Reply Brief — Director of Revenue of Mo. v. COBANK ACB

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No. 99-1792 BELLE

ROW 2 - 20

In the Cue .tn |

SUPREME COURT OF THE UNITEDSTATES ~~

DIRECTOR OF REVENUE OF MISSOURI,

Petitioner,

Vv.

CoBANK, ACB, as Successor to the

National Bank for Cooperatives,

Respondent.

On Writ of Certiorari

to the Supreme Court of Missouri

REPLY BRIEF FOR PETITIONER

JEREMIAH W. (JAY) NIXON

Attorney General of Missouri

JAMES R. LAYTON*

State Solicitor

GAIL VASTERLING

DAVID LIEBER

P.O. Box 899

Jefferson City, MO 65102

(573) 751-3321

*Counsel of Record

TABLE OF CONTENTS

Page

TRE Ge RCRD occ vccvcccececcsescsceuc il

REPLY BRIEF FOR PETITIONER .................. l

l. The line between entities with

implied immunity from state

taxation and those without is

defined by the criteria in United

States v. New MeXICO. 2.0.6. ccccccscces 2

2. Congress, by merely authorizing

temporary, indirect federal

financial assistance, did not

confer broad tax immunity. ............ 10

CPUS ence unde véeewesséreesucetonsnanes 14

il

TABLE OF AUTHORITIES

CASES Page

Arkansas v. Farm Cred. Servs., 520 U.S. 821 (1997)... 5, 10

California State Bd. of Equalization v. Sierra Summit,

Inc., 490 U.S. 844 (1989) .. 0. eee. 7

Davis v. Michigan Dep't of Treasury, 489 U.S. 803 .

BRS SR ae eee _ Ener aa

Federal Land Bank of St. Paul v. Bismarck Lumber Co..

EAA ae 5

Federal Land Bank v. Kiowa County, 368 U.S. 146

(1961) ..... Se ee re 5, 6

First Agricultural Nat'l Bank of Berkshire Cty. v. State

Tax Comm'n, 392 U.S. 339 (1968) ............. 13

James v. Dravo Contracting, 302 U.S. 134 (1937) ....... 7

Jefferson County v. Acker, 527 U.S. 423 (1999) ........ 6, 8

Massachusetts v. United States, 435 U.S. 444 (1978) ..... l

~S

Memphis Bank & Trust Co. v. Garner, 459 U.S. 392

DEE Sih Wee BAECS UASRE EE KKAS COCR Ore Cece. 8,9

M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316

PT cheat un Fé eaen en 5, 8, 10

Rohr Aircraft Corp. v. County of San Diego, 362 U.S.

De eee keen den deaeestecesesscece 10

gerne

ill

South Carolina v. Baker, 485 U.S. 505 (1988) ........ 6,9

United States v. County of Fresno, 429 U.S. 452 (1977)... 10

United States v. New Mexico, 455 U.S. 720 (1982) .. 1, 6-9

STATUTES

eee ceeswensccest 3,12

er anne cenereneebecees 9

36 U.S.C. § 130502 (Supp. IV 1998)... ......6. 600005. 2

36 U.S.C. § 152502 (3) (Supp. IV 1998) ....... +... +++ 2

36 U.S.C. § 152702(a) (Supp. IV 1998) .............6. 2

36 U.S.C. § 20101(a) (Supp. IV 1998) ............0065 2

36 U.S.C. § 300101 (Supp. IV 1998) ...........6..00 0s 2

36 U.S.C. § 70902 (Supp. IV 1998) .....-.. 00-222 eee es 2

dS ceiceeaseenstée

as sais du peneedees 4

i on. occ nodeddeccbeeuseens s

GIN oo cccccvctceccceccocccens 8

1V

F ae Eo b.v nénousessdesdcdsecakenee

Fee OF en sudtssddecestséacwonnsnae 4

Act of July 1, 1862, § 1, 12 Stat. 489 .................. 2

OTHER AUTHORITIES

H.R. Rep. No. 295, 100" Cong., 1* Sess. (1987),

reprinted in 1987 U.S.C.C.A.N. 2723 .......... 1]

H.R. Rep. No. 425, 99" Cong., 1" Sess. (1985),

reprinted in 1985 U.S.C.C.A.N. 2587 ....... 11-13

No. 99-1792

In the

SUPREME COURT OF THE UNITED STATES

DIRECTOR OF REVENUE OF MISSOURI,

Petitioner,

v.

CoBANK, ACB, as Successor to the

National Bank for Cooperatives,

Respondent.

On Writ of Certiorari

to the Supreme Court of Missouri

REPLY BRIEF FOR PETITIONER

“{Tjhe political process is ‘uniquely adapted to

accommodating the competing demands’” of federal programs

and state taxation. United States v. New Mexico, 455 U.S. 720,

737 (1982) (quoting Massachusetts v. United States, 435 U.S.

444, 456 (1978) (plurality opinion)). Contrary to the arguments

set forth by respondent CoBank, that process did not, in 1985,

résult in the grant to Banks for Cooperatives (BFCs) of an

immunity from state and local taxes beyond any they had ever

2

enjoyed — indeed, so broad as to be nearly unique among

federally-chartered financial institutions.

1. The line between entities with implied

immunity from state taxation and those

without is defined by the criteria in United

States v. New Mexico.

As the scope of federal activity has widened, both the

numbers and kinds of entities that Congress has created to carry

out its objectives have multiplied. Federally chartered

organizations range from important national institutions such as

the American National Red Cross (see 36 U.S.C. § 300101

(Supp. IV 1998)), to organizations with somewhat less national

prominence, such as the Agricultural Hall of Fame (36 U.S.C.

§ 20101(a) (Supp. IV 1998)) and the National Ski Patrol

System (36 U.S.C. § 152702(a) (Supp. IV 1998)). Congress

has even authorized the creation of entirely private entities,

such as ComSat (47 U.S.C. § 731), and the Union Pacific

Railroad (Act of July 1, 1862, § 1, 12 Stat. 489). It is

undisputed (indeed, nearly tautological) that entities created or

otherwise endorsed by Congress perform governmental

functions, that is, activities that Congress has determined to

promote the national interest.' This Court has never held, as

' See, e.g., 36 U.S.C. § 152502 (3) (Supp. IV 1998)

(National Safety Council, a federally chartered corporation, is

“to arouse and maintain the interest of the People of the United

States . . . in safety and accident prevention”); 36 U.S.C.

§ 70902 (Supp. IV 1998) (purposes of Future Farmers of

America, a federally chartered corporation, include “to develop

character, train for useful citizenship, and foster patriotism, and

thereby develop competent and aggressive rural and agricultural

leadership”); 36 U.S.C. § 130502 (Supp. IV 1998) (Little

League Baseball, Incorporated, a federally chartered

ae

3

CoBank urges, that all federally chartered entities are

automatically entitled to immunity, absent an express statutory

waiver, from all state and local taxes. Clearly there are some

entities that have automatic immunity by constitutional decree

(which Congress may waive). For others, lacking constitutional

immunity, Congress may provide immunity in whatever manner

it wishes. Thus the first question in this case is what sort of

entity CoBank is.

The line between entities whose immunity is implied or

presumed, and those whose immunity is not, matters here

because, as both the Director and CoBank make clear in their

briefs, whether and how the states can tax BFCs depends on the

meaning of what 12 U.S.C. § 2134 does not say. It does not

expressly say whether states could impose an income tax on the

BFCs. Nor, for that matter, does it expressly say whether states

could impose franchise, sales, personal property, real property,

or other taxes on BFCs. Did Congress thus ldave BFCs

immune from such taxes, an argument necessarily based on a

claim that they were on the “implied immunity” side of the

line? Or did it leave them subject to state and local taxation, as

they would be on the “no immunity provided” side of the line?

CoBank and the Director disagree as to the line between the two

groups.

CoBank defines the line in two ways. First, it defines it

according to labels, i.e., it claims that merely being labeled a

“federal instrumentality,” or even just being a “federally

chartered fiscal institution,” is enough to place an entity in the

corporation, is “using the disciplines of the native American

game of baseball, to teach spirit and competitive will to win,

physical fitness through individual sacrifice, the values of team

play, and wholesome well being through healthy social

association.”’).

4

implied immunity group. Respondent's Brief (Resp. Br.) at

22-24. But in labeling the entities it authorizes, Congress has

not shown the kind of consistency that would be required to

permit labels to define the scope of implied immunity. That is

demonstrated dramatically by the Rural Telephone Bank,

invoked by CoBank. The Rural Telephone Bank is statutorily

designated both as “an instrumentality of the United States”

(7 U.S.C. § 941(c)), and as “an agency of the United States”

(7 U.S.C. § 943(a)). The Bank is then made subject to the

Government Corporation Control Act in the same manner and

to the same extent as if it were included in the definition of

“wholly owned Government corporation.” 7 U.S.C. § 943(c).

The kind of confusion created by use of overlapping and

inconsistently defined terms like “agency,” “instrumentality,”

and “government corporation” explains why CoBank is unable

to cite authonty for — or to even explain the logic behind — a

claim that the line defining agencies with Supremacy Clause

implied immunity hangs on Congress’s choice of label. But it

does explain why Congress has so consistently defined the

precise scope of immunity given to federally chartered but

privately owned entities. See Petitioner’s Brief (Pet. Br.) at 23-

26.

Second, CoBank suggests that the line can be drawn

according to whether the entity “performs an important

governmental function.” Resp. Br. at 24-25. But besides being

without precedential support, such a line is entirely unworkable

in the absence of some definition of “important governmental

function,” which CoBank fails to provide. Any

Congressionally chartered entity would claim that it “performs

an important governmental function” and thus has implied tax

immunity. And who is to prove otherwise? For both

“important” and “governmental” are fluid concepts. And as

demonstrated by their commercial competitors, the BFCs’

“important governmental functions” may be performed even by

5

entirely private organizations. Federal contractors and federal

employees, too, perform important governmental functions, yet

they are not immunized from taxation by the Supremacy

Clause. CoBank’s proposed formulation is nothing more than

a return to the expansive intergovernmental tax immunity

doctrine, which held that any state tax that had an impact on

_ federal operations was unconstitutional under M'Culloch v.

Maryland, 17 U.S. (4 Wheat.) 316 (1819). That is a doctrine

that this Court has, at length, rejected. See Pet. Br. at 14-16.

By rejecting “important governmental functions” as the

test for defining the scope of implied immunity, the Director

does not suggest that whether a Congressionally-chartered

entity performs “governmental functions” is unimportant. The

fact that an entity will perform governmental functions is what

empowers Congress to immunize it from taxation. That was

suggested by this Court in Federal Land Bank of St. Paul v.

Bismarck Lumber Co., 314 U.S. 95 (1941), which CoBank

misreads (Resp. Br. at 24-5) to hold that a Farm Credit System

institution is entitled to immunity by the force of the

Supremacy Clause alone. In Bismarck Lumber, this Court held

that Congress has the power to provide such immunity pursuant

to the Necessary and Proper Clause. /d. at 102-03 (“Congress

has authority to prescribe tax immunity for activities connected

with, or in furtherance of, the lending functions of federal credit

agencies”). See also Arkansas v. Farm Cred. Servs., 520 U.S.

821, 829 (1997) (tax immunity is “a permitted consequence” of

federal instrumentality designation). That leaves open the

question of whether and how Congress exercised that power.

Here, of course, whether Congress could grant immunity from

income taxes to the BFCs is not in dispute; Congress did so,

6

without protest from Missouri, until 1985. The question is

whether Congress continued to do so after 1985.’

To answer that question, the Court should once again

use the criteria articulated in United States v. New Mexico: that

implied immunity be given only to “the United States itself, or

on an agency or instrumentality so closely connected to the

Government that the two cannot realistically be viewed as

separate entities, at least insofar as the activity being taxed is

concerned.” 455 U.S. at 735. CoBank attacks the use of that

test by asserting that it applies only to “federal contractors, not

federal instrumentalities.” Resp. Br. at 30. Though it was

certainly adopted in the context of contractors, it is not limited

to that context.

The question posed in New Mexico, as in other

contractor tax cases, was when could a privately owned,

for-profit enterprise, performing services for the Government,

claim the United States’ constitutional tax immunity? This

question is subsidiary to the larger question of when a private

party may claim a tax exemption as to benefits received in the

performance of activities which also serve the purposes of the

United States. It is closely related to issues like the taxability

of federal employees’ salaries and the taxability of federal

creditors. Thus, rather than being limited to contractor tax

cases, the New Mexico test has been cited in a wide variety of

non-contractor cases. E.g., Jefferson County v. Acker, 527 U.S.

423, 436-37 (1999) (case involving the taxation of Federal

Judges’ salaries; citing New Mexico for the proposition that this

2 Federal Land Bank v. Kiowa County, 368 U.S. 146

(1961), upon which Cobank also relies, is of little help in

answering that question. Because the Court there was

construing express statutory language, it did not consider the

availability of implied immunity. /d. at 156.

7

Court has reaffirmed “‘a narrow approach to governmental tax

immunity,” and “contract[ed] the once expansive

intergovernmental tax immunity doctrine”); South Carolina v.

Baker, 485 U.S. 505, 516-527 (1988) (discussing New Mexico

among developments in the doctrine of intergovernmental tax

immunity that required overruling previous precedent granting

such immunity to state bond interest paid to private parties);

Rockford Life Ins. Co. v. Illinois Dept. of Revenue, 482 U.S.

182, 191 n.11 (1987) (case involving state taxability of

federally guaranteed bonds; citing New Mexico for the

proposition that taxability would not necessarily be improper

even if such taxability was shown to affect the “federal fisc”’).

One such non-contractor case was California State Bd.

of Equalization v. Sierra Summit, Inc., where this Court

considered the taxability of a bankruptcy liquidation sale. 490

U.S. 844, 845-46 (1989). The Court rejected the argument that

a sales tax on the bankruptcy trustee impermissibly interfered

with the federal operations of the bankruptcy court, recognizing

that the argument rested on a view of intergovernmental tax

immunity that the Court had rejected in cases beginning with

James v. Dravo Contracting, 302 U.S. 134 (1937). Rather than

stretch immunity to the points urged there by Sierra Summit

and here by CoBank, the Court held, again, that “absolute tax

immunity is appropriate only when the tax is on the United

States itself, ‘or on an agency or instrumentality so closely

connected to the Government that the two cannot realistically

be viewed as separate entities.”” Jd. at 848-49 (quoting New

Mexico, 455 U.S. at 735). Applying the New Mexico test, the

Court upheld the sales tax because it was nondiscriminatory,

and because the bankruptcy trustee was not so closely

connected to the Government that the two could not realistically

be viewed as separate entities. /d. at 849-50.

8

Whether CoBank, a privately owned corporation that

operates for the profit of its private shareholders, falls within

the absolute constitutional immunity from taxation now

reserved to the United States itself, is well within the realm of

questions the New Mexico test was designed to answer.’ By

contrast, that test does not answer other questions regarding

intergovernmental tax immunity. In particular, this Court

expressly excluded discriminatory taxes from the approach it

took in New Mexico. Thus “state taxes on contractors are

constitutionally invalid if they discriminate against the Federal

Government, or substantially interfere with its activities,”

regardless of whether the entity being taxed is entitled to

implied immunity. 455 U.S. at 735 n.11. Similarly, the fact

that federal employees are not protected from

nondiscriminatory state taxes does not deprive them of the

protection from discriminatory taxes that M’'Culloch

established. See e.g, Jefferson County v. Acker, 527 U.S. at

436-37; Davis v. Michigan Dep't of Treasury, 489 U.S. 803,

811 (1989).

> Because it rejects the use of the New Mexico test,

CoBank does not explain how it would apply to the Rural

Telephone Bank, CoBank’s “apt illustration” of a federal

instrumentality with implied immunity. Resp. Br. at 28. The

Bank is “an agency of the United States,” subject to the

supervision and direction of the Secretary of Agriculture, able

to use the facilities and services of employees of the Secretary

without cost, and subject to the Federal Tort Claims Act and to

supervision of certain litigation by the Attorney General.

7 U.S.C. § 943 (a), (b), and (e). Because of ties to the

government that the BFCs do not have, the Bank could

plausibly be said to be “so closely connected to the Government

that the two cannot realistically be viewed as separate entities”

(New Mexico, 455 U.S. at 735).

9

By failing to distinguish between the issue here and that

raised by claims of discriminatory taxes, CoBank not only reads

New Mexico and its successors too narrowly, but also

misinterprets this Court’s holding in Memphis Bank & Trust

Co. v. Garner, 459 U.S. 392 (1983). Noting that the Court in

Memphis Bank called 31 U.S.C. § 742 a codification of the

constitutional rule, CoBank presents the “relevant part” of that

statute, which provides that federal obligations are exempt from

State tax unless otherwise provided for by law. Resp. Br. at 25.

CoBank neglects to mention that § 742 statutorily defines the

scope of immunity; it does not invoke or rely on implied

immunity alone. And CoBank fails to acknowledge that the

“constitutional rule” the Court applied was that “[wJhere, as

here, the economic but not the legal incidence of the tax falls on

the Federal Government, such a tax generally does not violate

the constitutional immunity if it does not discriminate against

holders of federal property or those with whom the Federal

Government deals.” 459 U.S. at 397.

The Court in Memphis Bank made clear that the scope

of the protection from discriminatory taxes is wider than the

protection from nondiscriminatory taxes: “Although the scope

of the Federal Government’s constitutional tax immunity has

been interpreted more narrowly in recent years, there has been

no departure from the principle that state taxes are

constitutionally invalid if they discriminate against the

Government. See, e.g., United States v. New Mexico.”

459 U.S. at 397 n.7. Thus, the reason the Tennessee tax was

invalidated was not solely, as CoBank implies, because it was

a tax on the holders of Federal Credit Bank bonds, but rather

because it violated the ban on discriminatory taxes that is “at

the heart of modern intergovernmental tax immunity case law.”

South Carolina v. Baker, 485 U.S. at 525-26. Because CoBank

never claims that Missouri’s corporate income tax is

10

discriminatory, it cannot rely on that ban, nor on this Court’s

decision not to use the New Mexico test to define its reach.

2. Congress, by merely authorizing temporary,

indirect federal financial assistance, did not

confer broad tax immunity.

The BFCs, because they are designated governmental

instrumentalities that perform functions that benefit the

government, are entitled to “enjoy the benefits and immunities

conferred by explicit statutes.” Arkansas v. Farm Cred. Servs.,

520 U.S. at 829. But in claiming that BFCs are immune from

state income taxes, CoBank cannot point to any “explicit

statute.” Thus it picks and chooses from the legislative history

of the 1985 Amendments to justify its theory that Congress

restored — or even expanded* — the BFCs’ broad tax immunity

without saying a word.

4

The Director pointed out that CoBank’s rationale

would preclude the imposition even of property taxes. In its-

brief, CoBank denies that premise, arguing that implied

immunity never applied to property taxes, and citing

M'Culloch. Resp. Br. at 36. That argument ignores post-

M 'Culloch holdings. E.g. Rohr Aircraft Corp. v. County of San

Diego, 362 U.S. 628, 634 (1960) (“[T]he general rule is ‘that

lands owned by the United States of America or its

instrumentalities are immune from state and local taxation.’”):

United States v. County of Fresno, 429 U.S. 452 (1977). It fails

to articulate a rationale for a line between real property and all

other taxes. And it fails to explain why Congress has so

consistently addressed the property tax question when it more

specifically defines the nature of a financial institution’s

immunity. Pet. Br. at 25-26.

1]

CoBank begins with the impetus for the 1985

Amendments: a crisis in American agriculture. But then it

ignores the response to that crisis: the restructuring of the Farm

Credit System to make it more independent and self-sufficient.

CoBank stresses the “new federal assistance” authorized by the

1985 Amendments, but disregards that this assistance would be

available only as a last resort, after the Farm Credit

Administration certified that it had made the maximum

practicable efforts on its own to deal with its financial stress.

Even then, the Secretary of Treasury would have discretion as

to whether the federal government would backstop the System's

finances. And the assistance, if provided, was to go not to the

BFCs, but to a separate temporary entity, the Farm Credit

System Capital Corporation.°

5 Indeed, “{t]he Committee rejected the idea of a

direct, mandated infusion of Federal funds into the Farm Credit

System. This idea was rejected for a variety of reasons

including the testimony from the U.S. Department of the

Treasury that if the System uses its own resources effectively,

outside assistance is not now needed and not likely to be needed

through 1987, even though by 1988 the System’s capital will be

substantially reduced.” H.R. Rep. No. 425, 99" Cong., 1" Sess.

14 (1985), reprinted in 1985 U.S.C.C.A.N. 2587, 2600-01.

Both the Undersecretary of Agriculture and the Assistant

Secretary of the Treasury testified before the Committee; both

emphasized that the Farm Credit System was not in need of

federal financial assistance. /d. at 35, 1985 U.S.C.C.A.N. at

2621. The $ 4 billion of federal funds to which CoBank

repeatedly refers were part of the Agricultural Credit Act of

1987, appropriated two years after the 1985 Amendments and

in conjunction with another restructuring of the Farm Credit

System. See H.R. Rep. No. 295, 100" Cong., 1* Sess.,

reprinted in 1987 U.S.C.C.A.N. 2723.

12

CoBank is unable, of course, to point to legislative

history tying this change to the amendment of Section 2134.

CoBank argues that Congress’s silence on BFC taxation is not

surprising for two reasons. First, because Congress by

eliminating the states’ ability to tax the BFCs did not make an

important change in the law. States were not authorized to tax

BFCs during periods of federal investment prior to the 1985

Amendments, CoBank says, and the change in Section 2134

simply “conformed” the statute to “the fact of new federal

investment.” Resp. Br. at 36. But prior to the 1985

Amendments, a BFC was immune from state and local taxes

(except real property taxes) only while the Governor of the

Farm Credit Administration owned its stock. After the 1985

Amendments, according to CoBank, all BFCs are always

immune because of the mere possibility that the Secretary of the

Treasury may authorize, as a last resort, discretionary financial

assistance to the Farm Credit System through a temporary®

corporation separate and apart from BFCs. The differences

between the original capitalization and ownership of the BFCs

and the post-1985 status of the Farm Credit System are too

great to support CoBank’s argument.

CoBank also claims that, given the time constraints in

passing the 1985 Amendments, “it is not surprising that

Congress did not provide a specific explanation of the

amendment to Section 2134.” Resp. Br. at 37. But Congress

did provide an explanation, just not CoBank’s explanation.

CoBank itself invokes the legislative history that contains that

® — The 1985 Amendments included a section that

terminated, on December 31, 1990, the Capital Corporation’s

authority to take on new liabilities. The House Committee

believed that “five years should be adequate to see the System

through its difficult period.” H.R. Rep. No. 425 at 14, 1985

U.S.C.C.A.N. at 2600.

13

explanation, claiming that because of “new federal assistance,”

it makes sense that Congress labeled the change to Section 2134

as a “technical and conforming amendment.” Resp. Br. at 37.

This claim ignores the full explanation for the change included

in the House Committee Report. That Report explained the

change as “technical and conforming” because it resulted from

“the elimination of the Yuthority [of the Farm Credit

Administration] to make separate investments in individual

institutions” and the deletion of “references to the Governor of

the Farm Credit Administration . . . since such office . . . will no

longer exist.” H.R. Rep. No. 425 at 28-29, 1985 U.S.C.C.A.N.

at 2615. The sentences deleted from Section 2134 referred to

an exemption that applied when the Governor of the Farm

Credit Administration held stock in BFCs — much as the

government once held shares in the Second Bank of the United

States. See First Agricultural Nat'l Bank of Berkshire Cty. v.

State Tax Comm'n, 392 U.S. 339, 355 (1968) (Marshall, J.,

dissenting). As to BFCs, that power, long dormant, was

eliminated by the 1985 amendment.

14

CONCLUSION

Petitioner respectfully requests this Court to reverse the

judgment of the Missouri Supreme Court and to render

judgment for Petitioner.

Respectfully submitted,

JEREMIAH W. (JAY) NIXON

Attorney General

JAMES R. LAYTON*

State Solicitor

GAIL VASTERLING

DAVID LIEBER

Assistant Attorneys General

P. O. Box 899

Jefferson City, Missouri 65102

(573) 751-3321

Counsel for Petitioner

*Counsel of Record

November 2000