Andover Sav. Bank v. Commissioner of Revenue

• Decision Date: 25 August 1982
• Citation: 439 N.E.2d 282,387 Mass. 229
• Parties: ANDOVER SAVINGS BANK et al. 1 v. COMMISSIONER OF REVENUE (and a companion case 2 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 282

439 N.E.2d 282

387 Mass. 229

ANDOVER SAVINGS BANK et al. ¹ v. COMMISSIONER OF REVENUE (and a companion case ²).

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued May 6, 1982.

Decided Aug. 25, 1982.

Laurence H. Tribe, Cambridge (Kenneth A. Cohen, Boston, with him) for Andover Sav. Bank, et al.

Stanley V. Ragalevsky, Boston (Karen J. Bloom, Boston, with him) for Stoneham Co-op. Bank, et al.

Stephen S. Ostrach, Asst. Atty. Gen. (Charles E. Walker, Asst. Atty. Gen., with him), for Com'r of Revenue.

Donald J. Barry, Jr., Milton, for Massachusetts Mortg. Bankers Ass'n, amicus curiae, submitted a brief.

Peter W. Coogan and Scott C. Moriearty, Boston, for Mutual Sav. Central Fund, Inc., amicus curiae, submitted a brief.

Theodore C. Landsmark, Cambridge, for Massachusetts Urban Reinvestment Advisory Group, amicus curiae, submitted a brief.

Thomas A. Brooks, F. Douglas Birdzell, W. Randolph Torres and Thomas W. Lawless, Jr., Washington, D. C., for Federal Deposit Ins. Corp., amicus curiae, submitted a brief.

Richard A. Manley, President for Massachusetts Taxpayers Foundation, Inc., amicus curiae, submitted a brief.

Before HENNESSEY, C. J., and WILKINS, NOLAN, LYNCH and O'CONNOR, JJ.

HENNESSEY, Chief Justice.

In this consolidated action filed in the county court, the plaintiffs, who are six savings banks, a savings banks association, and two cooperative banks, seek to have this court declare that the bank excise tax levied by G.L. c. 63, § 11, ³ is unconstitutional and also illegally applied by the Commissioner of Revenue. ⁴ See G.L. c. 231A. The case is before us on reservation and report by a single justice of this court, with an accompanying statement of agreed facts. ⁵ The plaintiffs make four claims: (1) that the excise is unreasonable and therefore in violation of Part II, c. 1, § 1, art. 4, of the Massachusetts Constitution; (2) that the Commissioner has incorrectly interpreted G.L. c. 63, § 11, so as to forbid the plaintiff banks to deduct as an "operating expense" the dividends or interest paid to depositors; (3) that § 11 is being discriminatorily applied contrary to the Massachusetts Constitution and the equal protection clause of the Fourteenth Amendment to the United States Constitution; and (4) that one aspect of § 11 impermissibly interferes with interstate commerce, and is therefore contrary to art. I, § 8, of the Constitution of the United States. We conclude that each of these claims is without merit and hold that the excise is constitutional.

1. As a preliminary matter, we note that the defendant does not argue that, because the plaintiffs have failed to exhaust their administrative remedies before the Appellate Tax Board, a declaratory judgment should be denied in this case. Where the Legislature has provided an administrative procedure for resolving certain types of controversies, the "requirement of exhaustion will be suspended only when the facts of a particular case raise important public questions whose resolution concerns or will affect more persons than the parties to the case." East Chop Tennis Club v. Massachusetts Comm'n Against Discrimination, 364 Mass. 444, 450, 305 N.E.2d 507 (1973). We agree that this case involves issues of law that affect every thrift institution chartered under the laws of this Commonwealth, and that this case is therefore an appropriate one with which to deal in a declaratory proceeding. See First Fed. Sav. & Loan Ass'n v. State Tax Comm'n, 372 Mass. 478, 482, 363 N.E.2d 474 (1977), aff'd, 437 U.S. 255, 98 S.Ct. 2333, 57 L.Ed.2d 187 (1978). ⁶

2. The Constitution of the Commonwealth authorizes the General Court to impose "reasonable" excises on the privilege of transacting business as a corporation. Part II, c. 1, § 1, art. 4. See S. S. White Dental Mfg. Co. v. Commonwealth, 212 Mass. 35, 38, 98 N.E. 1056 (1912) (constitutional reference to "commodities" includes the privilege of transacting business as a corporation), aff'd, 231 U.S. 68, 34 S.Ct. 15, 58 L.Ed. 127 (1913). See also Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., 384 Mass. 607, --- - ---, Mass.Adv.Sh. (1981) 2233, 2238-2239, 428 N.E.2d 297. The cooperative banks ⁷ broadly attack G.L. c. 63, § 11, as unreasonable and therefore in violation of that constitutional limit on the legislative power. They do not appear to argue that the deposits portion of the excise, § 11(a)(2) & (b)(2), is unreasonable, nor could they well do so in light of the well-reasoned decision upholding that aspect of the tax in Commonwealth v. People's Five Cents Sav. Bank, 5 Allen 428 (1862). See Provident Inst. v. Massachusetts, 73 U.S. (6 Wall.) 611, 18 L.Ed. 907 (1867), affirming Commonwealth v. Provident Inst. for Sav., 12 Allen 312 (1866). Rather, the thrust of their argument is that the income-based portion of the excise tax, § 11 (a)(1) & (b)(1), is unreasonable as interpreted and applied by the Commissioner because it does not fairly measure the present existing value of the franchises of the banks. They point out that while the pretax profits of the banks have in recent years decreased, the amount of taxes assessed under § 11 has increased. In particular, it is argued that amounts paid as interest to depositors constitute a "cost" of doing business and therefore must be deducted from "net operating income" if the excise is to measure accurately the value of the privilege of conducting business as a corporation.

The parties agree that the thrift industry in Massachusetts is currently experiencing severe financial difficulties. A major factor has been the rise of interest rates in recent years. It appears that, during the 1960's and 1970's, thrift institutions (also referred to as "mutual" institutions) invested their funds mostly in long-term, fixed-rate real estate loans at interest rates which, by today's standards, are relatively low. According to the agreed statement of facts, depositors at that time put their money primarily into regular savings accounts which yielded returns of approximately 4 1/2% to 5 1/2%. Because the banks were able to get average returns on their loans at higher rates than were paid to the depositors, they were able to operate on a sound financial basis. As interest rates rose in the late 1970's, however, these banks were forced to pay higher rates in order to continue attracting depositors. Many depositors withdrew their money from regular savings accounts and purchased term certificates of deposit which yielded returns at higher rates of 13% to 16%. The banks' investments in outstanding long-term loans have continued to yield returns at the relatively lower interest rates existing at the time they were made. Although total investment returns have increased in recent years, they have not kept up with the sharp increase in funds paid to depositors. Several of the plaintiffs have been unable in the last two years to earn sufficient income to cover the amount of these funds and overhead expenses.

The plaintiffs assert that this situation has been exacerbated by the Commissioner's interpretation of G.L. c. 63, § 11. Section 11, in addition to imposing a tax on deposits, also levies a tax on "net operating income" defined as gross income for the taxable year, less "operating expenses" and other deductions not relevant to this case. The Commissioner interprets "operating expenses" as not encompassing amounts paid to depositors in the form of interest or dividends. Without the deduction for amounts paid to depositors, the taxes assessed on the banks under § 11 have generally increased even though the banks have been experiencing significantly lower earnings, and even losses.

In addressing a constitutional challenge to a tax measure, we begin with the premise that the tax is endowed with a presumption of validity and is not to be found void unless its invalidity is established beyond a rational doubt. Eaton, Crane & Pike Co. v. Commonwealth, 237 Mass. 523, 527, 130 N.E. 99 (1921); Commonwealth v. People's Five Cents Sav. Bank, supra at 431-432. See Johnson v. Martignetti, 374 Mass. 784, 790-791, 375 N.E.2d 290 (1978). The Legislature is empowered to impose a reasonable excise on any franchise or privilege conferred by the Commonwealth. The limitation that an excise be "reasonable" was not intended to give to the judiciary the right to revise decisions of the Legislature that might be thought unwise or inexpedient. Connecticut Mut. Life Ins. Co. v. Commonwealth, 133 Mass. 161, 163 (1882). Nevertheless, the Legislature may not impose an excise tax which is based upon "false and unjust principles," Commonwealth v. People's Five Cents Sav. Bank, supra at 437, or which exacts assessments that are "grossly oppressive or contrary to common right," American Uniform Co. v. Commonwealth, 237 Mass. 42, 45, 129 N.E. 622 (1921), or which does not "show a proper proportion between the benefits received and the sum paid for the enjoyment of them," Suffolk Sav. Bank for Seamen, petitioner, 151 Mass. 103, 105, 23 N.E. 728 (1890).

These principles cannot be applied in a vacuum. The constitutionality of an excise must be judged in relation to the nature of the entity upon which it is imposed. Mutual banking institutions, which consist of savings banks, cooperative banks, and savings and loan associations, are nonprofit organizations established solely for the benefit of their depositors. Their original purpose was to encourage thrift and also to afford a method by which the profits and advantages arising from the use of large amounts of money could be enjoyed by persons of moderate means. Commonwealth v. People's Five Cents Sav. Bank, supra at 433. Bank of Redemption v. Boston, 125 U.S. 60, 68, 8 S.Ct. 772, 776, 31 L.Ed. 689 (1888). In addition, they were "designed to make it easier for a person to borrow money to build, buy or repair a home and to make available a certain amount of capital for government and public enterprise securities." Report of the...