Centerre Bank of Crane v. Director of Revenue

• Decision Date: 20 January 1988
• Docket Number: No. 69047,69047
• Citation: 744 S.W.2d 754
• Parties: CENTERRE BANK OF CRANE, et al., Petitioners, v. DIRECTOR OF REVENUE, State of Missouri, et al., Respondents.
• Court: Missouri Supreme Court

Page 754

744 S.W.2d 754

CENTERRE BANK OF CRANE, et al., Petitioners, v. DIRECTOR OF REVENUE, State of Missouri, et al., Respondents.

No. 69047.

Supreme Court of Missouri En Banc.

Jan. 20, 1988.

Juan D. Keller, Thomas C. Walsh, St. Louis, for petitioners.

William L. Webster, Atty. Gen., Melodie A. Powell, Asst. Atty. Gen., Jefferson City, for respondents.

Duane Benton, Jefferson City, for intervenor respondent.

Joseph J. Russell, Cape Girardeau, amicus curiae.

ROBERTSON, Judge.

This appeal presents three questions: (1) whether Missouri's bank tax, Section 148.030, RSMo 1978, is a nondiscriminatory franchise tax which falls outside the prohibition of 31 U.S.C. sec. 3124(a) (1982) against taxing federal obligations or the interest thereon; (2) whether sales and use taxes paid by banks on purchases of tangible personal property are "taxes paid to the State of Missouri or any political subdivision thereof", Section 148.030.3, RSMo 1978, and thus may be taken as a credit against the Missouri bank tax; and (3) whether Section 148.040.3, RSMo 1978, permits a taxpayer bank which is a member of an affiliated group of banks for federal income tax purposes to deduct as ordinary and necessary business expenses payments to the parent company equal to the member bank's federal income tax liability as if it had filed a separate federal income tax return instead of filing a consolidated return. The Administrative Hearing Commission upheld the Director's decisions on all issues. Taxpayers appealed.

Because this appeal involves the construction of the revenue laws of the State of Missouri, we have jurisdiction. Mo. Const. art. V, sec. 3. The decision of the Administrative Hearing Commission is affirmed in part, reversed in part and remanded with directions.

I.

Centerre Bank of Crane ("Crane") is a Missouri banking corporation located in Crane, Missouri, and is a member of an affiliated group of banking corporations of which Centerre Bancorporation ("Centerre"), formerly First Union Bancorporation, is the common parent corporation.

As Crane's parent, Centerre filed consolidated federal income tax returns for the years at issue. Under a tax sharing agreement between members of the affiliated group, each member was to make (or receive) payments to (or from) the common parent in the amount of its separate federal tax liability (or refund). In 1977 and 1978, Crane had federal losses and received cash payments from Centerre under the agreement; Crane reported these payments as income for bank tax purposes. In 1979, Crane made a payment to Centerre based on Crane's federal income tax liability for that year. Crane timely filed its bank tax returns with the Director of Revenue for the taxable years in question here, 1977, 1978, 1979 and 1983. On its bank tax returns, Crane reported receiving interest on obligations of the United States Government. The Director rejected Crane's method of computing its federal income tax deduction, assessed a deficiency in Missouri bank tax for the taxable year 1979 and found refunds were due Crane for 1977 and 1978. Crane filed a claim for refund of the bank tax for taxable year 1983; the Director issued a final decision disallowing the claim for refund. Crane timely filed complaints with the Administrative Hearing Commission for the four taxable years in question.

First National Bank of Bethany ("Bethany") is a Missouri banking corporation located in Bethany, Missouri. Bethany timely filed its bank tax returns for taxable years 1982, 1983 and 1984, deducting on each return amounts it had paid for Missouri state and local sales tax on purchases of tangible personal property and taxable services and Missouri use tax it paid for the consumption of tangible personal property in Missouri. The Director disallowed Bethany's claimed credits for sales and use taxes. Bethany also timely filed a complaint with the Administrative Hearing Commission.

The Administrative Hearing Commission consolidated the cases and upheld the Director's decisions in all respects. This appeal followed.

II.

We first consider Crane's attack on the validity of the bank tax.

Section 148.030 applies to every Missouri bank, imposing a seven percent tax "for the privilege of exercising its corporate franchises within the state according to and measured by its net income for the preceding year." Section 148.040.1, RSMo 1978. "Net income" is "gross income" less the deductions allowed in Section 148.040.3, RSMo 1978. "Gross income" includes:

[I]nterest from obligations issued by the United States government or any political subdivision or any instrumentality thereof, or any state or political subdivision thereof, or issued by any foreign country or nation or political subdivision thereof....

Section 148.040.2, RSMo 1978. 31 U.S.C. sec. 3124(a) (1982) 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 other nonproperty tax instead of a franchise tax, imposed on a corporation; and

(2) an estate or inheritance tax. ¹

[Emphasis added]. Thus, sec. 3124(a) permits an indirect tax on federal obligations only to the extent that the tax is 1) a franchise tax and 2) does not discriminate against federal obligations.

A.

Crane first argues that Missouri's bank tax is not a bona fide franchise tax but is instead an assessment against a banking corporation's property measured by yield.

Franchise taxes are excises, which include:

every form of taxation which is not a burden laid directly upon persons or property; in other words, excises include every form of charge imposed by public authority for the purpose of raising revenue upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation.

General American Life Ins. Co. v. Bates, 363 Mo. 143, 249 S.W.2d 458, 462 (1952), quoting State ex rel. Missouri Portland Cement Co. v. Smith, 338 Mo. 409, 90 S.W.2d 405, 407 (1936).

By its express terms, Section 148.030 imposes a tax for the privilege of exercising a corporate franchise. Crane urges, however, that we must look behind the plain language of the statute to discover the true intent of the General Assembly in imposing the tax. Crane finds that intent in Section 148.110 which provides:

It is the purpose and intent of the general assembly to substitute the tax provided by sections 148.010 to 148.110 for the tax on bank shares which was imposed by section 10959, RSMo 1939, and for all taxes on all tangible and intangible personal property of all banking institutions subject to the provisions of sections 148.010 to 148.110 ...,

and thus concludes that the bank tax is, in reality, a property tax. Crane supports this conclusion with In re Armistead, 245 S.W.2d 145, 152 (Mo.1952) ("The bank tax is an annual 'substitute' tax for the personal property tax.... We see no difference between such a tax and an annual property tax, on intangible personal property based upon 'yield.' ") and William A. Straub, Inc. v. City of St. Louis, 506 S.W.2d 377, 380 (Mo.1974) ("We conclude that the General Assembly has expressed in Section 148.110 an intention that payment of the seven percent income tax by a bank is to be substituted for payment of the tangible property tax and is equivalent thereto.")

In Arsenal Credit Union v. Giles, 715 S.W.2d 918 (Mo. banc 1986), we discussed a virtually identical tax on credit unions imposed at a rate of seven percent of the credit union's net income for the preceding year, stating that "[t]he tax now under consideration is an excise by its terms...." Id. at 923. Crane contends that the Giles language is dicta, and argues that Giles is not controlling because "the Court did not engage in any analysis of the operation of the tax in referring to an excise tax but merely accepted the statutory language without further reflection."

Further reflection, assuming that more is needed, does not yield a different result. Nor do Straub and Armistead compel a different conclusion. We determine the nature of a tax not by the character of the tax it displaces but by the manner in which it is imposed.

Crane's argument that a tax on income cannot be a franchise tax is simply wrong. Income is merely the base against which this franchise tax is measured. "If a tax requires that earning income and exercising the privilege of doing business in a corporate form coincide before imposing tax liability, such a tax is properly characterized as a franchise tax." State ex rel. Douglas v. Karnes, 346 N.W.2d 231, 233 (Neb.1984).

The United States Supreme Court 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." (Emphasis added.) Werner Machine Co. Director, Division of Taxation, 350 U.S. 492, 494, 76 S.Ct. 534, 535, 100 L.Ed. 634 (1956). It is the operation of the statute which determines the nature of the tax.

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.

...