ArtI.S10.C1.6.12 Strict Construction of Charters, Tax Exemptions

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Long before the cases last cited were decided, the principle that they illustrate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the state, or as it is otherwise often phrased, nothing passes by implication in a public grant.

The leading case was Charles River Bridge v. Warren Bridge, 1 which was decided by a substantially new Court shortly after Chief Justice Marshall's death. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the state's permitting another company of later date to operate a free bridge in the immediate vicinity. Because the first company could point to no clause in its charter specifically vesting it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story presented a vigorous dissent in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circumstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the ensuing transaction.

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the police power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney's opinion evinces the influence of both these developments. The power of the state to provide for its own internal happiness and prosperity was not, he asserted, to be pared away by mere legal intendments, nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines. 2

The Court has reiterated the rule of strict construction many times. In Blair v. City of Chicago, 3 decided nearly seventy years after Charles River Bridge, the Court said: Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privileges may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed. . . . The principle is this, that all rights which are asserted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.4

An excellent illustration of the operation of the rule in relation to tax exemptions was furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence, in the absence of express permission by the state, may not be passed on to a successor. 5 Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate, the new corporation was held to be subject to taxation. 6 Again, a statute that granted a corporation all the rights and privileges of an earlier corporation was held not to confer the latter's immunity from taxation. 7 Yet again, a legislative authorization of the transfer by one corporation to another of the former's estate, property, right, privileges, and franchises was held not to clothe the later company with the earlier one's exemption from taxation. 8

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly entitled to it. Thus, the exemption conferred by its charter on a railway company was held not to extend to branch roads it constructed pursuant to a later statute. 9 Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business. 10 And, the charter exemption of the capital stock of a railroad from taxation for ten years after completion of the said road was held not to become operative until the completion of the road. 11 So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation. 12 Provisions in a statute that bonds of the state and its political subdivisions were not to be taxed and should not be taxed were held not to exempt interest on them from taxation as income of the owners. 13


  1.  Jump to essay-136 U.S. (11 Pet.) 420 (1837).
  2.  Jump to essay-236 U.S. at 548-53.
  3.  Jump to essay-3201 U.S. 400 (1906).
  4.  Jump to essay-4201 U.S. at 471, 472, quoting The Binghamton Bridge, 70 U.S. (3 Wall.) 51, 75 (1866).
  5.  Jump to essay-5Memphis & L.R. R.R. v. Comm'rs, 112 U.S. 609, 617 (1884). See also Morgan v. Louisiana, 93 U.S. 217 (1876); Wilson v. Gaines, 103 U.S. 417 (1881); Louisville & Nashville R.R. v. Palmes, 109 U.S. 244, 251 (1883); Norfolk & Western R.R. v. Pendleton, 156 U.S. 667, 673 (1895); Picard v. East Tennessee, V. & G. R.R., 130 U.S. 637, 641 (1889).
  6.  Jump to essay-6Atlantic & Gulf R.R. v. Georgia, 98 U.S. 359, 365 (1879).
  7.  Jump to essay-7Phoenix F. & M. Ins. Co. v. Tennessee, 161 U.S. 174 (1896).
  8.  Jump to essay-8Rochester Ry. v. Rochester, 205 U.S. 236 (1907); followed in Wright v. Georgia R.R. & Banking Co., 216 U.S. 420 (1910); Rapid Transit Corp. v. New York, 303 U.S. 573 (1938). Cf. Tennessee v. Whitworth, 117 U.S. 139 (1886), the authority of which is respected in the preceding case.
  9.  Jump to essay-9Chicago, B. & K.C. R.R. v. Guffey, 120 U.S. 569 (1887).
  10.  Jump to essay-10Ford v. Delta and Pine Land Company, 164 U.S. 662 (1897).
  11.  Jump to essay-11Vicksburg, S. & P. R.R. v. Dennis, 116 U.S. 665 (1886).
  12.  Jump to essay-12Millsaps College v. City of Jackson, 275 U.S. 129 (1927).
  13.  Jump to essay-13Hale v. State Board, 302 U.S. 95 (1937).