Maryland National Bank v. State Department of Assessments & Taxation

LOWE, Judge. “ ‘When I use a word,’ Humpty-Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean— neither more nor less.’ ” 1 Generally speaking, the term “taxable income” (for purposes of measuring the federal income tax) excludes from a taxpayer’s gross income any state “income taxes” which the taxpayer has paid during the taxable year. In 1969, Maryland imposed a “franchise tax” 2 upon its financial institutions which was measured by their “net income” 3 . It defined the latter term as the institution’s federally “taxable income” 4 but required that any “income taxes” imposed by the State be added back to federal “taxable income”. 5 Perhaps anticipating a refund claim by the institutions which had added the federally deductible State franchise tax (measured on income) to their taxable income when determining the net income upon which the tax was imposed, the General Assembly in 1977 amended the statute “[f]or the purpose of clarifying the amounts which must be added to the federal taxable income of a corporate taxpayer . . . .” 6 . ²⁷¹ It clarified that the “income taxes” it had required to be added back to the federally taxable income (upon which the 7% franchise tax was imposed) meant State “taxes based upon income”. The rationale for saying that “income taxes” had meant upon enactment just what it (the Legislature) had chosen it to mean, was apparent from the legislative purpose in its enactment, 7 the plural use of the term in the statute, 8 and the “unvarying construction” given to the statute by the agency charged with its enforcement for its fourteen year life. 9 When contemplating what type of tax to impose upon financial institutions in 1968, the Legislature had before it the Report of the Joint Legislative-Executive Committee to Study Taxation and Fiscal Problems.

In its observations, the Committee pointed out that if the normal corporate income tax were imposed upon financial institutions, the bulk of their income would not be taxable because it was derived from interest and dividends from federal treasury obligations, which income was not subject to a direct state income tax due to a peculiar phraseology in 12 U.S.C.A. § 548 ; but that source of income could be taxed by charging a state franchise tax. Realizing that a rose by another name may even smell sweeter, the State “imposed” its 7% tax on the franchise of the financial institution’s “net earnings”, Art. 81, § 128A(b), i.e., its income. Thus, it was able to tax the otherwise exempt income from the institution’s treasury obligations. The State then defined the “net income” measure of the “franchise tax” as including the “taxable income of [the] taxpayer as defined in the laws of the United States . . . . ” Art. 81, § 280A(a).

The laws of the United States permitted an exemption for the “franchise tax” imposed by the ²⁷² State which was measured by the institution’s income so the State required that: “There shall be added to the taxable income of such taxpayer: ... (1) income taxes . . . imposed by the State of Maryland . . . .” Art. 81, § 280A(b). For fourteen years the appellee, State Department of Assessments and Taxation, has considered the franchise tax on financial institutions which is measured by their income as one of the “income taxes . .. imposed by the State of Maryland.” When the Legislature clarified that purposed intent in 1977, the appellant Maryland National Bank perceived it as a sign of semantic weakness. It filed for refunds from Maryland of the tax it had paid Maryland on the “franchise tax” which it had added back to its federal taxable income pursuant to § 280A(b)(l) in order to calculate its taxable