Indiana Dept. of State Revenue v. Fort Wayne Nat. Corp.

• Decision Date: 10 April 1995
• Docket Number: No. 49S10-9406-TA-521,49S10-9406-TA-521
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, and Kenneth L. Miller, in his Capacity as Commissioner of the Indiana Department of State, Appellants, v. FORT WAYNE NATIONAL CORPORATION, Appellee.
• Court: Indiana Supreme Court

Page 109

649 N.E.2d 109

INDIANA DEPARTMENT OF STATE REVENUE, and Kenneth L. Miller,

in his Capacity as Commissioner of the Indiana

Department of State, Appellants, v. FORT WAYNE NATIONAL CORPORATION, Appellee.

No. 49S10-9406-TA-521.

Supreme Court of Indiana.

April 10, 1995.

Pamela Carter, Atty. Gen., David A. Arthur, Deputy Atty. Gen., Indianapolis, for appellants Indiana Dept. of State Revenue and Kenneth L. Miller, in his Capacity as Com'r of the Indiana Dept. of State Revenue.

William F. Landers, Jr., Thomas M. Shoaff, Baker & Daniels, Indianapolis, for appellees and cross-appellant Fort Wayne Nat. Corp.

Lewis C. Bose, Theodore J. Nowacki, Ronald M. Soskin, George T. Patton, Jr., Bose McKinney & Evans, Indianapolis, amicus curiae for Indiana League of Sav. Institutions, Inc.

ON PETITION TO TRANSFER

DeBRULER, Justice.

This case is an appeal of a summary judgment against the appellant, Indiana State Department of Revenue, granting Fort Wayne National's claim for refund of a portion of the Financial Institutions Tax (FIT) it paid for the 1990 calendar year. Specifically, appellee Fort Wayne National Corporation (FWNC) contended in the Tax Court that the Department is precluded from using the income from municipal and federal bonds issued after March 11, 1959, and prior to January 1, 1990 in computing Fort Wayne National's tax liability by the General Exemption Statute (GES). The Tax Court granted appellee's motion for summary judgment under Ind. Trial Rule 56(B). Fort Wayne Nat. v. Dept. of State Revenue (1993), Ind.Tax, 621 N.E.2d 668. The Department has petitioned this court for review. The petition is granted.

Appellant's brief raises the following issues:

(1) whether the FIT operates as a direct tax on the municipal and federal bonds by using them to measure the taxpayer's FIT liability;

(2) whether the GES precludes the FIT from including the current income of federal and municipal bonds in the determination of the amount of tax to be paid;

(3) whether including federal bond income in the determination of FIT liability violates the non-discrimination requirement of 31 U.S.C. § 3124; and

(4) whether the FIT impairs a contract in violation of the Contract Clause of the U.S. Constitution ¹ by using the income from tax exempt municipal bonds to determine the taxpayer's FIT liability. ²

Facts

Fort Wayne National Corporation (FWNC), the taxpayer, is a financial institution domiciled in Indiana and is therefore subject to Indiana's Financial Institutions Tax (FIT). The General Assembly passed the FIT in 1990. That same year, the Assembly also added language to the General Exemption Statute, explicitly excepting the FIT from the GES. For the taxable year 1990, FWNC paid $1,973,936 toward its FIT liability. Later, FWNC filed a claim for refund in the amount of $685,533 plus interest. It claimed that the refund sought represented tax either improperly levied upon or measured by municipal and federal bond income from municipal bonds or federal bonds issued after March 11, 1959 and prior to May 1989. The Indiana Department of State Revenue neither granted nor denied the claim for refund within 180 days of its filing. FWNC filed the original tax appeal shortly thereafter. The parties have stipulated to the material facts.

Discussion

I. The Nature of the Financial Institutions Tax (FIT)

In order to determine the nature of the FIT, the starting point is the distinction between income, property, and excise taxes within American revenue systems. The United States Supreme Court has long recognized two great categories of taxes: direct or indirect. To the class of direct taxes belong taxes upon income and property; to the class of indirect taxes belong excises, duties, and imposts. Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108 (1895). Historically, whether a federal tax was classified as a direct or indirect tax determined whether it was subject to either the apportionment clause or the uniformity clause of the United States Constitution. ³ For federal income taxes, the question of whether the federal income tax was a direct tax became superfluous with the passage of the Sixteenth Amendment.

The Indiana Courts have adopted the direct-indirect tax as well. The distinction between property taxes and excise taxes became an issue in the applicability of art. 10, § 1 of the Indiana Constitution to various state taxes. See Lutz v. Arnold (1935), 208 Ind. 480, 193 N.E. 840; Miles v. Department of Treasury (1935), 209 Ind. 172, 199 N.E. 372, appeal denied, 298 U.S. 640, 56 S.Ct. 750, 80 L.Ed. 1372 (1935). Lutz addressed the issue of whether a general intangibles tax was an excise tax or a property tax. ⁴ The court held that the general intangibles tax was an excise tax. The holding in Lutz hinged on the distinguishing characteristic of an excise tax, i.e., that it is "a tax imposed upon the performance of an act, the engaging in an occupation, or the enjoyment of a privilege...." Lutz, 208 Ind. at 489, 193 N.E. at 844 (emphasis added). The distinction between a tax on property and an excise tax on the exercise of a privilege was also explicitly recognized:

the tax imposed under the act is for the right to exercise one or more of the privileges as above set out. It does not attempt to impose the tax on property included in the class defined and it fixes the rate of the tax and the method of measuring the amount of the tax to be paid by each person subject to the tax. The tax is not payable unless the privileges as set out are exercised and the exercising of the privileges is made the occasion for the tax.

Lutz, 208 Ind. at 490-91, 193 N.E. at 844 (emphasis added). Similarly, this Court ruled in Miles that the Gross Income Tax Act of 1933 created an excise tax, rather than a property tax:

We conclude that the tax in question is an excise, levied upon those domiciled within the state or who derived income from sources within the state, upon the basis of the privilege of domicile or the privilege of transacting business within the state, and that the burden may reasonably be measured by the amount of income.

Miles, 209 Ind. at 188, 199 N.E. at 379. Given our holding in Miles, it is manifest that an excise or franchise tax may be measured by a taxpayer's income without being construed as an income tax. Moreover, municipal bonds that are exempt from direct state and federal taxation can be used to measure a taxpayer's excise tax liability. Storen et al. v. J.D. Adams Mfg. Co. (1937), 212 Ind. 343, 7 N.E.2d 941, reh'g denied, rev'd in part, aff'd in part, 304 U.S. 307, 58 S.Ct. 913, 82 L.Ed. 1365 (1938). The United States Supreme Court has also ruled that federal obligations otherwise exempt from direct state taxation may be included in the determination of a corporation's "net worth" for purposes of a state franchise tax:

Appellant argues further that even if this is a franchise tax, it must fall because its effect is the same as if it had been imposed directly on the tax-exempt federal securities. Since the tax remains the same whatever the character of the corporate assets may be, no claim can be sustained that this taxing statute discriminates against the federal obligations. And since this is a tax on the corporate franchise, it is valid despite the inclusion of federal bonds in the determination of net worth. This Court has consistently upheld franchise taxes measured by a yardstick which includes tax-exempt income or property, even though a part of the economic impact of the tax may be said to bear indirectly upon such income or property.

Werner Machine Co., Inc. v. Director of Division of Taxation, 350 U.S. 492, 493-94, 76 S.Ct. 534, 535, 100 L.Ed. 634, 637 (1956) (per curiam). Thus, direct taxes on income and indirect taxes, such as excise taxes, are afforded very different treatment under both federal tax law and the tax law of Indiana.

FWNC claims that the FIT is a direct tax on its federal and municipal bonds issued after March 11, 1959 and before January 1, 1990, as well as the income from those bonds, and that the application of the FIT to those bonds is an impermissible, "retroactive" tax. The Department, on the other hand, argues that the FIT does not tax the bonds; rather, the FIT is an excise that taxes a financial institution's privilege of conducting business in Indiana. The FIT itself reads as follows:

There is imposed on each taxpayer a franchise tax measured by the taxpayer's adjusted gross income or apportioned income for the privilege of exercising its franchise or the corporate privilege of transacting the business of a financial institution in Indiana.

IND.CODE ANN. § 6-5.5-2-1(a) (West Supp.1994) (emphasis added). The statute determines the amount of the tax for the taxable year by multiplying eight and one-half percent (8.5%) times the remainder of

(1) the taxpayer's adjusted gross income or apportioned income; minus

(2) the taxpayer's deductible Indiana net operating losses as determined under this section; minus

(3) the taxpayer's net capital losses minus the taxpayer's net capital gains ... multiplied by the apportionment percentage applicable to the taxpayer ... for the taxable year of the loss.

Id. Thus, the basis of this particular tax reflects the extent to which a financial institution enjoys the privilege of operating as a financial institution in Indiana. If this tax were truly a direct property tax, it would be imposed regardless of whether the taxpayer realized net returns or not. Storen, 212 Ind. at 358, 7 N.E.2d at 947. If this tax were a direct tax on appellant's bonds and their income, the fact that the taxpayer was coincidentally exercising its corporate privilege in Indiana would also be irrelevant.

In determining the nature of any state tax, "the declaration in a statute that the tax is of a particular nature, while not conclusive, is very important and must be given consideration in construing the statute." Lutz, 208 Ind. at...