Appellants brought suit in a Massachusetts court challenging the
State's power to impose an excise tax on federal savings and loan
associations as measured by their net operating income, claiming
that the tax violates § 5(h) of the Home Owners' Loan Act of 1933,
which provides that no tax on a federal savings and loan
association shall be "greater than that imposed" by the State on
similar local thrift and home financing institutions. Appellants
claimed that the state tax on their net operating income exceeds
that imposed on similar local institutions because the deduction
available under the state tax statute for "minimum additions to its
guaranty fund or surplus required by law or the appropriate federal
and state supervisory authorities" is generally lower for federal
savings and loan associations than for similar state savings
institutions. Appellants also contended that, because the
Massachusetts tax does not apply to credit unions, which,
appellants maintained, are "similar" to federal savings and loan
associations, the associations are entitled to the credit unions'
exemptions. The Supreme Judicial Court of Massachusetts upheld the
statute.
Held:
1. The Massachusetts tax is not discriminatory on its face. The
amount of the deduction depends on varying regulatory practices as
to the reserves that must be maintained, but a tax is not invalid
because it recognizes that state and federal regulations may
differ. Nor does the record show any discrimination in fact, or in
statutory purpose (federal reserve requirements were as high as the
State's when the tax was enacted). Pp.
437 U. S.
257-260.
2. Credit unions are not "similar" to federal savings and loan
associations within the meaning of § 5(h), as is clear not only
from distinctions between the two under both federal and state law
but also from the fact that Massachusetts savings banks and
cooperative banks are more competitive with federal associations
than credit unions are. Congress recognized that States might
classify their own institutions in various ways, as Massachusetts
has done in excluding credit unions from a large
Page 437 U. S. 256
classification that includes state institutions more closely
resembling the federal associations. Pp.
437 U. S.
260-262.
372 Mass. 478, 363 N.E.2d 474, affirmed.
STEVENS, J., delivered the opinion of the Court, in which
BURGER, C.J., and BRENNAN, STEWART, WHITE, MARSHALL, POWELL, and
REHNQUIST, JJ., joined. BLACKMUN, J., filed an opinion concurring
in part and dissenting in part,
post, p.
437 U. S.
263.
MR. JUSTICE STEVENS delivered the opinion of the Court.
This appeal challenges the power of the State of Massachusetts
to impose a tax on federal savings and loan associations. Relying
on a federal law forbidding States to tax federal associations more
heavily than "similar" state institutions, appellants contend that
the State's tax discriminates against federal associations because:
(1) the state institutions subject to the tax are allowed a larger
deduction for required additions to reserves than federal
associations, and (2) the state tax does not apply to credit
unions, which appellants believe to be "similar" to federal savings
and loan associations.
In the Home Owners' Loan Act of 1933, Congress authorized the
creation of federally chartered savings and loan associations. 48
Stat. 128. Section 5(h) of that Act, as amended, 76 Stat. 984, 12
U.S.C. § 1464(h) (1976 ed.), provides:
"No State, county, municipal, or local taxing authority
Page 437 U. S. 257
shall impose any tax on such associations or their franchise,
capital, reserves, surplus, loans, or income greater than that
imposed by such authority on other similar local mutual or
cooperative thrift and home financing institutions."
As enacted in 1966, the Massachusetts statute imposed an excise
tax, measured by deposits and income, on state cooperative banks,
state savings banks, and state and federal savings and loan
associations. 1966 Mass. Acts, ch. 14, § 11. In 1973, the deposits
aspect of the tax was invalidated as discriminatory.
United
States v. State Tax Comm'n, 481 F.2d 963 (CA1 1973).
See n 3,
infra. The present case, brought in state court in 1975,
challenges the income aspect of the tax. It was presented on
stipulated facts to the Supreme Judicial Court of Massachusetts,
which upheld the statute. 372 Mass. 478, 363 N.E.2d 474 (1977). We
affirm.
I
The state tax statute allows a financial institution to deduct
from its taxable income any "minimum additions . . . to its
guaranty fund or surplus required by law or the appropriate federal
and state supervisory authorities." Mass.Gen.Laws Ann., ch. 63, §
11(b) (West Supp. 1977). As might be expected, the reserves
required by state and federal regulators are not precisely the
same. Before 1970, each federal association was required to adopt a
charter providing for a minimum reserve equal to 10% of the
association's capital.
See 12 CFR § 544.1 (1977). This
reserve was as large as, or larger than, the reserves that
Massachusetts required its institutions to maintain. [
Footnote 1] In 1970, federal associations
were allowed
Page 437 U. S. 258
to delete the reserve provision from their charters, a change
that dropped their reserve requirement to 5% of checking and
savings account balances. 35 Fed.Reg. 4044 (1970); 12 CFR §§
544.8(c)(1), 563.13 (1977); 12 U.S.C. § 1726(b) (1976 ed.). More
than three-quarters of the federal associations in Massachusetts
adopted the change within a few months of the new regulation, and
all but four have now amended their charters. The new requirement
is lower than those set for state institutions. For this reason,
the federal associations argue, their tax deductions are smaller
than those of state institutions; they contend that this disparity
in deductions is the sort of discrimination that has been
proscribed by federal law.
Section 5(h) of the Home Owners' Loan Act of 1933 "unequivocally
bars discriminatory state taxation of the Federal Savings and Loan
Associations."
Laurens Federal Savings Loan Assn. v. South
Carolina Tax Comm'n, 365 U. S. 517,
365 U. S. 523.
It is one of several laws passed by Congress to protect federally
chartered financial institutions from "unequal and unfriendly
competition" caused by state tax laws favoring state-chartered
institutions. [
Footnote 2] On
its face, however, Massachusetts' tax scheme is not unfriendly or
discriminatory. It applies a single neutral standard to state and
federal institutions alike. The amount of the deduction depends on
varying regulatory practices, but a tax is not invalid because it
recognizes that state and federal regulations may differ. There is
no reason to believe that § 5(h) was intended to force state and
federal regulation into the same mold. [
Footnote 3]
Page 437 U. S. 259
Notwithstanding its neutral language, the federal associations
argue that the tax is discriminatory in fact. They have not,
however, established that it is unfairly burdensome in "practical
operation."
Michigan Nat. Bank v. Michigan, 365 U.
S. 467,
365 U. S. 476.
The record does not indicate that federal associations have
suffered a significant handicap in competing with state
institutions, or that any other federal policies have been
thwarted. [
Footnote 4] The
lower reserve requirement, by making more funds available for
dividends, may well give the associations a competitive advantage,
despite the tax. Certainly the associations' rush to amend their
charters in 1970 lends support to that conclusion. Any suggestion
of discriminatory purpose
Page 437 U. S. 260
is foreclosed by the fact that the tax was enacted when federal
reserve requirements were as high as state requirements.
II
Massachusetts does not impose its tax on credit unions. Arguing
that credit unions in Massachusetts are "similar" to federal
savings and loan associations, the associations claim entitlement
to the credit unions' exemption.
There are indeed similarities between these two kinds of
financial institutions. For example, both are characterized by
mutual ownership and control; 12 CFR § 544.1 (1977); Mass.Gen.Laws
Ann., ch. 171, §§ 10, 13, and 24 (West 1971 and Supp. 1977); and
both are empowered to make loans secured by real estate. 12 U.S.C.
§ 1464(c) (1976 ed.); Mass.Gen.Laws Ann., ch. 171, § 24 (West Supp.
1977). But the institutions are far from identical.
Congress has long treated federally chartered credit unions
differently from federally chartered savings and loan associations,
giving the credit unions, but not the savings and loan
associations, an exemption from state taxes.
See 12 U.S.C.
§ 1768 (1976 ed.). In establishing insurance programs to protect
members' deposits, Congress distinguished state and federal credit
unions from state and federal savings and loan associations.
See 12 U.S.C. §§ 1726(a) and 1781(a) (1976 ed.). Moreover,
courts in other jurisdictions have generally rejected the claim
that credit unions are "similar" under § 5(h) to federal savings
and loan associations. [
Footnote
5]
The distinctions found in those jurisdictions have validity in
Massachusetts as well. By law, Massachusetts credit unions must
give preference to small personal loans, Mass.Gen.Laws
Page 437 U. S. 261
Ann., ch. 171, § 24 (West Supp. 1977), while the primary lending
role of federal savings and loan associations is "to provide for
the financing of homes." 12 U.S.C. § 1464(a) (1976 ed.).
Massachusetts credit unions may lend only to members, Mass.Gen.
Laws Ann., ch. 171, § 24 (West Supp. 1977), while federal
associations are not so limited. And, despite individual
exceptions, there are major differences between the actual lending
practices of state credit unions as a class and federal
associations as a class. [
Footnote
6]
Of greater importance than these differences, however, is the
fact that Massachusetts credit unions are not the federal
associations' closest state-chartered competitors. Massachusetts
savings banks and cooperative banks have much more in common with
federal associations than do state credit unions; their business is
unquestionably similar to that of the federal associations.
[
Footnote 7] These institutions
are an important segment of Massachusetts' financial community.
[
Footnote 8] Any favoritism
shown
Page 437 U. S. 262
to Massachusetts credit unions falls as harshly on them as on
the federal associations. Nonetheless, the Massachusetts
Legislature has concluded that credit unions are not similar to
state cooperative and savings banks or to state and federal savings
and loan associations.
When Congress required that federal savings and loan
associations be placed in the same classification as "similar"
state institutions, it certainly did not assume that every local
and mutual or cooperative thrift and home financing institution is
similar to a federal association.
See 12 U.S.C. § 1464(h)
(1964 ed.). It recognized that States might classify their own
institutions in various ways. Massachusetts has excluded credit
unions from a large classification that includes the institutions
most closely resembling federal savings and loan associations. The
composition of the class in which Massachusetts has placed the
federal associations satisfies the federal statute's central
purpose of protecting federal associations from discriminatory
treatment. We conclude that Massachusetts has not imposed a greater
tax on the federal associations than that imposed on other
"similar" institutions. [
Footnote
9]
Page 437 U. S. 263
Accordingly, the judgment of the Supreme Judicial Court is
affirmed.
So ordered.
[
Footnote 1]
Massachusetts savings banks must set aside 7 1/2% of deposits.
Mass.Gen.Laws Ann., ch. 168, § 58 (West 1971). State cooperative
banks must reserve 10% of their assets. Ch. 170, § 38. The reserve
requirement for state savings and loan associations is not spelled
out by statute.
Cf. ch. 93, § 34 (West Supp. 1977).
[
Footnote 2]
Mercantile Bank v. New York, 121 U.
S. 138,
121 U. S. 155.
See 12 U.S.C. § 548 (1976 ed.) (national banks); 12 U.S.C.
§ 627 (1976 ed.) (corporations federally authorized to engage in
foreign banking).
[
Footnote 3]
Indeed, the federal statute protects federal associations from
being forced into the state regulatory mold. The deposits aspect of
the tax was invalidated partly because its apparently neutral
provisions were calculated to impose state regulatory requirements
on federal associations. The statute permitted an institution to
take a deduction for loans secured by out-of-state real estate, but
only if the property was within 50 miles of the institution's home
office. Mass.Gen.Laws Ann., ch. 63, § 11 (West Supp. 1977). This
limit reflected state restrictions on making out-of-state loans
more than 50 miles from the home office.
United States v. State
Tax Comm'n, 481 F.2d 963, 968 969, n. 6 (CA1 1973). But
federal associations are empowered by federal law to make such
loans up to 100 miles from home. 12 U.S.C. § 1464(c) (1976 ed.). By
treating the state and federal institutions as though they were
subject to the same regulatory limits, the statute exacted a higher
tax from federal associations and tended at the same time to force
federal associations to follow state, rather than federal,
regulations. It is difficult to conceive of a nondiscriminatory
reason for the 50-mile limit on deductions. For these reasons, the
Court of Appeals for the First Circuit held the tax discriminatory
under § 5(h). 481 F.2d at 970.
[
Footnote 4]
Cf. n 3,
supra. The sparse evidence introduced on this point by the
associations is ambiguous, at best. For example, in three of the
seven years from 1968 to 1975, federal associations put a larger
proportion of their assets into required reserves than did state
savings banks, which are the dominant state mutual institutions.
From 1970 through 1973, federal associations made smaller
contributions to surplus than state savings banks, but, in these
years, the federal associations may have been simply consuming
reserves built up under the stringent requirements of their
pre-1970 charters.
[
Footnote 5]
See Manchester Federal Savings & Loan Assn. v. State Tax
Comm'n, 105 N.H. 17, 191 A.2d 529 (1963);
First Federal
Savings & Loan Assn. v. Connelly, 142 Conn. 483, 115 A.2d
455 (1955),
appeal dismissed, 350 U.S. 927;
State v.
Minnesota Federal Savings & Loan Assn., 218 Minn. 229, 15
N.W.2d 568 (1944).
[
Footnote 6]
As the Supreme Judicial Court noted:
"In 1972, . . . credit unions placed 30.1% of their total
investments (in dollars) in real estate mortgages. Federal savings
and loan associations had 87.7% of their total investments (in
dollars) in real estate mortgages. . . . Federal savings and loan
associations had almost 98% of their total loans in real estate
mortgages. . . . Credit unions, on the other hand, had only about
42% of their total loans in real estate mortgages."
372 Mass. 478, 493-494, 363 N.E.2d 474, 484 (1977).
[
Footnote 7]
See, e.g., Commissioner of Corporations & Taxation v.
Flaherty, 306 Mass. 461, 28 N.E.2d 433 (1940);
Springfield
Institution for Savings v. Worcester Federal Savings & Loan
Assn., 329 Mass. 184,
107
N.E.2d 315 (1952). Massachusetts cooperative banks had more
than 97% of their total loans in real estate mortgages in 1972,
while state savings banks had 95% of their loans in real estate
mortgages. Federal associations had almost 98% of their loans in
real estate mortgages. Cooperative banks had 80.4% of their total
dollar investments in real estate mortgages, and savings banks had
65.3% in such mortgages. The figure for federal associations was
87.7%.
See 372 Mass. at 493, 363 N.E.2d at 484.
[
Footnote 8]
Their assets greatly exceed those of state credit unions. State
savings banks had assets of almost $18.5 billion in 1973;
cooperative banks had almost $3 billion in assets; federal
associations had almost $2.5 billion; and credit unions had over 41
billion. App. 131-132; Annual Report of the Commissioner of Banks,
Commonwealth of Massachusetts, Division of Banks and Loan Agencies,
Sec. B (Credit Unions), iv (1973).
[
Footnote 9]
Only two of the associations' remaining attacks on the statute
deserve mention. They claim that Massachusetts' tax is not one of
the enumerated taxes approved by § 5(h), which allows a
nondiscriminatory "tax on [federal] associations or their
franchise, capital, reserves, surplus, loans, or income." 12 U.S.C.
§ 1464(h) (1976 ed.). Whether or not this tax may be characterized
as a "franchise" or an "income" tax, it is certainly a tax "on"
federal associations, and therefore within the ambit of § 5(h).
The federal associations also argue that the state statute
violates the Commerce Clause by creating a risk of multiple
taxation. They claim that some neighboring States may at some time
in the future attempt to tax the income from loans secured by
property in that State. This argument is wholly speculative, and
unsupported by evidence in the record.
MR. JUSTICE BLACKMUN, concurring in part and dissenting in
part.
Section 5(h) of the Home Owners' Loan Act of 1933, as amended,
76 Stat. 984, 12 U.S.C. § 1464(h) (1976 ed.), reads:
"No State, county, municipal, or local taxing authority shall
impose any tax on such associations or their franchise, capital,
reserves, surplus, loans, or income greater than that imposed by
such authority on other similar local mutual or cooperative thrift
and home financing institutions."
The Court, in speaking of this statute, has said: "This
provision unequivocally bars discriminatory state taxation of the
Federal Savings and Loan Associations."
Laurens Federal Savings
Loan Assn. v. South Carolina Tax Comm'n, 365 U.
S. 517,
365 U. S. 523
(1961).
I agree with the Court's ruling today on the first issue,
namely, that the lesser reserve deduction available for federal
savings and loan associations, of itself, does not demonstrate that
the associations pay a greater tax than similar Massachusetts
savings banks.
On the second issue, however, I am in disagreement with the
Court, and, to that extent, dissent from its opinion. For this
issue, the important focus of the statute is on the word "similar,"
and the measure of the Commonwealth's allowable tax is only that
imposed "on other similar local mutual or cooperative thrift and
home financing institutions."
There is no argument here that Massachusetts credit unions are
not "local mutual or cooperative thrift and home financing
institutions" within the meaning of § 5(h).
See
Mass.Gen.Laws Ann., ch. 171, § 2 (West 1971). The Supreme
Judicial
Page 437 U. S. 264
Court so found, 372 Mass. 478, 492, 363 N.E.2d 474, 483 (1977),
and no challenge to that finding is made here. The question, then,
is whether Massachusetts credit unions are "similar" to federal
savings and loan associations. If they are similar, the tax
Massachusetts would impose on the federal entities,
see
Mass.Gen.Laws Ann., ch. 63, § 11 (West Supp. 1977), violates the
statute, for the Commonwealth's excise does not apply at all to
Massachusetts credit unions.
The Court, in construing a similar federal statute, Rev.Stat. §
5219, as amended, 12 U.S.C. § 548(1)(b), which had barred state
taxation of the shares of national banks "at a greater rate than is
assessed upon other moneyed capital . . . coming into competition
with the business of national banks," and at a rate higher than the
highest rates assessed upon business corporations, observed that
Congress intended
"to prohibit only those systems of state taxation which
discriminate in practical operation against national banking
associations or their shareholders as a class."
Tradesmens Nat. Bank v. Oklahoma Tax Comm'n,
309 U. S. 560,
309 U. S. 567
(1940);
Michigan Nat. Bank v. Michigan, 365 U.
S. 467,
365 U. S. 473
(1961). The policy of § 5(h) obviously is to assure that the States
do not put federal associations to any competitive disadvantage
with respect to local savings institutions.
The statutory term "similar" usually, and certainly here, does
not mean "identical." [
Footnote
2/1] The Massachusetts credit union and the federal savings and
loan association are "similar" with respect to their fundamental
elements. Each has mutuality of ownership and control. Each has the
pronounced ability to attract savings. Each is empowered to make
first mortgage residential real estate loans on substantially the
same terms
Page 437 U. S. 265
and to approximately the same extent. The Massachusetts credit
union has the statutory authority to make loans secured by first
mortgages on real estate for terms up to 30 years, for 90% of the
value of the property, and to a maximum amount of $40,000.
See Mass.Gen.Laws Ann., ch. 171, §§ 24(b)(a)(4) and (b)(8)
(West Supp. 1977), and 1977 Mass. Acts, ch. 20. A federal
association may make real estate loans for terms up to 30 years,
for 80% of the value of the property, and to a maximum amount of
$55,000.
See 12 U.S.C. § 1464(c) (1976 ed.); 12 CFR §
545.6-1(a)(1)(i) (1977).
Although the Massachusetts credit union, to be sure, may make
loans only to members, and is required to give "preference" to
"personal loans,"
see Mass.Gen.Laws Ann., ch. 171, § 24
(West Supp. 1977), this distinction is minor, and does not
demonstrate that the credit union is not "similar" to the federal
association within the meaning of § 5(h). There is no statutory
limitation on the membership of the Massachusetts credit union,
other than self-imposed conditions of residence, occupation, or
association,
see Mass.Gen.Laws Ann., ch. 171, § 7(c) (West
1971), and a small deposit will qualify a prospective borrower as a
member. In addition, there is no statutory enforcement of the
"preference" in favor of personal loans. The Supreme Judicial Court
observed, 372 Mass. at 493-494, 363 N.E.2d at 44, that, in 1972,
Massachusetts credit unions placed 30.1% of their total dollar
investments in real estate mortgages, and 42% of their total loans
in real estate mortgages. [
Footnote
2/2] As of the end of 1973, they had $329 million as
outstanding mortgage loans. Large Massachusetts credit unions may
invest up to 80% of their assets in real estate loans,
see
Mass.Gen.Laws Ann., ch. 171, § 24(b)(b)(7) (West Supp. 1977).
All this leads me to conclude that the Massachusetts credit
union, in all pertinent respects, is "similar," and not
dissimilar,
Page 437 U. S. 266
to the federal savings and loan association. [
Footnote 2/3] Both perform the same functions, in
that they attract savings upon which they pay interest, and they
make loans, substantial amounts of which are first mortgage
residential loans. It follows, in my view, that, because of these
similarities, the exemption of Massachusetts credit unions from the
Massachusetts excise tax to which federal savings and loan
associations are subject renders the tax invalid, under § 5(h), as
applied to the federal institutions.
I therefore would reverse the judgment of the Supreme Judicial
Court of Massachusetts.
[
Footnote 2/1]
See Commonwealth v. Fontain, 127 Mass. 452, 454 (1879);
Chicago v. Vaccarro, 408 Ill. 587,
601,
97 N.E.2d
766, 773 (1951);
Thomas v. Consumers Power Co., 58
Mich.App. 486, 493-494, 228 N.W.2d 786, 790 (1975);
Miner v.
Allstate Ins. Co., 66 Wash. 2d
871, 875,
405 P.2d
712, 714 (1965).
[
Footnote 2/2]
Federal associations had 87.7% of their total dollar investments
in real estate mortgages, and almost 98% of their total loans in
such mortgages.
[
Footnote 2/3]
See Message of the President to the Congress on Tax
Reduction and Reform, Jan. 20, 178, 14 Weekly Comp. of Pres.Docs.
158, 172.