Opinion
No. S-2375.
February 24, 1989.
Appeal from the Superior Court, Third Judicial District, Anchorage, John Bosshard, III, J.
Robert C. Bundy, Bogle Gates, Anchorage, Ronald T. Schaps, Seattle, for appellant.
David T. LeBlond, Asst. Atty. Gen., Anchorage, Grace Berg Schaible, Atty. Gen., Juneau, for appellee.
Before MATTHEWS, C.J., and RABINOWITZ, BURKE, COMPTON and MOORE, JJ.
OPINION
I. INTRODUCTION.
National Bank of Alaska (NBA) appeals from the superior court's affirmance of the Department of Revenue's (DOR) decision to deny its request for a tax refund. The refund was sought for an alleged overpayment made in 1981 under the Alaska business license (ABL) tax imposed by AS 43.70.030.
NBA is a national banking association with its principal place of business in Anchorage, Alaska. In 1981, NBA timely filed its 1980 ABL tax return and paid the total amount due for 1980, $816,024. This amount was calculated by including NBA's income from the following federal obligations in its net income subject to the tax:
Nature of Federal Income ABL Tax Obligation Received Imposed United States Treasury Bills $1,397,000 $ 91,393 United States Treasury Notes 2,229,000 145,823 Federal Farm Credit Bank Bonds 1,275,000 83,411 Federal Home Loan Bank Bonds 535,000 35,000 Federal National Mortgage Association 806,000 52,729 Government National Mortgage Association 210,000 13,738 __________ ________ $6,452,000 $422,093
In March 1984, NBA filed an amended ABL return for 1980 and submitted a refund claim for $422,093, the amount previously paid on its income from federal obligations. DOR denied NBA's refund claim in writing. NBA appealed DOR's decision to the superior court, which affirmed DOR's decision. NBA now appeals to this court. We affirm the decision of the superior court.
Since all the issues presented in this appeal raise matters of statutory construction, the applicable standard of review is that of independent judgment. National Bank of Alaska v. State, Dep't of Revenue, 642 P.2d 811, 815-16 (Alaska 1982).
NBA relies primarily upon 31 U.S.C. § 742 to support its argument that its income from federal obligations is exempt from state taxation. In 1980, that statute stated:
In 1982, 31 U.S.C. § 742 was recodified, with minor changes, as 31 U.S.C. § 3124(a). Act of Sept. 13, 1982, Pub.L. 97-258, 96 Stat. 877, 945-46.
In its current form, 31 U.S.C. § 3124(a) provides:
Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except —
(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation; and
(2) an estate or inheritance tax.
Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under state or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes.
NBA argues that the ABL tax is not a "nondiscriminatory franchise or other nonproperty tax in lieu thereof," and cannot therefore be levied upon its income from federal obligations.
If this court rejects its argument that 31 U.S.C. § 742 bars application of the ABL tax to income from all federal obligations, NBA alternatively asserts that certain of its federal obligations are exempt from state taxation by virtue of separate federal statutory provisions. In this regard, it argues that its Federal Home Loan Bank obligations are exempt under 12 U.S.C. § 1433, and that its Federal Farm Credit Bank obligations are exempt under 12 U.S.C. § 2079.
12 U.S.C. § 1433 states in relevant part:
Any and all notes, debentures, bonds, and other such obligations issued by any bank, and consolidated Federal Home Loan Bank bonds and debentures, shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority. The bank, including its franchise, its capital, reserves, and surplus, its advances, and its income, shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority; except that any real property of the bank shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed.
12 U.S.C. § 2079 provides:
Every Federal intermediate credit bank and the capital, reserves, and surplus thereof and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation except taxes on real estate held by a Federal intermediate credit bank to the same extent, according to its value, as other similar property held by other persons is taxed. The obligations held by the Federal intermediate credit banks and the notes, bonds, debentures, and other obligations issued by the banks shall be deemed to be instrumentalities of the Government of the United States, and, as such, they and the income therefrom shall be exempt from all Federal, State, municipal, and local taxation, other than Federal income tax liability of the holder thereof under the Public Debt Act of 1941 (section 742(a) of Title 31).
II. WAS AS 43.70.030(b) A "NONDISCRIMINATORY FRANCHISE TAX OR OTHER NONPROPERTY TAX IN LIEU THEREOF" AS REQUIRED BY 31 U.S.C. § 742? A. Was AS 43.70.030(b) a Franchise Tax or Other Nonproperty Tax in Lieu of a Franchise Tax?
There are several state statutes that provide for the taxation of corporations and other businesses in Alaska. The basic corporate net income tax is imposed by AS 43.20.011(e). However, in 1980 banks were not subject to this tax. Alaska also levies an "annual corporation tax" on each corporation doing business in the state. AS 10.05.717. In 1980 banks were exempt from this tax as well.
In 1980, AS 43.20.011(e) (amended 1981) provided:
There is imposed for each taxable year upon the entire taxable income of every corporation derived from sources within the state a tax consisting of a normal tax equal to 5.4 percent of taxable income, and a surtax which is equal to 4.0 percent of taxable income, except that the tax on a corporation engaged in the production or transportation of crude oil or natural gas shall be determined and paid in accordance with AS 43.21. For tax years beginning after December 31, 1979, the surtax exemption is $50,000. For controlled corporations described in secs. 1561-1563 of the Internal Revenue Code only one surtax exemption may be allowed for the controlled group.
Alaska Statute 43.20.031(d) (repealed, ch. 98, § 1, SLA 1984) provided:
Banks and savings and loan associations chartered by the federal government or the state are exempt from income tax under this chapter.
Alaska Statute 10.05.717(a) (as amended, ch. 123, § 22, SLA 1980) provides:
Each domestic corporation and each foreign corporation doing business in this state or having its articles of incorporation on file with the department must, before January 2 of each filing year, pay to the commissioner a biennial corporation tax as follows: domestic corporation, $100; foreign corporation, $200. A corporation which fails to pay the biennial corporation tax before February 1 of the filing year must pay to the commissioner a penalty of $25 for each year or part of a year of delinquency.
Alaska Statute 10.05.825(2) (recodified in 1985 as AS 10.05.825(8)) specifically excluded banks from the definition of corporations:
"[C]orporation" or "domestic corporation" means a corporation for profit subject to the provisions of this chapter, except a foreign corporation or a state or national bank.
Finally, the Alaska Business License (ABL) Act, AS 43.70.020-.120, imposes a "license fee" on each person doing business in the state. The first sentence of AS 43.70.020(a) provides that:
Both "person" and "business" are defined broadly in AS 43.70.110. "Business" is defined in AS 43.70.110(1) as including
all activities or acts, personal, professional, or corporate, engaged in or caused to be engaged in, or following or engaging in a trade, profession, or business, including receipts from advertising services, rental of personal or real property, construction, processing, or manufacturing, but excluding fisheries businesses, fishermen, liquor licenses, insurance businesses, mining, and coin-operated amusement and gaming machines, calling or vocation, with the object of financial or pecuniary gain, profit or benefit, either direct or indirect, and not exempting subactivities producing marketable commodities or services used or consumed in the main business activity, each of which subactivities shall be considered business. The giving or supplying of services as an employee and the furnishing of property, services, substances, or things, by a person who does not represent to be regularly engaging in those transactions, does not constitute business under the meaning of this chapter.
Under AS 43.70.110(4):
(4) "Person" includes an individual, firm, partnership, joint adventure, association, corporation, estate trust, business trust, receiver, or any group or combination acting as a unit.
For the privilege of engaging in a business in the state, a person shall first apply, upon forms prescribed by the commissioner, and obtain a license to do so, and pay the license fee provided for in AS 43.70.030.
In 1980, AS 43.70.030(b) (repealed 1984) provided:
The $25 license fee imposed on "each business" by subsection (a) of the statute is not at issue on appeal. All references herein to "the ABL tax" refer to the tax imposed by subsection (b).
The license fee for each national bank and state bank, trust company and savings and loan association is seven percent of its net income. Net income means the taxable income of each taxpayer before net operating loss deduction and special deductions, computed as required under the Internal Revenue Code of the United States and includes all other income including income from federal, state or municipal obligations. Each of these taxpayers required to make a return under the provisions of the Internal Revenue Code shall at the same time file with the department a return setting out the amount of tax due under this chapter, and other information for the purpose of carrying out the provisions of this chapter which the department requires. Each of these taxpayers shall also at the same time file a true and correct copy of the tax return which he has filed with the Internal Revenue Service. A taxpayer filing under this subsection shall use the same tax year as the taxpayer uses for federal income tax purposes. . . .
Until 1979, all businesses except banks paid ABL taxes based on their gross receipts; banks paid ABL taxes based on their net income. The ABL tax based on gross receipts was then repealed, ch. 144, § 3, SLA 1978, but the ABL tax on banks' net income continued until 1984, when the legislature repealed AS 43.70.030(b). Ch. 98, § 1, SLA 1984.
The 7% tax provided for by AS 43.70.030(b) is imposed on net income, "including income from federal, state, and municipal obligations." NBA argues that federal law exempts income from federal obligations from state taxation.
Prior to 1959, the United States Supreme Court repeatedly upheld state taxes that were measured by, but not directly imposed upon, net income (including income from federal obligations). See, e.g., Werner Mach. Co. v. Director of Div. of Taxation. In response to these decisions, Congress in 1959 added to 31 U.S.C. § 742 the specific provision that:
350 U.S. 492, 493-94, 76 S.Ct. 534, 535, 100 L.Ed. 634, 636-37 (1956) (citing prior cases).
This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes.
Act of Sept. 22, 1959, Pub.L. 86-346, § 105(a), 73 Stat. 621.
In 1983, the Supreme Court reaffirmed that "[t]he 1959 amendment [to section 742] rejected and set aside this Court's rather formalistic pre-1959 approach to [the statute]." American Bank and Trust Co. v. Dallas County. The Court stated that "Congress intended to sweep away formal distinctions and to invalidate all taxes measured directly or indirectly by the value of federal obligations, except those specified in the amendment."
Id. at 867, 103 S.Ct. at 3377, 77 L.Ed.2d at 1082.
Therefore, unless the ABL tax falls within in an exception specified in section 742, NBA is entitled to the refund it seeks. If, however, the ABL tax falls within the exception for "franchise or other nonproperty taxes in lieu thereof," no refund is due NBA.
The state argues that AS 43.70.030(b) was an allowable "nonproperty" privilege tax. The state further argues that whether it is further classified as a "franchise tax" is immaterial because it was imposed on banks for the privilege of doing business in Alaska.
A franchise tax is a tax imposed on the franchise of a corporation, that is, on the right and privilege of carrying on business in the character of a corporation, for the purposes for which it was created, and in the conditions which surround it. See City of Poplar Bluff v. Poplar Bluff Loan Bldg. Ass'n, 369 S.W.2d 764, 766 (Mo.App. 1963).
Because in 1980 banks paid neither an income tax under AS 43.20.011(e) nor an annual corporation ("franchise") tax under AS 10.05.717, we find persuasive the state's argument that the ABL tax imposed on banks was a "nonproperty" tax in lieu of a franchise tax. Case law from other jurisdictions supports this argument.
See supra notes 5-8 and accompanying text.
The United States Supreme Court has stated that "the nature of a tax must be determined by its operation rather than by particular descriptive language which may have been applied to it." Educational Films Corp. v. Ward, 282 U.S. 379, 387, 51 S.Ct. 170, 171, 75 L.Ed. 400, 404 (1931).
Garfield Trust Co. v. Director, Division of Taxation, is instructive. There the New Jersey statute in question required
102 N.J. 420, 508 A.2d 1104 (1986), appeal dismissed, 479 U.S. 925, 107 S.Ct. 390, 93 L.Ed.2d 345 (1986).
a corporation to pay an annual franchise tax "for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business . . . in this State." The tax now is computed by adding together prescribed percentages of a net worth base and an entire net income base.
Id. 508 A.2d at 1106 (citation omitted). Under the New Jersey statute "the entire net income base includes interest income of any kind that is derived from securities or indebtedness, notwithstanding any specific federal or state exemption or exclusion." Id. (emphasis in original).
The Supreme Court of New Jersey rejected the argument that the legislature's addition of the net income base transformed the tax from a franchise tax to an income tax:
This argument ignores the fact that the United States Supreme Court noted in Werner Machine: "This Court has consistently upheld franchise taxes measured by a yardstick which includes tax-exempt income or property, even though a part of the economic impact of the tax may be said to bear indirectly upon such income or property."
Id. at 1108 (emphasis in original).
The court concluded that the tax in question was an annual franchise tax, stating:
The holding and implications of Werner Machine retain their vitality through recent decisions of both this Court and the United States Supreme Court. See American Bank and Trust Co. v. Dallas, 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 (1983); Memphis Bank Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983). Therefore, inclusion of the face value and interest income of federal obligations in the bases for calculating the . . . [tax] does not by its own force violate [31 U.S.C. § 742].
Id. at 1109 (emphasis in original).
The Garfield decision was appealed to the United States Supreme Court, which dismissed the appeal for want of a substantial federal question.
479 U.S. 925, 107 S.Ct. 390, 93 L.Ed.2d 345 (1986).
Also of significance is the Supreme Court of Florida's decision in Department of Revenue v. First Union National Bank of Florida. There the court upheld a 5 1/2% franchise tax imposed on banks and savings and loan associations. The banks challenged the validity of the franchise tax on the ground that it violated 31 U.S.C. § 3124(a). The Florida lower court had concluded that the franchise tax was the equivalent of an income tax and thereby "invalid to the extent that it purported `to include income from federal securities within its measure.'" The supreme court found this analysis erroneous: "However, the question is not whether the tax operates in a manner similar to an income tax. Rather, the question is whether the tax is a nondiscriminatory franchise tax as contemplated by the exception contained in 31 U.S.C. § 3124." The court concluded that the tax "[was] a classic nonproperty excise tax on the privilege of operating a bank or savings association within the state. As such, it is a franchise tax as contemplated by the exception numbered (a)(1) of 31 U.S.C. § 3124." Schwinden v. Burlington Northern, Inc. provides further support for our holding. The statute there in question provided that
513 So.2d 114 (Fla. 1987), appeal dismissed, ___ U.S. ___, 108 S.Ct. 1253, 99 L.Ed.2d 408 (1988).
Id. at 116.
Id. at 115-16.
Id. at 116.
Id. at 118.
213 Mont. 382, 691 P.2d 1351 (1984), clarified, 730 P.2d 422 (Mont. 1986).
[e]very corporation . . . engaged in business in the state of Montana shall annually pay to the state treasurer as a license fee for the privilege of carrying on business in this state such percentage or percentages of its total net income for the preceding taxable year at the rate hereinafter set forth. . . .
Id. 691 P.2d at 1356.
Relying in part on the opinion of the court of original jurisdiction in Garfield Trust Company v. Director, Division of Taxation, the Supreme Court of Montana stated:
6 N.J. Tax 462 (1984), aff'd, 7 N.J. Tax 664 (Super.Ct.App. Div.), aff'd, 102 N.J. 420, 508 A.2d 1104 (1986), appeal dismissed, 479 U.S. 925, 107 S.Ct. 390, 93 L.Ed.2d 345 (1986).
The legal theory adopted by the New Jersey Tax Court in reaching its decision is the same as we have expounded here. The decision was based on American Bank which makes it clear that Congress, in 31 U.S.C. § 3124 provided a distinction between nondiscriminatory franchise taxes measured by tax exempt obligations on the one hand, and property taxes otherwise levied directly or indirectly by states on such federal items on the other.
691 P.2d at 1358 (emphasis in original). See also National Bank of Alaska v. State, Dep't of Revenue, 642 P.2d 811, 818-19 (Alaska 1982); Savings League of Wis., Ltd. v. Wisconsin Dep't of Revenue, 141 Wis.2d 918, 416 N.W.2d 650 (App. 1987), review denied, 144 Wis.2d 956, 428 N.W.2d 554 (1988), appeal dismissed, ___ U.S. ___, 109 S.Ct. 37, 102 L.Ed.2d 16 (1988); Ruben L. Anderson-Cherne, Inc. v. Commissioner of Taxation, 303 Minn. 124, 226 N.W.2d 611 (1975), appeal dismissed, 423 U.S. 886, 96 S.Ct. 181, 46 L.Ed.2d 118 (1975).
On the basis of the foregoing, we conclude that AS 43.70.030(b) can properly be characterized as a "nonproperty" tax in lieu of a franchise tax allowable under 31 U.S.C. § 742.
In reaching this holding we have considered and rejected every argument that NBA has advanced against this conclusion. These arguments are: that AS 43.70.030(b) was not called a franchise tax; that the tax was imposed for the privilege of doing business instead of the privilege of existing in the corporate form; that AS 10.05.717 was termed a franchise tax although it was not imposed on banks; and that AS 43.70.030(b) was imposed on entities other than corporations.
B. Was AS 43.70.030(b) a "Nondiscriminatory" Nonproperty Tax?
The Supreme Court of New Jersey noted in Garfield Trust that 31 U.S.C. § 742 requires that
the franchise tax be "nondiscriminatory" in order for the federal obligations to be included in these tax bases. And so, the federal statute allows inclusion of the principal and income from federal obligations only if the state enabling legislation likewise permits inclusion of the principal and income from state obligations.
508 A.2d at 1109 (emphasis in original) (citing Memphis Bank Trust Co. v. Garner, 459 U.S. 392, 397-98, 103 S.Ct. 692, 695-96, 74 L.Ed.2d 562, 567-68 (1983) (defining "nondiscriminatory" in the context of 31 U.S.C. § 742)); see also First Union, 513 So.2d at 118; Schwinden, 691 P.2d at 1358 (both applying this definition).
In National Bank of Alaska v. State, Department of Revenue, we held that the ABL tax applied equally to income from both state and federal obligations:
642 P.2d 811 (Alaska 1982).
An unlawful tax discrimination problem arises where federal securities are accorded less favorable treatment by state laws than is given to state or private securities. See, e.g., Schuylkill Trust Co. v. Commonwealth, 296 U.S. 113, 56 S.Ct. 31, 80 L.Ed. 91 (1935). AS 43.70.030(b) includes within the term "net income" "all other income including income from federal . . . obligations." To the extent that all federal obligations are subject to the business license tax, including those obligations afforded a specific tax exemption by Congress, the statute must equally impose the tax on state obligations and bonds, which are otherwise tax exempt pursuant to specific state tax exemptions, in order to avoid any unlawful discrimination against federal securities. This, we believe, is accomplished by our construction of the business license statute.
Id. at 818 (footnotes omitted).
Consequently, we conclude that AS 43.70.030(b) is a nondiscriminatory franchise or other nonproperty tax within the exception of 31 U.S.C. § 742.
In so holding, we reject NBA's argument that "[t]he economic realities of former AS 43.70.030(b) [are] that it was a discriminatory tax aimed at federal obligations and the federal government's primary source of credit for those obligations." The provisions of AS 43.70.030(b) are not reflective of an intent on the part of the legislature to tax federal securities in a manner which discriminates against federal credit sources.
III. ARE CERTAIN OF THE FEDERAL OBLIGATIONS HELD BY NBA EXEMPT FROM STATE TAXATION BY VIRTUE OF SEPARATE FEDERAL STATUTORY PROVISIONS?
As indicated at the outset NBA alternatively argues that its Federal Home Loan Bank (FHLB) obligations are exempt under 12 U.S.C. § 1433, and that its Federal Farm Credit Bank (FFCB) obligations are exempt under 12 U.S.C. § 2079.
See supra notes 3-4.
We believe the decision of the Court of Appeals of Maryland in State Department of Assessments and Taxation v. Maryland National Bank is dispositive of this issue. In that case the court held that 12 U.S.C. § 1433 did not preclude the state from including in net income, for purposes of the state's nondiscriminatory franchise tax for financial institutions, the interest received on FHLB bonds. In reaching this conclusion the court reasoned as follows:
310 Md. 664, 531 A.2d 294 (1987), appeal dismissed, ___ U.S. ___, 108 S.Ct. 2812, 100 L.Ed.2d 913 (1988).
In the case before us the two statutes can be read compatably [sic] by reading 12 U.S.C. § 1433 in the light of the direct tax-indirect measurement distinction which shone more brightly in 1932, when § 1433 was enacted, than it does today. The Maryland franchise tax does not offend § 1433's command that "all [FHLB] bonds, and other such obligations . . . shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by . . . any State" because Maryland has not taxed the bond or the interest on them. Maryland has taxed the privilege of doing business as a financial institution in corporate form in this state and has measured the tax by net income which constitutionally may, under the principle established by the intergovernmental immunity cases cited above, include interest on federal obligations. Thus, the exemption first created in 1932 for FHLB bonds and interest does not control here because the Maryland franchise tax does not tax interest on the FHLB bonds. Title 31, § 3124(a) later abolished the long-standing legal distinction in the intergovernmental immunity context between direct tax and indirect measurement, but the abolition was accompanied by an express federal consent to using interest on federal obligations to compute a nondiscriminatory franchise tax.
Id. 531 A.2d at 297-98. Compare National Bank of Alaska v. State, Dep't of Revenue, 642 P.2d 811, 817-18 (Alaska 1982), where we said:
We find the general/specific rule of statutory construction to be unhelpful in this context, and agree with the Department that the rule is inapplicable here because the various statutory provisions can be harmonized. As this court noted in State, Department of Highways v. Green, 586 P.2d 595, 602 (Alaska 1978):
[T]he rule of construction favoring specific provisions over general provisions need not be invoked unless it is impossible to give effect to both provisions.
Given the foregoing, we reject NBA's argument that its FHLB and FFCB obligations are exempt from taxation pursuant to AS 43.70.030(b).
The superior court's affirmance of the Department of Revenue's denial of a refund to the National Bank of Alaska is AFFIRMED.