Bank One Dayton, N.A. v. Limbach

• Decision Date: 18 April 1990
• Docket Number: No. 89-284,89-284
• Citation: 553 N.E.2d 624,50 Ohio St.3d 163
• Parties: BANK ONE DAYTON, N.A. et al., Appellants, v. LIMBACH, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 163

50 Ohio St.3d 163

553 N.E.2d 624

BANK ONE DAYTON, N.A. et al., Appellants, v. LIMBACH, Tax Commr., Appellee.

No. 89-284.

Supreme Court of Ohio.

Submitted Jan. 17, 1990.

Decided April 18, 1990.

Bricker & Eckler, Charles F. Glander, Edgar L. Lindley and Mark A. Engel, Columbus, for appellants.

Anthony J. Celebrezze, Jr., Atty. Gen., and Richard C. Farrin, Columbus, for appellee.

ALICE ROBIE RESNICK, Justice.

Appellants assert two propositions of law, the first of which is that Ohio's corporate franchise tax, R.C. Chapter 5733, violates Section 3124(a), Title 31, U.S. Code, and the Borrowing and Supremacy Clauses of the United States Constitution. Furthermore, appellants assert that R.C. 5733.05(A) discriminates against federal obligations by including them in a financial institution's net worth tax base, while excluding certain other assets held by a financial institution. The second proposition appellants present is that R.C. 5733.06 violates the Equal Protection Clauses of both the Ohio and United States Constitutions by imposing a tax on financial institutions at a higher rate than that which it imposes on other corporations.

I

In their first proposition of law, appellants contend that the Ohio franchise tax on financial institutions violates the Borrowing and Supremacy Clauses of the United States Constitution, and Section 3124(a), Title 31, U.S. Code. To support their contention, appellants assert that the franchise tax set forth in R.C. Chapter 5733 is actually a property tax disguised as a franchise tax. We begin our analysis by reviewing both the state and federal statutes that are at issue.

R.C. 5733.01(A) states that "[t]he tax provided by this chapter for domestic corporations shall be the amount charged against each corporation organized for profit under the laws of this state * * * for the privilege of exercising its franchise during the calendar year in which such amount is payable * * *." R.C. 5733.06 is the operative statute which levies the tax on corporations. A corporation other than a financial institution must first determine the value of its issued and outstanding shares of stock under the net income method of R.C. 5733.05(B) and multiply the first $25,000 in value by 5.1 percent, and the excess value over $25,000 by 9.2 percent. The corporation then must add these two amounts together, which total is the calculated tax by the net income method. The corporation then ascertains the value of the issued and outstanding shares of stock determined under the net worth method of R.C. 5733.05(A), and multiplies this value by 5.82 mills. This is the tax calculated on the net worth method. The greater of the two tax calculations is the amount of the franchise tax due.

However, R.C. 5733.06(D) taxes financial institutions at fifteen mills times the value of the issued and outstanding shares of stock as determined under the net worth method. R.C. 5733.06 does not require or allow a financial institution to calculate a tax amount under the net income method.

R.C. 5733.05(A) is used to calculate the value of the issued and outstanding shares of stock of a corporation as being "[t]he total value, as shown by the books of the company, of its capital, surplus, whether earned or unearned, undivided profits, and reserves * * *." This figure is a base or measure of the franchise tax liability, and is commonly referred to as the net worth tax base. R.C. 5733.05(A)(5) excludes from this value the corporation's investments in eighty-percent-owned public utilities, eighty-percent-owned insurance companies, and twenty-five-percent-owned financial institutions. Division (A)(6) excludes land devoted exclusively to agricultural use in Ohio. Other exemptions from the Ohio corporate tax base are as follows: R.C. 5709.25 exempts certified pollution control facilities; R.C. 5709.35 exempts certified fuel conversion facilities; R.C. 5709.50 exempts certified energy conversion, solid waste energy conversion, and thermal efficiency improvement facilities; R.C. 5709.65 exempts certified enterprise zone property; and R.C. 6111.31 exempts certified water pollution control facilities.

The foregoing is a brief review of the Ohio corporate franchise tax. We now turn to an analysis of the federal statutory and constitutional provisions that are at issue. Pursuant to the Borrowing and Supremacy Clauses of the federal Constitution, " * * * 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. * * *

" * * * So long as the tax is not directly laid on the Federal Government, it is valid if nondiscriminatory * * * or until Congress declares otherwise. * * * " United States v. Cty. of Fresno (1977), 429 U.S. 452, 459-460, 97 S.Ct. 699, 703, 50 L.Ed.2d 683. This is in accord with the constitutional rule of federal tax immunity first established in McCulloch v. Maryland (1819), 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579. Furthermore, the United States Supreme Court has treated what is now Section 3124(a), Title 31, U.S.Code as being a restatement of this constitutional principle. ² See Memphis Bank & Trust Co. v. Garner (1983), 459 U.S. 392, 397, 103 S.Ct. 692, 695, 74 L.Ed.2d 562; INew Jersey Realty Title Ins. Co. v. Division of Tax Appeals (1950), 338 U.S. 665, 672, 70 S.Ct. 413, 417, 94 L.Ed. 439; Missouri, ex rel. Missouri Ins. Co. v. Gehner (1930), 281 U.S. 313, 321-322, 50 S.Ct. 326, 327-328, 74 L.Ed. 870. Current Section 3124(a), Title 31, U.S. Code provides, in relevant part:

"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 nonproperty tax instead of a franchise tax, imposed on a corporation; and

"(2) an estate or inheritance tax." ³

According to American Bank & Trust Co. v. Dallas Cty. (1983), 463 U.S. 855, 862, 103 S.Ct. 3369, 3374, 77 L.Ed.2d 1072, " * * * [u]nder the plain language of * * * [Section 3124(a) ] the tax is barred regardless of its form if federal obligations must be considered, either directly or indirectly, in computing the tax [except nondiscriminatory franchise taxes, nonproperty tax instead of franchise taxes, and estate and inheritance taxes]." ⁴ (Emphasis sic.)

Appellants argue that the corporate franchise tax is actually a property tax and therefore does not come within either of the two exceptions contained in Section 3124(a), Title 31, U.S.Code. Appellee responds that the franchise tax is a tax on the privilege of doing business in Ohio. Furthermore, appellee argues that the tax is measured by the value of federal obligations, and is not levied on the assets themselves.

The nature of a tax must be determined by its operation, rather than by its particular descriptive language. Educational Films Corp. of America v. Ward (1931), 282 U.S. 379, 387, 51 S.Ct. 170, 171, 75 L.Ed. 400. Therefore, appellants contend that simply labeling the tax as a franchise tax does not accord the tax such status. ⁵ The United States Supreme Court, in Educational Films, described the operation of a franchise tax as follows:

"If we look to the operation of the present statute, it is plain that it can have no application independent of the corporation's enjoyment of the privilege of exercising its franchise. If appellant had ceased to do business before November 1, 1929, it would not have been subject to any tax under this statute, although it had received, during its preceding fiscal year, income which the statute makes the measure of the tax. Since it can be levied only when the corporation both seeks or exercises the privilege of doing business in one year and has been in receipt of net income during its preceding fiscal year, the tax, whatever descriptive terms are properly applicable to it, obviously is not exclusively on income apart from the franchise." Id. 282 U.S. at 388, 51 S.Ct. at 171.

Likewise, this court has previously discussed the nature and operation of the Ohio corporate franchise tax, stating as follows:

"Similarly, the annual franchise tax levied on corporations is also a tax on the privilege of doing business in this state. R.C. 5733.01(A); Woodland Gardens Apartments v. Porterfield (1968), 16 Ohio St.2d 56, 242 N.E.2d 580. Both the excise tax on public utilities and the franchise tax on corporations are levied on the exercise of a privilege and not on income, sales or receipts. Further, both taxes are based upon the results of an entire year of doing business and tax liability is not fixed until the end of that annual period * * *." East Ohio Gas Co. v. Limbach (1986), 26 Ohio St.3d 63, 67, 26 O.B.R. 54, 57, 498 N.E.2d 453, 456.

In Werner Machine Co. v. Dir. of Div. of Taxation (1956), 350 U.S. 492, 76 S.Ct. 534, 100 L.Ed. 634, the Supreme Court approved a tax scheme which included the value of federal bonds in a corporation's net worth to determine New Jersey's franchise tax. Therein, the high court accepted the state supreme court's conclusion that the tax was not imposed directly on property, but was indeed a bona fide franchise tax. Furthermore, the United States Supreme Court stated that it had " * * * 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. * * * " Id. at 494, 76 S.Ct. at 535.

More recently, in Garfield Trust Co. v. Dir. of Div. of Taxation (1986), 102 N.J. 420, 508 A.2d 1104, dismissed for want of substantial federal question (1986), 479 U.S. 925, 107 S.Ct. 390, 93 L.Ed.2d 345 the New Jersey Supreme Court approved the franchise tax considered in Werner Machine, supra, which had become, in Garfield...