The opinion
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Karen Freeman-Wilson Thomas C. Borders
Attorney General of Indiana Richard A. Hanson
Kevin J. Feeley
Jon Laramore Theodore R. Bots
Deputy Attorney General Chicago, Illinois
Indianapolis, Indiana
Marilee J. Springer
Indianapolis, Indiana
IN THE
SUPREME COURT OF INDIANA
INDIANA DEPARTMENT OF )
STATE REVENUE, )
)
Appellant, )
)
v. ) Cause No. 49S10-9908-TA-453
)
FARM CREDIT SERVICES )
OF MID-AMERICA, ACA, )
)
Appellee. )
[pic]
APPEAL FROM THE INDIANA TAX COURT
The Honorable Thomas G. Fisher, Judge
Cause No. 49T10-9801-TA-5
[pic]
September 1, 2000
SHEPARD, Chief Justice.
Farm Credit Services of Mid-America (Mid-America), an Agricultural
Credit Association, claims it is exempt from Indiana’s Financial
Institutions Tax under constitutional principles of intergovernmental tax
immunity. We conclude it is only partially exempt.
Facts and Procedural History
Mid-America is part of the Farm Credit System, a nation-wide network
of cooperative, borrower-owned banks and lending institutions that were
established to provide affordable credit to farmers and ranchers. 12
U.S.C.A. § 2001 (West 1989).[1]
The system includes twelve Farm Credit Banks (FCBs), located in each
of twelve districts. Through local associations, these banks provide real
estate loans secured by mortgages. The local associations include Federal
Land Bank Associations (FLBAs), which provide long-term loans, and
Production Credit Associations (PCAs), which provide short-term and
intermediate loans.
Congress created the Farm Credit System in 1916 and has reformed it
several times during the intervening decades. In the early 1980s, the
system began to falter under unfavorable economic conditions that
threatened the stability of its lending institutions. Congress responded
by enacting the Agricultural Credit Act of 1987. The Act authorized
voluntary mergers between PCAs and FLBAs in an effort to streamline the
structure of the lending bodies. The institution resulting from such a
merger is called an Agricultural Credit Association (ACA).
Mid-America was created in 1989 through the merger of two PCAs and
two FLBAs. This case arose in March 1997, when Mid-America filed an
amended tax return with the Indiana Department of Revenue requesting a
refund of the Financial Institutions Tax[2] it had paid for the tax years
1993 and 1994. Mid-America asserted that as a federal instrumentality it
was immune from state taxation. The Department denied Mid-America’s claim.
Mid-America appealed to the Indiana Tax Court, where it prevailed on
summary judgment. Farm Credit Serv. Of Mid-America v. Department of State
Revenue, 705 N.E.2d 1089 (Ind. Tax Ct. 1999).[3]
Early Tax Immunity Doctrine
The doctrine of intergovernmental tax immunity derives from M’Culloch
v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), the landmark case holding that
the State of Maryland could not impose a tax on the Bank of the United
States. Chief Justice Marshall’s opinion for the Court relied both on the
discriminatory nature of the tax and on general principles of federal
supremacy. Specifically, Marshall determined that, because the Bank was a
“federal instrument” used to carry out the government’s powers, state
taxation would unconstitutionally interfere with the exercise of these
powers. Id. at 425-37. Marshall explained that the individual states:
have no power, by taxation or otherwise, to retard, impede, burden, or
in any manner control the operations of the constitutional laws
enacted by congress to carry into execution the powers vested in the
general government.
Id. at 436.
This principle was applied broadly for many years thereafter to bar
taxation by one sovereign on another, or even on the employees of another.
Davis v. Michigan Dep’t of Treasury, 489 U.S. 803 (1989); see also, e.g.,
Collector v. Day, 78 U.S. (11 Wall.) 113 (1871) (invalidating federal
income tax on salary of state judge); Dobbins v. Comm’rs of Erie County, 41
U.S. (16 Pet.) 435 (1842) (invalidating state tax on a federal officer).
In the late 1930s, however, the Court began to narrow its view of tax
immunity. In Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939), the
Court overruled the Dobbins-Day line of cases and held that
intergovernmental tax immunity bars only those taxes imposed directly on
one sovereign by another, or that discriminate against the sovereign to
which they apply. Id. at 481-87. In restraining the scope of tax
immunity, the Court explained:
[T]he implied immunity of one government and its agencies from
taxation by the other should, as a principle of constitutional
construction, be narrowly restricted. For the expansion of the
immunity of the one government correspondingly curtails the sovereign
power of the other to tax, and where that immunity is invoked by the
private citizen it tends to operate for his benefit at the expense of
the taxing government and without corresponding benefit to the
government in whose name the immunity is claimed.
Id. at 483.
Over the intervening years, the doctrine of intergovernmental tax
immunity has become, in the Court’s words, “a ‘much litigated and often
confused field,’ one that has been marked from the beginning by
inconsistent decisions and excessively delicate distinctions.” United
States v. New Mexico, 455 U.S. 720, 730 (1982) (internal citations
omitted).
Here, both parties agree that ACAs are “federal instrumentalities”,
but disagree about the tax implications of this status.
Both parties urge distinct views of tax immunity. Mid-America argues
that federal instrumentalities are immune from state taxation unless
Congress expressly waives such immunity, while the Department argues that
federal instrumentalities are subject to state taxation unless Congress
expressly exempts the instrumentality from taxation.
The Department’s View
In asserting that ACAs are subject to state taxation absent a
congressional statement otherwise, the Department directs us to Arkansas v.
Farm Credit Serv. of Cent. Arkansas, 520 U.S. 821 (1997). In that case,
four PCAs brought suit in U.S. District Court claiming an exemption from
Arkansas sales and income taxes. The District Court granted the PCAs’
motion for summary judgment, and the Court of Appeals for the Eighth
Circuit affirmed. Farm Credit Serv. of Cent. Arkansas v. Arkansas, 76 F.3d
961 (8th Cir. 1996).
The Supreme Court reversed on jurisdictional grounds, holding that,
under the Tax Injunction Act, 28 U.S.C. § 1341, PCAs cannot sue in federal
court for an injunction against state taxation unless the United States is
a co-plaintiff. Arkansas v. Farm Credit, 520 U.S. at 831-32. In so
holding, the Court considered the long-standing power of the federal
government to sue to protect itself or its instrumentalities from state
taxation. The Court ultimately determined that, although PCAs are
congressionally designated federal instrumentalities, this designation
“does not in and of itself entitle an entity to the same exemption the
United States has under the Tax Injunction Act.” Id. at 832.[4]
The Department urges us to rely on Arkansas v. Farm Credit for the
proposition that status as a federal instrumentality does not necessarily
confer upon an entity the same rights and privileges enjoyed by the United
States itself. Further, it directs us to the Court’s description of PCAs:
Whatever may be the rule under the Tax Injunction Act where a federal
agency or body with substantial regulatory authority brings suit,
PCA’s [sic] are not entities of that description. PCA’s are not
granted the right to exercise government regulatory authority but
rather serve specific commercial and economic purposes long associated
with various corporations chartered by the United States.
. . . .
The PCAs’ business is making commercial loans, and all their stock is
owned by private entities. Their interests are not coterminous with
those of the Government any more than most commercial interests.
Despite their formal and undoubted designation as instrumentalities of
the United States, and despite their entitlement to those tax
immunities accorded by the explicit statutory mandate, . . . that
instrumentality status does not in and of itself entitle an entity to
the same exemption the United States has under the Tax Injunction Act.
Id. at 831-32.
Mid-America’s View
The decision in Arkansas v. Farm Credit, of course, meant that only
state supreme courts and the U.S. Supreme Court possess jurisdiction to
decide whether PCAs are exempt from state taxation, and Mid-America directs
our attention to some cases subsequently decided by other state high
courts.
In Arkansas v. Farm Credit Serv. of Cent. Arkansas, 994 S.W.2d 453
(Ark. 1999), cert. denied, 120 S. Ct. 1530 (2000), the Arkansas Supreme
Court held that PCAs are exempt from state sales and income taxes.[5] In
so holding, the court reasoned that federal instrumentalities are immune
from state taxation unless Congress expressly waives the immunity. Id. at
455. This reasoning was based on the court’s interpretation of M’Culloch
and its progeny, including the 1997 decision of the Indiana Tax Court. See
id.
Similarly, in Production Credit Ass’n v. Director of Revenue, 10
S.W.3d 142 (Mo. 2000) (en banc), cert. granted in part, 120 S. Ct. 2716
(June 26, 2000), the Missouri Supreme Court concluded that PCAs were immune
from Missouri state income taxes. The court reasoned that entities
designated as “federal instrumentalities” are immune unless Congress
explicitly waives immunity. The Missouri court examined the current
version of the federal statute governing PCAs, noted it was silent on the
matter of taxation, and concluded its inquiry, thus holding against the
state. Id. at 143.[6]
While the cases offered by Mid-America and the Department provide an
excellent background into our inquiry, we note that none of the cases are
directly on point as all of the cited cases deal with PCAs rather than
ACAs. While this difference is not dispositive, for reasons that will
become apparent, these cases offer a view of tax immunity doctrine that is
no longer reflected in recent Supreme Court decisions.
Current Tax Immunity Doctrine
Mid-America cites United States v. County of Allegheny, 322 U.S. 174
(1944),[7] and several federal circuit decisions for the proposition that,
where Congress is silent, state tax immunity of federal instrumentalities
is implied. (Appellee’s Br. at 6-7.) More recent Supreme Court cases
suggest, however, that in determining tax status, a court must examine the
nature of the instrumentality, and the activity being taxed.
The 1982 case United States v. New Mexico, 455 U.S. 720, addressed
whether government contractors are immune from state taxation. In deciding
that they are not, the Court provided an historical overview of tax
immunity law and then said:
We have concluded that the confusing nature of our precedents counsels
a return to the underlying constitutional principle. The one constant
here, of course, is simple enough to express: a State may not,
consistent with the Supremacy Clause, . . . lay a tax “directly upon
the United States.”
. . . .
What the Court’s cases leave room for, . . . is the conclusion that
tax immunity is appropriate in only one circumstance: when the levy
falls on the United States itself, or on an agency or instrumentality
so closely connected to the Government that the two cannot
realistically be viewed as separate entities, at least insofar as the
activity being taxed is concerned. This view, we believe, comports
with the principal purpose of the immunity doctrine, that of
forestalling “clashing sovereignty,” by preventing the States from
laying demands directly on the Federal Government.
Id. at 733-35 (citations omitted).
Similarly, in California State Bd. of Equalization v. Sierra Summit,
Inc., 490 U.S. 844 (1989), the Court held that the doctrine of
intergovernmental tax immunity does not bar the imposition of a state sales
or use tax on a bankruptcy liquidation sale. In so holding, the Court said
“‘[a] court must proceed carefully when asked to recognize an exemption
from state taxation that Congress has not clearly expressed,’” Id. at 851-
52 (quoting Rockford Life Ins. Co. v. Illinois Dep’t of Revenue, 482 U.S.
182, 191 (1987)), and reiterated that “[a]bsolute tax immunity is
appropriate only when the tax is on the United States itself ‘or an agency
or instrumentality so closely connected to the Government that the two
cannot realistically be viewed as separate entities, . . .’” Id. at 849
(quoting New Mexico, 455 U.S. at 755); see also United States v.
California, 507 U.S. 746, 753 (1993) (quoting New Mexico); South Carolina
v. Baker, 485 U.S. 505, 523-24 (1988) (quoting New Mexico).
We cannot read these cases and hop directly to the conclusion that
anything labeled a federal instrumentality automatically possesses immunity
from state taxation. The designation “federal instrumentality” certainly
carries with it a strong possibility of such immunity, but the inquiry
cannot simply end there.
After all, the last century was awash in Congressional enactments
creating scores of commissions and corporations to carry out programs that
the national legislature deemed important federal missions. From the Red
Cross and the Boy Scouts to Amtrak and Comsat, these entities have been
called by various names: federal instrumentalities, federal corporations,
and government-sponsored enterprises, to mention a few.
Perusal of the field rapidly demonstrates that the name Congress
chooses to give (or even not give) a particular entity does not by itself
determine whether the entity is “an agency or instrumentality so closely
connected to the Government that the two cannot realistically be viewed as
separate entities.” New Mexico, 455 U.S. at 735.
The statute creating the Red Cross, for example, says nothing about
tax immunity and describes the corporation simply as “a body corporate and
politic in the District of Columbia.”[8] The Red Cross nevertheless has
been deemed part of the Government for tax immunity purposes because of its
close connection to federal departments and because the President appoints
the board.[9] The Boy Scouts were created by Congress as a “corporation
under the laws of the District of Columbia” in a statute that says nothing
about tax immunity,[10] and the Scouts appear exempt for reasons unrelated
to sovereign immunity. Comsat, formally the Communications Satellite
Corporation, has a board chosen by its private shareholders, who have
provided its capital; in creating Comsat, Congress declared it “will not be
an agency or establishment of the United States Government.”[11]
Such disavowals by Congress, however, do not bring constitutional
inquiries to a close. The National Railroad Passenger Corporation, created
by Congress as “a for profit corporation”,[12] recently cited a similar
provision in the statute (“not an agency”)[13] to assert that it was not
the government. Though the case arose under rather different circumstances
than the ones we examine today, the Court spoke rather broadly about
Amtrak’s contention that the language of the statute settled the matter:
“[I]t is not for Congress to make the final determination of Amtrak’s
status as a Government entity for purposes of determining the
constitutional rights of citizens affected by its actions.” Lebron v.
National R.R. Passenger Corp., 513 U.S. 374, 392 (1995). On matters of
such gravity, labels do not account for much. As the Court said in
considering the finances of the Reconstruction Finance Corporation: “That
the Congress chose to call it a corporation does not alter its
characteristics so as to make it something other than what it actually is.”
Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 539 (1946).
We thus proceed to examine what Mid-America “actually is.”
Agricultural Credit Associations
As we mentioned above, ACAs such as Mid-America are entities created
by merging FLBAs and PCAs.
FLBAs are federally chartered instrumentalities of the United States,
offering long-term loans to farmers and farm-related businesses for land
and other capital purchases. 12 U.S.C.A. § 2091 (West 1989); H.R. Rep. No.
100-295(I), at 55 (1987), reprinted in 1987 U.S.C.C.A.N. 2723, 2727.
Since their inception, FLBAs have enjoyed immunity from state taxation
pursuant to the following specific exemption enacted by Congress:
Each Federal land bank association and the capital, reserves,
and surplus thereof, and the income derived therefrom, shall be exempt
from Federal, State, municipal, and local taxation, except taxes on
real estate held by a Federal land bank association . . . .
12 U.S.C.A. § 2098 (West 1989).
PCAs are also “[f]ederally chartered instrumentalit[ies] of the
United States”; they are privately-owned, corporate financial institutions
organized by ten or more farmers to provide short-term and intermediate
loans to farmers. 12 U.S.C.A. § 2071, 2075 (West 1989). These loans are
intended to cover seasonal operating expenses, land improvement, and
purchases of farm equipment, livestock and buildings. H.R. Rep. No. 100-
295(I), supra, at 55.
Unlike FLBAs, PCAs possess limited express tax immunity. First
created by the Farm Credit Act of 1933, PCAs were initially funded by
government loans, and were afforded immunity from state taxation as long as
they were publicly-owned. The statute providing for this exemption, which
remained substantially unchanged until 1985, read:
Each production credit association and its obligations are
instrumentalities of the United States and as such any and all notes,
debentures, and other obligations issued by [PCAs] shall be exempt,
both as to principal and interest from all taxation . . . imposed by
the United States or any State, territorial, or local taxing
authority. [PCAs], their property, their franchises, capital,
reserves, surplus, and other funds, and their income shall be exempt
from all taxation now or hereafter imposed by the United States or by
any State, territorial, or local taxing authority; . . . except that
any real and tangible personal property . . . shall be subject to
Federal, State, territorial, and local taxation to the same extent as
similar property is taxed. The exemption provided in the preceding
sentence shall apply only for any year or part thereof in which stock
in the production credit associations is held by the Governor[14] of
the Farm Credit Association.
Farm Credit Act of 1971, Pub. L. No. 92-181, § 2.17, 85 Stat. 583, 602
(1972) (emphasis supplied).
During the 1950s and 1960s, stock held by the Farm Credit Association
was gradually retired. By 1968, PCAs were entirely owned by their borrower-
members, as they continue to be. See H.R. Rep. No. 92-593 (1971),
reprinted in 1971 U.S.C.C.A.N. 2091, 2098; Smith v. Russellville Prod.
Credit Ass’n, 777 F.2d 1544, 1550 (11th Cir. 1985).
In 1985, Congress deleted the express tax exemption that had been
granted to publicly-owned PCAs. What remains in the current statute is a
partial exemption:
Each production credit association and its obligations are
instrumentalities of the United States and as such any and all notes,
debentures, and other obligations issued by such associations shall be
exempt, both as to principal and interest, from all taxation . . .
imposed by the United States or any State, territorial, or local
taxing authority, . . .
12 U.S.C.A. § 2077 (West 1989). [15]
Both PCAs and FLBAs are privately owned and controlled. They are,
however, considered “[g]overnment-sponsored entities” and have a preferred
place in the nation’s money markets, although debt issuances are not
guaranteed by the United States. H.R. Rep. No. 100-295(I), supra, at 55.
The associations are governed by boards of directors elected from and by
the stockholders. Id.[16]
The power to merge FLBAs and PCAs is found in 12 U.S.C.
§ 2279c-1. While this statute authorizes such mergers, it does not
establish what the tax implications are for the resulting ACA. The statute
provides only that a merged association shall:
(A) possess all powers granted under this chapter to the
associations forming the merged association; and
(B) be subject to all of the obligations imposed under this
chapter on the associations forming the merged association.
12 U.S.C.A. § 2279c-1(b)(1) (West 1989).
As discussed above, Congress enacted the Agricultural Credit Act of
1987 in response to an agricultural depression that began in the early
1980s. The 1987 Act was passed, in essence, to salvage the Farm Credit
System. H.R. Rep. No. 100-295(I), supra. Mergers between Farm Credit
entities were authorized in an effort to increase efficiency within the
system while maintaining control by the farmer-shareholders. Such evidence
of Congressional intent as we can find emphasizes not the close connection
of the United States to lenders but the close connection of the local
owners. In recommending legislation to allow such mergers, the House
Committee on Agriculture said:
The Federal Land Bank System has served as the primary lender of
long-term agricultural credit since its inception in 1916.
Competition from other institutions has existed but the Farm Credit
System’s ability to obtain funds in capital markets on Wall Street
(known as agency status) has allowed the System to offer lower
interest rates to farmers and ranchers.
. . . .
The loan portfolio of the Farm Credit System has shrunk
considerably in the last five years. . . . [T]he Farm Credit Systems’
[sic] seventy year-old structure must be reorganized in order that the
System compete in an agricultural lending environment that is going
through its biggest changes since farmers began borrowing money. . . .
Realizing the structure was quickly becoming outmoded and
incapable of maintaining a competitive position, the Committee felt
the Farm Credit System must make certain changes. . . .
Because the concept of a member-owned cooperative is appreciated
to the highest degree at the local level, the fairest and most
effective approach in dealing with the problem would be to down-size
the middle layer (district banks) of the bureaucracy. This approach
would allow the stockholders to continue control production credit
associations and Federal land bank associations while accruing
significant savings on borrower interest costs, especially in years to
come.
H.R. Rep. No. 100-295(I), supra, at 65-66.
Legislative and regulatory history also suggests that institutions
created by mergers were deemed to retain the characteristics of the former
entities. The statute governing mergers of Farm Credit entities states:
“The Farm Credit Administration shall issue regulations that establish the
manner in which the powers and obligations of the associations that form
the merged association are consolidated and, to the extent necessary,
reconciled in the merged association.” 12 U.S.C.A. § 2279c-1(b)(2) (West
1989).
The FCA regulations define an agricultural credit association as an
“association[] created by the merger of one or more Federal land bank
associations or Federal land credit associations and one or more production
credit associations . . .” Farm Credit Administration Definition, 12
C.F.R. § 619.9015 (2000). The regulations also define a merger as the
“[c]ombining of one or more organizational entities into another similar
entity,” or “the combination of one or more associations into a continuing
constituent association, which retains its charter and bylaws (except as
amended to effect the merger proposal).“ Id. §§ 619.9210, 611.1122 (2000).
[17]
Thus, a merged association, like an ACA, is not considered a new
organizational entity, but rather a combination of the two previous
entities. And although PCAs and FLBAs are merged to streamline the Farm
Credit System, the resulting ACA continues to provide the same services to
the same constituents as the original entities.
Mid-America’s own structure reflects this definition of “merger.”
With offices principally located in Louisville, Kentucky, Mid-America’s
territory also includes Indiana, Tennessee, and parts of Kentucky and Ohio.
Farm Credit Service of Mid-America, ACA, 1999 Annual Report (2000)
[hereinafter Annual Report]. Mid-America consists of an ACA parent
company, and two wholly-owned subsidiaries: Farm Credit Services of Mid-
America, FLCA (Federal Land Credit Association),[18] and Farm Credit
Services of Mid-America, PCA. The FLCA makes secured long-term
agricultural real estate and rural home mortgage loans while the PCA makes
short and intermediate-term loans. Id.[19] The entity thus performs two
distinct and seemingly autonomous functions: long-term mortgage lending
through an FLCA and short-term lending through a PCA.
Congress has been very clear in its decision that long-term lending
institutions, such as FLBAs and FLCAs, should enjoy immunity from state
taxation. Most writers on the general principles of intergovernmental tax
immunity take for granted that Congress possesses the power to confer
immunity. Thus, the FLCA or long-term mortgage lending portion of Mid-
America’s operations should not be factored into a calculation of taxes
owed by Mid-America under Indiana’s Financial Institution Tax.
With respect to the PCA or short-term lending portion of Mid-
America’s operations, we reach a different conclusion. Since 1985,
Congress has afforded only partial tax immunity to PCAs. Before that, it
protected PCAs from state taxation only while they were publicly-owned.
PCAs are now entirely privately-owned and controlled. They obtain their
funds in the private market and disperse them without any participation by
the United States. Their farmer/shareholders choose the managers of the
enterprise. In light of these characteristics of the entity and Congress’s
removal of the exemption, we cannot conclude that a PCA is “an agency or
instrumentality so closely connected to the Government” so as to afford it
an exemption from state taxation. As the Supreme Court said: “Their
interests are not coterminous with those of the Government any more than
most commercial interests.” Arkansas v. Farm Credit, 520 U.S. at 831.
The Indiana Financial Institutions Tax is measured by calculating the
taxpayer’s adjusted gross income, or apportioned income, for the privilege
of transacting the business of a financial institution in Indiana. Ind.
Code Ann. § 6-5.5-2-1 (West 2000). Although Mid-America only formally
divided its operations into two subsidiaries in 1999, we presume it could
separate and calculate the gross income derived from long-term mortgage
loans from that derived from short-term loans for the tax years 1993 and
1994.
Thus, the Department is entitled to tax that part of Mid-America’s
gross income derived from Mid-America’s short-term PCA operations, but not
the income generated by long-term FLBA lending, which enjoys immunity from
state taxation under the Farm Credit Act.
Conclusion
We thereby reverse and remand to the Indiana Tax Court for
proceedings to determine the tax due on Mid-America’s PCA operations.
Dickson and Rucker, JJ., concur
Boehm, J., dissents with separate opinion in which Sullivan, J., joins.
ATTORNEYS FOR APPELLANT
Karen Freeman-Wilson
Attorney General of Indiana
Jon Laramore
Deputy Attorney General
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
Thomas C. Borders
Richard A. Hanson
Kevin J. Feeley
Theodore R. Bots
Chicago, Illinois
Marilee J. Springer
Indianapolis, Indiana
_______________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
INDIANA DEPARTMENT OF )
STATE REVENUE, )
)
Appellant (Petitioner Below), )
)
v. ) Indiana Supreme Court
) Cause No. 49S10-9908-TA-453
FARM CREDIT SERVICES )
OF MID-AMERICA, ACA, )
)
Appellee (Respondent Below). )
__________________________________________________________________
APPEAL FROM THE INDIANA TAX COURT
The Honorable Thomas G. Fisher, Judge
Cause No. 49T10-9801-TA-5
__________________________________________________________________
ON PETITION FOR INTERLOCUTORY APPEAL
__________________________________________________________________
September 1, 2000
BOEHM, Justice, dissenting.
I agree in large part with the majority’s account of tax immunity
doctrine past and present. And the majority’s result is inviting. As the
majority explains, PCAs enjoy only limited immunity from state and local
taxation, but FLBAs enjoy complete immunity. One can imagine that an ACA,
as the product of a merger of these two, might enjoy tax immunity for those
activities traditionally conducted by FLBAs, but not for those historically
performed by PCAs. Nonetheless, it seems clear to me that Mid-America, as
an ACA, is a new entity, albeit one formed by the merger of a PCA and an
FLBA. Neither party in this lawsuit contends that ACAs enjoy partial
immunity from state taxation and I cannot find a statutory basis for the
majority’s result that splits Mid-America’s tax liability based on long-
term versus short-term lending. Forced to choose between the poles of
complete taxability and total immunity for ACAs, I believe taxability is
more consistent with the statutory pattern that gives rise to this question
of federal law. Moreover, it seems to me that the majority’s Solomonic
solution will lead to endless disputes as to the character of various
transactions as the creative juices of accountants, tax lawyers, and
revenuers begin to flow.
The majority points out that in evaluating a claim of immunity current
Supreme Court law requires us to “examine the nature of the
instrumentality, and the activity being taxed.” Indiana Dep’t of State
Revenue v. Farm Credit Servs., ___ N.E.2d ___, ___ (Ind. 2000). I agree
with that standard but disagree as to the result it produces. An ACA is a
privately owned entity operated for the benefit of private interests. I
believe this strongly suggests a taxable entity. And the nature of an
ACA’s activities—financing farmland acquisitions and short-term
borrowings—points in the same direction. These activities are conducted by
a myriad of other privately owned taxable entities. Thus, both the nature
of the entity and its activities, in the interest of competitive fairness,
suggest taxability, not immunity. It is of course true that all of these
activities were once immune from state taxation if conducted by a PCA or an
FLBA. But that was by reason of the nature of the entity and/or by express
congressional mandate, not by reason of the activity itself. I also think
it is significant that we are interpreting a relatively recently enacted
statute. It seems improbable to me that immunity was intended by omission
in this era of legislative moves toward privatization and reliance on
market forces.
Nor can I find support for immunity in the express language of the
statute authorizing the merger of PCAs and FLBAs into ACAs. Congress has
been deafeningly silent on the issue of state taxation of ACAs. Citing
United States v. Allegheny County, 322 U.S. 174 (1944), Mid-America claims
that in the absence of an expression of congressional opinion it is
entitled to immunity as a “federal instrumentality.” The Department urges
that, even though some earlier cases found tax immunity despite
congressional silence, the current statutes governing the Farm Credit
System expressly address this subject and confer varying degrees of
immunity on the several farm credit entities. See 12 U.S.C. §§ 2001 to
2279 (1994). The Department maintains that in the absence of an explicit
conferral of immunity, we should conclude there is none.
As the Supreme Court held, status as a federal instrumentality does not
confer automatic immunity under the Tax Injunction Act. See Arkansas v.
Farm Credit Servs., 520 U.S. 821, 831-32 (1997). And, as the majority
notes, recent Supreme Court cases make clear that this status carries no
talismanic defense to a state revenue agent. See Farm Credit Servs., ___
N.E.2d at ___. These cited statutory provisions produce, at best, a
standoff, and no other statutory language seems to me to bear on this
issue. The majority points out that the statute specifies that the merged
association will “possess all powers granted under this chapter to the
associations forming the merged association” and “be subject to all of the
obligations imposed under this chapter on the associations forming the
merged association.” 12 U.S.C. § 2279c-1. I find neither provision
relevant here. It is an odd if not distorted usage to speak of a tax
immunity as either a “power” or an “obligation” of a corporate entity. One
thinks of the former as referring to the activities and actions the entity
may undertake, and the latter as referring to the debts, contractual and
other acquired obligations, of the predecessor. Neither, in conventional
usage, refers to a status such as immunity from taxes. And, as the
Fourteenth Amendment witnesses, the terms to confer an immunity have long
been familiar to legislators and even the drafters of constitutions, but
are glaringly absent here.
In sum, in today’s world, given the trends identified by the majority
against implied immunity, it seems more probable to me that if Congress had
intended to provide immunity for some activities of an ACA but not for
others, it would have said so explicitly. Congress did something like this
with respect to PCAs, whose obligations are exempt from state taxation in
the hands of their holders, but whose activities are subject to state
taxation. See id. § 2077. We thus have a statutory scheme in which two
farm credit entities are explicitly exempted from all state taxation, two
are explicitly partially exempt from taxation, and one—the ACA—enjoys no
explicit exemptions. See id. §§ 2023, 2077, 2098, 2134. As the Supreme
Court put it, “Where Congress includes particular language in one section
of a statute but omits it in another section of the same Act, it is
generally presumed that Congress acts intentionally and purposely in the
disparate inclusion or exclusion.” Rodriguez v. United States, 480 U.S.
522, 525 (1987) (per curiam) (quoting Russello v. United States, 464 U.S.
16, 22-23 (1983)). If Congress had intended to exempt the newly created
ACAs from state and local taxation, I believe it would have said so.
All of the foregoing applies to the tax years before 1999. Mid-America,
whether for tax or other reasons, has now apparently dropped its operations
into two wholly owned subsidiaries. One of these is a Federal Land Credit
Association and, therefore, like an FLBA, is exempt by virtue of its
status. The other is a taxable PCA. How these tax statuses affect a
consolidated return, if one is required or electable, is a matter for
another day. For now, the issue is solely Mid-America’s pre-reorganization
tax status, which I would conclude is that of a fully taxable entity like
any other private enterprise. Accordingly, I respectfully dissent.
SULLIVAN, J., concurs.
-----------------------
[1]
It is declared to be the policy of the Congress, recognizing that a
prosperous, productive agriculture is essential to a free nation and
recognizing the growing need for credit in rural areas, that the
farmer-owned cooperative Farm Credit System be designed to accomplish
the objective of improving the income and well-being of American
farmers and ranchers by furnishing sound, adequate, and constructive
credit and closely related services to them, their cooperatives, and
to selected farm-related businesses necessary for efficient farm
operations.
12 U.S.C.A. § 2001(a) (West 1989).
[2] Ind. Code Ann. § 6-5.5-2-1(a) (West 2000).
[3] Mid-America and the Department earlier litigated Mid-America’s
liability for the Indiana Gross Income Tax for 1989 and the Indiana
Financial Institutions Tax for 1990 through 1992. See Farm Credit Serv. of
Mid-America v. Department of State Revenue, 677 N.E.2d 645 (Ind. Tax Ct.
1997), review denied. In that case, the Department conceded that if Mid-
America was found to be a federal instrumentality it was immune from
taxation and entitled to a refund of taxes paid. The Tax Court determined
that Mid-America was a federal instrumentality, and Mid-America thus
prevailed. Id. at 651. Here, the Department concedes that Mid-America is
a federal instrumentality, but asserts that this is not dispositive of
state tax immunity.
[4] In representing the United States as Amicus Curiae, the Solicitor
General took the position that PCAs are subject to state taxation. In so
asserting, he stated:
It would be particularly implausible to read [12 U.S.C.] Section 2077
so as to ascribe to Congress an intent to grant a production credit
association a comprehensive immunity from taxation without regard to
whether the federal government owned stock in it – an immunity that
the associations never have enjoyed.
(App. to Appellant’s Br., Br. for the United States as Amicus Curiae, at
16.)
Conversely, in M’Culloch v. Maryland, the Attorney General of the
United States argued that the Bank of the United States was immune from
state taxation, stating:
[T]he bank, as ordained by Congress, is an instrument to carry into
execution its specified powers; and in order to enable this instrument
to operate effectually, it must be under the direction of a single
head. It cannot be interfered with, or controlled in any manner, by
the states, . . .
M’Culloch v. Maryland, 17 U.S. (4 Wheat.) at 361.
[5] The PCAs involved were the same four PCAs in Arkansas v. Farm Credit,
520 U.S. 821. After the Supreme Court reversed on jurisdictional grounds,
the litigants found their way to the courts of Arkansas.
[6] This is roughly how the Louisiana Court of Appeals handled the same
question. Northwest Louisiana Production Credit Ass’n v. Louisiana, 746
So.2d 280 (La. Ct. App. 1999).
[7] United States v. County of Allegheny was effectively overruled in 1958.
United States v. City of Detroit, 355 U.S. 466 (1958); United States v.
County of Fresno, 429 U.S. 452 (1977).
[8] 36 U.S.C.A. § 1 (West 1988).
[9] Department of Employment v. United States, 385 U.S. 355 (1966).
[10] 36 U.S.C.A. § 24 (West 1988).
[11] 47 U.S.C.A. § 731 (West Supp. 2000). Comsat bears some resemblance to
the venture launched by Congress during an earlier technological
revolution: the Union Pacific Railroad. Congress created the corporation
and the President appointed two members of the board. Act of July 1, 1862,
§ 1, 12 Stat. 491. Though Congress was silent on the question of tax
immunity, we think it unlikely that the Union Pacific was ever regarded as
exempt.
[12] 45 U.S.C.A. § 541 (West 1987) (repealed 1994).
[13] In establishing the Amtrak corporation, Congress provided:
The Corporation shall be operated and managed as a for profit
corporation, the purpose of which shall be to provide intercity and
commuter rail passenger service, . . . . The Corporation will not be
an agency or establishment of the United States Government.
Id. (emphasis added).
[14] Before 1985, the Chairman of the Farm Credit Association was called
the “Governor.” 12 U.S.C.A. § 2241 (West 1989), Historical and Statuory
Notes, Interim Implementation of 1985 Amendment, Pub. L. No. 99-205, § 402.
[15] By the time this amendment was adopted, there were no publicly-owned
PCAs entitled to the exemption. See Farm Credit Serv. of Cent. Arkansas v.
Arkansas, 76 F.3d at 967 (Loken, J., dissenting). Thus, Mid-America
concludes that PCAs were subject to taxation before 1985, and not
afterwards, inasmuch as taxation was no longer “expressly authorized.”
(See Appellee’s Br. at 14.)
[16] As a condition of obtaining a loan, borrowers are required to purchase
stock in the association in an amount equal to a set percentage of the face
amount of the loan. H.R. Rep. No. 92-593, supra, 1971 U.S.C.C.A.N at 2097;
12 C.F.R. § 614.4335 (2000).
[17] Conversely, a consolidation is defined as the “[c]reation of one new
organizational entity from two or more existing entities or parts thereof.”
12 C.F.R. § 619.9110.
[18] A federal land credit association (FLCA) is an entity that has
received a transfer of direct long-term lending authority from an FLBA. An
FLCA is authorized to make real estate mortgage loans. Farm Credit
Administration Definitions, 12 C.F.R. §§ 614.4030, 619.9155 (2000); 12
U.S.C.A. § 2279b (West 1989).
[19] Mid-America’s Annual Report states:
On December 1, 1999, the Association restructured its operations.
Instead of the single ACA entity, the Association is now composed of
an ACA parent company with two wholly-owned subsidiaries. The
subsidiaries are chartered as a PCA and an FLCA. The restructuring
preserves certain advantages of the ACA structure while clarifying the
tax exemption of the mortgage operations by conducting those
operations in a separate subsidiary chartered as an FLCA.
Annual Report, supra, Management’s Discussion and Analysis, at 2.
As discussed in Note 1, the Association moved to a parent-subsidiaries
structure effective December 1, 1999. In a case of a completed
restructuring using this subsidiary pattern by another ACA, the IRS
issued a private letter ruling that the income of a new FLCA
subsidiary is, under the Farm Credit Act, exempt from taxation.
Annual Report, supra, Notes to Consolidated Financial Statements, at 5.
Although technical advice memoranda issued by the IRS may not be used
or cited as precedent, we find the aforementioned helpful in uncovering Mid-
America’s understanding of the tax implications of its bifurcated
structure.