FIRST FEDERAL S. & L. v. MASSACHUSETTS TAX COMM'N

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Argument of Chester M. Howe

Chief Justice Warren E. Burger: We will hear arguments next in the First Federal Savings and Loan v. the State Tax Commission.

Mr. Howe you may proceed whenever you are ready.

Mr. Chester M. Howe: Mr. Chief Justice and may it please the Court.

We start with the uncontested proposition, that Federal Savings and Loan Association are Federal Instrumentalities.

As such, they maybe taxed only as Congress authorizes.

The Congressional Authorization appears in Title XII U.S.C. Section 1464 (h).

Chief Justice Warren E. Burger: Then what you really mean is that there are Federal Instrumentalities for that limited purpose, they are not Federal Instrumentalities and the use of that term as it is used under the Federal Tort Claims Act for example.

Mr. Chester M. Howe: They are as that phrase is used I believe in the National Banking.

Chief Justice Warren E. Burger: National Banking, it is a narrow instrumentality, not a broad one.

Mr. Chester M. Howe: I would agree with that Your Honor.

The Congressional Authorization appears in Section 1464 (h) and it provides in pertinent part, that no state shall impose any tax on Federal associations or their franchise, capital reserves, surplus or loans or income greater than that imposed on similar Local Mutual or Cooperative Thrift and Home Financing institutions.

This is a case of first impression which should determine extent to which Congress has authorized state taxation of federal associations.

In 1966, Massachusetts elected to tax federal associations.

The tax as imposed was measured by a deposit element and by an income element.

The statute is now challenged on the grounds that it conflicts with 1464 (h) because it discriminates against federal associations and also because it violates federal constitutional provisions.

I propose to address four issues presented in our brief.

The first is that the state statute exempts entirely all Massachusetts Credit Unions from the tax.

The exemption is discriminatory if State Credit Unions are similar to federal associations within the meaning of 1464 (h).

The largest Credit Unions in Massachusetts are functionally similar, though not identical in both powers and purposes and in operations to federal associations.

The next two issues, which I would like to address, is whether the tax is a franchise tax or whether the commerce clause is violated.

Both arise from one statutory defect and that is, that the statute has no apportionment provision.

As a result, all income earned outside the Massachusetts by federal associations, is taxed by Commonwealth.

Federal associations have earned during years that we have statistics about a third of their income from states other than Massachusetts.

The associations are a part of a National Housing Program and necessarily do a large out-of-state business.

Other states provide a variety of benefits upon federal associations to their recording facilities in other ways.

The statute makes no attempt to exclude from the tax base, the benefits conferred by the other states.

By definition of franchise tax measures only, the value of the benefits conferred by the taxing state, Massachusetts goes beyond that.

It fails to limit is tax based in any way.

The commerce cause parallels to franchise tax issue.

Again, no apportionment is provided where income earned outside the Commonwealth.

The risk here is one of double taxation on the federal associations, which ought to be prohibited by the commerce clause.

The final and perhaps most important issue is that the State Court found that the income measure of the tax discriminates against federal associations.

The discrimination is caused by the deduction from income for required additions to surplus.

All Thrift institutions have that kind of requirement.

The terminology may vary from institution to institution, but they are called guarantee fund surplus or something equivalent to that.

The State Court finding discrimination is clearly accurate, it should be dispositive of the case.

However, the State Court excused the discrimination on the grounds that its source was a Federal Regulatory Agency, which regulates the amount of the reserve requirements for federal associations.

The court also said that the associations have failed to show a substantial competitive disadvantage, neither justification is valid.

This case arises as a result of a declaratory judgment by the Massachusetts Supreme Judicial Court.

The record consists of a stipulated facts and an affidavit.

The Court upheld the state’s statute against all challenges presented.

It was the second time that the state statute had been before court.

In 1973, the Court of Appeals for the First Circuit, held the deposit elements of the tax to be invalid as against the federal associations on the grounds that it was discriminatory against them on the 1464 (h).

The basis of the holding was that in general the mortgage deduction loans, which were a deduction from the deposits element, were applicable solely to them state institutions. Out-of-state loans were not deductible and the greatest impact of that limitation was against the federal associations.

The court, the Court of Appeals that is, abstained from the adjudicating the income element of the tax on the grounds of comity, indicating that there was an adequate remedy in the State Court.

Beginning with the Credit Union Issue, the State Court found that Credit Unions are in fact, mutual thrift and home financing institutions.

However, it concluded that they were not similar.

The Court said that and I quote, “The test for similarity is not what each type of institution might do, but rather what each type of institution does not in fact.

The associations urge the standard adopted as erroneous.

The test is otherwise in other cases, other tax cases.

Since 1935, this Court’s leading decision in Morrisey v. Commissioner, the character of an institution has been determined by its powers, not by what is does not in fact, but by what it might do.

The basis of the holding is an institution may exercise the powers granted to it fully at any time.

In the National Bank taxing cases, involving a statute related 1464 (h), the test is also based upon powers.

For example, in Mercantile Bank v. New York case, the sole emphasis for testing similarity between New York Trust Companies and National Banks was the respective powers.

Unknown Speaker: Mr. Howe, can I interrupt you with one question?

Mr. Chester M. Howe: Surely.

Unknown Speaker: Supposing you had a thousand State Savings and Loan Institutions and Credit Unions, all of which were taxed at the same rate as the federal and then the State of Massachusetts granted an exemption to say 2 or 3 institutions, so that they would not be taxing all of the similar institutions, but just 97% of them say.

Would that require them to repeal the tax on the federal or is there a requirement that all similar institutions be taxed?

Mr. Chester M. Howe: As I read the 1464 (h), I would think that, that would be the answer, Your Honor.

Unknown Speaker: Just says that the rate cannot be higher than that imposed on other similar local units and there is a tax on the State Savings and Loans and the rate on the federal is the same, what is if it says that every similar state agency must be subjected to the tax?

Mr. Chester M. Howe: Well, if I can try to answer it by assuming that all such state institutions that you are describing earn exactly the same level of income as did all federal associations, excepting for the 2 or 3 that were exempt.

Unknown Speaker: Right.

Mr. Chester M. Howe: The rate of tax in the aggregate on the state institutions would be lesser, perhaps by a relatively small amount, but nevertheless in the aggregate lesser.

Unknown Speaker: I see, so you say that are all of those that are similar?

Mr. Chester M. Howe: That is correct.

Interestingly, the State Court failed to respond to these precedents and the State Tax Commission has equally failed to address them.

Unknown Speaker: So, if you prevail on this the State could not collect the tax from the federal institutions at all for the years in question?

Mr. Chester M. Howe: The years in question that would be the answer, Your Honor, but on that score, I might note that the federal associations have been challenging the tax from the outset on the grounds that is discriminatory.

There it is not something that comes out of the woodwork late in the day.

Reply to those statutory differences which exist, they tend to be trivial.

For example, a Credit Union may mortgage up to 90% of the value on an individual home as compared to 80% by an S&L.

A Credit Union may invest a total of 80% of all its assets including surplus in the mortgage field as compared to 95% for federal associations of deposits only, so that while the figures are 15% apart, they in fact are closer.

The maximum loan on an individual residents is $50,000.00 for a Credit Union, whereas it is $55,000.00 for a Savings and Loan Association.

Unknown Speaker: Instantly, release similarities, I gather is what you argued.

When Section 11 was enacted, that was in 1966, was it not?

Mr. Chester M. Howe: There have been continuing changes, Your Honor, even beginning with --

Unknown Speaker: What was in 66?

Mr. Chester M. Howe: I believe the individual limitation for a federal association in 66 was $40,000.00 per home, the total assets --

Unknown Speaker: The Credit Unions and what was it for the Credit Union?

Mr. Chester M. Howe: For Credit Unions, the Appendix includes the rate that was involved.

Unknown Speaker: That is is alright, do not (Inaudible).

Mr. Chester M. Howe: Thank you.

Unknown Speaker: It was about the same?

Mr. Chester M. Howe: About the same.

Unknown Speaker: So, any changes since 66, have paralleled to one another, have they as to the --

Mr. Chester M. Howe: They tended to escalate presumably reflecting the fact that everything cost more (Voice Overlap)

Unknown Speaker: To the same degree for each?

Mr. Chester M. Howe: If you are asking that in terms of the percentages, I am not able to answer the question, Your Honor.

Unknown Speaker: The amounts?

Mr. Chester M. Howe: If I may answer in terms of comparability, yes, but not by dollar amounts.

Chief Justice Warren E. Burger: I take it that withdrawals as there being a great deal, less liquidity in the employee’s association, what did you --

Mr. Chester M. Howe: The Credit Union?

Chief Justice Warren E. Burger: Credit Union, the typical Credit Union is not intended to have the kind of liquidity that a Federal Savings and Loan has, it?

Mr. Chester M. Howe: I am not sure if I understand the term liquidity.

Chief Justice Warren E. Burger: Well, if they invest 95% of their assets and mortgages, they are not going to have to be able to respond to their depositors very rapidly, are they?

Mr. Chester M. Howe: The federal associations, Your Honor, 95% applies to federal associations, there is, however, a --

Chief Justice Warren E. Burger: There is a waiting period for withdrawals, is not there on all of them?

Mr. Chester M. Howe: Generally speaking 90 days.

As far as the S&Ls are concerned, however, there is a liquidity requirement, independent from and which is not in anyway incorporated into the tax statute.

The state court, in fact did note, that there were statutory differences and commented that the primary area was in the details of the loans that might be made and in the lending powers.

Beyond that, it made no judgment.

For the larger Credit Unions, the percentage of mortgage loans may, it begins to approximate the percentage of the loans made by federal associations.

There were 99 Credit Unions with over $2 million in assets each in 1973.

The $2 million figure is important because the powers of Credit Unions are scaled according to their size.

At the $2 millions level, the powers that I have been addressing are with Credit Unions.

Below that, the loan provisions are lesser.

Of the 99, that group invested $330 million in of their assets in mortgage loans.

The 20 of that group had more that 50% and 10th of that group had over 60% of their assets in mortgage loans.

The major difference which exists between the two kinds entities is that the federal associations invest almost exclusively in mortgage loans, whereas Credit Unions do a substantial personal loans business.

They invested approximately 43% of their assets in personal loans.

Nevertheless, other concededly similar institutions, invest substantial portions of their assets in non-real estate loans and by way of example, the State Saving Banks in 1972, invested over 35% of their assets in corporate securities, a power which the federal associations do not have.

State Savings Banks are conceded to be similar.

In considering this question of similarity, it should be remembered that differences must exist if similarity can exist between entities.

Similarities denotes difference.

Without differences, there would be identity.

If we do not have differences, we would either have only Credit Unions or only federal savings and loan associations.

The State Courts which have considered this issue in the past, have failed to recognize that simple proposition.

They have universally permitted, very minimal differences to be the basis for the exemption of Credit Unions.

Unlike the State Court, the tax commission emphasizes differences in lending powers to support finding of dissimilarity.

To properly assess this contention, it should be remembered that the Congress intended to protect federal associations from discriminatory tax treatment.

If a state institution has powers greater than those of the federal associations, the local institution has an advantage, an economic advantage.

The broader lending powers conferred upon the Credit Unions provides them with that kind of advantage.

Adding tax exemption, adds to their competitive advantage.

In substance, the Tax Commission would have the court believe that the Credit Union with over $65 million in assets, with larger investment powers, needs special protection by way of tax exemption, stating the proposition demonstrates its invalidity.

Both the State Tax Commission and the State Court also assert that the preference for personal loans imposed on Credit Unions, limitation was significance.

In fact, it really adds the power to Credit Unions that federal associations do not have and in an any event, it is not restrictive.

Any Credit Union, which invests in accordance with its statutory powers that is for example up to 80% on mortgage loans, cannot validly be criticized.

The commission cites no case or regulatory proceeding to show that the statutory precatory language regarding personal loans has ever been enforced.

That fact in itself indicates that there is no validity in the distinction.

Justice William H. Rehnquist: Whose burden is it to show whether that language in concededly existing statue of regulation has been enforced on the person who is seeking to sustain the validity of the tax or on the person who seeks to invalidate the tax?

Mr. Chester M. Howe: Proof of the negative tends be somewhat difficult, Your Honor, I have not found one and that maybe simply inadequacy, but absent that I do not know what kind of proof might exist.

Presumably the state would have better records, at least in the regulatory area, than would be available to us.

Justice William H. Rehnquist: But it is your view that, that burden should be on the state and not on you?

Mr. Chester M. Howe: If they have had that data, yes.

Justice William H. Rehnquist: How do we know whether they have had data or nothing?

Mr. Chester M. Howe: It would be a simple matter to make it available, I would assume, if they do have.

I do not know if there any records kept, we find not.

Unknown Speaker: Mr. Howe, I am going to reveal my stupidity, but are there federally-chartered Credit Unions as well as state-chartered?

Mr. Chester M. Howe: There are, in number of states; federal savings and loan associations in Massachusetts.

Unknown Speaker: Are the federally-chartered Credit Union subject to tax?

Mr. Chester M. Howe: In the Commonwealth?

Unknown Speaker: Yes in the commonwealth.

Mr. Chester M. Howe: In 1966, the Commonwealth chose the tax federal associations, yes.

Unknown Speaker: Was not there sovereign immunity problem in taxing?

Why did they need a special exemption for savings and loans and not for Credit Unions?

Mr. Chester M. Howe: There is no exemption for Credit Unions either.

In 1934, Congress specifically authorized States to tax not only Federal Credit Unions, but of course, their own institutions.

Unknown Speaker: I see, so federally-chartered Credit Union in Massachusetts could be taxed by the state, by the State of Massachusetts?

Mr. Chester M. Howe: It is, that is the statute that I initially quoted to.

The Congressional authorization is contained of 1464 (h).

Unknown Speaker: It covers both Credit Unions and Savings and Loan.

Mr. Chester M. Howe: It covers all similar institutions.

It specifically covers Federal Savings and Loans Association and also more institutions.

Unknown Speaker: So they are putting all together.

The State of Massachusetts taxes state and federal savings and loans and Federal Credit Unions, but not State Credit Union.

Mr. Chester M. Howe: The state does not tax Federal Credit Unions.

Unknown Speaker: It does not tax Federal Credit Union?

Mr. Chester M. Howe: That is correct, Your Honor.

It makes a great point of that at one point in their brief, and I would like to address that.

One other point on the standard of proof that the state court imposed on us with respect to Credit Unions.

They required proof from competition for the same kinds of investors and borrowers, without indicating the characters of proof that might be required.

It seems to us that the proof obviously must be made on the basis of a class, based upon purposes and powers.

It cannot require an individual sensory survey data type of thing, dealing with age, sex, religion, wealth or whatever.

It seems to me, it would have to be and typically has been in the National Banking cases on the basis of what the institution is designed to do.

In that regard, both entities have similarly insured deposits levels in the mortgage lending powers we have already discussed.

Here again, if the investors and borrowers are different for the two classes of entities, the State Court and the State Tax Commission have failed to show what those differences may be.

Justice William H. Rehnquist: And you say again, the burden of proof is on them rather than on you?

Mr. Chester M. Howe: No, I do not say that precisely, Your Honor.

I say that from our point of view, the standard which we are implying, that is the powers and purposes, whether deposits level generally are $33,000.00 in the one instance and going up to $66,000.00 for joint account versus a $40,000.00 level of insured deposits for federal associations are so conferrable as to inclined towards the same type of depositor.

If there is something that indicates that that conclusion is incorrect, the state has not brought it forward.

Justice William H. Rehnquist: You are saying that they have made an argument and you disagree with their argument?

Mr. Chester M. Howe: The point I make, Your Honor, is that we say that powers and purposes indicate that the classes are identical because of the similarity.

If there is proof that, that proposition is incorrect, it has not come forth and that burden rests on the state.

Regarding the legislative history, the State Commission relied heavily on the fact that the federal taxing policy towards Federal and State Credit Unions, supports their position.

We believe that the reliance is misplaced and the reason is that the federal legislation began in 1934.

At that time, the Federal Credit Union was empowered to make loans with a maturity of not over 2 years and the maximum loan that a Credit Union could issue was $200.00.

In 1951, which is when Savings and Loans Associations became taxable under Title XXVI, the Internal Revenue Code, the maximum maturity for loans for Federal Credit Union is only 3 years.

The differences in powers and purposes of the Federal Credit Unions and Federal Savings and Loan Associations clearly justified the Federal difference in treatment in taxation.

Federal Credit Unions continue to be exempt from tax for Federal purposes.

States, however, have been empowered to tax Federal Credit Unions from the outset.

If taxed, however, they had to be taxed at a rate not greater than that imposed on Local Banking Institutions.

The fact that Congress linked, Federal Credit Unions with Banking Institutions establishes that the Federal Credit Unions were considered to be light Banking Institutions and not some unique kind of entity.

The Massachusetts tax policy, on the other hand, began in 1966, 32 years after Federal Credit Unions were first created.

In doing so, it was obligated in 1966 to make the comparison between Federal Associations and Credit Unions to see whether at that time, they were similar.

There is no point in comparing Credit Unions as they existed in 1934 and Federal Associations as they existed in 1966.

Moreover, our view is 1464 ought to be read to impose a continuing obligation on states to maintain a nondiscriminatory tax on Federal Associations, that is the whole function of 1464 when compared to all similar institutions.

If a local entity is to have its tax exemption continue, the exemption must be re-examined each time, there is a substantive change in the powers of either, Federal Associations or the Local Entity.

It is not something that can be once looked at and then forgotten.

An exemption from tax not discriminatory in its origins, may become so over time.

Finally and most important --

Unknown Speaker: That is to say if in 1966, there may have been a basis for concluding that the State Credit Unions were dissembled, and therefore, it did not have to be taxed although federal institutions could, that might change since 66 and the two become similar, is that it?

Mr. Chester M. Howe: That is correct and it clearly has since 1934, Your Honor.

Finally and most important --

Unknown Speaker: It gets back to what asked I had asked you earlier.

How about 66, what was the situation in 66?

Mr. Chester M. Howe: The jurisdictional and the record and the --

Unknown Speaker: Well did you regard them as similar?

Mr. Chester M. Howe: Yes I did, Your Honor.

Unknown Speaker: And were they taxed in 66?

Mr. Chester M. Howe: In 66, Massachusetts began taxing federal associations.

Unknown Speaker: But they did not tax?

Mr. Chester M. Howe: They chose not to tax its own Credit Unions and it continues to exempt.

Unknown Speaker: That is what I was saying.

Mr. Chester M. Howe: Yes, Your Honor.

Unknown Speaker: And you say, they should have taxed them then and continue to and not having done so they cannot tax you?

Mr. Chester M. Howe: That is correct, Your Honor.

Perhaps the most important aspect of the statutory history is what President Carter has asked the Congress to do.

The President has said in his message to the Congress on January 21 of this year and I quote, “Credit Unions are tax exempt,” yet their powers and functions are defined so broadly that the term Credit Union can include financial institutions that are functionally identical to a Savings and Loan Association.

The tax exemption provides them with an unfair advantage over their competitors.

That is precisely what we have been saying since 1966.

The federal statutory and legislative history rather than supporting the State Tax Commission, clearly establishes Credit Unions to be similar banking institutions nearly identical to Federal Savings and Loans Associations.

There is no justification for the exemption of the tax of the Credit Unions.

The next two subjects can be handled together and briefly I hope, and they arise because the state statute provides for no apportionment for income earned outside the Commonwealth.

The failure to apportion is fatal in our view.

The two simple propositions are presented here and the first is definitional.

The State Court labeled the tax a franchise tax and of course, 1464 (h) permits a franchised tax.

The real question is, is it a franchise tax within the meaning of 1464 (h) and the answers seems to me is a clear “no.

By definition, a franchise tax must measure only the value of the privileges conferred by the taxing state.

Here in Massachusetts taxes the entire value of the Federal franchise without regard to the benefits conferred by other states and the other states do confer substantial benefits.

Federal Associations are part of a National Housing Program.

One of the functions they serve in that is to put mortgage loans out throughout the nation.

Justice William H. Rehnquist: Your client is domiciled in Massachusetts, is it not?

Mr. Chester M. Howe: The principal offices of all of the Federal Associations are in Massachusetts, Your Honor.

Chief Justice Warren E. Burger: Your time has expired Mr. Howe, but you may finish your sentence if you have a thought that escaping us.

Mr. Chester M. Howe: The failure to permit other states to tax on that basis for the benefits they confer, Massachusetts is taxing all of them.

It seems to me violates the Section 1464 (h) by imposing effectively a double tax, although there is no such present double tax.

Chief Justice Warren E. Burger: Mr. Rosenfeld, excuse me, yes that is right.

Argument of S. Stephen Rosenfeld

Mr. S. Stephen Rosenfeld: Mr. Chief Justice and may it please the Court.

I wish to argue three points on behalf of the Commonwealth this afternoon.

First and primarily as it turns out that Credit Unions are not similar to the appellant associations either as the word similar was intended by Congress in 12 U.S.C. Section 1464 (h) or under the current facts as presented in the record in this case.

My second argument will be that the Massachusetts tax is neutral and fair and nondiscriminatory under the standards of 12 U.S.C. 1464 (h) and finally and briefly that the tax does not intrude upon interstate commerce.

For the purposes of the whole argument, I wish to emphasize these elements.

Massachusetts is attempting to do with this tax is to have the appellant associations, domiciliary corporations contribute their fair share to support the cost of government.

The Acts of Congress which authorized state taxation of federal institution such as this in National Banks, plainly support that state tax policy.

Additionally, the appellants have presented no independent substantive federal policy which is violated on supremacy class grounds by the state tax in question.

Given the fact that Congress in this Court have accorded state tax policy making broad discretion, we believe that the appellant associations have come to this appeal with a heavy burden of persuasion.

I am going to turn initially to the tax treatment of Credit Unions which the appellants have emphasized in their oral argument today.

The appellants say that by treating Credit Unions differently, Massachusetts has violated Federal Law because in their view, Credit Unions are similar to Federal Savings and Loan Associations as the word similar is used in Section 1464 (h).

This is not he case, however.

Credit Unions are not included in state tax, that is true, but they are not similar either as a matter of Congressional intent, the primary standard for this Court or as a matter of current actual fact.

Appellant made no argument about Congressional intent at all in the brief they presented to this Court and they could not.

The legislative history to the Home Owners Loan Act and it was the Home Owners' Loan Act that established Savings and Loan Associations and also enacted 1464 (h), the Federal Statue in question, that Federal Home Owners Loan Act in the legislative history to it, presented in our brief makes plain that the 73rd Congress did not intend Credit Unions to come within the definition of the word similar.

What the Congress had in mind were State Savings and Loan Associations, State Saving Banks and State Cooperative Banks.

It is interesting to know that the very same Congress, which enacted the Home Owners Loan Act, was the Congress that enacted the Federal Credit Union Act, creating Federal Credit Unions for the first time.

The Federal Credit Union Act was enacted one year later in 1934.

The Congress which had created Savings and Loan Associations, one year later in a establishing Federal Credit Unions, established a wholly different, wholly separate regulatory structure for Federal Credit Unions, which differ significantly from the Federal Home Loan Bank or in Federal Savings and Loan Association, not assigning its view that similarity as what its view of Credit Unions.

Finally, in terms of Congressional intent, what Massachusetts has done, tax the franchise of Savings and Loan Associations and while not taxing the franchise of Credit Unions, follows almost exactly the tax policy that Congress itself has chosen for purposes of Federal Income Tax.

Congress has always exempted all Credit Unions, state and federal, from the federal income-base tax, but has since 1951, imposed a Federal Corporate Income Tax on Federal Savings and Loan Associations, including appellants.

It would be an anomalous to say that the state is precluded from the adopting the same kind of taxing policy in terms of supporting its cost that Congress itself has chosen in imposing the Federal Income Tax.

One additional point, my brother suggested that Federal Credit Unions were subjected to taxation by the states.

In fact, I believe that is not true.

The citation is 12 U.S.C. Section 1768 and suggested, the language is that Federal Credit Unions, their property, etc.'shall be exempt from all taxation now or here after imposed by the United States or by any state, territorial, a local taxing authority.

It appears clear to us that the Congress used Credit Unions, Federal and State as different and subject to different forms of taxation than Federal Savings and Loan Associations.

Turning now to the record in this case and the actual facts putting aside for the moment Congressional intent, we believe that appellants have not shown similarity in fact.

In addressing similarity, we believe it is a comparison between classes of institutions that should be paramount rather than picking a single institution from one class and seeing whether it may bear some similarity to a single institution from another class.

In looking at the classes of institution in question, the facts are these.

Credit Unions are very small.

They are tightly limited in their membership by state statute, to those who have a common bond in either employment, affiliation or residence.

They have far less assets than the appellants and they are mandate.

They are mandate by state statute is to emphasize the small personal loans to its members.

Justice William H. Rehnquist: What does affiliation mean in the states that (Voice Overlap).

Mr. S. Stephen Rosenfeld: It could mean a religious affiliation, club affiliation, and social affiliation.

Justice William H. Rehnquist: It could just mean affiliation with the Credit Union?

Mr. S. Stephen Rosenfeld: No, it could not.

As I said, the mandate is to emphasize small personal loans and it is noteworthy that this is an activity that is virtually shunned by the Federal Associations.

On the other side, 60% of the Credit Unions have no real estate lending activity whatsoever.

As far as the remaining 40% of the Credit Unions are concerned, appellants have not shown that their loans are at all competitive with the Federal Associations much larger and far more pervasive real estate lending activity and they could not show competition because the Credit Union Loans are, once again, limited to their members.

Credit Union simply cannot go out on a general market and seek to compete with other institutions, who lack the kind of limits that Credit Unions have.

The facts, in short, are against the arguments that appellant are making and they do not support excusing appellants all together from state tax as they would have this Court do.

At bottom, the argument here that the appellants present is one on tax policy.

The fact is, as appellants have suggested with quoting a statement from President Carter, it is a policy debate that is now going on between the legislative and executive branches and Massachusetts believes that this Court should resist an attempt to draw the judiciary into the debate.

I would like to set an out turn just briefly because appellant has not raised this issue in their oral argument to the question of discrimination between Federal Associations on the one hand and the state's treatment of those state entities which they do tax under Section 1464 (h), these are State Saving Banks and State Cooperative Banks.

The question is whether Massachusetts has unfairly favored local savings institutions somehow at the expense of the Federal Associations.

The vital facts are these.

The statute, Massachusetts General Laws, Chapter 63 Section 11, is neutral on its face.

The rate of the tax is the same for the federal and state institutions.

The types of deductions are identical and the appellants offer nothing apart from the face of the statute to suggest that it was past enacted as a hostile or unfriendly act towards the federal institution and these are the words that this Court has used in assessing the question of discrimination.

As far as the appellant’s factual proof goes, they have made no showing of discrimination or disproportion in result between in taxing of federal state and institutions.

Chiefly, they have made no showing that their actual tax burden in dollars and cents is any heavier proportionally than the tax burden of state institutions and under the decisions of this Court, the failure to show a difference in practical impact on account of the state tax is fatal to their case.

The appellants, while they do not present evidence of actual tax impact do present some evidence about the amount of their deductions under the state tax as compared with their total assets.

They present ratios comparing the amount of their deductions with total assets and compare that ratio to the ratio for state institutions.

That ratio has no proximate relationship to actual tax burden about which the record is silent, but even looking at the ratios which are presented, there is no clear pattern this favoring the federal institutions.

What those ratios of federal and state institution show is that in some years, the state’s institutions did enjoy a proportionally or comparatively a greater deduction than the federal institutions, but in other years, the reverse is the case.

In three of the years presented by the appellants it was the federal institutions which enjoyed a greater benefit from the deduction, using the ratio evidence that they present and rely on.

Finally, on this question of discrimination, this Court’s decisions under Section 1464 (h) and the companion provision permitting state tax on National Banks 12 U.S.C. 548, this Court’s decisions under both of those Sections leave no doubt in our view that the state tax is valid.

Those decisions require fairness and even handedness from the states.

Appellants have shied away from these principles and instead their argument demands rigid, mathematical equality between state and federal institutions.

Following their analysis, no deduction which had a disparate result or even the potential for a disparate result, no matter how small could stand under the principle of discrimination which they advance.

In our view, following this Court’s more practical standard of fairness, the appellants claim of discrimination falls short.

Finally, I would like to turn to the question of whether or not the state tax intrudes impermissibly on interstate commerce under the principles lay down by this Court under the commerce clause.

We believe that on this issue, appellants do not law or evidence on their side.

There is no direct evidence whatsoever of the extent of income that the appellants derive from interstate commerce.

The record is bare on how many borrowers, real estate mortgage borrowers, live out of state and there is no evidence on how many these loans were culminated out of state, however, we do know this.

We do know that everyone of appellants have all their offices in Massachusetts, and therefore, all of the processing of the loans, all the monitoring of the loans and all the receiving of the loans, goes on in Massachusetts.

Well, we believe the record thus establishes two independent bases, under the commerce clause principles for the tax that Massachusetts has imposed.

The first relies on the fact that Massachusetts is the state of domicile for the Appellant Associations and under this Court’s decision, a strong presumption exists in favor of a state’s right to demand a support in contribution in the costs of government, when that demand is made by the home state of the corporation.

Then second, quite apart from domicile, putting domicile aside, the record shows in this case a close connection between the taxing State Massachusetts and the activities and income upon which the Massachusetts tax has levied.

As a final point under commerce clause, appellants raise the specter of multiple taxation, but they simply have no foundation in our view for arguing that interstate commerce is in jeopardy of multiple taxation and the burden that would flow there from.

There is no overlapping tax that exists right now and it would be a strange, we believe, to strike down this current justified tax on the basis that in the future, some state with a lesser claim and a lesser right might impose some tax burden or might stake a claim to a tax burden on some portion of appellant’s income.

In our view, this is a “thin ice” for a constitutional challenge to a state tax.

We believe, therefore, and for this reason and other reasons are presented, the reasons the Commonwealth has presented in its brief that the state tax should stand and the judgment of the court below should be affirmed.

Thank you very much.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.