Case Title: KeyCorp v. Tracy

Citation: 1999-Ohio-43

Docket Number: 19981608

State: ohio

Court: Ohio Supreme Court

Date: 1999-12-01T00:00:00Z

Document:
KEYCORP, SUCCESSOR IN INTEREST TO SOCIETY CORPORATION [AND TRUSTCORP, 
INC.], APPELLANT, v. TRACY, TAX COMMISSIONER, APPELLEE. 
[Cite as KeyCorp v. Tracy (1999), 87 Ohio St.3d 238.] 
Taxation — Franchise tax — Amount of bank holding company’s repurchase 
agreements, Eurodollar deposits, cash deposits, and certificates of deposits 
it had with its wholly owned banking subsidiary are not the types of 
indebtedness that are excluded by R.C. 5733.05(A)(5)(c) in determining 
value of bank holding company’s issued and outstanding shares of stock. 
(No. 98-1608 — Submitted September 15, 1999 — Decided December 1, 1999.) 
APPEAL from the Board of Tax Appeals, No. 96-M-954. 
 
KeyCorp, appellant, is a bank holding company owning both banking and 
nonbanking subsidiaries.  KeyCorp was created in 1994 when Trustcorp, Inc. and 
Society Corporation (“Society”) merged.  Society, the surviving corporation, 
changed its name to KeyCorp after the merger.  Society’s wholly owned banking 
subsidiary was Society National Bank (“SNB”). 
 
Prior to the merger, for tax years 1990, 1991, and 1992, Society1 calculated 
and paid its franchise tax using net worth as the tax base.  Finding  error in its 
calculations, the Tax Commissioner issued assessments against Society as follows:  
$1,194,791.62 for 1990, $198,664.73 for 1991, and $826,533 for 1992.  Society 
filed timely petitions for reassessment. After a hearing, the commissioner reduced 
 
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the assessments (tax and interest) to $752,256.13 for 1990, $141,566.04 for 1991, 
and $680,084.74 for 1992. 
 
Society appealed the commissioner’s decision to the Board of Tax Appeals 
(“BTA”) on two issues:  (1) whether Society was a quiescent holding company and 
(2) whether the amounts of the repurchase agreements, Eurodollar deposits, cash 
deposits, and certificates of deposit that it had with SNB on the last day of its fiscal 
year were excluded by R.C. 5733.05(A)(5)(c) in determining the value of Society’s 
issued and outstanding stock. 
 
The first issue was resolved in Society’s favor and the Tax Commissioner 
has not appealed that finding.  As to the second issue, the BTA ruled against 
Society, finding that these transactions were not the types of indebtedness that 
were excluded by R.C. 5733.05(A)(5)(c) in determining the value of Society’s 
issued and outstanding shares of stock. 
 
The matter is now before us upon an appeal as of right. 
__________________ 
 
Baker & Hostetler L.L.P., Edward J. Bernert, George H. Boerger and 
Christopher J. Swift, for appellant. 
 
Betty D. Montgomery, Attorney General of Ohio, and Richard C. Farrin, 
Assistant Attorney General, for appellee. 
 
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Vorys, Sater, Seymour & Pease L.L.P., Raymond D. Anderson and Scott J. 
Ziance; and Jeffrey D. Quayle, urging reversal for amicus curiae, Ohio Bankers 
Association. 
__________________ 
 
FRANCIS E. SWEENEY, SR., J.  At issue is whether Society’s placement of its 
excess cash in repurchase agreements, Eurodollar deposits, and cash deposits2 with 
SNB creates the types of investments in indebtedness that are excluded by R.C. 
5733.05(A)(5)(c) from the value of the issued and outstanding shares of Society’s 
stock at issue.  We answer this issue in the negative, finding that the transactions in 
question do not constitute investments in the issued indebtedness of SNB and, 
therefore, should not be excluded under R.C. 5733.05(A)(5)(c).  We affirm the 
BTA’s decision. 
 
Franchise tax is an excise tax paid by domestic and foreign for profit 
corporations for the privilege of doing business within the state.  R.C. 5733.01(A); 
Gulf Oil Corp. v. Lindley (1980), 61 Ohio St.2d 23, 25, 15 O.O.3d 42, 43, 398 
N.E.2d 790, 791.  R.C. 5733.05 is the statute that provides two bases for the 
calculation of corporate franchise tax.  One measure is based upon the net worth of 
the corporation and the other measure is based upon the net income of the 
corporation.  Tax is due upon the greater sum of the two methods of calculation.  
 
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R.C. 5733.06.  For the tax years involved, Society paid its tax using its net worth as 
the tax base. 
 
The net worth basis calculation begins with the value of the issued and 
outstanding shares of stock of a corporation, which is described in former R.C. 
5733.05(A), as in effect during the period in question, as “[t]he total value, as 
shown by the books of the company, of its capital, surplus, whether earned or 
unearned, undivided profits, and reserves, but exclusive of:  * * *.”  Seven specific 
exclusions are then set forth in R.C. 5733.05(A)(1) through (7).  Society relies on 
the exclusion found in R.C. 5733.05(A)(5)(c): 
 
“(5) A portion of the value of the issued and outstanding shares of stock of 
such corporation equal to the amount obtained by multiplying such value by the 
quotient obtained by: 
 
“ * * * 
 
“(c) Dividing (1) the amount of the corporation’s assets, as shown on its 
books, represented by investments in the capital stock and indebtedness of 
financial institutions of which at least twenty-five percent of the financial 
institution’s issued and outstanding common stock is owned by the corporation by 
(2) the total assets of such corporation as shown on its books.”  (Emphasis added.)  
141 Ohio Laws, Part II, 4166. 
 
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Thus, these provisions allow corporations owning at least a twenty-five-
percent interest in financial institutions to exclude the value of those interests. 
 
Society owned the requisite amount of SNB’s common stock.  This is not 
disputed.  Instead, the question presented by this case involves the interpretation of 
the phrase “investments in the capital stock and indebtedness” of a qualifying 
subsidiary. 
 
During the tax years in question, Society had excess cash (income over 
operating expenses) at the end of each business day.  Society would use this money 
to purchase investments that provide a greater rate of return than a savings account. 
The funds were placed in either repurchase agreements or Eurodollars.  Society 
also had general cash deposits with SNB. 
 
Society argues that the repurchase agreements, Eurodollars, and cash 
deposits it had with SNB at the end of each fiscal year represent excludable 
investments by it in the indebtedness of SNB.  Society focuses on the word 
“indebtedness,” contending that there is no basis in the express language of R.C. 
5733.05(A)(5)(c) to limit the scope of indebtedness. 
 
However, the Tax Commissioner contends that the word “indebtedness” 
cannot be read in isolation.  Instead, it must be considered along with the word 
“investments” as part of the phrase that excludes “investments in the capital stock 
and indebtedness.”  Thus, the commissioner contends that the entire exclusionary 
 
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phrase contained in R.C. 5733.05(A)(5)(c) must be considered.  Once this is done, 
the repurchase agreements, Eurodollars, and cash deposits are not investments by 
Society in the indebtedness of SNB. 
 
Statutory construction principles direct us to “ascertain and give effect to the 
intent of the lawmaking body which enacted it.”  Slingluff v. Weaver (1902), 66 
Ohio St. 621, 64 N.E. 574, paragraph one of the syllabus.  Moreover, “[i]n looking 
to the face of a statute or Act to determine legislative intent, significance and effect 
should be accorded to every word, phrase, sentence and part thereof, if possible.”  
State v. Wilson (1997), 77 Ohio St.3d 334, 336-337, 673 N.E.2d 1347, 1350.  See, 
also, R.C. 1.42:  “Words and phrases shall be read in context and construed 
according to the rules of grammar and common usage.  Words and phrases that 
have acquired a technical or particular meaning, whether by legislative definition 
or otherwise, shall be construed accordingly.” 
 
A review of the statutory history of the phrase “investments in the capital 
stock and indebtedness” shows that it was enacted in the franchise tax statutes in 
1969 as part of Am.Sub.S.B. No. 55.  133 Ohio Laws, Part I, 127.  At first, the 
exclusion was applicable only to public utility holding companies. 
 
Am.Sub.H.B. No. 475 amended the franchise tax law in 1971.  This 
amendment treated insurance and financial holding companies the same as public 
utility holding companies, thereby allowing them to exclude their “investments in 
 
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the capital stock and indebtedness” of qualifying subsidiaries.  134 Ohio Laws, 
Part II, 1559.  By choosing to retain the same exclusionary language, the General 
Assembly indicated that the criterion for determining excludable “investments in 
the capital stock and indebtedness” for insurance and financial institution holding 
companies was to remain the same as it had been for public utility holding 
companies. 
 
R.C. Chapter 4905 contains the general powers of the Public Utilities 
Commission relating to the issuance of stocks, bonds, notes, and other evidences of 
indebtedness by public utility companies.  When Am.Sub.S.B. No. 55 was enacted 
(and as it remains today), R.C. 4905.40(A), (C), (D), (F)(2), (F)(3), and (G) all 
contained a phrase, similar to that now under consideration, relating to the issuance 
by public utilities of “stocks, bonds, notes, and [or] other evidences of 
indebtedness,” “stocks, bonds, and other evidences of indebtedness,” or “bonds, 
notes, or other evidence[s] of indebtedness.”  Thus, at the time Am.Sub.S.B. No. 
55 was enacted, the only investments available to a public utility holding company 
would have been “stocks, bonds, notes, or other evidences of indebtedness.” 
 
After considering this history, we believe that the types of indebtedness that 
would have been available to a public utility for investment were not limited to 
stock, bonds, and notes.  Instead, other evidences of indebtedness were permitted.  
Additionally, all of the types of indebtedness listed represented indebtedness 
 
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“issued” by the public utility.  Finally, we note that while “other evidences of 
indebtedness” are permitted, they must be of the same character as stock, bonds, 
and notes.  We make these conclusions based upon the rule of ejusdem generis — 
“where in a statute terms are first used which are confined to a particular class of 
objects having well-known and definite features and characteristics, and then 
afterwards a term having perhaps a broader signification is conjoined, such latter 
term is, as indicative of legislative intent, to be considered as embracing only 
things of a similar character as those comprehended by the preceding limited and 
confined terms.”  State v. Aspell (1967), 10 Ohio St.2d 1, 39 O.O.2d 1, 225 N.E.2d 
226, paragraph two of the syllabus.  Applying this principle, we find that the 
phrase “other evidences of indebtedness” is not open-ended.  Instead, it is limited 
to and would include only indebtedness issued by the public utility that is similar 
to stocks, bonds, and notes. 
 
A repurchase agreement is best described as a type of hybrid transaction that 
is not exactly a security, not exactly a loan, and not exactly a sale.  In Nebraska 
Dept. of Revenue v. Loewenstein (1994), 513 U.S. 123, 126, 115 S.Ct. 557, 560, 
130 L.Ed.2d 470, 475, the court described the repurchase agreement used by the 
parties as “a two-part transaction, commonly called a ‘repo,’ between a party who 
holds federal securities and seeks cash * * * and a party who has available cash 
and seeks to earn interest on its idle funds.” 
 
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In part one of the transaction, SNB sold a set amount of government 
securities to Society for a set price.  In part two of the transaction, SNB agreed to 
buy the securities back from Society at a certain time, usually the next day.  The 
predetermined price paid by SNB to repurchase the securities was higher than the 
initial purchase price paid by Society for the securities.  This difference is interest 
and is determined by a mutually agreed-upon rate, based generally on certain 
market rates.  Any interest earned or paid on the securities during the term of the 
repurchase agreement stayed with the initial seller (SNB). 
 
A witness for Society described the repurchase transaction as a 
“collateralized borrowing” with “similar features to a secured loan.”  Yet, while 
the repurchase transaction may be conceptualized as a secured loan, it is not.  
When the United States Supreme Court described the repurchase agreement in 
Loewenstein, 513 U.S. at 126, 115 S.Ct. at 560, 130 L.Ed.2d at 475, it was careful 
not to characterize repurchase agreements for federal income tax law or debtor 
creditor law.  However, the court pointed out features of the repurchase agreement 
that were consistent with a normal lender-borrower relationship.  It also alluded to 
testimony about possible consequences that might develop if repurchase 
agreements were to be characterized as secured loans for purposes of federal 
bankruptcy and banking law or of commercial and local government law.  Id., 513 
U.S. at 136, 115 S.Ct. at 565, 130 L.Ed.2d at 481-482.  The court went on to say, 
 
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“Our decision today, however, says nothing about how [repurchase agreements] 
should be characterized for those purposes.”  Id. at 136, 115 S.Ct. at 565, 130 
L.Ed.2d at 482. 
 
In Schroeder, Repo Madness:  The Characterization of Repurchase 
Agreements Under the Bankruptcy Code and the UCC (1996), 46 Syracuse L.Rev. 
999, 1008, Professor Schroeder points out that the characterization of a repurchase 
agreement as a security interest would be disastrous to the multi-trillion-dollar 
repurchase agreement market because the remedies of Article 9 of the U.C.C., 
rather than the contractual remedies of this agreement, would apply.  Likewise, 
characterization of a repurchase agreement is important when considering whether 
it should be regulated as a security, or its status in a bankruptcy context. 
 
Turning now to the record, we find that the only documentary evidence 
concerning Society’s repurchase transactions consisted of Exhibits 4 and 5, which 
are merely confirmation receipts for the transactions.  The confirmation receipts 
contain a clause under the section entitled “Additional Terms and Conditions 
Governing Repurchase Agreements,” which states that “a repurchase agreement is 
not a deposit of the bank and is not insured by the FDIC.” 
 
We do not find a sample master repurchase agreement in the evidence.  A 
master repurchase agreement would provide definitions, and specify such terms as 
 
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the rights and remedies of the parties in the event of a default, substitution of 
collateral, margin requirements, and notice requirements. 
 
By not being characterized as a deposit, the repurchase money SNB received 
from Society was not subject to any charge for FDIC insurance, nor was the bank 
subject to any reserve requirement on the money.  While we know the general 
characteristics of a repurchase agreement, we know nothing about the specifics of 
the repurchase agreements involved in this case. 
 
The second type of financial transaction between Society and SNB involved 
deposits made by Society with SNB’s Grand Cayman branch.  Again, the only 
documentary evidence of the Eurodollar transactions consisted of confirmation 
receipts. 
 
Eurodollar deposits are dollar deposits in a foreign bank or a foreign branch 
of an American bank outside the United States.  When Eurodollar deposits are 
payable only outside the United States, they are exempt from bank reserve 
requirements and FDIC assessments. 
 
Society’s witness testified that whether a repurchase agreement or a 
Eurodollar deposit was used to employ excess cash was a function of whether SNB 
had collateral at the time of the transaction.  If SNB had collateral available a 
repurchase agreement was used; if not, a Eurodollar deposit was used. 
 
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The third type of financial transaction employed by Society was a cash 
deposit.  Society’s witness testified that such deposits were “like a checking 
account you or I would have.” 
 
Society believes that any indebtedness owed to Society by SNB should be 
excluded.  According to Society, any general deposit made by Society with SNB 
creates an excludable indebtedness, based on the debtor-creditor relationship that a 
general deposit creates between a bank and its customer. 
 
In Speroff v. First-Cent. Trust Co. (1948), 149 Ohio St. 415, 37 O.O. 98, 79 
N.E.2d 119, paragraph one of the syllabus, this court held:  “The relationship 
between a bank and general depositor is that of debtor and creditor.”  Here, the 
Eurodollar and cash deposits represent the type of general deposits that would 
create a debtor-creditor relationship between Society and SNB.  In addition, from 
Society’s point of view, to the extent that Society expected to earn interest on these 
deposits, they represented a type of investment.  We reject Society’s contention. 
 
Instead, we determine that the repurchase agreements, Eurodollar deposits, 
and cash deposits do not represent excludable types of indebtedness issued by a 
subsidiary corporation.  These transactions are banking customer products.  For 
example, a checking account is a banking customer product created for the use of 
the customer; it is not issued indebtedness of the bank in which an investment is 
 
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made.  Likewise, while the Eurodollar deposits may create a debtor-creditor 
relationship, they do not represent indebtedness issued by the bank. 
 
The repurchase agreements present a somewhat different situation.  If the 
repurchase agreement is interpreted as an actual sale and repurchase of securities, 
then the transaction clearly would not be an investment by Society in the issued 
indebtedness of its subsidiary, SNB.  Even if the repurchase agreement is 
interpreted as a collaterized loan to SNB, it still does not meet the criterion of 
being an investment in an issued indebtedness of the bank.  If the repurchase 
transactions are viewed as collateralized loans, they could be considered to have 
created a debtor-creditor relationship.  However, the contractual terms of the 
repurchase transactions are unknown because the record does not contain any 
evidence of the repurchase agreements between the parties. 
 
Moreover, investments in capital stock and other forms of indebtedness, 
such as bonds and notes, issued by a corporation are sold to investors by the bank, 
and do not constitute banking customer products.  Customer products are for the 
use and benefit of the customer.  Investments in indebtedness are issued for the 
benefit of the bank. 
 
R.C. 5733.05(A)(5) states, “investments in the capital stock and 
indebtedness.”  The word “in” appears to have been ignored by the parties.  The 
investments must be “in” the indebtedness.  To be an investment in the 
 
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indebtedness of the subsidiary requires that the subsidiary first have created an 
indebtedness in which an investment can be made, e.g., stock, bonds, or notes.  
This concept parallels that set forth in the sections of R.C. Chapter 4905 discussed 
above, wherein the investments must be ones “issued” by the public utility holding 
company’s subsidiary.  Eurodollar deposits and other deposits with a bank do not 
represent an indebtedness issued by the bank, nor do they represent any type of 
security issued by the bank.  Securities issued in the indebtedness of a bank are 
sold to investors, who in turn may resell the security; this is not the case with 
deposits and repurchase agreements.  Not all debt creates an investment in the 
indebtedness of the debtor within the meaning of R.C. 5733.05(A)(5)(c). 
 
Therefore, we find that when Society placed its excess cash with SNB in 
repurchase agreements, Eurodollars, and cash deposits, it was dealing with SNB as 
a bank customer, and not as an investor investing in the indebtedness issued by 
SNB.  Thus, since these transactions are not investments in the issued indebtedness 
of SNB, they cannot be excluded under R.C. 5733.05(A)(5)(c).  We affirm the 
BTA’s decision. 
Decision affirmed. 
 
MOYER, C.J., DOUGLAS, SUNDERMANN, PFEIFER, COOK and LUNDBERG 
STRATTON, JJ., concur. 
 
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J. HOWARD SUNDERMANN, JR., J., of the First Appellate District, sitting for 
RESNICK, J. 
FOOTNOTES: 
1. 
We refer to appellant as “Society,” since the assessments were prior to the 
KeyCorp merger and the franchise tax returns in dispute were filed by Society. 
2. 
In its notice of appeal to the BTA, Society included certificates of deposit as 
another type of disputed transaction.  However, Society has apparently abandoned 
this claim, since there is no mention of certificates of deposit in the notice of 
appeal filed with this court or in the submitted briefs.