Memphis Bank Trust Company v. Garner

• Decision Date: 24 January 1983
• Docket Number: No. 81-1613,81-1613
• Citation: 74 L.Ed.2d 562,103 S.Ct. 692,459 U.S. 392
• Parties: MEMPHIS BANK & TRUST COMPANY, Appellant v. Riley C. GARNER, Shelby County Trustee, et al
• Court: U.S. Supreme Court

74 L.Ed.2d 562

103 S.Ct. 692

459 U.S. 392

MEMPHIS BANK & TRUST COMPANY, Appellant

v Riley C. GARNER, Shelby County Trustee, et al.

No. 81-1613.

Argued Nov. 29, 1982.

Decided Jan. 24, 1983.

Syllabus

A Tennessee statute imposes a tax on the net earnings of banks doing business in the State, and defines net earnings to include interest received on obligations of the United States and its instrumentalities and of other States but not interest earned on obligations of Tennessee and its political subdivisions. Appellant bank brought an action in a Tennessee state court to recover taxes paid on interest earned on various federal obligations, alleging that the bank tax, as applied to appellant, violated 31 U.S.C. § 742—which exempts obligations of the United States from state and local taxation except where the taxes are "nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations" or estate or inheritance taxes and thus was unconstitutional under the Supremacy Clause. The trial court granted appellant's motion for a summary judgment. The Tennessee Supreme Court reversed, holding that the bank tax fell within the exception for "nondiscriminatory franchise taxes" set forth in § 742.

Held: The Tennessee bank tax violates the immunity of obligations of the United States from state and local taxation. The tax cannot be characterized as nondiscriminatory under § 742. It discriminates in favor of securities issued by Tennessee and its political subdivisions and against federal obligations by including in the tax base income from federal obligations while excluding income from otherwise comparable state and local obligations, and thus improperly discriminates against the Federal Government and those with whom it deals. Pp. 395-399.

624 S.W.2d 551, (Tenn.1981), reversed and remanded.^*

K. Martin Worthy, Washington, D.C., for appellant.

Jimmy G. Creecy, Deputy Atty. Gen., Nashville, Tenn., for appellee William M. Leech, Jr. J. Minor Tait, Jr., Memphis, Tenn., for appellees Riley C. Garner and Glen E. Foster.

Justice MARSHALL delivered the opinion of the Court.

The Tennessee bank tax imposes a tax on the net earnings of banks doing business within the State, and defines net earnings to include income from obligations of the United States and its instrumentalities but to exclude interest earned on the obligations of Tennessee and its political subdivisions. Tenn.Code Ann. § 67-751. This appeal presents the question whether the Tennessee bank tax violates the immunity of obligations of the United States from state and local taxation.

I

Appellant Memphis Bank & Trust Company (Memphis Bank) brought this action in state court to recover $56,696.81 in taxes covering the years 1977 and 1978 which had been assessed pursuant to the Tennessee bank tax, Tenn.Code Ann. § 67-751.¹ Each bank doing business in Ten- nessee is required under § 67-751 to pay to local governments of the State a tax of 3% of the bank's net earnings for the preceding fiscal year, less a portion of the ad valorem taxes paid by the bank for that year.² Under the statute, net earnings include interest received by the bank on the obligations of the United States and its instrumentalities, as well as interest on bonds and other obligations of states other than Tennessee, but exclude interest on obligations of Tennessee and its political subdivisions.³

Appellant alleged that the bank tax, as applied to it, violated 31 U.S.C. § 742, and thus was unconstitutional under the Supremacy Clause. The parties stipulated that the amount of tax paid by appellant for the years 1977 and 1978 was based entirely on interest earned on various federal obligations, primarily notes and bills of the U.S. Treasury and obligations of Federal Credit Banks.⁴ They also stipulated that if the interest earned on such federal obligations were excluded from the computation, Memphis Bank would owe no taxes for the years in question.

The Chancery Court of Shelby County granted Memphis Bank's motion for summary judgment, holding that 31 U.S.C. § 742 prohibits the inclusion of interest on obligations of the United States and its instrumentalities in the computation of taxable "net earnings" under the Tennessee bank tax. The Supreme Court of Tennessee reversed. 624 S.W.2d 551 (1981). It held that the bank tax fell within the exception for "nondiscriminatory franchise taxes" set forth in 31 U.S.C. § 742. We noted probable jurisdiction, --- U.S. ----, 102 S.Ct. 2005, 72 L.Ed.2d 464 (1982), and we reverse.

II

31 U.S.C. § 742 establishes a broad exemption of federal obligations from state and local taxation:

"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 non- property taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes."

The exemption established in § 742 applies not only to Treasury notes and bills, but also to the obligations of such instrumentalities of the United States as Federal Credit Banks. Cf. Smith v. Davis, 323 U.S. 111, 117, 65 S.Ct. 157, 160, 89 L.Ed. 107 (1944) ("other obligations" must be interpreted "in accord with the long established Congressional intent to prevent taxes which diminish in the slightest degree the market value or the investment attractiveness of obligations issued by the United States in an effort to secure necessary credit"). Because no federal statutes have "otherwise provided," § 742 applies to income from the types of federal obligations held by Memphis Bank.⁵ Therefore, the bank tax is impermissible unless the tax is a "nondiscriminatory franchise tax or other nonproperty tax in lieu thereof" under § 742.⁶

We have not previously had occasion to determine whether a state or local tax is "nondiscriminatory" within the meaning of § 742. However, we have frequently considered this concept in our decisions concerning the constitutional immunity of federal government property, including bonds and other securities, from taxation by the States. Our decisions have treated § 742 as principally a restatement of the constitutional rule. See, e.g., New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665, 672, 70 S.Ct. 413, 417, 94 L.Ed. 439 (1950); Missouri Ins. Co. v. Gehner, 281 U.S. 313, 321-322, 50 S.Ct. 326, 328, 74 L.Ed. 870 (1930).

Under the constitutional rule of tax immunity established in M'Culloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579 (1819), "States may not impose taxes directly on the Federal Government, nor may they impose taxes the legal incidence of which falls on the Federal Government." United States v. County of Fresno, 429 U.S. 452, 459, 97 S.Ct. 699, 703, 50 L.Ed.2d 683 (1977) (footnote omitted). Where, as here, the economic but not the legal incidence of the tax falls on the Federal Government, such a tax generally does not violate the constitutional immunity if it does not discriminate against holders of Federal property or those with whom the Federal Government deals. See, e.g., United States v. County of Fresno, supra, at 459-464, 97 S.Ct. at 703-05; United States v. City of Detroit, 355 U.S. 466, 473, 78 S.Ct. 474, 478, 2 L.Ed.2d 424 (1958); Werner Machine Co. v. Director of Division of Taxation, 350 U.S. 492, 76 S.Ct. 534, 100 L.Ed. 634 (1956); Tradesmens National Bank of Oklahoma v. Oklahoma Tax Comm'n, 309 U.S. 560, 564, 60 S.Ct. 688, 691, 84 L.Ed. 947 (1940).⁷

A state tax that imposes a greater burden on holders of federal property than on holders of similar state property impermissibly discriminates against federal obligations. See e.g., United States v. County of Fresno, supra, 429 U.S., at 462, 97 S.Ct., at 704 ("a state tax on those who deal with the Federal Government" is unconstitutional if the tax "is imposed [un]equally on similarly situated constituents of the State"). Our cases establish, however, that if the "tax remains the same whatever the character of the [property] may be, no claim can be sustained that this taxing statute discriminates against federal obligations." Werner Machine Co. v. Director of Division of Taxation, supra, 350 U.S., at 493-94, 76 S.Ct., at 535 (1956). In Schuylkill Trust Co. v. Pennsylvania, 296 U.S. 113, 119-120, 56 S.Ct. 31, 34-35, 80 L.Ed. 91 (1935), we held invalid a Pennsylvania tax levied upon the shares of a trust company that was measured by the company's net assets. In calculating net assets, the statute excluded shares owned by the trust company in Pennsylvania corporations but included shares owned in United States obligations. The Court found that the tax statute discriminated in favor of securities issued by Pennsylvania corporations and against United States bonds or other obligations.

Similarly, in Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960), we held unconstitutional a local tax upon private lessees which was imposed on the estimated full value of the leased premises. The tax statute applied to lessees of United States government property but not to lessees of exempt real property owned by the State and its political subdivisions. We held that the tax "discriminates unconstitutionally against the United States and its lessee." Id., at 387, 80 S.Ct., at 481.

It is clear that under the principles established in our previous cases, the Tennessee bank tax cannot be characterized as nondiscriminatory under § 742. Tennessee discriminates in favor of securities issued by Tennessee and its political subdivisions and against federal obligations. The State does so by including in the tax base income from federal obligations while excluding...