First Federal Sav. and Loan Ass'n of Boston v. State Tax Commission

• Decision Date: 03 May 1977
• Citation: 363 N.E.2d 474,372 Mass. 478
• Parties: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BOSTON et al. 1 v. STATE TAX COMMISSION et al. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 474

363 N.E.2d 474

372 Mass. 478

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BOSTON et al. ¹ v. STATE TAX COMMISSION et al. ²

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Nov. 4, 1976.

Decided May 3, 1977.

Chester M. Howe, Boston, for plaintiffs.

Howard Whitehead, Asst. Atty. Gen., for defendants.

Before HENNESSEY, C.J., and QUIRICO, BRAUCHER, WILKINS and LIACOS, JJ.

WILKINS, Justice.

The plaintiffs are all the Federally chartered savings and loan associations (associations) in the Commonwealth. They seek a declaratory judgment concerning various aspects of the excise which they are required to pay pursuant to G.L. c. 63, § 11(a)(1), and § 11(b)(1), the significant portions of which are set forth in the margin. ³

The associations argue that the defendant Commissioner of Corporations and Taxation (Commissioner) has misconstrued G.L. c. 63, § 11, by disallowing interest or dividends paid to members as a deduction in arriving at net operating income subject to the excise. They also challenge the excise in its entirety on several grounds, relying on constitutional arguments and on claims that the imposition of the excise is not authorized by Congress. The associations and the defendants moved for summary judgment. A judge of the Superior Court reserved and reported the case on a record which consists of the pleadings, a stipulation of facts, and an affidavit in support of the associations' motion for summary judgment. We granted the associations' request for direct appellate review. We conclude that none of the associations' arguments has merit.

Since 1966, when the income-based portion of the excise was added to the law (St.1966, c. 14, § 11), the associations have been challenging the application to them of the income-based portion of the excise. Applications for abatement have been filed by the associations for the years 1966 to 1974, inclusive; those applications have been denied by the defendant State Tax Commission (commission); and petitions under the formal procedure have been filed with the Appellate Tax Board. ⁴

For an understanding of the background of this case, we should note Federal court proceedings which also dealt with the excise imposed on the associations by G.L. c. 63, § 11. In 1970, the United States filed a complaint in the United States District Court, District of Massachusetts, challenging the application of that portion of the excise which was based on the deposits of Federal savings and loan associations. Six of the plaintiff associations intervened in that action. The District Court concluded that the provisions of G.L. c. 63, § 11(a)(2)(ii), and (b)(2)(ii), resulted in an illegal disparity of tax treatment between Federal savings and loan associations and local savings institutions. United States v. State Tax Comm'n, 348 F.Supp. 397, 400 (D.Mass.1972). The Court of Appeals agreed but vacated and modified the judgment in a respect not involving the District Court's central conclusion. United States v. State Tax Comm'n, 481 F.2d 963, 970--971 (1st Cir. 1973). The issues involved in that case are not before us here. As the result of the Federal litigation, the associations are exempt from the deposits-based aspect of the excise provided in G.L. c. 63, § 11, and those associations which filed timely applications for abatement have received refunds of all payments of that portion of the excise.

In conjunction with the action commenced by the United States, the six associations which intervened in that action filed another action challenging the income-based aspect of the excise on several grounds. Certain of the issues raised here by the associations were presented to the District Court and, as indicated subsequently in this opinion, were rejected. United States v. State Tax Comm'n, 348 F.Supp. at 400--401. Another issue was not considered because the matter was pending before the commission. Id. at 401. On appeal the six associations argued the points raised below and pressed certain additional issues, including Federal and State constitutional claims. The United States did not join in the separate challenges advanced by the six associations. United States v. State Tax Comm'n, 481 F.2d at 966. The First Circuit Court of Appeals declined to pass on any of the issues raised by the six associations because the 'taxpayers have adequate recourse to state courts for a determination of their claims.' Id. at 972.

The defendants do not contend that, because the associations have not exhausted their administrative remedies before the Appellate Tax Board, a declaratory judgment should not be granted in this case. We agree that this is an appropriate case to deal with on declaratory judgment. The associations raise a broad challenge to G.L. c. 63, § 11, presenting questions of statutory construction and of constitutional law of importance to every Federal savings and loan association in the Commonwealth. Although not all of the questions are pure issues of law, because, as will be seen, in certain respects there are matters of proof involved, the resolution of the issues by a court in the first instance in a consolidated proceeding makes practical sense. In other situations of a somewhat similar nature, we have approved an exercise of discretion to grant a declaratory judgment regarding a tax statute. See Sydney v. Commissioner of Corps. & Taxation, --- Mass. ---, --- - --- and cases cited ^a, 356 N.E.2d 460 (1976). We turn then to the various arguments advanced by the associations.

1. The associations argue that amounts paid members, as dividends or interest, are 'operating expenses' which may be deducted in arriving at 'net operating income.' Section 11 of G.L. c. 63 defines 'net operating income' as gross income from all sources less certain items, including 'operating expenses.' The dispute arises because 'operating expenses' are not defined. The Commissioner has taken a consistent position that payments of interest or dividends to members are not 'operating expenses' and hence are not allowable deductions. ⁵

We are concerned, of course, with what the Legislature intended by the words 'operating expenses.' The associations rely in part on general accounting principles in support of their position. We see no basis, however, for assuming that the Legislature intended to import accounting practice into its statutory language and thus to permit accounting principles to be the guide to the meaning of the words 'operating expenses.' See Ivan Allen Co. v. United States, 422 U.S. 617, 635, 95 S.Ct. 2501, 45 L.Ed.2d 435 (1975).

The parties have recognized that, if an association's obligation to a member were a debt, any periodic payment might be equated to the payment of interest and thus represent an operating expense; whereas, if periodic payments to members were equated to dividends, these payments would not be an expense in the traditional sense and thus not deductible. We are invited, as courts are in Federal tax cases involving this issue, to analyze the interest of a member to determine whether he has an equity interest or whether he is a creditor. See Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972).

The relationship between an association and its members has elements common to an ownership status and to a debtor-creditor relationship. This charter of an association refers to account holders in terms of ownership and investment. It describes a holder of a savings account as a member who has (1) a right to vote on the election of directors, and to vote on charter amendments, by-laws, and resolutions, (2) a right to a pro rata distribution of net earnings (as defined) twice a year, (3) a right to withdraw his savings account on thirty days' notice, and (4) a right to pro rata share of the value of the association's assets in the event of liquidation, dissolution, or winding up of the association. There is no fixed date of maturity of an association's obligation to its members, nor any fixed rate of return. A member's status is subordinate to creditors and, when withdrawal of funds is requested, a holder of a savings account does not become a creditor. These elements tend to demonstrate that a member is an investor, not a creditor.

The Federal enabling legislation states that one purpose of a Federal savings and loan association is to 'provide local mutual thrift institutions in which people may invest their funds . . .' (emphasis supplied). 12 U.S.C. § 1464(a) (1970). See 12 U.S.C. § 1757(8)(D) (1970), as amended, 12 U.S.C. § 1757(8)(D) (Supp. IV, 1974), authorizing Federal credit unions to 'invest' their funds in shares or accounts of Federal savings and loan associations. The Federal decisions concering the relationship of a member and an association support the position that a member is an investor, not a creditor. See Porter v. Aetna Cas. & Sur. Co., 370 U.S. 159, 161, 82 S.Ct. 1231, 8 L.Ed.2d 407 (1962); Id. at 163, 82 S.Ct. 1231 (Douglas, J., concurring); Wisconsin Bankers Ass'n v. Robertson, 111 U.S.App.D.C. 85, 294 F.2d 714, 716, cert. denied, 368 U.S. 938, 82 S.Ct. 381, 7 L.Ed.2d 338 (1961). To the extent that the status of a member is determinative of the question whether a periodic payment to him is a payment of interest or the payment of a dividend, the weight of circumstances support the conclusion that any payment is more analogous to a dividend to an owner than to a payment of interest to a creditor. ⁶

We come back, however, to the question of the meaning of the words 'operating expenses.' Even accepting our conclusion that the status of a member is more like that of an owner than that of a creditor, arguably the wores 'operating expenses' are ambiguous. In such a situation the consistent interpretation of a statute, since its enactment, by the agency charged with the administration of the law is entitled to consideration in resolving the ambiguity. See BOARD OF EDUC. V. ASSESSOR OF WORCESTER, --- MASS. ---, --- -...