MEMPHIS BANK & TRUST CO. v. GARNER
ORAL ARGUMENT OF K. MARTIN WORTHY, ESQ. ON BEHALF OF APPELLANT
Chief Justice Burger: We'll hear arguments next in Memphis Bank & Trust Company against Riley C. Garner, et al..
Mr. Worthy, I think you may proceed whenever you're ready.
Mr. Worthy: Mr. Chief Justice, and may it please the Court:
The question before the Court is whether the Tennessee bank tax violates federal law to the extent that it includes interest on the obligations of the federal government and its instrumentalities in the tax base, while excluding interest from similar obligations issued by the state of Tennessee itself.
The Tennessee Supreme Court, reversing the chancery court, said no.
We think the answer is clearly yes.
There is no dispute as to the essential facts.
In 1977, the Tennesse legislature made inapplicable to banks the existing intangible personal property tax on financial institutions which made no distinction between state and federal obligations.
And it created instead, in the words of the statute, a subclassification of intangible personal property designated as shares of banks and banking institutions to be taxed at 3 percent on net income of the previous year.
Earnings are required for this purpose to be computed by including interest on obligations of the federal government and its instrumentalities, and also including interest on obligations of other states, but by excluding interest on obligations of the state of Tennessee itself.
The tax in no event is to be less than an ad valorem tax of 60 percent on the value of the property of the bank.
The tax is an obligation of the bank itself, and is not collectible by either the state or the bank itself from its stockholders.
Unidentified Justice: Mr. Worthy, do you pay another separate franchise tax in Tennessee?
Mr. Worthy: Yes, sir.
There is a... all banks and all other corporations are subject specifically to a Tennessee franchise tax which is imposed specifically on the... to quote from that statute... on the privilege of engaging in business in corporate form in the state.
And every corporation is also required to pay an excise tax which is imposed specifically, to quote that statute, as compensation for the benefits it receives from doing business in Tennessee.
There is no such language in the statute imposing the bank tax.
Appellant, the Memphis Bank & Trust Company, a state bank, paid the tax as so imposed under protest for 1977 and '78, and brought suit in the chancery court for refund of the tax, contending that collection of the tax violated federal law to the extent that the tax applied to interest earned on obligations of the federal government and federal farm credit agencies, and thereby violated the prohibitions of state taxation contained in Section 742 of Title 31 of the United States Code, and Sections 2055, 2079 and 2134 of Title XII of the Code, relating to farm credit agencies.
It was thereafter stipulated that if such interests were excluded, appellant would have no liability for tax for the years in issue.
Codifying a long line of decisions of this Court, going back to M'Culloch versus Maryland, more than 160 years ago, Section 742 of Title 31 of the Code specifically prohibits every form of state taxation directly or indirectly on interest from federal obligations, except non-discriminatory franchise or other non-property taxes in lieu thereof.
The Tennessee tax clearly violates the general prohibition of the statute.
The state claims, however, that the tax fits within the exception for non-discriminatory franchise or other non-property taxes imposed in lieu thereof.
Appellant submits that it does not.
First of all, it's not a franchise tax or other non-property tax imposed in lieu thereof.
Unidentified Justice: Mr. Worthy, is that question to be determined as a matter of federal law, do you think, whether it's a franchise tax within the meaning of Section 742?
Mr. Worthy: Yes, Justice O'Connor, I think it is to be determined as a matter of federal law.
I have, obviously,... I think this Court has held that it should look at the effect of the law to determine whether it's a franchise or a property tax.
Obviously, the intent of the legislature and the authority under which the legislature acted are prime considerations in determining the nature of the tax.
But it is a question to be resolved by this Court.
Even if the tax is a franchise tax, we believe that it's clearly discriminatory.
It is quite clear that in enacting the bank tax, the Tennessee legislature intended to impose a property tax and not a franchise or similar non-property tax.
The preamble to the act imposing the tax states specifically that the legislature is acting under authority to tax intangible personal property of banks, and to divide intangible personal property into subclassifications.
There is no mention of any authority or any statement of intent to impose a franchise or privilege tax.
Unidentified Justice: So what your argument now is that even if Tennessee obligations were included in the basis of the tax, the tax is not one permitted by the federal statute.
Mr. Worthy: That's correct, Justice White.
As I've indicated, the act creates a subclassification of intangible personal property designated as shares of banks to be taxed on the basis of 3 percent of net earnings, with the net tax in no event to be less than an ad valorem tax of 60 percent of the value of the property of the bank, with a credit for tax paid on its real and personal property.
The tax is codified in the same chapter of the Tennessee Code as other property taxes, unlike those on franchises and excises.
Payment and collection are at the local level, in contrast with the provisions for payment and collection at the state level of Tennessee franchise and privilege taxes.
Futhermore, the tax is allocated to the municipalities and counties on the basis of their respective property tax rates.
As I previously indicated, the bank is subject to both the regular general Tennessee franchise tax imposed by a different chapter of the Code and to the Tennessee excise tax imposed by a different chapter of the Code.
The state nevertheless says that because the bank tax is measured by income, it should be treated as a franchise tax.
This certainly does not follow.
The nature of a tax is not determined by its method of calculation.
This Court has many times held that a tax imposed as a franchise tax will be treated as a franchise tax even though it is measured by the value of the property.
By the same token, a tax imposed as a property tax should be treated as a property tax even though the measure of the value of the property is income.
It's long been settled in cases going back to 1829 by this Court that federal obligations may not be included in the measure of a state property tax, and this principle is now codified in Section 742 in prohibiting a state property tax in any form which directly or indirectly taxes federal obligations or the interest thereon.
For this reason alone, the Tennessee statute should be declared invalid insofar as it requires interest from federal obligations to be included in the tax base.
But even if the Tennessee tax were regarded as a franchise tax, it clearly violates federal law because it discriminates against federal obligations by requiring that interest therefrom be taxed while specifically exempting in interest from obligations of the state of Tennessee itself.
There have been numerous cases in which this Court has stated that the proper test of whether there is discrimination is simply whether the tax is higher as a result of an investment being made in federal obligations than it would be if a similar investment were made in some other assets.
This principle is specifically demonstrated in the Schuylkill case, the first Schuylkill case in 1935, in which Pennsylvania imposed a tax on trust companies on the value of shares represented by investments in government obligations, but exempted from tax such value represented by investments in Tennessee... excuse me, in Pennsylvania corporations and such other assets as Pennsylvania chose to exempt.
This Court said it is impossible to avoid the conclusion that the law discriminates in favor of companies owning stocks already taxed or relieved from taxation by the state, and against those companies amongst whose assets there are United States bonds taxed by reason of ownership of such federal securities.
Now, appellees in their brief vigorously criticize Schuylkill contending that it stands alone as authority in support of the bank's position in this case.
The principle is well established in other cases.
In National Life versus United States in 1928, this Court applied precisely the same principle to a federal attempt to impose a tax on state obligations, invalidating the tax, because it required petitioner to pay more upon its taxable income than could have been imposed had its income from state obligations been derived instead from other securities.
And the test has been restated many times by the Court as a basis for finding lack of discrimination.
For example, in the Home Insurance case in 1890 in upholding a New York tax, this Court emphasized that the tax sustained, and I quote,
"would not be affected if the nature of the property in which the whole capital stock is invested were changed and put into real property or bonds of New York or of other states. "
That is, of course, the reverse of the situation here in that the tax here would be reduced if the investment were shifted from federal to state bonds.
And although dicta, the Court in the Bank of Commerce case cited the statute in Weston versus City of Charleston in which federal obligations and most other personal assets, but not state obligations, were taxed as a prime example of discrimination.
The Supreme Court of Pennsylvania more recently, in the Curtis Publishing case in 1949 in which this Court denied certiorari, invalidated a tax strikingly similar to that of the Tennessee tax involved here.
Pennsylvania, like Tennessee, had adopted the federal test of net income including interest on federal obligations but excluding interest on Pennsylvania obligations.
It was held by the Supreme Court of Pennsylvania that the inclusion of federal interest while excluding state interest constituted unlawful discrimination against federal obligations, in violation of the Federal Constitution.
And just a few months ago, the Supreme Court of Alaska, in the National Bank of Alaska case, held that it would be an unlawful discrimination for state privilege tax to include in its measure income from federal obligations while excluding income from Alaska state obligations.
In a slightly different context but involving the same principle this Court, in fact, in 1960 in the Phillips Chemical case, invalidated a state tax imposed on a lessee of federal lands where an equivalent tax burden was applied to lessees of all lands in the state except state lands.
The Court said, the state and the school district concede that Phillips would not be taxed at all if its lessor were the state or one of its political subdivisions instead of the federal government.
It does not seem too much to require that the state treat those who deal with the government as well as it treats those with whom it deals itself.
This language was repeated by the Court in invalidating a Washington state tax in the Moses Lake Homes case in 1961, and certainly applies here.
As very simply put in Curtis, the state has no right to tax federal securities while leaving its own untaxed.
Unidentified Justice: Mr. Worthy, do you think that Section 548 of Title 12 U.S. Code has any impact here?
Mr. Worthy: Does it have any... I'm sorry, Justice O'Connor?
Unidentified Justice: Any effect here on the result of the case?
Mr. Worthy: No, I do not think so.
Section 548 as now in effect and has been for several years and as in effect during the years in issue here, simply provides that the states may tax national banks to the same extent as they tax state banks, and that section obviously does not give the states any right to tax either state or national banks to any greater extent than they can tax any other corporation.
Section 548 as it existed prior to its amendment provided, among other things, that a state could not impose a tax on a national bank measured by income to any greater extent than it imposed on manufacturing and mercantile corporations.
Obviously, under the long line of cases of this Court and as codified now in Section 742 of Title 31, states cannot impose a tax on mercantile or manufacturing corporations which discriminate against federal obligations or the interest thereon.
I don't think Section 548 really has any relevance whatever to the issue before the Court today.
Unidentified Justice: Did you cite a Pennsylvania Supreme Court case?
Mr. Worthy: Yes, sir, I did.
Unidentified Justice: That's not listed in your... at least I don't find it readily.
Mr. Worthy: --Yes, sir.
It's 69 Atlantic 2d 410, and I believe it is referred to... it's the Curtis Publishing case, and it is--
Unidentified Justice: I've got it.
Mr. Worthy: --Yes, sir.
I probably didn't refer to the plaintiff but to the defendant.
Now, the state suggests in its brief that there's no discrimination if inclusion of interest on federal obligations is casual or incidental, and that the federal obligations must be singled out for tax for the rule of discrimination to apply.
But I call to your attention that that was not the case in the Phillips, just cited, where this Court was careful to point out that the tax burden on private lands was exactly the same as on federal lands.
Yet, exemption of state lands was sufficient for the matter to be treated as one of discrimination, invalidating the state tax.
And in Miller versus Milwaukee, a case relied on very heavily by the State of Tennessee in its briefs, the record discloses that the tax there involved did not apply solely to income derived from federal obligations, but also applied to income from a variety of other sources such as wages, salaries, business profits, dividends from activities carried on in other states.
And this Court held that the tax was invalid because of its discrimination in exempting income from other investments while including the income from federal obligations.
The suggestion of appellees that the appellant has the burden of establishing that state obligations are in direct competition with the federal bonds, or the burden of establishing that the Tennessee tax inhibits the purchase of federal bonds simply has no support whatever.
In valuing a debt obligation, a free market takes into account a great many factors.
The risk, the term, the interest rate, the rate of return after all taxes, and obviously, after everything has been taken into account, the burden of the bank tax reduces the value of federal obligations below what they would be if no such tax was imposed.
And the absence of such a tax on Tennessee obligations increases the value of those obligations above what they would be if such a tax was imposed.
As the Curtis case said, when Pennsylvania exempts from taxation its own securities but taxes directly or indirectly the securities of the United States, the latter securities are handicapped in their competition with the securities of Pennsylvania among buyers in the marketplace.
As far back as M'Culloch versus Maryland and Weston versus City of Charleston in the 1800s, this Court said that it would invalidate a discriminatory tax however inconsiderable the burden on the government.
And in both Smith versus Davis in 1944 and the New Jersey Realty Title Insurance Company case in 1946, this Court reiterated the principle by ruling that the exemption statute is intended, and I quote,
"to prevent taxes which diminish in the slightest degree the market value or investment attractiveness of obligations issued by the United States. "
It can hardly be said that the burden here is even slight or inconsiderable, in light of the Solicitor General's calculation in the Amicus brief, which the Solicitor General has filed in behalf of the federal government in this case, that imposition of a tax by every state similar to that of the bank tax imposed by Tennessee would impose an additional burden on the borrowing power of the United States of over a quarter of a billion dollars a year.
For all of these reasons, we submit that the Court should reverse the Tennessee Supreme Court and hold that the Tennessee bank tax violates federal law to the extent that it requires that there be included in the tax base obligations of the federal government and its instrumentalities and all the interest thereon, while excluding the interest from that of the state of Tennessee itself.
Chief Justice Burger: Mr. Creecy?
ORAL ARGUMENT OF JIMMY C. CREECY, ESQ. ON BEHALF OF APPELLEE, WILLIAM M. LEECH, JR.
Mr. Creecy: Mr. Chief Justice, and Justices, may it please the Court:
Because of the impact of this case upon state and local government, a motion was filed to divide the argument in this case and it was granted.
In examining the Tennessee bank tax statute here, Section 742 sets up two standards.
One, the nature of the tax imposed; and two, whether or not there is discrimination against federal securities within the meaning of Section 742.
For the purposes of oral argument, I will address the nature of the tax involved, and Mr. Minor Tait, representing Shelby County in Memphis, Tennessee, will address the discrimination issue.
Section 742 of Title 31 is a codification of many opinions of this Court dealing with the parameters within which a state may tax federal securities and the interest thereon, in accordance with the Supremacy Clause and the Borrowing Clause of the Federal Constitution.
As early as 1819 in the similar case of M'Culloch v. Maryland the principle was established that the states cannot directly tax federal obligations or their interest.
In 1829, the Court further noted in the case of Weston v. City Council of Charleston that a direct tax on U.S. obligations was prohibited and void.
Section 742, which originated and was first codified in the 1860s, sets forth this basic exemption that a state cannot tax stocks, bonds, Treasury notes or other obligations of the United States government.
It's expressly prohibited by the Supremacy Clause of the Federal Constitution and the Borrowing Clause.
However, this Court has noticed and recognized that a tax upon the corporate franchise or corporate privilege is permissible within the parameters of the Constitution, even though these federal bonds and interest may be included within the tax base.
This principle was first enunciated by this Court in 1867 in the case of Society for Savings v. Coite and was subsequently reaffirmed in a number of cases including Flint v. Stone Tracy Company in 1911, Educational Films Corporation of America v. Ward in 1931, and as recently as 1956 in Werner Machine Company v. Director of Taxation.
Now, the first question the Court will face here in applying our bank tax to Section 742 is the type of tax that we have.
If the Court should determine that this is a direct property tax, then the question of discrimination becomes moot and would be void.
But it's our position that this is a franchise tax within the meaning of the second sentence of Section 742, which permits a non-discriminatory franchise tax.
Unidentified Justice: Then you have two franchise taxes on banks in Tennessee.
Mr. Creecy: That's correct, Mr. Justice.
This bank tax is imposed only against banks.
We have a general corporate excise tax and a general corporate franchise tax.
Now, the statute which imposes the bank tax specifically provides that this tax is in addition to any other excise tax or any other taxes that may be imposed against the bank.
Unidentified Justice: Of course, I suppose the labels don't mean anything.
Mr. Creecy: Well, I think it's the effect of the tax primarily that's important.
Whether we call this a property tax or a franchise tax, a gross receipt tax or whatever is, to some extent, immaterial.
But I think the actual effect and operation of the tax is important.
Unidentified Justice: Is there any way for us to rule with you without declaring that this is a "franchise" tax?
Is there any other way we can rule with you?
Mr. Creecy: Well, Mr. Justice, I think the term 742 is a generic term.
It doesn't include just, for instance, a tax on corporate capital.
As this Court has noted in several opinions, a franchise tax may include a tax on net income.
I think the Court can quite easily rule that this is a franchise tax within the meaning of Section 742.
Now, there is some language there that says
"or a non-property tax in lieu thereof. "
Now, the Court, I suppose, could take that approach and say that it is a non-corporate... I mean, a non-property tax in lieu thereof imposed on corporations.
But it's our position that this is a franchise tax that we're imposing.
Of course, the nature of the tax, rather than the label attached to it, must be determined by its operation and effect.
And, of course, this Court is not bound by the characterization of the tax which is placed on it by the state court.
But this Court has noted in a number of cases that such interpretation is to be given weight by this Court in determining the nature of the tax.
The Tennessee Supreme Court in this case below affirmatively held that this was an excise tax, and it has done so in other independent decisions before the court.
The fact that the tax may be included within our Code section that deals with direct property taxes, or that it may be denominated a tax in lieu of property tax does not make it a property tax, as is suggested by the appellants in the case.
This Court has noted in the case of Tradesmen's National Bank of Oklahoma v. Oklahoma Tax Commissioner in 1940 that in defining a franchise tax, that a franchise tax is a tax upon a corporation for the exercise of its corporate privilege and franchise within the state, and further, that this tax may be measured either by net income or by net assets.
And that the two terms are used interchangeably.
So when we attach the label 742.
As I stated, the tax is not a property tax but in Tennessee it's a bank tax upon banks for the exercise of the banking privilege in the state of Tennessee.
And for several reasons.
Article II, Section 28 of our state constitution which was amended in 1973 permits our legislature to impose a tax upon banks and other financial institutions in lieu of the intangible personal property tax.
Now, the Tennessee General Assembly has done this in 1977 by this bank tax within the meaning of the statute; it specifically identifies the tax as an excise tax, it makes the tax imposed in addition to any other excise taxes or any other type of tax that the bank may be required to pay the state of Tennessee.
Unidentified Justice: Does the state of Tennessee levy any kind of a tax on the Tennessee Valley Authority?
Mr. Creecy: No, Your Honor, we do not.
Under the provisions of our law they make, in lieu of tax, payments to the state of Tennessee based upon values as a fairly complicated formula.
They do not pay property tax per se to the state.
Unidentified Justice: Then I'll put it another way.
Could the state of Tennessee levy a tax absent that arrangement, on the Tennessee Valley Authority.
Mr. Creecy: Because the Tennessee Valley Authority is an instrumentality of the federal government, it's very doubtful that we could, Mr. Justice.
Unidentified Justice: Counsel, a minor point, if I may, while you're interrupted.
The parties stipulated that no tax is due if the federal obligations can't be included in net earnings.
Now, does that stipulation mean that no minimum tax would be owing, regardless of what we held under the Tennessee tax provisions?
Mr. Creecy: Under the facts and the situation of this case, Madame Justice, the minimum tax does not come into play because under the minimum tax computation it is based upon the book value... 60 percent of the book value of the bank less the appraised value of real or intangible personal property.
In this case, apparently the real or intangible personal property more than wiped out any minimum tax that would have been owed.
So that's not a question.
Unidentified Justice: But in effect, you've stipulated that there would be none owing on the minimum tax.
Mr. Creecy: That's correct.
Unidentified Justice: Thank you.
Mr. Creecy: The tax is imposed at the rate of 3 percent of net earnings.
The amount of property held by the bank is totally irrelevant.
The value of this property is irrelevant.
What better way to measure the exercise of a corporate franchise than the benefits that inures to the corporation from this franchise; that is, the net earnings.
Although below, as the appellants have contended, there was a stipulation in the trial court with regard to the amount of the tax and the source of the interest that the tax was characterized as an intangible personal property tax, unfortunately, but the Supreme Court of Tennessee quite correctly held that this was an excise tax.
And that point was raised below and argued before the Tennessee Supreme Court.
I believe that's all I have, Mr. Chief Justice, unless there's some questions.
Chief Justice Burger: Very well, Mr. Creecy.
ORAL ARGUMENT OF J. MINOR TAIT, JR., ESQ. ON BEHALF OF APPELLEES, GARNER and FOSTER
Mr. Tait: Mr. Chief Justice, and may it please the Court:
As Mr. Creecy stated, we have more or less divided our arguments, since the Court did grant us permission to make divided argument.
I'm primarily going to address the question of discrimination.
I think that this case turns on two simple points.
Number one, what type of tax is involved; and number two, is the tax discriminatory.
Now, it's clear that no state can tax an obligation of the United States unless Congress has given its permission.
I don't think this point is even in issue.
At the time that we tried this case at the trial level, Congress had given the states permission to tax federal obligations in two areas.
Number one was 12-548 which was the right to tax national banks and national banks' shares.
31-742 gave the states the right to tax any obligation as long as it was a non-discriminatory franchise tax.
Now, at the trial level we raised both 548 and 742, but the Tennessee Supreme Court ruled that this was a 742 tax, which was a non-discriminatory franchise tax.
So I only briefly addressed that in my brief.
Now, to be a franchise tax, as Mr. Creecy has pointed out, it determines on whether or not the tax is on the business of a corporation... and I think it's important to realize that when you talk about non-discriminatory, you've got to determine are we talking about a franchise tax, are we talking about a property tax, are we talking about an income tax.
Now, I submit that the appellants in their brief have lumped together all type of taxes that this court has heretofore ruled on.
They have lumped together property taxes, they have lumped together income taxes, they have lumped together franchise taxes.
Now, what we're talking about in this case is a non-discriminatory franchise tax, and that's all.
We're not talking about a property tax or an income tax.
Now, it's been held by this Court on many occasions that a state has wide discretion in enacting franchise taxes.
That if a corporation comes into a state and gets the privileges to operate as a corporation, they must pay a tax to do that.
And it's our position that a state has much wider discretion and authority in the area of a franchise tax than it does in the area of property taxes or income taxes.
Now, when we look at whether or not this is a discriminatory act... and I'm not going to address whether or not it's a franchise tax or property tax because Mr. Creecy has done that.
But when we look in the area of whether or not this is a discriminatory tax, then we have to look to the decisions of this honorable Court, and we have to look to the intention of Congress.
Now, it is our position that discriminatory does not mean what the appellants would have this Court believe it means.
If you adopt the appellant's definition of discrimination, as I understand their argument they are saying that if a state exempts anything from a tax base, then they have to exempt federal obligations or else it's discriminatory.
Now, I take that to mean that if a state exempted charities or hospitals or religious institutions, then by the same token, they would have to exempt government securities or government obligations.
Unidentified Justice: I thought the cases Mr. Worthy was quoting from indicated only that you can't treat state bonds better than you can treat federal bonds.
Mr. Tait: That was what he was arguing to the Court, but it's our position that these cases do not hold that; that there's a common thread throughout the holdings of this Court that when you talk about discrimination in the context of a franchise tax, what you're talking about is a direct effort by the state to single out the federal obligations for taxation.
Unidentified Justice: Why should intent make any difference in this area?
What if the Tennessee legislature simply passes a tax and decides that A, B, and C should be exempt and C, D and E should be used as the base of the tax, and it turns out that they come out with a product which, in effect, discriminates against the federal government in Mr. Worthy's context because it taxes the revenue from federal securities but doesn't tax the revenue from state securities?
Why would it make any difference whether the state of Tennessee intended to single out the federal government?
Mr. Tait: Well, the main reason, Justice Rehnquist, is because that is what the decisions, in my judgment, of this Court have held for over 100 years.
Now, that is the definition that the appellants are urging on the Court; that a tax is discriminatory if the taxpayer has to pay a higher tax because of the fact that he owns federal obligations than if he did not own federal obligations.
That's the entire thrust of their argument.
They're saying that that's the test that you look at.
That if he has to pay a higher tax because of federal obligations, then that's a discriminatory tax.
Unidentified Justice: Well, isn't this explicitly discriminatory, though?
It's an explicit discriminatory classification.
It says that it includes income from federal bonds.
Mr. Tait: Justice White, we say that it is not.
We say that based upon the prior holdings of this Court,--
Unidentified Justice: Or, it explicitly excludes the... which does it?
Does it explicitly exclude the income from state bonds?
Mr. Tait: --The bank tax simply uses taxable federal income as the base for the tax.
And the bank tax of Tennessee does not define or allow any adjustments; it simply says you must go to the excise tax of Tennessee and use that formula to determine the final basis of the federal taxable income and the tax base; that when you go to the excise statute of Tennessee, the excise statute says you take the federal base of taxable income and you make certain adjustments and deductions.
Now, the problem is that the federal government allows taxation on federal obligations, the income from federal obligations, so when you get the federal taxable income base, you've already got built into that all federal obligations.
Now, it does not allow the taxation of Tennessee obligations.
So here again, when you--
Unidentified Justice: So there is an explicit classification there.
Mr. Tait: --Well, that's not done by the state of Tennessee, though, it's done by the federal government in their federal tax structure.
Unidentified Justice: I know, but the state of Tennessee picks it up.
Mr. Tait: They do.
Unidentified Justice: Picks it up, and it says we'll take this base that includes the income from federal bonds but which excludes the state bond income.
Mr. Tait: The state bonds are excluded under the federal taxable income.
Unidentified Justice: One could almost say it was accidental.
The alleged discrimination.
Mr. Tait: It's not done by the state of Tennessee legislature.
We're simply adopting what the federal government uses on its taxable income basis.
But it's my point--
Unidentified Justice: My remark was merely directed to these comments about intent.
Maybe there was no intent, but it came out with Tennessee bonds being excluded.
Mr. Tait: --I think it's clear from this record that the Tennessee legislature itself did nothing to tax federal obligations.
And I think that's a key and important point because throughout the cases on this subject there's a thread that says that it has to be a direct intentional act to single out the federal obligations for taxation.
Unidentified Justice: Mr. Tait, am I mistaken or do I recall correctly that your tax law does impose a tax on the income from other state bonds; not Tennessee but, say, West Virginia?
Mr. Tait: On the basis from federal taxable income, the state act adds in the obligations from other states.
Unidentified Justice: Now, that's not in the... even though the federal government doesn't tax those.
Mr. Tait: That's correct, Your Honor.
Unidentified Justice: So what they did, in effect, is they added into the federal base all state income except from Tennessee bonds.
Mr. Tait: Except Tennessee.
And under Tennessee law, Tennessee obligations are excluded.
So Tennessee could not add in Tennessee obligations.
An interesting comment of this Court was in Miller versus Milwaukee... and this is a case, or one of the cases that we're relying upon on our position that it has to be more than just a discrimination or a difference in the tax base.
And I quote from Miller,
"A tax may very well be upheld as against any casual effect it may have upon the bonds of the United States when passed with a different intent and not aimed at them. "
"But it becomes a more serious attack on their immunity when they are its obvious aim. "
Now, it's our position that that shows that what they're talking about in the context of a franchise tax... and I keep coming back to that because the appellants are lumping in all type of taxes.
They're even talking about... and Mr. Worthy mentioned... cases involved doing business with the United States government, and they've cited in their brief property taxes and income taxes.
But a franchise tax, based upon prior holdings of this court, is a peculiar tax.
And this Court has ruled time and time again that the states have a wide discretion in assessing a franchise tax.
They can include some property, exclude other property.
They can set one basis for one property, or set a different basis for another property.
Now, this same theme--
Unidentified Justice: May I ask this question?
Supposing it were not a franchise tax, for a moment, but were an income tax, at say a 10 percent rate.
So it would be another non-property tax.
Would you agree it would be discriminatory for that kind of tax?
Mr. Tait: --I think if it's not a 742 non-discriminatory franchise tax, or it's not a 548 tax under the national bank shares, then the state of Tennessee could not tax federal obligations.
And I still--
Unidentified Justice: But could they include it in the... oh, all right.
But you would agree that would be discriminatory in that case.
Mr. Tait: --Not... well, it depends on what you're saying--
Unidentified Justice: Well, you're saying you really don't reach the discriminatory issue in that situation.
Mr. Tait: --There's a difference in taxing the property itself, and there's a difference in using the property as the measure of the tax.
Now, if they're only using the income as the measure of the tax, then I see nothing wrong with that.
But the cases make a distinction in that regard.
Unidentified Justice: But would you say they could even go up... increase the rate to 10 or 15 percent and base it on income and say we'll call this thing a franchise tax, and it would be all right?
Mr. Tait: I don't think that it's what they called it.
I think that the act speaks for itself.
And if you are taxing property as compared to the privilege or the franchise to do business, then it's not a franchise tax, it's a property tax.
And I don't think they can do that in the context of a property tax.
But where you are taxing the right of a corporation to do business... and that's all the bank tax is.
In Tennessee, banks enjoy special privileges and rights and immunities.
Now, as a consideration of that right to do business, then they pay a franchise tax.
And that's all that Tennessee is doing in this case.
If they didn't operate as a bank, then they would not--
Unidentified Justice: How many franchise taxes could you put on a bank?
Mr. Tait: --As I understand the--
Unidentified Justice: It's unlimited, isn't it?
In your theory.
Mr. Tait: --I don't think there's any limit to the amount of franchise or privilege taxes the state can assess as long as they're not arbitrary and unreasonable.
Now, I'd like to point out that the banks do pay the same excise franchise tax as other corporations.
Now, they are excluded from a business tax in Tennessee, which is another privilege tax that banks do not pay.
But this bank tax only applies to banks, to no one else.
Unidentified Justice: Mr. Tait, would you agree that the Tennessee bonds and securities are in substantial competition with the federal securities here?
Mr. Tait: Justice O'Connor, we raised that in our brief, and that is a question of fact.
And I want to point out that the appellants have been taking that position throughout this lengthy litigation.
They're saying that these Tennessee bonds are in substantial competition.
I'd like to point out... you asked a question of Mr. Worthy a moment ago, if 548 had any application.
If you will look at 548, one of the definitions of Congress is that the money capital has to be in substantial competition with the federal obligation.
And that is specifically set out in 548, which shows to me that the intent of Congress is that these other obligations have to be in substantial competition.
There's no proof in this record; it's just silent as a tomb, as they say, about whether or not there's any direct competition.
And I think that's a very important point and we raised that in our brief, that that was incumbent upon the appellants to prove that, if that is their position.
Now, if they cite out... and they take great joy in citing the amicus brief of the Attorney General that some $250 million in obligations are involved.
That's assuming that all of these banks would abandon U.S. obligations and buy Tennessee obligations, of which there's no proof at all in this record.
Unidentified Justice: Can I ask you one question before you sit down.
As I correct in assuming there really is no difference in the legal position of your client and of the state's position?
Mr. Tait: The positions are identical.
Unidentified Justice: I wonder why you filed separate briefs and had separate arguments?
Mr. Tait: Well, the money goes to the county and city; it does not go to the state... the state has an interest in the constitutionality of the statute in question, and I might point out that this is of utmost concern to the state of Tennessee because the formula that we use in the bank tax is the same formula that we use in our excise tax.
Unidentified Justice: I'm not questioning your right, either of you.
I'm just curious to know as a matter... because it's sometimes a less effective method of presentation to divide arguments.
Mr. Tait: Well, I was going to argue and the state wanted to be heard because of the constitutionality, and that's basically what happened.
I felt like that we should split it because there's more involved than just the interest of Memphis and Shelby County, Tennessee in this lawsuit; it has statewide application, and I just felt like it should be split and agreed to.
I thank you.
Chief Justice Burger: Mr. Worthy?
ORAL ARGUMENT OF K. MARTIN WORTHY, ESQ. ON BEHALF OF THE APPELLANT -- REBUTTAL
Mr. Worthy: Mr. Chief Justice, may it please the Court:
Mr. Creecy cited a number of cases in which this Court has held that a franchise tax may properly be imposed on the interest on federal obligations or on federal obligations themselves.
He failed to note, however, that several of those cases, the Educational Foundation case, the Werner Machine case, the Tradesman's Bank case and many others, all note that the states can impose such a tax, provided it is not discriminatory.
For example, in the Werner Machine Company case, it validated the tax, held it was lawful, since the tax measures... since the tax is the same whatever the character of the assets may be.
Now, interestingly enough, when Mr. Tait talks about discrimination, he hasn't really told us what discrimination is except to say that all of the theories of discrimination which this Court has announced in numerous cases, are inapplicable.
All he says is that there is no discrimination if federal obligations are not singled out.
As I pointed out in my original argument, in both the Phillips Chemical case and the Miller versus Milwaukee case, there was no singling out of federal obligations, yet the tax was found to be invalid.
And insofar as the intent of the legislature in imposing the tax is concerned, I do call to your attention that the Tennessee legislature was specifically aware, when it adopted the formula for the measurement of income, as shown by the report of the legislative committee which is referred to on page 10 of our Reply Brief, that it knew that it was taxing interest on federal obligations, knew that it was not taxing interest on obligations of the state of Tennessee, knew that it was taxing interest on obligations of other states.
So it deliberately chose the course which it followed.
Chief Justice Burger: Thank you gentlemen, the case is submitted.