Petition for Writ of Certiorari — NACCO Industries, Inc. v. Tracy
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Y) 92 868 Nov 241997
No. 97- OFFICE OF THE CLERK
IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1997
NACCO INDUSTRIES, INC.,
Petitioner,
Vv.
ROGER W. TRACY, TAX COMMISSIONER OF OHIO,
Respondent.
Petition for a Writ of Certiorari to the
Supreme Court of Ohio
PETITION FOR A WRIT OF CERTIORARI
TIMOTHY B. Dyk
(Counsel of Record)
GREGORY A. CASTANIAS
PAUL R. REICHERT
JONES, DAY, REAVIS & POGUE
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
CHARLES M. STEINES
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
Counsel for Petitioner
RI = — site
i
QUESTIONS PRESENTED
Ohio’s corporate franchise tax taxes gains on the sale of United
States Treasury Bonds and other federal obligations, but excludes
gains on the sale of comparable state obligations. This case
presents the following questions:
1. Whether Ohio’s discriminatory tax violates 31 U.S.C.
§ 3124(a), which bars “each form of taxation that would require
the [United States] obligation, the interest on the obligation, or
both, to be considered in computing a tax... .”
2. Whether Ohio’s tax impermissibly discriminates against
holders of federal obligations in violation of the intergovernmental
tax immunity doctrine under the Supremacy Clause of the United
States Constitution.
ii
PARTIES TO THE PROCEEDINGS
The parties to the proceedings in the Ohio Supreme Court were
NACCO Industries, Inc. and Roger W. Tracy, Tax Commissioner
of Ohio.
Pursuant to this Court’s Rule 29.6, NACCO Industries, Inc.
states that it has no parent companies. NACCO Industries, Inc.
owns 97.62% of Hyster-Yale Material Handling, Inc., which
owns 100% of NACCO Materiais Handling Group, Inc. In turn,
NACCO Materials Handling Group, Inc. owns 20% of Yale
Financial Services, Inc., and a 50% interest in Sumitomo-Yale
Co., Ltd. (Japan). NACCO Industries, Inc. also owns The North
American Coal Corporation, which owns partiai interests in two
Texas partnerships — approximately 36.7% of Dos Republicas
Coal Partnership and 50% of Red River Mining Company.
iii
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ........----++++++:: i
PARTIES TO THE PROCEEDINGS ..........----- il
TABLE OF AUTHORITIES ... 2.2... ceecvecces iv
Ce I ing ban 6 bw ee tea th ee eens ]
DE ie sas ee OE ee eH 1
CONSTITUTIONAL AND STATUTORY PROVISIONS
oe a cing e wie eee eww eee om 1
yt ee ean os Kee ee ee +
REASONS FOR GRANTING THE WRIT ........-.-.-- 10
I. IN HOLDING THAT THE OHIO TAX DID NOT
VIOLATE 31 U.S.C. § 3124, THE OHIO
SUPREME COURT MISINTERPRETED THIS
COURT’S DECISION IN NEBRASKA DEPART-
MENT OF REVENUE v. LOEWENSTEIN .......-.- - 10
Il. CERTIORARI SHOULD BE GRANTED BECAUSE
THE OHIO SUPREME COURT’S DECISION
CONFLICTS WITH THIS COURT’S DECISION
IN MEMPHIS BANK & TRUST CO. v. GARNER .... 16
Ill. THE ISSUES PRESENTED BY THIS CASE
Pe EET, oo ic ke 6 ee ties teers 20
Ce i oe Sk he es Oe ORS Oe 22
iv
TABLE OF AUTHORITIES
Page
Cases
American Bank & Trust Co. v. Dallas County,
G63: 41,5; G55 COPRS) oe ieee ee ass 11, 12, 13, 14
Barker v. Kansas, 503 U.S. 594 (1992) ............. 16
Brotherhood of Railway and Steamship Clerks, Freight
Handlers, Express and Station Employees v.
MN FT AB EE EE eh ee 16
Central Hardware Co. v. NLRB, 407 U.S.
SPENT oe EPO ET COUN 6 oe ee awe 16
Chicago v. Environmental Defense Fund, 511 U.S.
RAAT a CEE ee 8 + Ow es 9, 14
City of Detroit v. Murray Corp., 355 U.S. 489 (1958) ... . 16
Dewsnup v. Timm, 502 U.S. 410 (1992) ............. 14
Doneski v. Comptroller of the Treasury, 605 A.2d 649
(Md. Ct.Spec. App. 1992), cert. denied, 506
US. FEO ie i oe ees oh sh eee 4 20
Duren v. Missouri, 439 U.S. 357 (1979) ............ 16
FIC v. Tewace, Ib... B93 VB. 208 C19) www tw ee 16
Field v. Mons, 116 &. UX; 437 Cee) oe eae ines os 14
Fulton Corp. v. Faulkner, 116 S. Ct. 848 (1996) ....... 20
Gozlon-Peretz v. United States, 498 U.S. 395 (1991) ..... 14
Halliburton Oil Well Cementing Co. v. Reily, 373
U.S, GUC se A ak eX. 19
Hardin v. Straub, 490 U.S. 536 (1989) ............. 16
Harte-Hanks Communications, Inc. v. Connaughton,
Pt Ti, er ee oo oi ee IA ec es 16
Home Savings Bank v. City of Des Moines, 205 U.S.
Se EEE aes ae ew Re a ee eee 15
Honda Motor Co. v. Oberg, 512 U.S. 415 (1994) ....... 16
Kentucky v. Whorton, 441 U.S. 786 (1979) (per curiam) . . 16
Kuhlmann v. Wilson, 477 U.S. 436 (1986) ........... 16
MCI Telecommunications Corp. v. Limbach, 625 N.E.2d 597
(Ohio), cert. denied, 513 U.S. 818 (1994) .......... 7
Memphis Bank & Trust Co. v. Garner, 459 U.S. 392
CIEE ee i ee Ae ee eee ee passim
v
TABLE OF AUTHORITIES
(Continued)
Page
Michigan v. Clifford, 464 U.S. 287 (1984) ........--- 16
Nebraska Department of Revenue v. Loewenstein, 513
CE. Fee LEO sk B58 E80 R 8; 41, 12
Oregon Waste Systems, Inc. v. Department of
Environmental Quality, 511 U.S. 93 (1994) ........-. 19
Rockford Life Insurance Co. v. Illinois Department of
Revenue, 482 U.S. 182 (1987) ......-.--+++5: 9,17
Society for Savings v. Bowers, 349 U.S. 143 to) eS 13
United States v. City of Detroit, 355 U.S. 466 (1958) ... . 16
United States v. County of Fresno, 429 U.S. 452
2: ar Carre pera leroy ey armen ie 9, 17, 18
United States v. Powell, 469 U.S. 57 (1984) ........-- 16
United States v. Township of Muskegon, 355 U.S. 484
NY siik Ew oR ORS Oe ee eee 16
Werner Machine Co. v. Director of Division of
Taxation, 350 U.S. 492 (1956)... 1... 2. ee eee eee 17
Willcuts v. Bunn, 282 U.S. 216 (1931) .....---+-+-- 17
Censtitutional Provisions and Statutes
i ate Oe WE, OD oe oe Re rhe he eee tee ee l
PR, DANTE sO EOE Rs 1
SE TB OIA Ne OR eee Cites passim
Conn. Gen. Stat. § 12-701(a)(20) ....-.- 22 eee ee eee 21
Kan. Stat. Ann. § 32-862 ........--2 eee eee reees 21
Wee Bet Ae SUGGS oie eee oe ws 21
Kan Stet. Amn, 6 GB-2061 2... ee ee ce ees 21
Ohio Rev. Code Ann. § 5709.76 .......---5+++05> A
Ohio Rev. Code Ann. § 5733.04([) ..........++--: passim
Ohio Rev. Code Ann. § 5733.06 .......--++eeee> 4
Act of June 25, 1947, ch. 147, 61 Stat. 180 .........-. 15
Act of Sept. 24, 1917, ch. 56, § 7, 40 Stat. 288, 291 .... 15
Act of Feb. 25, 1862, ch. 33, 12 Stat. 345
(codified at 31 U.S.C. § 742) (revised)......-.-.-. 13
Pub. L. No. 86-346, § 105, 73 Stat. 621,622 ......... 14
vi
TABLE OF AUTHORITIES
(Continued)
Page
Pub. L. No. 97-258, § 3124, 96 Stat. 877,945 ........ 15
Public Debt Act of 1941, ch. 7, § 4, 55 Stat. 7, 9
(codified at 31 U.S.C. § 742a) (revised) ........... 15
Miscellanous Authorities
Black’s Law Distionary (6th ed. 1990) ............. 12
H.R. Rep. No. 423, 8th Cong., Ist Sess.,
reprinted in 1947 U.S.C.C.A.N. 1218 ............ 15
Pennsylvania Dept. of Revenue Tax Update
ee ei ae a ho ie so ol es eso 8 21
S. Rep. No. 275, 80th Cong. Ist Sess,
pepetnted in 1947 U.S.C CAN. 1217 2... tee 15
PETITION FOR A WRIT OF CERTIORARI
NACCO Industries, Inc. (“NACCO”) respectfully petitions for
a writ of certiorari to review the judgment of the Supreme Court
of Ohio in this case.
OPINIONS BELOW
The opinion of the Supreme Court of Ohio is reported at 681
N.E.2d 900. It is reprinted at pages la-11a of the appendix to
this petition. The decision and order of the Ohio Board of Tax
Appeals is unreported. It is reprinted at pages 12a-20a of the
appendix to this petition.
JURISDICTION
The judgment of the Supreme Court of Ohio was entered on
August 6, 1997. On October 23, 1997, Justice Stevens extended
the time for filing a petition of certiorari to and including
November 24, 1997. The jurisdiction of this Court is invoked
under 28 U.S.C. § 1257.
CONSTITUTIONAL AND STATUTORY
PROVISIONS INVOLVED
The Supremacy Clause of Article VI, section 2 to the United
States Constitution provides:
This Constitution, and the Laws of the United States which
shall be made in Pursuance thereof; and all Treaties made, or
which shall be made, under the Authority of the United States,
shall be the supreme Law of the Land; and the Judges in every
State shall be bound thereby, any Thing in the Constitution or
Laws of any State to the Contrary notwithstanding.
Section 3124 of Title 31, United States Code, provides:
(a) Stocks and obligations of the United States Government are
exempt from taxation by a State or political subdivision of a
State. The exemption applies to each form of taxation that
would require the obligation, the interest on the obligation, or
both, to be considered in computing a tax, except — (1) a
nondiscriminatory franchise tax or another nonproperty tax
2
instead of a franchise tax, imposed on a corporation; and (2)
an estate or inheritance tax.
(b) The tax status of interest on obligations and dividends,
earnings, or other income from evidences of ownership issued
by the Government or an agency and the tax treatment of gain
and loss from the disposition of those obligations and evidences
of ownership is decided under the Internal Revenue Code of
1954 (26 U.S.C. 1 et seq.). An obligation that the Federal
Housing Administration had agreed, under a contract made
before March 1, 1941, to issue at a future date, has the tax
exemption privileges provided by the authorizing law at the
time of the contract. This subsection does not apply to
obligations and evidences of ownership issued by the District
of Columbia, a territory or possession of the United States, or
a department, agency, instrumentality, or political subdivision
of the District, territory, or possession.
Section 5733.04(1) of the Ohio Revised Code provides, in
pertinent part:
(I) “Net income” means the taxpayer’s taxable income
before operating loss deduction and special deductions, as
required to be reported for the taxpayer’s taxable year under
the Internal Revenue Code, subject to the following adjust-
ments:
baad * *
(5) Deduct any interest or interest equivalent on public
obligations and purchase obligations to the extent included in
federal taxable income. As used in divisions (1)(5) and (6) of
this section, “public obligations,” “purchase obligations,” and
“interest or interest equivalent” have the same meanings as in
section 5709.76 of the Revised Code.
(6) Add any loss or deduct any gain resulting from the
sale, exchange, or other disposition of public obligations to the
extent included in federal taxable income.
———————————
3
Section 5709.76 of the Ohio Revised Code provides, in
pertinent part:
(A) All of the following are exempt from taxes levied by
the state and its subdivisions:
(1) Public obligations;
(2) Interest or interest equivalent on public obligations and
on purchase obligations;
(3) The transfer, and any profit made on the sale, ex-
change, or other disposition, of public obligations.
* a *
(D) As used in this section:
; * * *
(5) “Public obligations” means public securities,
fractionalized interests in purchase obligations, and any obliga-
tion or evidence of obligation to pay interest or interest
equivalent on public securities or on fractionalized interests in
purchase obligations, and does not include purchase obliga-
tions.
Re eee ee
(6) “Public securities” means bonds, notes, certificates of
indebtedness, commercial paper, and other instruments in
writing issued by the state or a subdivision, or by any non-
profit corporation authorized to issue public securities for or on
behalf of the state or a subdivision, to evidence the obligation
of the state, subdivision, or nonprofit corporation to repay
money borrowed by, or to pay at any future time other money
obligations of, the state, subdivision, or nonprofit corporation,
and does not include purchase obligations. Public securities
may be in the form of either certificated securities or uncertifi-
cated securities, as those terms are defined in section 1308.01
of the Revised Code.
4
STATEMENT
This case presents important questions regarding the limitations
upon discriminatory state taxation imposed both by 31 U.S.C.
§ 3124(a) and by the intergovernmental tax immunity doctrine of
the Constitution’s Supremacy Clause.
NACCO’s Activities. On September 27, 1982, for investment
purposes, NACCO purchased for $6,100,003 a fifteen-year U.S.
Treasury Bond with a principal amount of $8,000,000. App. 12a.
On May 5, 1989, NACCO sold this bond for $7,694,071.
NACCO realized a $1,467,493 long-term capital gain from the
sale of this bond; the remaining $126,575 represented accrued but
unpaid interest. App. la. Because Ohio’s franchise tax excludes
consideration of gain from the sale of Ohio-issued obligations, it
was NACCO’s belief, in view of the applicable federal statutory
and constitutional restrictions, that the capital gain from the sale
of this federal obligation could likewise not be considered in the
calculation of the franchise tax. Accordingly, NACCO did not
include the $1,467,493 gain as part of its net income in
calculating its 1990 Ohio franchise tax return, and it “flagged this
issue in a separate statement” submitted with the return. See
Transcript of Hearing Before the Ohio Board of Tax Appeals
(“Tr.”) at 12-14; App. 12a.
The Ohio Franchise Tax. Under Ohio law, the initial base
for calculating a corporation’s net income is its federal taxable
income before any operating loss or special deductions. See Ohio
Rev. Code Ann. § 5733.04(I).' In calculating net income, gains
from the sale of federal obligations are included in income, while
gains from the sale of state obligations are not. This result occurs
because corporations may “[aJdd any loss or deduct any gain
resulting from the sale, exchange, or other disposition of public
obligations to the extent included in federal taxable income.”
' The State of Ohio requires corporations to calculate their franchise tax
on both a net worth and a net income basis, and to pay the greater
amount. See Ohio Rev. Code Ann. § 5733.06. Here, the net income
calculations yielded the greater tax liability.
5
Ohio Rev. Code Ann. § 5733.04(1)(6). A “public obligation”
under this provision is defined to include “public securities,” see
Ohio Rev. Code Ann. §§ 5733.04(1)(5), 5709.76(D)(5); in turn,
the definition of “public securities” includes “bonds, notes, certi-
ficates of indebtedness, commercial paper, and other instruments
in writing issued by the state or a subdivision.” Ohio Rev. Code
Ann. § 5709.76(D)(6) (emphasis added). However, the definition
of “public securities” does not include obligations issued by the
federal government.
The Tax Commissioner’s Assessment. When NACCO filed
its 1990 Ohio Corporate Franchise Tax Report, it excluded from
its tax base, as determined by the net income method, the
$1,467,493 gain NACCO realized from the sale of its treasury
bond. App. 12a; Tr. 12-13. On October 14, 1993, the Ohio
Department of Taxation issued a franchise-tax assessment to
NACCO for the 1990 tax year in the amount of $116,202.58,
plus $37,343 in interest. The Department of Taxation concluded
that the gain realized by NACCO from the sale of its U.S.
Treasury Bond should have been included in NACCO’s 1990
Ohio franchise tax base under the net income method. App. 12a-
13a.
On November 12, 1993, NACCO filed a Petition for
Reassessment, objecting to the franchise-tax assessment on the
ground that inclusion of the gain from the sale of the U.S.
Treasury Bond in calculating its Ohio franchise tax base violated
the United States Constitution because (1) it impermissibly
discriminated against federal obligations by excluding similar
gains from the sale of obligations issued by the State of Ohio
from the franchise tax, and (2) it violated 31 U.S.C. § 3124(a)
since the state statute required the “obligation . . . to be con-
sidered in computing the tax."* App. 13a. The Tax
2 Section 3124(a) of Title 31, United States Code, provides in pertinent
part:
Stocks and obligations of the United States Government are exempt
from taxation by a State or political subdivision of a State. The
6
Commissioner, however, rejected NACCO’s arguments and
issued his final determination on September 28, 1995, affirming
the Department of Taxation’s assessment.
Proceedings Before The Board of Tax Appeals. NACCO
appealed from the Tax Commissioner’s determination to the Ohio
Board of Tax Appeals (“BTA”) on October 27, 1995. The state
did not dispute that the statute taxed the gain from the sale of
federal obligations while exempting gain from the sale of state
obligations. During a March 26, 1996, hearing before a BTA
hearing examiner, NACCO presented unrebutted testimony from
an expert financial witness from the Ohio State University,
Stephen A. Buser, who testified that if gain from the sale of
federal, but not state, obligations was taxable by the state, the
federal government “would have to increase the interest rate” on
new bonds “to compensate for the negative tax consequence”;
existing bonds, similarly, “would be placed at a disadvantage.”
Tr. 25-26. Buser testified that because “[i]t is generally accepted
that securities all compete for roughly the same set of investment
dollars,” any attribute that makes a particular security “becomfe]
incrementally less attractive” would either cause “that security
[to] drop out of the investment opportunity set,” or the issuing
agency would have to compensate for that burden in some other
way “to make investors still want to hold those securities.” Tr.
26-27.
On June 7, 1996, the BTA affirmed the Tax Commissioner’s
final determination. App. 12a-20a. Because the only issues
presented on appeal to the BTA were constitutional ones
(preemption under 31 U.S.C. § 3124, and intergovernmental tax
immunity under the Supremacy Clause), the BTA’s affirmance
was largely pro forma — Ohio law provides that the BTA acts as
a “receiver of evidence,” but “cannot rule on” constitutional
exemption applies to each form of taxation that would require the
obligation, the interest on the obligation, or both, to be considered in
computing a tax, except — (1) a nondiscriminatory franchise
Sic ate Me, raga
Oe ASE ie
7
questions; the latter task is left solely to the Ohio Supreme Court.
MCI Telecommunications Corp. v. Limbach, 625 N.E.2d 597,
599 (Ohio), cert. denied, 513 U.S. 818 (1994). Accordingly, the
BTA held that it was “beyond the jurisdiction of the Board of Tax
Appeals” to decide the two constitutional questions presented by
NACCO’s appeal, and it affirmed the Tax Commissioner’s final
determination. App. 20a.
Proceedings Before The Ohio Supreme Court. = In
accordance with Ohio practice, NACCO appealed the BTA’s
ruling to the Ohio Supreme Court. NACCO reurged its twin
arguments that Ohio’s taxation of gains realized from the sale of
its U.S. Treasury Bond — but not from the sale of similar state
obligations — was prohibited both under 31 U.S.C. § 3124 and
by the United States Constitution under the intergovernmental tax
immunity doctrine. App. 2a.
The Tax Commissioner opposed both arguments. Again, the
differential treatment of gain from state and federal obligations
was admitted. With respect to section 3124, the Commissioner
urged that the Ohio franchise tax’s consideration of “gains
realized from the sale of federal obligations” does not fall within
section 3124(a)’s prohibition upon “each form of taxation that
would require the obligation, the interest on the obligation, or
both, to be considered in computing a tax.” Comm’rs Br. at 8-
14. Significantly, however, the Commissioner did not argue that,
if the Ohio tax scheme were covered by section 3124(a), the Ohio
franchise tax would fall within the statutory exception for “a
nondiscriminatory franchise tax . . . imposed on a corporation.”
31 U.S.C. § 3124(a)(1).
With respect to NACCO’s intergovernmental tax immunity
argument, the Commissioner urged that NACCO was errone-
ously “focus[ing] on only part of the provision that it attacks”
(i.e., the admittedly differential treatment of federal and state
obligations). Comm ’rs Br. at 15. Instead, the Commissioner
urged, NACCO was required to “consider the whole statute,”
including the provision that requires the add-back of losses from
the sale of state obligations but not federal obligations (Ohio Rev.
8
Code Ann. § 5733.04(1)(6)). Comm’rs Br. at 15-17. According
to the Commissioner, NACCO’s intergovernmental tax immunity
argument suffered from a failure of proof because NACCO’s
expert witness could not express an opinion as to whether the
overall “economic effect of the statutory scheme . . . would be a
positive or a negative one as to the marketability of federal
obligations.” Jd. at 16.
The Ohio Supreme Court’s Decision. The Ohio Supreme
Court affirmed the decision of the Board of Tax Appeals,
recognizing the differential treatment and adopting much the same
reasoning advanced by the Commissioner.
The court first held that 31 U.S.C. § 3124 did not prohibit the
application of Ohio’s franchise tax to the gain from NACCO’s
sale of the U.S. Treasury Bond. It concluded, despite the
statutory language, that section 3124(a), “[b]y its terms . . . does
not extend to gains from the sale of federal obligations.” App.
4a. The Ohio court viewed its construction of the statute as
compelled by this Court’s decision in Nebraska Department of
Revenue v. Loewenstein, 513 U.S. 123 (1994). Loewenstein
involved private “repurchase agreements” — two-step loan
transactions in which security holders temporarily transfer their
federal securities to a trust in exchange for a cash loan, which is
later paid back to the trust (with interest on the loan) in exchange
for a return of the securities. This Court held that the interest
received was interest on loans of cash, not interest on “obligations
of the United States Government.” Jd. at 129. According to the
Ohio Supreme Court, NACCO’s gain was similar to the non-
exempt interest in Loewenstein — it was “attributable to a
contractual relationship between two private parties,” and “not
attributable to redemption of the obligations or payment by the
United States government.” App. 5a.
The Ohio Supreme Court also viewed its construction of the
statute as compelled by canons of statutory construction, relying
on differences in language between the statute involved here (31
U.S.C. § 3124(a)), and 31 U.S.C. § 3124(b), the Public Debt Act
of 1941, which provides for federal taxation of United States
an Sis
icine Taina eaves aha daniiscate
9
government obligations. The court reasoned that section 3124(b),
unlike section 3124(a), “incorporates the phrase ‘tax treatment of
gain and loss from the disposition of these [federal] obligations.’
Congress is generally presumed to act intentionally and purposely
when it includes particular language in one section of a statute but
omits it in another.” App. 4a (citing Chicago v. Environmental
Defense Fund, 511 U.S. 328, 338 (1994)). Like the
Commissioner, the Ohio Supreme Court did not even advert to
section 3124(a)(1)’s exception for “a nondiscriminatory franchise
tax . . . imposed on a corporation.”
The court also rejected NACCO’s intergovernmental tax
immunity argument. The court held that Ohio's imposition of tax
on gain from federal obligations is “*far too attenuated’ from the
doctrine’s concern with the borrowing power of the United States
to support constitutional immunity.” App. 6a-7a (quoting
Rockford Life Ins. Co. v. Illinois Dep't of Revenue, 482 U.S. 182,
190 (1987)). Addressing NACCO’s argument that the tax was
invalid under the antidiscrimination component of the intergov-
ernmental tax immunity doctrine, the Ohio court adverted to the
holding of United States v. County of Fresno, 429 U.S. 452, 460
(1977), that “[s]o long as the tax is not directly laid on the
Federal Government, it is valid if nondiscriminatory . . . or until
Congress declares otherwise” (App. 4a (quotation omitted)), and
concluded that Congress had somehow “declared otherwise” in
section 3124(a) — even though that section on its face gives no
approval to discriminatory taxation. Thus, the court held that
“Ohio’s franchise tax is valid, regardless of whether it is dis-
criminatory.” App. 9a.
Finally, even though the court stated that it did not need to
consider whether the Ohio franchise tax discriminated against the
federal government, the court nonetheless concluded that NACCO
had failed to prove discrimination. Citing no authority, the Ohio
court held that NACCO, to prevail, had to show as a factual
matter that, taking a// provisions of the Ohio franchise tax into
account, “any difference in treatment between state and federal
obligations affects or impedes a function of the federal gov-
ernment: in this case, the marketability of federal obligations.”
10
App. 10a. Even though NACCO’s expert witness had concluded
that deducting gains from the sale of Ohio public obligations but
not federal obligations “would place federal obligations at a
disadvantage in the market” (App. 10a), the court held this
evidence to be insufficient as a matter of law to demonstrate
discrimination. The court relied on the fact that Ohio also
required corporations to add back losses from the sale of state
obligations, and that the same was not true of losses from federal
obligations. Since NACCO’s expert could not express an opinion
about the relative marketability of federal obligations when both
the deduction of gains and the addition of losses from the sale of
state obligations but not federal obligations are taken into account,
the court concluded that “NACCO has failed to establish that the
franchise tax discriminates against the federal government or
those with whom it deals.” App. 11a.
REASONS FOR GRANTING THE WRIT
This case raises important questions concerning the federal
Statutory and constitutional limitations upon state taxation of
federal obligations.
I. IN HOLDING THAT THE OHIO TAX DID NOT
VIOLATE 31 U.S.C. § 3124, THE OHIO SUPREME
COURT MISINTERPRETED THIS COURT’S DECI-
SION IN NEBRASKA DEPARTMENT OF REVENUE
v. LOEWENSTEIN
Section 3124(a) of Title 31, United States Code, provides in
part:
Stocks and obligations of the United States Government are
exempt from taxation by a State or political subdivision of a
State. The exemption applies to each form of taxation that
would require the obligation, the interest on the obligation, or
both, to be considered in computing a tax, except — (1) a
nondiscriminatory franchise tax... .
This Court has held that this statute “establishes a broad
exemption of federal obligations from state and local taxation,”
11
Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 395 (1983),
a “sweeping” exemption that extends to “every form” of state
taxation where “federal obligations must be considered, either
directly or indirectly, in computing the tax.” American Bank &
Trust Co. v. Dallas County, 463 U.S. 855, 862 (1983) (emphasis
in original). The Ohio Supreme Court nonetheless held that
Ohio’s franchise tax, which taxes gains from the sale of federal
but not state obligations, did not violate section 3124(a).° The
court reached this conclusion based upon a misreading of this
Court’s decision in Nebraska Department of Revenue v.
Loewenstein, 513 U.S. 123 (1994), and by a fundamental
misapplication of statutory construction principles at odds with
this Court’s teachings. Certiorari should be granted to resolve
these conflicts.
There was no contention in Loewenstein that the state tax at
issue impermissibly “require{d] the obligation . . . to be
considered in computing the tax,” and the Court’s approval of the
Nebraska tax cannot possibly be read as approving state taxation
of gains from the sale of federal obligations. The sole question
presented to this Court in Loewenstein was whether interest
earned by a taxpayer from repurchase agreements (“repos”)
involving federal securities was immune from state tax under
section 3124(a) as “interest on” an “[o]bligatio[n] of the United
States Government.” “Repos” are two-step loan transactions in
which the holder of a federal obligation transfers the obligation to
a trust, which then makes a cash loan to the holder. Under the
repo agreement, the holder later pays back the loan to the trust,
with an agreed-upon rate of interest not tied to the interest rate on
>The Ohio Supreme Court did not hold, and respondent has never
argued, that Ohio’s franchise tax on corporations is “a nondiscriminatory
franchise tax . . . imposed on a corporation” sufficient to satisfy one of
the two express exceptions to 31 U.S.C. § 3124(a). Nor could it be
seriously maintained that the franchise tax is “nondiscriminatory” in
view of the patently discriminatory treatment of gains from federal
obligations vis-a-vis state obligations. See discussion at pages 16-20,
below.
12
the federal obligation, in exchange for the return of the
obligation. This Court held that the “interest” earned by the
taxpayer from his transaction with the trust was not tax-exempt
“interest on the obligation,” 31 U.S.C. § 3124(a), but instead was
‘taxable “interest on loans of cash from the Trusts to the Seller-
Borrower.” Loewenstein, 513 U.S. at 129.
Unlike Loewenstein, this case does not present the question of
whether gain on the sale of a federal obligation is “interest on the
obligation.” The court below plainly misunderstood Loewenstein
when it held that because “the income at issue here is not
attributable to redemption of the obligations or payment by the
United States government,” but was “attributable to a contractual
relationship between two private parties,” the gain realized by
NACCO from its sale of the treasury bond w.. permissibly taxed
under 31 U.S.C. § 3124(a). App. 5a. Loewenstein does not rest
on the ground that section 3124(a) applies only to income from
United States government redemptions or interest payments, and
the statutory language could not possibly support such a reading.
Section 3124(a) prohibits taxation of gains from the sale of
federal securities, because taxation of such gains “require[s] the
obligation . . . to be considered in computing a tax.” 31 U.S.C.
§ 3124(a). This provision prohibits not only tax on the
“redemption of the obligations or payment by the United States
government” (App. 5a), but prohibits all taxes that take the value
of the obligation into account, whether directly or indirectly. As
Loewenstein itself explained, “[b]y contrast” to the treatment of
interest under section 3124(a), “[t]he obligation itself is
‘considered’ when its value is ‘taken into account, or included in
the accounting,’ in computing the taxable value of a taxpayer’s
assets or net worth for the purpose of a property tax or the like.”
513 U.S. at 128-29 (emphasis added; quoting American Bank &
Trust Co. v. Dallas County, 463 U.S. at 862). The Ohio tax on
the “gain” recognized on the sale of the obligation thus obviously
“take[s] into account” the “value” of the obligation — indeed, the
dictionary definition of “gain” is “[a]ppreciation in value or worth
of securities or property.” Black’s Law Dictionary 678 (6th ed.
1990) (emphasis added).
13
The Ohio court’s refusal to give effect to the plain language of
section 3124(a), coupled with its misreading of this Court’s
Loewenstein decision, resulted in a highly formalistic construction
of section 3124(a). Such formalism is contrary both to the
statute’s “broad exemption” (Memphis Bank & Trust Co. v.
Garner, 459 U.S. at 395), and to congressional intent. As this
Court recognized in American Bank & Trust Co. v. Dallas
County, section 3124(a) (then known as Rev. Stat. § 3701, or 31
U.S.C. § 742) was amended in 1959 to overturn “this Court’s
rather formalistic pre-1959 approach to § 3701,” under which the
Court had “consistently held” that “§ 3701 did not prohibit
nondiscriminatory taxes imposed on discrete property interests
such as corporate shares or business franchises, even though the
value of that discrete interest was measured by the underlying
assets.” 463 U.S. at 858 (emphasis added). Up to 1959, “this
formal but economically meaningless distinction between taxes on
Government obligations and taxes on separate interests was
‘firmly embedded in the law.’” Jd. (quoting Society for Savings
v. Bowers, 349 U.S. 143, 148 (1955)).*
To counter the highly formalistic interpretation announced by
this Court, Congress in 1959 added a sweeping sentence to the
statute — “‘[tJhis exemption extends to every form of taxation
that would require that either the obligations or the interest
thereon, or both, be considered, directly or indirectly, in the
computation of the tax.’” Jd. (quoting statute) (Current section
3124(a) contains almost identical language.) This Court has
subsequently recognized that “{uJnder the plain language of the
1959 amendment, . . . the tax is barred regardless of its form if
federal obligations must be considered, either directly or
indirectly, in computing the tax.” 463 U.S. at 862 (emphasis in
original). Thus, by enacting section 3124(a) “Congress intended
‘Prior to 1959, Rev. Stat. § 3701, 31 U.S.C § 742, provided, in
pertinent part, that “[aJll stocks, bonds, Treasury notes, and other
obligations of the United States, shall be exempt from taxation by or
under State or municipal or local authority.” See American Bank &
Trust Co. v. Dallas County, 463 U.S. 855, 858 (1983).
if
to sweep away formal distinctions and to invalidate all taxes
measured directly or indirectly by the value of federal
obligations.” Jd. at 867. The Ohio Supreme Court’s decision,
however, impermissibly resurrects the pre-1959 formalism.
The court below exacerbated its erroneous reading of section
3124(a) and Loewenstein by an untenable application of statutory
construction principles. The court held that because section
3124’s other subsection, 31 U.S.C. § 3124(b), “incorporates the
phrase ‘tax treatment of gain and loss from the disposition of
those [federal] obligations,’” the logical inference is that Congress
meant to exclude “gains from the sale of federal obligations”
from the exemption provision of section 3124(a). App. 4a-5a
(citing Chicago v. Environmental Defense Fund, 511 U.S. 328,
338 (1994)). Such a “negative pregnant” construction of section
3124(a) (Field v. Mans, 116 S. Ct. 437, 442 (1995)) has no
application where, as here, the two subsections of section 3124
have their origins in two entirely different congressional
enactments, and do not possess parallel structure in any event.
See id. at 446; see also Gozlon-Peretz v. United States, 498 U.S.
395, 404 (1991).°
The history of the two subsections of section 3124 illustrates
this. Section 3124(a) was originally enacted by Congress during
the Civil War, Act of Feb. 25, 1862, ch. 33, 12 Stat. 345,
codified in 1925 as 31 U.S.C. § 742, amended in 1959 (Pub. L.
No. 86-346, § 105, 73 Stat. 621, 622) to “rejec[t] and set aside
this Court’s rather formalistic pre-1959 approach” (American
Bank & Trust v. Dallas County, 463 U.S. at 862), and ultimately
codified as 31 U.S.C. § 3124(a) in 1982 without substantial
change. Prior to the Civil War, it had not been deemed necessary
to enact legislation expressly stating that state governments were
° Even where a statute contains the identical term in different subsections
(which is not the case here) the term may carry two different meanings
— particularly where history and prior practice indicate that the sections
should have different meanings. Dewsnup v. Timm, 502 U.S. 410, 417-
20 (1992).
TT TERI,
15
prohibited by the Constitution from taxing federal securities; the
political climate of Civil War times, however, made it necessary
for the Congress to do so. Home Savings Bank v. City of Des
Moines, 205 U.S. 503, 513-14 (1907).
By contrast, section 3124(b) has an entirely different history.
Its origins are in the Public Debt Act of 1941, 55 Stat. 7, then
codified as 31 U.S.C. § 742a, which was passed to remove the
federal tax exemption for federal securities, an exemption that
originally had been granted in 1917 in order to fund World War
I. See Act of September 24, 1917, ch. 56, § 7, 40 Stat. 288, 291
(“All such bonds and certificates shall be exempt, both as to
principal and interest from all taxation now or hereafter imposed
by the United States, any state, or any of the possessions of the
United States, or by any local taxing authority .. . .”).°
The two statutes were joined together by Congress when they
were recodified as separate subsections of 31 U.S.C. § 3124 in
1982. See Pub. L. No. 97-258, § 3124, 96 Stat. 877, 945. In
view of the divergent histories of subsections 3124(a) and
3124(b), and the resultant lack of a parallel structure between
those subsections, the “negative pregnant” canon of statutory
construction had no place here.
In sm: Certiorari should be granted to correct the Ohio
Supreme Court’s fundamental misinterpretation of 31 U.S.C.
® The legislative history of then-section 742a made quite clear that the
Act “makes no change in existing law with respect to the taxation of
Federal securities by the States and their political subdivisions . . . .”
S. Rep. No. 275, 77th Cong., Ist Sess., reprinted in 1947
U.S.C.C.A.N. 1217 (emphasis added). A 1947 adjustment to the text
of then-section 742a (Act of June 25, 1947, ch. 147, 61 Stat. 180)
caused the House Committee on Ways and Means to reiterate that the
passage of section 742a “indicates no intent to permit taxation of Federal
securities by other jurisdictions than the Federal government.” H.R.
Rep. No. 423, 80th Cong., Ist Sess., reprinted in 1947 U.S.C.C.A.N.
1218.
16
§ 3124(a), and of this Court’s prior decision in Nebraska
Department of Revenue v. Loewenstein.’
II. CERTIORARI SHOULD BE GRANTED BECAUSE
THE OHIO SUPREME COURT’S DECISION CON-
FLICTS WITH THIS COURT’S DECISION IN
MEMPHIS BANK & TRUST CO. v. GARNER
The Ohio Supreme Court’s constitutional decision also conflicts
with this Court’s decision in Memphis Bank & Trust Co. v.
Garner, supra.
The doctrine of intergovernmental tax immunity, as interpreted
by this Court, comprises two separate and distinct components.
The first component, which is not at issue here, provides an
absolute immunity from state taxation, but is limited to taxes
imposed “directly against the Government of the United States or
its property without the consent of Congress.” United States v.
City of Detroit, 355 U.S. 466, 469 (1958). See also City of
Detroit v. Murray Corp., 355 U.S. 489 (1958); United States v.
Township of Muskegon, 355 U.S. 484 (1958).
The second component, which might be called the “antidis-
crimination component” of the doctrine, forbids state taxes that
“impos{e] a greater burden on holders of federal property than on
holders of similar state property.” Memphis Bank & Trust Co. v.
’This Court has often granted certiorari to address the question of
whether the lower courts have consistently and correctly applied a prior
decision of this Court. See, e.g., Honda Motor Co. v. Oberg, 512 U.S.
415, 420 (1994); Barker v. Kansas, 503 U.S. 594, 597 (1992); Harte-
Hanks Communications, Inc. v. Connaughton, 491 U.S. 657, 659
(1989); Hardin v. Straub, 490 U.S. 536, 536 (1989); Kuhlmann v.
Wilson, 477 U.S. 436, 444 (1986); United States v. Powell, 469 U.S.
57, 61-62 (1984); Michigan v. Clifford, 464 U.S. 287, 289 (1984);
Kentucky v. Whorton, 441 U.S. 786, 787 (1979) (per curiam); Duren v.
Missouri, 439 U.S. 357, 363 (1979); Central Hardware Co. v. NLRB,
407 U.S. 539, 542 (1972); FTC v. Texaco, Inc., 393 U.S. 223, 225
(1968); Brotherhood of Railway and Steamship Clerks, Freight Handlers,
Express and Station Employees v. Allen, 373 U.S. 113, 118 (1963).
17
Garner, 459 U.S. at 397. See also United States v. County of
Fresno, 429 U.S. at 462 (“a state tax imposed on those who deal
with the Federal Government” is unconstitutional if the tax “is
imposed [un]-equally on . . . similarly situated constituents of the
State”). Only where the “tax remains the same whatever the
character of the [property] may be” can such a state tax be
upheld. Werner Machine Co. v. Director of Division of Taxation,
350 U.S. 492, 493-94 (1956); see also Memphis Bank & Trust
Co. v. Garner, 459 U.S. at 397-98. Thus, the antidiscrimination
component prohibits all state taxes that discriminate “against
holders of federal property or those with whom the Federal
Government deals.” Jd. at 397. The principal cases relied upon
by the Ohio Supreme Court were inapposite to the discrimination
issue — they involved the first, narrower component of the
doctrine, not the antidiscrimination component.*®
This Court recognized and applied this antidiscrimination
principle in Memphis Bank & Trust Co. v. Garner, supra.
Tennessee’s bank tax imposed a tax on the “net earnings” of
banks doing business in the state, and “include[d] income from
obligations of the United States and its instrumentalities” — but
not income from Tennessee obligations — in the tax base. 459
U.S. at 393. The Court held that this discriminatory tax scheme
violated the antidiscrimination component of the intergovern-
mental tax immunity doctrine: “Tennessee discriminates in favor
of securities issued by Tennessee and its political subdivisions and
against federal obligations. The State does so by including in the
tax base income from otherwise comparable state and local
obligations.” Jd. at 398. The Court thus concluded that the
Tennessee tax was unconstitutionally discriminatory. Jd. at 398-
99.
8 See App. 6a-8a (citing Rockford Life Insurance Co. v. Illinois Dep't of
Revenue, 482 U.S. 182 (1987) (upholding nondiscriminatory tax on
“Ginnie Mae” bonds issued by private financial institutions), and
Willcuts v. Bunn, 282 U.S. 216 (1931) (upholding nondiscriminatory
federal tax on gains from sale of state and municipal obligations)).
18
The Ohio Supreme Court plainly misunderstood the
antidiscrimination principle. Citing Memphis Bank & Trust Co.
v. Garner, the court misquoted that case by holding that “a state
tax is invalid only if it discriminates against the federal
government or those with whom it deals.” App. lla (citing
Memphis Bank & Trust Co. v. Garner, 459 U.S. at 397). What
the cited page of Memphis Bank & Trust Co. v. Garner actually
says, of course, is that taxes which “discriminate against holders
of federal property or those with whom the Federal Government
deals” are invalid. 459 U.S. at 397 (emphasis added). NACCO
was plainly a “holde[r] of federal property,” and was plainly
discriminated against by Ohio’s taxation of its gains from the sale
of its federal obligation.
Despite its recognition that the Ohio franchise tax distinguishes
between holders of state and federal property (see, e.g., App. 2a
(“gain from the sale of an Ohio obligation is exempt from the
Ohio franchise tax, while gain from the sale of a federal
obligation is not”) (footnote omitted)), the Ohio Supreme Court
nonetheless held that “Ohio’s franchise tax is valid, regardless of
whether it is discriminatory.” App. 9a. The court reached this
conclusion by relying on the rule that a discriminatory tax such
as Ohio’s franchise tax, even though “not directly laid on the
Federal Government,” violates the Supremacy Clause unless
“Congress declares otherwise.” United States v. County of
Fresno, 429 U.S. at 460 (citation omitted); App. 4a. The court
determined that “Congress has ‘declared otherwise,’” by implied-
ly excluding gains from the sale of federal obligations from the
scope of 31 U.S.C. § 3124(a)’s immunity. App. 4a. This con-
clusion was untenable as a matter of statutory construction since
section 3124(a) does not remotely indicate congressional approval
of discriminatory state franchise taxes. Indeed, as discussed
above, Congress specifically disapproved of such discriminatory
taxes. See 31 U.S.C. § 3124(a)(1).
In an attempt to buttress its holding that the discriminatory
franchise tax was nonetheless constitutional, the Ohio court held
alternatively that NACCO was guilty of a failure of proof. The
supreme court held, citing no authority in support, that NACCO
19
was not only required to prove discrimination; it was also
required to “demonstrate that any difference in treatment between
state and federal obligations affects or impedes a function of the
federal government; in this case, the marketability of federal
obligations.” App. 9a-10a. No such proof was required. See,
e.g., Memphis Bank & Trust Co. v. Garner, 459 U.S. at 398 &
n.8 (finding unconstitutional discrimination on the face of the
statute without resort to expert testimony). In any event,
NACCO’s expert witness testified that the taxation of gains from
federal but not state obligations would place federal obligations at
a market disadvantage, and would require the federal government
to raise its coupon rate to compensate for the disadvantage. See
Tr. 26-27. The Ohio court found this testimony insufficient to
satisfy the test it had just announced. Instead, the Ohio court
said, NACCO’s case failed because its expert witness could not
express an opinion as to the relative marketability of federal
obligations when the deductibility of losses from federal but not
state obligations was also factored into the overall equation. App.
10a.
The court in effect found that the provision allowing add-back
of losses from the sale of federal obligations, Ohio Rev. Code
§ 5733.04(1)(6), was sufficiently “compensatory” for the
admittedly discriminatory treatment of gains from the sale of
federal obligations. No such “compensatory tax” doctrine exists
in the intergovernmental immunity area; indeed, none has ever
been recognized outside the sales and use tax area. Oregon Waste
Systems, Inc. v. Department of Environmental Quality, 511 US.
93, 105 (1994). But even if a compensatory tax doctrine could
be engrafted onto the doctrine of intergovernmental tax immunity,
the Ohio Supreme Court’s version could not be sustained. This
Court has always demanded “strict equality” from “compensa-
tory” taxes (see, e.g., Halliburton Oil Well Cementing Co. v.
Reily, 373 U.S. 64, 73 (1963)); the Ohio tax fails that require-
ment. This Court has repeatedly expressed its “unwilling[ness]
to plunge . . . into the morass of weighing comparative tax
burdens,” recognizing that “[t]he complexities of factual economic
proof always present a certain potential for error, and courts have
20
little familiarity with the process of evaluating the relative
economic burden of taxes” (Fulton Corp. v. Faulkner, 116 S. Ct.
848, 859 (1996) (quotation omitted)); the complex economic
testimony required by the Ohio court’s newly minted test was
likewise contrary to this authority.
At least one other state court has reached a decision contrary
to that of the court below. In Doneski v. Comptroller of the
Treasury, 605 A.2d 649 (Md. Ct. Spec. App. 1992), cert. denied,
506 U.S. 1054 (1993), the court held that Maryland’s taxation of
gains from the sale of federal obligations, while exempting
comparable gains from the sale of bonds issued by the State of
Maryland, was prohibited both by 31 U.S.C. § 3124(a) and by
the intergovernmental tax immunity doctrine. The Maryland
court recognized that the underlying purpose of this provision was
to prohibit the imposition of state taxes that disadvantage federal
obligations in the marketplace. 605 A.2d at 653-54. It found that
Maryland’s tax scheme “clearly discriminate[d] against the federal
government and the people with whom it deals” by “diminishing
the investment attractiveness of the United States obligations in
favor of state obligations.” Jd. at 654.
In sum: Certiorari should be granted to resolve the conflict
between the decision below and this Court’s decision in Memphis
Bank & Trust Co. v. Garner.
Ill. THE ISSUES PRESENTED BY THIS CASE ARE
IMPORTANT
The issues raised by this case have serious implications for the
ability of the federal government to borrow money through the
issuance of federal obligations. If taxpayers were unable to
deduct gains from the sale of federal and state obligations equally,
federal obligations would be placed at a distinct disadvantage in
the market and rendered less attractive to the investing public.
See Memphis Bank & Trust Co. v. Garner, 459 U.S. at 398 n.8
(citing data provided by the brief amicus curiae of the United
States). If Ohio’s rule were adopted by other states, the federal
government would have to offer a higher interest rate on its
securities — ultimately increasing the federal government’s cost
21
of borrowing money — in order to compensate for the market
disadvantage imposed on federal obligations by the discriminatory
franchise tax. See, e.g., id. (noting that “if all 50 States enacted
provisions comparable to the Tennessee bank tax, the United
States would incur additional borrowing costs estimated at $280
million at an interest rate of 12%”).
Even at present, this problem is not limited to Ohio. A
number of other states also exempt gains from the sale of state —
but not federal — obligations from taxation. For instance, the
State of Kansas exempts profits from the sale of certain state
obligations from both corporate and individual income tax, but
does not provide for a deduction for a gain recognized on the sale
of federal obligations. See, e.g., Kan. Stat. Ann. §§ 32-862;
68-2013; 68-2041. In calculating individual income tax,
Connecticut provides for a deduction for the gain on a sale of
state securities, but does not provide a similar deduction for a
gain from the sale of a federal obligation. See Conn. Gen. Stat.
§ 12-701(a)(20). And prior to the decision below, Pennsylvania's
Department of Revenue determined that it was “constitutionally
obligated” to exclude gains from the sale of federal obligations
for corporate net income tax purposes. See Pennsylvania Dep't.
of Revenue Tax Update No. 16, at 4 (July 1, 1987).
The decision of the Ohio Supreme Court in this case, if left to
stand, will surely encourage other states to follow Ohio’s lead and
adopt similarly discriminatory tax structures. If this decision is
not reversed, any state eager to raise revenues and encourage
local investment has every incentive to amend its tax statutes to
exempt only the gains from the sale of state obligations from state
taxation. Such a result clearly would have a significant negative
impact on the market for U.S. Treasury Bonds and other federal
obligations. Ohio, Kansas and Connecticut already represent a
substantial share of the total market for U.S. Treasury Bonds.
Granting permission to other states to discriminate against
purchasers of federal obligations will impede the marketability of
these securities.
22
Finally, if there is any doubt that the petition should be
granted, this Court should seek the views of the United States
concerning the issues presented by this petition, particularly in
view of the important federal interest in assuring the continued
marketability of United States government obligations.
In sum: Certiorari should be granted to consider these issues
of national importance.
CONCLUSION
For the foregoing reasons, the petition for a writ of certiorari
should be granted.
Respectfully submitted,
TIMOTHY B. DYK
(Counsel of Record)
GREGORY A. CASTANIAS
PAUL R. REICHERT
JONES, DAY, REAVIS & POGUE
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
CHARLES M. STEINES
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
Counsel for Petitioner
November 24, 1997
APPENDIX
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SUPREME COURT OF OHIO
NACCO Industries,
Appellants.
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Roger W. Tracy,
Commissioner of Ohio,
Appellee.
No. 96-1535
Decided August 6, 1997
APPEAL from the Board of Tax Appeals, No. 95-K-1210.
In 1982, NACCO Industries, Inc. (*NACCO”) purchased, for
$6,100,003, a fifteen-year U.S. Treasury Bond in the principal
amount of $8,000,000. Seven years later, NACCO sold the bond
for $7,694,071, of which $126,575 represented accrued, but
unpaid, interest. NACCO did not include its $1,467,493 gain
from the sale of the bond in the calculation of its 1990 Ohio
franchise tax.
NACCO objected to the inclusion of the gain on the basis that
the Ohio franchise tax impermissibly discriminated against federal
obligations because it exempted gains only from the sale of Ohio
public obligations. The Ohio Department of Taxation disagreed,
included the $1,476,493 gain in NACCO’s net income, and
increased the assessment in the amount of $116,202. Upon
NACCO’s petition for reassessment, the Tax Commissioner
affirmed the $116,202 assessment plus $37,343 in interest. The
Board of Tax Appeals affirmed the final determination of the Tax
Commissioner.
This cause is now before the court upon an appeal as of right.
COOK, Justice.
: Ohio corporations calculate their franchise tax on both a net
ns worth basis and a net income basis and pay which-ever produces
the greater tax. R.C.5733.06. In this case, the relevant calculation
is net income. The initial base for the net income tax is federal
taxable income before net operating loss and special deductions.
R.C. 5733.04(1). From that figure, Ohio corporations are
permitted to “[a]dd any loss or deduct any gain resulting from the
sale, exchange, or other disposition of public obligations to the
extent included in federal taxable income.” R.C. 5733.04(1)(6).
For purposes of R.C. 5733.04(1)(6), a “public obligation” is
defined as a “public security.” R.C. 5733.04(1)(5),
: 5709.76(D)(5). A “public security,” in turn, is defined as “bonds,
: notes, certificates of indebtedness, commercial paper, and other
: instruments in writing issued by the state or a subdivision.”
(Emphasis added.) R.C. 5709.76(D)(6).
The effect of these definitions is that gain from the sale of an
Ohio obligation is exempt from the Ohio franchise tax,' while
gain from the sale of a federal obligation is not. We decide here
whether this taxing scheme violates Section 3124, Title 31,
U.S. Code, or is unconstitutional under the doctrine of inter-
governmental immunity as embodied in the Supremacy Clause of
the United States Constitution. We conclude that Ohio’s
corporate franchise tax scheme violates neither the statute nor the
constitutional doctrine.
With the famous declaration that “the power to tax involves the
power to destroy,” McCulloch v. Maryland (1819), 17 U.S. (4
Wheat.) 316, 431, 4 L. Ed. 579, 607, Chief Justice John
‘Notably, this exemption from state taxation for state obligations is
necessary to comply with the Ohio Constitution. Section 2k(D)(4),
Article VIII of the Ohio Constitution exempts from taxation the interest
and other income, including profits from sales, from bonds issued for the
purpose of financing or assisting in the financing of the cost of public
infrastructure capital improvements of municipal corporations, counties,
townships and other governmental entities.
"
3a venened
Marshall announced the doctrine of federal immunity from state
taxation. In McCulloch, the court considered Maryland’s
imposition of a tax on notes issued by any bank established
without its authority. The only bank falling into that category was
the Bank of the United States. Chief Justice Marshall explained
that the federal government “though limited in its powers, is
supreme within its sphere of action.” /d. at 405, 4 L. Ed. at 601.
Although both sovereigns could impose taxes, the court held that
a state does not have authority to tax an instrument employed by
the federal government in the execution of its power. /d. at 432,
4 L. Ed. at 608.
From McCulloch evolved the doctrine of intergovernmental tax
immunity. In Metcalf & Eddy v. Mitchell (1926), 269 U.S. 514,
521, 46 S. Ct. 172, 173-174, 70 L. Ed. 384, 391, the court
explained that “the very nature of our constitutional system of
dual sovereign governments is such as impliedly to prohibit the
federal government from taxing the instrumentalities of state
government, and in a similar manner to limit the power of the
states to tax the instrumentalities of the federal government.”
In its early development, the doctrine of intergovernmental
immunity was construed to insulate not only direct government
functions from taxation, but also derivative transactions relating
to the performance of governmental functions. 2 Rotunda &
Nowak, Treatise on Constitutional Law (2 Ed. 1992) 300, Section
13.9. Ultimately, the court expanded the doctrine to prohibit both
a state income tax on federal employees and a federal income tax
on state employees. Dobbins v. Erie Cty. Commrs. (1842), 41
U.S. (16 Pet.) 435, 10 L. Ed. 1022; The Collector v. Day (1870),
78 U.S. (11 Wall.) 113, 20 L. Ed. 122.
In modern times, however, the Supreme Court has adopted “a
functional approach to claims of intergovernmental immunity,
accommodating of the full range of each sovereign’s legislative
authority and respectful of the primary role of Congress in
resolving conflicts between the National and State governments.”
North Dakota v. United States (1990), 495 U.S. 423, 435, 110 S.
Ct. 1986, 1994, 109 L. Ed. 2d 420, 433. Abandoning its early
da
beginnings, the court apparently has eroded the doctrine to the
following: “So long as the tax is not directly laid on the Federal
Government, it is valid if nondiscriminatory * * * or until
Congress declares otherwise.” United States v. Fresno Cty.
(1977), 429 U.S. 452, 460, 97 S. Ct. 699, 704, 50 L. Ed. 2d
683, 691.
By enacting Section 3124, Title 31, U.S. Code (“Section
3124”), Congress has “declared otherwise” on the subject of
immunity from state taxation for federal obligations. Because the
statutory immunity codified at Section 3124(a) is principally a
restatement of the constitutional rule, Rockford Life Ins. Co. v.
Illinois Dept. of Revenue (1987), 482 U.S. 182, 187-188, 107 S.
Ct. 2312, 2315, 96 L. Ed. 2d 152, 159, we first view the case at
bar under the statutory immunity and then consider whether the
constitutional doctrine of intergovernmental immunity requires a
broader exemption.
Section 3124 states, in part:
“(a) Stocks and obligations of the United States Government
are exempt from taxation by a State or political subdivision
of a State. The exemption applies to each form of taxation
that would require the obligation, the interest on the obli-
gation, or both, to be considered in computing a tax, except
— (1) a nondiscriminatory franchise tax or another
nonproperty tax instead of a franchise tax, imposed on a
corporation * * * .”
Under this section, the scope of the immunity from state
taxation granted by Congress extends only to federal obligations
and the interest on such obligations. By its terms, the immunity
expressed in Section 3124(a) does not extend to gains from the
sale of federal obligations. In contrast, Section 3124(b), Title 31,
U.S.Code, regarding federal taxation of federal obligations,
incorporates the phrase “tax treatment of gain and loss from the
disposition of those [federal] obligations.” Congress is generally
presumed to act intentionally and purposely when it includes
particular language in one section of a statute but omits it in
another. Chicago v. Environmental Defense Fund (1994), 511
5a
U.S. 328, 338, 114 S. Ct. 1588, 1593, 128 L. Ed. 2d 302, 311.
Had Congress intended Section 3124(a) immunity to extend to
gains from the sale of federal obligations, it would have expressed
that intent in the statute. See California State Bd. of Equalization
v. Sierra Summit, Inc. (1989), 490 U.S. 844, 854, 109 S. Ct.
2228, 2235, 104 L. Ed. 2d 910, 920.
Moreover, in Nebraska Dept. of Revenue v. Loewenstein
(1994), 513 U.S. 123, 115 S. Ct. 557, 130 L. Ed. 2d 470, the
court upheld a state tax upon interest earned from repurchase
agreements involving federal securities under Section 3124.
Under these repurchase (“repo”) agreements, the owner of the
securities agreed to sell and repurchase the securities at a fixed
increased price. The original seller retained the interest earned
by the securities during the term of the repo agreement. The state
exempted from tax the interest paid by the federal government on
the federal obligations, but assessed an income tax against the
interest paid as a result of the repurchase agreements.
In upholding the state tax, the court found the dispositive
question to be whether the interest at issue was earned on the
obligations of the United States government. For purposes of
Section 3124, the court concluded, the interest was not
attributable to redemption of the securities or payment by the
United States government. Rather, the interest was income
earned as interest on loans to private parties. Thus, the court
concluded that the income being taxed by the state was not
interest from the federal securities and Section 3124 did not
prohibit the state from taxing the income.
We similarly find that the dispositive question in this case is
whether the income at issue was earned on the obligations of the
United States. The income at issue here is not attributable to
redemption of the obligations or payment by the United States
government. Rather, the income is attributable to a contractual
relationship between two private parties. Accordingly, we hold
that Section 3124 immunity from state taxation does not extend to
Ohio’s corporate franchise tax upon the gain from the sales of
federal obligations and such a tax is not prohibited by that statute.
6a
We turn now to consider whether the constitutional doctrine of
intergovernmental immunity requires any broader exemption than
the statute. Before we proceed, however, we are mindful of the
Supreme Court’s caveat that a “court must proceed carefully
when asked to recognize an exemption from state taxation that
Congress has not clearly established. We do well to remember
the concluding words in Smith v. Davis (1944), 323 U.S. 111,
119, 65 S. Ct. 157, 161, 89 L. Ed. 107, 113], which although
spoken in reference to the statute, are relevant to our role in
applying the constitutional doctrine as well: ‘All of these related
statutes are a clear indication of an intent to immunize from state
taxation only the interest-bearing obligations of the United States
which are needed to secure credit to carry on the necessary
functions of government. That intent, which is largely codified in
§ 3701, should not be expanded or modified in any degree by the
judiciary.’” Rockford Life Ins. Co., 482 U.S. at 191, 107 S. Ct.
at 2317-2318, 96 L. Ed. 2d at 161. “[A]bsent congressional
action,” the court has emphasized, “the States’ power to tax can
be denied only under the ‘clearest constitutional mandate.’”
(Citation omitted.) United States v. New Mexico (1982), 455
U.S. 720, 738, 102 S. Ct. 1373, 1384, 71 L. Ed. 2d 580, 594.
In Rockford Life Ins. Co., the court considered whether
“Ginnie Maes,” financial instruments issued by private financial
institutions and guaranteed by the Government National Mortgage
Association, were exempt from state taxation by either statutory
or constitutional intergovernmental immunity. In considering the
constitutional immunity, the court turned to the purpose of the
constitutional doctrine. The doctrine, the court noted, is based on
the proposition that “the borrowing power is an essential aspect
of the Federal Government’s authority and, just as the Supremacy
Clause bars the States from directly taxing federal property, it
also bars the States from taxing federal obligations in a manner
which has an adverse effect on the United States’ borrowing
ability.” Jd. at 190, 107 S. Ct. at 2317, 96 L. Ed. 2d at 160.
The court considered the lack of a fixed and certain obligation
by the United States on Ginnie Maes “far too attenuated” from
the doctrine’s concern with the borrowing power of the United
fe ae. 7
7a
States to support constitutional immunity. /d. The court also
considered that none of the proceeds from the sale of Ginnie Maes
was received by the federal government or used to finance any
federal function. /d. at 191, 107 S. Ct. at 2317, 96 L. Ed. 2d at
161.
In Willcuts v. Bunn (1931), 282 U.S. 216, 51 S. Ct. 125, 75
L. Ed. 304, the court upheld a federal tax upon gains from the
sale of state and municipal obligations after a challenge based
upon the doctrine of intergovernmental immunity. There, the
court rejected the notion that a prohibition of a tax on the interest
payable on state and municipal bonds also prohibited a tax upon
the profits derived from a sale of such bonds. /d. at 227, 51
S. Ct. at 127, 75 L. Ed. at 308. The court observed that the sale
of bonds by their owners “is a transaction distinct from the
contracts made by the government in the bonds themselves, and
the profits on such sales are in a different category of income
from that of the interest payable on the bonds.” /d. The court
further noted that “the tax upon interest is levied upon the return
which comes to the owner of the security according to the
provisions of the obligation and without any further transaction on
his part. The tax falls upon the owner by virtue of the mere fact
of ownership, regardless of the use or disposition of the security.
The tax upon profits made upon purchases and sales is an excise
upon the result of the combination of several factors, including
capital investment and, quite generally, some measure of sagacity;
the gain may be regarded as ‘the creation of capital, industry and
skill.’” (Citation omitted.) Jd. at 227-228, 51 S. Ct. at 127-128,
75 L. Ed. at 308.
The court found particularly persuasive the fact that in a
“uniform and long-established practice * * * neither the Federal
Government nor the States have found a tax on the profits of the
sales of their securities to be a burden on their power to borrow
money. So far as we are advised, the Federal Government has
not at any time deemed it to be necessary to exempt from taxation
the profits realized by owners on the sale of its obligations, with
the exception, recently made, of short-term Treasury bills issued
8a
on a discount basis and payable without interest.” Jd. at 232, 51
S. Ct. at 129, 75 L. Ed. at 310.
The Willcuts court additionally observed that “it may be
doubted whether the prospect on the part of the ordinary investor
of obtaining profit on the resale of such obligations is so
important an element in inducing their acquisition that a federal
tax laid on such profits, in common with profits derived from the
sales of other property, constitutes any substantial interference
with the functions of state governments. While ihe tax is laid on
gains, there is also a deduction for losses on sales, and whether
investors in such securities would consider it an advantage if both
provisions were eliminated is a matter of mere speculation. * * *
[Bjefore we can restrict their application upon the ground of a
burden cast upon the State’s borrowing power, where the state tax
is not laid upon contracts made by the State in the exercise of that
power, or upon the amounts payable thereunder, but is laid upon
the result of distinct transactions by private owners, it must
clearly appear that a substantial burden upon the borrowing power
of the State would actually be imposed. But we have nothing but
assertion and conjecture.” 282 U.S. at 231, 51 S. Ct. at 129, 75
L. Ed. at 310.
From these precedents, it is apparent that the limits of the
constitutional doctrine do not extend to a state tax upon gains
from the proceeds of a contract between two private parties where
there is no demonstrable burden on the federal borrowing power.
The nexus between the federal government and the exchange of
a federal obligation among private parties is “far too attenuated”
from the doctrine’s concern with the effect of the tax upon the
borrowing power of the United States to support constitutional
immunity. Rockford Life Ins. Co., 482 U.S. at 190, 107 S. Ct.
at 2317, 96 L. Ed. 2d at 160.
Ohio taxes the proceeds from a transaction between two private
parties, a transaction distinct from that of the interest payable on
the bonds or the amount payable on the bond itself. The profits
from the transaction are realized entirely by the owner of the
obligation. None of the proceeds from the sale of the obligations
9a
was received by the federal government or used to finance any
federal function. We have no evidence clearly establishing that a
substantial burden on the federal government’s borrowing power
would actually be imposed.
Section 3124 is an indication of an intent to immunize only the
federal obligation or the interest on the obligation from state
taxation. Until Congress, in its primary role of resolving conflicts
between the national and state governments, expressly resolves
this conflict to the contrary, we decline to extend the constitu-
tional limits of the immunity doctrine any further than that
provided by Section 3124. As a result, we find that neither the
statutory nor the constitutional intergovernmental immunity
doctrine prohibits Ohio’s corporate franchise tax on the gains
from the sale of federal obligations.
NACCO argues that our inquiry cannot end here. NACCO
contends that under the constitutional doctrine of inter-
governmental immunity, any state tax that discriminates against
those who deal with the federal government is invalid. We note,
however, that under the modern doctrine of intergovernmental
immunity, “so long as the tax is not directly laid on the Federal
Government, it is valid if nondiscriminatory * * * or until
Congress declares otherwise.” (Emphasis added.) Fresno Cty.,
429 U.S. at 460, 97 S. Ct. at 704, 50 L. Ed. 2d at 691. Since we
have determined that Congress has declared otherwise, and we
have declined to expand the limits of that immunity further,
Ohio’s franchise tax is valid, regardless of whether it is
discriminatory.
Even assuming that we must consider whether the tax is
discriminatory, we would nevertheless uphold Ohio’s corporate
franchise tax. A state tax impermissibly discriminates against
federal obligations where it imposes a greater burden on holders
of federal property than it does on holders of similar state
property. Jd. The nondiscrimination rule, however, remains
rooted in the principle that the state may not obstruct the activities
of the federal government. North Dakota, 495 U.S. at 437-438,
110 S. Ct. at 1996, 109 L. Ed. 2d at 435. With this principle in
10a
mind, we find persuasive the Tax Commissioner’s argument that
in order to establish that the Ohio franchise tax discriminates
against federal obligations, NACCO must demonstrate that any
difference in treatment between state and federal obligations
affects or impedes a function of the federal government; in this
case, the marketability of federal obligations. To this end,
NACCO’s expert testified that in his opinion, the exclusion of
gain from the sale of state obligations but not federal obligations
would place federal obligations at a disadvantage in the market.
At first glance, this argument appears to support NACCO. In
analyzing the constitutionality of a state law, however, it is
inappropriate for a court to look to the most narrow provision
addressing the issue. North Dakota, 495 U.S. at 438, 110 S. Ct.
at 1996, 109 L. Ed. 2d at 435. Rather, a determination of
whether a tax is discriminatory requires an examination of the
state’s whole tax structure. Washington v. United States (1983),
460 U.S. 536, 542, 103 S. Ct. 1344, 1348, 75 L. Ed. 2d 264,
271. Accordingly, we consider that in addition to requiring
corporations to “deduct any gain” on the sale of a state
obligation, R.C. 5733.04(1)(6) also requires corporations to “add
any loss” on the sale of a state obligation in calculating its net
income basis.
NACCO’s expert testified that the add back of losses from the
sale of state obligations but not federal obligations would place
federal obligations at a market advantage. However, NACCO’s
expert could not express an opinion on the relative marketability
of the obligations when accounting for both gains and losses from
the sale of federal obligations but not on state obligations in the
calculation of net income basis. More than mere conjecture or
speculation is required to establish that a tax is unconstitutional.
Rockford Life Ins. Co., 482 U.S. at 190, 107 S. Ct. at 2317, 96
L. Ed. 2d at 160, fn. 10.
NACCO cites Memphis Bank & Trust Co. v. Garner (1983),
459 U.S. 392, 103 S. Ct. 692, 74 L. Ed. 2d 562, as support for
the argument that Ohio’s tax discriminates against federal
obligations. In Memphis Bank, the court found a Tennessee state
lla
tax on interest earnings from federal obligations but not on
interest earnings from state obligations violated Section 3124. We
find this case distinguishable. In Memphis Bank, the tax upon the
interest of a federal obligation fell within the scope of Section
3124. Thus, Congress already made the determination that a state
tax on the interest of federal obligations would substantially affect
a function of government. Here, however, the tax on the gain
from the sale of federal obligations does not fall within the scope
of Section 3124 and NACCO has not otherwise established that
the state tax at issue affects a function of government.
We also consider that a state tax is invalid only if it
discriminates against the federal government or those with whom
it deals. Jd. at 397, 103 S. Ct. at 696, 74 L. Ed. 2d at 567.
Here, the transaction subject to the tax does not arise directly
from the relationship between the taxpayer and the federal
government. Rather, the transaction subject to the tax arises from
a contractual relationship between two private parties. We find
this relationship to the federal government too attenuated to
invalidate the Ohio franchise tax. Accordingly, we find that
NACCO has failed to establish that the franchise tax discriminates
against the federal government or those with whom it deals.
Because we find that Ohio’s corporate franchise tax violates
neither the statutory intergovernmental immunity nor constitu-
tional intergovernmental immunity, we affirm the decision of the
Board of Tax Appeals.
Decision affirmed.
MOYER, C.J., and DOUGLAS, FRANCIS E. SWEENEY,
SR., PFEIFER and LUNDBERG STRATTON, JJ., concur.
RESNICK, J., concurs in judgment only.
12a
STATE OF OHIO — BOARD OF TAX APPEALS
NACCO Industries, ) CASE NO. 95-K-1210
Appellant, ) (FRANCHISE TAX)
)
v )
)
Roger W. Tracy, Tax ) Decision and Order
Commissioner of Ohio, ) June 7, 1996
)
Appellee.
DECISION AND ORDER
This cause and matter is before the Board of Tax Appeals as
a result of a notice of appeal filed on October 27, 1995 by
appellant, NACCO Industries. Appellant appeals a final deter-
mination of the Tax Commissioner dated September 28, 1995, in
which that official denied appellant’s objection to a corporate
franchise tax assessment for 1990.
It appears that the facts of this appeal are not in dispute. On
September 27, 1982, appellant purchased, for $6,100,003, a fif-
teen year U.S. Treasury bond in the principal amount of
$8,000,000. On May 5, 1989, appellant sold this bond for
$7,694,071, realizing and recognizing a gain of $1,467,493 on
the sale. When appellant filed its 1990 Ohio Corporate Franchise
Tax Report, it excluded the gain on the sale of this bond from its
tax base as determined under the net income method.
Subsequently, the Department of Taxation assessed appellant
$116,202.58 in franchise tax, as well as $37,343.81 in interest,
based upon the Department’s determination that the gain which
g
Bs
i
B
¢
:
13a
appellant had realized on its sale of the bond should have been
included within appellant’s net income calculation performed
under R.C. 5733.05.
Appellant then filed a petition for reassessment, claiming that
Ohio’s exclusion of gains realized on state obligations while not
providing a comparable exclusion for gains incurred on federal
obligations was unconstitutional. In his decision, the Tax
Commissioner denied appellant’s objection, concluding that the
gain which appellant incurred on its sale of a U.S. Treasury bond
was not excluded by statute. The Tax Commissioner also stated
within his final determination that there existed no
unconstitutional infirmity in this regard.
It is from this decision that appellant now appeals, specifying
the following single error:
“The Appellee erroneously determined that Appellant is
required to include gain realized on the sale of a federal
obligation when calculating the value of its issued and
outstanding shares of stock, as determined under the net
income method of R.C. [section] 5733.05(B). The federal
obligation in question is a ten-year U.S. Treasury Bond in the
principal amount of $8,000,000. Appellant purchased the
bond on September 27, 1982 for $6,100,003 and sold it on
May 5, 1989 for $7,567,500 realizing and recognizing a gain
of $1,467,497 on the sale.
“Gain from the sale, exchange, or other disposition of public
obligations, — e.g., notes issued by the State of Ohio or a
subdivision, evidencing the obligation of the State or
subdivision to repay money borrowed by, or to pay at any
future time other money obligations of, the State or subdivision
— are excluded when calculating the value of taxpayer’s issued
and outstanding shares of stock, as determined under the net
income method. Such disparate treatment is in violation of the
Supremacy Clause of the U.S. Constitution and 31 U.S.C.
[section] 3124.” 7
14a
This matter is now considered by this Board based upon
appellant’s notice of appeal, the statutory transcript certified by
the Tax Commissioner, the record of the hearing conducted on
March 26, 1996 and the brief submitted by appellant. At this
Board’s hearing, appellant presented the testimony of two
witnesses: Kenneth C. Schilling, appellant’s manager of tax and
budgeting, and Dr. Stephen A. Buser, Associate Dean for Budget
at the Ohio State University.
At the outset, it is necessary to address a matter upon which
the attorney examiner presiding at hearing reserved ruling.
Following appellant’s voir dire of Dr. Buser, counsel for the Tax
Commissioner objected to this Board receiving the testimony of
an expert witness whose identity had not been disclosed prior to
hearing. Arguing that exclusion was warranted, counsel cited this
Board’s rule regarding discovery, which became effective March
1, 1996.7, Ohio Adm. Code 5717-1-11(A), the rule to which the
Tax Commissioner’s counsel referred, provides in pertinent part:
“Discovery may be permitted by deposition upon oral
examination or written questions; written interrogatories;
production of documents or tangible things or permission to
enter land or other property; and requests for admissions. The
‘Ohio Rules of Civil Procedure’ shall be followed for
discovery purposes to the extent they are not inconsistent with
other board rules, and subject to the following limitations:
?Counsel also referred to Ohio Adm. Code 5717-1-15(E), which
provides as follows:
“Each party should identify its witnesses and provide copies of the
documentary exhibits it plans to offer into evidence (reduced in size,
if necessary), to all parties and the attorney examiner, at least seven
days prior to the hearing, unless otherwise ordered by the attorney
examiner.”
Although this rule sets forth the recommended course of practice, its
language is not mandatory and there exists no specific sanction for
failure to comply. Accordingly, we will limit our discussion to Ohio
Adm. Code 5717-1-11(A).
15a
** * *
“(5) An expert may not be permitted to testify if he or she has
not been timely identified prior to hearing. The parties may
mutually agree to the exchange of any written reports of expert
witnesses to be relied upon by them. Additionally, an expert’s
report or portions thereof may be excluded from evidence if
the report was not made available in a timely fashion to
complete a mutually agreed exchange of reports. In all events,
the identity of the expert and the written valuation reports shall
be provided to counsel seven days pr*or to hearing, except as
otherwise ordered by the attorney examiner.”
This is the first occasion in which we have had cause to
address a request to exclude the testimony of an expert witness on
the basis of an alleged failure to comply with Ohio Adm. Code
5717-1-11(A)(5). Initially, we acknowledge that these rules
became effective approximately three weeks prior to the hearing
in this matter. As of the date of this hearing, these rules,
although made available upon request, had not yet been published
in the Ohio Administrative Code. Thus, we find reasonable the
representation of appellant’s counsel that he was unaware of the
specific provision upon which counsel relies.
It is important to point out that the provision for exclusion of
an expert’s testimony is included within the rule setting forth the
manner by which discovery is to proceed before this Board. In
this instance, counsel for the Tax Commissioner acknowledged
that he had not pursued any discovery of appellant. The purpose
of Ohio Adm. Code 5717-1-11(A)(5) is to prevent a party, from
whom discovery has been sought, from introducing the testimony
of a previously undisclosed expert witness and forcing the party
who diligently prepared for hearing to either proceed, perhaps
unprepared, or to request a continuance of the hearing.
The language included within this section will not be construed
by this Board to permit a party which has not attempted to learn
the identity of witnesses through discovery, to achieve, as a
sanction, the exclusion of an expert witness at hearing. Cf.
Sindel v. Toledo Edison Co. (1993), 87 Ohio App. 3d 525,
16a
528-529. This result should be obvious since Ohio Adm. Code
5717-1-11(A)(5) requires only that a party identify a witness seven
days prior to hearing. Under those circumstances where
discovery has not been undertaken, we are unable to find that a
party suffers any prejudice, other than that caused by its own
inaction, when it learns that the testimony of an expert witness
will be offered at hearing.
Finally, it is apparent from counsel’s decision to proceed with
his cross-examination of appellant’s expert, despite having been
accorded the opportunity to have the hearing recessed and
reconvened at a later time, as well as the questions which he
asked, that neither counsel nor the Tax Commissioner was
prejudiced in not being advised of the identity of appellant’s
expert in advance of hearing. Accordingly, for all of the
foregoing reasons, counsel’s request to exclude the testimony of
Dr. Buser is hereby denied.
We now turn to the merits of appellant’s appeal. Simply as
background, it is noted R.C. 5733.01 imposes a corporate
franchise tax upon for-profit corporations for the privilege of
exercising their corporate franchise. This tax is first computed on
a net income basis and then on a net worth basis, with payment
being determined on the higher yielding tax. R.C. 5733.05. See
Gulf Oil Corp. v. Lindley (1980), 61 Ohio St. 2d 23, 25.
The issue in this case is whether the gain realized by appellant
on its sale of a U.S. Treasury bond should be considered when
calculating its tax liability under the net income method. Relevant
in this instance, R.C. 5733.04(I) provides in part:
“*Net income’ means the taxpayer’s taxable income before
operating loss deduction and special deductions, as required to
be reported for the taxpayer’s taxable year under the Internal
Revenue Code, subject to the following adjustments:
* * * *
“(5) Deduct any interest or interest equivalent on public
obligations and purchase obligations to the extent included in
federal taxable income. As used in divisions (I)(5) and (6) of
ee ee eee ean reer or eeeh a ernie er
17a
this section, ‘public obligations,’ ‘purchase obligations,’ and
‘interest or interest equivalent’ have the same meanings as in
section 5709.76 of the Revised Code.
“(6) Add any loss or deduct any gain resulting from the sale,
exchange, or other disposition of public obligations to the
extent included in federal taxable income.”
R.C. 5709.76, to which reference is made above, provides in
pertinent part:
“(5) ‘Public obligations’ means public securities, fractionalized
interests in purchase obligations, and any obligation or
evidence of obligation to pay interest or interest equivalent on
public securities or on fractionalized interests in purchase
obligations, and does not include purchase obligations.
“(6) ‘Public securities’ means bonds, notes, certificates of
indebtedness, commercial paper, and other instruments in
writing issued by the state or a subdivision, or by any
nonprofit corporation authorized to issue public securities for
or on behalf of the state or a subdivision, to evidence the
obligation of the state, subdivision, or nonprofit corporation to
repay money borrowed by, or to pay at any future time other
money obligations of, the state, subdivision, or nonprofit
corporation, and does not include purchase obligations. Public
securities may be in the form of either certificated securities or
uncertificated securities, as those terms are defined in section
1308.01 of the Revised Code.”
Appellant does not claim that the above-cited statutes
specifically authorize it to deduct the gain which it realized on the
sale of its U.S. Treasury bond from its net income calculation.
Instead, appellant argues that Ohio’s exclusion of gain realized on
the sale of public obligations issued by the state or one of its
political subdivisions, without similar provision being made for
gain realized on the sale of federal obligations, is discriminatory
and thereby violates the United States Constitution and 31 U.S.C.
3124.
18a
Recently, in Bd. of Edn. of the City of Dublin School Dist. v.
Tracy (Feb. 14, 1996), B.T.A. Case No. 95-K-692, this Board
reviewed its role when challenges of a constitutional nature are
made. Citing several decisions of the Ohio Supreme Court, we
once again acknowledged the well-settled principle that the Board
of Tax Appeals, a statutorily created administrative agency, is
without jurisdiction to declare a given statute unconstitutional. /d.
at 5-6. In this same decision, we also concluded that the Board
of Tax Appeals is without authority to address constitutional
challenges regarding the application of a statute to a given set of
facts:
“[G]iven the more recent decision in MCI Telecommunications
Corp. v. Limbach (1994), 68 Ohio St. 3d 195, we conclude
that the ability to determine whether a statute has been applied
in a manner which is unconstitutional is reserved for courts
created by Article IV, Section 1, of the Ohio Constitution.
When MCI appealed to this Board, it claimed that the Tax
Commissioner’s application of one statute to it rather than
another denied MCI of equal protection of the laws. See MC7
Telecommunications, Corp. v. Limbach (Jun. 12, 1992),
B.T.A. Case No. 88-G-1137, unreported, at 3 (quoting notice
of appeal paragraphs four and five). In reserving ruling on
these issues, we stated:
“*Further, although this Board received the testimony and
evidence relative to the constitutional issues raised, the parties
did not brief the issues since the Board of Tax Appeals lacks
jurisdiction to decide the issues. * * * Therefore, the only
remaining issue presented for resolution is whether the Tax
Commissioner properly apportioned the taxable value of MCI’s
taxable property among the taxing districts in Ohio.’ Jd. at 3-4.
(Citation omitted.)
“On appeal, the Supreme Court agreed with the foregoing,
holding as follows:
“*The BTA understood its role to be a receiver of evidence for
constitutional challenges. Accordingly, it did so, giving the
parties wide latitude in presenting the evidence. The BTA
19a
determined no facts on the constitutional questions. The
commissioner, however, in her Proposition of Law No. IV,
contends that the BTA not only receives evidence in this type
of case, but must weigh the evidence and determine the facts
necessary for the court’s review of the constitutional questions.
Since the BTA did not make findings of fact, the commissioner
asserts that we should remand the case for the BTA to comply.
“In Cleveland Gear Co. v. Limbach (1988), 35 Ohio St. 3d
229, * * *, paragraph three of the syllabus, we held:
“*“The question of whether a tax statute is unconstitutional
when applied to a particular state of facts must be raised in the
notice of appeal to the Board of Tax Appeals, and the Board
of Tax Appeals must receive evidence concerning the question
if presented, even though the Board of Tax Appeals may not
declare the statute unconstitutional. (Bd. of Edn. of
SouthWestern City Schools v. Kinney [1986], 24 Ohio St. 3d
184, * * * construed.)”
““We explained the process, 35 Ohio St. 3d at 232 * * *:
“*“When a statute is challenged on the basis that it is
unconstitutional in its application, this court needs a record,
and the proponent of the constitutionality of the statute needs
notice and an opportunity to offer testimony supporting his or
her view.
“*“To accommodate this court’s need for extrinsic facts and to
provide a forum where such evidence may be received and all
parties are apprised of the undertaking, it is reasonable that the
BTA be that forum. The BTA is statutorily created to receive
evidence in its role as factfinder.”
“*Under Cleveland Gear, the BTA need only receive evidence
for us to make the constitutional finding. This is because the
BTA accepts facts but cannot rule on the question. On the
other hand, we can decide the constitutional questions but have
limited ability to receive evidence. Thus, the BTA receives
evidence at its hearing, but we determine the facts necessary
20a
to resolve the constitutional question.’ MC] Telecommunica-
tions, supra, 68 Ohio St. 3d at 197-198. (Parallel citations
omitted.)” Jd. at 7-9.
The issue which is presented by appellant’s appeal and, in turn,
the relief which it requests is beyond the jurisdiction of the Board
of Tax Appeals. The applicable statutory provisions do not
specifically provide for the exclusion of gain realized on the sale
of federal obligations in the calculation of a corporation’s tax base
under the net income method prescribed by R.C. 5733.05.
Accordingly, it is the decision of the Board of Tax Appeals that
appellant’s specification of error must be overruled. It is therefore
the order of this Board that the final determination of the Tax
Commissioner must be, and hereby is, affirmed.
I hereby certify the foregoing to
be a true and correct copy of the
action of the Board of Tax
Appeals of the State of Ohio,
this day taken, with respect to
the above matter.
/s/ Kiehner Johnson
Kiehner Johnson, Chairman
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