TAXATION ‑- CORPORATION EXCISE TAX ‑- EXEMPTION OF STATE MUTUAL SAVINGS BANKS, STATE AND FEDERAL SAVINGS AND LOAN ASSOCIATIONS ‑- DEDUCTIONS FOR 'DIVIDENDS' PAID MEMBERS AND SHAREHOLDERS

AGO 1951 No. 455 - Feb 22 1951

Attorney General Smith Troy

TAXATION ‑- CORPORATION EXCISE TAX ‑- EXEMPTION OF STATE MUTUAL SAVINGS BANKS, STATE AND FEDERAL SAVINGS AND LOAN ASSOCIATIONS ‑- DEDUCTIONS FOR "DIVIDENDS" PAID MEMBERS AND SHAREHOLDERS.

1. The exemption of mutual savings banks and state and Federal savings and loan associations from the operation of House Bill 408 without a corresponding exemption as to national banking associations, would be discriminatory and invalid as to national banking associations, under the provisions of 12 U.S.C.A., section 548.

2. A provision in the bill allowing state mutual savings banks and savings and loan associations to include in their deductions from gross income, amounts paid as "dividends" or interest on their deposits, would not be discriminatory under 12 U.S.C.A., section 548, as to national banking associations, even though national banking associations were not allowed a deduction for dividends paid on their corporate stock.

- - - - - - - - - - - - -

February 22, 1951

Honorable Robert M. Ford,Chairman
Committee on Revenue & Taxation
House of Representatives
Olympia, Washington Cite as: AGO 49-51 No. 455

Dear Sir:

I wish to acknowledge receipt of your letter of February 19, 1951, in connection with House Bill No. 408, relating to the proposed corporation excise tax. The bill in its present form would impose a 4% corporate excise tax on all corporations doing business in the state including national banking associations, mutual savings banks and state and Federal savings and loan associations. The tax is to be assessed according to, or measured by, the annual net income from sources within the state.

[[Orig. Op. Page 2]]

With reference to the application of the provisions of the act of March 25, 1926, amending section 5219, Revised Statutes of the United States (12 U.S.C.A., section 548) you request my opinion on the following questions:

"1. Could state mutual savings banks, state savings and loan associations, and federal savings and loan associations be lawfully exempted from the operation of House Bill 408 without national banking associations being likewise exempted therefrom?

"2. In imposing the tax fixed by House Bill 408, could the 'dividends' payable by state mutual savings banks and state savings and loan associations under section 33.03.09 [[RCW 33.12.090]]and 32.03.09 [[RCW 32.12.090]], ciations under sections 33.03.09 and 32.03.09, Revised Code of Washington, be lawfully allowed as a deduction from gross income (see Sec. 14 of bill), without the dividends payable on the corporate stock of national banking associations be likewise made deductible from gross income?"

My conclusions may be summarized as follows:

ANALYSIS

The Federal act above referred to, 12 U.S.C.A., section 548, grants to the states the power to tax national banking associations under any one of four alternative methods, subject to the restrictions attached to each method. The material provisions of section 548 are:

[[Orig. Op. Page 3]]

"The legislature of each State may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits. The several States may (1) tax said shares, or (2) include dividends derived therefrom in the taxable income of an owner or holder thereof, or (3) tax such associations on their net income, or (4) according to or measured by their net income, provided the following conditions are complied with:

"1. (a) * * *

"(b) In the case of a tax on said shares the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national Banks: * * *

"(c) In case of a tax on or according to or measured by the net income of an association, the taxing State may, except in case of a tax on net income, include the entire net income received from all sources, but the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations doing business within its limits: * * *" (Emphasis added.)

The Supreme Court of the United States has stated the purpose of the restrictions attached to the authority given the states to tax national banks, as follows:

"* * * It was intended to prevent the fostering of unequal competition with the business of national banks by the aid of discriminatory taxation in favor of capital invested by institutions or individuals engaged either in similar businesses or in [[Orig. Op. Page 4]] particular operations or investments like those of national banks. * * *"First Nat. Bank v. Hartford, 273 U.S. 548, 71 L.Ed. 767, 47 S.Ct. 462.

Under House Bill No. 408, method (4), as restricted by subsection 1 (c), is adopted in applying the tax to national banks. The restriction involved in your questions is that which prohibits the taxing of national banks at a rate higher than that assessed upon other "financial corporations."

Although the Federal act does not define the term "financial corporations," by analogy, the same test should be applied in construing this term as is used in determining the meaning of the term "other moneyed capital * * * coming into competition with the business of national banks" which appears in the restriction set out in subsection 1 (b) attached to the second method of taxation. Crown Finance Corporation v. McColgan, 23 Cal. (2d) 280, 144 P. (2d) 331. The Supreme Court of Washington has held that the capital of mutual savings banks and of savings and loan associations is "moneyed capital in competition with national banks," within the meaning of subsection 1 (b) of the Federal act. National Bank of Commerce v. King County, 153 Wash. 351, 280 Pac. 16. It would seem clear, therefore, that state mutual savings banks and state and Federal savings and loan associations fall within the classification of "other financial corporations" referred to in subsection 1 (c) of the Federal act. The exemption of such financial corporations from the operation of the proposed state corporation excise tax act, while including national banks within its coverage, obviously would result in the assessment of national banks at a higher rate than that assessed on the exempt corporations. This would be discriminatory against national banks and a violation of the restriction of the Federal act. The state corporate excise tax, in so far as national banks are concerned, would be invalid.

The case ofFirst Nat. Bank v. Hartford, supra, involved a tax on the shares of stock of a national bank. The evidence showed that there was substantial "moneyed capital" in competition with national banks within the meaning of subsection 1 (b), and that such moneyed capital was exempt from the tax. The court held that such discrimination rendered the tax invalid as to national banks, saying:

"* * * But a consideration of the entire course of judicial decision on this subject can leave no doubt that state legislation and taxing measures which [[Orig. Op. Page 5]] by their necessary operation and effect discriminate against capital invested in national bank shares in the manner described are intended to be forbidden. * * *"

In considering your second question, I have found no case directly in point. However, the case of Tradesmen's National Bank v. Oklahoma Tax Commission, 309 U.S. 560, 60 S. Ct. 688 (decided by the Supreme Court of the United States in 1940), involved an Oklahoma franchise tax measured by net income under the same method adopted by House Bill No. 408. Income from tax exempt securities was included in gross income as to national banks but was excluded as to all other corporations subject to the tax. The other corporations paid various types of additional taxes and, in most instances, paid as much or more to the state than did the national banks. The court restated the purpose of the restrictions of section 548 as follows:

"A consideration of the course of judicial decision on R.S. § 5219 and its predecessors can leave no doubt that the various restrictions it places on the permitted methods of taxation are designed to prohibit only those systems of taxation which discriminate in practical operation against national banking associations or their stockholders as a class."

In holding that the Oklahoma tax did not discriminate against national banks in violation of subsection 1 (c) of the Federal act, the court concluded:

"* * * Discrimination is not shown merely because a few individual corporations, out of a class of several thousands which ordinarily bear the same or a heavier tax burden, may sustain a lighter tax than that imposed on national banking associations."

It is thus clearly indicated that the courts will look to the ultimate results of the particular taxing system. If its practical operation does not disclose a material discrimination against national banks, it will not be invalidated merely because the assessment process contains variations which are not strictly uniform in their application as between national banks and other financial corporations.

[[Orig. Op. Page 6]]

The case ofAberdeen Savings and Loan Association v. Chase, 157 Wash. 351, 289 Pac. 536, involved a statute providing for a tax measured by net income. In the administration of the law, savings and loan associations were not allowed any deduction on account of payments made to their members or shareholders for the use of money deposited with the savings and loan associations, while banks were allowed to make deductions for interest paid on their savings accounts. With reference to the nature of the relationship between savings and loan associations and their depositing members or shareholders, the court said:

"* * * The fundamental relation between the member and the depositee is always that of debtor and creditor, and the payments or dividends, when paid, for the purposes of an act such as that now before us, would seem to partake well nigh exactly of the nature of interest paid by a bank upon money deposited with it. * * *"

The court then concluded:

"After careful consideration, we are of the opinion that appellants, under any law similar to that now under consideration, would be entitled, in computing the net income upon which they are to pay a tax, to some credit on account of dividends paid to members."

InRummens v. Home Savings and Loan Association, 182 Wash. 539, at 541, 47 P. (2d) 845, theAberdeen Savings and Loan Association case was cited for the statement that "While the members of savings and loan associations may sometimes be referred to as stockholders, they are depositors rather than investors in corporate stock."

Under a tax measured by net income, payments made to the depositors or members of savings and loan associations and mutual savings banks as "dividends" or interest are, in my opinion, to be considered on the same basis as interest paid by banks on savings accounts, and should be allowed as deductions from gross income. Under the views expressed in the Tradesmen's National Bank case, supra, I am of the opinion that the allowance of such deductions would not be regarded as discriminatory under subsection [[Orig. Op. Page 7]] 1 (c) of the Federal statute, even though national banks were not allowed a deduction for dividends paid their stockholders. Such deductions would be considered as corresponding to those allowed national banks for interest paid on their savings accounts.

The foregoing conclusions relate solely to the application of the provisions of 12 U.S.C.A., section 548, to the questions as presented by you.

Very truly yours,

SMITH TROY
Attorney General