ST. LOUIS CTY. v. FED. LAND BANK OF ST. PAUL

• Decision Date: 16 November 1983
• Docket Number: C4-82-846.,No. C3-82-630,C3-82-630
• Citation: 338 NW 2d 741
• Parties: In the Matter of the Proceedings to Enforce Payment of the Tax on Mineral Interests Assessed Pursuant to Minn. Stat. § 273.13, Subdivision 2a, and Remaining Delinquent on the First Monday in January, 1977, 1978, and 1979, for the County of St. Louis, State of Minnesota. COUNTY OF ST. LOUIS, Respondent, and Minnesota Chippewa Tribe, Respondent, C3-82-630, C4-82-846 v. THE FEDERAL LAND BANK OF ST. PAUL, Relator (C3-82-630), Appellant (C4-82-846).
• Court: Minnesota Supreme Court

338 N.W.2d 741 (1983)

In the Matter of the Proceedings to Enforce Payment of the Tax on Mineral Interests Assessed Pursuant to Minn. Stat. § 273.13, Subdivision 2a, and Remaining Delinquent on the First Monday in January, 1977, 1978, and 1979, for the County of St. Louis, State of Minnesota.

COUNTY OF ST. LOUIS, Respondent, and Minnesota Chippewa Tribe, Respondent, C3-82-630, C4-82-846 v. THE FEDERAL LAND BANK OF ST. PAUL, Relator (C3-82-630), Appellant (C4-82-846).

Nos. C3-82-630, C4-82-846.

Supreme Court of Minnesota.

October 7, 1983.

Rehearing Denied November 16, 1983.

Dorsey & Whitney, William J. Hempel, John W. Windhorst, Jr., and Bruce Schnider, Minneapolis, for appellant, relator.

Hubert H. Humphrey, III, Atty. Gen., C. Paul Faraci, Deputy Atty. Gen., Philip J. Olfelt, Asst. Atty. Gen., St. Paul, for respondent State of Minn.

Alan L. Mitchell, County Atty., and Michael R. Dean, Asst. County Atty., Duluth, for County of St. Louis.

Tupper, Smith & Mattson, Kent P. Tupper, Walker, for respondent Minnesota Chippewa Tribe.

Heard, considered and decided by the court en banc.

COYNE, Justice.

This case involves a challenge by the Federal Land Bank of St. Paul (the "Bank") to taxes assessed under Minn.Stat. § 273.13, subd. 2a (1982) by several counties on severed mineral interests held by the Bank. The Bank claims that it is exempt from the tax for two reasons: (1) the tax is not a tax on real estate "according to its value," and the Bank is therefore exempt under a federal statute (12 U.S.C. § 2055); and (2) the tax is unconstitutional notwithstanding this court's decision in Contos v. Herbst, 278 N.W.2d 732 (Minn.), appeal dismissed sub nom. Prest v. Herbst, 444 U.S. 804, 100 S.Ct. 24, 62 L.Ed.2d 17 (1979). The Minnesota Tax Court upheld the tax as applied to the Bank, and the Bank appealed. We reverse on the basis of the federal statute and therefore do not reach the constitutional issue.

The Bank refused to pay the taxes assessed for the years 1975, 1976, and 1977 on its severed mineral interests in land in St. Louis County¹ and filed answers in the district court under Minn.Stat. § 279.15 (1982). The proceedings were transferred to the tax court under Minn.Stat. § 271.01, subds. 5 and 6 (1982). The state and the county (hereinafter "the state") appeared on behalf of enforcement of the tax. The Minnesota Chippewa Tribe subsequently intervened in the tax court proceedings as an interested party.²

Both the Bank and the state moved for summary judgment. On July 23, 1980, the tax court ordered summary judgment for the state, finding that the Bank was not exempt under 11 U.S.C. § 2055 and that any constitutional challenge was disposed of by Contos. On the Bank's petition for rehearing, however, the court ordered an evidentiary hearing limited to the factual issue whether some severed mineral interests are valueless, making a tax on all such interests unconstitutional.³ Following the hearing, the tax court found as fact that every mineral interest has some value, although the value of mineral interests may vary from place to place within the state, and, relying on Contos, concluded that the tax was constitutional. Proceedings for review of the tax court decision by certiorari and the Bank's appeal from the judgment entered thereon have been consolidated.

I.

a. Tax on Severed Mineral Interests. The severed mineral interest is a type of estate in real property — the owner of the estate owns an interest in the minerals produced from the property but does not own the surface of the property. Minn.Stat. § 273.13, subd. 2a (1982). Severed mineral interests exist in much of Minnesota and are especially common in northeastern Minnesota. Contos v. Herbst, 278 N.W.2d at 735. In Washburn v. Gregory Co., 125 Minn. 491, 147 N.W. 706 (1914), this court held that severed mineral interests are separate interests in land, taxable separately from the surface interest and do not forfeit to the state for nonpayment of taxes on the surface interest. The legislature subsequently found that the severed mineral interests themselves are rarely taxed because of assessment difficulties. Minn.Stat. § 272.039 (1982). Therefore, separate ownership of surface and mineral estates was practiced widely as a means of holding mineral rights indefinitely while remaining effectively immune from taxation and tax forfeiture.

The legislature cited the above factors as reasons for enacting the Mineral Registration Act in 1973, Minn.Laws 1973, c. 650, art. XX. Minn.Stat. § 272.039 (1982). The Act was designed to enforce the registration of severed mineral interests under § 93.52 (enacted in 1969) and to tax those interests. First, the Act added § 93.55, providing that such interests would forfeit to the state if not registered within a specified period. Second, the Act imposed the tax involved in this case upon severed mineral interests not taxed under other provisions. Minn.Stat. § 273.13, subd. 2a (1982).⁴ Third, the Act explicitly provided that severed mineral interests are subject to forfeiture for nonpayment of the above tax. Minn.Stat. § 272.04, subd. 1 (1982).

In Contos v. Herbst, 278 N.W.2d 732 (Minn.1979), plaintiff-owners of severed mineral interests (the plaintiffs included U.S. Steel and Burlington Northern Railroad) challenged the tax and registration forfeiture provisions of the Act. This court held that the tax was constitutional because (1) it was reasonable to classify severed interests separately from unsevered interests for taxation, and (2) property taxes need not be related to value. 278 N.W.2d at 736-41.⁵

b. Federal Land Bank and Its Mineral Policies. The Bank is a federally chartered instrumentality of the United States. One of twelve Federal Land Banks, it was established in 1917 pursuant to the Federal Farm Loan Act (Acts of July 17, 1916, chapter 245, 39 Stat. 360) and is presently governed by 12 U.S.C. §§ 2011-2055. The Bank provides long-term agricultural loans to farmers in Michigan, Minnesota, North Dakota, and Wisconsin. Each borrower becomes a member of a Federal Land Bank Association; the Associations own the stock of the Bank. The Associations are similar to cooperatives; the net earnings of the Bank eventually inure to its individual borrowers in the form either of dividends or of lower interest rates on their variable interest loans.

The Bank obtains severed mineral interests by reserving these interests when it sells any property upon which it has foreclosed. The Bank initiated this practice in the 1930's, when it foreclosed on many farms and could not recover the unsatisfied debt on resale. Most of the Bank's interests are 50% interests in perpetuity. The remaining 50% interests belong to the surface owners and are therefore unsevered interests. As of the end of 1980, the Bank owned about 3,200 mineral interests situated in 85 of Minnesota's 87 counties and covering about 484,000 gross mineral acres. These Minnesota interests have provided almost no mineral income for the Bank. It is the Bank's policy never to release or sell its severed mineral interests except to avoid hardship to the surface owner or expense to the Bank.

II.

The Bank has neither pleaded nor proved that the tax on severed mineral interests, Minn.Stat. § 273.13, subd. 2a (1982), discriminates against the Bank. Nor has the Bank convinced us that the tax is unfair.⁶ Indeed, we agree with the tax court that the nondiscriminatory tax in question ought to be deemed to come within the basic spirit of the Congressional waiver of immunity from tax contained in 12 U.S.C. § 2055. Unfortunately, however, it is outside the letter of the waiver and we are, therefore, required to recognize the Bank's statutory immunity from the tax imposed by Minn. Stat. § 273.13, subd. 2a (1982).

Section 2055 provides, in relevant part:

Every Federal land bank and every Federal land bank association and the capital, reserves, and surplus thereof, and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation, except taxes on real estate held by a Federal land bank or a Federal land bank association to the same extent, according to its value, as other similar property held by other persons is taxed. * * *

(Emphasis added). The exemption from state taxation and attendant waiver of immunity were part of the Federal Farm Loan Act of 1916, Act of July 17, 1916, ch. 245, 39 Stat. 360.⁷ Although the clause — "to the same extent, according to its value, as other real estate is taxed" — appeared for more than 100 years in the waiver of immunity contained in the National Banking Act⁸ and although the same clause appears in statutes exempting other federal instrumentalities from state taxation,⁹ we are aware of no cases in which application of the waiver of immunity to a flat or area-based general distribution tax on real estate has been at issue. The plain language of section 2055, however, does not admit of construction. It provides, in perfectly straightforward terms, that the Bank is exempt from state taxes except nondiscriminatory value-based taxes on real estate.

The state commends to us the statement in Swords v. Nutt, 11 F.2d 936, 936 (9th Cir.1926) on which the tax court relied: "The sole purpose of section 5219 that section of the National Banking Act upon which section 2055 was patterned is to protect the real property of national banks against unequal assessments or assessments that shall discriminate against the same." The Swords case, which held that the real estate of a national bank was not exempt from a nondiscriminatory special assessment because it was a payment for improvements directly benefitting the land and not a tax, is inapposite.¹⁰ There is no doubt that the obligation imposed by § 272.13, subd. 2a, is a tax. Furthermore, to limit the tax immunity provided by § 2055 to discriminatory real estate taxes, whether or not value-based, would require us to ignore the phrase "according to its value" or treat...