Farm Credit Serv. of Mid-America v. Zaino - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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[Cite as Farm Credit Serv. of Mid-America v. Zaino, 91 Ohio St.3d 564, 2001-
Ohio-113.]

FARM CREDIT SERVICES OF MID-AMERICA, APPELLANT AND CROSS-
APPELLEE, v. TRACY [ZAINO], TAX COMMR., APPELLEE AND CROSS-
APPELLANT.
[Cite as Farm Credit Serv. of Mid-America v. Zaino (2001), 91 Ohio St.3d 564.]
Taxation -- Franchise tax -- Agricultural credit association that is the product
of the merger of several federal land banks and a production credit
association is not exempt from Ohio franchise tax.
(No. 00-505 -- Submitted March 14, 2001 -- Decided June 6, 2001.)
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, Nos. 97-T-889 and
98-T-333.
__________________

Per Curiam. On March 31, 1989, the Federal Land Bank Association of
the Fourth District, Louisville, Kentucky, the Production Credit Association of the
Fourth District, Louisville, Kentucky, the Federal Land Bank Association of
Bellefontaine, Ohio, and the Federal Land Bank Association of Minerva in
Warren, Ohio, merged to form appellant and cross-appellee Farm Credit Services
of Mid-America, an Agricultural Credit Association, appellant, with headquarters
in Louisville, Kentucky. Farm Credit Services took over the long-term loans of
the merged federal land bank associations and the short-term and intermediate-
term loans of the merged production credit association.

The stock issued by the merging entities converted to stock representing
ownership in Farm Credit Services. Farm Credit Services may issue further stock
to investors and borrowers; borrowers must be farmers, ranchers, and producers
or harvesters of aquatic products. Federal land bank associations and production
credit associations have received federal instrumentality designation under federal
statute. Sections 2091 and 2077, Title 12, U.S.Code. Farm Credit Services, an

SUPREME COURT OF OHIO
agricultural credit association, received designation as a federally chartered
instrumentality from the Farm Credit Administration, a federal agency.

Farm Credit Services paid Ohio franchise tax for tax years 1990 through
1996. It applied for a refund for tax years 1990 through 1993, totaling
$2,060,332, with the Tax Commissioner, appellee and cross-appellant, claiming
immunity from state taxation under the federal Supremacy Clause. It also applied
for refunds for tax years 1994 through 1996, totaling $2,733,340, by separate
applications that presented the same claim. The commissioner dismissed the
refund claim for tax year 1994 as untimely filed and denied the remaining refund
applications. On appeal, the Board of Tax Appeals, finding that it had no
jurisdiction to interpret and apply the federal Supremacy Clause, affirmed the
commissioner's order.

This cause is now before the court upon an appeal and cross-appeal as of
right.

Less than ten years ago, in NLO, Inc. v. Limbach (1993), 66 Ohio St.3d
389, 394, 613 N.E.2d 193, 197, we observed, "the federal Supremacy Clause,
Clause 2, Article VI, United States Constitution, prevents the state from taxing the
federal government and its instrumentalities." This year, in Dir. of Revenue of
Missouri v. CoBank ACB (2001), 531 U.S. 316, 121 S.Ct. 941, 148 L.Ed.2d 830,
the United States Supreme Court reviewed the Supremacy Clause in a context
similar to the instant case.
In CoBank, the court identified two types of immunity under the
Supremacy Clause--explicit immunity, where Congress has expressly stated that
a federal instrumentality is not subject to a state tax, and implied immunity, where
Congress has not set forth any such immunity. In CoBank, the court held that the
income of a bank for cooperatives, which has a tax status similar to production
credit associations, one of the merging entities in this case, was taxable. This was
so, according to the court, because "Congress has provided that banks for
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January Term, 2001
cooperatives are subject to state taxation." Id., 531 U.S. at ___, 121 S.Ct. at 944,
148 L.Ed.2d at 835.

Federal land bank associations and production credit associations, the
merging predecessors in this case, are "federally chartered instrumentalit[ies] of
the United States" under Sections 2091 and 2071, Title 12, U.S.Code. Federal
land bank associations are exempt from state taxes under Section 2098, Title 12,
U.S.Code. Production credit associations, however, are not exempt from state
taxes; according to Section 2077, Title 12, U.S.Code, only their notes, debentures,
and other obligations are exempt. Thus, federal land bank associations were
exempt from Ohio's franchise tax during the disputed tax years; production credit
associations were not.

In Section 2279c-1, Title 12, U.S.Code, Congress authorized federal land
bank associations and production credit associations within the same district to
merge if approved, inter alia, by the Farm Credit Administration Board, a federal
agency. Under this statute, the merged association possesses all powers and
succeeds to all obligations of the merging associations. Finally, division (b)(2) of
the statute empowers the Farm Credit Administration to "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."

These statutes do not declare the merged association to be a federal
instrumentality, and they do not provide immunity or exemption from state
taxation to the merged association. Nevertheless, the Farm Credit Administration
calls these merged associations "agricultural credit association[s]" and issued a
charter to Farm Credit Services naming it a "Federally chartered instrumentality."
Farm Credit Services relies on this charter to claim exemption from franchise tax.
But the commissioner argues that the Farm Credit Administration cannot
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immunize an agricultural credit association from state taxation by calling it,
without congressional authority, a federally chartered instrumentality.

Congress has exempted federal land banks from Ohio's franchise tax but
has not exempted production credit associations. We have, however, neither of
these entities before us; we have an agricultural credit association ("ACA"), the
product of the merger of several federal land banks and a production credit
association. Congress has not expressed an immunity from taxation for an ACA.
Under CoBank, therefore, we must decide whether Farm Credit Services has an
implied immunity from the franchise tax.

We discussed implied immunity under the Supremacy Clause in NLO,
Inc.:
"In
United States v. New Mexico, supra, [1982], 455 U.S. [720] at 735,
102 S.Ct. [1373] at 1383, 71 L.Ed.2d [580] at 592, the court concluded that a state
cannot levy a tax `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.' " 66 Ohio St.3d at 394, 613 N.E.2d at 197.
In New Mexico, the United States Supreme Court reviewed the "much
litigated and often confused field" of Supremacy Clause rulings. United States v.
Detroit (1958), 355 U.S. 466, 473, 78 S.Ct. 474, 478, 2 L.Ed.2d 424, 429.
According to the New Mexico court, the language quoted in NLO, Inc. sets forth
the latitude each form of government needs in maintaining sovereignty. A private
taxpayer, moreover, must stand in the shoes of the federal government to be
immune. Quoting from United States v. Detroit, the New Mexico court explained
that the language "[c]omports with the principal purpose of the immunity
doctrine, that of forestalling `clashing sovereignty,' McCulloch v. Maryland
[1819], 4 Wheat. [316], at 430, 4 L.Ed. 579, by preventing the States from laying
demands directly on the Federal Government. * * * At the same time, a narrow
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January Term, 2001
approach to governmental tax immunity accords with competing constitutional
imperatives, by giving full range to each sovereign's taxing authority. * * *"

"Thus, a finding of constitutional tax immunity requires something more
than the invocation of traditional agency notions: to resist the State's taxing
power, a private taxpayer must actually `stand in the Government's shoes.' " 455
U.S. at 735-736, 102 S.Ct. at 1383, 71 L.Ed.2d at 592-593.

We conclude that Farm Credit Services, as an ACA, is a privately owned
business benefiting private interests. Private shareholders own the association,
and private borrowers benefit from the loans that the association distributes.
Farm Credit Services is a commercial enterprise that performs no governmental
duty. It does not stand in the federal government's shoes and, thus, is not "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." Id.
at 735, 102 S.Ct. at 1383, 71 L.Ed.2d at 592. Ohio can, consequently, impose the
franchise tax on it.

We also dismiss Farm Credit Services' argument that language in the
statute, asserting that merged associations possess all powers and assume all
obligations of the merging associations, passes tax immunity to the successor
association. According to normal usage, "powers" refers to the activities and
actions the predecessor entities may undertake, and "obligations" refers to the
debts, contractually and otherwise acquired duties that the predecessor entities
have undertaken. Black's Law Dictionary (7 Ed.Rev.1999) 1189-1190, 1102-
1103.

Taxation is the rule, exemption the exception. Vought Industries, Inc. v.
Tracy (1995), 72 Ohio St.3d 261, 264, 648 N.E.2d 1364, 1366. As Justice
Thomas, writing for the majority, observed in CoBank, Congress knows how to
exempt federal instrumentalities from taxation. 531 U.S. at ___, 121 S.Ct. at 946,
148 L.Ed.2d at 837. If Congress does not explicitly do so, the Supremacy Clause
5

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does not supply an implicit exemption to a privately owned entity that lends funds
to private individuals.

Accordingly, we agree with the commissioner's denial of the request for
refunds and affirm the BTA's decision.
Decision affirmed.

MOYER, C.J., DOUGLAS, RESNICK, F.E. SWEENEY, PFEIFER, COOK and
LUNDBERG STRATTON, JJ., concur.
__________________

McDermott, Will & Emery, John A. Biek, Richard A. Hanson and
Theodore R. Bots, for appellant and cross-appellee.

Betty D. Montgomery, Attorney General, and Robert C. Maier, Assistant
Attorney General, for appellee and cross-appellant.
__________________
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