Petition — National Bancshares Corp. v. Bullock

In THE

Supreme Court of Che United States

Ocroser TERM, 1979

NATIONAL BANCSHARES CORPORATION

Or Texas, Er ALt.,

Petitioners,

Vv.

Bos Butiock, CompTrroLtLeR Or Pusiic Accounts OF

Tue Srate Or Texas, Er At,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF TEXAS

LEON JAWORSKI

C. W. WELLEN

Bank of the

Southwest Bldg.

Houston, Texas 77002

KeirH A. JONES

1150 Connecticut

Of Counsel: Ave., N.W.

Wasser &: Lae Washington, D.C. 20036

Fusricat & JAWORSKI Marvin K. Cote

Bank of the Southwest Bldg. Harry M. Reasoner

Houston, Texas 77002 1800 First City National

THomas P. Marinis, JR. Bank Building

Houston, Texas 77002

ANN LeEnTs Counsel for Petitioners

Vinson & ELKINS

1800 First City National

Bank Building

Houston, Texas 77002

Bowne of Houston, Inc. Printed In U.S.A.

—

i

TABLE OF CONTENTS

PaGE

Ee ee il

Opinions Below . ee 1

Fe | th Se ne.

kee eee eee 2

Constitutional and Statutory Provisions

EE 2

kee ee ee 3

Reasons for Granting Review. .................._ 8

Conclusion. ..__.... a 13

Appendix A

Opinion of the Supreme Court of Texas,

i ee eee. ae

Appendix B

Opinion of the Court of Civil Appeals, Third

Supreme Judicial District of Texas, 569

I B-1

Appendix C

Findings of Fact and Conclusion of Law of the

District Court of Travis County, Texas......—s-—« C-1

Appendix D

Judgment of the Supreme Court of Texas... _..._ D-1

Appendix E

Respondents — Bank Holding Companies’ Motion

ES E-1

Appendix F

Notice of Order Denying Motion for Rehearing ._ F-1

Appendix G

Plaintiffs’ First Amended Original Petition _ G-1

il

PAGE

Appendix H

Plaintiffs’ Motion for a New Trial | . Be

Appendix I

Excerpt from Petitioners’ Answer to Application

for Writ of Error in the Supreme Court of Texas I-1l

Appendix J

Excerpt from Petitioners’ Post-Submission Brief

in the Supreme Court of Texas... s—s—s—si‘w‘a’.d..:sdOCS

Appendix K

Public Law 91-156 (12 U.S.C. § 548) | eee

Appendix L

Texas Comptroller’s Ruling 80-0.18 ............. L-1

TABLE OF AUTHORITIES

CASES

Chase Manhattan Bank, N.A. v. Finance Administration of

Seep Ware, Wr Os Gs Be COD soe lds wie eens 8

Coyle v. Oklahoma, 221 U.S. 559(1911).................. 12

Crowell v. Benson, 285 U.S. 22 (1932) ..............0..... 10

Davenport National Bank v. Board of Equalization,

a eB, SRR ae nares ne en 12

Dickinson v. First National Bank of Homestead,

Pee I I os gs eas acne cen wr os oS ade « 9

First Agricultural National Bank of Berkshire County v. State

Tax Commission, 392 U.S. 339 (1968) .................. 9

Fry v. United States, 421 U.S. 542 (1975) ................ 11

Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939) .... 12

Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172

i _, BEE en reriteny ants RELA imine dt } gsr 4,8

ill

PACE

Lane County v. Oregon, 74 U.S. (7 Wall.) 71 (1869) 11, 12

National League of Cities v. Usery, 426 U.S. 833

ERPS 5 ea tg yay SAE yee aga ee ee 8, passim

Snow v. Dixon, 66 Ill. 2d 443, 362 N.E.2d 1052 (1977) ...... ll

Thomson v. Union Pacific R.R., 76 U.S. (9 Wall.) 579 (1870) 11

Union Bank & Trust Co. v. Phelps, 288 U.S. 181 (1933) 12

United States v. Best, 573 F.2d 1095 (9th Cir. 1978) ........ 12

CONSTITUTION AND STATUTES

Orie ee I ee ees eee es wt 2, passim

12 U.S.C. § 548 (1970 & Supp. V 1975) .............. 2, passim

Act of Dec. 24, 1969, Pub. L. No. 91-156, Stat. 434, codified

as 12 U.S.C. § 548 (1970 & Supp. V 1975) [“Pub. L. 91-

156”] Pra aw Aas 2, passim

National Bank Act, 12 U.S.C. § 21 et seq. (1945) ae ee 4

Se es eT ie ees ce 2

Tex. Tax.— Gen. ANN. arts. 12.01-12.22 (Vernon 1969. &

Supp. 1978-1979) . yea 4

1971 Tex. Gen. kik Ch. 999, art. 1, a; at - 1206, ‘voli

as a footnote in Tex. Tax. — Gen. ANN. art. 20.02 (Vernon

De te ie FO ah Sete eee heres oiws ass 6,7

MISCELLANEOUS

Conr. Rep. No. 91-728, 91st Conc., lst Sess. 1, reprinted in

[1969] 2 U.S. Cope Conc. & Ap. News 1601 ............ 10

115 Cone. Rec. 19908 (1969) (remarks of Rep. Patman) ___. 9

115 Conc. Rec. 19909 (1969) (remarks of Rep. Brown) ..... 9

115 Cone. Rec. 35399 (1969) (remarks of Sen. Proxmire) |... 9

115 Conc. Rec. 35400 (1969) (remarks of Sen. Holland) .... 9

H.R. Rep. No. 91-290, 91st Cong., Ist Sess. 1 (1969) ...... 9

S. Rep. No. 91-530, 91st Cong., Ist Sess. 1, reprinted in

[1969] 2 U.S. Cope Conc. & Ap. News 1595 ............ G

Texas Comptroller of Public Accounts, pois 80-0.18 sypei

(“Ruling 80-0.18"] rttbiohsaes . 3, passim

In THE

Supreme Cort of Che United States

OctToBER TERM, 1979

BN RY «3

NATIONAL BaNcSHARES CORPORATION

Or Texas, Et AL.,

Petitioners,

v.

Bos BuLiock, CoMPTROLLER Or Pusiic Accounts OF

Tue Strate Or Texas, Et At.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF TEXAS

National Bancshares Corporation of Texas, Cullen/Frost

Bankers, Inc., Southwest Bancshares, Inc., Texas American

Bancshares, Inc., First City Bancorporation of, Texas, Inc.,

First United Bancorporation, Inc., Mercantile Texas Corpo-

ration, and Fort Sam Houston Bankshares, Inc., hereby

petition for a writ of certiorari to review the judgment of

the Supreme Court of Texas in this case.

OPINIONS BELOW

The opinion of the Supreme Court of Texas (App. A,

infra) is reported at 584 S.W.2d 268. The opinion of the

Court of Civil Appeals (App. B, infra) is reported at 569

2

S.W.2d 584. The findings of fact and conclusion of law of

the District Court (App. C, infra) are not reported.

JURISDICTION

The judgment of the Supreme Court of Texas was entered

on June 20, 1979 (App. D, infra). A timely motion for

rehearing (App. BE, infra) was denied on July 25, 1979

(App. F, infra). This petition for writ of certiorari is

being filed within ninety days of that date. The jurisdic-

tion of this Court is invoked under 28 U.S.C. § 1257(3).

QUESTIONS PRESENTED

1. Whether Pub. L. 91-156 (12 U.S.C. § 548) requires

the State of Texas to treat national banks as if they were

incorporated under the laws of Texas for purposes of

determining the Texas franchise tax liabilities of non-

banking corporations.

2. If so, whether such federal interference with the exer-

cise of state taxing power is constitutional.!

CONSTITUTIONAL AND STATUTORY

PROVISIONS AND RULING INVOLVED

The Tenth Amendment to the United States Constitution

provides:

The powers not delegated to the United States by

the Constitution, nor prohibited by it to the States, are

reserved to the States respectively, or to the people.

12 U.S.C. § 548, as amended by Pub. L. 91-156 (repro-

duced in full in App. K, infra), in pertinent part provides:

For the purpose of any tax law enacted under

authority of the United States or any State, a national

bank shall be treated as a bank organized and existing

under the laws of the State or other jurisdiction within

which its principal office is located.

In view of the constitutional question presented by this case, 28

U.S.C. § 2403 may be applicable. Service, therefore, is being

made upon the Solicitor General of the United States.

3

Ruling 80-0.18 (reproduced in full in App. K, infra)

issued by the Comptroller of Public Accounts of the State

of Texas in pertinent part provides:

The “location of payor” test is used in determining

whether dividends and interest are attributable as

receipts from business done in Texas under Article

12.02(1)(b). In accordance therewith, dividends and

interest paid by a domestic corporation are includable

in gross receipts from business done in Texas, whereas

dividends and interest paid by a foreign corporation do

not constitute Texas gross receipts under the statute.

Prior to January 1, 1973, national banks were con-

sidered to be foreign corporations for franchise tax

purposes and, consequently, dividends and interest

paid by a national bank located in Texas were not

attributable as Texas gross receipts. Public Law 91-156

amended Section 5219 of the Revised Statutes to pro-

vide, effective January 1, 1973, that for the purposes

of any tax law enacted under the authority of any state

a national bank shall be treated as a bank organized

and existing under the laws of the state within which

its principal office is located. Accordingly, dividends

and interest paid on and aiter January 1, 1973 by a

national bank whose principal office is located within

Texas are includable in gross receipts from business

done in Texas pursuant to Article 12.02(1)(b).

STATEMENT OF THE CASE

Petitioners are bank holding companies that are subject

to the franchise tax imposed by the State of Texas on all

corporations incorporated or doing business in that State.

The amount of franchise tax each petitioner must pay is

calculated in part by reference to-the amount of its annual

“gross receipts from business done in Texas.”” A “location

2 The franchise tax is computed on the basis of a formula that

provides that (1) the taxpayer’s gross receipts from business done

in Texas is divided by its total gross receipts to determine an

4

of payor” test is used to determine whether dividends,

interest, or other similar payments constitute gross receipts

from business done in Texas. Humble Oil & Refining Co. v.

Calvert, 414 S.W.2d 172 (Tex. 1967). Under the location

of payor test, payments made by a corporation not incorpo-

rated under the laws of the State of Texas do not constitute

gross receipts from business done in Texas for the purpose

of computing the recipient’s franchise tax liability. The

location of payor test is an administrative rule of such long

standing that it may not be changed or departed from “in

the absence of clear statutory authorization.” Humble Oil

& Refining Co. v. Calvert, 414 S.W.2d at 180.

For the period prior to January 1, 1973, respondent

Comptroller of Public Accounts of the State of Texas

treated dividend and interest payments received from na-

tional banks, wherever located, as gross receipts from busi-

ness done outside Texas, because such banks are chartered

by the federal government under the National Bank Act,

12 U.S.C. § 21 et seqg., and are not incorporated under the

laws of the State of Texas. Effective January 1, 1973, the

federal statute governing state taxation of national banks,

12 U.S.C. § 548 (1970), was amended by Pub. L. 91-156 to

provide in pertinent part as follows:

For the purpose of any tax law enacted under

authority of the United States or any State, a national

bank shall be treated as a bank organized and existing

under the laws of the State or other jurisdiction within

which its principal office is located.

allocation percentage, (2) the allocation percentage is multiplied

by the taxpayer's total capital as of the end of the preceding year

to determine taxable capital, and (3) the taxable capital is multi-

plied by the applicable tax rate. Tex. Tax.— Gen. ANN. arts.

12.01-12.22 (Vernon 1969 & Supp. 1978-1979).

4)

In direct response to the amendment of this federal statute,

the Comptroller published Ruling 80-0.18 on April 18, 1974,

which stated:

The “location of payor” test is used in determining

whether dividends and interest are attributable as

receipts from business done in Texas under Article

12.02(1)(b). In accordance therewith, dividends and

interest paid by a domestic corporation are includable

in gross receipts from business done in Texas, whereas

dividends and interest paid by a foreign corporation do

not constitute Texas gross receipts under the statute.

Prior to January 1, 1973, national banks were con-

sidered to be foreign corporations for franchise tax

purposes and, consequently, dividends and interest

paid by a national bank located in Texas were not

attributable as Texas gross receipts. Public Law 91-156

amended Section 5219 of the Revised Statutes to pro-

vide, effective January 1, 1973, that for the purposes

of any tax law enacted under the authority of any state

a national bank shall be treated as a bank organized

and existing under the laws of the state within which

its principal office is located. Accordingly, dividends

and interest paid on and after January 1, 1973 by a

national bank whose principal office 1s located within

Texas are includable in gross receipts from business

done in Texas pursuant to Article 12.02(1)(b). (Em-

phasis added. )

®

The application of this Ruling to petitioners, which receive

substantial dividend and interest payments from national

banks with principal offices in Texas, caused the assess-

ment of additional aggregate franchise taxes in excess of

one million dollars annually.

Petitioners paid the additional franchise taxes assessed

pursuant to Ruling 80-0.18 and then brought this lawsuit in

the District Court of Travis County, Texas, to recover the

additional taxes so paid, alleging, inter alia, that Pub. L.

6

91-156 did not permit the taxation in question. App. G,

infra, at G-9. The district court found that the Ruling

“was promulgated as a direct result of the enactment of

Public Law 91-156,” App. C, infra, at C-1, but held that

the Ruling was valid as promulgated.* Petitioners again

properly raised the federal questions sought to be reviewed

herein by motion for new trial, App. H, infra, at H-2, and

preserved them in the Court of Civil Appeals by point of

error. See Appellants Bank Holding Companies’ Brief in

the Court of Civil Appeals at 2-3, 8:

The Court of Civil Appeals, Third Supreme Judicial

District, reversed. The court reasoned that Pub. L. 91-156,

upon which the Comptroller relied as the sole authority for

the issuance of Ruling 80-0.18, “merely remove[d] restric-

tions on state taxation of national banks,” and “provide[d]

authorization for the states to levy modern types of taxes

on banks. .. .” App. B, infra, at B-10. Accordingly, the

court held that the federal statute neither required nor

authorized the issuance of Ruling 80-0.18:

... the federal statute simply allows the states to treat

national banks as state banks for purpose of equal

taxation of banks. The concept thus provided is for

equal taxation of banks and is unrelated to taxation of

dividends and interest from national bank stock in the

hands of corporate stockholders.

3 The a issue addressed by the district court was whether

Ruling 80-0.18 was invalid under 1971 Tex. Gen. Laws, Ch. 292,

art. 7, §1 (“H.B. 730”), which provides in pertinent part that

[t]he passage of Public Law 91-156 by the Congress of the

United States shall not operate to impose or permit the imposi-

tion of any additional tax or taxes upon the institutions affected

thereby. . . .” The district court concluded, without elaboration,

that petitioners “were not institutions affected by the passage by

[sic] Public Law 91-156 within the meaning of art. 7 of House

Bill 730.” App. C, infra, at C-2.

7

Id., at B-11.4 The Court therefore determined that the

Comptroller had acted without authority in promulgating

the Ruling and that the Ruling was invalid and unenforce-

able.

In turn, the Supreme Court of Texa’ also reversed. In

that court, respondents argued that Pub.L. 91-156 amounted

to a federal “edict” to the State to impose the taxes called

for by Ruling 80-0.18 and that the intermediate appellate

court’s refusal to enforce that Ruling “ignores and affronts

the directive of P.L. 91-156” in violation of the Supremacy

Clause of the United States Constitution. Respondents’

Application for Writ of Error at 18, 21.5

Without explicitly endorsing this argument, the Supreme

Court acknowledged that the Comptroller had based the

“change in taxation policy [represented by Ruling 80-0.18]

on Pub. L. 91-156...,” App. A, infra, at A-5, and held that

the Comptroller had “correctly ruled that, under the loca-

tion of payor rule, interest and dividends derived from

national banks located in this state are includable in the

corporate payee’s Texas gross receipts for the purpose of

assessing a franchise tax.” IJd., at A-11-12. Although the

court thereby applied Pub. L. 91-156 so as to require

imposition of additional state taxes on nonbanking institu-

tions, the court did not respond to petitioners’ argument

that the federal statute, if so construed and applied, would

4In the alternative, the court held that to the extent that Ruling

80-0.18 was based upon Pub. L. 91-156, H.B. 730 barred the

meal from imposing any additional tax pursuant to that

Ruling.

5 See also Respondents’ Application for Writ of Error at 21-22:

The passage and enforcement of P.L. 91-156 [12 U.S.C. § 548]

confronted Petitioner Comptroller with the latest edict of Con-

gress .. . and such edict, besides expanding the types of state

taxes allowed on national banks, also directed that national

banks, for the purpose of any tax law, ‘be treated as a bank

organized and existing under the laws of the State’ of its

principal location.

8

represent an unconstitutional infringement upon state tax-

ing power. See App. I, infra; App. J, infra.®

In upholding Ruling 80-0.18, the court did not suggest

that the Ruling constituted a change in the location of

payor test. To the contrary, the court referred approvingly

to Humble Oil d Refining v. Calvert, supra, and did not

call into question that decision’s explicit premise that no

change in the location of payor test could be made in the

absence of prior state legislative authorization. Accord-

ingly, the judgment below rests solely upon the applica-

tion of Pub. L. 91-156 and does not rest upon any inde-

pendent state ground.

REASONS FOR GRANTING REVIEW

The Supreme Court of Texas has applied an important

federal statute of broad, nationwide scope” in a manner

that raises serious doubts concerning that statute’s con-

stitutionality. By construing the federal statute, Pub. L.

91-156 to mandate the imposition of new and additional

state taxes on nonbanking institutions, the court below has

approved the type of federal interference with integral state

governmental functions that this Court specifically pro-

hibited in National League.of Cities v. Usery, 426 U.S. 833

(1976). This case therefore presents questions of grave sig-

nificance to the proper accommodation of state and federal

powers under the United States Constitution.

1, The Supreme Court of Texas incorrectly applied

Pub. L. 91-156. That legislation was not intended, and

® In reversing, the court also held that H.B. 730 did not prevent

the imposition of additional franchise taxes on nonbanking insti-

tutions. See App. A, infra, at A-2, A-12.

7 This Court already has had occasion to determine the proper

construction of the savings clause of Pub. L. 91-156. See Chase

Manhattan Bank, N.A. v. Finance Administration of New York,

99 S. Ct. 1201 (1979).

9

should not be construed, to affect the taxation of nonbank-

ing corporations such as petitioners. The sole concern of

Congress in enacting Pub. L. 91-156 was with the state

taxation of national and state banks. The court below

clearly erred in extending the reach of Pub. L. 91-156

beyond this specific area of congressional concern.

Pub. L. 91-156 represents the congressional response to

this Court’s decisions in First Agricultural National Bank

of Berkshire County v. State Tax Commission, 392 U.S.

339 (1968), and Dickinson v. First National Bank of Home-

stead, 393 U.S. 409 (1969), aff’g, 291 F. Supp. 855 (N.D. Fla.

1968). See, e.g., H. R. Rep. No. 91-290, 91st Cong., Ist Sess.

6 (1969); 115 Conc. Rec. 19909 (1969) (remarks of Rep.

Brown); id. at 35400-01 (remarks of Sen. Holland). In

those cases, this Court held that Federal law prohibited the

states from subjecting national banks to certain specified

nondiscriminatory taxes. The purpose. of Pub. L. 91-156

was to undo those decisions by giving “the States and their

subdivisions the opportunity to tax banks within their juris-

diction in the same way that they tax other business... .”

Id. at 35399 (remarks of Sen. Proxmire). See also H. R.

Rep. No. 91-290, supra, at 3; S. Rep. No. 91-530, 91st

Cong., Ist Sess. 1, reprinted in [1969] 2 U.S. Copg Cone. &

Ap. News 1595. This purpose was achieved by mandating

state tax parity between national and state banks. See H. R.

Rep. No. 91-290, supra, at 1. But the establishment of such

tax parity was all that Congress intended:

The bill provides that national banks shall be subject

to the same taxation as a State bank. The bill says

nothing more.

115 Conc. Rec. 19908 (1969) (remarks of Rep. Patman).

In short, the sole concern of Congress in enacting Pub. L.

91-156 was “to clarify the liability of national banks for

10

certain taxes ” Conr. Rep. No. 91-728, 91st Cong., 1st

Sess. 1, reprinted in [1969] 2 U.S. Cope Cona. & Ap. News

1601. Congress had no intention of controlling, interfering

with, changing, or otherwise affecting any state’s taxation

of institutions other than banks.

It follows that the Supreme Court of Texas should not

have applied Pub. L. 91-156 in a manner that requires the

imposition of additional state taxes on nonbanking corpora-

tions. That statute should be given the narrow construc-

tion that reflects the limited legislative objective underlying

its enactment. Pub. L. 91-156 was intended to apply, and

therefore should apply, solely to the taxation of banks.

That construction of Pub. L. 91-156 is especially appro-

priate, moreover, in view of the fact that a broader reading

would impinge upon the states’ own legislative choices

respecting the proper objects, and the proper extent, of

state taxation. As we discuss further below, serious con-

stitutional doubts are raised by a construction of Pub. L.

91-156 that would require the states to change their manner

of taxing persons other than banks. The court below im-

properly departed from settled practice in failing to con-

strue Pub. L. 91-156 in a manner that would avoid such

doubts. See, e.g., Crowell v. Benson, 285 U.S. 22, 52 (1932).

2. As applied by the Supreme Court of Texas, Pub. L.

91-156 affirmatively requires the State of Texas to impose

additional franchise taxes on petitioners and other similarly

situated nonbanking corporations. Such direct interference

with state taxing power is an impermissible infringement

upon the rights reserved to the states by the Tenth Amend-

ment to the United States Constitution. Although Congress

possesses broad power to regulate commerce among the

states, it “may not exercise that power so as to force

directly upon the states its choices as to how essential

decisions regarding the conduct of integral governmental

functions are to be made.” National League of Cities v.

11

Usery, 426 U.S. at 855. See also Fry v. United States, 421

U.S. 542, 547 n.1 (1975).

There can be no doubt that state legislative taxing deci-

sions represent “traditional aspects of state sovereignty,”

National League of Cities v. Usery, 426 U.S. at 849, which

are protected by the Tenth Amendment against federal

encroachment. This Court gave explicit recognition to that

principle in Lane County v. Oregon, 74 U.S. (7 Wall.) 71

(1869). In Lane County, this Court was asked to decide

whether a federal law making United States notes lawful

money for the payment of all debts, public and private,

abrogated a state law that required counties to collect taxes

and pay them to the state in gold and silver coin. This

Court held that the passage of the federal law was not

intended to, did not, and could not impair, alter, or affect

the county’s tax obligations to the state:

... [T]he power of taxation . . . is an essential function

of government. . .. The extent to which it shall be

exercised, the subjects upon which it shall be exercised,

and the mode in which it shall be exercised, are all

equally within the discretion of the legislatures to

which States commit the exercise of the power... .

There is nothing in the Constitution which contem-

plates or authorizes any direct abridgment of this

power by national legislation.

Lane County v. Oregon, 74 U.S. at 76-77. See also Thom-

son v. Union Pacific R.R., 76 U.S. (9 Wall.) 579, 591 (1870)

(“the power to tax all property, business and persons,

within their respective limits, is original in the States and

has never been surrendered”). In short, “matters of State

taxation are reserved to the States under the tenth amend-

ment to the Constitution.” Snow v. Dixon, 66 Ill. 2d 443,

464, 362 N.E.2d 1052, 1062 (1977).

Congressional interference with or alteration of the rules

governing the imposition of the state franchise tax on

12

petitioners cannot be excused as an exercise of authority

incident to the federal power over national banks. This is

so for two obvious reasons. First, petitioners are not banks,

and the federal power over national banks does not extend

to the state taxation of persons other than banks:

The Constitutional inhibition against taxing [national

banks] does not abridge the taxing power of the several

states in respect of other property. The implied

exemption is a shield for federal agencies; not the

source of Congressional power to control state action

in respect of other matters.

Union Bank & Trust Co. v. Phelps, 288 U.S. 181, 187-88

(1933). Accord, Davenport National Bank v. Board of

Equalization, 123 U.S. 83, 85 (1887). Second, even as to

national banks Congress lacks power to mandate the impos-

ition of state taxes. The federal power over national banks

is merely one of “granting or withholding immunity of

federal agencies from state taxation.” Graves v. New York

ex rel. O’Keefe, 306 U.S. 466, 478 (1939). That power does

not extend to the imposition of state taxes not affirmatively

enacted by the state legislature.

The legislative power to determine the proper amount

and objects of state taxation is perhaps the most important

of those “functions essential to separate existence” that

this Court has vigilantly safeguarded against federal

encroachment. See National League of Cities v. Usery, 426

U.S. at 845; Coyle v. Oklahoma, 221 U.S. 559, 580 (1911);

Lane County v. Oregon, 74 U.S. at 76. It follows that Pub.

L. 91-156 cannot constitutionally be applied to mandate the

imposition of state taxes that would not otherwise have been

assessed under state law. Cf. United States v. Best, 573

F.2d 1095 (9th Cir. 1978) (federal government may not

require state agency to suspend a driver’s license). The

decision below to the contrary is in error and should be

reversed.

13

CONCLUSION

The petition for a writ of certiorari should be granted.

LEon JAWORSKI

C. W. WELLEN

Bank of the

Southwest Bldg.

Houston, Texas 77002

(713) 651-5151

Keita A. JonEs

1150 Connecticut

Ave., N.W.

Washington, D.C. 20036

(202) 452-6800

Marvin K. Co.uie

Harry M. REASONER

1800 First City National

Bank Building

Houston, Texas 77002

Of Counsel: (713) 651-2358

Wurm S§. LEE Counsel for Petitioners

Futsricut & JAWORSKI

Bank of the Southwest Bldg.

Houston, Texas 77002

Txomas P. Marinis, JR.

ANN LENTS

Vinson & ELKINS

1800 First City National

Bank Building

Houston, Texas 77002

October 1979

APPENDIX

A-1

APPENDIX A

[268]

Bos Buiiock, Comprrotter Or Pusiic Accounts

Or Tue Strate Or Texas, Er At,

Vv.

NATIONAL BANCSHARES CORPORATION

Or Texas, Er. At.,

No. B-7896. -

Supreme Court Or Texas.

JuNE 20, 1979.

REHEARING Dentep Jury 25, 1979.

[269 ]

McGEE, Justice.

This is a suit by certain taxpayers against the comptrol-

ler of public accounts to recover in excess of $2,000,000.00

in franchise taxes paid under protest.! The trial court

denied relief, but the court of civil appeals reversed the

lower court judgment, rendering judgment that the tax-

payers recover all sums paid. 569 S.W.2d 584. We reverse

the judgmeat of the court of civil appeals and affirm the

judgment of the trial court.

The basic facts of this case are undisputed and may be

briefly summarized. Tax-

[270]

payers are eight national bank holding companies, which

1 The plaintiffs and respondents in this suit are National Banc-

shares Corp. of Texas, Cullen/Frost Bankers, Inc., Southwest

Bancshares, Inc., Texas American Bancshares, Inc., on its own

behalf and as successor in interest to Southern National Corp.,

First City Bancorporation of Texas, Inc., First United Bancor-

poration, Inc., Mercantile Texas Corporation, as successor in

interest to Federal Capital Corporation, Fort Sam Houston Bank-

shares, Inc. (by intervention), and Reidy International, Inc. (by

intervention ).

A-2

have derived income from national bank shares, and one

ordinary business corporation, which has derived income

from a national bank certificate of deposit. In April of

1974 the comptroller of public accounts. issued a ruling

which provided that dividends and interest paid on or after

January 1, 1973 by a national bank located in this state

are includable in the corporate payee’s gross receipts for

the purpose of assessing a franchise tax. The taxpayers

paid the franchise tax under protest and subsequently

brought this suit to recover sums paid.

The central issue presented is whether the comptroller

correctly ruled that interest and dividends derived from

national banks located in this state are includable in the

corporate payee’s Texas gross receipts for the purpose of

assessing a franchise tax. The taxpayers contend, and the

court of civil appeals has held, that an act of the Texas

legislature, 1971 Tex.Gen.Laws, ch. 292, art. 7 41, at 1206,

codified as a footnote in Tex.Tax.—Gen.Ann. art. 20.02

(Vernon Supp.1978-1979) (hereinafter article 7, section

1), precludes such inclusion. We cannot agree. It is our

opinion that the legislature merely intended to preclude

the additional taxation of banks and did not intend to

preclude a franchise tax upon other, unmentioned cor-

porate entities.

Unless otherwise provided by law, a franchise tax is

imposed upon all domestic and foreign corporations doing

business in Texas. See Tex.Tax.—Gen.Ann. arts. 12.01

to 12.22 (Vernon 1969 & Supp.1978-1979). The granting

of the privilege to transact business in this state confers

economic benefits, including the opportunity to realize

gross income and the right to invoke the protection of

local law. The Texas franchise tax is a tax on the value

of this privilege. General Dynamics Corp. v. Bullock,

547 S.W.2d 255, 257-58 (Tex.1976) ; Texaco, Inc. v. Calvert,

A-3

526 S.W.2d 630, 633 (Tex.Civ.App.— Austin 1975, writ

ref’d n.r.e.); see Ford Motor Co. v. Beauchamp, 308 U.S.

331, °24-35, 60 S.Ct. 273, 84 L.Ed. 304 (1939) (holding

Texas franchise tax constitutional).

The formula employed to compute a corporation’s fran-

chise tax is designed to achieve a tax commensurate with

the value of the privilege granted. General Dynamics

Corp. v. Bullock, supra at 257; United North & South

Development Co. v. Heath, 78 S.W.2d 650, 652 (Tex.Civ.

App. — Austin 1934, writ ref’d). This is accomplished by

dividing the gross receipts from business done in Texas

by the gross receipts from the entire business. The result-

ing allocation percentage is multiplied by the total taxable

capital and, in turn, the product of this calculation (capital

taxable by Texas) is multiplied by the current tax rate.

The final product of this calculation is the sum of the cor-

poration’s franchise tax liability from business done in

Texas.2 Tex.Tax. — Gen.Ann. arts. 12.01 & 12.02 (Vernon

1969 & Supp.1978-1979) ; see Humble Oil & Refining Co. v.

Calvert, 414 S.W.2d 172, 173n. 1 (Tex.1967); Texaco, Inc.

v. Calvert, supra at 632; Note, 5 Hous.L.Rev. 132, 133

(1967).

To determine what receipts from intangibles should be

allocated to business done in this state, Texas employs

the location of payor test. Humble Oil & Refining Co. v.

Calvert, supra at 175. Under this test, the domicile of the

debtor or payor in the case of interest or dividends is dis-

positive and not the domicile of the taxpaying corporate

payee. If dividends or interest are received from a Texas

corporation, they are Texas receipts. Conversely, if re-

2 Gross Receipts Capital

in Texas — Allocation Entire — Taxable , Tax — Franchise

Gross Receipts of | Percentage re me at * Rate Tax

Entire Business Texas

A-4

ceived from a foreign corporation, they are not Texas

receipts. Jd. at 175; Note, 5 Hous.L.Rev. 134 (1967).

Historically, the comptroller did not include dividends

or interest income received

[271]

from a national bank located in Texas in the corporate

payee’s Texas gross receipts. See Silco, Inc. v. Calvert,

482 S.W.2d 56, 59 (Tex.Civ.App. — Austin 1972, writ ref’d

n.r.e.). This was because national banks, as opposed to

state-chartered banks, were considered foreign corpora-

tions. Thus, under the location of payor test, income

received from state-chartered banks was includable in

Texas gross receipts, but income received from national

banks was not equally includable. Jd. at 58-59.

In April of 1974 the comptroller issued ruling 80-0.18

which is set forth in full in the margin.? This ruling essen-

3“General: The ‘location of payor’ test is used in determining

whether dividends and interest are attributable as receipts from

business done in Texas under Article 12.02(1)(b). In accordance

therewith, dividends and interest paid by a domestic corporation

are includable in gross receipts from business done in Texas,

whereas dividends and interest paid by a foreign corporation do

not constitute Texas gross receipts under the statute.

“State Banks: Dividends and interest paid by a bank organized

under the Banking Code of Texas are includable in gross receipts

from business done in Texas pursuant to Article 12.02(1)(b).

“National Banks: Prior to January 1, 1973, national banks were

considered to be foreign corporations for franchise tax purposes

and, consequently, dividends and interest paid by a national bank

located in Texas were not attributable as Texas gross receipts.

Public Law 9.1-156, amended Section 5219 of the Revised Stat-

utes to provide, effective January 1, 1973, that for the purposes

of any tax law enacted under the authority of any state a national

bank shall be treated as a bank organized and existing under the

laws of the state within which its principal office is located.

Accordingly, dividends and interest paid on and after January 1,

1973 by a national bank whose principal office is located within

Texas are includable in gross receipts from business done in Texas

pursuant to Article 12.02(1)(b).”

A-5

tially provides that effective January 1, 1973 income re-

ceived from national banks located in Texas is taxable on

the same basis as income received from state-chartered

banks. The comptroller based this change in taxation

policy on Pub.L. 91-156, 83 Stat. 434 (codified at 12 U.S.C.

§548 (Supp.1979)) (hereinafter Pub.L. 91-156), which

became effective January 1, 1973.4 That congressional en-

actment provided that for the purposes of any state tax law

a national bank shall be treated as a bank organized and

existing under the laws of the state within which its prin-

cipal office is located. Applying the location of payor test,

the comptroller concluded that dividends and interest re-

ceived from national banks located in Texas constituted

Texas gross receipts in the hands of the corporate payee.

The taxpayers in this case contend that the comptroller

is precluded by an act of the Texas legislature from includ-

ing income received from national banks located in this

state in their Texas gross receipts. Article 7, section 1

provides:

The passage of Public Law 91-156 by the Congress

of the United States shall not operate to impose or

permit the imposition of any additional tax or taxes

upon the institutions affected thereby unless:

(a) The tax or taxes were being imposed prior

to January 1, 1971, or

(b) Such institutions are specifically designated

as being subject to such additional tax or taxes

other than the limited sales and use tax by an Act

4 Pub.L. 91-156 provides:

For the purpose of any tax law enacted under authority of

the United States or any State, a national bank shall be treated

as a bank organized and existing under the laws of the State or

other jurisdiction within which its principal office is located.

Id.

A-6

of the Legislature passed subsequent to the effec-

tive date of Publie Law 91-156.

Id. (Emphasis added). The taxpayers reason that cor-

porate payees of national bank dividends and interest —

specifically, national bank holding companies and corporate

holders of national bank certificates of deposit — are “in-

stitutions affected” by Pub.L. 91-156.

Before we undertake a determination of what institutions

are affected by Pub.L. 91-156 within the meaning of article

7, section 1, we note that the present taxpayers’ contention

is tantamount to a claim for exemption from the franchise

tax. Statutory exemptions from taxation are

[272 j

subject to strict construction since they are the antithesis

of equality and uniformity and because they place a greater

burden on other taxpaying businesses and individuals. Hill-

top Village, Inc. v. Kerrville Independent School District,

426 S.W.2d 943, 948 (Tex.1968) ; accord, Air Force Village

Foundation v. Northside Independent School District, 561

S.W.2d 905, 909 (Tex.Civ.App. — El Paso 1978, writ ref’d

n.r.e.). An exemption cannot be raised by implication, but

must affirmatively appear, and all doubts are resolved in

favor of taxing authority and against the claimant. Simply

stated, the burden of proof is on the claimant to clearly

show that it comes within the statutory exemption. Aransas

Hospital, Inc. v. Aransas Pass Independent School District,

521 S.W.2d 685, 689 (Tex.Civ.App. — Corpus Christi 1975,

writ ref’d n.r.e.) ; Space Precision Machining Co. v. State,

003 S.W.2d 289, 291 (Tex.Civ.App.— Austin 1973, writ

ref’d n.r.e.).5

5 Professor Sands summarizes the rule thusly: As a general rule,

grants of tax exemptions are given a strict interpretation against

A-7

We now turn to an examination of article 7, section 1.

This statute states that there shall be no additional taxa-

tion of “institutions affected” by Pub.L. 91-156. Since an

exemption from taxation must affirmatively appear and

since there is no affirmative indication in article 7, section 1

of what corporations the term “institutions” was intended

to encompass, we must refer to Pub.L. 91-156. The only

“institutions” mentioned or referred to in that statute are

“banks.”

Although we adhere to the strict construction rules afore-

mentioned, an examination of the history of Pub.L. 91-156

is helpful to an understanding of its intended effect. Behind

the passage of this statute is the long-settled rule that the

several states cannot tax national banks except as permitted

by Congress. This limitation on the states’ taxation power

is founded on the theory that national banks are chartered

by the United States government and that the federal power

is supreme over its instrumentalities. First Agricultural

National Bank v. State Tax Commission, 392 U.S. 339, 340,

88 S.Ct. 2173, 20 L.Ed.2d 1138 (1968) ; see Mitchie on Banks

and Banking 348-49 n. 6 (1971). Historically, this meant

that state-chartered banks were subject to some types of

state taxation that national banks were exempt from. A

good example of this disparity in tax treatment is provided

As explained in court opinions: “Exemptions from taxation

claimed under legislative acts should be rigidly construed and

established beyond a reasonable doubt. It is only where a

deliberate se of the jegislature to grant an exemption is

expressed in clear and unequivocal terms that a claim to an

exemption can be maintained.” “Taxation is the rule and exemp-

tion therefrom the exception; and the claimant of such an exemp-

tion must show his right thereto by evidence which leaves the

uestion free from doubt. The claimant for an exemption must

= 4 that his demand is within the letter as well as the spirit of

e law.

3 C. Sands, Statutes and Statutory Construction § 66.09, at 207

(1972 & Supp.1979).

A-8

by Grayson County State Bank v. Calvert, 357 S.W.2d 160

(Tex. Civ.App. — Austin 1962, writ ref’d n.r.e.). In that

case it was held that a state franchise tax could constitu-

tionally be levied against a state bank although-the same

tax could not be levied against a national bank located in

this state. The court reasoned that national and state banks

were not within the same class; rather, a national bank

could transact business within state boundaries without

the state’s permission and without paying for the privilege.

Id. at 162. A concurring justice noted this “inequitable

condition” and called upon the Texas legislature to rectify

the tax disadvantages under which state banks were forced

to compete with national banks. 7d. at 163. One year later

the Texas legislature responded with an amendment to

article 342-908 of the Texas Revised Civil Statutes. That

article presently provides that state-chartered banks are

subject only to such taxes that lawfully can be imposed by

Texas on national banks located in the state.® In ef-

[273]

fect, this means that both national and state banks are

equally exempt from many forms of state taxation in Texas.

Although Texas achieved tax parity among state and

national banks with this amendment, many other states had

® TexRev.Civ.Stat.Ann. art. 342-908 (Vernon 1973) provides:

[273]

State and national banks are hereby declared to be within

the same class under the Constitution and laws of this state. It

is not the intention of the Legislature to discriminate between

state banks, national banks, and private banks. To the extent

that the State of Texas has power to legislate with reference to

national banks, all laws of this state s apply alike to state

banks, private banks, and national banks domiciled in this

state; and state banks and private banks shall be subject to only

such taxes heretofore or hereafter imposed by the state, or any

political subdivision thereof, as aatehie be imposed upon

such state banks or private banks were they operating as

national banks.

A-9

not totally or effectively remedied the disadvantageous tax

position of their state-chartered banks.? The United States

Congress accordingly reacted to this nationwide problem

in 1969 with the passage of Pub.L. 91-156. The legislative

history of that enactment reveals that the intended effect

was to remove the prohibition against states “to levy mod-

ern types of taxes on national banks” to the same extent

and in the same manner that they presently have the right

to tax state-chartered banks. S.Rep.No.91-530, 91st Cong.,

Ist Sess., reprinted in [1969] U.S. Code Cong. & Admin.

News, pp. 1599, 1599, 1594-98. The Congress concluded that

there was no longer any justification for continuing to grant

national banks immunities from state taxation that were not

enjoyed by state-chartered banks.®

7 See Note 8, infra.

8§.Rep.No. 91-530, 91st Cong. Ist Sess.; H.Rep.No. 91-728, 91st

Cong., Ist Sess., reprinted in [1969] U.S. Code Cong. & Admin.

News, p. 1595. The Senate Committee on Banking and Currency

reported:

Some States have exempted State banks from liability for any

States taxes which national banks are required to pay. There,

the State may or may not have attempted to achieve equality

between banks and other businesses by taxing banks at a higher

rate on the allowable taxes than other businesses pay. This

type of device is at best uncertain.

Regardless of the method employed by the particular State

in an attempt to achieve equality, there is always a question of

whether it ies actually been achieved, be it equality between

— and National banks, or equality between banks and other

usinesses.

There may have at one time been justification for giving

national banks Fnac ty and immunities which were denie

State banks, under the theory that national banks are peculiarly

an instrumentality of the Federal Government, and, as such,

hold a = and distinct position from that of other institu-

tions. Without specifically addressing the question of whether

national banks remain, in substance, such a Federal instrumen-

tality, the committee is agreed that there is no longer any justi-

A-10

Thus, the only institutions affected by Pub. L. 91-156 are

“banks.” Not one of the taxpayers in this case, however,

ean be characterized as a “bank.” ® A national bank holding

company is a company which has control over a bank, but

it is not chartered or statutorily empowered to transact

banking business. 12 U.S.C.A. § 1841(a)(1) (1969 & Supp.

1979); P. Heller, Handbook of Federal Bank Holding Com-

pany Law 1-52 (1976). A corporate holder of a bank certi-

ficate of deposit is clearly not a bank, but merely a creditor

of the bank. Southview Corp. v. Kleberg First National

Bank, 512 S.W.2d 817, 819 (Tex.Civ.App. — Corpus Christi

1974, no writ); 10 Am.Jur.2d Banks § 455 (1963).

This strict, but literal, construction of the pertinent stat-

utes leads to only one reasonable conclusion. By passage

of article 7, section 1, our legislature sought to address

[274]

the congressional effort to remove federal barriers to equal

tax treatment of state and national banks. Texas, unlike

some other states, had previously equalized taxation among

state and national banks and the legislature doubtlessly

intended to maintain this parity by precluding any addi-

tional taxation of those institutions. Stated differently,

fication for Congress continuing to grant national banks immu-

nities from State taxation which are not afforded State banks.

Id. at 1595 (emphasis added); see Lake County National Bank

v. Kosydar, 305 N.E.2d 799, 802 (Ohio 1973); Mitchie on Banks

and Banking 350 n. 11 (1971 & Supp.1979) (purpose of Pub.L.

91-156 is to remove immunity from state taxation).

9 A “bank” may be defined as an “institution organized under the

laws of the United States . . . the District of Columbia, [or] any

territory of the United States . . . which (1) accepts deposits that

the depositor has a legal right to withdraw on demand, and (2)

engages in the business of making commercial loans.” 12 U.S.C.A.

§ 1841 (c) (1969 & Supp.1979) (emphasis added).

A-11

there is no reason for us to presume that the legislature

sought to exempt national bank holding companies and

corporate holders of national bank certificates of deposit

from a franchise tax computed on income received from

national banks located in this state.

Moreover, an exemption from taxation cannot be ex-

tended to a taxpayer merely because it is related to or

connected with a tax-exempt corporation. In Silco, Inc. v.

Calvert, 482 S.W.2d 56 (Tex.Civ.App. — Austin 1972, writ

ref’d n.r.e.), the court was faced with a contention similar

to the one advanced by the national bank holding com-

panies in this case. The taxpayer, Silco, Inc., was a holding

company comprised of four tax-exempt corporations, in-

cluding one state bank and one state savings and loan. The

comptroller assessed a franchise tax against Sileo which

was computed on the interest and dividends which Silco

had received from its four subsidiary corporations. Silco

filed suit to recover the tax paid, contending that its corpo-

rate components were exempt from franchise taxation and

that logic and equity dictated that such extensions should

be extended to Silco itself. The trial court held for the

Comptroller and the court of civil appeals affirmed. The

court stated that Sileo was connected with its tax-exempt

components through ownership, but held that the paient

corporation and its components were separate legal entities.

Sileo could not bring itself within the exemption statute

by the mere fact that its capital was invested in the stock

or securities of a corporation exempted from the tax. Jd. at

58. Likewise, we do not believe that national bank holding

companies are entitled to an exemption merely because the

legislature has continued the franchise tax exemption for

the national banks.

We therefore hold that the comptroller correctly ruled

that, under the location of payor rule, interest and dividends

A-12

derived from national banks located in this state are includ-

able in the corporate payee’s Texas gross receipts for the

purpose of assessing a franchise tax. To hold otherwise

would mean that the Texas legislature intended to continue

the unequal treatment between recipients of income from

state banks and recipients of income from national banks.

This we cannot accept. Rather, we believe that the legisla-

ture merely intended to preserve the status quo in refer-

ence to taxation of banks, both national and state, until it

chose to impose additional taxation at a later time.

The judgment of the court of civil appeals is accord-

ingly reversed and the judgment of the trial court is

affirmed.

a a a - |

B-1

APPENDIX B

[584]

NATIONAL BANCSHARES CORPORATION

Or Texas, Er. Au.,

Vv.

Bos Butiock, ComprroLtLter Or Pusiic Accounts

Or Tue State Or Texas, Et Atu.,

No. 12750.

Court Or Crvm Appeats Or Texas, AUSTIN.

Jury 12, 1978.

REHEARING Dentep Ava. 9, 1978.

[585 |

O’QUINN, Justice.

EKight bank holding companies brought this lawsuit in

September of 1974 to recover in excess of $2,000,000.00 in

franchise taxes paid under protest to the Comptroller of

Public Accounts. Subsequently, in January of 1976, one

additional bank holding company intervened, and in March

of 1976 an ordinary business corporation, holder of certifi-

cates of deposit of national banking associations situated

in Texas, also intervened to be allied with plaintiffs. In

addition to the Comptroller, the Attorney General and the

State Treasurer were made parties defendant as required

by statute.

The principal issue to be decided is whether the State

may treat dividends and

[586]

interest flowing from a stock held in national banks as

part of the holding corporation’s “gross receipts from

business done in Texas” for purposes of ascertaining the

franchise tax. Challenged by plaintiffs below, who are

B-2

appellants, and to be tested for validity, is Comptroller’s

Ruling 80-0.18 (1974), which on its face claims authority

for such treatment under provisions of revised 12 U.S.C.

See. 548 (1969, effective 1973), also known as Public Law

91-156. This suit also involves interpretation of an amend-

ment, codified under Article 20.02, V.A.C.S., Taxation-

yeneral (1971), by which Act the Legislature of Texas

undertook to control the effects of the federal statute (12

U.S.C. See. 548) on the Texas tax system.

To place the main issue of this cause in proper focus, it

is appropriate to review the statutory, administrative, and

case law developments established prior to the Comptrol-

ler’s Ruling of 1974, which rested upon the Act of Con-

gress, and together spawned the controversy leading to

this litigation.

Every domestic and foreign corporation, chartered or

authorized to do business in Texas or doing business in

Texas, must pay a Texas franchise tax pursuant to require-

ments of Article 12.01, V.A.T.S., Tax.-Gen. Each corpora-

tion liable for payment of a franchise tax must determine,

in compliance with Article 12.02(1)(a), “...the portion of

its entire taxable capital taxable by the State of Texas by

multiplying same by an allocation percentage which shall

be the percentage relationship which the gross receipts

from its business done in Texas bear to the total gross

receipts of the corporation from its entire business.” (Em-

phasis added)

The same basic franchise tax allocation formula in Arti-

cle 12.02 was used in Article 7084, V.A.T.S., the source of

the present statute. Article 7084 did not designate the

receipts which were to be included as the corporation’s

“business done in Texas,” and to supply certainty, in cur-

ing the omission, administrators of the Texas franchise

tax adopted the “location of payor test” in allocating

B-3

receipts from intangibles to a corporation’s “business done

in Texas.” Only receipts from intangibles paid by a payor

located in Texas were considered under this test to be a

part of the corporate taxpayer’s business done in Texas.

Thus receipts from intangibles paid to a corporation by

an out-of-state payor were not treated as within the mean-

ing of “business done in Texas” and were not included in

applying the formula. Although it was recognized by the

Supreme Court of Texas that such administrative policy

was not obligatory, the Court nevertheless in 1967 held

that the doctrine was of such long standing it should not

be changed or departed from “in the absence of clear statu-

tory authorization.” Humble Oil & Refining Co. v. Calbert,

414 S.W.2d 172, 180 (Tex.Sup.1967).

A large portion of the gross receipts from business

activities of the taxpayers in this lawsuit consists of divi-

dends and interest received from national banks in which

the several taxpayers own stock. National banks are not

Texas corporations but are created under the National

Bank Act (12 U.S.C. See. 21 et seq.) which constitutes

“|. by itself a complete system for the establishment and

government of national banks.” Deitrick v. Greaney, 309

U.S. 190, 60 S.Ct. 480, 84 L.Ed. 694 (1940).

Prior to the dispute in this lawsuit, the Comptroller

excluded dividends and interest, flowing from stock held

in national banks, from a taxpayer’s “gross receipts from

its business done in Texas.” In this case the Comptroller

insists that even prior to this controversy the Comptroller

could have treated national banks as domestic corporations

if the Comptroller had chosen to do so. In apparent sup-

port of this contention, the Comptroller makes the singular

argument that heretofore there was some “doubt” respect-

ing the “domicile” of a national bank, and claims that the

Comptroller resolved any doubt regarding the location of

B-4

the payor national bank in favor of a status as a non-Texas

corporation.

The provision of 12 U.S.C. Sec. 548 (P.L. 91-156),

enacted by Congress in 1969 and effective in 1973, upon

which the Comptroller rests the Ruling of 1974, is in this

language:

[587 ]

“For the purpose of any tax law enacted under author-

ity of the United States or any State, a national bank

shall be treated as a bank organized and existing under

the laws of the State or other jurisdiction within which

its principal office is located.” (Emphasis added)

The Comptroller contends that any doubt regarding loca-

tion of payor which the Comptroller entertained prior to

1973 was removed automatically by the Congressional Act

because “An ancillary effect of the statute was to eliminate

prior uncertainties as to the domicile of national banks.”

Prior to its amendment by the 91st Congress in 1969, 12

U.S.C. See. 548 provided a list of taxes which could be

imposed on national banks by state legislatures. The per-

missible levies named were the only taxes which could be

imposed by a state on any national bank. The statute was

designed explicitly to restrict the power of state legislatures

in levy of taxes on national banks. See 2 U.S.Code Cong. &

Admin.News (1969), p. 1594.

The restrictions imposed under 12 U.S.C. See. 548 prior

to amendment were not applicable of course to state tax-

ation of state banks and thereby created an inequality

between state and national banks. As early as 1943, the

Legislature of Texas moved to remedy this inequality with

enactment of Article 342-908, V.A.T.S, by which Texas

voluntarily restricted its authority to tax state banks except

in the same manner it imposed taxes on national banks.

B-5

The language of the statute, amended in 1963 and again

in 1965, embodies the basic purpose and effect of the law

as originally passed in 1943:

“State and national banks are hereby declared to be

within the same class under the Constitution and laws

of this state. Jt is not the intention of the Legislature

to discriminate between state banks, national banks,

and private banks. To the extent that the State of

Texas has power to legislate with reference to national

banks, all laws of this state shall apply alike to state

banks, private banks, and national banks domiciled in

this state; and state banks and private banks shall be

subject to only such taxes heretofore or hereafter im-

posed by the state, or any political subdivision thereof,

as could lawfully be imposed upon such state banks or

private banks were they operating as national banks.”

(Emphasis added)

Revised 12 U.S.C. See. 548, although enacted by Congress

in 1969, was not made effective until 1973. In that interim

the Legislature of Texas reacted to revision of the federal

statute by enacting, among various amendments of tax

statutes, Article 7 of that Act, which expressly foreclosed

“any additional tax or taxes upon the institutions affected

thereby” Public Law 91-156 (12 U.S.C. Sec. 548).

Article 7 in its full text provided:

“Section 1. The passage of Public Law 91-156 by the

Congress of the United States shall not operate to

impose or permit the imposition of any additional tax

or taxes upon the institutions affected thereby unless:

(a) The tax or taxes were being imposed prior

.to January 1, 1971, or

(b) Such institutions are specifically designated

as being subject to such additional tax or taxes

other than the limited sales and use tax by an Act

of the Legislature passed subsequent to the eftec-

tive date of Public Law 91-156.” (Acts 1971, 62nd

B-6

Leg., p. 1193, 1206, ch. 292, Art. 7, eff. July 1, 1971;

see also Note V.A.T.S. Tax.-Gen., art. 20.02).

Nearly three years later, the Comptroller, in April of

1974, published Ruling 80-0.18, the essential parts of which

are set out:

“General: The ‘location of payor’ test is used in

determining whether dividends and interest are attribu-

table as receipts from business done in Texas under

Article 12.02(1)(b). In accordance therewith, dividends

and interest paid by a domestic corporation are includ-

able in gross receipts from business done in Texas,

whereas dividends and interest paid by a foreign cor-

poration do not constitute Texas gross receipts under

the statute.

[588 ]

“State Banks: Dividends and interest paid by a bank

organized under the Banking Code of Texas are includ-

able in gross receipts from business done in Texas

pursuant to Article 12.02(1) (b).

“National Banks: Prior to January 1, 1973, national

banks were considered to be foreign corporations for

franchise tax purposes and, consequently, dividends

and interest paid by a national bank located in Texas

were not attributable as Texas gross receipts. Public

Law 91-156 amended Section 5219 of the Revised Stat-

utes to provide, effective January 1, 1973, that for the

purposes of any tax law enacted under the authority

of any state a national bank shall be treated as a bank

organized and existing under the laws of tue state

within which its principal office is located. According-

ly, dividends and interest paid on and after January 1,

1973 by a national.bank whose principal office is located

within Texas are includable in gross receipts from bus-

iness done in Texas pursuant to Article 12.02(1)(b).”

In reliance on the Ruling of 1974, the Comptroller

assessed additional franchise taxes against appellant

B-7

taxpayers in the amount of $1,022,803.77 for 1974 and

$1,087,731.43 for 1975. Appellants paid the taxes for 1974

under protest and within ninety days thereafter brought

this action for refund, and again in 1975 the taxes were

paid under protest and appellants amended their plead-

ings to include the taxes paid for both 1974 and 1975.

The cause was tried before the court without a jury,

and the court entered judgment on June 27, 1977, that

plaintiffs below take nothing by their suit. The district

court’s judgment was based on the court’s conclusion that as

a matter of law appellants were not “institutions affected

by the passage of Public Law 91-156 within the meaning

of” Article 7 of the Legislative Act of 1971 (Note, Article

20.02, V.A.T.S., Tax.-Gen.).

We will reverse the judgment of the trial court and

will render judgment that appellant taxpayers recover the

taxes assessed pursuant to Ruling 80-0.18 and paid under

protest.

In addition to the conclusion of law already noted, the

trial court found the following facts:

(1) Franchise Tax Ruling 80-0.18, which held that

dividends and interest from national banks with prin-

cipal offices in Texas were “gross receipts from its

business done in Texas,” was promulgated as a direct

result of the enactment of Public Law 91-156.

(2) The publication of Ruling 80-0.18 was the first

formal pronouncement of the Comptroller’s policy

with respect to the effect of Public Law 91-156 on the

Texas franchise tax treatment of dividends and inter-

est from national banks.

(3) Acts 1971, 62nd Legislature, p. 1206, ch. 292,

art. 7, Sec. 1, codified as a footnote to Article 20.02,

B-8

V.A.T.S., Tax.-Gen., was adopted by the Legislature

in 1971.

(4) The rule set forth in Ruling 80-0.18 increased

the amount of franchise taxes payable by the tex-

payers.

(5) Such increase was not being imposed prior to

1971.

(6) The taxpayers in this suit have not been spe-

cifically designated as being subject to such increase

by any act of the Legislature passed after the effec-

tive date of 12 U.S.C. See. 548.

(7) Prior to the effective date of revised 12 U.S.C.

Sec. 548, corporations receiving interest or dividends

from Texas national banks were not required to

include the same in their “gross receipts from its

business done in Texas” for franchise tax purposes.

Appellants bring two points of error. First, appellants

contend the trial court erred in concluding that the tax-

payers are not “institutions affected” by passage of Public

Law 91-156 and therefore not entitled to relief or protec-

tion purportedly provided by Article 7 of the Legislative

Act of 1971, now annotated as a footnote to Article 20.02,

V.A.T.S., Tax.-Gen. Second, appellants urge error because

the trial court concluded that Public Law 91-156 automatic-

ally imposed, or permitted, without State

[589]

legislation, an additional tax on appellants. In essence this

claim is that revision of 12 U.S.C. Sec. 548 dealt with equal

taxation of state and national banks, and that since the

revised statute was not concerned with taxation of corpora-

tions owning stock in national banks, the Comptroller was

B-9

without authority to use the federal statute as authority for

publishing Ruling 80-0.18.

The State defends the trial court’s judgment principally

on three grounds: (1) that the corporate taxpayers are

not “institutions” within the meaning of Article 7 of the

Act of 1971 (Art. 20.02, footnote); (2) that appellants are

not “affected” by revision of 12 U.S.C. Sec. 548 within the

meaning of Article 7; and (3) that the substantially in-

creased franchise tax, resulting from Ruling 80-0.18, is

not an “imposition of additional taxes” within the mean-

ing of Article 7.

The State further contends that construction of Article

7 of the Act of 1971, as urged by appellants, would lead

to an “unjust result in that it would cause inequality of

taxation among banks, bank holding companies and cor-

porations generally.” This contention obviously is based

on the Comptroller’s view that the purpose and effect of

revised 12 U.S.C. Sec. 548 is to change the preexisting

franchise tax structure for corporations owning stock in

national banks.

In view of this contention, we deem it more orderly to

consider first, the purpose of revised 12 U.S.C. Sec. 548,

at issue under appellants’ second point of error, and there-

after consider the import of Article 7, in the Legislative

Act of 1971, at issue under the first point.

The theory of the State, that revised 12 U.S.C. Sec. 548

authorizes the Comptroller to change the State’s policy on

the inclusion of dividends and interest in the stockholder’s

“eross receipts from its business done in Texas,” is equivo-

cal and wanting in consistency. The legislative history of

revised 12 U.S.C. Sec. 548 shows that the specific purpose

of the revision was “. . . to provide authorization for the

States. . . to levy modern types of taxes on national banks

B-10

.. .’ (Emphasis added) See 2 U.S.Code Cong. & Admin.

News (1969), p. 1599. The Congress believed there was

“ . .no longer any justification for. . . continuing to grant

national banks immunities from State taxation which are

not afforded State banks .. .” (Emphasis added) 2 U.S.

Code Cong. & Admin.News (1969), p. 1595.

In this suit the State insists that an “ancillary” and

“automatic” effect of the revision was to alter the taxation

of corporations owning national bank stock, but the con-

tention is without support or a showing that such policy

was of concern to the drafters of the revision or that such

a change is mandated by the federal statute.

To the contrary, it appears that because Article 342-908,

set out earlier, declares state and national banks equal for

purposes of state taxation of the banks, revised 12 U.S.C.

Sec. 548 does not abrogate the State’s taxation scheme, but

merely removes restrictions on state taxation of national

banks, thereby enlarging taxation permissible for both state

and national banks. As observed earlier, the specific pur-

pose of revised 12 U.S.C. Sec. 548 was to provide authoriza-

tion for the states to levy modern types of taxes on banks

which were not authorized under the statute before its

amendment.

Prior to revision, 12 U.S.C. Sec. 548 restricted only state

taxation of national banks. The statute did not prohibit

state taxation of dividends and interest flowing from stock

in national banks to corporations owning such stock. The

Legislature of Texas voluntarily excluded this income of

corporations from “gross receipts from its business done

in Texas” under the doctrine of “location of payor rule,”

since national banks were and are created under federal

law, not state law.

It does not follow that 12 U.S.C. See. 548, when revised

to remove restrictions on state taxation of national banks,

B-11

also altered a long established procedure in Texas which

had been in no manner controlled by the restrictions of the

statute prior to its revi-

[590]

sion. As revised, the federal statute simply allows the

states to treat national banks as state banks for purpose

of equal taxation of banks. The concept thus provided is

for equal taxation of banks and is unrelated to taxation

of dividends and interest from national bank stock in the

hands of corporate stockholders.

It is also apparent that exclusion of national bank stock

dividends and interest from “gross receipts from its busi-

ness done in Texas” by the taxpayers does not conflict with

the stated purpose of the revised federal statute, and there-

fore no change is mandated by the revision. The ends of

12 U.S.C. See. 548 are not defeated by allowing a state to

treat national banks as non-Texas corporations, for pur-

poses of computing the stockholders’ franchise tax, because

there is no resulting inequality in the tax treatment of

banks themselves. In fact, this procedure, of treating na-

tional banks as non-Texas corporations for purposes of

the stockholders’ franchise tax, has existed harmoniously

in Texas for forty-five years with this State’s system of

equality for state and national banks. The Legislature

made clear its intention in Article 342-908 (1943) not to

“discriminate between state banks, national banks, and

private banks.”

This harmonious coexistence demonstrates that the prin-

ciple of treating national banks as non-Texas corporations,

for purposes of the stockholders’ franchise tax, results in

no discrimination between state and national banks and

does not cause “inequality of taxation among banks,” as

urged by the Comptroller. The Comptroller’s present posi-

tion on this question is out of harmony with past perform-

B-12

ance. In the more than forty years since the Legislature

declared state and national banks equal for purposes of °

state taxation of banks, the Comptroller has at no time

challenged the exclusion of dividends and interest on na-

tional bank stock from the stockholders’ “gross receipts

from its business done in Texas” on the ground that the

practice created an inequality between state and national

banks. The Comptroller before this Court in 1972 urged

the identical proposition now advanced by the appellants

and was successful in Silco, Inc. v. Calvert, 482 S.W.2d 56,

59 (Tex.Civ.App. Austin 1972, writ ref’d n.r.e.). In that

ease this Court held: “This statute (Article 342-908)

requires only that state and national banks be treated

equally under the state laws. The statute does not in any

way require an equal treatment of any other corporations

that are not state banks or national banks.” (Emphasis

added)

In the present case the trial court found that Ruling

80-0.18 was promulgated as a direct result of revised 12

U.S.C. See. 548. The federal statute becomes the Comptrol-

ler’s only authority to support his attempt to alter the

established franchise tax system, and the argument seems

to be that the amended statute removed “doubt” as to

“domicile” of national banks. Yet Article 342-908 made it

clear that there has been no question of “domicile” simply

by mandating equal treatment of state banks, private banks,

and “national banks domiciled in this state.” (Emphasis

added) The question of domicile had been determined long

ago without violence to compatibility of the two concepts

under examination in this case. The Comptroller is com-

mitted to his own contention in Silco, supra, when interpre-

ting the impact of a federal statute precisely of the same

nature as Article 342-908.

The State’s essential complaint appears reduced to de-

ploring “inequality of taxation among bank holding com-

B-13

panies and corporations generally.” Since this matter of

inequality presents no conflict with the revised federal

statute, the Comptroller’s challenge goes to the inherent

inequality of the “location of payor test” itself. The Su-

preme Court placed that challenge beyond authority of the

Comptroller in Humble Oil & Refining Co. v. Calvert, supra,

and held there that the “location of payor test” may be

changed only by action of the Legislature. (414 S.W.2d

180, col. 2)

We turn now to consideration of the Legislature’s action

in 1971 to forestall the levy of additional taxes on institu-

tions affected by passage of Public Law 91-156.

[591]

We conclude that even if the Comptroller should be cor-

rect in the contention that the federal statute as revised had

as its purpose the cure of unequal franchise tax treatment

of corporations owning stock in national banks, and we

have held that the statute had no such purpose, neverthe-

less the State may not prevail in this lawsuit. The Legisla-

ture in 1971 prohibited precisely the type of change the

Comptroller took to make in the tax structure acting under

authority claimed to be derived from 12 U.S.C. See. 548.

The Legislature, being aware of the revision by Congress

of 12 U.S.C.A. See. 548, acted without delay, in fact two

years before the federal statute would become operative,

to anticipate changes in the State’s tax system, which might

be improvidently undertaken because of the federal statute,

and enacted laws to prevent changes not first considered

and approved by the Legislature. The legislative intent

could hardly be expressed more clearly or more forcefully

than in the text reading, “The passage of Public Law 91 —

156 (12 U.S.C.A. See. 548) by the Congress of the United

States shall not operate to impose or permit the imposition

B-14

of any additional tax or taxes upon the institutions affected

thereby . . .” (Emphasis added)

It is the State’s position that the Act of 1971 (Article 7)

does not apply to bank holding companies and other cor-

porations owning stock in national banks, and in its attempt

to sustain this position the State reveals a basic flaw in the

argument that the revised federal statute gives the Comp-

troller authority .o change the established corporate fran-

chise tax structure. The State argues that one of the pur-

poses of the federal law was to cure unequal treatment of

corporations owning stock in national banks. The State

insists that such treatment is not in keeping with the spirit

of 12 U.S.C.A. See. 548, and that an “ancillary effect” of

the statute was to correct this inequality. Further, the

State claims, the greatly increased franchise tax, achieved

by Ruling 80-0.18, is an “automatic effect” of the federal

law and therefore the federal statute is authority for the

administrative Ruling.

The State continues with the argument that the corpora-

tions owning stock in national banks are not “institutions

affected” by the federal statute within the meaning of the

Act of 1971 (Article 7) because the federal amendment was

adopted by Congress to cure unequal treatment of banks

and therefore banks are the only “institutions affected.”

Thus it is clear that the Comptroller attempted to use a

federal statute as authority for increasing the franchise tax

payable by these appellants by more than one million dol-

lars annually and yet claim that the federal law does not

“affect” these institutions. The finding of the trial court

that Ruling 80-0.18 was promulgated as a direct result of

revised 12 U.S.C. Sec. 548, and the further finding that the

Ruling was the formal pronouncement of the Comptroller’s

policy, with respect to the effect of the federal law on the

Texas franchise tax, make inescapable the conclusion that

B-15

the Comptroller acted on belief that 12 U.S.C. See. 548

permits the imposition of increased taxes and that the

federal law in fact “affected” appellant corporations in the

ordinary dictionary sense. Appellants were affected when

the effect produced was “the imposition of any additional

tax or taxes” upon them, actually, in this case, at the annual

rate of more than one million dollars.

It appears that the only remaining question is whether

the required inclusion of dividends and interest in the

stockholders’ “gross receipts from its business done in

Texas,” resulting in substantially increased taxes, consti-

tutes “the imposition of any additional tax or taxes” within

the meaning of Article 7. We hold that inclusion of the

dividends and interest, resulting in significant increases in

the franchise tax of appellants, amounted to “imposition of

. additional . . . taxes,” in contravention of the prohi-

bition the Legislature enacted in Article 7 of the Act of

1971. Yoakum Industries, Inc. v. Calvert, 414 S.W.2d 171

(Tex.Sup.1967) ; Calvert v. Electro-Sci-

[592]

tence Investors, Inc., 509 S.W.2d 700 (Tex.Civ.App. Austin

1974, no writ).

Upon the holdings and reasoning stated, we reach the

conclusion that the Comptroller acted without authority

and in contravention of an explicit Act of the Legislature in

promulgating and enforcing Ruling 80-0.18 to increase the

franchise taxes of appellant corporations owning stock in

national banks, and that the additional taxes collected ought

to be refunded to the taxpayers.

The judgment of the trial court is reversed, and judgment

is rendered that appellant taxpayers recover the taxes paid

under protest as shown by the record in this cause.

SHANNON, J., not participating.

C-1

APPENDIX C

NaTIONAL BANCSHARES CORPORATION OF TExas, Er AL.

v.

Bos Buttock, Er Au.

In Tue District Court or Travis County, Texas

Findings of Fact and Conclusion of Law

Findings of Fact

1. The stipulations of the parties filed herein are

adopted and found as fact by the Court and incorporated

herein by reference.

2. Franchise Tax Ruling 80-0.18, which held that divi-

dends and interest from national banks with principal

offices in Texas were “gross receipts from business done

in Texas,” was promulgated as a direct result of the enact-

ment of Public Law 91-156.

3. The publication of Franchise Tax Ruling 80-0.18 on

April 18, 1974, was the first formal pronouncement of the

Comptroller of Public Accounts’ policy with respect to the

effect of Public Law 91-156 on the Texas franchise tax

treatment of dividends and interest from national banks

with principal offices in Texas.

4. Acts 1971, 62nd Legislature, p. 1206, ch. 292, art. 7,

§ 1, codified as a footnote to article 20.02, Trex. Tax.-Gen.

(House Bill 730), was adopted by the Legislature of the

State of Texas in 1971, to be effective July 1, 1971.

d. The rule set forth in Franchise Tax Ruling 80-0.18

increased the amount of Texas franchise taxes payable by

Plaintiffs and Intervenors.

6. Such increase was not being imposed prior to Jan-

uary 1, 1971.

C-2

7. Plaintiffs and Intervenors have not been specifically

designated as being subject to such increase by any act of

the Legislature passed subsequent to January 1, 1973, the

eventual effective date of Public Law 90-156.

8. Prior to January 1, 1973, corporations receiving

interest or dividends from Texas national banks were not

required to include the same in its “gross receipts from

business done in Texas” for franchise tax purposes.

9. Plaintiffs and Intervenors were subject to and paid

the Texas franchise tax prior to January 1973, and have

been subject to and paid the Texas franchise tax since

January 1, 1973, except Intervenor Reidy which has been

subject to and paid such tax since January 1, 1974.

Conclusion of Law

Plaintiffs and Intervenors were not institutions affected

by the passage by Public Law 91-156 within the meaning of

art. 7 of House Bill 730.

Sicnep Tus 2nd day of December, 1977.

Judge Presiding

D-1

APPENDIX D

JUDGMENT

Bos BuLiock, COMPTROLLER OF PusBLic AccouNTS

OF THE StaTE OF Texas, Er At.

v.

NATIONAL BANCSHARES CORPORATION OF TExas, Er Ax.

From Travis County, Turrp District

This cause came on to be heard on writ of error to the

Court of Civil Appeals for the Third Supreme Judicial

District and the original transcript and transcript showing

the proceedings in the Court of Civil Appeals having been

duly considered, it is the opinion of the Court that there

was error in the judgment of the Court of Civil Appeals

which reversed the judgment of the trial court and rendered

judgment that the taxpayers recover all sums. Therefore,

it is adjudged, ordered and decreed that the judgment of

the Court of Civil Appeals be, and hereby is, reversed and

set aside, and the judgment of the trial court which found

for petitioners, Bob Bullock, Comptroller of Public

Accounts of the State of Texas et al., be, and hereby is,

affirmed in accordance with the opinion of this Court

herein this day delivered.

It is further ordered that respondents, National Banc-

shares Corporation of Texas et al., and their surety, The

Aetna Casualty and Surety Company, pay all costs

expended and incurred in this Court and the Court of Civil

Appeals and that petitioners, Bob Bullock, Comptroller of

Public Accounts of the State of Texas et al., have and

recover of and from respondents, National Bancshares

Corporation of Texas et al., and their surety, The Aetna

Casualty and Surety Company, all costs by them expended

and incurred in said courts and that a copy of this judgment

be certified to the District Court of Travis County, Texas

for observance.

(Opinion of the Court by Justice McGee)

E-1

APPENDIX E

In THE

Supreme Court of Cexas

No. B-7896

Bos Buttock, ComprroLtLerR oF Pusitic Accounts oF THE

State oF Texas; Warren G. Harpinc, StaTE TREASURER OF

Tue State or Texas; and Joun L. Hix, Jr., ATTORNEY

GENERAL OF THE StaTE OF TEXAS,

Petitioners,

v.

NationaL BancsHares CorPoRATION OF TEXAS; CULLEN/

Frost Bankers, Inc.; Sournwest BancsHares, Inc.; TExas

AMERICAN BancsuHares, INnc., on its own behalf and as suc-

cessor in interest to Southern National Corporation; First

Crry BancorporATION oF TExas, INc.; First Unrrep Bancor-

PORATION, INc.; MERCANTILE TExas CoRPORATION, as successor

in interest to Federated Capital Corporation; Fort Sam

Houston BanxsnHares, Inc. by intervention; and Remy

INTERNATIONAL, Inc. by intervention,

Respondents.

RESPONDENTS — BANK HOLDING COMPANIES’

MOTION FOR REHEARING

TO THE HONORABLE SUPREME COURT OF TEXAS:

NOW COME Respondents National Bancshares Corpo-

ration of Texas, Cullen/Frost Bankers, Inc., Southwest

Bancshares, Inc., Texas American Bancshares, Inc., on its

own behalf and as successor in interest to Southern National

Corporation, First City Bancorporation of Texas, Inc.,

First United Bancorporation, Inc., Mercantile Texas Cor-

poration, as successor in interest to Federated Capital

E-2

Corporation, and Fort Sam Houston Bankshares, Inc. by

intervention (referred to herein as “Respondents” or “Tax-

payers”) and file this their Motion for Rehearing of this

Honorable Court’s action in reversing the Court of Civil

Appeals’ judgment and as grounds for such motion would

respectfully show as follows:

1. Public Law 91-156 Does Not and Constitutionally Could Not

Authorize the Comptroller’s Action in Ruling 80-0.18.

This Court decided without discussion or question that

the federal Congress can mandate a change in well-estab-

lished Texas tax policy towards state-chartered bank hold-

ing companies and thereby usurp the power of taxation

reserved to the Texas Legislature under the United States

Constitution. Because of the critical importance of this

question, Respondents are filing this motion for rehearing.

A succinct summary of the litigation is necessary. The

Trial Court found as a fact that Ruling 80-0.18 was promul-

gated as a direct result of the enactment of Public Law

91-156 and that Ruling 80-0.18 was the first formal pro-

nouncement of the Comptroller’s policy with respect to the

effect of Public Law 91-156 on the Texas franchise tax treat-

ment of dividends and interest from national banks [Find-

ings of Fact Nos. 2 and 3, Supp. Tr. 2-3].!_ Based upon

these findings, the Court of Civil Appeals correctly observed

that the validity of Ruling 80-0.18 must rest upon whether

Public Law 91-156 provides sufficient legal basis for the

change in law promulgated by the ruling. 569 S.W.2d 584,

1 The critical importance of Public Law 91-156 to Ruling 80-0.18

cannot be questioned. National banks are not and cannot be

Texas corporations in fact. They are chartered by the federal

government under the National Bank Act (12 U.S.C. Sec. 21 et

seq.). They can be treated as Texas corporations for purposes of

the location-of-payor rule only if the rule of Public Law 91-156 (a

rule derived solely for the p of taxing banks) is to be

extended to the computation of the Texas franchise tax of holding

companies. See 569 S.W.2d at 591.

E-3

589 (Tex.Civ.App. — Austin 1978, writ granted). Further,

since the purpose and intent of Public Law 91-156 was con-

fined to taxation of national banks, it was not a proper

basis for changing the mode of Texas franchise taxation of

bank holding companies and other corporations receiving

income from national banks. 569 S.W.2d at 589-90. This

alone was a sufficient basis upon which to reverse the Trial

Court and to render judgment for Respondents. The Court

of Civil Appeals, however, went further and held in the

alternative that Ruling 80-0.18 was prohibited by article 7,

section 1 of House Bill 730.

This Court’s opinion is directed entirely to the second

and alternative holding of the Court of Civil Appeals. The

opinion completely ignores the first and primary holding

of the Court of Civil Appeals and assumes without dis-

cussion that Public Law 91-156 authorized the Comptroller

to issue the Ruling. Yet this Court agrees with both of the

basic premises of the Court of Civil Appeals by recogniz-

ing that the “comptroller based this change in taxation

policy on [Public Law 91-156]” and that “the only ‘institu-

tions’ mentioned or referred to in [Public Law 91-156] are

‘banks.’” Slip Opinion at 4 and 6. Further, this Court

emphasized that Public Law 91-156 was intended to oper-

ate only with regard to tax treatment of banks. Slip

Opinion at 6-9.

Holding that Public Law 91-156 ‘applies only to banks

is manifestly inconsistent with holding that Public Law

91-156 mandates a change in the long-established Texas

policy regarding taxation of bank holding companies. By

so holding, this Court is trapped by the same circularity

of reasoning that the Court of Civil Appeals found fatal

to the Comptroller’s position:

Thus it is clear that the Comptroller attempted to use

a federal statute as authority for increasing the fran-

K-4

chise tax payable by these appellants by more than one

million dollars annually and yet claim that the federal

law does not “affect” these institutions.

569 S.W.2d at 591.

By implicitly holding that Public Law 91-156 mandates

the change in the method of taxation of state-chartered

bank holding companies, this Court has allowed the fed-

eral Congress to preempt longstanding Texas tax policy

toward these institutions without the concurrence of the

Texas Legislature. This is not something that the federal

Congress intended, because, as this Court has correctly

noted, the Congress intended to deal only with the taxa-

tion of national banks in Public Law 91-156. Slip Opinion

at 6-9.

Furthermore, even if Congress had intended to change

Texas tax policy regarding state-chartered bank holding

companies, it is clear that it could not constitutionally do

so. While Congress can prohibit or limit state taxation

under the Commerce Clause or require equal taxation of

federal institutions such as banks, it cannot affirmatively

impose state taxation on non-federal institutions such as

state-chartered bank holding companies. For Congress to

direct an official of the State of Texas to impose a state

tax usurps the power of taxation reserved to the state

legislatures by the federal Constitution. See U.S. CONST.

amend. X; Lane County v. Oregon, 74 U.S. 71 (1869), cited

with approval in National League of Cities v. Usery, 426

U.S. 833, 844 (1976). See also Respondent’s Answer to

Application for Writ of Error at 7-10 and Respondent’s

Post-Submission Brief at 6-7.

This Court has held previously that the longstanding

location-of-payor rule of the Texas franchise tax cannot be

changed without action by the Texas Legislature. Humble

Oil & Refining Co. v. Calvert, 414 S.W.2d 172 (Tex. 1967).

E-5

Ruling 80-0.18 unquestionably changes the substance of

this rule as it applies to Texas bank holding companies

by treating dividends and interest received from non-

Texas corporations (e.g., national banks) as “gross receipts

from business done in Texas.” In permitting this, the

Court’s holding approves a change in the rule by the uni-

lateral action of the Comptroller based upon a change in

federal law having nothing to do with the taxation of bank

holding companies and without any action by the Texas

Legislature. This holding constitutes a significant and

unprecedented erosion of the constitutionally-mandated

prerogative of the Texas Legislature over Texas tax

policy.

Carried to its logical conclusion, this Court could as well

hold that the State of Delaware, for example, could pass

a law that any corporation incorporated in Delaware should

be treated as a corporation organized and existing under

the laws of the state within which its principal office is

located, and such law would require the Texas Comptroller

to treat all Delaware subsidiaries with principal offices in

Texas as Texas corporations under the location-of-payor

rule. Obviously, such a result would be absurd. Only the

Texas Legislature, and not Delaware nor the federal Con-

gress, can make the decision to treat non-Texas corpora-

tions as Texas corporations. Thus, it is clear that Public

Law 91-156 did not have the effect of transforming national

bank corporations into Texas corporations under the loca-

tion-of-payor rule. Both before and after the passage of

Public Law 91-156, a national bank is a national corpora-

tion chartered by the federal Congress, just as a Delaware

subsidiary of a Texas corporation is a Delaware corpora-

tion chartered by the State of Delaware. Neither is a Texas

payor under the location-of-payor rule.

. Respondents respectfully urge the Court to re-examine

its holding in light of the compelling logic of the Court of

E-6

Civil Appeals’ primary holding that Public Law 91-156

would not operate to change franchise taxation in Texas

without affirmative action by the Texas Legislature. Such

a decision would prevent the inadvertant and unconstitu-

tional result of a federal statute dealing solely with banks

significantly altering Texas tax policy toward state-chart-

ered bank holding companies without the concurrence of

the Texas Legislature.

Since this is an independent ground for relief, it can be

followed without altering this Court’s analysis of House

Bill 730. In fact, the Court of Civil Appeals’ analysis of

Public Law 91-156 is the only analysis that is logically

consistent with this Court’s analysis of House Bill 730.

2. House Bill 730 Precludes Imposition of the Disputed Tax.

If upon re-examination, this Court finds that Public Law

91-156 did change the Texas policy regarding franchise

taxation of bank holding companies, then the Court must

re-examine its opinion that bank holding companies are not

“institutions affected” by Public Law 91-156 in order to

avoid the circularity of reasoning noted by the Court of

Civil Appeals. If Public Law 91-156 changed the taxation

of bank holding companies, then it is inescapable that they

have been “affected” by Public Law 91-156. In such cir-

cumstances, House Bill 730 requires clear affirmative action

by the Texas Legislature before that effect can take place.

See Chase Manhattan Bank, N.A. v. Finance Administra-

tion of the City of New York, 47 U.S.L.W. 3585 (March 6,

1979), reversing 372 N.E.2d 789 (N.Y. 1977) .2

There has been no such action by the Texas Legislature.

2In Chase Manhattan the Supreme Court invalidated a New York

commercial rent tax on national banks because it had not been

applied to national banks by affirmative action of the New York

legislature after Public Law 91-156. The case turned on con-

struction of the federal savings clause which is almost identical

to House Bill 730. See Respondents Answer to Application for

Writ of Error at 18.

I i aso sn

E-7

3. Taxpayers Do Not Seek an Exemption from Taxation.

The Court’s opinion states that Respondents’ position is

“tantamount to a claim for exemption from the franchise

tax.” Slip Opinion at 6. That is simply not correct.

Respondents are and have always been subject to Texas

franchise tax and they do not seek to change that here.

Rather, they seek only to maintain the status quo of that

taxation as it existed prior to January 1, 1973, the effective

date of Public Law 91-156. That prior treatment was sanc-

tioned by the Texas Legislature. Humble Oil € Refining

Co. v. Calvert, 414 S.W.2d 172 (Tex. 1967). See also Silco,

Inc. v. Calvert, 482 S.W.2d 56 (Tex. Civ. App. — Austin

1972, writ ref’d n.r.e.). The Texas Legislature has not

changed that treatment. The only thing that has changed

is the enactment of federal Public Law 91-156, a statute

having absolutely nothing to do with Texas franchise taxa-

tion of bank holding companies.

Thus Respondents seek only the continued application of

the general rules prior to the change in federal law. It is

instead the State which must argue for a departure from

established tax policy, and it must do so solely on the basis

of an edict of the federal Congress.

PRAYER

For the foregoing reasons, Respondents — Bank Holding

Companies respectfully move this Court to withdraw its

opinion in this case and upon rehearing to issue an opinion

affirming the judgment of the Court of Civil Appeals.

Respectfully submitted,

C. W. WELLEN Marvin K. Co.uie

THomas J. BrorBy Harry M. Reasoner

R. RicHarp Coston TxHomas P. Marinis, JR.

WiuiaM LEE Ann LEntTs

E-8

Of Counsel: Of Counsel:

FuLBriGHT & JAWORSKI Vinson & ELKINS

800 Bank of the Southwest 2100 First City National

Building Bank Building

Houston, Texas 77002 Houston, Texas 77002

Attorneys for Respondents — Bank Holding Companies

CERTIFICATE OF SERVICE

I hereby certify that copies of the foregoing Respond-

ents — Bank Hoiding Companies’ Motion for Rehearing

were served upon counsel for Defendants by delivering

copies to Mr. Gilbert Bernal, Assistant Attorney General

of Texas, Office of the Attorney General of Texas, P.O.

Box 12548, Capitol Station, Austin, Texas 78711 and upon

counsel for Respondent Reidy International, Ine. by deliv-

ering copies to Mr. Willis Witt, 500 Gulf Building, Hous-

ton, Texas 77002 by messenger on this the 5th day of

July, 1979.

/8/

F-1

APPENDIX F

CLERK’S OFFICE — SUPREME COURT

Austin, Texas, July 25, 1979

Dear Sir:

You are hereby notified that the Motion for Rehearing

in the ease of BULLOCK ET AL. v. NATIONAL BANC-

SHARES ET AL., No. B-7896 was this day overruled.

Very truly yours,

GARSON R. JACKSON, Clerk

G-1

APPENDIX G

In THE

Bistrict Court

oF Travis County, TExAs

53rp J upIcIAL District

No. 223,714

NATIONAL BANCSHARES CORPORATION OF TEXAS; FROSTBANK

Corporation; SoutHweEst BancsHares, Inc.; Texas AMER-

IcAN BancsHares, Inc.; First Crry BANCORPORATION OF

Texas, Inc.; First Untrep Bancorporation, Inc. ; SoUTHERN

NATIONAL CoRPORATION ; FEDERATED CAPITAL CORPORATION,

Plaintiffs,

v.

Rosert S. Catvert, CoMpTrRoLLER OF PuBLIC ACCOUNTS OF

THe State oF TEXAS; JESSE JAMES, STATE TREASURER OF THE

State or Texas; AND JoHN L. Hii, Jr., ATTORNEY GENERAL

oF THE State oF Texas,

Defendants.

PLAINTIFFS’ FIRST AMENDED ORIGINAL PETITION

Plaintiffs, National Bancshares Corporation of Texas;

FrostBank Corporation; Southwest Bancshares, Inc.;

Texas American Bancshares, Inc.; First City Bancorpora-

tion of Texas, Inc.; First United Bancorporation, Inc.;

Southern National Corporation, Federated Capital Cor-

poration (hereinafter referred to as “Plaintiffs”) complain

of Bob Bullock, successor in office to Robert S. Calvert as

Comptroller of Public Accounts of the State of Texas,

Jesse James, in his capacity as Treasurer of the State of

Texas, and John L. Hill, Jr., in his capacity as Attorney

General of the State of Texas, Defendants, and file this,

G-2

their amended joint petition, and for cause of action allege

as follows:

js

Plaintiff National Bancshares Corporation of Texas is a

corporation duly organized and existing under the laws of

the State of Texas, with its principal office and place of

business in San Antonio, Texas. Its address is 430 Solidad

Street, San Antonio, Texas 78291.

- II.

Plaintiff FrostBank Corporation is a corporation duly

organized and existing under the laws of the State of Texas,

with its principal office and place of business in San

Antonio, Texas. Its address is P.O. Box 1600, San Antonio,

Texas 78296.

III.

Plaintiff Southwest Bancshares, Ine. is a corporation

duly organized and existing under the laws of the State of

Delaware, with its principal office and place of business

in Houston, Texas. Its address is P.O. Box 2629, Houston,

Texas 77001.

IV.

Plaintiff Texas American Bancshares Inc. (formerly

The Fort Worth National Corporation) is a corporation

duly organized and existing under the laws of the State of

Texas, with its principal office and place of business in Fort

Worth, Texas. Its address is P.O. Box 2050, Fort Worth,

Texas 76101.

V.

Plaintiff First City Bancorporation of Texas, Inc. is a

corporation duly organized and existing under the laws of

the State of Texas, with its principal office and place of

G-3

business in Houston, Texas. Its address is 1001 Main Street,

Houston, Texas 77002.

VI.

Plaintiff First United Bancorporation, Ine. is a ecorpora-

tion duly organized and existing under the laws of the

State of Texas, with its principal office and place of busi-

ness in Fort Worth, Texas. Its address is 500 West 7th

Street, Fort Worth, Texas 76102.

VII.

Plaintiff Southern National Corporation is a corpora-

tion duly organized and existing under the laws of the

State of Texas, with its principal office and place of busi-

ness in Houston, Texas. Its address is P.O. Box 2529,

Houston, Texas 77001.

VIII.

Plaintiff Federated Capital Corporation (formerly Cap-

ital National Corporation) is a corporation duly organized

and existing under the laws of the State of Delaware, with

its principal office and place of business in Houston, Texas.

Its address is P.O. Box 500, Houston, Texas 77001.

IX.

Defendants, Bob Bullock, Jesse James, and John L. Hill,

Jr., are, respectively, Comptroller of Public Accounts,

Treasurer, and Attorney General of the State of Texas.

Defendants are sued in their respective capacities in

accordance with the provisions of Article 1.05, Tex.Tax-

Gen. (Ch. 1, Title 122A, Rev. Civ. Stat. 1925, as amended).

Each resides in Austin, Travis County, Texas, where ser-

vice of citation may be had on him.

G-4

X.

This suit is brought pursuant to Article 1.05, Tex.Tax.-

Gen., to recover franchise taxes for the franchise tax

period from May 1, 1974 to April 30, 1975 and for the fran-

chise tax period from May 1, 1975 to April 30, 1976. For

the period May 1, 1974 to April 30, 1975, Plaintiffs seek to

recover $1,022,803.07, which were timely paid by Plaintiffs

pursuant to written protests accompanying said payments

as required by Article 1.05(1), Tex.Tax.-Gen., as follows:

National Bancshares Corporation of

| er acl hee = .... § @yaais

FrostBank Corporation. ...._............ 38,530.50

Southwest Bancshares, Inc. .__.. | 141,061.75

Texas American Bancshares, Inc. __. 47,502.25

First City Bancorporation of Texas, Ine. 448,081.75

First United Bancorporation, Inc. .__. 76,852.75

Southern National Corporation —_ 11,280.66

Federated Capital Corporation 217,740.25

$1,022,803.07

for the period May 1, 1975 to April 30, 1976, Plaintiffs

(except Plaintiff Southern National Corporation) seek to

recover $1,027,731.34, which were timely paid by Plaintiffs

(except Plaintiff Southern National Corporation) pursu-

ant to written protests accompanying said payments as

required by Article 1.05(1), Tex.Tax.-Gen., as follows:

National Bancshares Corporation of

MS ore ak ve deen ere ee $ 45,781.00

FrostBank Corporation ............... 94,251.25

Southwest Bancshares, Inc.............. 112,387.00

Texas American Bancshares, Inc... ..... 28,160.50

First City Bancorporation of Texas, Ine. 519,799.59

First United Bancorporation, Inc. _.... 63,856.25

Federated Capital Corporation .__... 263,495.75

$1,087 ,731.34

G-5

Plaintiffs’ original petition sought recovery of $1,022,403.07

in taxes for the franchise tax period May 1, 1974 to April

30, 1975. This amended petition is being filed to add the

$1,087,731.34 in taxes for the franchise tax period May 1,

1975 to April 30, 1976, as contemplated by Article 1.05(3),

Tex. Tax.-Gen.

In addition, this suit shall cover all additional taxes that

may be paid under protest during the pendency of this suit

or any appeal thereof as provided in Article 1.05(3), Tex.

Tax.-Gen. This Court has jurisdiction over this suit by

virtue of Article 1.05(2), Tex. Tax.-Gen. Plaintiffs have

joined in this suit pursuant to Tex.R.Civ.P. 40 in that all

claims arise out of the same occurrence and contain com-

mon questions of fact and law.

XI.

Ninety (90) days did not elapse between payment of the

aforementioned franchise taxes for the period May 1, 1974

to April 30, 1975, with the accompanying protests and the

filing of this suit by Plaintiffs seeking recovery of said

payments on September 9, 1974; thirty (30) days have not

elapsed between payment of the aforementioned franchise

taxes for the period May 1, 1975 to April 30, 1976 with the

accompanying protests and the filing of this amended peti-

tion by Plaintiffs seeking recovery of said payments.

XII.

Plaintiffs are bank holding companies under the Bank

Holding Company Act of 1956, as amended. During the

accounting period indicated on each Plaintiff’s 1974 and

1975 franchise tax reports Plaintiffs received dividends

and interests from national banks whose principal offices

were located within the State of Texas.

i hide

G-6

XIII.

Under Article 12.02, Tex. Tax.-Gen., each corporation

subject to franchise tax shall “determine the portion of its

entire taxable capital taxable by the State of Texas by

multiplying same by an allocation percentage which shall

be the percentage relationship which the gross receipts

from its business done in Texas bear to the total gross

receipts of the corporation from its entire business.”

XIV.

Prior to April 18, 1974, Defendant Comptroller of Public

Accounts’ predecessor in office did not consider dividends

and interest received from national banks with principal

offices in Texas to be includible in gross receipts from busi-

ness done in Texas. However, on that date Defendant

Comptroller of Public Accounts’ predecessor in office pub-

lished Franchise Tax Ruling No. 80-0.18 requiring inclu-

sion of such dividends interest paid on or after January 1,

1973, in “gross receipts from business done in Texas” for

purposes of computing Texas franchise tax pursuant to

Article 12.01, Tex. Tax.-Gen.

XV.

Plaintiffs had no reasonable statutory alternative but

to comply with Franchise Tax Ruling No. 80-0.18 and

accordingly included dividends and interest received from

national banks whose principal offices were located in

Texas as gross receipts from business done in Texas in

the computation of their 1974 and 1975 Texas franchise

tax. Such inclusion resulted in Plaintiffs’ franchise tax

being greater than it would have been without such inclu-

sion by the amounts set forth in Paragraph X. As required

Article 1.05(1), Tex. Tax.-Gen. Plaintiffs paid the addi-

G-7

tional taxes for the period May 1, 1974 to April 30,

1975 under protest to Defendant Comptroller of Public

Accounts’ predecessor in office. Defendant Comptroller of

Public Accounts’ predecessor in office acknowledged receipt

of such payments by letters. As required by Articles

1.05(1) and 1.05(3), Tex. Tax.-Gen. Plaintiffs (except

Plaintiff Southern National Corporation) paid additional

taxes for the period May 1, 1975 to April 30, 1976 under

protest to the Defendant Comptroller of Public Accounts.

Defendant Comptroller of Public Accounts acknowledged

receipt of such payments by letters. The protest letters

transmitting Plaintiffs’ payments disclosed fully the

grounds of protest, but the Defendants have refused to

refund such payments or any portion thereof.

XVI.

Defendants are not lawfully entitled to demand, collect

or retain the protested payments because Revised Civil

Statutes of Texas, Acts 1971, 62 Leg. P. 1206, Ch. 292, Art.

7, $1 (“House Bill 730”) exempts Plaintiffs from such

additional taxation in that Plaintiffs are all “institutions

affected” by the passage of Public Law 91-156 (12 U.S.C.

§ 548) by the Congress of the United States and thereby

entitled to the protection from additional taxation afforded

by House Bill 730.

XVII.

Alternatively and cumulatively, Defendants are not law-

fully entitled to demand, collect or retain the protested

payments because Franchise Tax Ruling No. 80-0.18 is

based on the erroneous assumption that the amendment of

section 5219, Revised Statutes (12 U.S.C. § 548) by Public

91-156 permits taxation by state and local authorities of

organizations other than national banks.

PY sesetabunttncichiied an tran

G-8

XVIII.

By virtue of such unlawful collection of franchise

tax, Defendants and the State of Texas became and are

now indebted to Plaintiffs in the following amounts plus

interest:

Plaintiff Additional Tax

National Bancshares Corporation of

| ARR 8 ree kee | _ $ 87,534.16

FrostBank Corporation See 92,781.75

Southwest Bancshares, Inc. | 253,448.75

Texas American Bancshares Ine. — 75,662.75

First City Bancorporation of Texas, Ine. 967,881.34

First United Bancorporation, Inc. 140,709.00

Southern National Corporation | 11,280.66

Federated Capital Corporation . 481,236.00

$2,110,534.41

Wuenerore, Plaintiffs pray that the Defendants be cited

to appear and answer herein, and that upon final trial and

hearing hereof, Plaintiffs receive judgment for the amounts

set forth in Paragraph XVIII hereof plus interest, for cost,

that Franchise Tax Ruling No. 80-0.18 be declared null and

void, and for such other further relief, general and special,

at law and equity, to which Plaintiffs may show themselves

justly entitled.

Respectfully submitted,

pe ee Rat Anse ennaen

C. W. WELLEN Marvin K. Coir

THomas J. BrorBy CuHar.es T. NEwTon, JR.

R. Rrcnarp Coston Tuomas P. Marrnis, JR.

Of Counsel: Of Counsel:

FutsricHt & JAworSKI Vinson, Evkrnys, SEARLS,

800 Bank of the Southwest Conna._y & SMITH

Building 2100 First City National

Houston, Texas 77002 Bank Building

Houston, Texas 77002

Attorneys for Plaintiffs

G-9

CERTIFICATE OF SERVICE

This is to certify that on this 5th day of September,

1975, a true and correct copy of Plaintiffs’ First Amended

Petition was served on The Honorable John L. Hill, Jr.,

Attorney General of Texas, and Rick Harrison, Assistant

Attorney General, P. O. Box 12548, Capitol Station, Austin,

Texas 78711, Attorneys for Defendants, by forwarding a

copy of said Petition to them by certified mail, return

receipt requested.

R. Ricuarp Coston

H-1

APPENDIX H

In THE

Bistrict Court

Or Travis County, TExas

53rp J upIcIAL District

No. 223,714

NaTIONAL BANCSHARES CoRPORATION OF TEXAS; F'ROSTBANK

CorporaTion ; SourHwest BancsHares, Inc.; Texas AMER-

1cAN BancsHareEs, Inc.; First City BANCORPORATION OF

Texas, Inc.; First Unrrep BancorporatTion, Inc. ; SouTHERN

NatTionaL CorporaTION; FEDERATED CapiTaL CORPORATION ;

and Fort Sam Houston BanxsuHakeEs, ING.,

Plaintiffs,

v.

Bos Buttock, CoMpTROLLER OF PuBLIC ACCOUNTS OF THE

State oF Texas; Jesse James, STaTE TREASURER OF THE

State or Texas; and Joun L. Hux, Jr., AtTroRNEY GENERAL

OF THE StaTE OF Texas,

Defendants.

PLAINTIFFS’ MOTION FOR A NEW TRIAL

TO THE HONORABLE JUDGE OF SAID COURT:

NOW COME National Bancshares Corporation of Texas;

Frostbank Corporation; Southwest Bancshares, Inc.;

Texas Amerie Bancshares, Inc.; First City Bancorpora-

tion of Texas, Inc.; First United Bancorporation, Inc.;

Southern National Corporation; Federated Capital Corpo-

H-2

ration; and, by intervention, Fort Sam Houston Bank-

shares, Ine., Plaintiffs in the above entitled and numbered

cause [hereinafter “Plaintiffs”], and file this their Motion

for New Trial and request that this Court set aside its judg-

ment heretofore entered into the above cause on June 27,

1977, rendering judgment against Plaintiffs and to grant a

new trial in the cause for the following good and sufficient

grounds:

I.

The Trial Court erred in concluding that the passage of

Publie Law 91-156 (83 Stat. 434) by the United States Con-

gress permits the imposition of additional Texas franchise

taxes on Plaintiffs by the Comptroller of Public Accounts

through adoption of an administrative ruling.

5

The Trial Court erred in concluding that Plaintiffs are

not “institutions affected” by the passage of Public Law 91-

156 (83 Stat. 434) who are entitled to the relief provided

by Acts 1971, 62nd Leg. of Texas, p. 1206, ch. 292, Art. 7,

$1, codified as a footnote in Art. 20.02, Tex. Tax.-Gen.

(“House Bill 730”).

ITT.

The Trial Court erred in concluding that Plaintiffs are

not public or financial institutions, or part of the banking

system, which are entitled to the protection of House Bill

730 even under a narrow construction of that statute.

IV.

The Trial Court erred in concluding that the Comptroller

of Public Accounts’ Ruling 80-0.18 did not impose an “addi-

H.3

tional tax” on Plaintiffs within the meaning of House Bill

730.

V.

The Trial Court erred in construing House Bill 730 other

than in accordance with the plain meaning of the words

contained in such statute.

Vi.

The Trial Court erred because:

A. There is no probative evidence to support its

ruling.

B. In the alternative, there is insufficient evidence

to support its ruling.

C. In the alternative, the ruling is so contrary to

the great weight and the preponderance of the evi-

dence as to be clearly wrong.

WHereErorE, Premises Consiperep, Plaintiffs pray that,

upon hearing, this Court sustain Plaintiffs’ Motion for New

Trial in all things and that this Court grant a new trial

and hearing upon the matters before this Court. Plaintiffs

respectfully reserve the right to amend this Motion for

New Trial pursuant to the Texas Rules of Civil Procedure.

Respectfully submitted,

/s/ .

Marvin K. Co.ure

Harry M, Reasoner

Tomas P. Marints, Jr.

Aww Lents

H-4

Of Counsel:

Vinson & ELKINS

2100 First City National

Bank Building

Houston, Texas 77002

Telephone: (713) 651-2222

/8/

C. W. WELLEN

Tomas J. Brorsy

R. Ricwarp Coston

Of Counsel:

Fuuanicnut & JAworski

800 Bank of the Southwest

Building

Houston, Texas 77002

Telephone: (713) 651-5151

Attorneys for Plaintiffs

CERTIFICATE OF SERVICE

Copies of the foregoing Motion for New Trial were

served upon counsel for Defendants and counsel for Inter-

venor Reidy Internaitonal Inc. by placing copies in the

United States mail addressed to Mr. Rick Harrison, Special

Assistant Attorney General, Office of the Attorney General

of Texas, P. O. Box 12548, Capitol Station, Austin, Texas

78711 and W. Robert Brown, 510 Gulf Building, Houston,

Texas 77002, respectively.

/8/

Tomas P. Martinis, Jr.

at a

<ete e se ~ 6 eee ee

i a —

ee ~~

I-1

APPENDIX I

EXCERPT FROM PETITIONERS’

ANSWER TO APPLICATION FOR

WRIT OF ERROR IN THE

SUPREME COURT OF TEXAS

[7]

ARGUMENT

I. Public Law 91-156 Does Not Authorize the Promul-

gation of Ruling 80-0.18 (In Reply to Petitioners’

Specific Point 3)

The Trial Court found that Ruling 80-0.18 was promul-

gated as a direct result of the enactment of Public Law

91-156 and that the ruling was the first formal pronounce-

ment of the Comptroller’s policy with respect to the effect

of Public Law 91-156 on the Texas franchise tax treatment

of dividends and interest from national banks [Findings of

Fact Nos. 2 and 3, Supp. Tr. 2-3]. Based upon these find-

ings, the Court of Civil Appeals properly concluded that

the validity of Ruling 80-0.18 must rest upon whether

Public Law 91-156 provides sufficient legal basis for the

change in law promulgated by the ruling (Slip Opinion at

8). Addressing this question, the Court of Civil Appeals

held that since the purpose and intent of Public Law 91-156

was confined to taxation of national banks, it could not be

used as a basis for

[8]

changing the mode of Texas franchise taxation of bank

holding companies and other corporations receiving income

from national banks (Slip Opinion at 9-10).

The State complains of this holding, arguing in effect

that Public Law 91-156 directed a change in the “state

of incorporation” of national banks for purposes of the

franchise taxation of bank holding companies and other

1.2

corporations and that Ruling 80-0.18 merely applies the

established “location-of-payor” test in light of that federal

directive. The State characterizes the refusal of the Court

of Civil Appeals to approve this construction as violating

the Supremacy Clause of the United States Constitution

(Article VI, Section 2). Further, the State argues that

the Court of Civil Appeals’ holding results in the unequal

treatment of state and national banks in contravention of

Publie Law 91-156, article 342-908, Tex. Rev. Civ. Stat.

Ann., and Article VIII, Section 1 of the Texas Constitution.

None of these arguments withstand examination.®

The Supremacy Clause.

In order for a decision of a state court or act of a state

legislature to violate the Supremacy Clause of the United

States Constitution there must first be a federal mandate

pertaining to the same subject matter with which that act

or decision conflicts. That federal mandate is not present

here, with good reason.

For Congress to direct an official of the State of Texas to

impose a state tax would have usurped the power of tax-

ation reserved to the states by the federal Constitution.

5 At several _ in its application the State refers to the testi-

money of Thomas P. Marinis, Jr., one of Respondents’ counsel,

before the Legislature in 1973 implying, among other things, that

Respondents had conceded the automatic effect of Public Law

91-156 on the status of national bank dividends and interest. Mr.

Marinis was testifying in the context of the Comptroller’s asser-

tion of the effect of Public Law 91-156. For example, for months

the Comptroller had been stating that he intended to impose

such additional tax when Public Law 91-156 became effective

(S.F. at 6-10). Mr. Marinis specifically stated that the matter

might become the subject of litigation and predicted that Re-

spondents would prevail in such litigation (Joint Ex. 2, at 9). The

entire purpose of Mr. Marinis’ appearance before the Legislature

was to inform it of a problem pa attempt to persuade it to a

legislative solution to avoid the necessity of the protracted litiga-

tion that is now before the Court. That appearance would not

have been necessary had the Comptroller followed House Bill 730.

nabcinda Ae PAR “apenas

I-3

See U.S. Const. amend. X; Lane County v. Oregon, 74 U.S.

71 (1869). The rationale of the Lane County

[9]

ease is strikingly similar to that of this case. In Lane

County, the law of Oregon required its counties to collect

and pay taxes to the state in gold and silver coin. The

United States Congress passed a federal law which pro-

vided that United States notes shall also be “lawful money,

and legal tender in payment of debts, public and private,

within the United States.” 74 U.S. at 78. The County of

Lane attempted to pay its taxes in United States notes, con-

tending (as the Comptroller does here) that the passage of

such federal law had the automatic effect of changing the

internal! tax structure of the state by requiring it to accept

United States notes in lieu of gold or silver coin in pay-

ment of taxes. In holding that the passage of this federal

law could not, and was not intended to, affect the tax laws

of Oregon, the Supreme Court clearly set forth the law

reserving to a state the power of internal taxation:

The extent to which it shall be ex rcised, the subjects

upon which it shall be exercised, and the mode in which

it shall be exercised, are all equally within the discre-

tion of the legislatures to which the States commit the

exercise of the power. . .. There is nothing in the

Constitution which contemplates or authorizes any

direct abridgement of this power by national legisla-

tion.

74 U.S. at 77. The Lane County decision was recently cited

and approved in National League of Cities v. Usery, 426

U.S. 833, 844 (1976), in which the Supreme Court held that

Congress did not have the power to impose minimum wage

and maximum hour provisions on state employees. In

National League of Cities, the Supreme Court “recognized

that there are attributes of sovereignty attaching to every

*

1-4

state government which may not be impaired by Congress

. . . beeause the Constitution prohibits it from exercising

the authority in that manner.” 426 U.S. at 845. These

activities include “those performed by state and local gov-

ernments in discharging their dual functions of adminis-

tering the public law and furnishing public services.” 426

U.S. at 851. Taxation is clearly one of these functions.

Lane County v. Oregon, supra at 76.

In view of these authorities the United States Congress

cannot constitutionally infringe in any way upon Texas’

power of taxation by altering the Texas franchise tax

treatment of bank holding companies and other corpora-

tions receiving income from national banks.

However, even assuming for the sake of argument that

Congress had the power to preempt the Texas “location-

of-payor” rule with

[10]

respect to national bank dividends and interest, it will not

be presumed to have done so “unless that was the clear and

manifest purpose of Congress. Rice v. Santa Fe Elevator

Corp., 331 U.S. 218, 230 (1947). That “clear and manifest

purpose” is lacking here, because it clearly was not the

intention of Congress in passing Public Law 91-156 to

require the State of Texas to impose additional franchise

taxes on bank holding companies or other corporations.

Public Law 91-156 does not direct the State of Texas to do

anything regarding taxation of bank holding companies.

Rather, as the Court of Civil Appeals specifically noted, the

sole purpose and intent of Public Law 91-156 was to free

states from any limitations on the taxation of national

banks and permit the states “to ievy modern types of taxes

on national banks” while at the same time preserving their

equality with state banks. See 2 U.S. Cope Cone. & Ap.

1-5

News 1599 (1969). The federal statute is permissive only;

Congress specifically stated that it was “firmly committing

to the several States’ responsibility for their own tax poli-

cies.” CoNFERENCE Report No. 91-728, STaTEMENT OF THE

MANAGERS ON THE Part or THE Houvss, 2 U.S. Cope Cone. &

Ap. News 1602 (1969). To insure this result, Congress

enacted a savings provision which prohibited the state tax-

ing authorities from imposing any additional taxes (except

certain enumerated taxes not relevant here) without affir-

mative action by the state legislatures until January 1,

1973. Id. at 1602-03. See also Revort oF THE SENATE BANK-

ING AND CurRENCY ComMITTEE, 2 U.S. Cope Conca. & Ap.

News 1597 (1969).

There is simply no support for the State’s position that

Congress intended to effect different policies in section

1(a) and section 2(a) of Public Law 91-156. Section 1(a)

was the temporary amendment effective on enactment in

1969, while section 2(a) was the permanent amendment

effective January 1, 1973. The Congressional policy

involved in the two approaches is the same. Further, the

State’s claim that section 2(a) is “clearly applying to any

tax, not just taxes imposed on banks” (State’s Application

at 19) is blatantly inconsistent with its assertion that “Pub-

lic Law 91-156 affected only banks, and Respondents are

not banks” (State’s Assignment of Error No. 1).

J-1

APPENDIX J

EXCERPT FROM PETITIONERS’ POST-

SUBMISSION BRIEF IN THE

SUPREME COURT OF TEXAS

[6]

II. P.L. 91-156 Does Not and Could Not Constitution-

ally Require the Imposition of These Additional

Taxes.

The State argues that under P.L. 91-156 and the federal

Supremacy Clause the State of Texas is required to change

the application of its location-of-payor rule with regard

to Respondents. As we discussed in Part II of this brief,

the short answer is that if P.L. 91-156 was intended to

effectuate such a change, then H.B. 730 precludes it from

doing so.

Further, examination of P.L. 91-156 reveals that Con-

gress had no such intention and under the federal Consti-

tution could not have properly affirmatively mandated the

imposition of a tax by the State of Texas.

The legislative history of P.L. 91-156 makes clear that it

was Congress’ intention to leave the question of the law’s

effect on state tax policy to the states. Thus, the Senate

Committee Report stated:

The Committee is in full accord with the principle that

every state government should be allowed the greatest

possible degree of autonomy with regard to the formn-

lation of its tax structure.

Report OF THE SENATE BANKING AND CurRENCY CoMMITTEE,

2 U.S. Copr Conca. & Apmin. News at 1595 (1969).

In the context of this legislative history, the State’s

Supremacy Clause argument is entirely spurious. P.L.

91-156 does not direct the State of Texas to do anything

regarding taxation of bank holding companies under the

location-of-payor rule. P.L. 91-156 simply does not speak

to the question of how shareholders of banks or recipients

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of interest from banks will be treated under the location-

of-payor rule. There is no conflict between taxing national

and state banks identically pursuant to P.L. 91-156 and

taxing shareholders of national and state banks differently

as settled state law requires.®

[7]

This should settle the issue. If, however, P.L. 91-156 is

deemed to speak to the taxation of shareholders of banks,

then H.B. 730 precludes its application. The State’s

lawyers cannot logically deny the Legislature’s power to

preclude such effect since they concede that H.B. 730 pre-

cludes the application of P.L. 91-156 to banks. If the fed-

eral Supremacy Clause does not prevent H.B. 730 from

precluding the application of P.L. 91-156 to banks, it cer-

tainly cannot prevent H.B. 730 from precluding the law’s

application to Respondents.

In fact, the State has never seriously questioned H.B.

730’s efficacy in general or the Legislature’s ability to coun-

termand the Public Law’s effect. It cannot do so, because

Congress simply does not have the power to impose Texas

taxes. While Congress can tell a state the limits of its

ability to tax, it cannot affirmatively tell a state to impose

a tax. U.S. Constr. amend. X; Lane County v. Oregon, 74

U.S. 71 (1869). See also National League of Cities v.

Usery, 426 U.S. 833, 844 (1976).

* * *

8 In response to Justice Pope’s inquiry, under the Texas location-of-

payor rule as it has existed for over half a century, a national bank

is not “organized under the laws of Texas.” The Texas Banking

Code expressly recognizes that a national bank is a creature of

federal, not state, law. It defines a national bank as “[a]ny bank

corporation organized under the provisions of Title 12, United

States Code, § 21 (U.S. Rev. Statutes, § 5133, and the amendments

thereto)”. Tex. Rev. Crv. Stat. ANN. art. 342-102 (1977). To be

organized under the laws of the State of Texas a corporation must

obtain a charter from the Secretary of State. Clearly the national

banks in which Respondents own shares have not been reincor-

porated in Texas. No federal statute can change Texas law to

make them Texas corporations for purposes of the Texas location-

of-payor rule.

K-1 | K-2

| “(3) Taxes (including documentary stamp taxes)

a on the execution, delivery, or recordation of docu-

PUBLIC LAW 91-156 ments within such jurisdiction.

(12 U.S.C. § 548) “(4) Taxes on tangible personal property (not

AN ACT including cash or currency) located within such

: ; j jurisdiction.

To clarify the liability of national banks for certain taxes. |

“(5) License, registration, transfer, excise, or

Be it enacted by the Senate and House of Representatives other fees or taxes imposed on the ownership, use,

detail or transfer of tangible personal property located

of the United States of America in Congress assembled. within such jurisdiction.

dment of section 5219, Revised

ya rile TE | “(c) No sales tax or use tax complementary thereto

shall be imposed pursuant to this paragraph 5 upon

(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) ; purchases, sales, and use within the taxing jurisdiction

“5. (a) In addition to the other methods of taxation

authorized by the foregoing provisions of this section

and subject to the limitations and restrictions speci-

fically set forth in such provisions, a State or political

subdivision thereof may impose any tax which is im-

posed generally on a nondiscriminatory basis through-

out the jurisdiction of such State or political subdivi-

sion (other than a tax on intangible personal prop-

erty) on a national bank having its principal office

within such State in the same manner and to the same

extent as such tax is imposed on a bank organized and

existing under the laws of such State.

“(b) Except as otherwise herein provided, the legis-

lature of each State may impose, and may authorize

any political subdivision thereof to impose, the follow-

ing taxes on a national bank not having its principal

office located within the jurisdiction of such State, if

such taxes are imposed generally throughout such jur-

isdiction on a nondiscriminatory basis:

“(1) Sales taxes and use taxes complementary

thereto upon purchases, sales, and use within such

jurisdiction.

“(2) Taxes on real property or on the occupancy

of real property located within such jurisdiction.

ee ae

—

a. ssh Sei. a ect aii sea RN

is amended by adding at the end thereof the following: . of tangible personal property which is the subject

matter of a written contract of purchase entered into

by a national bank prior to September 1, 1969.

“(d) As used in this paragraph 5, the term ‘State’

means any of the several States of the United States,

the District of Columbia, the Commonwealth of Puerto

Rico, the Virgin Islands, and Guam.”

|

(b) The amendment made by subsection (a) of this sec-

tion shall be effective from the date of enactment of this

Act until the effective date of the amendment made by

section 2(a) of this Act.

§2. Permanent amendment of section 5219, Revised

Statutes

(a) Section 5219 of the Revised Statutes (12 U.S.C. 548)

is amended to read:

“SEC. 5219. For the purposes of any tax law enacted

under authority of the United States or any State, a

national bank shall be treated as a bank organized and

existing under the laws of the State or other jurisdic-

tion within which its principal office is located.”

(b) The amendment made by subsection (a) becomes

effective on January 1, 1972.

K-3

§ 3. Saving provision

(a) Except as provided in subsection (b) of this section,

prior to January 1, 1972, no tax may be imposed on any

class of banks by or under authority of any State legislation

in effect prior to the enactment of this Act unless

(1) the tax was imposed on that class of banks prior

to the enactment of this Act, or

(2) the imposition of the tax is authorized by affirma-

tive action of the State legislature after the enactment

of this Act.

(b) The prohibition of subsection (a) of this section does

not apply to

(1) any sales tax or use tax complementary thereto.

(2) any tax (including a documentary stamp tax) on

the execution, delivery, or recordation of documents, or

(3) any tax on tangible personal property (not

including cash or currency), or for any license, regis-

tration, transfer, excise or other fee or tax imposed on

the ownership, use or transfer of tangible personal

property,

imposed by a State which does not impose a tax, or an

increased rate of tax, in lieu thereof.

§ 4. Study by Board of Governors of the Federal Reserve

System

(a) The Board of Governors of the Federal Reserve Sys-

tem (hereinafter referred to as the “Board”) shall make a

study to determine the probable impact on the banking sys-

tems and other economic effects of the changes in existing

law to be made by section 2 of this Act governing income

taxes, intangible property taxes, so-called doing business

ini Nit te

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K-4

taxes, and any other similar taxes which are or may be

imposed on banks. In conducting the study the Board shall

consult with the Secretary of the Treasury and appropriate

State banking and taxing authorities.

(b) The Board shall make a report of the results of its

study to the Congress not later than December 31, 1970.

The report shall include the Board’s recommendations as

to what additional Federal legislation, if any, may be

needed to reconcile the promotion of the economic efficiency

of the banking systems of the Nation with the achievement

of effectiveness and local autonomy in meeting the fiscal

needs of the States and their political subdivisions.

[The effective date of section 2 of P.L. 91-156 was sub-

sequently extended to January 1, 1973 by Joint Resolution

of Congress on December 22, 1971. The reason for such

extension was that the Board of Governors of the Federal

Reserve System had not completed the study required in

section 4.]

L-1

APPENDIX L

COMPTROLLER’S RULING NO. 80-0.18

DIVIDENDS AND INTEREST

References:

Section 5219 of the Revised Statutes (12 U.S.C. 548);

Article 12.02(1)(b), Chapter 12, Title 122A, Revised Civil

Statutes of Texas; Acts 1971, 62nd Leg., p. 1206, Ch. 292,

Art. 7, #1; Sileo v. Calvert, 482 S.W.2d 56; Humble Oil &

Refining Co. v. Calvert, 414 S.W.2d 172.

1. General.

The “location of payor” test is used in determining whether

dividends and interest are attributable as receipts from

business done in Texas under Article 12.02(1)(b). In

accordance therewith, dividends and interest paid by a

domestic corporation are includable in gross receipts from

business done in Texas, whereas dividends and interest

paid by a foreign corporation do not constitute Texas

gross receipts under the statute.

2. State Banks.

Dividends and interest paid by a bank organized under

the Banking Code of Texas are includable in gross

receipts from business done in Texas pursuant to Article

12.02(1)(b).

3. National Banks.

Prior to January 1, 1973, national banks were considered

to be foreign corporations for franchise tax purposes and,

consequently, dividends and interest paid by a national

bank located in Texas were not attributable as Texas gross

receipts. Public Law 91-156 amended Section 5219 of the

}

a ae

set. se

L,-2

Revised Statutes to provide, effective January 1, 1973, that

for the purposes of any tax law enacted under the author-

ity of any state a national bank shall be treated as a bank

organized and existing under the laws of the state within

which its principal office is located. Accordingly, divi-

dends and interest paid on and after January 1, 1973 by

a national bank whose principal office is located within

Texas are includable in gross receipts from business done

in Texas pursuant to Article 12.02(1)(b).