FIRST NATIONAL BANK OF ATLANTA, ETC., APPELLANT V. BARTOW COUNTY BOARD OF TAX ASSESSORS, ET AL. No. 83-1620 In the Supreme Court of the United States October Term, 1984 On Appeal From the Supreme Court of Georgia Brief For the United States As Amicus Curiae Supporting Appellant TABLE OF CONTENTS Opinions below Jurisdiction Constitutional provisions and statute involved Interest of the United States Statement Summary of argument Argument: The Georgia bank share tax applied by the court below is inconsistent with Rev. Stat. Section 3701 Conclusion OPINIONS BELOW The original opinion of the Supreme Court of Georgia (J.S. App. A10-A23) is reported at 248 Ga. 703, 285 S.E.2d 920. The opinion on remand from this Court (J.S. App. A1-A8) is reported at 251 Ga. 831, 312 S.E.2d 102. JURISDICTION The judgment of the Supreme Court of Georgia was entered on January 4, 1984. Notices of appeal to this Court were filed in the Supreme Court of Georgia and in the Superior Court of Bartow County on March 2, 1984 (J.S. App. A24, A25). The jurisdictional statement was filed on April 3, 1984, and this Court noted probable jurisdiction on May 29, 1984. The jurisdiction of this Court is invoked under 28 U.S.C. 1257(c). CONSTITUTIONAL PROVISIONS AND STATUTE INVOLVED The Constitution of the United States: Art. I, Section 8, Cl. 2: The Congress shall have Power * * * To borrow Money on the credit of the United States(.) Art. VI, Cl. 2: This Constitution, and the laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding. Rev. Stat. Section 3701 (1878 ed.), as amended by the Act of Sept. 22, 1959, Pub. L. No. 86-346, Section 105(a), 73 Stat. 622: /1/ 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. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes. Ga. Code Ann. Section 48-6-90 (1982) is set forth at J.S. App. A26-A29. QUESTION PRESENTED Whether the Supreme Court of Georgia erred in holding that, for purposes of computing the state tax on bank shares, measured by the bank's net worth, Rev. Stat. Section 3701 (as amended in 1959) does not require that the assets taken into account in computing the bank's net worth be reduced by the amount of the obligations of the United States held by the bank, but rather permits a reduction by only that fraction of the net worth that United States obligations constitute of the bank's total assets. INTEREST OF THE UNITED STATES After this Court's decision in American Bank & Trust Co. v. Dallas County, No. 81-1717 (July 5, 1983), in which the United States participated as amicus curiae at the invitation of this Court, this case was remanded to the Supreme Court of Georgia for further consideration in light of American Bank (J.S. App. A9). On remand, the Supreme Court of Georgia acknowledged that its prior decision permitting computation of Georgia's tax on bank shares without consideration of the amount of obligations of the United States held by the bank was inconsistent with this Court's decision in American Bank (J.S. App. A2-A3). Nontheless, the court largely adhered to the result of that prior decision by now holding that, in the imposition of the State's tax on bank shares, only a portion of the obligations of the United States held by the bank need be excluded from the computation; the greater part (90.25% in an example employed by the court) could be taken into account in computing the tax. We are informed by the Department of the Treasury that, as of December 1983, $1,022.6 billion of federal obligations were privately held, of which $188.9 billion were held by commercial banks. /2/ To the extent that such obligations are taken into account in the computation of state or local taxes, their marketability is diminished and the cost of borrowing by the United States is enhanced to a significant, if not precisely measurable, extent. Hence, the United States has an important interest in the question whether Rev. Stat. Section 3701, as amended in 1959, permits the computation method applied below. STATEMENT The First National Bank of Cartersville, Georgia (Bank), to which appellant is the successor in interest, filed with local taxing authorities its 1980 (Determination of Taxable Value of Bank Shares," as required by 1933 Ga. Laws Section 91A-3301(b), codified at Ga. Code Ann. Section 48-6-90(b) (1982) (see J.S. App. A27). Section 48-6-90(a) imposes upon bank shares a tax "at their fair market value, which shall be determined by adding together the amount of the capital stock, paid-in capital, appropriated retained earnings, and retained earnings * * *." This figure represents what is commonly called "net worth." See J.S. App. A2. Relying on Rev. Stat. Section 3701, as amended, in its 1980 return the Bank deducted from this figure the value of obligations of the United States owned by it. That deduction, along with similar deductions by two other banks, was disallowed by the Bartow County Board of Tax Assessors. All three banks appealed to the Board of Equalization, which decided against the Bank and (because different panels heard the cases) one of the other two banks. The three cases were consolidated on appeals to the Superior Court of Bartow County, which held that the banks could not deduct the value of federal obligations in determining net worth for purposes of the share tax (see J.S. App. A12-A13). The Supreme Court of Georgia affirmed (J.S. App. A10-A23). On appeals to this Court (No. 81-1834), the judgment of the Supreme Court of Georgia was vacated, and the case was remanded to that court for further consideration in light of this Court's decision in American Bank & Trust Co. v. Dallas County, No. 81-1717 (July 5, 1983) (J.S. App. A9). On remand, the Supreme Court of Georgia adhered in large part, although not entirely, to its initial result. The court acknowledged that its prior decision approving a complete failure to consider federal obligations was incorrect and that American Bank demonstrated that the Georgia statute "is unconstitutional unless it be construed so that the value of federal obligations which the banks hold not be considered, directly or indirectly, in computing the tax" (J.S. App. A2). Nevertheless, the court rejected the Bank's claim that federal obligations should be deducted in full in the computation of the tax. The court explained that "we deal here with a value tax measured by net worth, rather than by total assets. The law commands that we exclude federal obligations from the tax base, which is to say, that we exclude federal obligations from net worth to the extent that they are represented therein." Id. at A4. The court then held that Rev. Stat. Section 3701, as amended, required only a proportionate deduction -- i.e., that net worth be reduced by that fraction that United States obligations owned by the bank constituted of the bank's total assets. Thus, in the example used by the court of the Citizens and Southern Bank of Bartow County (C & S Bank), the $1,995,393 of federal securities owned by the C & S Bank constituted 9.75% of total assets of $20,463,522; hence, the court held that only 9.75% of its net worth of $2,082,488, or $203,043, was represented by federal securities and had to be deducted in the computation of taxable net worth, rather than the entire $1,995,393 of the United States obligations (J.S. App. A4-A7). The Bank's successor in interest again appeals, arguing that this revised reading of the Georgia statute also violates Rev. Stat. Section 3701. SUMMARY OF ARGUMENT Rev. Stat. Section 3701, as amended, provides a state tax exemption for federal obligations from "every form of taxation" that would require the obligations to "be considered, directly or indirectly, in the computation of the tax." The Georgia bank share tax approved below, which is based on the net worth of the bank, reduced by only a fraction of the obligations of the United States held by the bank, violates this provision. The fundamental flaw in the decision of the court below is its acceptance of net worth as a given figure, without examining how that figure was obtained. In fact, the net worth of a corporation essentially represents the sum of its assets minus its liabilities. Thus, the net worth figure that the court below took as the base from which further computation of the bank share tax proceeded included all of the obligations of the United States held by the bank. This net worth figure is a necessary figure "in the computation of the tax," and, in order to comply with the amended Rev. Stat. Section 3701, it is therefore necessary to exclude obligations of the United States from the computation of net worth. This the court below failed to do. And, contrary to the suggestion below, it is not disproportionate to subtract the full amount of the federal obligations, rather than a fraction, from net worth; that subtraction simply substitutes for the failure to subtract the obligations from total assets at the beginning of the net worth calculation. This Court has long held that a state tax on a corporation's assets, or on its capital, or capital and surplus, is invalid insofar as obligations of the United States are included in the computations by which the amount of the tax is ascertained. Specifically, if the Georgia tax were imposed directly upon the net worth of the bank, a full deduction for the obligations of the United States would have to be allowed. New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665, 672-673 (1950). Under this Court's recent decision in American Bank & Trust Co. v. Dallas County, No. 81-1717 (July 5, 1983), it is clear that the same result must obtain when the tax is on the bank's shares valued by net worth. The tax here plainly reduces the investment value of federal obligations, and it indisputably takes into account a large portion of those obligations (90.25% in the example used by the court) in computing the tax. Hence, it violates both the purpose and the letter of Rev. Stat. Section 3701. ARGUMENT THE GEORGIA BANK SHARE TAX APPLIED BY THE COURT BELOW IS INCONSISTENT WITH REV. STAT SECTION 3701 Prior to 1959, Rev. Stat. Section 3701 had provided in general terms for the exemption of obligations of the United States from taxation under State or municipal or local authority. By the Act of Sept. 22, 1959, Pub. L. No. 86-346, Section 105(a), 73 Stat. 622, Congress significantly expanded the coverage of the statute. With exceptions not here relevant, the amended Section 3701 provides: This exemption extends to every form of taxation that would require that either the obligations (of the United States) or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax * * *. In American Bank & Trust Co. v. Dallas County, No. 81-1717 (July 5, 1983), slip op. 5, the Court explained that the exemption provided by the amended statute is "sweeping," and it held that the amendment rejected the Court's earlier approval of bank share taxes that did not provide a deduction for the amount of federal obligations held by the bank. The Court in American Bank therefore held invalid the Texas bank share tax involved there, noting incidentally that the Georgia bank share tax involved here used the same method for assessing the value of bank shares as the invalid Texas statute. Id. at 9 n.9. On remand from this Court in light of American Bank, the Georgia Supreme Court conceded that its earlier decision upholding the Georgia bank share tax (J.S. App. A10-A23) was erroneous. However, the court reinterpreted that statute to establish a different method of computing the tax and concluded that this revised method is consistent with Rev. Stat. Section 3701 even though it provides only a small deduction for federal obligations and hence yields substantially the same tax result as the invalidated method that completely ignored the existence of federal obligations. The Supreme Court of Georgia rationalized its substantial adherence to its prior decision by explaining that "we deal here with a value tax measured by net worth, rather than by total assets" (J.S. App. A4). The court's analysis simply accepted net worth as a given figure, without examining or questioning how that figure was computed. The court then attributed to that net worth only a small percentage of the obligations of the United States held by the bank (corresponding to the percentage of the bank's total assets that were United States obligations). Using the figures of C & S Bank as an example, the court took $2,082,488 as its given net worth. Since C & S's $1,995,393 of federal obligations constituted 9.75% of the bank's total assets of $20,463,522, the Court attributed 9.75% of those obligations, or $203,043, to the bank's net worth. Therefore, the court held that, in measuring the value of C & S's shares, Rev. Stat. Section 3701 would be satisfied if the bank's net worth of $2,082,488 were reduced by only $203,043 by virtue of its ownership of $1,995,393 in obligations of the United States. See J.S. App. A7. This holding, like the court's prior decision upholding the Georgia statute, cannot be squared with the terms of Rev. Stat. Section 3701 and the decisions of this Court. Rev. Stat. Section 3701, as amended, unequivocally states that the exemption extends to "every form of taxation" that requires that the United States obligations "be considered, directly or indirectly, in the computation of the tax." As this Court explained in American Bank, "(i)n context, the word 'considered' means taken into account, or included in the accounting." Slip op. 6 (footnote omitted). It cannot seriously be doubted that the federal obligations are taken into account in computing the Georgia bank share tax; indeed, counting those obligations is an essential part of the process. The fundamental flaw in the decision below is that the Georgia Supreme Court arbitrarily began its analysis with the net worth figure without discussing the origin of that figure. But "net worth" is not a number that comes out of thin air, it is intimately connected with other data. Specifically, the net worth of a corporation (or of a person) is the sum of its assets (computed on the basis either of cost or of value), minus its liabilities or, as this Court put it in Holland v. United States, 348 U.S. 121, 125 (1954), the "total net value of the taxpayer's assets." /3/ Thus, the first step in the process of computing the bank share tax is determining the total assets of the bank so that net worth can be calculated. It necessarily follows that, to use the statutory phrase, "in the computation of" the amount of the Bank's net worth here, all of the obligations of the United States owned by the Bank were included. That net worth is an indispensable, albeit not the ultimate, figure that must be employed in the computation of Georgia's tax under the interpretation of the court below. This inclusion of federal obligations in the computation of the amount of the Bank's net worth therefore violates the explicit terms of Rev. Stat. Section 3701, as amended. In order to comply with the statute, the amount of the obligations of the United States owned by the Bank should be excluded in the initial computation of the amount of the Bank's net worth, the base figure from which further computation proceeds. The Georgia Supreme Court's conclusion that the "proportionate deduction" method it employed is valid seems to stem from the view that it would be somehow "disproportionate" to subtract the full value of the United States obligations from the net worth figure, since that figure is so much smaller than the total assets of the bank. In the words of the Georgia court, it is not appropriate to subtract the full value of the federal obligations because "only a portion of the federal obligations are attributable to net worth" (J.S. App. A4). But this approach completely misses the point. To the extent that it seems disproportionate to subtract the federal obligations from the smaller net worth figure, that is an illusion because that subtraction simply corrects the failure to subtract those obligations from total assets initially when computing the net worth figure. Obviously, it is not "disproportionate" to subtract the total value of the federal obligations from the bank's total assets at the outset. The final result of subtracting the federal obligations from the net worth figure at the end is the same, and hence the method proposed by appellant properly accounts for the federal obligations exemption. /4/ Conversely, the Georgia court's "proportionate deduction" method results in a higher taxable net worth, and hence higher tax, than if the federal obligations were not included in total assets; therefore, that method is a form of taxing federal obligations. /5/ In short, to take the bank's net worth as a given, without reference to Rev. Stat. Section 3701 or to the obligations of the United States owned by the bank, is simply to ignore the provisions of Rev. Stat. Section 3701. The formulation of the 1959 amendment to Rev. Stat. Section 3701 in terms of computation of the tax was designed to make the exemption for obligations of the United States a thorough protection and to prevent avoidance or circumvention by such formalistic devices of characterization or hypothetical allocations as those engaged in by the court below. See H.R. Rep. 1148, 86th Cong., 1st Sess. 2, 8, 12 (1959); S. Rep. 909, 86th Cong., 1st Sess. 2, 8, 11 (1959); Public Debt Ceiling and Interest Rate Ceiling on Bonds: Hearings Before the House Comm. on Ways and Means, 86th Cong., 1st Sess. 71, 72 (1959). The Georgia bank share tax cannot satisfy the strictures of Rev. Stat. Section 3701 unless the full amount of the federal obligations held is deducted from the total assets that form the basis for the net worth computation; the contrary decision below simply invites state legislatures and courts to devise ingenious methods of partially counting federal obligations in the tax base. The decisions of this Court fully support the result indicated by the plain language of Rev. Stat. Section 3701. As this Court pointed out in its opinion in American Bank (slip op. 6-7, 9-10), the Court has long and consistently held that a tax directly on a corporation computed on the amount of the corporation's net worth (see New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665, 672-673 (1950)), or its capital (Bank of Commerce v. New York City, 67 U.S. (2 Black) 620 (1863)), or its "capital stock paid in" (Bank Tax Case, 69 U.S. (2 Wall.) 200, 207 (1865)) is invalid insofar as obligations of the United States are included in the computations by which the amount of the tax is ascertained. In each of those cases, the Court held that the amount on which the tax was computed was required to be reduced by the amount of obligations of the United States owned by the corporation. See also Society for Savings v. Bowers, 349 U.S. 143, 147-148 (1955); Weston v. City Council, 27 U.S. (2 Pet.) 449 (1829). If the tax had been imposed directly on the net worth of the banks in this case, the amount on which the tax was computed would have had to be reduced by the amount of the obligations of the United States he by the banks. New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, supra. Prior to 1959, a different result would have obtained for a tax on bank shares, but American Bank makes clear that the 1959 amendment obliterated this distinction between a tax on the bank's assets and a tax on the bank's shares whose value is measured by the underlying assets. Thus, as in New Jersey Realty, in computing Georgia's tax on bank shares, the value of the shares subject to tax must be ascertained by first removing from the computation all of the obligations of the United States held by the banks. To do otherwise would severely undercut the decision in American Bank and mark a return to the pre-1959 "formal but economically meaningless distinction between taxes on government obligations and taxes on separate interests." American Bank, slip op. 2; see also Society for Savings v. Bowers, 349 U.S. at 148. Rather, as the Court in American Bank explained, the statute explicitly prohibits the tax assessment upheld below because a "tax is barred regardless of its form if federal obligations must be considered, either directly or indirectly, in computing the tax." Slip op. 6 (emphasis in original). Moreover, appellees accept, at least for purposes of argument, that the tax challenged here will decrease the marketability or investment value of federal obligations. Motion to Dismiss 8. /6/ Thus, it is clear that the tax computation does not use the federal obligations in some tangential way; rather the tax here goes to the core of the purpose underlying Rev. Stat. Section 3701, viz., "to prevent taxes which 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." Smith v. Davis, 323 U.S. 111, 117 (1944). "Section 3701 prohibits any form of tax that would require consideration of federal obligations in computing the tax; it cannot matter whether such consideration is mandated by the tax assessor in practice or by the state statute in so many words." American Bank, slip. op. 9 (footnote omitted). By the same token, it cannot matter whether such consideration is mandated by statutory construction in the state courts. The Supreme Court of Georgia has construed the Georgia statute to require that obligations of the United States held by a bank be taken fully into account in computing the net worth of the bank, and that that net worth then be reduced, in computing the amount of the tax, by only a fraction of the obligations of the United States held by the bank, i.e., by that fraction that the obligations of the United States constitute of the total assets of the bank. In the example employed by the court (J.S. App. A7), where obligations of the United States represented 9.75% of the total assets of the bank, 100% of those obligations were taken into account in determining the net worth of the bank, and that figure was then reduced by the amount of 9.75% of those obligations, leaving 90.25% of the obligations of the United States having been taken into account, directly or indirectly, in the computation of the tax on bank shares. The decision of the Supreme Court of Georgia is therefore inconsistent with the decision of this Court in American Bank, and with the explicit provisions of Rev. Stat. Section 3701, as amended in 1959. /7/ CONCLUSION The judgment of the Supreme Court of Georgia should be reversed. Respectfully submitted. REX E. LEE Solicitor General GLENN L. ARCHER, JR. Assistant Attorney General ALAN I. HOROWITZ Assistant to the Solicitor General MICHAEL L. PAUP ERNEST J. BROWN Attorneys JULY 1984 /1/ As noted by this Court in its American Bank opinion (slip op. 2 n.1), Rev. Stat. Section 3701 was succeeded by 31 U.S.C. 3124(a) when Title 31 of the United States Code was enacted into positive law without substantive change on September 13, 1982, subsequent to the year here involved. See Act of Sept. 13, 1982, Pub. L. No. 97-258, Section 3124(a), 96 Stat. 945. /2/ See Bureau of Gov't Financial Operations, Office of the Secretary, U.S. Dep't of Treasury, Treasury Bulletin 31 (1st Quarter FY 1984). /3/ See also 19 W. Fletcher, Cyclopedia of the Law of Private Corporations Section 9236, at 428 (1975) (footnotes omitted); ("The term 'net worth' of a corporation generally means the difference between the assets and liabilities of the corporation, and as used in a contract the term has been construed as equivalent to the book value of the corporation."); McGarry v. United States, 388 F.2d 862, 864 (1st Cir. 1967); W. H. Miner, Inc. v. Peerless Equipment Co., 115 F.2d 650, 655 (7th Cir. 1940); Internal Revenue Code of 1954, 26 U.S.C. 341(e)(7); Treasury Regulations on Income Tax (1954 Code), 26 C.F.R. 1.341-6(j). /4/ Significantly, it has never been suggested that the Georgia statutory deduction for real estate be made through the "proportionate deduction" method. Rather, the full value of real estate is deducted from net worth. The Georgia Supreme Court's explanation of this discrepancy is wholly unconvincing. See J.S. App. A6. The court points out that real estate is taxed separately, but that is not a genuine distinction; to the contrary, it highlights the fact that real estate and federal obligations ought to be treated alike for these purposes. Because real estate is taxed separately, it should not be taxed at all under the bank share tax. The way this complete exemption is accomplished is by deducting the value of real estate fully from net worth. By the same token, federal obligations, which may not be taxed at all under the bank share tax, must also be deducted fully from net worth. /5/ Indeed, the Georgia court indirectly exposes the fallacy in its approach by acknowledging (J.S. App. A4 n.3) that banks that could show that federal obligations were purchased from capital stock or surplus might be entitled to a complete deduction. Plainly, the protections of Rev. Stat. Section 3701 should not vary depending on the label of the fund out of which they were purchased. /6/ It seems clear enough that the investment attractiveness of federal obligations under appellant's submission, which gives full credit for such obligations, is greater than under the "proportionate deduction" method. Appellees are of course correct that this tax advantage evaporates when the bank in question reaches a point where it no longer has to pay any tax. See Motion to Dismiss 8-9 n.4. But the same can be said about any situation where Rev. Stat. Section 3701 applies. The critical fact is that, until that "no tax" point is reached, the decision below decreased the marketability of federal obligations. /7/ United States v. Atlas Life Ins. Co., 381 U.S. 233 (1965), on which the court below relied (J.S. App. A5), has no bearing on this case. That case involved the constitutionality of Section 804 of the Internal Revenue Code of 1954 (26 U.S.C.), calling for a division of a life insurance company's investment income, including income from municipal bonds, into two parts, the company's share and the policyholders' share, and the tax computations dependent thereon. It in no way involved Rev. Stat. Section 3701, which deals with state taxation of federal obligations. In Atlas Life the question was not of statutory construction but of the constitutionality of a statute unrelated to this case. The constitutional standard applied there does not control the question presented here of the construction and application of Rev. Stat. Section 3701 to the particular facts in this case. In any event, the proration in Atlas Life was justified to avoid a double exemption; as explained above, appellant here seeks only to exempt the full value of federal obligations once from the total assets used to calculate net worth.