A statute of Massachusetts, G. L. c. 63, § 32, as amended by St. 1923, c. 424, § 1, provides:
'Except as otherwise provided in sections thirty-four and thirty-four A, every domestic business corporation shall pay annually, with respect to the carrying on or doing of business by it, an excise equal to the sum of the following, provided that every such corporation shall pay annually a total excise, not less in amount than one twentieth of one per cent. of the fair cash value of all the shares constituting its capital stock on the first day of April when the return called for by section thirty-five is due:
'(1) An amount equal to five dollars per thousand upon the value of its corporate excess.
'(2) An amount equal to two and one half per cent. of that part of its net income, as defined in this chapter, which is derived from business carried on within the commonwealth.'
By G. L. c. 63, § 30, par. 5, as amended by St. 1925, c. 343, § 1A, 'net income' is defined:
"Net income,' except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal Revenue Act applicable for the period, adding thereto any net losses as defined in said federal Revenue Act that have been deducted, and all interest and dividends not so required to be returned as net income except dividends on shares of stock of corporations organized under the laws of the commonwealth and dividends in liquidation paid from capital.' Before this amendment, the definition embodied in G. L. c. 63, § 30, par. 5, as amended, shortly before the passage of the last-quoted amendment, by Stat. 1925, c. 265, § 1, provided:
"Net income,' except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal Revenue Act applicable to the period, adding thereto any net losses as defined by said federal Revenue Act that have been deducted, and, in the case of a domestic business corporation, such interest and dividends, not so required to be returned as net income, as would be taxable if received by an inhabitant of this commonwealth; less, both in the case of a domestic business corporation and of a foreign corporation, interest, so required to be returned, which is received upon bonds, notes and certificates of indebtedness of the United States.'
Thus, under the original definition of net income, there was expressly excluded from the net income taxable at 2 1/2 per cent. all interest received upon bonds, notes, and certificates of indebtedness of the United States. And the definition had the effect of excluding, in the same respect, interest on state, county, and municipal bonds.
Appellant, a business corporation organized under the laws of Massachusetts, owned a large number of United States Liberty bonds and Federal Farm Loan bonds. The Liberty bonds by statute of the United States are expressly made exempt from all taxation imposed by any state, except estate or inheritance taxes. Chapter 56, 40 Stat. 288, 291, § 7 (31 USCA § 747). Federal Farm Loan bonds are issued under authority of chapter 245, 39 Stat. 360 (12 USCA § 641 et seq.), and by section 26, p. 380 (12 USCA § 931), declared to be instrumentalities of the United States and both as to principal and income exempt from all state taxation. The corporation also owned a large number of bonds of Massachusetts counties and municipalities which, when issued and acquired by the corporation, were exempt from taxation by the terms of a state statute. G. L. c. 59, § 5, par. 25. Of course, in respect of United States securities, the statutory exemption is superfluous. A state tax, however small, upon such securities or interest derived therefrom, interferes or tends to interfere with the constitutional power of the general government to borrow money on the credit of the United States, and constitutes a burden upon the operations of government, and carried far enough would prove destructive. The principle set forth a century ago in Weston v. Charleston, 2 Pet. 449, 468 (7 L. Ed. 481), has never since been departed from by this court:
'The right to tax the contract to any extent, when made, must operate upon the power to borrow, before it is exercised, and have a sensible influence on the contract. The extent of this influence depends on the will of a distinct government; to any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely.' Home Savings Bank v. Des Moines, 205 U.S. 503, 513, 27 S.C.t. 571, 51 L. Ed. 901.