Dept. of State Revenue v. FARM CREDIT SVCS.

• Decision Date: 01 September 2000
• Docket Number: No. 49S10-9908-TA-453.,49S10-9908-TA-453.
• Citation: 734 N.E.2d 551
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Appellant, v. FARM CREDIT SERVICES OF MID-AMERICA, ACA, Appellee.
• Court: Indiana Supreme Court

734 N.E.2d 551

INDIANA DEPARTMENT OF STATE REVENUE, Appellant, v. FARM CREDIT SERVICES OF MID-AMERICA, ACA, Appellee.

No. 49S10-9908-TA-453.

Supreme Court of Indiana.

September 1, 2000.

Karen Freeman-Wilson, Attorney General of Indiana, Jon Laramore, Deputy Attorney General, Indianapolis, Indiana, Attorneys for Appellant.

Thomas C. Borders, Richard A. Hanson, Kevin J. Feeley, Theodore R. Bots, Chicago, Illinois, Marilee J. Springer, Indianapolis, Indiana, Attorneys for Appellee.

ON PETITION FOR INTERLOCUTORY APPEAL

SHEPARD, Chief Justice.

Farm Credit Services of Mid-America (Mid-America), an Agricultural Credit Association, claims it is exempt from Indiana's Financial Institutions Tax under constitutional principles of intergovernmental tax immunity. We conclude it is only partially exempt.

Facts and Procedural History

Mid-America is part of the Farm Credit System, a nation-wide network of cooperative, borrower-owned banks and lending institutions that were established to provide affordable credit to farmers and ranchers. 12 U.S.C.A. § 2001 (West 1989).¹

The system includes twelve Farm Credit Banks (FCBs), located in each of twelve districts. Through local associations, these banks provide real estate loans secured by mortgages. The local associations include Federal Land Bank Associations (FLBAs), which provide long-term loans, and Production Credit Associations (PCAs), which provide short-term and intermediate loans.

Congress created the Farm Credit System in 1916 and has reformed it several times during the intervening decades. In the early 1980s, the system began to falter under unfavorable economic conditions that threatened the stability of its lending institutions. Congress responded by enacting the Agricultural Credit Act of 1987. The Act authorized voluntary mergers between PCAs and FLBAs in an effort to streamline the structure of the lending bodies. The institution resulting from such a merger is called an Agricultural Credit Association (ACA).

Mid-America was created in 1989 through the merger of two PCAs and two FLBAs. This case arose in March 1997, when Mid-America filed an amended tax return with the Indiana Department of Revenue requesting a refund of the Financial Institutions Tax² it had paid for the tax years 1993 and 1994. Mid-America asserted that as a federal instrumentality it was immune from state taxation. The Department denied Mid-America's claim. Mid-America appealed to the Indiana Tax Court, where it prevailed on summary judgment. Farm Credit Serv. of Mid-America v. Department of State Revenue, 705 N.E.2d 1089 (Ind. Tax Ct. 1999).³

Early Tax Immunity Doctrine

The doctrine of intergovernmental tax immunity derives from M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819), the landmark case holding that the State of Maryland could not impose a tax on the Bank of the United States. Chief Justice Marshall's opinion for the Court relied both on the discriminatory nature of the tax and on general principles of federal supremacy. Specifically, Marshall determined that, because the Bank was a "federal instrument" used to carry out the government's powers, state taxation would unconstitutionally interfere with the exercise of these powers. Id. at 425-37. Marshall explained that the individual states:

have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by congress to carry into execution the powers vested in the general government.

Id. at 436.

This principle was applied broadly for many years thereafter to bar taxation by one sovereign on another, or even on the employees of another. Davis v. Michigan Dep't of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989); see also, e.g., Collector v. Day, 78 U.S. (11 Wall.) 113, 20 L.Ed. 122 (1870) (invalidating federal income tax on salary of state judge); Dobbins v. Comm'rs of Erie County, 41 U.S. (16 Pet.) 435, 10 L.Ed. 1022 (1842) (invalidating state tax on a federal officer). In the late 1930s, however, the Court began to narrow its view of tax immunity. In Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 59 S.Ct. 595, 83 L.Ed. 927 (1939), the Court overruled the Dobbins-Day line of cases and held that intergovernmental tax immunity bars only those taxes imposed directly on one sovereign by another, or that discriminate against the sovereign to which they apply. Id. at 481-87. In restraining the scope of tax immunity, the Court explained:

[T]he implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and where that immunity is invoked by the private citizen it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed.

Id. at 483.

Over the intervening years, the doctrine of intergovernmental tax immunity has become, in the Court's words, "a `much litigated and often confused field,' one that has been marked from the beginning by inconsistent decisions and excessively delicate distinctions." United States v. New Mexico, 455 U.S. 720, 730, 102 S.Ct. 1373, 71 L.Ed.2d 580 (1982) (internal citations omitted).

Here, both parties agree that ACAs are "federal instrumentalities", but disagree about the tax implications of this status.

Both parties urge distinct views of tax immunity. Mid-America argues that federal instrumentalities are immune from state taxation unless Congress expressly waives such immunity, while the Department argues that federal instrumentalities are subject to state taxation unless Congress expressly exempts the instrumentality from taxation.

The Department's View

In asserting that ACAs are subject to state taxation absent a congressional statement otherwise, the Department directs us to Arkansas v. Farm Credit Serv. of Cent. Arkansas, 520 U.S. 821, 117 S.Ct. 1776, 138 L.Ed.2d 34 (1997). In that case, four PCAs brought suit in U.S. District Court claiming an exemption from Arkansas sales and income taxes. The District Court granted the PCAs' motion for summary judgment, and the Court of Appeals for the Eighth Circuit affirmed. Farm Credit Serv. of Cent. Arkansas v. Arkansas, 76 F.3d 961 (8th Cir.1996).

The Supreme Court reversed on jurisdictional grounds, holding that, under the Tax Injunction Act, 28 U.S.C. § 1341, PCAs cannot sue in federal court for an injunction against state taxation unless the United States is a co-plaintiff. Arkansas v. Farm Credit, 520 U.S. at 831-32, 117 S.Ct. 1776. In so holding, the Court considered the long-standing power of the federal government to sue to protect itself or its instrumentalities from state taxation. The Court ultimately determined that, although PCAs are congressionally designated federal instrumentalities, this designation "does not in and of itself entitle an entity to the same exemption the United States has under the Tax Injunction Act." Id. at 832, 117 S.Ct. 1776.⁴

The Department urges us to rely on Arkansas v. Farm Credit for the proposition that status as a federal instrumentality does not necessarily confer upon an entity the same rights and privileges enjoyed by the United States itself. Further, it directs us to the Court's description of PCAs:

Whatever may be the rule under the Tax Injunction Act where a federal agency or body with substantial regulatory authority brings suit, PCA's [sic] are not entities of that description. PCA's are not granted the right to exercise government regulatory authority but rather serve specific commercial and economic purposes long associated with various corporations chartered by the United States.

....

The PCAs' business is making commercial loans, and all their stock is owned by private entities. Their interests are not coterminous with those of the Government any more than most commercial interests. Despite their formal and undoubted designation as instrumentalities of the United States, and despite their entitlement to those tax immunities accorded by the explicit statutory mandate,... that instrumentality status does not in and of itself entitle an entity to the same exemption the United States has under the Tax Injunction Act.

Id. at 831-32.

Mid-America's View

The decision in Arkansas v. Farm Credit, of course, meant that only state supreme courts and the U.S. Supreme Court possess jurisdiction to decide whether PCAs are exempt from state taxation, and Mid-America directs our attention to some cases subsequently decided by other state high courts.

In Arkansas v. Farm Credit Serv. of Cent. Arkansas, 338 Ark. 322, 994 S.W.2d 453 (1999), cert. denied, ___ U.S. ___, 120 S.Ct. 1530, 146 L.Ed.2d 345 (2000), the Arkansas Supreme Court held that PCAs are exempt from state sales and income taxes.⁵ In so holding, the court reasoned that federal instrumentalities are immune from state taxation unless Congress expressly waives the immunity. Id. at 455. This reasoning was based on the court's interpretation of M'Culloch and its progeny, including the 1997 decision of the Indiana Tax Court. See id.

Similarly, in Production Credit Ass'n v. Director of Revenue, 10 S.W.3d 142 (Mo. 2000) (en banc), cert. granted in part, ___ U.S. ___, 120 S.Ct. 2716, 147 L.Ed.2d 981 (2000), the Missouri Supreme Court concluded that PCAs were immune from Missouri state income taxes. The court reasoned that entities designated as "federal instrumentalities" are immune unless Congress explicitly waives immunity. The Missouri court examined the current version of the federal statute governing PCAs, noted it was silent on the matter of taxation, and concluded its inquiry, thus holding against the state. Id. at 143.⁶

While the cases offered by Mid-America and the Department provide an excellent background...