Opposition Brief — NACCO Industries, Inc. v. Tracy

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supreme Court, U.S

No. 97-868 DEC 23 199

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1997

NACCO Industries, Inc.,

Petitioner,

¥.

ROGER W. TRACY, TAX COMMISSIONER OF OHIO,

Respondent.

On Petition for Writ of Certiorari to the

Supreme Court of Ohio

RESPONDENT’S BRIEF IN OPPOSITION

BETTY D. MONTGOMERY

Attorney General of Ohio

SIMON B. KARAS

Deputy Chief Counsel

RICHARD C. FARRIN

(Counsel of Record)

ELISE W. PORTER

Assistant Attorneys General

30 East Broad Street, 16th Floor

Columbus, Ohio 43215-3428

(614) 466-5967

COUNSEL FOR RESPONDENT

QUESTIONS PRESENTED

Ohio’s Corporate Franchise Tax considers both gains

and losses on the sale of federal obligations but excludes

from consideration both gains and losses on the sale of state

obligations in the calculation of net income base. This case

presents the following questions:

1. Whether the above provisions of Ohio’s corporate

franchise tax violate 31 U.S.C. §3124(a). .

2. Whether Congress has comprehensively defined

the scope of immunity for federal obligations from state

taxation in the enactment of 31 U.S.C. §3124(a).

3. Whether the factual finding by the Ohio Supreme

Court that NACCO failed to establish that the challenged

franchise tax provisions discriminated against federal

obligations was without evidence to support it.

TABLE OF CONTENTS

CUES TMs PRR eee soc Ce ia ph ie eae ss

TAs CH AU SEAEEE. Nc eee nc eee ee eee i

DRASEE 6 4 KH R DR Oa O KE Cea

REASONS THE PETITION SHOULD BE DENIED

A. The Decision Below Does Not Present A

Substantial Federal Question; Instead It

Involves The Failure By NACCO To Present

Evidence Establishing Its Claim Of

RI a ek oe ee ee ae ee

B. The Decision Below Does Not Conflict With

The Decision Of Another State Court Of Last

Resort Or A United States Court Of Appeals .. .

ee The Decision Below Does Not Conflict With

The Decisions OF Tima Comit . . cc asin ce ces

l. The Decision Below Did

Not Méisinterpret Nebraska

Department of Revenue v.

Lowenstein, 513 U.S. 123

CR ns dak 4 8 a a

2. The Decision Below Does Not

Conflict With Memphis Bank &

Trust Co. v. Garner, 459 U.S.

DPR CO ar en ee oe ce ee

iil

D. The Decision Below Does Not Conflict With

The Language Of 31 U.S.C. §3124(a) ....... 8

E. No Question Of National Importance Is

Presented; Any Concerns Portended By

NACCO Regarding The Marketability Of

Federal Obligations Can Best Be Addressed

ee a ie aa de Be wo oes 12

I i 8 x oS ei aig a is eee 14

TABLE OF AUTHORITIES

Cases

California State Board of Equalization v. Sierra

Summit, Inc., 490 U.S. 844 (1989) ........ Y

Chicago v. Environmental Defense Fund,

Set Nt ee eS ce A cen eA 10

Doneski v. Comptroller of the Treasury, 605 A.2d 649

(Md. Ct. Spec. App. 1992), cert. denied

PO Se Oe Ce aE Ee 8 a's 5

Graves v. New York ex rel. OKeefe,

Pe Cis ew ee ek 10

Keene Corp. v. United States,

ee A IEE. ee ha ek eae oS 10

Memphis Bank & Trust Co. v. Garner,

Tae Sl Oe COP ee OS Oe ees 3,7,8

Nebraska Department of Revenue v. Lowenstein,

Bee Oia SRO TT as se ee Ce 1,6,7

North Dakota v. United States,

See Asis A CAD 6s 0 a eh we 2,4,13

Rockford Life Insurance Co. v. Illinois Department

of Revenue, 482 U.S. 182 (1987) ........ 2,10

Rodriquez v. United States,

Seed Se OE CUT eR Ta Ss 6h oe 10

South Carolina v. Baker,

ee Se RP REED Ce eS ec eae eo 7

United States v. Detroit,

Be 8 | arr ers rarer pS

Washington v. United States,

Or hats ee a eh CT See as 2,4,13

Willcuts v. Bunn, 282 U.S. 216 (1931) ....... 7,9,11

Statutes

ee A SS oh ee oS 7,9

Be We ee Gs bk ss Se hk Sa 9

aE We eee oe ee os Se PEK Ce 2,6

oe St RS Sk ev ei ee eco passim

Pe TE ee kk rs Cie Sie Ce )

Cree Vs CE TOO) ko bo bi Sc ke ees 6,19

Rev. Stat. §3701, (as so amended, 31 U.S.C. §742). . 9.10

Pu. Si es. oO Oe GS eS Se 9

Miscellaneous Authorities

S. Rep. No. 909, 86th Congress, Ist Sess., reprinted

we i959 (2) U.S.0.C.AWN, ZA oo ee ce. 9

U.S. Cong. & Adm. News, 86th Congress,

Ist Session 1959 (2), 2769, 2773-4 ........ 10

STATEMENT

In its petition, NACCO mischaracterizes both the

decision by the Ohio Supreme Court and the challenged

franchise tax provisions, to argue that a substantial federal

question is presented. A fair reading of the decision and

statute however establishes no case worthy of certiorari

review. No conflict exists with state or lower appellate court

rulings, and no conflict exists with decisions of this Court,

or the statutory scheme involved. No national issue of

importance is presented; only three states are identified as

having a similar taxation method.

Most notably for purposes of this Court’s

consideration of whether to grant the petition, the Ohio

Supreme Court held that NACCO had “failed to establish

that the franchise tax discriminates against the federal

government or those with whom it deals.” App. lla. The

Ohio Supreme Court so held on the basis of the testimony of

NACCO’s own expert witness regarding the effect of the

entire statutory provision which considers not only gains but

also losses from sales of state and federal obligations.

Additionally, applying the plain language of 31

U.S.C. §3124(a), the court held that the immunity granted by

Congress extended only to state taxation which would require

the federal obligation or the interest on the federal obligation

to be considered in the computation of the tax. App. 4a.

Contrary t0 NACCO’s statement, the court did not so hold

because it determined that its construction of section 3124(a)

was compelled by this Court’s decision in Nebraska

Department of Revenue v. Lowenstein, 513 U.S. 123 (1994).

Instead, the Ohio Supreme Court determined that its holding

was compelled by the plain language of the statute, noting

that it expressly referred only to federal obligations and the

interest on such obligations, and contained no reference to

gains on tte sale of such obligations.

a ee |

Finally, the Ohio Supreme Court simply followed the

heedings of this Court that when Congress has acted in the

area of intergovernmental immunity by establishing an

exemption from state taxation or regulation a court should

give substantial deference to Congress and not expand such

immunity beyond that clearly established by Congress. See

North Dakota v. United States, 495 U.S. 423, 435 (1990);

Rockford Life Insurance Co. v. Illinois Dept. of Revenue, 482

U.S. 182, 191-192 (1987); Washington v. United States, 460

U.S. 536, 546 (1983); United States v. Detroit, 355 U.S.

466, 474-475 (1958). As a result, the Ohio Supreme Court

held that the Ohio franchise tax provisions which considered

both gains and losses on the sale of federal obligations in the

net income base measure but excluded consideration of both

gains and losses on the sale of state obligations in that

measure did not violate that doctrine.

REASONS THE PETITION SHOULD BE DENIED

This case does not present any issues which warrant

review by this Court. It is simply a case involving one

taxpayer's challenge to a $116,202.58 franchise tax imposed

pursuant to a state tax provision which the taxpayer asserted

but failed to establish discriminated against federal

obligations. The decision below by the Ohio Supreme Court

is not in conflict with any decisions of other state courts of

last resort, United States Courts of appeal, or this Court.

Nor is the decision below in conflict with the provisions of

31 U.S.C. §3124.

A. The Decision Below Does Not Present A

Substantial Federal Question; Instead It

Involves The Failure By NACCO To

Present Evidence Establishing Its Claim Of

Discrimination.

This case does not present a substantial federal

question that demands this Court’s review. Instead, it

involves the application by the Ohio Supreme Court of the

plain language of a federal statute, 31 U.S.C. §3124(a), by

which Congress comprehensively declared the scope of

immunity from state taxation provided federal obligations,

and the established precedents of this Court regarding

intergovernmental immunity. Ultimately, it involves a

factual determination by the Ohio Supreme Court that the

evidence failed to establish that the challenged statutory

scheme discriminated against the federal government or those

with whom it deals. As a2 result of this factual finding,

NACCO’s challenge to the franchise tax would have been

rejected even if all of its legal arguments regarding the scope

of the statutory and constitutional immunity provided to

federal obligations were accepted. For this reason alone, this

case does not merit review by this Court.

In the context of federal obligations, this Court has

stated the nondiscrimination rule as follows:

. 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.

Memphis Bank & Trust Co. v. Garner, 459 U.S. 392,397.

eT ee

Moreover, because the nondiscrimination rule of the

intergovernmental immunity doctrine is based upon the

principle that the states cannot obstruct the activities of the

federal government, North Dakota v. United States, 495

U.S., at 437-438, in considering NACCO’s discrimination

claim the Ohio Supreme Court properly focused on the effect

of the challenged franchise tax provisions on the activity of

the federal government involved - the exercise of the

borrowing power through the sale of federal obligations.

App. 9a - 10a.

Based upon the evidence, the Ohio Supreme Court

held that NACCO had failed to establish that the challenged

tax provisions effected a discrimination against federal

obligations. Presented with the undisputed fact that under

the Ohio franchise tax provisions both gains and losses from

the sale of federal obligations are considered in computing

the net income base while neither gains nor losses from the

sale of state obligations are considered in the computation,

NACCO’s expert witness testified that he could not give an

opinion on whether such a scheme would have an effect on

the marketability of federal obligations or, if it would,

whether the effect would be a positive or a negative one.'

NACCO’s expert could not give such an opinion because

while the exclusion of gain from the sale of state obligations

' Unlike NACCO, the Ohio Supreme Court observed this Court’s

admonitions that a state tax scheme is not discriminatory simply

because it treats those who deal with the federal government

differently, and that a determination whether a tax is

discriminatory must be based upon a review of the whole tax

structure. Washington v. United States, 460 U.S., at 542.

Throughout its argument, NACCO consciously focuses solely on

that part of the franchise tax provision that deals with gain, and

ignores that part that deals with losses.

but not federal obligations would, in his opinion, place some

disadvantage on federal obligations in the marketplace, the

required add back of losses from the sale of state obligations

but not federal obligations would, in his opinion, have the

reverse effect - it would place federal obligations at an

advantage in the market, a fact which NACCO studiously

ignores.

B. The Decision Below Does Not Conflict With

The Decision Of Another State Court Of

Last Resort Or A United States Court Of

Appeals.

The decision of the Ohio Supreme Court is not in

conflict with the decision of another state court of last resort

or a United States court of appeals. The only decision which

NACCO portrays as in conflict with the decision of the Ohio

Supreme Court is Doneski v. Comptroller of the Treasury,

605 A. 2d 649 (Md. Ct. Spec. App. 1992), cert. denied 506

U.S. 1054 (1993). That lone decision is not a sufficient

reason to grant review.

Initially, that decision was issued by an intermediate

state court of appeals, the Maryland Special Court of

Appeals. Moreover, the decision simply does not present a

conflict. Doneski involved the imposition of Maryland’s

personal income tax on gains from the sale of federal

obligations. More importantly, the statutory scheme under

review in Doneski did not include a provision requiring that

losses on the sale of state obligations be added back to the

base on which the income tax was imposed. Thus, the

scheme was materially different than the Ohio franchise tax

provisions at issue herein. That is, perhaps, the reason that

the state did not address the issue of discrimination in

Doneski.

fie The Decision Below Does Not Conflict With

The Decisions Of This Court.

1. The Decision Below Did Not

Misinterpret Nebraska

Department of Revenue vy.

Lowenstein, 513 U.S. 123

(1994).

NACCO states that the Ohio Supreme Court rejected

its argume:: that the franchise tax provisions violate 31

U.S.C. §3124 because the court believed that Nebraska

Department of Revenue v. Lowenstein, supra, compelled its

construction of that statute (Pet. At 8), and then proceeds to

urge this Court to grant certiorari to correct what NACCO

claims was a fundamental misinterpretation of Lowenstein by

the Ohio Supreme Court. The basic flaw in this argument is

that it is based upon an erroneous premise. NACCO grossly

overstates the reliance placed on Lowenstein by the Ohio

Supreme Court. That court did not state or even imply that

its construction of section 3124(a) was compelled by

Lowenstein.

Clearly, Lowenstein was cited by the Ohio Supreme

Court simply to note that like the transaction generating the

income in Lowenstein, the transaction in this case - the sale

of federal obligations from the purchaser, NACCO, to a

private party - was one between private parties; the income

was not, therefore, attributable to the contractual relationship

between NACCO and the federal government arising out of

NACCO’s purchase of the federal obligations from the

federal government. This distinction between transactions

whereby the owner of a government obligation sells it to a

private party and those for the purchase of the obligation

from the government in which the government contracts to

pay interest was the very same distinction relied on in

Willcuts v. Bunn, 282 U.S. 216, 227 (1931), as the basis for

rejecting an intergovernmental immunity challenge to a

federal tax imposed on gains from the sale of state

obligations.”

In any event, the Ohio Supreme Court held that

section 3124(a) did not extend immunity to gains from the

sale of federal obligations, not because it felt that such a

construction was compelled by Lowenstein, but by the clear

language of the statute. App. 4a.

2. The Decision Below Does Not )

Conflict With Memphis Bank

& Trust Co. v. Garner, 459

U.S. 392 (1983).

Memphis Bank & Trust Co. is inapposite because the

challenged state tax was imposed on interest on federal

obligations, not on gains from the sale of such obligations.

That case involved a challenge under 31 U.S.C §742

(replaced without substantive change by 31 U.S.C. §3124(a))

to a Tennessee bank tax imposed on net earnings of banks,

including interest received on federal obligations but not

interest received on Tennessee obligations. 31 U.S.C. §742

was Clearly applicable because it (like its successor, section

3124(a)) expressly included within its scope every form of

state taxation that would require interest on federal

obligations to be considered. The specific issue in Memphis

ade SRNR Ney emma areneren

> Although Willcuts involved a federal tax imposed on the

gain from the sale of state obligations, the same reasoning

was applied to both federal and state tax immunity. See,

e.g., South Carolina v. Baker, 485 U.S. 505, 518 (1988).

Te |

Bank & Trust Co. was not whether the tax fell within the

scope of the statute, but whether it fell within the exception

for nondiscriminatory franchise taxes set forth in the statute.

Memphis Bank & Trust Co. was decided solely under

the statute. The statute does not, however, include gains

from the sale of federal obligations within its scope. As a

result, the statute, including the nondiscrimination provision,

is inapplicable. Therefore, Memphis Bank & Trust Co. is

wholly inapposite.

D. The Decision Below Does Not Conflict With

The Language Of 31 U.S.C. §3124(a).

A review of 31 U.S.C. §3124(a) demonstrates that the

holding by the Ohio Supreme Court that the franchise tax

provisions do not violate that statute is unassailable:

(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 wouid 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 non property tax instead of

a franchise tax, imposed on a

corporation; and

(2) an estate or inheritance tax.

Contrary to NACCO’s assertion, section 3124(a) does

not extend the exemption from state taxation to gains realized

from the sale of federal obligations. By the plain language

of the statute, the exemption is extended to “the obligation”

and “the interest on the obligation.” It contains no mention |

of gains.

Had Congress intended the exemption to extend to

gains from the sale of federal obligations it would have |

expressly so provided. See California State Bd. of :

Equalization v. Sierra Summit, Inc., 490 U.S. 844, 854 |

(1989). Interest on an investment is clearly understood as a

distinct item from gain realized from a sale of that

investment. This distinction between interest and gain was

the basis of the ruling in Willcuts v. Bunn, 282 U.S., at 227,

upholding against an intergovernmental immunity challenge

a federal tax imposed on the gain from the sale of state

obligations.

Further demonstrative of the lack of substance in

NACCO’s assertion is the fact that in former 31 U.S.C. §742

and §742a, as amended in 1959 by Publ. L. 86-346, 73 Stat.

622, 624, Congress included only the language “obligations |

or the interest thereon” in defining the scope of the :

exemption from state taxation (§742), but included not only

“interest upon” but also “gains from the sale” of federal

obligations in the immediately following section (§742a)

which dealt with federal taxation. The same is true in

current 31 U.S.C. §3124(a) and (b). Subsection (a), which

deals with state taxation, refers only to interest while

subsection (b), which deals with federal taxation, refers not

only to interest but also to earnings and other income and to

gain from the sale of federal obligations.

Ne arn

ea PN nid rv

The legislative history of the 1959 amendment to Rev.

Stat. §3701, as so amended, 31 U.S.C. §742 (86th Congress,

H.R. 9035) further evidences that Congress expressly

referenced gains when it intended that they be included

within the scope of the provision. Part II.D. of the Senate

iit

1 I ap rece + “

report, which explained the section of the bill regarding the

exemption from state taxation, referred only to interest; it

contains no mention of gains. U.S. Cong. & Adm. News,

86th Congress, Ist Session 1959 (2), 2769, 2773-4. The

immediately following part of the Senate report (II.E.),

discussed a section of the bill which provided for the

nonrecognition of gain or loss on certain exchanges of United

States obligations for new United States obligations. Jd. at

2774. This demonstrates that Congress was fully cognizant

of the separate concepts of interest and gains when they

amended Rev. Stat. §3701, because in the very same bill

Congress addressed and amended another statute which dealt

specifically with the treatment of gains from federal

obligations. Given Congress’ obvious awareness of this

distinction, the absence of any inclusion of “gain” in Rev.

Stat §3701 can only be presumed to be intentional. Chicago

v. Environmental Defense Fund, 511 U.S. 328, 338 (1994),

citing Keene Corp. v. United States, 508 U.S. 200 (1993).

Accord, Rodriquez v. United States, 480 U.S. 522, 525

(1987).

Congress has not expressed any intent to include gains

from the sale of federal obligations within the comprehensive

grant of immunity from state taxation provided by 31 U.S.C.

§3124(a). The specific language used by Congress does not

even imply such an intent. This clearly expressed intent

should not be expanded or modified by the courts. Rockford

Life Insurance Co. v. Illinois Dept. of Revenue, 482 U.S.., at

191-192; Graves v. New York ex rel. O’Keefe, 306 U.S. 466,

479 (1939). As Rockford Life Insurance cautions:

A court must proceed carefully when

asked to recognize an exemption from state

taxation that Congress has not clearly

established.

482 U.S., at 191.

NACCO attempts to avoid the fatal impact of the

absence of any reference to gain in section 3124(a) by

engaging in a tortured construction of the language in that

provision. NACCO argues that a tax which considers gains

on the sale of federal obligations in its computation is a tax

which considers the obligation in its computation. On its

face, this argument is fallacious. A tax which considers the

gain does just that, it does not consider the obligation in the

computation.

NACCO’s construction is also rebutted by the very

language relied upon. That language states that a tax falls

within the exemption if it requires the obligation or the

interest on the obligation to be considered. Under NACCO’s

construction, there would be no reason to include interest

within the provision because if the general reference to

obligations included a prohibition on considering gain it

would certainly prohibit a consideration of interest. The

separate inclusion of interest in the language of the provision

conclusively negates any argument that the term “obligation”

was intended to include anything other than the principal of

the obligation.

Thus, the absence of any prohibition on the inclusion

or consideration of gains from the sale of federal obligations

is not at all puzzling. As Willcuts v. Bunn, 282 U.S., at

232, noted, the taxation by states of gains on the sale of

federal obligations had not historically been a concern of the

federal government. It is not a concern of section 3124(a).

‘nei tad 8 2%.

E. No Question Of Nationa! Importance Is

Presented; Any Concerns Portended By

NACCO Regarding The Marketability Of

Federal Obligations Can Best Be Addressed

By Congress.

NACCO asserts that a substantial national question is

presented, but cites to only two other states that have a

similar taxation methodology to Ohio. And this case

involves only one taxpayer, seeking approximately $116,000.

If this were ever a proper issue for certiorari, it is one that

needs further development before it is worthy of this Court’s

review.

NACCO’s argument that this case presents issues that

have serious implications for the ability of the federal

government to borrow money through the sale of its

obligations (Pet. at 20-21) is based wholly upon assertions

that are simply in conflict with the evidence. As detailed

earlier, NACCO’s own expert witness could not testify that

the challenged franchise tax provisions would place federal

obligations at a market disadvantage. Dr. Buser admitted

that he could not give an opinion as to whether the difference

in the treatment of gains and losses from the sale of federal

as opposed to state obligations would make federal

obligations more attractive or less attractive to an investor.

NACCO’s statement that the federal government would have

to offer higher interest rates is likewise unsupported because

it is based solely upon the erroneous assertion of a

demonstrated market disadvantage for federal obligations.

In all events, NACCO’s claims of adverse

consequences to the ability of the federal government to

market its obligations ignores a fundamental fact. If

Congress determines that such statutory schemes would

burden or obstruct the federal government’s ability to market

federal obligations, it has the unquestioned power to alleviate

any such concern by the simple expedient of amending

section 3124(a) to prohibit the consideration of gains from

the sale of federal obligations under such statutory schemes.

Moreover, in the absence of a mandate in the

Constitution or in section 3124(a), it should be left to

Congress to address any perceived adverse consequences

regarding the marketability of federal obligations. As this

Court has noted, deference should be given to Congress to

determine the scope of intergovernmental immunity because

Congress is best qualified to resolve the delicate balancing of

the competing demands of the respective gove.nments.

North Dakota v. United States, 495 U.S., at 435; Washington

v. United States, 460 U.S., at 546; United States v. Detroit,

355 U.S., at 474. Congress is in the best position to

determine whether or to what extent a state tax scheme

would burden or obstruct an activity of the federal

government - such as the exercise of the borrowing power -

and, if so, whether the situation calls for Congressional

action.

CONCLUSION

For the foregoing reasons, the Court should deny the

petition for a writ of certiorari.

Respectfully submitted,

BETTY D. MONTGOMERY

Ohio Attorney General