National Bank of Alaska v. State, Dept. of Revenue, S-2375
| Court | Supreme Court of Alaska (US) |
| Citation | 769 P.2d 990 |
| Docket Number | No. S-2375,S-2375 |
| Parties | NATIONAL BANK OF ALASKA, Appellant, v. STATE of Alaska, DEPARTMENT OF REVENUE, Appellee. |
| Decision Date | 24 February 1989 |
Robert C. Bundy, Bogle & Gates, Anchorage, Ronald T. Schaps, Seattle, for appellant.
David T. LeBlond, Asst. Atty. Gen., Anchorage, Grace Berg Schaible, Atty. Gen., Juneau, for appellee.
Before MATTHEWS, C.J., and RABINOWITZ, BURKE, COMPTON and MOORE, JJ.
National Bank of Alaska (NBA) appeals from the superior court's affirmance of the Department of Revenue's (DOR) decision to deny its request for a tax refund. The refund was sought for an alleged overpayment made in 1981 under the Alaska business license (ABL) tax imposed by AS 43.70.030.
NBA is a national banking association with its principal place of business in Anchorage, Alaska. In 1981, NBA timely filed its 1980 ABL tax return and paid the total amount due for 1980, $816,024. This amount was calculated by including NBA's income from the following federal obligations in its net income subject to the tax:
Nature of Federal Obligation Income Received ABL Tax Imposed
United States
Treasury Bills $1,397,000 $ 91,393
United States
Treasury Notes 2,229,000 145,823
Federal Farm
Credit Bank Bonds 1,275,000 83,411
Federal Home
Loan Bank Bonds 535,000 35,000
Federal National
Mortgage Association 806,000 52,729
Government National
Mortgage Association 210,000 13,738
--------------- --------
$6,452,000 $422,093
In March 1984, NBA filed an amended ABL return for 1980 and submitted a refund claim for $422,093, the amount previously paid on its income from federal obligations. DOR denied NBA's refund claim in writing. NBA appealed DOR's decision to the superior court, which affirmed DOR's decision. NBA now appeals to this court. We affirm the decision of the superior court. 1
NBA relies primarily upon 31 U.S.C. § 742 2 to support its argument that its income from federal obligations is exempt from state taxation. In 1980, that statute stated:
Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under state or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes.
NBA argues that the ABL tax is not a "nondiscriminatory franchise or other nonproperty tax in lieu thereof," and cannot therefore be levied upon its income from federal obligations.
If this court rejects its argument that 31 U.S.C. § 742 bars application of the ABL tax to income from all federal obligations, NBA alternatively asserts that certain of its federal obligations are exempt from state taxation by virtue of separate federal statutory provisions. In this regard, it argues that its Federal Home Loan Bank obligations are exempt under 12 U.S.C. § 1433, 3 and that its Federal Farm Credit Bank obligations are exempt under 12 U.S.C. § 2079. 4
There are several state statutes that provide for the taxation of corporations and other businesses in Alaska. The basic corporate net income tax is imposed by AS 43.20.011(e). 5 However, in 1980 banks were not subject to this tax. 6 Alaska also levies an "annual corporation tax" on each corporation doing business in the state. AS 10.05.717. 7 In 1980 banks were exempt from this tax as well. 8
Finally, the Alaska Business License (ABL) Act, AS 43.70.020-.120, imposes a "license fee" on each person doing business in the state. 9 The first sentence of AS 43.70.020(a) provides that:
For the privilege of engaging in a business in the state, a person shall first apply, upon forms prescribed by the commissioner, and obtain a license to do so, and pay the license fee provided for in AS 43.70.030.
In 1980, AS 43.70.030(b) (repealed 1984) 10 provided:
The license fee for each national bank and state bank, trust company and savings and loan association is seven per cent of its net income. Net income means the taxable income of each taxpayer before net operating loss deduction and special deductions, computed as required under the Internal Revenue Code of the United States and includes all other income including income from federal, state or municipal obligations. Each of these taxpayers required to make a return under the provisions of the Internal Revenue Code shall at the same time file with the department a return setting out the amount of tax due under this chapter, and other information for the purpose of carrying out the provisions of this chapter which the department requires. Each of these taxpayers shall also at the same time file a true and correct copy of the tax return which he has filed with the Internal Revenue Service. A taxpayer filing under this subsection shall use the same tax year as the taxpayer uses for federal income tax purposes.... 11
The 7% tax provided for by AS 43.70.030(b) is imposed on net income, "including income from federal, state, and municipal obligations." NBA argues that federal law exempts income from federal obligations from state taxation.
Prior to 1959, the United States Supreme Court repeatedly upheld state taxes that were measured by, but not directly imposed upon, net income (including income from federal obligations). See, e.g., Werner Mach. Co. v. Director of Div. of Taxation. 12 In response to these decisions, Congress in 1959 added to 31 U.S.C. § 742 the specific provision that:
This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes. 13
In 1983, the Supreme Court reaffirmed that "[t]he 1959 amendment [to section 742] rejected and set aside this Court's rather formalistic pre-1959 approach to [the statute]." American Bank and Trust Co. v. Dallas County. 14 The Court stated that "Congress intended to sweep away formal distinctions and to invalidate all taxes measured directly or indirectly by the value of federal obligations, except those specified in the amendment." 15
Therefore, unless the ABL tax falls within an exception specified in section 742, NBA is entitled to the refund it seeks. If, however, the ABL tax falls within the exception for "franchise or other nonproperty taxes in lieu thereof," no refund is due NBA.
The state argues that AS 43.70.030(b) was an allowable "nonproperty" privilege tax. The state further argues that whether it is further classified as a "franchise tax" 16 is immaterial because it was imposed on banks for the privilege of doing business in Alaska.
Because in 1980 banks paid neither an income tax under AS 43.20.011(e) nor an annual corporation ("franchise") tax under AS 10.05.717, 17 we find persuasive the state's argument that the ABL tax imposed on banks was a "nonproperty" tax in lieu of a franchise tax. 18 Case law from other jurisdictions supports this argument.
Garfield Trust Co. v. Director, Division of Taxation, 19 is instructive. There the New Jersey statute in question required
a corporation to pay an annual franchise tax "for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business ... in this State." The tax now is computed by adding together prescribed percentages of a net worth base and an entire net income base. 20
The Supreme Court of New Jersey rejected the argument that the legislature's addition of the net income base transformed the tax from a franchise tax to an income tax:
This argument ignores the fact that the United States Supreme Court noted in Werner Machine: "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." 21
The court concluded that the tax in question was an annual franchise tax, stating:
The holding and implications of Werner Machine retain their vitality through recent decisions of both this Court and the United States Supreme Court. See American Bank and Trust Co. v. Dallas, 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 (1983); Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983). Therefore, inclusion of the face value and interest income of federal obligations in the bases for calculating the ... [tax] does not by its own force violate [31 U.S.C. § 742]. 22
The Garfield decision was appealed to the United States Supreme Court, which dismissed the appeal for want of a substantial federal question. 23
Also of significance is the Supreme Court of Florida's decision in Department of Revenue v. First Union National Bank of Florida. 24 There the court upheld a 5 1/2% franchise tax imposed on banks and savings and loan associations. The banks challenged the validity of the franchise tax on the ground that it violated 31 U.S.C. § 3124(a). 25 The Florida lower court had concluded that the franchise tax was the equivalent of an income tax and thereby "invalid to the extent that it purported 'to include income from federal securities within its measure.' " 26 The supreme court found this analysis erroneous: ...
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