Story Case

The National Indemnity Exchange was a corporation, organized under Delaware laws by citizens of Illinois to do a general insurance business. During the course of its business, the corporation acquired an office building and other valuable property in Chicago. In December, 1914, the State Legislature of Illinois passed a law to compel all foreign insurance companies to pay a two per cent increase property tax over that imposed upon local corporations. The organizors of The National Indemnity Exchange maintained that this increase could not be collected against its company (1) because the members were all citizens of Illinois and (2) even though the corporation were a citizen of another state, the tax would be unconstitutional, because the national constitution forbids one state from levying any burdens upon citizens of another state not levied upon its own citizens. The state authorities maintained (1) that it is immaterial where the members of the corporation reside, since the corporation is a citizen of the state in which it receives its charter, (2) that the state has the right to exclude foreign corporations entirely if it choose and, therefore, can place any regulations or unequal burdens upon them.

Virginia Vs. Paul, Volume 8 Wallace's Reports, Page 168. (United States Supreme Court)

Samuel Paul was appointed by several insurance companies, incorporated in New York, to act as their agent in the State of Virginia. He applied for a license from the treasurer of that state, but refused to deposit bonds as required by the state statute. Notwithstanding the refusal to grant him a license, he proceeded to transact business in the state. For this, he was indicted and fined. He appealed to the Supreme Court of the United States, on the ground that the statute which he had violated was contrary to the Constitution of the United States and was void. The contention consisted in the fact that the requirements imposed upon foreign corporations were in violation of the provision that "Citizens of each state shall be entitled to all the privileges and immunities of citizens in the several states."

In an opinion delivered by Mr. Justice Field, the Court said: " The answer which readily occurs to this objection consists in the fact that corporations are not citizens, within the meaning of this clause. It is true that it has been held, for the purpose of maintaining the jurisdiction of federal courts over actions by or against corporations, enforcing contracts or rights of property, that the corporation will be considered by the Court as a citizen of the state in which it is incorporated, within that clause of the Constitution extending the judicial power of the United States to controversies between citizens of different states. But that rule goes no farther than the cases in which it was laid down and the purposes for which it was adopted. That clause of the Constitution in point deals with a very different subject matter from the one in question. It was undoubtedly the object of that clause to relieve citizens of one state from the disabilities of alienage in other states, to insure them the same freedom possessed by the citizens of those states in the acquisition and enjoyment of property and in the pursuit of happiness.

"The term 'Citizen,' as here used, applies only to natural persons, and does not apply to artificial persons created by the legislature and possessing only the attributes which the legislature has prescribed. If the right here asserted should be recognized, the states could not repel intruding corporations, except on the condition of refusing incorporation to their own citizens. Yet, it is of the highest importance that each state should be able to limit and control the corporations doing business within it."

It was therefore held that the action by the state was not unconstitutional. A corporation is not a citizen, and when it leaves its own state, cannot claim a right to all the privileges and immunities allowed or granted by the other states to their own citizens.

The conviction of Paul was affirmed.

Ruling Law. Story Case Answer

In determining the domicile or residence of a corporation, it is now the law in all the states that the organization is a citizen of the state in which it has received its charter. The residence or domicile of the incorporators is of no importance in determining this point.

The Federal Constitution provides that' Citizens of each state shall be entitled to all the privileges and immunities of citizens in the several states." It is well settled in this connection that a foreign corporation is not a citizen, if the state does not choose to recognize it. That is, with reference to question of jurisdiction and recognition of corporations, the states of the Union are foreign to each other. A corporation may have the power granted to do business anywhere, but its right to do business in any other state than the one creating it depends upon the consent of the state where it seeks to conduct its affairs.

After a state has once permitted a foreign corporation to enter and to do business, it must be recognized as a citizen with reference to rights acquired. If, for instance, the corporation has acquired property, the state cannot enforce unreasonable taxes; it cannot in this regard discriminate between its own and foreign corporations. The foreign corporation must be recognized as a citizen under the Federal Constitution. The second answer of the National Indemnity Exchange is therefore correct, and the tax law in question is unconstitutional.