Comerica Bank-Detroit v. Department of Treasury

• Decision Date: 04 May 1992
• Docket Number: P,BANK-DETROI,Docket No. 128955
• Citation: 194 Mich.App. 77,486 N.W.2d 338
• Parties: COMERICAlaintiff-Appellant/Cross-Appellee, v. DEPARTMENT OF TREASURY, and Revenue Commissioner of the Department of Treasury, Defendants-Appellees/and Cross-Appellants.
• Court: Court of Appeal of Michigan — District of US

Page 338

486 N.W.2d 338

194 Mich.App. 77

COMERICA BANK-DETROIT, Plaintiff-Appellant/Cross-Appellee, v. DEPARTMENT OF TREASURY, and Revenue Commissioner of the Department of Treasury, Defendants-Appellees/and Cross-Appellants.

Docket No. 128955.

Court of Appeals of Michigan.

Submitted March 10, 1992, at Lansing.

Decided May 4, 1992, at 9:20 a.m.

Released for Publication Aug. 3, 1992.

Miller, Canfield, Paddock & Stone by Samuel J. McKim, III, Robert F. Rhoades, and Joanne B. Faycurry, Detroit, for plaintiff.

Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., and Russell E. Prins and Terry P. Gomoll, Asst. Attys. Gen., for defendants.

Before SHEPHERD, P.J., and SAWYER and CONNOR, JJ.

CONNOR, Judge.

Plaintiff appeals as of right from Ingham Circuit Court Judge Peter D. Houk's order of April 23, 1990, granting summary disposition for defendants. Defendants have filed a cross appeal from that same order. We reverse the trial court's decision and remand to the trial court for additional proceedings.

I

The facts in this matter are generally uncontested. This action was filed by plaintiff on October 23, 1983, to seek a refund of taxes paid in 1971, 1974, and 1975. Plaintiff filed amended returns for 1974 and 1975 on July 25, 1983. In addition, plaintiff amended its tax return for 1971 because the amendment for the 1974 return resulted in a net operating loss carry-back to the year 1971. The revenue commissioner denied the refund request on September 30, 1983, on the ground that the period of limitation had lapsed.

It was plaintiff's claim that the taxes it was required to pay in 1974 and 1975 were unconstitutional and it was entitled to refunds. Plaintiff relied upon the United States Supreme Court's holding in Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983), declaring that state laws that include interest on federal obligations in the tax base for determining the income tax on financial institutions while at the same time excluding from taxation interest earned on state obligations violate the Supremacy Clause and federal law. Plaintiff did not pay its original taxes under protest and never raised the issue of unconstitutional taxation by defendants until after Memphis Bank was decided.

Well before the decision in Memphis Bank was released, the Michigan Legislature, by 1975 P.A. 233, immediately effective August 27, 1975, repealed the sections of the Income Tax Act of 1967 that plaintiff contends were ruled unconstitutional by Memphis Bank. At the time plaintiff's tax returns were filed in 1974 and 1975, M.C.L. Sec. 206.71; M.S.A. Sec. 7.557(171) provided as follows:

(1) There is levied and imposed upon every financial institution a tax measured by 9.7% of taxable income as defined in section 34 subject to the applicable source and attribution rules contained in this act.

(2) The tax imposed on financial institutions is in lieu of all other state and local taxes, however measured, upon financial institutions, except taxes imposed upon real property, sales, use and similar excise taxes, examination and audit fees and those taxes levied under the provisions of Act No. 156 of [194 Mich.App. 80] the Public Acts of 1964, as amended, being sections 489.501 to 489.920 of the Compiled Laws of 1948.

(3) If the application of this tax to national banking associations is held to be invalid by final judicial action, then there shall be no tax levied or imposed by this section 71 on state banks, including industrial banks and trust companies.

The controversy in this case specifically pertains to the definition used for "taxable income" for financial institutions in M.C.L. Sec. 206.34; M.S.A. Sec. 7.557(134), also repealed by 1975 P.A. 233, and referred to in M.C.L. Sec. 206.71; M.S.A. Sec. 7.557(171). M.C.L. Sec. 206.34; M.S.A. Sec. 7.557(134) provided, in pertinent part, for the years at issue in this case:

(1) "Taxable income" in the case of a financial institution means federal taxable income subject to the following adjustments:

(a) Add gross interest income and dividends derived from obligations or securities of states other than Michigan, in the same amount which has been excluded from federal taxable income, less related expenses not deducted in computing federal taxable income because of section 265 of the internal revenue code.

In the trial court, the parties filed cross motions for summary disposition on multiple grounds, including that the period of limitation had expired, that subject-matter jurisdiction should be with the Tax Tribunal and the Court of Claims rather than the Ingham Circuit Court, and, finally, that the decision in Memphis Bank should be given prospective application only.

The trial court agreed with defendants that the decision in Memphis Bank should be applied prospectively only and held that plaintiff was not entitled to a refund at that late date.

II

The first issue raised by plaintiff on appeal is whether the trial court correctly determined that Memphis Bank should be applied prospectively only.

In Memphis Bank, the United States Supreme Court reviewed a Tennessee statute that imposed on banks doing business within Tennessee a tax based on net earnings and that defined net earnings to include income from obligations of the United States and its instrumentalities but excluded income earned on obligations of Tennessee and its political subdivisions. The Tennessee statute based the calculation on net earnings on the federal taxable income with specific adjustments, 26 U.S.C. Sec. 103(a). 459 U.S. at 394, n. 3, 103 S.Ct. at 694, n. 3. Under 26 U.S.C. Sec. 103(a), federal taxable income included interest earned on the obligations of the United States and its instrumentalities, but did not include interest on state or municipal obligations. 459 U.S. at 394, n. 3, 103 S.Ct. at 694, n. 3. The adjustment to federal taxable income that Tennessee utilized in determining net earnings included interest income from bonds and other obligations of other states or their political subdivisions, but no similar adjustment was made to include interest on obligations of the State of Tennessee or its political subdivisions. Id. The effect of this tax law was to require Tennessee banks to pay state taxes on earnings from federal obligations but not on earnings from Tennessee obligations.

The appellant bank contended that the bank tax violated 31 U.S.C. Sec. 742 (now 31 U.S.C. Sec. 3124) and was unconstitutional under the Supremacy Clause. Memphis Bank, 459 U.S. at 394-395, 103 S.Ct. at 694-695. The Supreme Court agreed with the appellant on both points.

In order to decide the case, the Supreme Court turned to previous decisions, some going back as far as 1819, concerning the constitutional immunity granted to federal government property, including bonds and other securities. Id., at 396-397, 103 S.Ct. at 695-696. 31 U.S.C. Sec. 742 was really only a restatement of the constitutional rule. 459 U.S. at 397, 103 S.Ct. at 695-696.

Under the constitutional rule of tax immunity established in McCulloch v. Maryland, [17 U.S.] (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 , 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, ; United States v. City of Detroit, 355 U.S. 466, 473, 78 S.Ct. 474 , 2 L.Ed.2d 424 (1958)....

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....

* * * * * *

It is clear that under the principles established in our previous cases, the Tennessee bank tax cannot be characterized as nondiscriminatory under Sec. 742. Tennessee discriminates in favor of securities issued by Tennessee and its political subdivisions against federal obligations. The State does so by including in the tax base income from federal obligations while excluding income from otherwise comparable state and local obligations. We conclude, therefore, that the Tennessee bank tax impermissibly discriminates against the Federal Government and those with whom it deals. [459 U.S. at 397-399, 103 S.Ct. at 695-696.]

The parties in the present case apparently concede that the holding in Memphis Bank invalidates M.C.L. Sec. 206.34; M.S.A. Sec. 7.557(134) and M.C.L. Sec. 206.71; M.S.A. Sec. 7.557(171). The dispute centers on whether the holding in Memphis Bank should be retroactively applied to plaintiff's request for a refund.

Since the decision in Memphis Bank was released, a few state courts have addressed the question whether that decision should be prospectively or retroactively applied to the various state bank tax laws that violated the holding in Memphis Bank.

In First Bank of Buffalo v. Conrad, 350 N.W.2d 580, 585-586 (N.D.1984), the North Dakota Supreme Court held that because the plaintiff had not paid its taxes under protest, it could not seek a refund for taxes paid pursuant to statutes that Memphis Bank subsequently had invalidated. The opinion did not specifically address whether Memphis Bank should be prospectively applied, although the holding certainly suggests that it would only be applied prospectively in North Dakota.

In contrast, the Oklahoma Supreme Court addressed the issue precisely in First of McAlester Corp. v. Oklahoma Tax Comm., 709 P.2d 1026, 1029 (Okla.1985). By applying the three-part test from Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the...