# Petition — National Bancshares Corp. v. Bullock

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1980
- **Citation:** 444 U.S. 1016

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_1130%3A1. Public record. Not legal advice.