United States v. State Tax Commission

Decision Date28 June 1973
Docket Number72-1381.,No. 72-1380,72-1380
Citation481 F.2d 963
PartiesUNITED STATES of America et al., Plaintiffs-Appellees, v. STATE TAX COMMISSION et al., Defendants-Appellants. UNITED STATES of America et al., Plaintiffs-Appellees, v. STATE TAX COMMISSION et al., Defendants-Appellees. First Federal Savings and Loan Association of Boston et al., Intervenors-Appellants.
CourtU.S. Court of Appeals — First Circuit


Terence P. O'Malley, Asst. Atty. Gen., with whom Robert H. Quinn, Atty. Gen., and Walter H. Mayo III, Asst. Atty. Gen., were on briefs, for the State Tax Commission.

Daniel B. Bickford, Chester M. Howe, and Richard McCarthy, Boston, Mass., with whom Ely, Bartlett, Brown & Proctor, and Joseph W. Bartlett, Boston, Mass., were on briefs, for First Federal Savings and Loan Assn. of Boston, and others.

Charles E. Stratton, Atty., Tax Div., Dept. of Justice, with whom Fred B. Ugast, Acting Asst. Atty. Gen., with whom James N. Gabriel, U. S. Atty., Meyer Rothwacks, and Bennet N. Hollander, Attys., Tax Div., Dept. of Justice, were on brief, for United States.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

These appeals question the validity of Massachusetts taxes1 on the deposits and income of federal savings and loan associations (hereinafter "federal associations").

In No. 72-1380, the United States seeks a declaration that the deposits tax, § 11(a)(2)(ii) and (b)(2)(ii), violates § 5(h) of the Home Owners' Loan Act of 1933, 12 U.S.C. § 1464(h).2 The United States objects to the deduction for loans secured by mortage of out-of-state real estate "within a radius of fifty miles of the main office" of a particular bank. M.G.L. c. 63 § 11(a)(2)(ii) and (b)(2)(ii). It contends that the 50-mile limitation causes a "greater" tax upon the federal associations than upon other similar state-chartered banks in violation of § 5(h) because the federal associations, unlike state banks, are empowered by controlling federal law to make out-of-state loans on real estate beyond a 50-mile radius and hence get no deduction for loans beyond that limit. We agree with the district court that the challenged deduction results in an illegal disparity of tax treatment between federal and local banks.

In No. 72-1381, six federal associations challenge the income tax, § 11(a)(1) and (b)(1) on grounds that it violates § 5(h) and various state and federal constitutional provisions. The United States has not joined in this challenge. We conclude, under equitable principles which federal courts normally apply to tax litigants other than the United States, that declaratory relief should have been denied without consideration of the merits.

I. No. 72-1380 (the Deposits Tax)

The United States, on behalf of the Federal Home Loan Bank Board, brought a complaint seeking a declaration that § 11(a)(2)(ii) and (b)(2)(ii) (the deposits tax) contravenes § 5(h) and the Supremacy Clause of the federal Constitution.3 Six federal associations were permitted to intervene and joined in the attack on the deposits tax, contending also that the deposits tax violates the Commerce Clause. They raised other issues, which are the subject of the appeal in No. 72-1381.

On plaintiffs' motions for summary judgment, the district court ruled that the deposits tax violates § 5(h) and the Supremacy Clause because it

operates in a very real way to bring intense economic pressure to bear on federally chartered banks which it does not bring to bear in any meaningful way on state chartered banks because of the fact that other state legislation severely restricts state chartered banks from making any substantial amount of loans in non-exempt areas.

The court also ruled that the deposits tax interferes with the federal associations' ability to carry out congressional purpose and policies in the lending of money, and that it constitutes "an unreasonable burden on the circulation of loans for home improvements in interstate commerce." United States v. State Tax Comm'n, 348 F.Supp. 397, 400 (D.Mass.1972). It rendered an amended judgment declaring invalid § 11(a)(2) and (b)(2). The Commonwealth has appealed.

M.G.L. c. 63, § 11(a)(2)(ii) and (b)(2)(ii), as inserted by St.1966, c. 14, § 11 and amended by St.1971, c. 555, § 26, is the latest in a series of taxes on the deposits of Massachusetts savings institutions going back to St.1862, c. 224, § 4. The original deposits tax, which before 1966 was imposed solely on non-federal institutions, was litigated extensively in the 1860's; both the Massachusetts Supreme Judicial Court and the Supreme Court sustained its validity,4 the latter having stated that a deposits tax was,

better calculated to effect justice among the corporations required to contribute to the public burdens than any other which has been devised, as its tendency is to graduate the required contributions to the value of the privilege granted.

Society for Savings v. Coite, 6 Wall. 594, 608, 18 L.Ed. 897 (1867). A deduction for loans secured by mortgage of Massachusetts real estate taxable in the Commonwealth was enacted in 1881. St. 1881, c. 304, § 8. Its purpose was to avoid double taxation, Massachusetts property owners being subject to local real estate taxes at full, fair cash value. Lexington Savings Bank v. Commonwealth, 252 Mass. 180, 182, 147 N.E. 569, 570 (1925). See M.G.L. c. 59, § 38; Bennett v. Board of Assessors of Whitman, 354 Mass. 239, 240, 237 N.E.2d 7, 9 (1968).

In 1966 Massachusetts adopted substantially the present statute, extending the deposits tax to federal associations. For the first time, the deduction for loans upon Massachusetts real estate was supplemented by a deduction for loans within a 50-mile radius on real estate in contiguous states. It is that feature which the federal associations attack as resulting in a "greater" tax upon them.5 The statute provides for a tax of one-twentieth of one percent upon average deposits and share capital after deducting (i) the bank's real estate used for banking purposes; (ii) the unpaid balances on loans secured by "mortgage of real estate taxable in this commonwealth, or . . . in a state contiguous . . . within a radius of fifty miles of the main office of such bank or association." The deduction is further qualified by a "grandfather clause" deduction allowing a bank or association not previously subject to tax to deduct the unpaid balance on loans secured by real estate outside Massachusetts which were outstanding at the time the tax statute was enacted in 1966.

The federal associations are federally created banks. Cf. First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339, 340, 88 S.Ct. 2173, 20 L.Ed.2d 1138 (1968). Chartered and regulated by the Federal Home Loan Board under authority conferred in the Federal Home Owners' Loan Act, 12 U.S.C. § 1464, they serve the statutory purpose of providing "local mutual thrift institutions in which people may invest their funds and . . . for the financing of homes." § 1464(a). The latter purpose, described more broadly as the "preservation of home owners and the promotion of a sound system of home mortgage," has been said to affect the welfare of the nation as a whole. First Federal Savings and Loan Association v. Loomis, 97 F.2d 831, 840 (7th Cir. 1938), cert. granted, 305 U.S. 564, 59 S.Ct. 92, 83 L. Ed. 355 (1938); dismissed on motion of counsel for petitioners sub nom. Martin v. First Federal Savings & Loan Ass'n, 305 U.S. 666, 59 S.Ct. 363, 83 L.Ed. 432 (1938). See Fahey v. O'Melveny, 200 F.2d 420 (9th Cir. 1952), cert. denied sub nom. Willhoit v. Fahey et al., 345 U.S. 952, 73 S.Ct. 866, 97 L.Ed. 1374 (1953).

The federal associations are closely affiliated with their district federal home loan bank (there are twelve nationally), which may provide them credit. The chairman of the Home Loan Bank Board states in an affidavit that the 4500 savings and loan associations in the nation are "the major mortgage lenders on residential properties," playing "the key role in the housing market" and providing "the largest, most stable source of funds for housing." They hold "44% of all outstanding home mortgages" and serve to promote the national housing policy "to provide for the economical financing of home ownership . . . by facilitating to the extent possible the inter-regional flow of mortgage funds from capital surplus areas to nationwide housing markets located in capital shortage areas."

The federal associations are allowed to "lend their funds only on the security of their savings accounts or on the security of first liens upon real property within one hundred miles of their home office or within the State in which such home office is located. . . ." § 5(c). The area limit was so extended from 50 to 100 miles by the Housing Act of 1964, Title IX, Pub.L. 88-560, § 901(a), 78 Stat. 804. The accompanying House Committee report stated:

The present 50-mile limitation was placed in the statute more than 25 years ago. In the intervening years, the country has experienced a tremendous suburban expansion, the establishment of new road systems and mass transit so that the commuting distance and metropolitan areas have been constantly enlarged. In recognition of these changes, your committee feels that the statutory lending area . . . should be 100 miles. . . .

1964 U.S.Code Cong. and Adm.News, p. 3442. The federal associations are also allowed to make certain investments outside the prescribed geographical areas. See, e.g. § 5(h), 12 C.F.R. § 545.6-4.

The "similar local" Massachusetts institutions purportedly favored by the area limitation in the deduction provisions of M.G.L. c. 63, § 11 are the savings banks (c. 168), the co-operative banks (c. 170), the savings and loan associations (c. 93, § 34) and the credit unions (c. 171). Excepting the credit unions, the similarity of which is disputed, all are...

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