already indicated, it is apparent, both upon the face of the California statute and from the legislative history thereof, that the inclusion of the interest from tax-exempt bonds was not “casual and incidental” but deliberate, the intent being to tax indirectly what could not be reached directly.
In conclusion, therefore, it may be said that the holding in the Educational.Films Co. case is entirely consistent with the earlier decisions of the United States Supreme Court, but the statute there involved, so far as it concerned itself with the income from taX-exempt copyrights, the only question then before the court, properly fell within the doctrine set down in
Flint
v.
Stone Tracy Co.,
whereas the California act, so far as the interest from nontaxable securities is involved, falls clearly within the category of statutes condemned in the Macallen case and is therefore unconstitutional in this respect.