ARKANSAS v. FARM CREDIT SERVICES
The Tax Injunction Act provides that federal "district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." In Department of Employment v. United States, 385 U.S. 355, the U.S. Supreme Court held that the Act does not limit the power of federal courts if the U.S. sues to protect itself or its instrumentalities from state taxation. Four Production Credit Associations (PCA's), federally chartered corporate financial institutions organized by farmers primarily to make loans to farmers, sued, seeing a declaratory judgment and an injunction prohibiting Arkansas from levying sales and income taxes against them. The PCA's argued that they constituted instrumentalities of the U.S. and that they were not subject to the Act's provisions. The District Court granted the PCA's summary judgment and the Court of Appeals affirmed.
Do Production Credit Associations fall within the exception in the Tax Injunction Act created by Department of Employment v. United States when they sue by themselves?
Legal provision: 28 U.S.C. 1341
No. In a unanimous opinion delivered by Justice Anthony M. Kennedy, the Court held that Production Credit Associations are not included within the judicial exception to the Act by virtue of their designation as instrumentalities of the United States alone. Therefore, the Court continued, PCA's may not sue in federal court for an injunction against state taxation without the United States as co-plaintiff. "The Tax Injunction Act is grounded in the need of States to administer their fiscal affairs without undue interference from federal courts," wrote Justice Kennedy, "[a]s all parties concede, respondents have a 'speedy, plain, and efficient remedy' in state court."
Argument of Martha Grissom Hunt
Chief Justice Rehnquist: We'll hear argument next in Number 95-1918, Arkansas v. Farm Credit Services of Central Arkansas.
Mr. Hunt: Mr. Chief Justice, and may it please the Court:
This case was decided incorrectly by the lower courts in two respects.
First, the district court should have dismissed the case for lack of jurisdiction under the Tax Injunction Act.
Second, on the merits, the reliance of the lower courts on a doctrine of implied immunity of production credit associations from State taxation is erroneous when 12 U.S.C. section 2077 clearly provides the extent to which production credit associations are exempt from Arkansas or from any State sales and income tax.
Unknown Speaker: I'm curious to know, was the Anti-Injunction Act point, the jurisdictional point argued in the Ninth Circuit... pardon me, in the Eighth Circuit or in the briefs that were filed?
Mr. Hunt: It was argued in the district court--
Unknown Speaker: I noticed that.
Mr. Hunt: --but not in the Eighth Circuit.
Unknown Speaker: Not in the briefs and not in the oral argument?
Mr. Hunt: Not in either, that's correct.
The Tax Injunction Act, which is printed on page 2 in the petitioner's brief, 28 U.S.C. section 1341, provides an absolute statutory bar to Federal court jurisdiction so long as the state provides an adequate remedy to taxpayers who are seeking to assert a claim against State taxation.
The respondents concede that the State of Arkansas's remedy is adequate.
This is evidenced by the fact that respondents have currently pending in State court a claim for a refund of these income and sales taxes based on the same theory for which they ask for a declaratory judgment in Federal court.
The respondents filed the suit on their own behalf.
The United States did not appear with them as a coplaintiff or to represent them.
The Court has confirmed that an implied exemption to the Tax Exemption Act exists for the United States.
In the Court's decision in Department of Employment, the language of the Court leads us to believe that this exemption applies when the United States appears to protect its interest or that of its instrumentalities.
Unknown Speaker: When you say appears, Ms. Hunt, do you mean appears as a party plaintiff, rather than just perhaps files an amicus brief?
Mr. Hunt: Yes, Your Honor.
That would be my contention, that that language does suggest that.
The respondents contend, however, that this implied exemption for the benefit of the United States should be extended to Federal instrumentalities.
Unknown Speaker: Well, certainly the courts have recognized some implied exemptions from that Tax Injunction Act, haven't they?
Mr. Hunt: --That is correct, Justice--
Unknown Speaker: For example, for the NLRB.
Mr. Hunt: --I am not aware that in the context of the Tax Injunction Act there has been an exemption applied for the NLRB.
I am aware that the Solicitor General has analogized the Tax Injunction Act to the general Anti-Injunction Act, to which there is an implied exemption.
Unknown Speaker: Right.
Mr. Hunt: One point that I would like to make--
Unknown Speaker: So what's the test?
If we're going to have an implied exemption, what's the test?
Mr. Hunt: --Our test that we would like to advocate to the Court is a bright line test.
If the United States appears with the instrumentality to assert its interest then jurisdiction is proper in the district court.
Unknown Speaker: And that's the only instance?
I don't think that's the position of the Government, is it, the Federal Government?
Mr. Hunt: I don't believe... I believe they do disagree with that in some respect.
I believe that their advocacy, though, would lead toward extending the applied exemption to agencies of the Government, as I understand their argument.
We make a distinction, we draw a distinction between agencies and instrumentalities.
Certainly there is a much more compelling reason for extending the implied exemption to agencies who would be functioning as arms of the Government, who might be regulating.
Their functions would certainly be governmental functions in a much greater respect than those of instrumentalities.
There are several--
Unknown Speaker: Why leave it to the executive branch to decide what's an instrumentality that is deserving of the exemption and what isn't?
That's what your position boils down to.
If the Solicitor General, or at the lower level, I suppose, the Civil Division of the Department of Justice, decides to argue for immunity under the Tax... from the Tax Injunction Act, then it wins.
Otherwise, it doesn't.
Mr. Hunt: --Yes, Your Honor, it does appear that that would be the case.
There is always the provision in the Tax Injunction Act that provides that if an adequate State remedy does not exist, then the entity can appear in district court.
If this is an instrumentality who is seeking to assert its interest, then if there is an adequate State remedy, it can assert those interests in the State court.
Unknown Speaker: Well, so far as the United States being a party, you're stuck with the decision of the Department of Employment Security.
There is an exemption if the United States appears as a party, and you don't have any trouble with that, I take it.
Mr. Hunt: That is correct, Your Honor.
We certainly have no problem with that.
Of course, we are advocating a bright line.
We understand that the lower courts have distinguished this bright line and have not adopted that, and that there have been lower court decisions who have looked at the governmental nature, for example, of the instrumentality to determine whether or not it should be allowed to appear on its own behalf.
Unknown Speaker: Your bright line... I just want to be sure I understand... is a distinction between an agency and an instrumentality.
Mr. Hunt: That is correct.
Unknown Speaker: And what is the difference between the two?
Mr. Hunt: I believe that in most cases an agency would be designated by statute as an agency of the Government.
They would obviously--
Unknown Speaker: Suppose the statute had called this entity an agency instead of an instrument?
What if they just gave it that name?
Would that be enough?
I mean, part of the problem here is we're not sure the name has any legal significance.
Mr. Hunt: --The instrumentality--
Unknown Speaker: And I'm just wondering how you know so clearly as to such a bright line that tells us whether it's an instrumentality or an agency.
Mr. Hunt: --That is why we would advocate an even more bright line, actually, and draw the line and say, if any entity appears the United States should appear.
Perhaps I was not entirely clear in trying to distinguish between them.
Unknown Speaker: --And you would say, then, that Nash-Finch, the NLRB case, deals with the Anti-Injunction Act generally, not with the Tax Injunction Act.
Mr. Hunt: That is correct, Your Honor, and there are, too... there is a difference in the purpose of those two acts that I would also like to distinguish.
The purpose of the general Anti-Injunction Act was to prevent conflict between Federal and State courts, whereas the purpose of the Tax Injunction Act was to limit Federal court jurisdiction when the subject that's being considered is State taxation.
This is in recognition of the vast importance, the crucial importance to States of their ability to deal with State tax matters that affect them.
Unknown Speaker: So you really expect us to hold that if the President is annoyed with the National Labor Relations Board and instructs the Solicitor General or the Civil Division of the Justice Department not to appeal in order to enable that agency to claim the benefit of the exemption from the Anti-Injunction Act, then that's the way it will be?
Mr. Hunt: Yes, Justice Scalia.
Unknown Speaker: Regardless of what Congress... it has nothing to do with Congress' intention to establish the NLRB as an agency of the United States.
It's all up to the executive whether he wants to appear in court or not.
Mr. Hunt: --Under the bright... under the absolute bright line test for the presence of the United States, that would be necessary.
Unknown Speaker: Can you tell me why I should do that, why I should leave this issue of law under a congressional statute to be decided dispositively by the President of the United States?
Mr. Hunt: --Obviously, if the President of the United States, the executive department, examines the entity that it is there to represent and makes this determination to appear, under the bright line test that would be a decision that would be left to the executive department.
As a practical matter, in instances of State taxation, I would find it very difficult to think of an example where a State would attempt to tax an agency.
Unknown Speaker: What if the President, during the presidency of Franklin Roosevelt the Civil Division does appear on behalf the labor board and says, this is an agency of the United States.
We claim an exemption from the... okay.
However, during the administration of Harry Truman, with a similar suit, the Civil Division chooses not to appear.
Is the labor board branded once and forever as an agency of the United States by reason of the first appearance under the prior administration, or can it be undone by the second?
Mr. Hunt: --Yes, Your Honor, I believe it could be undone.
If you are allowing the executive to make that decision, then it appears that it would be within the executive's discretion under that test.
Of course, on behalf of the State of Arkansas, in considering that the entities here are production credit associations, regardless of whether the Court adopts a bright line test, and even if the Court should determine that a much more flexible test is appropriate, it is our contention that the production credit associations would fail to meet the standard regardless of what the test is, even if it's a more flexible governmental nature of the organization.
Unknown Speaker: Ms. Hunt, may I ask you a question about the discrete jurisdictional issue, which this Court asked the parties to address.
It seems to me that the answer to the jurisdictional question goes a long way, if not all the way, to answer the question on the merits as well.
Would you agree with that, that how you categorize this agency for purposes of the Tax Injunction Act--
Mr. Hunt: No, Justice Ginsburg.
I believe that the tests are different here.
The test for purposes of the Tax Injunction Act has not totally been established by this Court.
However, I believe the test for whether or not an instrumentality has been... tax immunity has been conferred on an instrumentality is determined first of all by looking to whether or not Congress has addressed the issue.
If Congress has clearly addressed the issue of tax immunity, then I think that forecloses further inquiry by the Court into the tax exempt status, so in that respect I believe the tests are different.
Unknown Speaker: --Why wouldn't it make sense to have the test simply be whether Federal dollars are at stake as the exemption for the Tax Injunction Act?
Mr. Hunt: If the only test were whether or not Federal dollars were at stake, there would be many, many entities who would then be entitled to the benefit of the Tax Injunction Act.
There are so many entities that in some respect have a stake in Federal money who do not execute agency functions, so in that respect I don't believe that merely the infusion of some sort of Government capital or access to Government capital would be a sufficient test to decide this case.
In addition to the other respects, Congress also has the power to provide an exemption to the Tax Injunction Act.
For example, in the Moe decision this Court construed a statute that had been passed, section 28 U.S.C. 1362 which deals specifically with the Indian tribes, to be an implied exemption to... not an implied exemption, but to be a statutory exemption to the Tax Injunction Act, which was passed sometime after the Tax Injunction Act.
Since this is an implied immunity for the benefit of the United States, it is our contention that implied immunity should be strictly construed, and before the Court would extend this implied immunity to another entity, this Court should look very carefully at that extension.
Unknown Speaker: Ms. Hunt, could we borrow a test from somewhere else?
What about just applying the same test that we would apply for sovereign immunity?
You know, if you sue the labor board you would not get anywhere.
Why don't we just say the same thing, it's any agency that would come under our sovereign immunity rules?
Mr. Hunt: In the sense of sovereign immunity this has frequently been addressed by statute, by the sue-and-be-sued statutes, so this alone would not be a sufficient test because that might have been spoken to by Congress already, and then you would have to enter into that sphere of statutory language dealing with the sue-and-be-sued provision.
May I reserve my time for rebuttal?
Unknown Speaker: Yes, you may, Ms. Hunt.
Mr. Wallace, we'll hear from you.
Argument of Lawrence G. Wallace
Mr. Wallace: Thank you, Mr. Chief Justice, and may it please the Court:
The principle underlying the exception to the Tax Injunction Act that was recognized in Department of Employment was described by this Court in 1960 in Federal Power Commission v. Tuscarora Indian Nation as,
"General statutes imposing restrictions do not apply to the Government itself without a clear expression to that effect. "
and in 1947 in United States v. United Mineworkers, instead of to the Government itself the Court said, will not be applied to the sovereign.
Now, who is the sovereign, or the Government for this purpose in our modern, complex governmental framework?
While the term, instrumentality is often used on the merits of questions of tax immunity, because obviously the Government itself cannot be taxed, and the issue is about whether an instrumentality is immune from tax, the expression that the Court used when it addressed this closely analogous question in NLRB v. Nash-Finch under section 2283 of title 28, was the United States and its agencies, or in one instance it used the term, public authority.
Unknown Speaker: When the Congress incorporates... a Federal corporation has a Federal charter, is it always an instrumentality?
Mr. Wallace: Sometimes they're designated an instrumentality.
Sometimes that question is up in the air.
But the question is always, instrumentality for what purpose?
Unknown Speaker: I should have asked, and it's apparent from your question, they are not always designated instrumentalities apparently.
Mr. Wallace: Not always.
Sometimes they're just designated a Government enterprise, but in footnote 8 of our brief we try to explain that the same body can be an instrumentality for one purpose but not for another under various holdings.
But what is different about an agency from other instrumentalities?
One model for an answer, and these terms are not always used in precisely the same way from one context to another, but one model for an answer is in the words themselves.
An instrumentality, or an instrument, is a tool or a device through which the Government accomplishes an objective.
It may be a very important objective, but it may be accomplished through a contractor, a corporation, or what-have-you.
An agency is related to the law of agency.
An agent is someone who shares in the governmental authority, or what we would call the regulatory authority of the Government, and that in our system is at least an important way of looking at it.
Another way of differentiating the group to whom the exception should extend is whether it is a public governmental body, or a privately owned enterprise.
Unknown Speaker: Well, what about the Red Cross?
I mean, that... it's hard to look at that as so much a part of the Government that it should share the Government's exempt status, and yet we have a case where at least when the Government was a coplaintiff it came within the exception.
Mr. Wallace: There... there it was held to be entitled to a tax immunity, but it was not held to be within the exception to the Tax Injunction Act.
The exception was recognized in that case because the United States was a coplaintiff.
The Court did not address whether the Red Cross could have brought the suit in Federal court itself.
Unknown Speaker: Mr. Wallace, I hate to go on creating different tests for all these different purposes.
Can we agree that the test here is the same as the test for sovereign immunity?
Mr. Wallace: Well, I--
Unknown Speaker: Not... not... leaving out the situation where the Government has said that a particular instrumentality can or cannot sue or be sued.
Let's assume that, you know, there's nothing said.
Would applying the general rules for sovereign immunity of agencies or instrumentalities of the United States produce the same result that you're arguing for here?
Mr. Wallace: --Well, I think it's closely related, but I--
Unknown Speaker: I know it's closely related.
Is it the same rule?
Mr. Wallace: --There are reasons... there are reasons I would hesitate to say it's the same.
In some instances it would require the Court to address a hypothetical constitutional question in order to answer a question that really could be resolved without resort to that.
There is... if I can commend to the Court's attention just one of the lower court cases that I think particularly rewards study it would be the Federal Reserve Bank of Boston case, in which Levin Campbell wrote for the First Circuit a very thoughtful opinion about why he concluded that the Federal Reserve Bank of Boston, because it functions as an arm of the Government sharing an important regulatory authority, would... should have the benefit of this exception.
I'm not sure that the considerations are the same as whether it would be entitled to sovereign immunity, whether or not the answer would be the same--
Unknown Speaker: Mr. Wallace, would the answer be... in your view, would the same test apply under both the Tax Injunction Act and the... 2283?
Mr. Wallace: --I think that it's a good model, and probably would be the same test.
That view is not universally held within the Government.
I have many nervous agencies and instrumentalities out there.
Unknown Speaker: Given that, why isn't... what's wrong with Arkansas' approach?
I mean, her approach is very clear, and moreover, all it say is that Congress and the President, who signed the bill, believe that State tax laws are pretty important, and before you go mucking around with an injunction, go into State court.
And if they're important enough for the United States, namely the Justice Department, to think they're that important, fine.
Then you can set them aside.
But if no one in the Justice Department thinks they're that important, that's the end of it.
Okay, then you can't.
Go into State court.
Now, that would be a very clear administrative way to do it, it would be simple, and I don't really see what the policy is underlying this that would be seriously interfered with.
Mr. Wallace: Well, what Judge Campbell suggested--
Unknown Speaker: What... what does he... yes.
Mr. Wallace: --for the First Circuit on this very point was that the Court should respect the reasons why Congress has chosen to confer independent litigating authority in the lower courts on certain agencies, because they should to some degree be insulated from the executive chain of command, and I think it's very well put.
It's an opinion that deserves--
Unknown Speaker: Yes.
Mr. Wallace: --and rewards study.
Unknown Speaker: Is it clear that you could have intervened here if you had chosen to do so?
Mr. Wallace: Yes, we could have.
Unknown Speaker: Under Rule 24 you have an interest?
Mr. Wallace: I believe so.
It would be very similar to the interest in the intervention in Department of Employment, the case itself, on behalf of the Red Cross' exemption.
These farm credit institutions perform an important Federal statutory function under the oversight of the Farm Credit Administration, some of the others are explicitly conferred tax exemptions, and the Government might well come forward.
They're part of the executive branch in such cases.
Now, I might just say--
Unknown Speaker: You're not saying that the executive branch should have any leverage in deciding whether there's an exemption or not.
You're just saying if it's a coplaintiff that should survive the Tax Injunction Act.
Mr. Wallace: --Exactly, so it's up to the courts to decide the merits of the exemption issue.
Obviously, the willingness of the Government to come forward might have something to do with its view of the merits, and if I could just say a word about the merits... since the court of appeals addressed the merits, the Court may choose to comment on the merits because of that.
We think that this is a clear case for application of the rule of the Russello case that, when different provisions of a statute address the matter explicitly in different ways, that difference should be respected.
This is a matter that Congress has addressed from the outset.
Under this scheme, the reliance on the part of the respondents is on the part of a deletion of two sentences which we have italicized--
Unknown Speaker: Thank--
Mr. Wallace: --on page 5 of their brief.
Unknown Speaker: --Thank you, Mr. Wallace.
Your time has expired.
Mr. Hanson, we'll hear from you.
Argument of Richard A. Hanson
Mr. Hanson: Mr. Chief Justice, and may it please the Court:
I'd like to answer Justice Scalia's question as to what standards ought to apply in determining application of the Tax Injunction act, application of sovereign immunity concepts, application of tax immunity concepts, but I think it really has two pieces.
One is that the same standard should apply in determining whether or not an entity is a Federal instrumentality, and the Court's most recent discussion of that is in U.S. v. New Mexico, where they talked about an entity being so closely connected to the Government that it cannot be viewed as a separate party.
Now, beyond that, and I think the Court said this in Federal Land Bank v. Priddy, you then get to the question of whether... and let me back up just a second.
In Federal Land Bank v. Priddy the Court, talking about a Federal Land Bank, which is one of the institutions of the system, said that it would partake of the sovereign immunity of the United States absent a waiver by Congress, and there was sue-and-be-sued language in the statutes, therefore the Court concluded that sovereign immunity to some extent had been waived.
The issue in that case involved execution of a judgment.
The result which you get in a Tax Injunction Act case, an immunity case, a sovereign immunity case, a case involving punitive damages, and a case involving estoppel, all of which are issues which have been addressed by this Court or the lower courts, then turns on what has Congress done?
And it becomes a question of, you know they're a Federal instrumentality.
You know they partake of the sovereignty of the United States.
Now, what does the governing statute tell you about what Congress has done in terms of waiver of tax immunity, waiver of sovereign immunity?
Unknown Speaker: And your position is that unless Congress has affirmatively waived that immunity, they are immune?
Mr. Hanson: On the merits, unless Congress has affirmatively consented to the taxation of these entities by Arkansas, 180 years of case law says that we are immune.
Unknown Speaker: Well, there's a lot of case law contrary to that, it seems to me.
The cases that say you have to look at what Congress has said, not saying that the burden is necessarily on those who would show that Congress had not waived the immunity.
Mr. Hanson: Well, I'm not aware of any case where this Court has departed from the rule that immunity is implied under the Supremacy Clause, and immunity exists unless Congress has consented to taxation, and certainly that has been--
Unknown Speaker: And you would say this is true of every single thing that is called a Federal instrumentality?
Mr. Hanson: --If it is a Federal instrumentality, and that really in large part is the crux of this case.
You know, the Government of the United States on brief said that these entities perform no governmental function.
Now, they say that in the face of a preamble which explains exactly what they do, in the face of being repeatedly designated... and frankly for current institutions this is a unique designation... Federal instrumentalities, and in face of a number of decisions by this Court involving various farm credit system entities.
But I think the other thing they say we need to... I would like to discuss a bit further.
They say that these entities exist to make profits for their members, and that simply misconceives the nature of the farm credit system.
When the Federal Land Banks were created back in 1916, Congress referred to the farm credit system as a bridge between farmers and the credit markets.
They said the Federal Government cannot provide a mechanism to get adequate credit to farmers, that the commercial banking institutions cannot provide a mechanism to get adequate credit to farmers, so what we will do is, we will provide a federally supported mechanism, and that's all the modern farm credit system does.
Unknown Speaker: Mr. Hanson, whatever this was originally when there was a Federal administrator involved, is there anything that these entities are doing that the farmers and ranchers couldn't have done getting together for themselves?
Is there anything that they are doing that is an exercise of Federal power, or are they just acting, admittedly with the spark provided by the Government, but as any privately arranged cooperative could act?
Mr. Hanson: Well, if they are... there are not in any material way exercising any Federal regulatory power.
The regulatory power exists in the Farm Credit Administration.
Unknown Speaker: So the only power that they're exercising is what the farmers and the ranchers choose to confer on them.
Mr. Hanson: With the support of the United States, but there is a reason why the system was set up this way.
Now, obviously there are all sorts of Federal farm programs and there are all sorts of Federal lending programs.
There are lending programs for students.
There are lending programs for small business, for veterans, for homeowners.
A determination was made that the unique nature of agricultural credit required a system set up so that the farmers would become the managers of their own system.
They could not have done it without Federal support.
They couldn't have done it in 1916, they couldn't have done it in 1933, and they can't do it without Federal regulation.
What the... and in 1985, it was again proven that the system itself required and was in fact given Federal help, so while it is true that the day-to-day management operations have been given to the farmers--
Unknown Speaker: Well, lots of private actors are given Federal help.
Universities and colleges are given Federal help, but that doesn't make them Government agencies.
Mr. Hanson: --The program under which that help is given, the program may or may not be a Federal agency, or a Federal instrumentality, but my point is that the farm credit system does not exist to make profit for its members.
The farm credit system exists to accomplish a governmental objective, which is stated in section 2001, which is to... that a program needs to exist to provide adequate secure and affordable credit to farmers.
Congress looked and said, the way we will do--
Unknown Speaker: I don't think that's enough to answer the question.
The Federal Government provides help to support the arts.
That doesn't mean that a company providing artistic service ought to be extended some form of Government immunity.
Mr. Hanson: --No, I would absolutely agree, and that in part was what was addressed in U.S. v. New Mexico.
Unknown Speaker: Yet there's a Government purpose there.
It serves a Government purpose, and that's what's happened now to the production credit association.
Yes, Congress wants to be sure that farmers and ranchers have credit to help them over the hard times, but that doesn't answer the question, it seems to me--
Mr. Hanson: Well, I--
Unknown Speaker: --of whether immunity should exist or whether you ought to go first into State court.
Mr. Hanson: --Well, let me contrast perhaps two different institutions.
You have an independent contractor who is... contracts with the Government to perform a governmental function.
What this Court has said is that that contractor is a separate entity pursuing its own private profit interests, and the fact that it is performing a function for the Government doesn't make it a Federal instrumentality, so the fact that a company assists the National Endowment for the Arts doesn't make it a Federal instrumentality under U.S. v. New Mexico and the prior cases.
My point is here that these entities perform no function except the specific governmental function that the system was set up to perform.
They have no separate private existence.
Now, they certainly have private characteristics, and I admit that.
I mean, they have officers, and they have directors.
Unknown Speaker: Well, what functions ally them with the Government rather than with the private members, because I think you answered my question candidly that they can do, these PCA's can do only what the members choose to allow them to do.
Mr. Hanson: Well, they can do only what the Government allows them to do under the controlling statute and regulations.
The members have day-to-day control.
But that's the purpose of the system.
I mean, the governmental function, as has been expressed by this Court, is to provide credit to farmers.
You've just defined the function.
Unknown Speaker: Can you tell me if there are other instrumentalities where all of the people, all of the personnel are on private payrolls, not Government payrolls, that would have this tax immunity--
Mr. Hanson: Well, I think--
Unknown Speaker: --from income tax, State income tax?
Mr. Hanson: --Certainly the Federal credit unions would be an analogous situation, and one of the ironies in this case... and frankly I want to come back to Justice Scalia's question on the jurisdictional issue.
In a case called United States v. Michigan before the Sixth Circuit Court of Appeals, the United States did file suit on behalf of the Federal credit unions with respect to a Michigan sales tax issue.
They argued not only a statutory exemption but the instrumentalities were... that the credit unions were in fact instrumentalities.
They did so by analogy to the farm credit system.
Now, we're being told that the farm credit system somehow is not entitled to that kind of representation.
Unknown Speaker: There's a distinction between the... a Federal credit union and the PCA's.
Mr. Hanson: There is in the statutory provision describing certain aspects of the tax exemption, but I'm not sure that there's much other than that, and the Sixth Circuit basically compares and contrasts the two and says the only real distinction is one provides financial services to a broader range of the public than the farm credit system does.
But the system is probably fairly stated unique.
It was formed because there was a congressional determination that this is how the congressional purpose could be accomplished, that the Federal Government can't do it because the farm economy is too complex, that you can't run the system from Washington.
The legislative history on the '33 act explains that a centralized Federal funding program during the early stages of the Depression had managed to lose some $40 million and had not accomplished its purpose.
They said, we can't do this, so what we will do is we will set up a farmer-supported system, or a federally supported system, and we will engage the farmers.
Now, that doesn't mean that they get into this system to make a profit.
It means that if a farmer wants to borrow money from the system, he has to buy stock, and it's mandatory.
It's not voluntary, because there is no profit potential.
It is a cost of entry, in effect, but it was determined that that way the farmer would be interested in the success of the associations, the success of the system as a whole.
So the role of the farmer reflects Congress' considered decision that this makes sense as a means of an effective system for delivery of credit, but you know, it's a closed system, too, except for periodic Government investment.
When you talk about where the system gets its "earnings" or its capital, basically that comes from its members.
They provide the capital.
That provided the source of funds to retire Government stock.
It's providing the source of... to retire the Government--
Unknown Speaker: Mr. Hanson suppose you were to say, look, if it is a matter of degree, here we have an organization that looks like an ordinary bank, performs the functions of ordinary banks.
The benefit of this tax exemption or immunity, if they get it, will go entirely to private shareholders or to other members outside the Government.
The United States Treasury is not affected by a penny--
Mr. Hanson: --Well--
Unknown Speaker: --and given these similarities between ordinary banks and what's going on here, and the fact that the Treasury is not implicated, this is not a Government instrumentality for purposes of the Tax Injunction Act.
That seems to track the kind of thing that Judge Campbell was doing.
Mr. Hanson: --Well, it is interesting that the Government's reference to the Federal Reserve Bank case... for example, the Federal Reserve Banks are capitalized solely by their member banks.
Unknown Speaker: Ah, but he has large number of things--
Mr. Hanson: I know.
Unknown Speaker: --to say--
Mr. Hanson: He talks about the regulatory function and so on.
I'm aware of that, but I go back to the nature that there is somehow sort of a separate private entity here, separate from the performance of the--
Unknown Speaker: --I'm just saying look at the similarities.
It looks like a bank, acts like a bank, talks like a bank, et cetera, and moreover the Treasury is not involved to the tune of a penny, nor is the member, nor are the taxpayers.
What's at issue here is private money that will go either to the State of Arkansas or to private shareholders or to their customers, who are private people.
Mr. Hanson: --Well--
Unknown Speaker: And given all that, we don't need to go further.
Mr. Hanson: --Well--
Unknown Speaker: I mean, that's... that, it seems to me, is what you face here.
Mr. Hanson: --The profits, the earnings, as this Court recognized in Kiawah County, are not a distribution of profits to the shareholder of the system.
They are a means, which is another part of the design of the system, to reduce the interest cost to the farmer, and that was part of the initial design in 1916.
Unknown Speaker: But they do benefit the farmers--
Mr. Hanson: The farmer--
Unknown Speaker: --rather than the Government.
Mr. Hanson: --Well--
Unknown Speaker: Rather than taxpayers, let's say.
Mr. Hanson: --They benefit the Government to this extent, and that is that currently, as part of the package of assistance that was provided in 1987, the system owes the Treasury some $600 million, and not only do they owe the Treasury $600 million, but the Government has implicitly guaranteed the system's bonds, and I realize it's not a statutory guarantee, but the market believes that the Government will support those bonds and, of course, it always has.
So that any additional expense that you place on the system, potentially at least, increases the likelihood of the Government having to come back.
Unknown Speaker: You can say that, though, about a lot of the Government contractor cases that were involved... that were discussed in New Mexico.
You can say ultimately the Federal Government is going to pick up the increased tab.
That didn't make... for a contractor--
Mr. Hanson: That did not make it.
Unknown Speaker: --You can say that about Chrysler Corporation, come to think of it.
Mr. Hanson: You could say it about them also.
Unknown Speaker: If it's just probabilities.
Mr. Hanson: But as to none of those could you say that Congress has said this is a federally chartered instrumentality of the United States, and as to none of those could you say that its sole function is to perform an important governmental function.
I mean, what we have here, and we recognize that, you know, one could say this looks like a bank.
Now, I disagree, because it looks far more like a Federal Reserve Bank in its operations.
The Federal Reserve Bank performs significant services to its member banks through discounting and otherwise.
Does that make it not a Federal instrumentality?
Now, I grant that the Federal Reserve Banks also have some regulatory authority.
Unknown Speaker: What Campbell said, if we go into that, if you want to, he says they're operated in furtherance of national fiscal policy, not operated for the profit of shareholders, do not provide ordinary commercial banking services, act as depositories for money held in the United States Treasury, hold the legal reserves and any remaining earnings are paid into the surplus fund where they may be used to supplement the gold reserve.
I mean, that was basically his--
Mr. Hanson: Well, and--
Unknown Speaker: --And most of those things seem absent here.
Mr. Hanson: --Well, I don't believe that's true.
I don't think there is any distribution of profits to private persons.
We do not perform normal banking services.
We do only one thing.
Unknown Speaker: You mean there aren't private shareholders who get the money here?
Mr. Hanson: There are farmers who own stock for which they receive no return, and if that stock is ever redeemed, which is at the discretion of the banks--
Unknown Speaker: Yes.
Mr. Hanson: --and the system--
Unknown Speaker: Yes.
Mr. Hanson: --they get what they paid in.
To suggest anybody has ever invested in the system I think--
Unknown Speaker: I see, so they don't get a profit.
Mr. Hanson: --They don't get a profit.
What you do see is a system set up to reduce their interest cost.
Now, obviously they get a benefit, but that's the benefit that Congress intended in the first instance.
I keep coming back to that.
Congress has said we're going to set up a system, we're going to provide it with an implicit guarantee at the top, we're in fact going to provide some support for it, if you will, at the bottom through farm price support programs, and that was one of the things that helped the farmers get out of the depression of the mid-eighties, as the system itself recognized.
So we have this system which serves no purpose except to perform a governmental function.
Unknown Speaker: Mr. Hanson, it took me a while, but the farm credit union example that you gave in answer to my earlier question, as I understand, that is entirely statutory.
The code exempts them from Federal, State, or local taxation except for their real and personal property?
Mr. Hanson: --No.
It is true that they have a statutory provision which specifies those exemptions, but the case also involved the proper statute of limitations, and that turned on a constitutional question, whether they were a Federal instrumentality for Supremacy Clause purposes in the decision in the Sixth Circuit Court of Appeals.
Unknown Speaker: Well, you recognize that you can be an instrumentality for one purpose but not for another?
Mr. Hanson: Well now, I don't believe that that's what this Court has ever said.
What this Court has said is, there is such a thing as an instrumentality.
Now, what its characteristics are with respect to various immunities may differ depending on what Congress has said.
The lower courts have said, well, there's this kind of instrumentality and that kind.
I find that very troubling, because I think--
Unknown Speaker: Do you think there is a pattern in, say, federally chartered institutions for when Congress labels them Federal instrumentalities and when it doesn't, say the Girl Scouts and the Boy Scouts, and the Red Cross and the others?
Mr. Hanson: --Actually, the only pattern is that we're the only institutions that currently bear that designation.
There were... that specifically are designated that way.
There are... there were institutions in the past, I believe the Homeowner's Loan Corporation, for example, was designated as a Federal instrumentality.
But I do believe there are a set of characteristics which define the Federal instrumentality.
Unknown Speaker: Well, perhaps it was a definition that came in originally when this... these associations were headed by a Federal administrator, and since the character of the--
Mr. Hanson: That designation changed--
Unknown Speaker: --association changed--
Mr. Hanson: --I'm sorry, Your Honor.
I didn't mean to interrupt.
That designation was reaffirmed in 1971, when all the Government stock had been redeemed and when the Farm Credit Administration was more independent than originally, so it certainly doesn't--
Unknown Speaker: --You mean reaffirmed by some positive act, or just so they didn't change it?
Mr. Hanson: --The Farm Credit Act of 1971, which was a recodification of the entire act, said the production credit associations continued to be Federal instrumentalities, federally chartered instrumentalities of the United States, so it was an affirmative act in 1971.
That's interesting, in 1987 various new entities were added to the system.
There was a Federal Systems Corporation, a Federal Insurance, Federal Farm Insurance Corporation, service corporations... Congress gave each one of them the same designation, federally chartered instrumentality of the United States.
So as I say, I believe that statement, that designation has some substance, and this Court has recognized that substance in various circumstances, and I go back to the Priddy case, which said that a Federal instrumentality would partake of sovereignty of the United States and would exercise sovereign immunity as against a private suit absent waiver by Congress, so I mean, it is a designation that does have significance.
I'd like to spend just a couple of minutes talking about why we believe that a bright line rule that requires that the United States to be... or the Justice Department, whoever it would be, to be the gatekeeper in suing in Federal court we think is inappropriate.
The underlying policy, or the underlying reason for Department of Employment, as I understand it, was the notion that a sovereign should not be viewed as having relinquished access to its own courts absent a very explicit surrender.
That's United Mineworkers and some of the earlier cases.
If that's a fair statement, and if the farm credit system institutions partake of the sovereignty of the United States, then it doesn't seem to me to be any... and I... and if we are talking about things that we agree are Federal instrumentalities I don't think it's a stretch to say, as... and this goes back to your question about, Justice Scalia, the question of whether you use the same standard for sovereign immunity or not.
I don't see it's any stretch to say that one should ask whether Congress has explicitly said that the Federal instrumentalities are... have to sue in State court to vindicate Federal rights which are based on the Supremacy Clause.
I mean, that seems unlikely, though it may be true.
Unknown Speaker: Of course, the Court could have said that in Department of Employment Security, and it didn't.
Mr. Hanson: Well, this Court is typically careful about deciding the case in front of it, and the case in front of it, United States had brought suit on behalf of an instrumentality.
Interesting, the cases it cited were all suits... I believe they were all suits where the United States had sued in the lower courts on behalf of what we would now say were not Federal instrumentalities but were private contractors.
But the court specifically said suits by the United States, so I grant that it... its... it clearly, that decision does not give us permission to be in Federal court--
Unknown Speaker: It didn't reject your position.
Mr. Hanson: --It did not.
Unknown Speaker: But it could have gone the way that would have supported it.
Mr. Hanson: Yes.
But wha... I think more troubling than sort of the judicial question, while I recognize that, is that if the Justice Department becomes what I've described as the gatekeeper, their decision is both sort of final and nonappealable as to the instrumentality, except perhaps in the political arena, because no court is ever going to look at it.
I mean, I can't go to Federal court say the Justice Department won't represent me.
That's simply final.
And what considerations the executive branch may bring to bear on that I offer again as an illustration.
They sued on behalf of the Federal credits unions in 1986 and drew an analogy to us.
10 years later, we're--
Unknown Speaker: You might try... I mean, I don't mean this necessarily seriously, but you could try a distinction between those agencies where there are strong reasons for independence of executive authority, the Fed, for example, maybe the FCC and a few other traditional independent ones, and those agencies where the proliferation of independent legal authority to control their own cases reflects nothing more than likely administrative convenience, and I don't know that that kind of distinction would work.
It would be difficult to apply, but so is the distinctions difficult to apply in the absence of that.
Mr. Hanson: --Well, I certainly agree that trying to write a bright line here--
Unknown Speaker: What about a rule that said Nash-Finch was the general Anti-Injunction Act and shouldn't be carried over to the Tax Injunction Act, so that neither Federal agencies nor Federal instrumentalities can get out of the Tax Injunction Act.
That would obviate the problem of the Department of Justice.
It would also make you lose your case.
Mr. Hanson: --I appreciate that, so I'm not sure I'm prepared to advocate that argument.
I think that that creates both a participation by the executive branch in a decision which they are not... they are not permitted to partake.
Unknown Speaker: The... what's difficult is Congress very often proliferates litigating authority for no reason other than the general counsel's office or the agency would like it, or there could be all kinds of reasons.
Mr. Hanson: Right.
Unknown Speaker: And it's unlikely Congress thought about this part when they did that, and of course the Fed's different.
It absolutely wanted independence there.
Mr. Hanson: Well--
Unknown Speaker: I don't know how it works across the banking agencies.
That's what I can't--
Mr. Hanson: --Well, in... but... you know... two points.
One is, obviously there are cases, there are lower court cases permitting the FDIC to sue on its own behalf.
That is a different circumstance, and the New Iberia case makes I think a pertinent point, is that all of the considerations that led to the passage of the Tax Injunction Act are completely missing here.
Unknown Speaker: --It would be nice to get--
--Well, certainly... certainly you could file your suit in State court here.
You admit that.
Mr. Hanson: Sure.
Unknown Speaker: And indeed, if you're going to get a refund of any taxes paid you're going to have to, aren't you?
Mr. Hanson: Right.
Unknown Speaker: So what's the harm in saying, gee, this is the kind of situation where it ought to track the Eleventh Amendment situation, go to State court?
Mr. Hanson: Well, I think--
Unknown Speaker: And you always have the right to petition to this Court if you think the State courts have erred on the merits.
Mr. Hanson: --Well, I think the concern that I would have is that there is some taint associated with the fact that this type of entity, unless you go back... if you adopt a bright line rule of the United States has to be a party, and if you accept, as I certainly do as a practicing attorney that, given a Federal question of this type I'd want to be in Federal court, not State court, I mean, with no disrespect to the Arkansas courts, my preference, as the United States' would be, would be in Federal district court.
If I have to go to State court, am I going to have Arkansas, as the multi-State Tax Commission say, gee, if you have to go to State court you're really not serving an important governmental interest, are you, or did the United States decide that, you know, you're wrong on the merits.
We go into State court with some serious adverse implications from the decision of the United States, and I think those implications exist whether the United States was asked, and to my knowledge they were not in this case, or they're asked and turn you down.
Now, in fairness, of course, we have that same problem here, because we have a brief by the United States which I'm sure will be widely publicized.
It is a question of whether we are sufficiently part of the sovereign that the principle of Department of Employment, are we... did Congress have to be more specific?
Unknown Speaker: Maybe it ought to be the same kind of a test we'd employ to see if there's some exception to the Eleventh Amendment.
Mr. Hanson: Well, and... I think that the test may be in part the same, though... though--
Unknown Speaker: That worries me, because I don't know about how many instances there are in borderline cases where you never have to reach the issue because Congress has said we give this the power to sue and be sued, and if we suddenly took an Eleventh Amendment test, I'd worry that all of a sudden we had to decide those things that otherwise never had to be decided--
Mr. Hanson: --I--
Unknown Speaker: --which are difficult.
I'm not sure.
Mr. Hanson: --Well--
Unknown Speaker: I'm just putting that forward.
Mr. Hanson: --I believe I misspoke, though, because one difference between sovereign immunity is, of course, that's a constitutional protection given the State.
This is simply... not simply.
This is a congressional action.
The question is, Congress said, all right, for various reasons, comity and federalism and so on, we want private suit cases in State court and, of course, there's nothing in the legislative history that anybody's identified that suggests an intention to cover this kind of a case.
And I observe that James v. Dravo, which I find kind of interesting as sort of a landmark Federal instrumentality case, was brought in Federal court by private attorneys on behalf of the contractor, and granted it was, I'm sure, litigation that started before the Tax Exemption Act was adopted, but there's not even a comment about it.
It seemed perfectly natural.
And the United States participated as an amicus, taking a position adverse to the taxpayer, and the Court decided the case.
But it... you know, I admit that's simply... maybe... maybe it's just an historical anomaly.
On the merits, our view is, as expressed in Professor Tribe's article, as expressed in the Congressional Reference Bureau's analysis of the Constitution... thank you, Your Honor.
Unknown Speaker: Thank you, Mr. Hanson.
Ms. Hunt, you have 5 minutes remaining.
Rebuttal of Martha Grissom Hunt
Mr. Hunt: First of all, regardless of test that the Court decides to apply, the respondents' arguments that they are entitled to first of all status under the Tax Injunction Act that would be the same as that of the United States is certainly not something that they have successfully been able to argue.
First of all, their argument that they are a Federal instrumentality certainly does not imply that that is the case for all purposes.
Unknown Speaker: What is your response to the Michigan case where he says the Government took just the opposite position in that case?
Mr. Hunt: --There is a specific statute, a specific taxation statute that relates to the Federal credit unions that gives them a very broad immunity from taxation.
In fact, that statute is very similar in wording and in language to the statute that the PCA's had prior to the amendment, and at the time that they were Government-owned, so Federal credit unions may be distinguished in that respect in that their tax immunity is very clear by statute.
Unknown Speaker: What would your position be if the statute here had not been amended and were the same as it had been?
Mr. Hunt: If the statute were the same, where the... well, first of all I need to answer that in two respects.
If the statute were exactly the same, then we would make the argument that because the PCA's are now privately owned, that they are not entitled to that exemption because the last sentence of that original statute provided that at the time they became privately owned the broad exemption was waived, so my answer would be they would still have essentially the same immunity that they do today because they are privately owned.
In another respect there are many other Federal instrumentalities other than production credit associations.
For example, the other Government-sponsored enterprises like Ginnie Mae, Fanny Mae, Freddie Mac, and all of those entities are designated by statute as Federal instrumentalities.
If you look at the language of the enacting statutes where Federal... where production credit associations are designated instrumentalities, which is printed on the respondent's brief on page Roman i, first of all it says each production credit association shall continue as a federally chartered instrumentality of the United States.
This is quoting directly from 12 U.S.C. section 2071(a).
It is my contention that this designation simply implies that Congress has the power to create or to allow these farmers to band together and to charter these institutions, because again, on the same page at 12 U.S.C. section 2071 (b)(7), there's the same instrumentality language relating to the fact that PCA's are federally chartered body corporate and an instrumentality of the United States.
Then, in their statute, the PCA statute relating to their taxation, which is printed in the petitioner's brief on page 2, we again see the instrumentality language.
Quoting from 2077, each production credit association and its obligations are instrumentalities of the United States and as such, going on with the language of the exemption from tax.
It is my contention that that language is there for a specific purpose, in the first instance to show that Congress has power to create these institutions, and in the second to show that Congress has the power to immunize them to the limited degree that they did from tax, which leads into the argument on the merits.
The respondents' attempt to apply the doctrine of McCulloch to this case, there is a very specific reason why the doctrine of McCulloch does not apply here.
There was no tax exemption statute in McCulloch which led the Court to construe the implied immunity.
Chief Justice Rehnquist: Thank you, Ms. Hunt.
Mr. Hunt: Thank you.
Chief Justice Rehnquist: The case is submitted.