Yurista v. Commissioner of Revenue, C2-89-2201
| Decision Date | 31 August 1990 |
| Docket Number | No. C2-89-2201,C2-89-2201 |
| Citation | 460 N.W.2d 24 |
| Parties | Harry YURISTA, Respondent, v. COMMISSIONER OF REVENUE, Relator. |
| Court | Minnesota Supreme Court |
Syllabus by the Court
Mutual fund dividends directly attributable to income from United States Treasury notes and bonds are exempt from state income taxation.
Hubert H. Humphrey, III, Atty. Gen., Thomas Overton, Sp. Asst. Atty. Gen., Tax Litigation Div., St. Paul, for relator.
Robert L. Miller, Christopher J. Chaput, Minneapolis, for respondent.
Considered and decided by the court en banc.
Certiorari on the relation of the Commissioner of Revenue to review a decision of the tax court exempting from state income taxation that portion of mutual fund dividends directly attributable to United States Treasury notes and bonds. See 31 U.S.C. § 3124(a) (1982) and Minn.Stat. § 290.01, subd. 19b(1) (1988). We affirm.
Taxpayer Harry Yurista is a shareholder of two mutual funds: Investment Portfolio's "Government Plus Portfolio" and Massachusetts Financial Service's "Government Securities High Yield Trust." These two mutual funds invested in United States Treasury Notes and United States government bonds, among other investments, and paid dividends from earnings derived from all investments, including those government securities. More specifically, the earnings were derived from the following sources:
Gov't Plus Portfolio MFS Gov't "High Yield
Trust"
GNMA * 2 % .4 %
Note FNMA ** 4 4.6
U.S. Treasury Notes 80 17.5
U.S. Treasury Bonds -- 76.1
Federal Home Loan Bank 1 --
Federal Home Loan Mtge. Corp. 1 --
Short term capital gain 12 --
Other unspecified source *** -- 1.4
------- ---------
100 % 100 %
* Government National Mortgage Association
** Federal National Mortgage Association
*** The record is unclear as to the exact composition of this category
Yurista received dividends from these mutual funds in 1987 and included all dividends, regardless of their source, as income on his 1987 Minnesota tax return. Later, in March 1988, he requested a refund from the commissioner of revenue, asserting that he was entitled to exclude from income those amounts received from these two mutual funds that were based on earnings from tax-exempt interest paid on U.S. Government bonds and notes. 1 Specifically, he argued that he should be permitted to exclude $2896.63 from income and that he was therefore entitled to a refund of approximately $245 plus interest.
The commissioner denied the refund claim and Yurista appealed to the tax court in February 1989. In support of his argument, Yurista provided the tax court with information compiled by the funds' management group concerning the exact source of the dividends. The tax court ruled that those dividends which were directly attributable to the earnings from investments in tax-exempt United States obligations were excludable from Yurista's income for state tax purposes and directed the refund. The commissioner challenges that determination.
Relator advances two arguments in support of the broad contention that the tax court ignored fundamental principles of both constitutional law and tax exemption. Urging a cautious approach to the identification of tax exempt income, the commissioner stresses the distinctive characteristics and tax consequences of mutual fund dividend distributions as opposed to direct interest payments from a tax-exempt federal obligation. In apparently contending that the aggregation of dividends and interest from a variety of sources by a mutual fund before distribution to individual fund shareholders is of particular significance or somehow alters the nature of the income, the argument ignores persuasive evidence attributing specific distributions to immune federal obligations.
Long ago in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431, 4 L.Ed. 579 (1819), Chief Justice Marshall observed that "the power to tax involves the power to destroy * * *." Seeking to limit potential abuse and to curb state's power in this regard, the United States Supreme Court held that the supremacy clause of the federal Constitution prohibited a state government from taxing a federal bank. Id. at 436. Ten years later, the Court similarly prohibited state taxation of federal obligations that were in the hands of private persons. Weston v. City Council of Charleston, 27 U.S. (2 Pet.) 449, 467, 7 L.Ed. 481 (1829). However, the United States Supreme Court subsequently developed a rule by which states were permitted to levy taxes that burdened federal obligations so long as the legal incidence of the taxes did not directly fall upon the federal obligation. Van Allen v. Assessors, 70 U.S. (3 Wall.) 573, 584, 18 L.Ed. 229 (1866); see also Home Sav. Bank v. Des Moines, 205 U.S. 503, 517-18, 27 S.Ct. 571, 575, 51 L.Ed. 901 (1907) ().
This "separate incidence" rule allowed the states to circumvent the constitutional immunity of federal obligations from state taxation by levying the tax upon the bank stock and indirectly taxing the federal obligation on which the bank stock was based. One commentator has explained: "Simply stated, the separate incidence rule allowed states to levy taxes which to some degree burdened federal obligations as long as the legal incidence of the taxes did not fall directly on any federal obligations." John A. Miller, American Bank & Trust Co. v. Dallas County: The Quiet Passing of the Separate Incidence Rule, 41 Tax Law. 831, 833 (1988) (footnote omitted; emphasis in original) (hereinafter "Miller").
Congress codified this rule in Revised Statutes of 1878, tit. 42, § 3701, 18 Stat. 731: 2 "all stocks, bonds and other securities of the United States held by individuals, corporations or associations within the United States shall be exempt from taxation by or under State authority."
In an apparent effort to rectify the abuse of the separate incidence rule, Congress amended this section in 1959 and added the following sentence: "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 * * *." Act of Sept. 22, 1959, § 105(a), 73 Stat. 622 (emphasis added). When Title 31 of the Code was enacted into positive law in 1982, the language of "directly or indirectly" of section 3124(a) was removed as surplusage. H.R.Rep. No. 651, 97th Cong., 2d Sess. 94 (1982), U.S.Code Cong. & Admin.News 1982, 1985, 1988. The United States Supreme Court has stated that the 1982 revision of this section was "without substantive change." American Bank & Trust Co. v. Dallas County, 463 U.S. 855, 859 n. 1, 103 S.Ct. 3369, 3373 n. 1, 77 L.Ed.2d 1072 (1983). Thus, although the phrase "directly or indirectly" has been removed from the statute, the purpose and meaning of the statute remains the same.
The statute as codified now reads:
Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except--
(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation; and
(2) an estate or inheritance tax.
31 U.S.C. § 3124(a) (1982). Minnesota legislation embraces and effectuates the federal policy. See Minn.Stat. § 290.01, subd. 19b(1) (1988) () which provides:
For individuals, estates, and trusts, there shall be subtracted from federal taxable income:
(1) 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.
For income tax purposes,...
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