Court Opinion

ID: 6762356
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:32:52.141329+00
Date Added: 2024-06-11T16:02:37.672900
License: Public Domain

Wright, J.,
dissenting. I must respectfully dissent from the majority’s holding that the tax imposed by R.C. Chapter 5733 is a nondiscriminatory corporate franchise tax as applied to financial' institutions. Section 3124(a), Title 31, U.S. Code protects the borrowing power of the United States by prohibiting the consideration of federal obligations, or the interest from such obligations, in the imposition or computation of a tax by the states. The section makes an exception for non-discriminatory franchise taxes. Because the tax imposed by R.C. Chapter 5733 is not a franchise tax but rather is unquestionably nothing more than a poorly disguised property tax, I *173cannot join in the majority’s judgment here.
As early as 1829, the United States Supreme Court held that obligations of the United States government were immune from state taxation. Weston v. City Council of Charleston (1829), 27 U.S. (2 Pet.) 449. The court premised this holding upon the Borrowing and Supremacy Clauses of the United States Constitution, Clause 2, Section 8, Article I, and Clause 2, Article VI, respectively, and stated that such immunity was necessary for the United States government to be able to borrow efficaciously. Id. The Borrowing Clause expressly authorizes Congress to borrow money on the credit of the United States. Clause 2, Section 8, Article I.
To ensure that investors would continue to consider these federal obligations as viable and appealing investments, Congress enacted Section 742, Title 31, U.S. Code, which provided that “all 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.” The United States Supreme Court found that the statute’s purpose was to proscribe taxes that “* * * diminish in the slightest degree the market value or the investment attractiveness of obligations issued by the United States in an effort to secure necessary credit.” (Emphasis added.) New Jersey Realty Title Ins. Co. v. Div. of Tax Appeals (1950), 338 U.S. 665, 675.
In 1959, Congress amended Section 742, Title 31, U.S. Code by adding a second sentence, and, as since amended, the section currently reads:
“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 instead of a franchise tax, imposed on a corporation; and
“(2) an estate or inheritance tax.” (Emphasis added.) Section 3124(a), Title 31, U.S. Code.
This amendment removed, for state and local tax purposes, the distinction between indirect taxes and direct taxes on federal obligations held by corporations. See American Bank & Trust Co. v. Dallas Cty. (1983), 463 U.S. 855, 862; Montana Bankers Assn. v. Montana Dept. of Revenue (1978), 177 Mont. 112, 580 P. 2d 909. Thus, a state or its political subdivision is flatly prohibited from taxing federal obligations outside the narrow ambit of Sections 3124(a)(1) and (2), Title 31, U.S. Code.
From 1932 until 1981, Ohio taxed financial institutions based upon the value of the shares of stock of the institution (the “shares” tax) and its deposits (the “deposits” tax). G.C. 5638 (Am. S.B. No. 323, 114 Ohio Laws 714, 722). Both of these taxes clearly were imposed upon the property of the institution, with the shares tax borne directly by the institution and the deposits tax generally borne by the depositors. Because of persistent doubts about the constitutionality of the shares and deposits taxes, the General Assembly phased out the deposits tax in 1982 and 1983, R.C. 5707.03(C), and repealed the deposits tax, effective in 1981. Am. Sub. H.B. No. 694 (139 Ohio Laws, Part II, 3460, 3992, 3994); Am. Sub. H.B. No. 552 (139 Ohio Laws, Part II, 3163, 3199). The loss of revenue from these taxes combined with the unique asset and capitalization structure of financial institutions*1747 presented the General Assembly with a novel problem. The legislature responded by imposing the franchise tax on financial institutions, R.C. 5725.26, Am. Sub. H.B. No. 694 (139 Ohio Laws, Part II, 3460, 3999) and adding a net worth tax rate applicable only to financial institutions, R.C. 5733.06(D), Am. Sub. H.B. No. 291 (140 Ohio Laws, Part II, 2872, 3211).
It is with this new net worth tax rate that the problem lies. In reality, R.C. 5733.06(D), stripped of its trappings, is nothing more or less than a disguised property tax posing as a franchise tax, since the tax bases for the old and the new taxes are the same.8 Both tax the property of financial institutions. I feel strongly that R.C. Chapter 5733.06(D) must yield to the federal prohibition against a state or its subdivision imposing such a property tax on holders of federal obligations.
We have only to look to our sister state of Pennsylvania for support of this position. The facts of Dale Natl. Bank v. Commonwealth of Pennsylvania (1983), 502 Pa. 170, 465 A. 2d 965, are quite similar to the facts of this case. In Dale, the Pennsylvania Supreme Court analyzed Pennsylvania’s attempt to bring a bank shares tax within the exception for nondiscriminatory franchise taxes found in Section 3124(a), Title 31, U.S. Code. The Pennsylvania statute taxed the actual value of a bank’s capital stock, paid-in surplus, and undivided profits “for the privilege of doing business in this Commonwealth.” Id. at 176, 465 A. 2d at 968. This tax base is essentially the same as that upon which Ohio’s share tax was levied. Rejecting the Pennsylvania Legislature’s characterization of the tax as a franchise tax, the Pennsylvania Supreme Court declared:
“* * * [I]t is clear that the tax imposed by section 701 was and continues to be a property tax identical in operation and effect to the tax invalidated in American Bank [(1983), 463 U.S. 855] * * * which, contrary to the intent of Congress, ‘unduly burden[s] federal obligations.’ ” Id. at 176, 465 A. 2d at 968.
Indeed, the Ohio Department of Taxation itself recognized that the new tax was old wine in a new bottle when its report stated:
“* * * The base of the net worth franchise tax would be virtually identical to the [then] present share tax[.] * * * [I]n reality it would be more of a change in the name of the tax than [in] the form * * *.” Ohio Dept. of Taxation, The Taxation of Financial Institutions in Ohio (Jan. 1981) 19.
It is, therefore, clear to me that the R.C. Chapter 5733 franchise tax as applied to financial institutions is a property tax which Ohio is prohibited from *175levying on holders of federal obligations. In accordance with the mandates of Section 3124(a), Title 31, U.S. Code, I would reverse the decision of the Board of Tax Appeals and remand for a redetermination of the appellants’ tax liability.
Holmes, J., concurs in the foregoing dissenting opinion.

 Financial institutions, unlike most other corporations, have an asset and capitalization structure typified by a small investment in tangible personal property and a large investment in federal obligations and other intangibles.

 The taxable shares of financial institutions were assessed on “the aggregate amount of the capital, the surplus or reserve fund, and the undivided profits * * *” of the financial institution as shown on the annual return. Former R.C. 5725.07. Am. H.B. No. 944 (126 Ohio Laws, Part II, 12, 16).
The net worth base for franchise tax purposes is, with stated exclusions, the book value of the corporation’s “capital, surplus, whether earned or unearned, undivided profits, and reserves * * *.” R.C. 5733.05(A).