First American Nat. Bank of Knoxville v. Olsen

• Decision Date: 23 November 1987
• Citation: 751 S.W.2d 417
• Parties: FIRST AMERICAN NATIONAL BANK OF KNOXVILLE (Park National Bank), Plaintiff-Appellant, v. Martha B. OLSEN, Commissioner of Revenue for the State of Tennessee, Defendant-Appellee.
• Court: Tennessee Supreme Court

Page 417

751 S.W.2d 417

FIRST AMERICAN NATIONAL BANK OF KNOXVILLE (Park National Bank), Plaintiff-Appellant, v. Martha B. OLSEN, Commissioner of Revenue for the State of Tennessee, Defendant-Appellee.

Supreme Court of Tennessee at Knoxville.

Nov. 23, 1987.

Donald F. Paine, D. Michael Swiney, T. Harold Pinkley, Paine, Swiney, and Tarwater, Knoxville, for appellant.

John C. Speer, Charles T. Tuggle, Jr., William H.D. Fones, Jr., Heiskell, Donelson, Bearman, Adams, Williams, and Kirsch, P.C., Memphis, for Amici Curiae: First Tennessee Bank Nat. Ass'n.

Stephen K. Rush, G. Michael Yopp, Paula W. Reed, Farris, Warfield & Kanaday, Nashville, for Third Nat. Bank.

Robert J. Warner, Steven L. Gill, Dearborn & Ewing, Nashville, for Commerce Union Bank.

W.J. Michael Cody, Atty. Gen. and Reporter, Joe C. Peel, Asst. Atty. Gen., Nashville, for appellee.

OPINION

DROWOTA, Justice.

In this tax refund suit, involving two consolidated cases, ¹ Plaintiff seeks a refund of corporate excise taxes paid under protest for the tax year 1983. Plaintiff contends that the amended excise tax, T.C.A. §§ 67-4-801, et seq., violates 31 U.S.C. § 3124(a) and impairs the obligation of a contract. Further, Plaintiff alleges that the trial court erred in disallowing the calculation of its 1982 net operating loss to be carried over into the 1983 tax year.

The genesis of this lawsuit is found in this Court's decision in Memphis Bank & Trust Co. v. Garner, 624 S.W.2d 551 (Tenn.1981) (Garner I ), reversed and remanded 459 U.S. 392, 103 S.Ct. 692 (1983). In Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983) (Garner II ), the United States Supreme Court held that the Tennessee local bank excise tax, T.C.A. §§ 67-751, et seq. (now repealed), ² unconstitutionally discriminated against Federal obligations because the interest from such obligations was included in the tax base while the interest on the obligations of the State of Tennessee was not included, thereby violating 31 U.S.C. § 742 (now codified as 31 U.S.C. § 3124). Upon remand, this Court issued an unpublished opinion, Memphis Bank & Trust Co. v. Garner (filed February 27, 1984; per curiam ) (Garner III ), which conformed to the holding of the United States Supreme Court. Subsequent to the opinion in Garner II, the Tennessee Legislature amended the Tennessee Corporate Excise Tax, T.C.A. §§ 67-4-801, et. seq., to cure the same discriminatory treatment of Federal obligations found in the local bank tax act, which the Legislature repealed, by including Tennessee obligations in the excise tax base under T.C.A. § 67-4-805 (Supp.1987) and thus treating Federal and State obligations in a nondiscriminatory fashion. See Midland Bank & Trust Co. v. Olsen, 717 S.W.2d 580, 582 (Tenn.1986), cert. denied, --- U.S. ----, 107 S.Ct. 1336, 94 L.Ed.2d 186 (1987).

Plaintiff's predecessor, Park National Bank, and First American National Bank paid their 1983 corporate excise taxes under protest and on March 11, 1983, filed a Complaint in the Chancery Court for Knox County, seeking a refund of 1983 excise taxes. ³ A number of amendments to the Complaint followed to include subsequent payments of taxes under protest and on September 30 and October 1, 1985, the trial of this action was held. On January 28, 1986, Chancellor Frederick McDonald filed his Memorandum Opinion in which he determined that the corporate excise tax was properly imposed in 1983. Finding that the Legislature's inclusion of the interest on Tennessee obligations in Plaintiff's net earnings did not impair the obligation of a contract because the tax was not imposed on these obligations but was merely measured by the income of the corporation, which income included interest earned on government obligations, the Chancellor ruled that no refund of 1983 taxes was due. Following a Motion for Further Findings of Fact and Conclusions of Law, the trial court again issued a Memorandum Opinion on May 8, 1986, which did not substantially alter the January 28, 1986, rulings, and Judgment was entered on May 25, 1986. Notice of Appeal was duly filed. We now affirm.

The issues on appeal are: (1) Whether the Tennessee Corporate Excise Tax, as amended in 1983, violates 31 U.S.C. § 3124(a) because the amendment was ineffective to cure discrimination against Federal obligations; (2) Whether the corporate excise tax is a franchise or nonproperty tax within the meaning of 31 U.S.C. § 3124(a)(1); and (3) Whether the Plaintiff is required to include interest on government obligations in computing its 1982 net operating loss carryover for the purpose of its 1983 excise taxes. These issues are purely legal and no factual dispute exists in this case.

Plaintiff argues that the 1983 amendment to T.C.A. § 67-4-805 is ineffective because it conflicts with T.C.A. § 9-9-112, which exempts State obligations from taxation (with certain exceptions inapplicable in this case), and other similar provisions. The tax exemption provided by these sections, being specific, controls the general excise tax statutes and thus revives the discriminatory treatment of Federal obligations held unconstitutional in Garner II and Garner III. Moreover, Plaintiff also contends that the 1983 amendment to the Tennessee Corporate Excise Tax breaches and impairs the obligation of its contracts with the State, formed when it purchased these tax exempt obligations prior to the amendment, and imposes the excise tax retroactively upon State obligations, violating the Constitutions of the State of Tennessee and of the United States.

Although Plaintiff and Amici make a sophisticated argument in support of their contentions on this issue, we are not persuaded that the 1983 amendment to the excise tax either violates 31 U.S.C. § 3124(a) or impairs the obligation of a contract. The discriminatory treatment condemned in Garner II is not revived by any perceived conflict between T.C.A. § 67-4-805, as amended, and such statutes as T.C.A. § 9-9-112. As this Court concluded in a similar case, construing a forerunner to this present code section, T.C.A. § 9-9-112 "does not exempt appellant corporation from the payment of the privilege tax enacted by the State for the privilege of doing business in Tennessee...." National Life & Accident Ins. Co. v. Dempster, 168 Tenn. 446, 457-458, 79 S.W.2d 564, 568 (1934). The excise tax is not aimed at or based solely on earnings from tax exempt obligations of the State or its political subdivisions. Id., 168 Tenn. at 456, 79 S.W.2d at 567. Because no inconsistency exists between the amended excise tax and the statutes providing a tax exemption for State obligations, application of the rules of statutory construction regarding conflicting statutory enactments is inappropriate and unnecessary; the statutes may be enforced together as they stand. The tax exemption for such obligations is not affected now anymore than when Dempster was decided: "By the act in question [the State] has adopted a form of privilege tax on corporations measured by their net income, without any form of discrimination as to the sources of the income included in the measure...." Id., 168 Tenn. at 455, 79 S.W.2d at 567. Since no conflict among the statutes at issue revives a tax exemption for the State, no discriminatory treatment is recreated contrary to the requirements of Garner II and 31 U.S.C. § 3124(a).

"Having guaranteed to the purchasers of these bonds immunity from taxation of the principal and interest, the State of Tennessee is without power subsequently to destroy the immunity and to tax the bonds or interest directly or indirectly. The act here in question, however, does not tax either the principal or interest of any bonds of the State of Tennessee, or of any political subdivision thereof, or of the United States."

Dempster, supra, 168 Tenn. at 456, 79 S.W.2d at 568. The 1983 amendment was explicitly enacted to include Tennessee obligations in the measure of the excise tax and this legislative intent must be upheld absent a constitutional barrier. "The power of determining the measure of the tax is a legislative function." Bank of Commerce & Trust Co. v. Senter, 149 Tenn. 569, 592, 260 S.W. 144, 150 (1923).

For similar reasons, the amended excise tax, which requires the taxpayer to include the earnings from tax exempt obligations of the State, of its political subdivisions, and of the United States, in the calculation of net income, does not impair the obligation of the contracts formed when State obligations were purchased. The Tennessee Constitution, Art. I, § 20, and the Constitution of the United States, Art. I, § 10, cl. 1, both prohibit laws that impair the obligation of a contract; however, the contracts between the State and Plaintiff are not impaired by inclusion of income from such obligations in the tax base on which the excise tax is imposed because "[t]he owner may enjoy his exempt property free of tax, but if he asks and receives from the State the benefit of a taxable privilege as the implement of that enjoyment, he must bear the burden of the tax which the State exacts as its price." Pacific Co., Ltd. v. Johnson, 285 U.S. 480, 490, 52 S.Ct. 424, 426, 76 L.Ed. 893 (1932). The excise tax is not imposed directly or indirectly on the obligations themselves or on the income earned from them but rather on the privilege of utilizing the corporate form in Tennessee, regardless of whether a corporation uses that privilege to acquire tax exempt obligations, id., 285 U.S. at 490, 52 S.Ct. at 426; it does not revoke the tax immunity provided by such statutes as T.C.A. § 9-9-112. Thus, the obligation of the contracts formed with Plaintiff at the time of their purchase is not impaired. "[T]he principle on which the doctrine of non-impairment of contracts stands is, that the law for its enforcement and execution existing at the time makes a part of the contract, so enters into it as to become a part of it, and therefore stands protected by...