ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Karen Freeman-Wilson Thomas C. Borders
Attorney General of Indiana Richard A. Hanson
Kevin J. Feeley
Jon Laramore Theodore R. Bots
Deputy Attorney General Chicago, Illinois
Marilee J. Springer
SUPREME COURT OF INDIANA
INDIANA DEPARTMENT OF ) STATE REVENUE, ) ) Appellant, ) ) v. ) Cause No. 49S10-9908-TA-453 ) FARM CREDIT SERVICES ) OF MID-AMERICA, ACA, ) ) Appellee. )
The system includes twelve Farm Credit Banks (FCBs), located in each of twelve
districts. Through local associations, these banks provide real estate loans secured by
mortgages. The local associations include Federal Land Bank Associations (FLBAs), which provide
long-term loans, and Production Credit Associations (PCAs), which provide short-term and intermediate loans.
Congress created the Farm Credit System in 1916 and has reformed it several
times during the intervening decades. In the early 1980s, the system began
to falter under unfavorable economic conditions that threatened the stability of its lending
institutions. Congress responded by enacting the Agricultural Credit Act of 1987.
The Act authorized voluntary mergers between PCAs and FLBAs in an effort to
streamline the structure of the lending bodies. The institution resulting from such
a merger is called an Agricultural Credit Association (ACA).
Mid-America was created in 1989 through the merger of two PCAs and two FLBAs. This case arose in March 1997, when Mid-America filed an amended tax return with the Indiana Department of Revenue requesting a refund of the Financial Institutions TaxSee footnote it had paid for the tax years 1993 and 1994. Mid-America asserted that as a federal instrumentality it was immune from state taxation. The Department denied Mid-Americas claim. Mid-America appealed to the Indiana Tax Court, where it prevailed on summary judgment. Farm Credit Serv. Of Mid-America v. Department of State Revenue, 705 N.E.2d 1089 (Ind. Tax Ct. 1999). See footnote
Id. at 436.
This principle was applied broadly for many years thereafter to bar taxation by
one sovereign on another, or even on the employees of another. Davis
v. Michigan Dept of Treasury, 489 U.S. 803 (1989); see also, e.g., Collector
v. Day, 78 U.S. (11 Wall.) 113 (1871) (invalidating federal income tax on
salary of state judge); Dobbins v. Commrs of Erie County, 41 U.S. (16
Pet.) 435 (1842) (invalidating state tax on a federal officer). In the
late 1930s, however, the Court began to narrow its view of tax immunity.
In Graves v. New York ex rel. OKeefe, 306 U.S. 466 (1939),
the Court overruled the Dobbins-Day line of cases and held that intergovernmental tax
immunity bars only those taxes imposed directly on one sovereign by another, or
that discriminate against the sovereign to which they apply. Id. at 481-87.
In restraining the scope of tax immunity, the Court explained:
[T]he implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and where that immunity is invoked by the private citizen it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed.
Id. at 483.
Over the intervening years, the doctrine of intergovernmental tax immunity has become, in
the Courts words, a much litigated and often confused field, one that has
been marked from the beginning by inconsistent decisions and excessively delicate distinctions.
United States v. New Mexico, 455 U.S. 720, 730 (1982) (internal citations omitted).
Here, both parties agree that ACAs are federal instrumentalities, but disagree about the
tax implications of this status.
Both parties urge distinct views of tax immunity. Mid-America argues that federal
instrumentalities are immune from state taxation unless Congress expressly waives such immunity, while
the Department argues that federal instrumentalities are subject to state taxation unless Congress
expressly exempts the instrumentality from taxation.
. . . .
The PCAs business is making commercial loans, and all their stock is owned
by private entities. Their interests are not coterminous with those of the
Government any more than most commercial interests. Despite their formal and undoubted
designation as instrumentalities of the United States, and despite their entitlement to those
tax immunities accorded by the explicit statutory mandate, . . . that instrumentality
status does not in and of itself entitle an entity to the same
exemption the United States has under the Tax Injunction Act.
Id. at 831-32.
In Arkansas v. Farm Credit Serv. of Cent. Arkansas, 994 S.W.2d 453 (Ark.
1999), cert. denied, 120 S. Ct. 1530 (2000), the Arkansas Supreme Court held
that PCAs are exempt from state sales and income taxes.
holding, the court reasoned that federal instrumentalities are immune from state taxation unless
Congress expressly waives the immunity. Id. at 455. This reasoning was
based on the courts interpretation of MCulloch and its progeny, including the 1997
decision of the Indiana Tax Court. See id.
Similarly, in Production Credit Assn v. Director of Revenue, 10 S.W.3d 142 (Mo.
2000) (en banc), cert. granted in part, 120 S. Ct. 2716 (June 26,
2000), the Missouri Supreme Court concluded that PCAs were immune from Missouri state
income taxes. The court reasoned that entities designated as federal instrumentalities are
immune unless Congress explicitly waives immunity. The Missouri court examined the current
version of the federal statute governing PCAs, noted it was silent on the
matter of taxation, and concluded its inquiry, thus holding against the state.
Id. at 143.
While the cases offered by Mid-America and the Department provide an excellent background into our inquiry, we note that none of the cases are directly on point as all of the cited cases deal with PCAs rather than ACAs. While this difference is not dispositive, for reasons that will become apparent, these cases offer a view of tax immunity doctrine that is no longer reflected in recent Supreme Court decisions.
. . . .
What the Courts cases leave room for, . . . is the conclusion
that tax immunity is appropriate in only one circumstance: when the levy falls
on the United States itself, or on an agency or instrumentality so closely
connected to the Government that the two cannot realistically be viewed as separate
entities, at least insofar as the activity being taxed is concerned. This
view, we believe, comports with the principal purpose of the immunity doctrine, that
of forestalling clashing sovereignty, by preventing the States from laying demands directly on
the Federal Government.
Id. at 733-35 (citations omitted).
Similarly, in California State Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844 (1989), the Court held that the doctrine of intergovernmental tax immunity does not bar the imposition of a state sales or use tax on a bankruptcy liquidation sale. In so holding, the Court said [a] court must proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed, Id. at 851-52 (quoting Rockford Life Ins. Co. v. Illinois Dept of Revenue, 482 U.S. 182, 191 (1987)), and reiterated that [a]bsolute tax immunity is appropriate only when the tax is on the United States itself or an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, . . . Id. at 849 (quoting New Mexico, 455 U.S. at 755); see also United States v. California, 507 U.S. 746, 753 (1993) (quoting New Mexico); South Carolina v. Baker, 485 U.S. 505, 523-24 (1988) (quoting New Mexico).
We cannot read these cases and hop directly to the conclusion that anything
labeled a federal instrumentality automatically possesses immunity from state taxation. The designation
federal instrumentality certainly carries with it a strong possibility of such immunity, but
the inquiry cannot simply end there.
After all, the last century was awash in Congressional enactments creating scores of
commissions and corporations to carry out programs that the national legislature deemed important
federal missions. From the Red Cross and the Boy Scouts to Amtrak
and Comsat, these entities have been called by various names: federal instrumentalities,
federal corporations, and government-sponsored enterprises, to mention a few.
Perusal of the field rapidly demonstrates that the name Congress chooses to give
(or even not give) a particular entity does not by itself determine whether
the entity is an agency or instrumentality so closely connected to the Government
that the two cannot realistically be viewed as separate entities. New Mexico,
455 U.S. at 735.
The statute creating the Red Cross, for example, says nothing about tax immunity
and describes the corporation simply as a body corporate and politic in the
District of Columbia.
See footnote The Red Cross nevertheless has been deemed part of
the Government for tax immunity purposes because of its close connection to federal
departments and because the President appoints the board.See footnote The Boy Scouts were
created by Congress as a corporation under the laws of the District of
Columbia in a statute that says nothing about tax immunity,See footnote and the Scouts
appear exempt for reasons unrelated to sovereign immunity. Comsat, formally the Communications
Satellite Corporation, has a board chosen by its private shareholders, who have provided
its capital; in creating Comsat, Congress declared it will not be an agency
or establishment of the United States Government.See footnote
Such disavowals by Congress, however, do not bring constitutional inquiries to a close.
The National Railroad Passenger Corporation, created by Congress as a for profit
corporation,See footnote recently cited a similar provision in the statute (not an agency)See footnote to
assert that it was not the government. Though the case arose under
rather different circumstances than the ones we examine today, the Court spoke rather
broadly about Amtraks contention that the language of the statute settled the matter:
[I]t is not for Congress to make the final determination of Amtraks
status as a Government entity for purposes of determining the constitutional rights of
citizens affected by its actions.
Lebron v. National R.R. Passenger Corp., 513
U.S. 374, 392 (1995). On matters of such gravity, labels do not
account for much. As the Court said in considering the finances of
the Reconstruction Finance Corporation: That the Congress chose to call it a
corporation does not alter its characteristics so as to make it something other
than what it actually is. Cherry Cotton Mills, Inc. v. United States,
327 U.S. 536, 539 (1946).
We thus proceed to examine what Mid-America actually is.
FLBAs are federally chartered instrumentalities of the United States, offering long-term loans to
farmers and farm-related businesses for land and other capital purchases. 12 U.S.C.A.
§ 2091 (West 1989); H.R. Rep. No. 100-295(I), at 55 (1987), reprinted in
1987 U.S.C.C.A.N. 2723, 2727.
Since their inception, FLBAs have enjoyed immunity from state taxation pursuant to the following specific exemption enacted by Congress:
Each Federal land bank association and the capital, reserves, and surplus thereof, and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes on real estate held by a Federal land bank association . . . .
12 U.S.C.A. § 2098 (West 1989).
PCAs are also [f]ederally chartered instrumentalit[ies] of the United States; they are privately-owned, corporate financial institutions organized by ten or more farmers to provide short-term and intermediate loans to farmers. 12 U.S.C.A. § 2071, 2075 (West 1989). These loans are intended to cover seasonal operating expenses, land improvement, and purchases of farm equipment, livestock and buildings. H.R. Rep. No. 100-295(I), supra, at 55.
Unlike FLBAs, PCAs possess limited express tax immunity. First created by the
Farm Credit Act of 1933, PCAs were initially funded by government loans, and
were afforded immunity from state taxation as long as they were publicly-owned.
The statute providing for this exemption, which remained substantially unchanged until 1985, read:
Each production credit association and its obligations are instrumentalities of the United States and as such any and all notes, debentures, and other obligations issued by [PCAs] shall be exempt, both as to principal and interest from all taxation . . . imposed by the United States or any State, territorial, or local taxing authority. [PCAs], their property, their franchises, capital, reserves, surplus, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, territorial, or local taxing authority; . . . except that any real and tangible personal property . . . shall be subject to Federal, State, territorial, and local taxation to the same extent as similar property is taxed. The exemption provided in the preceding sentence shall apply only for any year or part thereof in which stock in the production credit associations is held by the Governor See footnote of the Farm Credit Association.
Farm Credit Act of 1971, Pub. L. No. 92-181, § 2.17, 85 Stat.
583, 602 (1972) (emphasis supplied).
During the 1950s and 1960s, stock held by the Farm Credit Association was
gradually retired. By 1968, PCAs were entirely owned by their borrower-members, as
they continue to be. See H.R. Rep. No. 92-593 (1971), reprinted in
1971 U.S.C.C.A.N. 2091, 2098; Smith v. Russellville Prod. Credit Assn, 777 F.2d 1544,
1550 (11th Cir. 1985).
In 1985, Congress deleted the express tax exemption that had been granted to
publicly-owned PCAs. What remains in the current statute is a partial exemption:
Each production credit association and its obligations are instrumentalities of the United States and as such any and all notes, debentures, and other obligations issued by such associations shall be exempt, both as to principal and interest, from all taxation . . . imposed by the United States or any State, territorial, or local taxing authority, . . .
12 U.S.C.A. § 2077 (West 1989).
Both PCAs and FLBAs are privately owned and controlled. They are, however,
considered [g]overnment-sponsored entities and have a preferred place in the nations money markets,
although debt issuances are not guaranteed by the United States. H.R. Rep.
supra, at 55. The associations are governed by boards of
directors elected from and by the stockholders. Id.
The power to merge FLBAs and PCAs is found in 12 U.S.C.
§ 2279c-1. While this statute authorizes such mergers, it does not establish what the tax implications are for the resulting ACA. The statute provides only that a merged association shall:
(A) possess all powers granted under this chapter to the associations forming the merged association; and
(B) be subject to all of the obligations imposed under this chapter on
the associations forming the merged association.
12 U.S.C.A. § 2279c-1(b)(1) (West 1989).
As discussed above, Congress enacted the Agricultural Credit Act of 1987 in response to an agricultural depression that began in the early 1980s. The 1987 Act was passed, in essence, to salvage the Farm Credit System. H.R. Rep. No. 100-295(I), supra. Mergers between Farm Credit entities were authorized in an effort to increase efficiency within the system while maintaining control by the farmer-shareholders. Such evidence of Congressional intent as we can find emphasizes not the close connection of the United States to lenders but the close connection of the local owners. In recommending legislation to allow such mergers, the House Committee on Agriculture said:
The Federal Land Bank System has served as the primary lender of long-term agricultural credit since its inception in 1916. Competition from other institutions has existed but the Farm Credit Systems ability to obtain funds in capital markets on Wall Street (known as agency status) has allowed the System to offer lower interest rates to farmers and ranchers.
. . . .
The loan portfolio of the Farm Credit System has shrunk considerably in the
last five years. . . . [T]he Farm Credit Systems [sic] seventy year-old
structure must be reorganized in order that the System compete in an agricultural
lending environment that is going through its biggest changes since farmers began borrowing
money. . . .
Realizing the structure was quickly becoming outmoded and incapable of maintaining a competitive
position, the Committee felt the Farm Credit System must make certain changes. .
Because the concept of a member-owned cooperative is appreciated to the highest degree
at the local level, the fairest and most effective approach in dealing with
the problem would be to down-size the middle layer (district banks) of the
bureaucracy. This approach would allow the stockholders to continue control production credit
associations and Federal land bank associations while accruing significant savings on borrower interest
costs, especially in years to come.
H.R. Rep. No. 100-295(I), supra, at 65-66.
Legislative and regulatory history also suggests that institutions created by mergers were deemed
to retain the characteristics of the former entities. The statute governing mergers
of Farm Credit entities states: The Farm Credit Administration shall issue regulations
that establish the manner in which the powers and obligations of the associations
that form the merged association are consolidated and, to the extent necessary, reconciled
in the merged association. 12 U.S.C.A. § 2279c-1(b)(2) (West 1989).
The FCA regulations define an agricultural credit association as an association created by
the merger of one or more Federal land bank associations or Federal land
credit associations and one or more production credit associations . . .
Farm Credit Administration Definition, 12 C.F.R. § 619.9015 (2000). The regulations also
define a merger as the [c]ombining of one or more organizational entities into
another similar entity, or the combination of one or more associations into a
continuing constituent association, which retains its charter and bylaws (except as amended to
effect the merger proposal). Id. §§ 619.9210, 611.1122 (2000).
Thus, a merged association, like an ACA, is not considered a new organizational
entity, but rather a combination of the two previous entities. And although
PCAs and FLBAs are merged to streamline the Farm Credit System, the resulting
ACA continues to provide the same services to the same constituents as the
Mid-Americas own structure reflects this definition of merger. With offices principally located
in Louisville, Kentucky, Mid-Americas territory also includes Indiana, Tennessee, and parts of Kentucky
and Ohio. Farm Credit Service of Mid-America, ACA,
1999 Annual Report (2000)
[hereinafter Annual Report]. Mid-America consists of an ACA parent company, and two
wholly-owned subsidiaries: Farm Credit Services of Mid-America, FLCA (Federal Land Credit Association),
and Farm Credit Services of Mid-America, PCA. The FLCA makes secured long-term
agricultural real estate and rural home mortgage loans while the PCA makes short
and intermediate-term loans.
See footnote The entity thus performs two distinct and
seemingly autonomous functions: long-term mortgage lending through an FLCA and short-term lending
through a PCA.
Congress has been very clear in its decision that long-term lending institutions, such
as FLBAs and FLCAs, should enjoy immunity from state taxation. Most writers
on the general principles of intergovernmental tax immunity take for granted that Congress
possesses the power to confer immunity. Thus, the FLCA or long-term mortgage
lending portion of Mid-Americas operations should not be factored into a calculation of
taxes owed by Mid-America under Indianas Financial Institution Tax.
With respect to the PCA or short-term lending portion of Mid-Americas operations, we reach a different conclusion. Since 1985, Congress has afforded only partial tax immunity to PCAs. Before that, it protected PCAs from state taxation only while they were publicly-owned. PCAs are now entirely privately-owned and controlled. They obtain their funds in the private market and disperse them without any participation by the United States. Their farmer/shareholders choose the managers of the enterprise. In light of these characteristics of the entity and Congresss removal of the exemption, we cannot conclude that a PCA is an agency or instrumentality so closely connected to the Government so as to afford it an exemption from state taxation. As the Supreme Court said: Their interests are not coterminous with those of the Government any more than most commercial interests. Arkansas v. Farm Credit, 520 U.S. at 831.
The Indiana Financial Institutions Tax is measured by calculating the taxpayers adjusted gross income, or apportioned income, for the privilege of transacting the business of a financial institution in Indiana. Ind. Code Ann. § 6-5.5-2-1 (West 2000). Although Mid-America only formally divided its operations into two subsidiaries in 1999, we presume it could separate and calculate the gross income derived from long-term mortgage loans from that derived from short-term loans for the tax years 1993 and 1994.
Thus, the Department is entitled to tax that part of Mid-Americas gross income
derived from Mid-Americas short-term PCA operations, but not the income generated by long-term
FLBA lending, which enjoys immunity from state taxation under the Farm Credit Act.
Dickson and Rucker, JJ., concur
Boehm, J., dissents with separate opinion in which Sullivan, J., joins.
Attorney General of Indiana
Deputy Attorney General
ATTORNEYS FOR APPELLEE
Thomas C. Borders
Richard A. Hanson
Kevin J. Feeley
Theodore R. Bots
Marilee J. Springer
It would be particularly implausible to read [12 U.S.C.] Section 2077 so as
to ascribe to Congress an intent to grant a production credit association a
comprehensive immunity from taxation without regard to whether the federal government owned stock
in it an immunity that the associations never have enjoyed.
(App. to Appellants Br., Br. for the United States as Amicus Curiae, at
MCulloch v. Maryland, the Attorney General of the United States argued
that the Bank of the United States was immune from state taxation, stating:
[T]he bank, as ordained by Congress, is an instrument to carry into execution
its specified powers; and in order to enable this instrument to operate effectually,
it must be under the direction of a single head. It cannot
be interfered with, or controlled in any manner, by the states, . .
MCulloch v. Maryland, 17 U.S. (4 Wheat.) at 361.
Id. (emphasis added).
On December 1, 1999, the Association restructured its operations. Instead of the
single ACA entity, the Association is now composed of an ACA parent company
with two wholly-owned subsidiaries. The subsidiaries are chartered as a PCA and
an FLCA. The restructuring preserves certain advantages of the ACA structure while
clarifying the tax exemption of the mortgage operations by conducting those operations in
a separate subsidiary chartered as an FLCA.
Annual Report, supra, Managements Discussion and Analysis, at 2.
As discussed in Note 1, the Association moved to a parent-subsidiaries structure effective
December 1, 1999. In a case of a completed restructuring using this
subsidiary pattern by another ACA, the IRS issued a private letter ruling that
the income of a new FLCA subsidiary is, under the Farm Credit Act,
exempt from taxation.
Annual Report, supra, Notes to Consolidated Financial Statements, at 5.
Although technical advice memoranda issued by the IRS may not be used or
cited as precedent, we find the aforementioned helpful in uncovering Mid-Americas understanding of
the tax implications of its bifurcated structure.