Federal Deposit Ins. Corp. v. Crystal

• Decision Date: 28 December 1999
• Docket Number: (SC 16079)
• Citation: 741 A.2d 956,251 Conn. 748
• Court: Connecticut Supreme Court
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION v. ALLAN A. CRYSTAL, COMMISSIONER OF REVENUE SERVICES FEDERAL DEPOSIT INSURANCE CORPORATION v. JAMES E. MEEHAN, COMMISSIONER OF REVENUE SERVICES

251 Conn. 748

741 A.2d 956

FEDERAL DEPOSIT INSURANCE CORPORATION v. ALLAN A. CRYSTAL, COMMISSIONER OF REVENUE SERVICES

FEDERAL DEPOSIT INSURANCE CORPORATION v. JAMES E. MEEHAN, COMMISSIONER OF REVENUE SERVICES

(SC 16079)

Supreme Court of Connecticut.

Argued September 22, 1999.

Officially released December 28, 1999.

McDonald, C. J., and Borden, Norcott, Palmer and Callahan, Js. William H. Narwold, with whom were Jaclyn C. Taner, pro hac vice, Charles D. Ray and, on the brief, Ann S. DuRoss, pro hac vice, and Colleen Boles, pro hac vice, for the appellants (plaintiff in each case).

Paul M. Scimonelli, assistant attorney general, with whom, on the brief, was Richard Blumenthal, attorney general, for the appellees (defendant in each case). Janet C. Spegele and Michael E. Malamut, pro hac vice, filed a brief for the Connecticut Business and Industry Association as amicus curiae.

Opinion

BORDEN, J.

The issue in this joint appeal concerns the scope of de novo review of a deficiency tax assessment pursuant to General Statutes § 12-237.¹ The plaintiff in both cases, the Federal Deposit Insurance Corporation (FDIC), as receiver of New Connecticut Bank and Trust Company, N.A., and of New England Savings Bank (New England), appeals² from the judgments of the trial court, following a joint trial, dismissing certain counts of the FDIC's complaints in both cases for lack of subject matter jurisdiction.³ The FDIC had appealed to the trial court, pursuant to § 12-237, from certain deficiency assessments imposed by the defendant, the commissioner of revenue services (commissioner), pursuant to General Statutes § 12-233,⁴ and challenged administratively by the banks pursuant to General Statutes § 12-236.⁵ The common basis of the trial court's dismissals, with respect to the claims asserted in those counts, was that because the banks had not filed amended returns and claims for refunds pursuant to General Statutes § 12-225 (b) (1),⁶ intertwined principles of sovereign immunity and exhaustion of administrative remedies deprived the court of subject matter jurisdiction over those counts. The FDIC claims that the scope of de novo review afforded by § 12-237 provided the court with subject matter jurisdiction over the counts of the complaints in question. We conclude that, under the circumstances of this case, the failure of the banks to have filed amended returns and claims for refunds pursuant to § 12-225 (b) (1) did not deprive the trial court of jurisdiction to consider the FDIC's claims. We therefore reverse the judgments of dismissal of the trial court.

The legal background, facts and procedural history are undisputed. Since 1979, corporate taxpayers such as the banks, in general, have been required to include as gross income, for purposes of the state's corporation business tax; General Statutes §§ 12-213 through 12-242i; interest income received from federal, state and local bonds, as well as from other securities and obligations. Moreover, under the corporation business tax, although a deduction is permitted for interest expenses incurred in holding bonds the income from which is taxable under the federal income tax, no such deduction is permitted for such expenses incurred in holding bonds the income from which is exempt from tax under the federal income tax. In 1996, this court, in D.A. Pincus & Co. v. Meehan, 235 Conn. 865, 880, 670 A.2d 1278 (1996), concluded that such diverse treatment did not violate the equal protection clauses of the federal and state constitutions. Furthermore, in contrast to the general taxability under the state corporation business tax of the income from federal, state and local bonds, from 1979 until 1995, the state, pursuant to various specific statutes, exempted from gross income under the state corporation business tax the interest income earned from certain Connecticut state and local bonds.⁷ It is also undisputed that, until 1991, CBT was a federally chartered national bank qualified to do business in this state and subject to the state corporation business tax. CBT owned federal and municipal bonds during the tax years of 1983 through 1987. In its tax returns for the tax years 1983 through 1985, the first audit period, CBT included in gross income the interest earned from the federal and municipal bonds that it held, and deducted its interest expenses incurred in buying and holding such bonds. After auditing CBT's 1983, 1984 and 1985 tax returns, the commissioner, in August, 1988, sent CBT audit workpapers showing a proposed tax recalculation of $2,112,532, plus interest. Following an informal conference with the commissioner, CBT received from the commissioner revised first audit workpapers adjusting the proposed tax recalculation to $2,175,329, plus interest. The audit results were based on the commissioner's disallowance of the deduction taken by CBT for interest expenses related to the federally tax exempt municipal bonds. CBT made a partial payment of $3,000,000 on the tax recalculation for the first audit period.⁸ CBT also made a claim for a refund of that payment, and preserved its rights to protest further and to appeal any and all audit adjustments. Thereafter, in September, 1991, the commissioner sent the FDIC, which by then had become the receiver of CBT, a determination letter.

Meanwhile, the commissioner also audited CBT's 1986 and 1987 tax returns, the second audit period, and issued a proposed tax recalculation indicating that CBT owed additional taxes for the second audit period, also based on disallowance of the interest expense deduction taken by CBT in connection with holding the federally tax exempt municipal bonds. In November, 1988, CBT made a partial payment of $1,800,000 on the second audit period tax recalculation. This payment also was made under protest with a claim for a refund of the payment, together with a preservation of CBT's right to protest and to appeal any tax adjustment. In June, 1990, the commissioner issued a billing notice for the second audit period to CBT for the assessment of $1,594,231, plus interest.

Pursuant to § 12-236, CBT requested a hearing and a correction of the two deficiency tax assessments. Thereafter, in September, 1991, the commissioner sent the FDIC, as receiver for CBT, a determination letter notifying it that the request for a correction was denied, and that the commissioner had determined that CBT owed an additional $386,817 for the second audit period. In October, 1991, pursuant to § 12-237, the FDIC filed its appeal in the present case to the trial court from the two deficiency assessments.

Until 1993, New England was a state chartered, federally insured bank that was subject to the state corporation business tax. New England owned federal and municipal obligations during 1986. In its 1986 corporation business tax return, New England included in income the interest earned from the federal and municipal bonds that it held, and deducted its interest expenses incurred in buying and holding such bonds. In May, 1988, after auditing New England's tax returns for the tax year 1986, the commissioner issued to New England a notice of assessment of an additional tax for 1986, in the amount of $17,654, plus interest, on the ground that New England improperly had deducted interest expenses incurred in holding the federally tax exempt municipal bonds.

Pursuant to § 12-236, New England applied for a hearing and a correction of the tax assessed. New England also made a protest payment of $21,773.28. Thereafter, the commissioner notified New England that its request for a correction was denied. In April, 1990, pursuant to § 12-237, New England filed its appeal in the present case to the trial court from the deficiency assessment.⁹

The commissioner's deficiency assessments against both CBT and New England were based on the disallowance of certain deductions taken by the banks for expenses related to municipal bond income. That type of income is exempt from federal taxation, but is taxable under our state corporate business tax. At the administrative level, the banks had claimed that the state's different tax treatment¹⁰ of federally tax exempt bonds, such as municipal bonds, versus federally taxable bonds, such as corporate bonds, discriminated against holders of the former as against holders of the latter in violation of the equal protection clauses of the state and federal constitutions. We refer herein to this claim as the FDIC's equal protection theory. Thus, the tax dispute arising out of the question of the validity of the banks' equal protection theory was whether the banks had overstated their deductions against an aspect of their gross income, namely, municipal bond income, thereby understating their net income for purposes of the corporation business tax.

The FDIC's appeals in both cases were stayed pending the outcome of D. A. Pincus & Co. v. Meehan, supra, 235 Conn. 865. On January 30, 1996, this court released its decision in D.A. Pincus & Co., rejecting the equal protection theory.

Thereafter, the FDIC, with the permission of the trial court, Maloney, J., amended its complaints in both the CBT and New England cases to add a new theory challenging the deficiency assessments. Under this new theory, the FDIC claimed that the fact that the state taxes interest income on federal bonds while exempting from taxation interest income from certain state and municipal bonds; see footnote 7 of this opinion and accompanying text; violated the borrowing clause¹¹ and the supremacy clause¹² of the United States constitution, and the doctrine of intergovernmental tax immunity as codified by 31 U.S.C. § 3124. We refer herein to this claim as the FDIC's intergovernmental tax immunity theory.

Under the intergovernmental tax immunity theory, the FDIC claims that, with respect to the federal bond interest income, the banks paid an invalid tax. Thus, under this theory, the question would be whether the banks had overstated...