In this cause the court below held on demurrer to the plaintiff's complaint that the same failed to state facts sufficient to constitute a cause of action; plaintiff declining to amend, there was final judgment for defendant. The purpose of the action, as disclosed by the complaint, is to recover money paid by plaintiff under protest to the assessor of the city and county as taxes for the fiscal year to end June 30, 1900, upon several bonds owned by plaintiff, of the par value of one thousand dollars each, issued by the North Pacific Coast Railroad Company, a corporation owning and operating a railroad wholly within this state, but in more than one county; which bonds are secured by mortgage or deed of trust of and upon all the real and personal property of said railroad company. The property mortgaged for the payment of the bonds has been, or will be, assessed for purposes of taxation to the railroad company at its full cash value, without deduction of the debt secured thereon. The question for decision is whether such bonds are assessable for purposes of taxation to the owner of them. If they are thus taxable, the judgment of the court below is right; otherwise, it is erroneous.
Article XIII of the constitution of this state has for its subject "Revenue and Taxation." By section 1 thereof "bonds," without any descriptive qualification, are named among the several species of property subject to taxation "in proportion to its value, to be ascertained as provided by law." Section 4 of said article, so far as necessary to be stated, is as follows: "A mortgage, deed of trust, contract, or other obligation by which a debt is secured, shall, for the purposes of assessment and taxation, be deemed and treated as an interest in the property affected thereby. Except as to railroad and other quasi public corporations, in case of debts so secured, the value of the property affected by such mortgage, deed of trust, contract, or obligation, less the value of such security, shall be assessed and taxed to the owner of the property, and the value *Page 593 of such security shall be assessed and taxed to the owner thereof, in the county, city, or district in which the property affected thereby is situate." By section 10 of the same article it is provided that: "The franchise, roadway, roadbed, rails, and rolling stock of all railroads operated in more than one county in this state shall be assessed by the state board of equalization, at their actual value." Railroad property not specified in section 10 is assessed for taxation by the local assessor of the county, town, or other taxing district where it is situated. (San Francisco v. Central Pac. R.R. Co., 63 Cal. 467; 49 Am. Rep. 98.) There seems to be no serious contention that the bonds in question here are not obligations by which a debt is secured within the meaning of the first clause of said section 4 of article XIII; nor could that position be maintained successfully. It is true that a railroad bond in the usual form is not identical with the mortgage by which its payment is secured; but the bond and the mortgage concur to constitute an obligation affecting the encumbered property; each bond issued carries with it in the hands of the holder a corresponding equitable interest in the mortgage. The mortgage alone, although it be formally executed and recorded, yet of itself evidences no debt and creates no lien until the bonds or some of them to which it relates are sold, pledged, or otherwise used, when it may in a proper case operate retrospectively as of the date of its execution or record. These propositions are elementary. (See Short on Railway Bonds, 43-46; Jones on Corporate Securities, sec. 181; Wade v. Brewing Co., 10 Wn. 284; People v. Eastman,25 Cal. 601, 603.)
The history of the plan for the taxation of secured credits in the present constitution is well known. The constitution of 1849 was understood and interpreted to be prohibitive of the taxation of all credits, including those secured by mortgage of property, on grounds which need not be now investigated nor here rehearsed, further than to say that the taxing of credits was considered to be double taxation and contrary to the constitutional requirement that taxation should be equal and uniform. (People v. HiberniaBank, 51 Cal. 243; 21 Am. Rep. 704; Bank of Mendocino v.Chalfant, 51 Cal. 369.) The constitution of 1879 was designed to change *Page 594 the rule existing at the time of its adoption; it makes taxable, in the matter prescribed by its own terms, all credits secured by mortgage; the understanding, however, has always been that double taxation is no part of the means by which this result is to be accomplished; in a decision rendered little more than a year after the instrument took effect, and thus valuable as contemporaneous exposition, it was said that "not only does the language of the constitution neither require nor permit double taxation, but we think it may be safely said that neither the framers of the instrument, nor those who ratified it, ever supposed that under its provisions there could be any such thing; for both in the debates on the floor of the convention which framed it, and in the arguments of those who advocated its adoption before the people, are to be found repeated disclaimers of any such intention." (Burke v. Badlam, 57 Cal. 594, per Mr. Justice Ross.) And to similar effect are San Francisco v.Anderson, 103 Cal. 69, 42 Am. St. Rep. 98, and several other cases.
We are, therefore, in the present case to understand the provisions of the constitution as directed to the purpose of securing to the state a revenue from such bonds equal to that derived from any other property of the same value, and at the same time avoiding the double taxation of any property. Holding in view both these intents, the scheme and plan of the constitution seems to be easy of apprehension: "A mortgage, deed of trust, contract, or other obligation by which a debt is secured, shall, for the purposes of assessment and taxation, be deemed and treated as an interest in the property affected thereby." This declaration is comprehensive; no class of secured obligation is excepted from it; such obligations being made an interest in the affected property for the purposes stated, necessarily the property affected includes, for the same purposes, the obligations which affect it, as well as the remaining interest of the debtor. The form which credits secured by mortgage should take for the purposes of taxation being thus fixed as an interest in the affected property, it remained to determine from whom payment of the tax on the aggregate of values comprised in the property should be exacted; as to credits secured on the property of individuals and strictly private corporations, the burden is divided and adjusted by *Page 595 assessing the interests separately — the owner of the secured credit being taxed on its value, and the owner of the encumbered property being taxed on the value thereof remaining after deducting the amount assessed to the secured creditor. But in the case of credits secured on the property of "railroad and otherquasi public corporations" no deduction from the value of the property is allowed on account of the indebtedness; the whole of the property — precisely commensurate with the interests of both debtor and creditor — is assessed to such corporation; and thus, as an interest in the affected property (which it is declared to be for this purpose by the first clause of section 4) the secured obligation is assessed, and the tax is paid by the debtor corporation. It necessarily follows that to assess and tax the obligation again to the holder thereof, as if it were an unsecured credit, would be to tax the same property twice, which in this instance, at least, is made impossible by the terms of the constitution; for, since the secured obligation is for purposes of assessment and taxation to be deemed and treated as an interest in the property affected, it cannot be taxed except as such interest.
It is no answer to say that if the bonds are assessed to the holder, and he pays the tax on them, he is taxed only once; for double taxation may consist in requiring a double contribution to the same tax on account of the same property, even though the assessments are to different persons. (Cooley on Taxation, 2d ed., 225; San Francisco v. Fry, 63 Cal. 470.) This is illustrated in Burke v. Badlam, supra, where it was held that when all of the property of a corporation is assessed for taxation, the shares of its stock, which merely represent interests in the corporate property, are not themselves taxable to the stockholder; and that when moneys deposited in a savings bank are assessed to the bank they cannot be also assessed to the depositors. (Compare McHenryv. Downer, 116 Cal. 20.) So, in the case before us, the bonds being made, for the purpose of taxation, an interest in the property on which they are secured, when this is taxed at its actual value, without deduction of the value of the security, the bonds are taxed in the only way the constitution allows them to be taxed. This view of the case receives some corroboration from the practice of the revenue officers of the state; so far as we are advised, bonds such as *Page 596 those here involved have not, from the time the constitution went into effect until now — some twenty years — been assessed to the holders thereof. The legislature has been of the same opinion; by the amendment of section 3617 of the Political Code (Stats. 1895, p. 310), the bonds of railroad and other quasi public corporations are, as such, excepted from the definition of property liable to taxation; counsel have assailed this enactment as unconstitutional, but, in our opinion, for the reasons already indicated, it would have been at variance with the constitution if it had provided otherwise.
There may have been various reasons why no independent taxation of credits secured on the property of railroad corporations was provided for. At the time the constitution was framed and adopted it was supposed that the property of such corporations was commonly mortgaged to an amount equal to or greater than its value; the difficulty or impossibility of reaching their mortgage bonds when held, as is frequently the case, in the hands of numerous owners dispersed over the world, may have made it seem politic and convenient to fix them as an interest in the property; by taxing the property without the deduction (on account of the debt) allowed to natural persons the state could lose no revenue, nor could railroad property in any wise escape taxation — both of which contingencies were doubtless designed to be avoided; the plan also was not open to the imputation of an attempt at double taxation. (See the argument of counsel for the state in California v. Central Pac. R.R. Co., 127 U.S. 18.)
The decision in Mackay v. San Francisco, 113 Cal. 392, in no way conflicts with what is held here; that case related to bonds of a railroad corporation of Arizona secured on property situated in that territory, which bonds were owned in this state; it was held that they were taxable here; no argument is required to show that securities which affect only property without this state are not the subject of our laws relating to the taxation of securities which are a lien on, and an interest in, property within the state. A dictum from the opinion in the case ofCentral Pac. R.R. Co. v. Board of Equalization, 60 Cal. 59, is pressed upon our attention. In that case it was in controversy, among other things, whether the railroad company was entitled to have *Page 597 deducted from the assessment of its property for local taxation the amount of a first mortgage imposed by the laws of the United States. The matter is covered by the terms of the constitution excepting railroad corporations from the provision for deduction allowed to other mortgagors, and the question for decision was merely whether this exception was violative of the fourteenth amendment to the constitution of the United States. It was held that the exception was not in conflict with said amendment, but the learned justice delivering the opinion, having referred to section 4 of article XIII of the state constitution, remarked thereon: "Reading the whole section together, it seems very plain that, as to mortgages, deeds of trust, contracts, or other obligations secured upon the property of railroad and quasi public corporations, they should not be deemed and treated as an interest in the property affected by them `for the purposes of taxation.'" The remark was wholly unnecessary to the decision, but was correct enough in the sense its author probably designed it to convey, and as it applied to the facts of that case; it was true that for the purpose of reducing the assessment to the railroad company the mortgage could not be regarded as an interest in its property, and in the very next sentence the court enlarged upon that conception, saying that: "Under the constitution of this state the property of such corporation is subject to assessment and taxation without deduction of the amount of any mortgage or like lien thereon." The state was without power, even if it had attempted the exercise thereof to make the mortgage existing in favor of the United States an interest in the property for the purpose of imposing a tax on such interest. We cannot allow to any such casual observation the effect of setting aside what the constitution explicitly affirms, viz., that for purposes of assessment and taxation an obligation by which a debt is secured shall be deemed and treated as an interest in the affected property. The judgment should be reversed, with directions to the court below to overrule the demurrer to the complaint.
Chipman, C., and Cooper, C., concurred. *Page 598
For the reasons given in the foregoing opinion the judgment is reversed, with directions to the court below to overrule the demurrer to the complaint.
McFarland, J., Temple, J., Harrison, J.