Shawnee Bank, Inc. v. Paige

• Citation: 488 S.E.2d 20,200 W.Va. 20
• Decision Date: 29 May 1997
• Docket Number: No. 23816,23816
• Court: Supreme Court of West Virginia
• Parties: SHAWNEE BANK, INC., a West Virginia Banking Corporation, Successor by Merger to 2nd Avenue Bank of South Charleston, Appellant Below, Appellant v. James H. PAIGE, III, Secretary of the Department of Tax and Revenue of the State of West Virginia Appellee Below, Appellee

Page 20

488 S.E.2d 20

200 W.Va. 20

SHAWNEE BANK, INC., a West Virginia Banking Corporation Successor by Merger to 2nd Avenue Bank of South Charleston, Appellant Below, Appellant v. James H. PAIGE, III, Secretary of the Department of Tax and Revenue of the State of West Virginia Appellee Below, Appellee

No. 23816.

Supreme Court of Appeals of West Virginia.

Submitted April 29, 1997.

Decided May 29, 1997.

[200 W.Va. 21] Syllabus by the Court

1. "Interpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review." Syllabus point 1, Appalachian Power Co. v. State Tax Dep't of West Virginia, 195 W.Va. 573, 466 S.E.2d 424 (1995).

2. "Once a full record is developed, both the circuit court and this Court will review the findings and conclusions of the Tax Commissioner under a clearly erroneous and abuse of discretion standard unless the incorrect legal standard was applied." Syllabus point 5, Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995).

3. "Interpretations of statutes by bodies charged with their administration are given great weight unless clearly erroneous." Syllabus point 4, Security National Bank & Trust Co. v. First W. Va. Bancorp., Inc., 166 W.Va. 775, 277 S.E.2d 613 (1981).

4. " ' "Where a person claims an exemption from a law imposing a license or tax, such law is strictly construed against the person claiming the exemption." Syl. pt. 2, State ex rel. Lambert v. Carman, State Tax Commissioner, 145 W.Va. 635, 116 S.E.2d 265 (1960).' Syl. pt. 5, Pennsylvania & West Virginia Supply Corp. v. Rose, 179 W.Va. 317, 368 S.E.2d 101 (1988)." Syllabus point 2, Tony P. Sellitti Construction Co. v. Caryl, 185 W.Va. 584, 408 S.E.2d 336 (1991).

5. The Federal National Mortgage Association is not an instrumentality of the United States as contemplated by W. Va.Code § 11-13-2k (1983) (Repl.Vol.1983) (Repealed 1989). Consequently, all interest received by a bank on securities of the Federal National Mortgage Association, except interest derived from mortgage-backed securities, is taxable as gross income to the bank pursuant to this section of the code.

6. A bank's Business and Occupation tax bad debt deduction is limited to the accrued interest on such debt for which Business and Occupation tax has been paid.

William W. Booker, Kay, Casto, Chaney, Love & Wise, Charleston, for Appellant.

Stephen Stockton, Assistant Attorney General, Charleston, for Appellee.

DAVIS, Justice:

Shawnee Bank, Inc., successor by merger to 2nd Avenue Bank of South Charleston, appeals an order of the Circuit Court of Kanawha County, which affirmed a decision of the Commissioner of the State of West Virginia Department of Tax and Revenue. Shawnee Bank contends that the circuit court erred in finding that the decision of the Tax Commissioner was not plainly wrong to the extent that such decision found that, for purposes of the state Business and Occupation tax, (1) interest received by a bank on certain securities of the Federal National Mortgage Association is taxable as gross income to the bank, and (2) a bank's bad debt

[200 W.Va. 22] deduction is limited to the accrued interest on such debt for which Business and Occupation tax has been paid. We find that the circuit court correctly ruled that the decision of the Department of Tax and Revenue was not plainly wrong.

I. FACTUAL AND PROCEDURAL HISTORY

On June 8, 1988, the State Tax Department of West Virginia [hereinafter Tax Department] issued an assessment for Business and Occupation tax [hereinafter B & O tax] ¹ against 2nd Avenue Bank of South Charleston [hereinafter the bank] ² for the period of January 1, 1982, through June 30, 1987, for a tax liability of $4,231.11, plus interest of $1,265.50. The tax liability resulted from the auditor's disallowance of certain exclusions and deductions from gross income that were claimed by the bank. Specifically, the auditor disallowed the bank's exclusion of interest earned from investments in securities issued by the Federal National Mortgage Association [hereinafter FNMA]. The auditor also disallowed the bank's deduction of the principal of bad debt reserves.

The bank responded to the assessment by filing a petition for reassessment with the Tax Department. After a hearing on the petition, the Tax Commissioner ³ rendered an administrative decision affirming the assessment. The bank then appealed to the Circuit Court of Kanawha County where, by order entered May 1, 1996, the court affirmed the decision of the Tax Commissioner. It is from this final order of the circuit court that the bank now appeals.

II. STANDARD OF REVIEW

In this case we are asked to review certain statutory and regulatory provisions of the West Virginia B & O tax to determine whether the Tax Commissioner correctly interpreted such provisions. We have previously held that "[i]nterpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review." Syl. pt. 1, Appalachian Power Co. v. State Tax Dep't of West Virginia, 195 W.Va. 573, 466 S.E.2d 424 (1995). Furthermore, "[o]nce a full record is developed, both the circuit court and this Court will review the findings and conclusions of the Tax Commissioner under a clearly erroneous and abuse of discretion standard unless the incorrect legal standard was applied." Syl. pt. 5, Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995). In making our determination, we are mindful that "[i]nterpretations of statutes by bodies charged with their administration are given great weight unless clearly erroneous." Syl. pt. 4, Security Nat'l Bank & Trust Co. v. First W. Va. Bancorp., Inc., 166 W.Va. 775, 277 S.E.2d 613 (1981).

III. DISCUSSION

A.

Appropriateness of Exclusion of Interest Income Received

from Federal National Mortgage Association

We are first asked to interpret the language of W. Va.Code § 11-13-2k (1983) Upon every person engaging or continuing within this State in the business of banking or financial business, from and after the first day of April, one thousand nine hundred seventy-one, the tax shall be equal to one and fifteen one-hundredths percent of the gross income received from interest, premiums, discounts, dividends, service fees or charges, commissions, fines, rents from real or tangible personal property, however denominated, royalties, charges for bookkeeping or data processing, receipts from check sales, charges or fees, and receipts from the sale of tangible personal property: Provided, that gross income shall not include (a) interest received on the obligations of the United States, its agencies and instrumentalities ....

                (Repl.Vol.1983) (Repealed 1989), 4 to determine whether, for the purpose of calculating a bank's B & O tax liability, interest income received from the Federal National Mortgage Association [hereinafter FNMA] is excludable from gross income as "interest received on the obligations of the United States, its agencies and instrumentalities."   The relevant portion of  W. Va.Code § 11-13-2k states
                

(Emphasis added).

The bank argues that the FNMA is an agency or instrumentality of the United States as contemplated by W. Va.Code § 11-13-2k (1983) (Repl.Vol.1983) (Repealed 1989). Thus, interest income earned by the bank on FNMA investments may be excluded from the bank's gross income when calculating its B & O tax liability. Finally, the bank contends that even if a state may assess a tax on the interest income earned on FNMA investments without violating the intergovernmental tax immunity doctrine, ⁵ such tax is prohibited by W. Va.Code § 11-13-2k.

The Tax Commissioner responds that Rockford Life Insurance Company v. Illinois Department of Revenue, 482 U.S. 182, 107 S.Ct. 2312, 96 L.Ed.2d 152 (1987), is instructive to the determination of this issue. In Rockford, the United States Supreme Court held that inclusion in a tax base of the value of mortgage-backed securities guaranteed by the Government National Mortgage Association [hereinafter GNMA] did not violate a federal tax immunity statute ⁶ or the doctrine of intergovernmental tax immunity. In reaching this conclusion, the Supreme Court explained that GNMA securities are not "a binding promise by the United States to pay specified sums at specified dates." Id. at 189-90, 107 S.Ct. at 2316-17, 96 L.Ed.2d at 160. The Tax Commissioner interprets this comment to mean that the GNMA is not an instrumentality of the United States, and furthermore, because of the similarity between the FNMA and the GNMA, the FNMA likewise is not an instrumentality of the United States. In support of this argument, the Tax Commissioner cites Yurista v. Commissioner of Revenue, 460 N.W.2d 24 (Minn.1990), in which the Supreme Court of Minnesota held that interest income from securities issued by the FNMA are not exempt from Minnesota's state income tax. The Yurista court addressed a statute that exempted from state income tax "interest income on obligations of any authority, commission, or instrumentality of the United States to the extent includable in taxable income for federal income tax purposes but exempt from state income tax under the laws of the United States." Id. at 27 (emphasis added).

We believe the authorities cited by the Tax Commissioner establish that a state may tax interest income from securities issued Prior to 1968, the FNMA was a government agency within the Department of Housing and Urban Development. 12 U.S.C. § 1717(a)(1) (1992) (1994 Ed.). However, on September 1, 1968, the FNMA was partitioned into two separate and distinct corporations, the FNMA and the GNMA. 12 U.S.C. § 1717(a)(2) (1992) (1994 Ed.). The post-partition FNMA became a "[g]overnment-sponsored private corporation," ⁷ while the GNMA remained a part of the federal government. 12 U.S.C. § 1716b (1968) (1994 Ed.).

[200 W.Va. 24] by the FNMA without violating the intergovernmental tax immunity doctrine. However, this does not resolve the...