Protest of First Federal Sav. and Loan Ass'n of Claremore, Matter of

• Decision Date: 07 December 1982
• Citation: 743 P.2d 640
• Parties: In the Matter of the PROTEST OF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLAREMORE, Oklahoma To the Proposed Assessment of Additional Income Tax Issued
• Court: Oklahoma Supreme Court

Page 640

743 P.2d 640

1987 OK 44

In the Matter of the PROTEST OF FIRST FEDERAL SAVINGS AND

LOAN ASSOCIATION OF CLAREMORE, Oklahoma To the

Proposed Assessment of Additional Income

Tax Issued December 7, 1982,

Appellant.

In the Matter of the PROTEST OF GREAT PLAINS FEDERAL SAVINGS

AND LOAN ASSOCIATION, (formerly Custer County Federal

Savings and Loan Association) of Weatherford, Oklahoma, to

the Proposed Assessment of Additional Income Tax Issued

January 14, 1983, Appellant, v. OKLAHOMA TAX COMMISSION, Appellee.

Nos. 64673, 64674.

Supreme Court of Oklahoma.

May 26, 1987.

As Modified Oct. 6, 1987.

Rehearing Denied Oct. 7, 1987.

Dee A. Replogle, Jr., Robert H. Gilliland, Jr., Richard D. Craig, McAfee & Taft, Oklahoma City, for appellants.

J. Lawrence Blankenship, Donna E. Cox, Christy J. Caesar, Oklahoma City, Marjorie L. Welch, Norman, Oklahoma Tax Com'n, for appellee.

KAUGER, Justice.

The issue presented is whether certain corporate income earned by Oklahoma savings and loan associations is exempt from taxation by the state of Oklahoma. The income in question includes the interest earned on 1) overnight/demand deposits ¹ placed in the Federal Home Loan Bank, 2) prepaid insurance premiums ² credited to the secondary reserve Federal Savings and Loan Insurance Corporation (FSLIC), 3) and bonds ³ issued by the Federal National Mortgage Association ^MA and the Federal Home Loan Mortgage Corporation (FHLMC). We find that the FHLMC bonds are exempt from taxation, but that the interest on the overnight/demand deposits, the bonds issued by FNMA, and the interest credited to the secondary reserve are taxable.

After office audits of the appellants, First Federal Savings and Loan Association of Claremore and Great Plains Federal Savings and Loan Association of Weatherford, the Oklahoma Tax Commission (OTC) issued its proposed assessment of additional income tax, penalties, and interest. The appellant savings and loan associations filed timely protests pursuant to 68 O.S.1981 § 221. ⁴ However, because the parties stipulated to the facts, no formal hearing was conducted.

The contention of the protesting savings and loan associations before the Oklahoma

                Tax Commission was that the income subjected to taxation was either earned on federal obligations or that it was exempt from taxation by controlling federal statutes.  After considering this argument, the Oklahoma Tax Commission on May 30, 1985, denied the protests, finding that the income earned on the overnight/demand deposits, the fed-funded transactions in the Federal Home Loan Bank (FHLB), 5 the pre-paid premiums to the Federal Savings and Loan Insurance Corporation (FSLIC), the bonds issued by the Federal National Mortgage Association MA, and the Federal Home Loan Mortgage Corporation (FHLMC) were not federal obligations pursuant to 12 U.S.C. §§ 1433, 1725. 6  The OTC concluded that all the income from these sources was subject to state taxation under 12 U.S.C. 1464(h). 7  The savings and loans appealed the Commission's findings except its finding that the income earned on the fed-funded transactions was taxable
                

HISTORY OF THE STATE TAXATION OF FINANCIAL INSTITUTIONS

The first significant controversy involving taxation of banks arose in McCulloch v. Maryland, 17 U.S. (4 Wheat) 316, 4 L.Ed. 579 (1819) when the state of Maryland attempted to tax bank notes issued by the Second Bank of the United States. The United States Supreme Court held that the bank was an instrumentality of the federal government, ⁸ that taxation of the banks operation would substantially burden governmental activities, ⁹ that the bank was a necessary and proper incident of the congressional power to lay and collect taxes and to borrow money, that the tax violated the supremacy clause of the United States Constitution, ¹⁰ and that the supremacy In 1819, the federal reserve system was non-existent, it was uncertain whether the federal government could issue money, ¹¹ and the Second Bank played a major role in the federal government's fiscal and monetary affairs. Nevertheless, the Court recognized that the general power of taxation by the states extends to certain aspects of federal instrumentalities: ¹²

clause vested Congress with the ability to override state laws in conflict with the exercise of constitutionally delegated congressional powers.

"This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the state. But this (tax on note issuance) is a tax on the operations of the bank, and is, consequently, a tax on the operations of an instrument employed by the government of the Union to carry its powers into execution."

The Borrowing ¹³ and Supremacy clauses of the Constitution do not prohibit the states from taxing personal property representing an interest in a federal instrumentality as long as the property interest is not taxed in a discriminatory manner when compared to similar investment property. This balancing of state and federal powers was the reason for the subsequent enactment of 12 U.S.C. § 548 in 1864, which allowed a bank share tax on national bank stock held in the hands of individuals to be taxed. Even so, the tax could not be levied at a greater rate than that applied to state-chartered banks or other moneyed capital. ¹⁴

In recent years, it has been recognized by Congress that national banks are no longer significant federal instrumentalities, and that general taxation of their activities has little effect on the operation of the federal government's fiscal and monetary affairs. ¹⁵ Congress amended § 548 ¹⁶ in 1969, to permit the general taxation of national banks--limited only by the nondiscrimination requirement relative to state-chartered banks, and possible constitutional requirements under the supremacy and borrowing clauses. The Federal Home Loan Bank Board was established in 1932 The protestants argue, and correctly so, that the "borrowing clause" of the United States Constitution ¹⁹ as well as 31 U.S.C. § 3124, ²⁰ prohibit the state from directly taxing interest on federal obligations. However, the question posed here is whether the assets subjected to taxation qualify for an exemption from state tax under either specific statutory or general constitutional principles.

                by the Federal Home Loan Bank Act. 17  In 1933, the Board was authorized to charter and supervise federal savings and loan associations, local mutual thrift institutions in which people could invest funds to provide financing for homes. 18
                

Title 12 U.S.C. § 1464(h) ²¹ allows states to tax federal savings and loan associations, their franchises, reserves, surplus, loans, and income if the taxation is not greater than that imposed on similar local mutual or cooperative thrift and home financing institutions. In Sooner Federal Savings and Loan Assoc. v. Oklahoma Tax Commission, 662 P.2d 1366, 1369 (Okla.1982) app. dism'd April 18, 1983, 460 U.S. 1075, 103 S.Ct. 1760, 76 L.Ed.2d 337, this Court, after reviewing § 1464(h) and the case law emanating therefrom, held that the statute supported non-discriminatory state taxation of all the income of federal savings and loans.

I

THE INTEREST EARNED ON FHLMC BONDS IS EXEMPT FROM TAXATION.

The FHLMC issued bonds pursuant to 12 U.S.C. § 1455, ²² which provides that

                if the purchase of the bonds is limited by state law, they shall be considered to be an obligation of the United States for purposes of the limitation.  Oklahoma does limit the investment in FHLMC stock to 5% of the savings and loan associations assets. 23  The bonds are considered obligations of the United States and any interest thereon also would be exempt from taxation
                

II

INTEREST RECEIVED FROM THE OVERNIGHT/DEMAND DEPOSITS IS NOT

EXEMPT FROM TAXATION

The protestants contend that the overnight/demand deposits are actually loans to the FHLB thereby constituting obligations under 31 U.S.C. § 3124 ²⁴ and 12 U.S.C. § 1433. The pertinent portion of § 1433 provides:

"Any and all notes, debentures, bonds and other such obligations issued by any bank, and consolidated Federal Home Loan Bank bonds and debentures, shall be exempt both as to principal and interest from all taxation ..."

The word "obligations" could be interpreted to embrace virtually everything which a bank is bound to pay. We must determine how broadly the "obligations" are to be construed and precisely what income is covered by the exemption. In discerning the scope of the word "obligations," we must bear in mind that the settled rule of construction is that tax exemptions are not to be inferred lightly, ²⁵ nor will exemptions be applied unless they are already granted by statute. ²⁶

Apparently, by using the term "issued", the obligations referred to in the statute are those which might be issued in the exercise of the borrowing power of the United States. ²⁷ The United States Supreme Court's decision in Hibernia Savings & Loan Society v. San Francisco, 200 U.S. 310, 315, 26 S.Ct. 265, 267, 50 L.Ed. 495 (1906), is helpful. In question there was the validity of a tax imposed by the State of California on checks or orders signed by the Treasurer of the United States. Section 3701 of the Revised Statutes (31 U.S.C.A. § 742) provided that "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."

In Hibernia, the Court noted that the basis of this exemption was that a tax upon the obligations of the United States virtually taxes the credit of the Government; that it impairs its power to raise money for the purpose of carrying on its civil and military operations; and that a tax which diminishes "A State or a...