First Federal Savings and Loan Association of Boston v. State Tax Commission

• Decision Date: 15 June 1978
• Docket Number: No. 77-334,77-334
• Citation: 98 S.Ct. 2333,437 U.S. 255,57 L.Ed.2d 187
• Parties: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BOSTON et al., Appellants, v. STATE TAX COMMISSION et al
• Court: U.S. Supreme Court

437 U.S. 255

98 S.Ct. 2333

57 L.Ed.2d 187

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BOSTON et al., Appellants,

v STATE TAX COMMISSION et al.

No. 77-334.

Argued March 21, 1978.

Decided June 15, 1978.

Syllabus

Appellants brought suit in a Massachusetts court challenging the State's power to impose an excise tax on federal savings and loan associations as measured by their net operating income, claiming that the tax violates § 5(h) of the Home Owners' Loan Act of 1933, which provides that no tax on a federal savings and loan association shall be "greater than that imposed" by the State on similar local thrift and home financing institutions. Appellants claimed that the state tax on their net operating income exceeds that imposed on similar local institutions because the deduction available nder the state tax statute for "minimum additions to its guaranty fund or surplus, required by law or the appropriate federal and state supervisory authorities" is generally lower for federal savings and loan associations than for similar state savings institutions. Appellants also contended that because the Massachusetts tax does not apply to credit unions, which, appellants maintained, are "similar" to federal savings and loan associations, the associations are entitled to the credit unions' exemptions. The Supreme Judicial Court of Massachusetts upheld the statute. Held:

1. The Massachusetts tax is not discriminatory on its face. The amount of the deduction depends on varying regulatory practices as to the reserves that must be maintained, but a tax is not invalid because it recognizes that state and federal regulations may differ. Nor does the record show any discrimination in fact, or in statutory purpose (federal reserve requirements were as high as the State's when the tax was enacted). Pp. 257-260.

2. Credit unions are not "similar" to federal savings and loan associations within the meaning of § 5(h), as is clear not only from distinctions between the two under both federal and state law but also from the fact that Massachusetts savings banks and cooperative banks are more competitive with federal associations than credit unions are. Congress recognized that States might classify their own institutions in various ways, as Massachusetts has done in excluding credit unions from a large classification that includes state institutions more closely resembling the federal associations. Pp. 260-262.

372 Mass. 478, 363 N.E.2d 474, affirmed.

Chester M. Howe, Boston, Mass., for appellants.

S. Stephen Rosenfeld, Boston, Mass., for appellees.

Mr. Justice STEVENS delivered the opinion of the Court.

This appeal challenges the power of the State of Massachusetts to impose a tax on federal savings and loan associations. Relying on a federal law forbidding States to tax federal associations more heavily than "similar" state institutions, appellants contend that the State's tax discriminates against federal associations because: (1) the state institutions subject to the tax are allowed a larger deduction for required additions to reserves than federal associations, and (2) the state tax does not apply to credit unions, which appellants believe to be "similar" to federal savings and loan associations.

In the Home Owners' Loan Act of 1933, Congress authorized the creation of federally chartered savings and loan associations. 48 Stat. 128. Section 5(h) of that Act, as amended, 76 Stat. 984, 12 U.S.C. § 1464(h) (1976 ed.), provides:

"No State, county, municipal, or local taxing authority shall impose any tax on such associations or their franchise, capital, reserves, surplus, loans, or income greater than that imposed by such authority on other similar local mutual or cooperative thrift and home financing institutions."

As enacted in 1966, the Massachusetts statute imposed an excise tax, measured by deposits and income, on state cooperative banks, state savings banks, and state and federal savings and loan associations. 1966 Mass. Acts, ch. 14, § 11. In 1973, the deposits aspect of the tax was invalidated as discriminatory. United States v. State Tax Comm'n, 481 F.2d 963 (CA1 1973). See n. 3, infra. The present case, brought in state court in 1975, challenges the income aspect of the tax. It was presented on stipulated facts to the Supreme Judicial Court of Massachusetts, which upheld the statute. 372 Mass. 478, 363 N.E.2d 474 (1977). We affirm.

I

The state tax statute allows a financial institution to deduct from its taxable income any "minimum additions . . . to its guaranty fund or surplus required by law or the appropriate federal and state supervisory authorities." Mass.Gen.Laws Ann., ch. 63, § 11(b ) (West Supp.1977). As might be expected, the reserves required by state and federal regulators are not precisely the same. Before 1970, each federal association was required to adopt a charter providing for a minimum reserve equal to 10% of the association's capital. See 12 CFR § 544.1 (1977). This reserve was as large as, or larger than, the reserves that Massachusetts required its institutions to maintain.¹ In 1970, federal associations were allowed to delete the reserve provision from their charters, a change that dropped their reserve requirement to 5% of checking and savings account balances. 35 Fed.Reg. 4044 (1970); 12 CFR §§ 544.8(c)(1), 563.13 (1977); 12 U.S.C. § 1726(b) (1976 ed.). More than three-quarters of the federal associations in Massachusetts adopted the change within a few months of the new regulation, and all but four have now amended their charters. The new requirement is lower than those set for state institutions. For this reason, the federal associations argue their tax deductions are smaller than those of state institutions; they contend that this disparity in deductions is the sort of discrimination that has been proscribed by federal law.

Section 5(h) of the Home Owners' Loan Act of 1933 "unequivocally bars discriminatory state taxation of the Federal Savings and Loan Associations." Laurens Federal Savings & Loan Assn. v. South Carolina Tax Comm'n, 365 U.S. 517, 523, 81 S.Ct. 719, 722, 5 L.Ed.2d 749. It is one of several laws passed by Congress to protect federally chartered financial institutions from "unequal and unfriendly competition" caused by state tax laws favoring state-chartered institutions.² On its face, however, Massachusetts' tax scheme is not unfriendly or discriminatory. It applies a single neutral standard to state and federal institutions alike. The amount of the deduction depends on varying regulatory practices, but a tax is not invalid because it recognizes that state and federal regulations may differ. There is no reason to believe that § 5(h) was intended to force state and federal regulation into the same mold.³ Notwithstanding its neutral language, the federal associat ons argue that the tax is discriminatory in fact. They have not, however, established that it is unfairly burdensome in "practical operation." Michigan Nat. Bank v. Michigan, 365 U.S. 467, 476, 81 S.Ct. 659, 664, 5 L.Ed.2d 710. The record does not indicate that federal associations have suffered a significant handicap in competing with state institutions, or that any other federal policies have been thwarted.⁴ The lower reserve requirement, by making more funds available for dividends, may well give the associations a competitive advantage, despite the tax. Certainly the associations' rush to amend their charters in 1970 lends support to that conclusion. Any suggestion of discriminatory purpose is foreclosed by the fact that the tax was enacted when federal reserve requirements were as high as state requirements.

II

Massachusetts does not impose its tax on credit unions. Arguing that credit unions in Massachusetts are "similar" to federal savings and loan associations, the associations claim entitlement to the credit unions' exemption.

There are indeed similarities between these two kinds of financial institutions. For example, both are characterized by mutual ownership and control; 12 CFR § 544.1 (1977); Mass.Gen.Laws Ann., ch. 171, §§ 10, 13, and 24 (West 1971 and Supp. 1977); and both are empowered to make loans secured by real estate. 12 U.S.C. § 1464(c) (1976 ed.); Mass.Gen.Laws Ann., ch. 171, § 24 (West Supp. 1977). But the institutions are far from identical.

Congress has long treated federally chartered credit unions differently from federally chartered savings and loan associations, giving the credit unions, but not the savings and loan associations, an exemption from state taxes. See 12 U.S.C. § 1768 (1976 ed.). In establishing insurance programs to protect members' deposits, Congress distinguished state and federal credit unions from state and federal savings and loan associations. See 12 U.S.C. §§ 1726(a) and 1781(a) (1976 ed.). Moreover, courts in other jurisdictions have generally rejected the claim that credit unions are "similar" under § 5(h) to federal savings and loan associations.⁵

The distinctions found in those jurisdictions have validity in Massachusetts as well. By law, Massachusetts credit unions must give preference to small personal loans, Mass.Gen.Laws Ann., ch. 171, § 24 (West Supp. 1977), while the primary lending role of federal savings and loan associations is "to provide for the financing of homes." 12 U.S.C. § 1464(a) (1976 ed.). Massachusetts credit unions may lend only to members, Mass.Gen.Laws Ann., ch. 171, § 24 (West Supp. 1977), while federal associations are not so limited. And, despite individual exceptions, there are major differences between the actual lending practices of state credit unions as a class and federal associations as a class.⁶

Of greater importance than these differences, however, is the fact that Massachusetts credit unions are not the federal associations' closest state-chartered competitors. Massachusetts savings banks and cooperative banks have much more in common with federal associations than do state credit unions; their business is...