When North Carolina amended its intangibles tax in 1978 to reach money on deposit in stock-owned savings and loan associations, did the tax also apply to deposits in federally chartered stock savings and loan associations, or did federal law block the state from taxing those federal deposits?

Plain-English summary

The Administrator of the Savings and Loan Division of the North Carolina Department of Commerce asked the AG a tax-administration question that had appeared with the 1978 General Assembly's amendment to G.S. 105-199, the intangibles tax statute. The amendment said the intangibles tax applied to "all money on deposit . . . with any . . . stock-owned savings and loan association in this State." The question was: does that include federally chartered stock S&L associations operating in North Carolina, or only state-chartered stock S&L associations?

The AG's analysis came in two layers.

Layer one: statutory intent. The AG read G.S. 105-199 as intending to cover all stock-owned S&L associations doing business in North Carolina, both state and federal. The text said "stock-owned savings and loan associations" without limiting language, and the legislative history did not suggest a state-only reading. To the contrary, equal treatment of state and federal stock S&L deposits would be the natural reading of a tax aimed at the deposit form, not the charter form.

Layer two: federal preemption. That natural reading runs into 12 U.S.C. § 1464(h), the federal nondiscrimination rule for federally chartered S&L associations. That federal provision bars state and local taxation of federal S&L associations on their franchise, capital, reserves, surplus, loans, or income at rates "greater than that imposed by such authority on other similar local mutual or cooperative thrift and home financing situations." Two questions had to be answered to apply the federal rule.

First, was the intangibles tax a tax "on the association" within the meaning of § 1464(h)? The AG answered no. The intangibles tax under G.S. 105-108 is a tax on the depositor, not on the S&L. The S&L sometimes collects and remits the tax as an agent of the depositor, but the legal incidence is on the deposit holder. The Massachusetts decision in Commissioner v. Flaherty, 306 Mass. 461, 28 N.E.2d 433 (1940), held that an analogous Massachusetts income tax on shareholders of federal S&L associations was not a tax "on the association" prohibited by federal law. The AG adopted that reading.

Second, did the tax nonetheless discriminate against federal stock S&L deposits in a way the federal rule prohibited? The AG answered yes. North Carolina's intangibles tax in 1979 did not reach deposits in state mutual S&L associations. The tax only reached deposits in stock-owned S&Ls (state or federal). If federal stock S&L deposits were taxed while state mutual deposits were not, the federal stock S&L association would be operating at a competitive disadvantage to a state mutual association in the same market. The AG read Flaherty as squarely on point: the Massachusetts court had identified the same problem in its own state and concluded that taxing federal S&L shareholders' income while exempting state cooperative bank shareholders' income discriminated against the federal form. The same analysis applied to North Carolina.

The bottom line: the General Assembly probably did not intend this result, but the federal nondiscrimination rule controlled. The intangibles tax under G.S. 105-199 could not be applied to deposits in federal stock S&L associations.

Currency note

This opinion was issued in 1979. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The North Carolina intangibles tax itself was substantially restructured, then repealed, after this opinion. The federal regulatory framework for savings and loan associations was rewritten by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989 and again by subsequent legislation, with the Office of Thrift Supervision later folded into the OCC and the federal nondiscrimination provisions reorganized. The state mutual versus stock S&L distinction the opinion turns on (state mutual deposits exempt, stock S&L deposits taxed) reflects a tax structure that no longer exists in its 1979 form. Anyone working with current S&L deposit-taxation questions or current federal-state thrift nondiscrimination issues should consult the current federal statutes (no longer 12 U.S.C. § 1464(h) in the form quoted here) and any current state tax provisions touching S&L deposits or shares.

Historical context: what the AG concluded

The opinion sits at the intersection of three legal frameworks: North Carolina's pre-reform thrift regulation and taxation, the federal regulation of federally chartered savings and loan associations, and the federal nondiscrimination rule for federal thrifts.

The 1977 stock-owned S&L authority and its tax treatment. Until 1977, North Carolina S&L associations were mutual associations. Depositors were also members (with voting rights) and shared in earnings through dividends. The 1977 General Assembly enacted Chapter 54A, which for the first time authorized stock-owned S&L associations under state law. The change in organizational form drove a change in tax treatment. Mutual associations were subject to a capital stock tax and an excise tax under Article 3D of the Revenue Act. Stock-owned associations under Chapter 54A became subject to the ordinary corporate income and franchise tax under G.S. 54-1(b).

The intangibles tax on deposits also had to be modernized. In 1978, the General Assembly amended G.S. 105-199 to provide that "All money on deposit . . . with any . . . stock-owned savings and loan association in this State . . . shall be subject to an annual tax." The amendment carried the state-mutual versus stock-owned distinction into the depositor-tax framework. Deposits in state mutual associations remained outside the intangibles tax; deposits in stock-owned associations were now taxed.

That left a question the General Assembly had not directly addressed: did the amended statute reach deposits in federally chartered stock S&L associations operating in North Carolina? Federal stock S&L associations had been authorized under 12 U.S.C. § 1461 et seq. for some time; their deposits looked like deposits in state stock S&L associations from the depositor's perspective. The amendment's text ("stock-owned savings and loan association in this State") was broad enough to cover them, and the AG concluded that this was the General Assembly's intent.

The federal nondiscrimination rule. 12 U.S.C. § 1464(h), as in force in 1979, said: "No State, county, municipal, or local taxing authority shall impose any tax on such associations on 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 situations." (The opinion cites this as both 12 U.S.C. and 26 U.S.C.; the correct citation is 12 U.S.C., codifying the Home Owners' Loan Act provisions.) The text reaches taxes "on such associations" (i.e., on the federal S&L itself), not taxes on third parties. So the threshold question was whether the intangibles tax was a tax on the federal S&L.

The AG answered no by analogy to Commissioner v. Flaherty. Under G.S. 105-108, the intangibles tax was levied on the depositor, not on the association. The association sometimes acted as a collection agent (deducting tax from interest paid and remitting), but the legal incidence was on the depositor. Massachusetts had reached the same conclusion in Flaherty about an analogous income tax on federal S&L shareholders. The federal incidence-of-tax doctrine focused on who the legal incidence falls on, not who the collection mechanism runs through. The intangibles tax was not directly "on" the federal S&L.

The discrimination problem. The AG did not stop there. Flaherty went on to identify a separate problem. The federal S&L could argue (and successfully did in Massachusetts) that even a tax on its shareholders (or, here, depositors) created discrimination against the federal charter form when the same tax did not apply to similar state-chartered competitors. The discrimination analysis is competitive, not formal: the federal S&L is at a disadvantage because its depositors are taxed while comparable state competitor depositors are not.

The AG applied that analysis to North Carolina. The Massachusetts court had observed that "the [tax] discriminates against the income received from a federal fiscal agency and in favor of income received from State co-operative banks. . . . Such an exercise of the taxing power cannot be sustained." North Carolina's situation mirrored Massachusetts: federal stock S&L deposits would be taxed under the 1978 amendment; state mutual S&L deposits would not. The federal stock S&L would be at a competitive disadvantage to a state mutual. That disparity itself was prohibited under § 1464(h) as the AG read Flaherty.

The bottom line. The General Assembly was attempting to expand the intangibles tax to capture the new stock-owned S&L form, and probably intended to treat state and federal stock S&L associations alike. But the only way to apply the amendment to federal stock S&L deposits consistent with federal law would have been to also apply it to state mutual S&L deposits (eliminating the discrimination), which the amendment did not do. Given that mismatch, the AG advised that the intangibles tax could not be applied to deposits in federal stock S&L associations.

For the Savings and Loan Division and the Department of Revenue in 1979, the operational takeaway was: do not assess intangibles tax on deposits in federally chartered stock S&L associations operating in North Carolina. The amendment as written would have to be either limited to state stock-owned associations or expanded to cover state mutual deposits before any application to federal deposits could survive the federal nondiscrimination rule.

Common questions

What is the intangibles tax?

A North Carolina tax on certain intangible personal property, including money on deposit. The tax in 1979 was an annual levy under G.S. 105-199 and was imposed on the depositor, not the depository institution. The depository sometimes collected the tax as agent for the depositor. The intangibles tax has since been repealed.

What is the difference between a mutual S&L and a stock-owned S&L?

A mutual S&L is owned by its depositors as members; they share in earnings through dividends and have voting rights. A stock-owned S&L is owned by shareholders separate from depositors; it earns and distributes profits like an ordinary corporation. The 1977 General Assembly first authorized stock-owned S&Ls under state law (Chapter 54A); the 1978 General Assembly added the corresponding intangibles-tax provision in G.S. 105-199.

Why does it matter whether the S&L is federally or state chartered?

Because 12 U.S.C. § 1464(h) prohibits state and local taxation of federally chartered S&Ls that discriminates against the federal charter form. State taxes on state-chartered S&Ls do not face that federal preemption. So a state tax that applies to federal but not state institutions, or that treats federal institutions worse, raises a federal preemption problem that does not exist for the analogous state-charter situation.

Was the tax actually on the association or on the depositor?

The opinion's legal-incidence analysis says it was on the depositor. The association acted as an agent for collection but did not pay the tax out of its own funds. Commissioner v. Flaherty (Mass. 1940) reached the same conclusion about an analogous Massachusetts tax.

If the tax was on the depositor, why was federal preemption relevant?

Because the discrimination analysis under Flaherty looks at competitive effect, not formal incidence. A tax on depositors of federal stock S&Ls makes those deposits less attractive than competing state mutual deposits (which were not taxed). That competitive disadvantage falls on the federal association even though the tax is formally collected from depositors. Flaherty read federal law to bar that competitive discrimination.

Could North Carolina have rewritten the statute to apply to federal stock S&L deposits?

Yes, by eliminating the discrimination. If state mutual deposits had also been brought within the intangibles tax, the disparity would have disappeared and federal stock S&L deposits could have been taxed without violating § 1464(h). But the 1978 amendment as written exempted state mutual deposits, which created the bar.

Did the General Assembly intend to exempt federal stock S&L deposits from the intangibles tax?

The AG says no. The opinion explicitly states that "[i]t seems clear that the General Assembly intended no such result." But the federal nondiscrimination rule made the result mandatory regardless of legislative intent.

Is Flaherty still good law?

Flaherty was a Massachusetts Supreme Judicial Court decision from 1940 about Massachusetts income tax. The U.S. Supreme Court denied certiorari (312 U.S. 680). The case is persuasive authority in other jurisdictions and the AG treated it as such. Its continuing value as authority for the proposition that federal nondiscrimination provisions reach competitive discrimination against federal thrifts (not just direct taxation of federal thrifts) would have to be checked against more recent decisions before relying on it in current practice.

Background and statutory framework

The opinion is built from three interlocking layers: North Carolina's S&L taxation structure, the federal regulation of federally chartered S&Ls, and the federal nondiscrimination rule.

North Carolina S&L taxation in 1979. Before 1977, North Carolina S&L associations were mutuals, subject to a capital stock tax and an excise tax under Article 3D of the Revenue Act. The 1977 General Assembly enacted Chapter 54A, authorizing stock-owned S&L associations. Stock-owned S&Ls were taxed differently: subject to the ordinary corporate income and franchise tax under G.S. 54-1(b). The 1978 intangibles tax amendment in G.S. 105-199 added a depositor-level tax for deposits in stock-owned S&L associations, both state and federal. State mutual S&L deposits remained outside the intangibles tax. The intangibles tax was a tax on the depositor under G.S. 105-108, sometimes collected and remitted by the association as agent.

Federal stock S&L authority. 12 U.S.C. § 1461 et seq. authorized federally chartered S&L associations, including both mutual and stock-owned forms. Federal stock S&Ls operating in North Carolina were chartered by federal regulators and operated alongside state-chartered associations in the same retail deposit market.

Federal nondiscrimination rule. 12 U.S.C. § 1464(h) prohibited state and local taxation "on such associations on 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 situations." The text limits its scope to taxes "on such associations" but, as Flaherty read it, the underlying discrimination principle reaches taxes that fall on federal-S&L counterparties (depositors, shareholders) and create competitive discrimination against the federal charter form.

The case authority. Commissioner v. Flaherty, 306 Mass. 461, 28 N.E.2d 433 (1940), cert. denied, 312 U.S. 680, 61 S. Ct. 450, 85 L. Ed. 1119, is the central authority. The Massachusetts SJC held that an income tax on shareholders of federal S&L associations was not a tax on the association itself within the meaning of the federal nondiscrimination rule. But it also held that the tax discriminated against the federal form because Massachusetts co-operative bank shareholders received the same kind of income tax-free. The case is the doctrinal model for the AG's analysis.

Citations

• G.S. 105-199 (intangibles tax on money on deposit in stock-owned savings and loan associations, as amended 1978)
• G.S. 105-108 (intangibles tax incidence on depositor; collection by association as agent)
• G.S. 105-109 (related intangibles tax provisions)
• G.S. 54-1(b) (corporate income and franchise tax application to stock-owned S&L associations)
• Chapter 54A (1977 authorization of stock-owned savings and loan associations under state law)
• Article 3D of the Revenue Act (capital stock and excise tax on mutual associations)
• 12 U.S.C. § 1461 et seq. (federal S&L charter framework)
• 12 U.S.C. § 1464(h) (federal nondiscrimination rule for taxation of federally chartered S&L associations)
• Commissioner v. Flaherty, 306 Mass. 461, 28 N.E.2d 433 (1940), cert. denied, 312 U.S. 680, 61 S. Ct. 450, 85 L. Ed. 1119 (Massachusetts SJC; income tax on federal S&L shareholders not on association but discriminatory against federal form)

Source

• Landing page: https://ncdoj.gov/opinions/taxation-intangibles-tax-money-on-deposit-federal-stock-savings-and-loan-associations/

Original opinion text

Requested By: W. L. Cole, Administrator, Savings and Loan Division, North Carolina Department of Commerce

Question:

Is money on deposit with a federal stock savings and loan association subject to intangibles tax?

Conclusion:

No.

The 1977 General Assembly for the first time authorized the creation of stock-owned savings and loan associations under State law, and based upon the method of organization and ownership, the manner of taxing them became different from the manner of taxing mutual savings and loan associations. For example, a mutual association was subject to a capital stock tax and an excise tax, pursuant to Article 3D of the Revenue Act, while stock-owned associations created pursuant to Chapter 54A of the General Statutes became subject to the ordinary corporate income and franchise tax. G.S. 54-1(b). In 1978, G.S. 105-199 was amended, carrying the distinction forward into the intangibles taxation of money on deposit. That statute now provides: "All money on deposit . . . with any . . . stockowned savings and loan association in this State . . . shall be subject to an annual tax. . . ."

In addition to mutual and stock savings and loan associations created under state law, mutual and stock associations may also be created under federal law, 12 U.S.C. § 1461 et seq., and the question has now arisen as to whether money on deposit in federal stock savings and loan associations is subject to the intangibles tax.

There are three types of concern which must be considered in answering the question: (1) did the General Assembly intend to restrict G.S. 105-199 to deposit only in State-chartered stockowned associations; (2) does 12 U.S.C. § 1464(h) preclude taxing deposits in federal stock-owned associations; (3) is the tax on such associations otherwise proscribed?

We are satisfied that the language of G.S. 105-199 applies, and was intended to apply, to all stock-owned savings and loan associations, both State and federal. G.S. 105-199 speaks of "stock-owned suavings and loan associations". The amendment to G.S. 105-109 was adopted months after the enactment of Chapter 54A, and was in no sense part of that "package". In fact, it would seem to be the intention of the Legislature to avoid discriminating between State and federal stock-owned associations in the area of intangibles tax by treating them equally; it was surely not their intention to discriminate against State-chartered associations by levying a tax on their deposits, but not on deposits in similar federal associations.

The federal law under which federal associations are created contains the following limitation on State taxing authority, which must be dealt with: "No state, county, municipal, or local taxing authority shall impose any tax on such associations on 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 situations." 26 U.S.C. § 1464(h).

The tax levied by G.S. 105-108 is not a tax upon the association but a tax upon its depositors, which in some instances the associations pays as agent for such depositors. In an analogous situation, Massachusetts levied an income tax on income from such deposits, and the Massachusetts court reasoned, correctly we believe, that with reference to 26 USC § 1464(h), "the tax now assailed does not offend this provision because it was not assessed upon the association or its property. . . . A tax upon the association is different from a tax upon its customers, depositors and shareholders." Commissioner v. Flaherty (1940), 306 Mass. 461, 28 NE 2d 433, cer. den. 312 US 680, 61 S. Ct. 450, 85 L. Ed. 1119. In short, the scope of § 1464(h) reaches only taxes on associations and their properties. It does not reach taxes upon depositors.

Unfortunately, that conclusion does not dispose of the question in its entirety, because the Massachusetts court went on to say:

"The appellee does not challenge the authority of the Commonwealth to lay a tax on income received by shareholders in a federal savings and loan association, but contends that the receipt of such income cannot be taxed if no tax is laid upon the receipt of similar income by the shareholder of a co-operative bank. . . . The bank discriminates against the income received from a federal fiscal agency and in favor of income received from State co-operative banks. Such an exercise of the taxing power cannot be sustained." (citing cases) Commissioner v. Flaherty, supra.

The same observation must be made here. It is of no moment under federal law that State and federal stock-owned associations are taxed the same, or that State stock-owned associations may be treated adversely if federal stock-owned associations' deposits are not subject to the tax. The important consideration is that deposits with a state mutual association, in competition with a federal stock-owned association, are not subject to tax and that consideration impels the conclusion that such a distinction is a proscribed discrimination under federal law.

It seems clear that the General Assembly intended no such result, but we must advise that the tax imposed by G.S. 105-199 may not be applied to deposits in federal stock-owned savings and loan associations.

Rufus L. Edmisten
Attorney General

Myron C. Banks
Special Deputy, Attorney General