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Argument for Plaintiffs in Error.

under, or provided for, by the constitution and laws of California in respect to the assessment and taxation of the roadbed, roadway, rails, and rolling stock of corporations such as the defendant, is a violation of the provisions of the Fourteenth Amendment to the Constitution in the particulars referred to in the propositions herein before stated. And it is to these that we invite the attention of the court.

When the constitution of the State was adopted, in 1879, this railroad company existed with its road completed, and with mortgages upon it quite equal to, if not in excess of, the assessable value of the property. And we venture to assume that the court will take judicial notice of so notorious a fact as that there were thousands of miles of railroad in that State, heavily mortgaged, many of the bonds of which were held outside of said State, and that could not be reached for taxation by assessments against the holders.

This property aggregated in value many millions of dollars -in this particular case alone, judging by the assessments, amounting to more than $20,000,000.

The aggregate of the assessments in the cases now before the court amounts to more than $50,000,000.

That this enormous amount of property should bear its fair proportion of the expenses of government will not be denied.

The Right to tax and the Right to classify Property for Taxation.

Unless it can be maintained that the Fourteenth Article of Amendment has destroyed it, the State, in the exercise of its sovereign power, has the right not only to tax according to its discretion, but also to classify property for assessment and taxation.

What the State may do in that behalf has been stated by this court in The Railroad Company v. Peniston, 18 Wall. 5. See also, to the same effect, Williams v. Supervisors of Albany, 122 U. S. 154, 163, 164.

In the light of these opinions, the sovereign and absolute power of a State to impose taxes, and to determine the extent, the subjects upon, and the mode in which it shall be

Argument for Plaintiffs in Error.

exercised, cannot be disputed. If the right to classify ever could have been the subject of reasonable disputation, it has been set at rest by the decision of this court in the Kentucky Railroad Tax Cases, 115 U. S. 321, in which this very question was presented and disposed of. See also State Railroad Tax Cases, 92 U. S. 575, at page 611.

It being, then, settled that the State may divide property into classes for the purposes of taxation-may make farming lands, city and town lots one class, and railroads, their franchises, roadway, etc., another class-it necessarily follows that if the State of California has made such a division or classification, she has not exceeded her sovereign authority by so doing. And it equally follows from this that the State must be the judge, and the sole judge, as to what classification shall be made within the limit of the power to classify. It can only become subject to legal criticism when what is done, or provided for, operates unequally upon different persons belonging to the same class. Missouri v. Lewis, 101 U. S. 22.

Now what has the State done? Its constitution and its laws. in this respect cover "property." They provide for assessing in one class property not owned by railroads operating in more than one county, in the doing of which mortgages are to be deemed an interest in the property, and so assessed, and the value in excess of the mortgage is to be deemed an interest in the same property, and so assessed; and in another class "property" owned by railroad companies operating in more than one county, as to which no such division is to be made. It is a distinct classification of "property," and not a classification of persons.

The railroad property is not taxed beyond its value, but, in taxing, it is not divided as property between the mortgagor (the company) and the mortgagee (the bondholder), and each taxed separately for his interest. Or, to state it yet differently, the mortgage in this case is not declared to be an interest in the railroad property, and the assessment is against the owner as to the entire value. Is this an unlawful discrimination?

The answer to this question, we submit, is found in the principles of law which control the powers and rights of sovereign

Argument for Plaintiffs in Error.

States to classify the property within the State for purposes of taxation. See Stuart v. Palmer, 74 N. Y. 189; Wilkinson v. Leland, 2 Pet. 627, 657, 658; Terret v. Taylor, 9 Cranch, 43; Von Hoffman v. Quincy, 4 Wall. 535, 550; Sinking Fund Cases, 99 U. S. 700, 719; Bank v. Moher, 20 Blatchford, 341; Cooley Const. Lim. 175, note 5, and cases there collected.

What is meant, therefore, to be designated by, and included in, this sovereign and unfettered power, discretion and right of choice, which is held by every State in making classification of property for taxation, is not the power to disregard the fundamental principles of free government and of private property rights; but this power does mean that the legislature, in making classification and imposing taxes, is (aside from limitations in the state constitution) subject to no other restraints, in the exercise of these high discretions, than those limitations which make the boundaries of the legislative power in every constitutional government - such limitations, for example, as that property shall not be taken without due process of law; that one man's property shall not be taken to be bestowed upon another man; that the ends of taxation shall be public and not private; that the apportionment of taxation shall not be arbitrary merely, and the like. Or, stated in another way, this sovereign power of classification for taxation is one whose boundaries are such, to here adopt the words of Chief Justice Marshall in McCulloch v. Maryland, 4 Wheat. 316, 428, that "the security against abuse of the power is found in the structure of the government itself."

The plain result of the proposition that the State's power and right of choice, in making classifications for taxation, is (aside from restraints in the state constitution) bounded only by the limitations which restrain the powers of legislation in every free government, is: that the classification of railroad property for taxation by itself, and without the right of deducting mortgage debts, is not in excess of legitimate classification for taxation, unless so to classify and tax is such a flagrant usurpation and injustice as to make it violative of the fundamental principles of property right as protected by all free governments.

Argument for Plaintiffs in Error.

Now, is the law of California, which the defence in the present case assails, of this flagrantly unjust character, or, on the other hand, is this discrimination complained of sanctioned by reason and justice?

common error

Before answering the question, it is important to notice a that these tax laws regard and deal with the natural persons, and their separate and private property, which make up these corporations, in their natural and individual, as distinguished from their associated and artificial, character and capacity, and that the legislature, in the very nature of the subject-matter, cannot, in imposing these taxes, regard the property invested in the corporations as in any other legal predicament or status than is an equivalent amount of similar property held by individuals as natural persons. The very opposite of this is the truth. These corporations are endowed by the State with most exceptional powers, rights, and franchises, and it is not just that their property should be classified for purposes of taxation precisely like all other property. For these corporations possess in connection with their holdings a species of property intangible, but of immense value, specially granted to them by legislative enactment, known as "franchises," which individuals do not have in respect to their holdings. It carries with it advantages of succession, perpetuity, etc., not enjoyed by individuals. It is the very life of these artificial persons.

They have the right of eminent domain; they have the privileges and immunities of common carriers; they come into being to conduct a special business intimately associated with the trade and commerce of the country, and the property they hold other than the franchise is only an incident to, or an instrumentality used as a means of making useful, this intangible yet most important part of their property, the "franchise." This franchise is inseparable from its ties, rails, etc., and it is impossible, certainly impracticable, to separate the one from the other in reaching its value; yet the fact that they were assessed together is one of the complaints made in this case. What it has in the shape of property has associated with it and inseparable from it that most valuable ele

VOL. CXXVII-2

Argument for Plaintiffs in Error.

ment, the "franchise"; franchise and road-bed and rails, and so on, go to make up the property of this artificial person. And thus it is made necessary to group them all together for the purpose of assessment; and other property, having no such element, and no such condition, justly occupies a place as a distinct class.

Again: The State in the exercise of its sovereign power could not do otherwise than make this a distinctive class without doing one of two things, viz.: it must tax its citizens to the full value of the property held by them, respectively, irrespective of mortgages; or it must permit to escape taxation all railroad property embraced in franchises, road-bed, etc., that is mortgaged to its full value.

Such property of a railroad company, it cannot be denied, should be subjected to a tax, but it could not be liable to a tax upon the principle of making a division, such as is provided for, above referred to, because the holdings of the bonds secured render the collection of such a tax, if so assessed, impracticable, indeed impossible. These bonds are sold and held all over the world, as is shown by the history of such railroad bonds the world over, and are in this respect unlike all private mortgages. And so the alternative was presented either to oppress the citizen by imposing a tax on property that he only in part owned, or dividing property held under such dissimilar conditions into classes in their nature and constituent elements wholly distinct, and thereby making subject to taxation, property, which it in large part created by granting the franchise, and which without such classification would escape taxation.

Who can justly say that property, thus brought into being, can be relieved from all taxation because it has been mortgaged to its full value, unless citizens whose property is the result of their own endeavors, and in no part the gift of the sovereign, shall also be taxed to the full value regardless of encumbrances?

The contention of the defendant in this respect is, it seems to us, most conclusively answered by the court in the State Railroad Tax Cases, 92 U. S. 575; Society for Savings v. Coite,