First of McAlester Corp. v. Oklahoma Tax Com'n

• Decision Date: 02 July 1985
• Docket Number: Nos. 60488,60653,s. 60488
• Citation: 1985 OK 52,709 P.2d 1026
• Parties: FIRST OF McALESTER CORPORATION, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee. FIRST STATE BANK & TRUST COMPANY OF SHAWNEE, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

Page 1026

709 P.2d 1026

1985 OK 52

FIRST OF McALESTER CORPORATION, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.

FIRST STATE BANK & TRUST COMPANY OF SHAWNEE, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.

Nos. 60488, 60653.

Supreme Court of Oklahoma.

July 2, 1985.

J.A. Allford, McAlester, for appellant First of McAlester Corp.

Terry W. West, Shawnee, for appellant First State Bank & Trust Co. of Shawnee.

J. Lawrence Blankenship, Gen. Counsel and Donna E. Cox, Oklahoma Tax Com'n, Oklahoma City, for appellee Oklahoma Tax Com'n.

Laura N. Pringle, Vice President and Gen. Counsel, Oklahoma City, for amicus curiae Oklahoma Bankers Association.

Conner, Winters, Ballaine, Barry & McGowen by J. Denny Moffett and Douglas M. Rather, Tulsa, for amicus curiae First Tulsa Bancorporation, Inc.

Hastie and Kirschner by James E. Britton, Oklahoma City, for amici curiae First National Bank, Mangum, First Mangum Corp. First National Bank, Mountain View, Guaranty Bancshares, Inc.

Bryce A. Baggett, Oklahoma City, for amici curiae Central National Bank of Oklahoma City and Friendly National Bank of Southwest Oklahoma City.

HODGES, Justice.

On June 21, 1983, and June 29, 1983, First of McAlester Corporation and First State Bank & Trust Company of Shawnee, Oklahoma (appellants), respectively, filed separate petitions in error. Simultaneous therewith approximately 268 appeals were filed with this Court. On September 19, 1983, this Court consolidated the foregoing named actions and stayed all other appellate proceedings of similarly situated banks pending resolution of such consolidated appeal. Further, this Court authorized the Oklahoma Bankers Association and any bank whose appeal is stayed to file amicus curiae briefs. ¹

Appellants in the instant consolidated action seek review of the Oklahoma Tax Commission Order No. 83-05-10-15 rendered May 10, 1983, denying appellants' and all other banks' claims for refund and denying all exclusions from net income for calculations of bank tax liability accrued prior to the decision of the United States Supreme Court in the case of Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983) and determining that Memphis Bank should be applied prospectively only.

Shortly after the Memphis Bank decision, appellants sought a refund of "in lieu tax" paid to the State of Oklahoma through the Oklahoma Tax Commission (Commission or appellee) pursuant to the requirements of 68 O.S. 1981 §§ 2370 and 2371, for the years of 1979, 1980 and 1981, respectively. Appellant First State Bank &amp Trust Company of Shawnee has filed and appellant First of McAlester Corporation asserts that it will file 1982 returns with the Commission excluding interest on federal securities from net income in reliance upon the United States Supreme Court's pronouncement in Memphis Bank. Appellants specifically request that Order No. 83-05-10-15 be vacated and the cause be remanded to the Commission with instructions to enter its Order granting appellants' claims for refund for the years 1979 through 1981, and allowing appellants' exclusions from net income for calculations of bank tax liability accrued prior to the Memphis Bank case. In addition, appellants seek declaratory relief from this Court, finding 68 O.S. 1981 §§ 2370 and 2371 ² invalid from the date those provisions of law became effective in the State of Oklahoma on June 22, 1971, and directing the Commission to honor claims for refunds for any amounts paid pursuant to those provisions since that date. Appellee requests that this Court uphold and affirm its Order and give prospective application to avoid inequity or hardship.

On January 24, 1983, the United States Supreme Court decided Memphis Bank, wherein the Court reviewed a Tennessee statute that imposed a tax on a bank's net earnings, and defined net earnings to include income from obligations of the United States and its instrumentalities but excluded interest earned on the obligations of Tennessee and its political subdivisions. ³ Each bank was required under the statute to pay to the local governments of Tennessee an excise tax of 3% of its net earnings for the preceding year, less 10% of the ad valorem taxes paid by the bank for that year. The Memphis Bank & Trust Company paid the required excise tax under protest and subsequently filed an action in state court to recover the portion of taxes paid covering interest income on federal obligations. The United States Supreme Court, in reversing the judgment of the Tennessee Supreme Court, unanimously held that the Tennessee bank tax violated the immunity of obligations of the United States from state and local taxation and found that the tax could not be characterized as nondiscriminatory under the exception for nondiscriminatory franchise taxes as provided for in 31 U.S.C. § 742. ⁴ 459 U.S. at 398. See also Federal Tax Immunity; Memphis Bank & Trust Co. v. Garner; Washington v. United States, 37 Tax Law 375 (1984).

On June 6, 1983, the Governor of Oklahoma signed into law Enrolled House Bill 1380, ⁵ which amended the provisions of 68 O.S. 1981 § 2370 by deleting the final paragraph of subsection C and adding a new subsection D and repealing 68 O.S. 1981 § 2371. Although the legislative history is silent as to the intent of the Legislative, it is apparent that its intent was to cure any constitutional infirmities that might be found in the in lieu bank tax provisions.

The dispositive issues presented in this consolidated appeal are as follows: (1) Whether the now repealed Oklahoma taxing scheme, which included income from federal securities, was unconstitutional; (2) If answered in the affirmative, should the invalid tax levy condemned by the Memphis Bank case, be nullified prospectively or retroactively to 1971, the date of enactment of 68 O.S. 1981 §§ 2370 and 2371?

I.

Turning now to appellants' constitutional claim, that the Commission's Order is contrary to the holding and intent of the Memphis Bank case in that it mandates recognition by the Commission that the in lieu tax "impermissibly discriminated against the Federal Government and those with whom it deals" from the date §§ 2370 and 2371 became effective in Oklahoma on June 22, 1971.

The relevant provisions of the United States Constitution to the present case are article I, § 8, clause 2 (the "Borrowing Clause") ⁶ and article VI, clause 2 (the "Supremacy Clause"). ⁷ In reliance upon Memphis Bank, appellants argue that the in lieu tax violates the federal constitutional immunity of United States obligations from state and local taxation. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819) established the constitutional doctrine of tax immunity derived from the Borrowing and Supremacy Clauses that, "States may not impose taxes directly on the Federal Government, nor may they impose taxes the legal incidence of which falls on the Federal Government." Memphis Bank, 459 U.S. at 397, 103 S.Ct. at 696 (quoting United States v. County of Fresno, 429 U.S. 452, 97 S.Ct. 699, 50 L.Ed.2d 683 (1977)). "Where, as here, the economic but not the legal incidence of the tax falls on the Federal Government, such a tax generally does not violate the constitutional immunity if it does not discriminate against holders of federal property or those with whom the Federal Government deals." Id. A state is without authority to tax securities and obligations of the federal government, directly or indirectly; however, a nondiscriminatory franchise or other nonproperty tax is not objectional as a tax on federal obligations despite the fact that the tax allows no deduction for sums invested in federal obligations.

The nondiscrimination test must therefore be applied in assessing the constitutionality of the Oklahoma bank tax. Accordingly, the pivotal question is whether the Oklahoma in lieu tax as provided in §§ 2370 and 2371 impermissibly discriminates against federal obligations in favor of obligations issued by Oklahoma and subdivisions thereof under 31 U.S.C. § 742.

The appellee urges this Court to adopt the construction of §§ 2370 and 2371 that such provisions on their face specifically exclude interest income earned on obligations of the United States from the measurement of the in lieu tax as well as the exclusion of interest income earned on obligations of Oklahoma and its political subdivisions, and is, thus, distinguishable from the Tennessee statute in Memphis Bank. In support of this contention, appellee argues that 68 O.S. 1981 §§ 2353 and 2358 are incorporated in their totality into the bank tax statutes. Specifically, appellee argues that the referenced "Section 8, A, 1" [68 O.S. 1981 § 2358(A)(1) ] and "Section 8" [68 O.S. 1981 § 2358] ⁸ contained in §§ 2370 and 2371 refer to § 2358 in its entirety, thus including both subsections 1 and 2 of § 2358(A) in calculating the tax basis, rather than incorporating only subsection 1 which adjusts taxable income by adding interest income on obligations issued by states other than Oklahoma. Appellee argues that the term "taxable income" ⁹ found in §§ 2370 and 2371 should be defined by reference to other provisions of the Oklahoma Income Tax Act as the definition sections of the bank tax were deleted in 1971 and codified as part of the Income Tax Act found in article 23 of title 68 of the Oklahoma Statutes. Specifically, appellee urges reference to the definition of "taxable income" found in § 2353(10) ¹⁰ which adopts the definition of taxable income for federal income tax purposes. Appellee then looks to § 2358 which provides for adjustments, i.e., additions, allocations and deductions, to taxable income to arrive at "Oklahoma taxable income." The term net income used in §§ 2370 and 2371 is not defined; however, appellee suggests the application of the definition provided for "Oklahoma taxable income" found in § 2353(12). ¹¹ Appellee concedes that it has not administered the bank tax to date to permit the...