State Department of Assessments & Taxation v. Maryland National Bank

RODOWSKY, Judge. This case presents a question of interpretation of congressional statutes which were intended to minimize problems in applying the doctrine of intergovernmental immunity in the taxation context. The problem of intergovernmental immunity at hand arises from Maryland’s having included in the measurement of the franchise tax imposed on the appellee, Maryland National Bank (the Bank), interest earned by the Bank on certain bonds issued by an instrumentality of the United States. The problem of interpretation arises because there are different federal statutes on which the adversaries rely to support their respective positions.

Maryland imposes a franchise tax on domestic financial institutions for the privilege of existing as a corporation and on foreign financial institutions for the privilege of transacting business in this state in corporate form. Md.Code (1957, 1980 Repl.Vol., 1986 Cum.Supp.), Art. 81, § 128A(a). The tax is measured by net earnings. § 128A(b). The Bank is a corporation organized and existing under the National Bank Tax Act.

For purposes of state taxation it is to “be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located.” 12 U.S.C. § 548 (1982). The Bank’s principal office is in Maryland and the Bank is subject to the franchise tax on financial institutions. There is no contention in this case that the Maryland tax is other than a true franchise or privilege tax. Nor is there ⁶⁶⁶ any contention that the tax applies or is administered in a discriminatory fashion.

For the years 1979 through 1982 the Bank included in its report of net earnings subject to the franchise tax a total of $2,818,727.79 of interest on consolidated bonds of Federal Home Loan Banks (FHLB). It paid the tax under protest and then claimed a refund. The State Department of Assessments and Taxation (the State) denied the refund and, on the Bank’s appeal, the Maryland Tax Court ordered the refund to be made. The Circuit Court for Baltimore City affirmed the order of the Tax Court and we issued the writ of certiorari on our own motion prior to consideration of the State’s appeal by the Court of Special Appeals.

The Bank relies principally on § 13, as amended, of the Federal Home Loan Bank Act of July 22, 1932, ch. 522, § 13, 47 Stat. 735 , now codified as 12 U.S.C. § 1433 . Section 1433 reads as follows: 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. The notes, debentures, and bonds issued by any bank, with unearned coupons attached, shall be accepted at par by such bank in payment ⁶⁶⁷ of or as a credit against the obligation of any home-owner debtor of such bank.[ 1 ] The State submits that, when interpreted in the light of history, § 1433 has no application to a franchise tax and that the controlling statute is 31 U.S.C. § 3124 (a) (1982).

The latter 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 non-property tax instead of a franchise tax, imposed on a corporation; and (2) an estate or inheritance tax. The State has analyzed the problem correctly, in our view. The doctrine of intergovernmental immunity rests on the nature of the federal system created by the United States Constitution.

With particular respect to a prohibition against state taxation of the obligations of federal instrumentalities, the doctrine has been recognized since M’Culloch v. Maryland, 4 Wheat. (17 U.S.) 316, 4 L.Ed. 579 (1819). In connection with the issuance of treasury notes to finance the Civil War and to prevent their possible taxation by the states, Congress undertook to express the constitutional prohibition in a statute. P. Hartman, Federal Limitations on State and Local Taxation § 6:20, at 340 (1981) (Hartman).

That enactment essentially became Rev.Stat. § 3701 and, later, 31 U.S.C. § 742 (1952), which read: Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United ⁶⁶⁸ States, shall be exempt from taxation by or under State or municipal or local authority. In 1865 the Supreme Court struck down the application of a New York property tax to obligations of the United States ownéd by a bank, saying that “the tax is imposed on the property of the institutions, as contradistinguished from a tax upon their privileges or franchises.” The Bank Tax Case, 2 Wall. (69 U.S.) 200, 209, 17 L.Ed. 793, 795 (1865). There followed a line of cases in the Supreme Court, decided while the substance of 31 U.S.C. § 742 was in effect, sustaining privilege taxes measured by nontaxable federal securities.

The judicial rationale was “that the taxing State has power to impose the tax on a privilege, which it had power to withhold; and which, therefore, the State has the power to tax---- [W]hen the State is imposing a tax on its own creation, it is not interfering with the operations of the Federal Government.” Hartman, supra, at 348 (footnote omitted). Writing in 1956 in Werner Machine Co. v. Director of Div. of Taxation, 350 U.S. 492, 494 , 76 S.Ct. 534, 535 , 100 L.Ed. 634 , 637, the Supreme Court said in a per curiam opinion that it “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.” The Court then cited, in chronological order, Society for Sav. v. Coite, 6 Wall. (73 U.S.) 594, 18 L.Ed. 897 (1868); Provident Inst. for Sav. v. Massachusetts, 6 Wall. (73 U.S.) 611, 18 L.Ed. 907 (1868); Hamilton Co. v. Massachusetts, 6 Wall.

(73 U.S.) 632, 18 L.Ed. 904 (1868); Home Ins. Co. v. New York, 134 U.S. 594 , 10 S.Ct. 593 , 33 L.Ed. 1025 (1890); Educational Films Corp. of America v. Ward, 282 U.S. 379 , 51 S.Ct. 170 , 75 L.Ed. 400 (1931); and Pacific Co. v. Johnson, 285 U.S. 480 , 52 S.Ct. 424 , 76 L.Ed. 893 (1932). In Educational Films, supra, decided in the year before enactment of the Home Loan Bank Act of 1932, the Court stated: ⁶⁶⁹ [W]e cannot say that the rule applied by this court for some seventy years, that a nondiscriminatory tax upon corporate franchises is valid, notwithstanding the inclusion of tax exempt property or income in the measure of it, has failed of its purpose, or has worked so badly as to require a departure from it now; or that the present tax, viewed in the light of actualities, imposes any such real or direct burden on the federal government as to call for the application of a different rule. [ 282 U.S. at 392 , 51 S.Ct. at 173 .] Present 31 U.S.C. § 3124 (a) was enacted in 1959. 2 The 1959 enactment was a response to an Idaho statute which imposed a tax upon individuals measured by an individual’s net income. Idaho took the position that the tax need not exempt interest received on federal obligations.

The 1959 amendment plainly did more than make clear that the interest on federal obligations was tax exempt. Idaho relied on the formal distinction between a tax on an individual, measured by his net income, and a tax on the income itself____ To answer this argument, the amend- ment abolished the formalistic inquiry whether the tax is on a distinct interest, and replaced it with the inquiry whether “computation of the tax” requires consideration of federal obligations. [American Bank & Trust Co. v. Dallas County, 463 U.S. 855, 867 , 103 S.Ct. 3369, 3377 , 77 L.Ed.2d 1072, 1082 (1983) (citation omitted).] The Bank submits that 12 U.S.C. § 1433 , which authorizes FHLB bonds, is more specific as to FHLB bonds than 31 U.S.C. § 3124 (a), that § 1433 declares an exemption from “all” taxation, and that the omission of franchise taxation from the specifically enumerated exceptions to the grant of exemption demonstrates congressional intent for FHLB bonds to be exempt from state franchise taxes “both as to principal and interest.” If we assume that FHLB bonds are “obligations of the United States Government” within the ⁶⁷⁰ meaning of 31 U.S.C. § 3124 (a) (see discussion, infra), then the Bank’s interpretation of 12 U.S.C. § 1433 places it in irreconcilable conflict with 31 U.S.C. § 3124 (a) insofar as nondiscriminatory franchise taxes are concerned. The rules of statutory construction applied by the Supreme Court to federal statutes are not significantly different from those which we apply. In Watt v. Alaska, 451 U.S. 259, 266-67 , 101 S.Ct. 1673, 1678 , 68 L.Ed.2d 80, 88 (1981), Justice Powell said for the Court: Sole reliance on the “plain language” of § 401(a) would assume the answer to the question at issue.

These cases involve two statutes, each of which by its literal terms applies to the facts before us. Restatement of the terms of § 401(a) cannot answer which statute Congress intended to control. Recognizing this, the Secretary invokes the maxim of construction that the more recent of two irreconcilably conflicting statutes governs. 2A C. Sands, Sutherland on Statutes and Statutory Construction § 51.-02 (4th ed. 1973). Without depreciating this general rule, we decline to read the statutes as being in irreconcilable conflict without seeking to ascertain the actual intent of Congress.

Our examination of the legislative history is guided by another maxim: “ ‘repeals by implication are not favored,’ ”____ “The intention of the legislature to repeal must be ‘clear and manifest.’ ” ... We must read the statutes to give effect to each if we can do so while preserving their sense and purpose. [Citations omitted.] In the case before us the two statutes can be read compatably 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 bonds or the interest on them. Maryland has taxed the privilege of ⁶⁷¹ doing business as a financial institution in corporate form in this state and has measured the tax by net income which