Fidelity Bank, N.A. v. Com. By and Through Dept. of Revenue

• Decision Date: 07 July 1994
• Citation: 165 Pa.Cmwlth. 524,645 A.2d 452
• Parties: FIDELITY BANK, N.A., Petitioner, v. COMMONWEALTH of Pennsylvania, acting By and Through the DEPARTMENT OF REVENUE and Robert P. Casey, Governor of the Commonwealth of Pennsylvania, and his successors in office et al., Respondents.
• Court: Pennsylvania Commonwealth Court

Page 452

645 A.2d 452

165 Pa.Cmwlth. 524

FIDELITY BANK, N.A., Petitioner, v. COMMONWEALTH of Pennsylvania, acting By and Through the DEPARTMENT OF REVENUE and Robert P. Casey Governor of the Commonwealth of Pennsylvania, and his successors in office et al., Respondents.

Commonwealth Court of Pennsylvania.

Argued April 13, 1994.

Decided July 7, 1994.

George T. Bell, for petitioner.

Michael A. Roman, Chief Deputy Atty. Gen., Tax Litigation Section, for respondents.

Bryan E. Barbin, for intervenors.

Before CRAIG, President Judge, and DOYLE, McGINLEY, PELLEGRINI, FRIEDMAN, KELLEY, NEWMAN, JJ.

PELLEGRINI, Judge.

Before this court are post-trial motions filed by Fidelity Bank, N.A. (Fidelity) and the Commonwealth of Pennsylvania (Commonwealth, collective for all named Respondents) pursuant to Pa.R.Civ.Pro. 227.1 ¹ to the decree nisi of this court filed December 6, 1993, granting Fidelity's request for a refund of improperly paid bank shares taxes. ²

Fidelity had filed a petition for review with this court seeking declaratory and injunctive relief. Fidelity contended that certain 1989 amendments to the Tax Reform Code of 1971 (Code) ³ were unconstitutional, and that refunds of bank shares taxes were required rather than credits given under the amendments. The parties submitted the stipulations of fact which we have adopted as our own. In the decree nisi, we ordered that refunds of improperly paid bank shares taxes should be made, but found it unnecessary to address the constitutional challenge to the 1989 amendments.

Both parties filed post-trial motions. Fidelity seeks to modify the order by requiring the Commonwealth to resettle its 1989 bank shares taxes so that credits would not be deleted. Fidelity asserts that if the credits are deleted without resettling the tax, an amount due would show, which would prompt a lien on Fidelity and impair its ability to operate. The Commonwealth asks us to modify the order to allow the credits given in 1989 to satisfy the order for refunds. Both parties ask us to address whether the 1989 amendments to the Code are constitutional.

Shares taxes on banks are based on the number of shares of capital stock subscribed for or issued and their actual value. Section 701 of the Code, 72 P.S. § 7701. In 1983, the United States Supreme Court decided in American Bank and Trust Co. v. Dallas County, 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072, reh'g denied, 463 U.S. 1250, 104 S.Ct. 39, 77 L.Ed.2d 1457 (1983), that bank shares taxes computed on the basis of the bank's net assets must deduct tax exempt U.S. obligations held by the bank in compliance with 31 U.S.C. § 3124. Because the former shares tax included in the tax base the value of U.S. obligations, the Pennsylvania Supreme Court understandably held when it was challenged that the former shares tax on Pennsylvania banks was also unconstitutional. Dale National Bank v. Commonwealth, 502 Pa. 170, 465 A.2d 965 (1983). Dale required the Commonwealth to refund millions of dollars in taxes to banks. Fidelity was owed a total of $13.7 million.

In response to the claims for refunds after the decision in Dale, the General Assembly enacted a one-time single excise tax ⁴ on banks in 1984 which was exactly equal to the shares tax refund due each bank under the prior court decision. The express purpose of the single excise tax was to provide revenues matching those anticipated through the bank shares tax but lost under the decision in Dale. Our Supreme Court found the single excise tax unconstitutional as violative of the Supremacy Clause of the United States Constitution ⁵ because it was a "thinly veiled attempt" to do indirectly what it could not directly, that is, impose the bank shares tax on U.S. obligations. First National Bank of Fredericksburg v. Commonwealth, 520 Pa. 244, 258, 553 A.2d 937, 944 (1989). The court also held that under Dale, the banks had an immediate legally-enforceable right to refunds of the improper bank shares taxes.

Responding to the loss of revenue, the General Assembly then enacted the 1989 amendments to Section 701 of the Code, enumerated Act 1989-21, presently being challenged. The amendments to the statute required banks to file an amended 1989 bank shares tax return and, for that year only, increased the tax rate on bank shares to 10.77%, nearly a tenfold increase. The 1989 amendments also changed the tax base from only the average shares values over the current year to the average shares value from the current year and the preceding five years, with adjustments such as the exemption of federal obligations. The General Assembly also required that banks pay 80% of the tax due before an objection to the validity of the tax rate increase could be brought. Under the amendments, Fidelity owed $41 million of tax liability.

The General Assembly also amended the Code to create a New Bank Tax Credit Law, Sections 1901-1909 of the Code (Article XIX), as added, by the Act of July 1, 1989, P.L. 6, 72 P.S. §§ 8901-8909, which provided a tax credit for banks chartered after January 1, 1979. This effect of the tax credit was to distinguish between those banks which would be eligible for a refund because they had paid the unconstitutional tax under Dale and those which would not because they were chartered too recently to have incurred the improper tax. ⁶

In summary, as a result of the passage of the 1989 amendments as well as the New Bank Tax Credit Law, for the tax year 1989:

• the tax rate on shares was increased to 10.77%;

• the tax base includes the average of share values over six years • a bank must pay 80% of the tax due before an objection can be made;

• banks chartered after January 1, 1979, receive a tax credit to offset the increased tax rate.

Fidelity complied with the amendments by filing the amended return and paying 80% of the amount due less a credit for the amount owing Fidelity as a refund (including interest) from the single excise tax. Fidelity then filed an action challenging the taxing scheme of the 1989 amendments which impose a much higher tax rate on only banks entitled to a refund as unconstitutional either because it violates the right to due process, the Uniformity Clause, the Equal Protection Clause, the Supremacy Clause or the separation of powers doctrine.

In the decree nisi to which the post-trial motions have been filed, we held that the Commonwealth failed to make a refund in the amount of the improperly paid shares taxes and granted Fidelity's request for a refund. We also stated that the constitutional challenges were not ripe for review until after the Commonwealth issues those refunds. Both Fidelity and the Commonwealth now seek to modify the order.

Fidelity contends that the Commonwealth must resettle Fidelity's 1989 bank shares tax liability by the amount they must refund so that Fidelity will not show a debt to the Commonwealth which would be a lien on all of its property and impair its ability to operate its business. Fidelity argues that the constitutional issues can be addressed, otherwise the refund alone fails to provide it meaningful relief, and that the amendments to the bank shares tax is unconstitutional. In its post-trial motion, the Commonwealth contends that it has fully met its obligations to pay refunds by giving a tax credit under the 1989 amendments. It also argues that if a resettlement is ordered as requested by Fidelity, Fidelity will be getting a double return.

I.

As to the issue squarely addressed in the decree nisi of whether the Commonwealth is required to give cash refunds rather than credits to Fidelity and the other banks who paid improper single excise taxes, Fidelity contends that, because in Fredericksburg, the Supreme Court held that the banks had an immediate, legally-enforceable right to a refund, the use of credits by the Commonwealth is unconstitutional under federal law and improper under state law.

Fidelity's argument is based on its contention that due process requires that a taxpayer get "meaningful backward-looking relief" when it has paid a tax that is declared unconstitutional, such as the single excise tax struck down in Fredericksburg, citing McKeeson Corporation v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990). "Meaningful backward-looking relief" as required in McKeeson is retroactive relief that eliminates the discriminatory tax treatment under the tax provision declared unconstitutional. In McKeeson, the Florida courts determined that the excise tax scheme on liquor distributors discriminately favored local products; however, the courts refused to provide any retroactive relief, only enjoining the imposition of the discriminatory part of the tax. The U.S. Supreme Court held that prospective relief alone does not satisfy federal law and required "meaningful backward-looking relief" to rectify the prior unconstitutional deprivation. Id. at 31, 110 S.Ct. at 2247. The court then discusses some options that Florida may choose in order to provide the required relief, such as by giving a full refund of the tax payments or by eliminating the difference in taxes by imposing back taxes on the competitors who benefited from the discriminatory taxes. Id. at 39-40, 110 S.Ct. at 2251-52. The court does not discuss credits at any time and also states that it is generally the state's duty to craft the appropriate relief under federal and state law. Id. at 33, 110 S.Ct. at 2248.

In general, under McKeeson, the relief given must be equivalent to the monetary interest lost by the banks because of the requirement to pay the shares taxes prior to challenging the tax scheme, and must adjust the unfair tax burdens imposed under the single excise tax to reverse the discriminatory aspect. Credits provide the exact monetary amount (plus interest) to eradicate the unfair aspect of the prior tax but is applied to present or future assessed taxes rather than handed out in cash form. We...