U.S. v. State of Mich.

• Decision Date: 23 August 1988
• Docket Number: No. 87-1858,87-1858
• Citation: 851 F.2d 803
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. STATE OF MICHIGAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 803

851 F.2d 803

57 USLW 2052

UNITED STATES of America, Plaintiff-Appellee, v. STATE OF MICHIGAN, Defendant-Appellant.

No. 87-1858.

United States Court of Appeals, Sixth Circuit.

Argued April 6, 1988.

Decided July 8, 1988.

Rehearing Denied Aug. 23, 1988.

Richard R. Roesch, Robert C. Ward, argued, Atty. Gens. Office, Lansing, Mich., for defendant-appellant.

John A. Smietanka, U.S. Atty., Grand Rapids, Mich., Richard A. Correa, Tax Div.-Dept. of Justice, Michael L. Paup (Lead), Chief, Appellate Section, Michael C. Durney, Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, William S. Rose, Gary R. Allen, David E. Carmack, John J. McCarthy, argued, Dept. of Justice, Tax Div., Washington, D.C., for plaintiff-appellee.

Before MARTIN, WELLFORD, and NELSON, Circuit Judges.

BOYCE F. MARTIN, Jr., Circuit Judge.

The State of Michigan appeals the district court's decision declaring unconstitutional certain provisions of the Michigan General Sales Tax Act, Mich.Comp.Laws Sec. 205.51 et seq. The court held that the incidence of the tax levied under this statute falls on federal credit unions which the court concluded were federal instrumentalities immune from state taxation under the Supremacy Clause of the United States Constitution. 635 F.Supp. 944 (1985). We affirm.

The United States brought this action in federal district court on behalf of approximately 238 federally-chartered credit unions located in Michigan. A federal credit union is a non-profit, cooperative association organized under the Federal Credit Union Act, 12 U.S.C. Sec. 1752 et seq., "for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes." Id. at Sec. 1752(1).

The complaint, filed at the request of the National Credit Union Administration, a federal agency, sought a declaratory judgment that Michigan's sales tax law violated the Supremacy Clause because it effectively taxed purchases made by federal credit unions in Michigan. The United States alleged that the law was unconstitutional because federal credit unions are federal instrumentalities entitled to the same immunity from state taxation as the United States. Therefore, the United States claimed, because the legal incidence of this sales tax falls on the purchaser, the tax could not be constitutionally imposed on purchases by federal credit unions. The United States also alleged that the state's sales tax statute unconstitutionally discriminates against the United States in that no exemption from the tax is extended to federal credit unions while Michigan and its institutions are exempt from the sales tax.

The district court granted the United States' motion for partial summary judgment and denied Michigan's summary judgment motion. The court held, first, that the Tax Injunction Act, 28 U.S.C. Sec. 1341, did not preclude it from asserting jurisdiction over the case. The court then held that federal credit unions are federal instrumentalities immune from state taxation under the Supremacy Clause. Next, the district court concluded that the legal incidence of Michigan's sales tax falls on the purchaser, and that, therefore, the law unconstitutionally imposed a tax on federal instrumentalities. Finally, the court found that the six-year statute of limitations for actions by the United States for recovery of monies, set forth in 28 U.S.C. Sec. 2415, applies to this case, rather than the state's four-year statute of limitations for tax refund cases. The court concluded that, in light of these holdings, it need not consider the United States' alternative argument, that the sales tax, as applied, unconstitutionally discriminates against federal credit unions.

The parties subsequently stipulated that the amount of the refund, properly calculated as of July 1, 1986, was $2,781,646.67, plus interest. On June 30, 1987, the district court entered a final judgment in accordance Michigan first challenges the district court's jurisdiction. Under 28 U.S.C. Sec. 1345, federal district courts "have original jurisdiction of all civil actions, suits or proceedings commenced by the United States." Michigan argues, however, that the Tax Injunction Act, which prohibits federal district courts from enjoining, suspending, or restraining "the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State," 28 U.S.C. Sec. 1341, precludes the United States from maintaining this action. The state recognizes that the United States is not subject to this limitation if the federal government is challenging the constitutionality of a state tax being levied on the United States or on one of its agencies or instrumentalities, see, e.g., Dep't of Employment v. United States, 385 U.S. 355, 87 S.Ct. 464, 17 L.Ed.2d 414 (1966), but Michigan claims that this jurisdictional determination depends upon a finding that federal credit unions are, in fact, federal instrumentalities.

with that stipulation. Michigan now appeals.

Michigan's position is untenable for it conflates a jurisdictional issue and a substantive determination. The Supreme Court refuted a similar argument in Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946). In that case, the defendants had argued that the district court had properly dismissed the plaintiff's complaint for lack of federal jurisdiction because it failed to state a cause of action. The court reversed, holding that whether the complaint stated a valid claim could only be decided after, and not before, the district court had assumed jurisdiction over the controversy. "If the court does later exercise its jurisdiction to determine that the allegations in the complaint do not state a ground for relief, then dismissal of the case would be on the merits, not for want or jurisdiction." Id. at 682, 66 S.Ct. at 776.

The Court recognized only two exceptions to this principle: where the alleged claim under the Constitution or federal statutes is clearly immaterial and made solely to obtain jurisdiction; or where the claim is wholly insubstantial and frivolous. Id. at 682-83, 66 S.Ct. at 776. Michigan did not and could not argue that either of these exceptions is applicable here. Therefore, the district court correctly ruled that the Tax Injunction Act did not bar the United States from maintaining this action, and the court properly exercised jurisdiction over this case under 28 U.S.C. Sec. 1345.

Michigan's jurisdictional challenge is also unavailing in light of our decision regarding the status of federal credit unions. The state contends that the district court erroneously concluded that federal credit unions are federal instrumentalities entitled to immunity from state taxation. We are not persuaded.

In the famous case of McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819), the Supreme Court established the doctrine of federal immunity from state taxation. In that case, the Court held that, absent Congressional consent, the federal government and its instrumentalities are immune from state taxation under the Supremacy Clause of the Constitution. Id. Congress clearly has not consented to state taxation of federal credit unions; to the contrary, Congress has expressly prohibited state taxation of federal credit unions, except for ad valorem taxation of real and personal property. 12 U.S.C. Sec. 1768. ¹

Therefore, if federal credit unions are federal instrumentalities, they are entitled to constitutional, as well as, statutory, immunity from state taxation.

Unfortunately, "there is no simple test for ascertaining whether an institution is so closely related to governmental activity as to become a tax-immune instrumentality." Dep't of Employment v. United States, 385 U.S. at 358-59, 87 S.Ct. at 467. The leading cases suggest that we examine the purpose for which federal credit unions were created, that we determine whether they continue to perform that function, and that we assess the federal government's control over and involvement with these organizations.

One significant factor in determining whether a particular entity is a federal instrumentality is whether it performs an important governmental function. See Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 62 S.Ct. 1, 86 L.Ed. 65 (1941). During the depths of the Depression, two of the many problems plaguing the national economy were scarce credit and high interest rates. In order to deal with these problems, Congress authorized the establishment of federal credit unions. S.Rep. No. 555, 73d. Cong., 2d Sess. (1934). These cooperative associations were designed to encourage and enable average citizens to pool their resources. Through federal credit unions, therefore, the federal government makes credit available on liberal terms and at low rates of interest to middle-class Americans who, because they frequently lack adequate security, might otherwise have to turn to small loan financiers who can extort excessive interest rates in times of unexpected need.

In Federal Land Bank v. Bismarck Lumber Co., the Supreme Court held that a virtually-identical fiscal function was indicative of tax-immune instrumentality status. The Court concluded that federal land banks were " 'instrumentalities, engaged in the performance of an important governmental function,' " 314 U.S. at 102, 62 S.Ct. at 5 (quoting Federal Land Bank v. Priddy, 295 U.S. 229, 231, 55 S.Ct. 705, 706, 79 L.Ed. 1408 (1935)), because "[t]hrough the land banks the federal government makes possible the extension of credit on liberal terms to farm borrowers." Federal Land Bank v. Bismarck Lumber Co., 314 U.S. at 102, 62 S.Ct. at 5. Thus, federal credit unions, which provide a similar public service to a broader cross-section of the nation's citizens, also perform an important governmental function.

Michigan attempts to divert our attention from this fundamental fact by arguing that federal credit unions are...