A federally chartered farm-lending cooperative is officially a 'federal instrumentality.' Does that status make it immune from New Mexico corporate income tax under the Supremacy Clause?

Subject

Production Credit Association of Eastern New Mexico (D&O 98-58)

Plain-English summary

The Production Credit Association of Eastern New Mexico ("PCA") is a federally chartered farm-lending cooperative in Clovis, part of the national Farm Credit System. It lends only to qualified farmers and ranchers in five New Mexico counties, and by federal statute it is a "federal instrumentality." PCA paid New Mexico corporate income tax for 1992 through 1996, then sought refunds of all of it — $56,745 for 1992 and $287,037 for 1993–1996 (about $343,782 total), plus interest — arguing that as a federal instrumentality it is immune from state income tax under the Supremacy Clause unless Congress affirmatively authorizes the tax. Hearing Officer Gerald B. Richardson denied the refund claims.

The competing arguments. PCA relied on the classic doctrine of intergovernmental tax immunity from McCulloch v. Maryland (1819) — "the power to tax involves the power to destroy" — under which, if Congress is silent, the risk of interfering with federal functions raises a presumption of immunity for a federal instrumentality. PCA argued that once the 1985 amendments to the Farm Credit Act deleted the language authorizing state taxation of production credit associations, nothing remained to permit New Mexico's tax. The Department countered that Congress had always expressly addressed these associations' taxability and never intended the 1985 cleanup to hand them a sweeping new immunity.

The unusual tax history that decided the case. From the associations' creation in the Farm Credit Act of 1933, Congress gave them an express tax exemption but expressly limited it: the exemption "shall not apply" to any production credit association after the government-held stock in it was retired. The 1971 Act kept that structure — the income-tax exemption applied "only for any year . . . in which stock . . . is held by the Governor of the Farm Credit Administration." By 1968, every production credit association was owned entirely by its private borrower-members, so none qualified for the exemption anymore. The 1985 amendments removed the now-moot exemption-and-limitation sentences as part of restructuring the Farm Credit Administration (eliminating the "Governor" position and making the agency an arm's-length regulator). The House Report described these as merely "technical and conforming amendments" with no mention of any tax consequence.

Why PCA lost. The Hearing Officer reasoned that the federal-instrumentality immunity doctrine is a doctrine of implied immunity that arises from congressional silence. But Congress was never silent about production credit associations — their taxability was spelled out expressly and expressly limited for over fifty years (and their obligations' exemption remains express today, 12 U.S.C. § 2077). It would "defy all logic" to conclude that by deleting a moot exemption, Congress silently created a brand-new implied immunity it had never intended — especially with no hint of that result anywhere in the legislative history. So rather than mechanically applying a silence-based presumption, the correct approach was to look to congressional intent behind the 1985 amendments, which clearly showed no intent to confer state-income-tax immunity on privately owned associations. PCA is therefore not immune from New Mexico corporate income tax, and its refund claims were denied.

The parallel Arkansas litigation. Nearly identical disputes played out in federal court. The Eighth Circuit (divided panel) and, on remand, an Arkansas state court held the associations immune for lack of an express waiver — but Judge Loken's dissent reached the opposite conclusion the Hearing Officer adopted here. The U.S. Supreme Court in Arkansas v. Farm Credit Services of Central Arkansas (1997) reversed on the Tax Injunction Act (28 U.S.C. § 1341) and pointedly did not decide the Supremacy Clause immunity question, while observing that these associations "make commercial loans," have all their stock "owned by private entities," and exercise no governmental regulatory power like the NLRB. The New Mexico Hearing Officer declined to follow the contrary Arkansas results and sided with the Department.

What this means for you

• Being a "federal instrumentality" is not, by itself, a guaranteed exemption from state income tax. Whether an entity is immune depends on what Congress has said about that entity's taxability — not merely on the instrumentality label.
• Farm Credit System production credit associations are taxable by the states on their income. New Mexico treated this association as subject to corporate income tax, and its Supremacy Clause refund claims failed. Similar associations should not assume their income is exempt.
• When Congress has spoken expressly, courts look to intent, not to a silence-based presumption. The implied-immunity presumption that helps federally connected entities exists to fill congressional silence. Where Congress expressly set — and then cleaned up — an exemption, the analysis turns on what Congress actually intended, and here the history showed no intent to grant immunity.
• The exemption for the associations' obligations is different from an exemption on their income. Federal law still expressly exempts the notes, debentures, and other obligations of these associations (12 U.S.C. § 2077). That is not the same as exempting the association's corporate income from state tax.
• A favorable ruling in one state or circuit is not controlling elsewhere. Even though courts in the Arkansas litigation sided with the associations, the New Mexico Hearing Officer independently reached the opposite result. Multistate entities should expect the question to be litigated jurisdiction by jurisdiction until a higher court resolves it.

Key questions answered

Isn't a federal instrumentality automatically immune from state tax?
Not automatically. The immunity is an implied one that arises when Congress is silent about whether a federally connected entity can be taxed. Where Congress has expressly addressed the entity's taxability — as it did for production credit associations since 1933 — the courts look to what Congress intended rather than presuming immunity.

What did the 1985 amendments actually do?
They deleted the sentences that had granted, and then limited, the associations' tax exemption — language that by then applied to no association, because since 1968 all were privately owned. The legislative history called these "technical and conforming amendments" tied to restructuring the Farm Credit Administration, with no stated tax purpose.

Why didn't the deletion of the taxing language create immunity?
Because the exemption had always been express and expressly limited, and the limitation had already become moot. The Hearing Officer found it illogical — and unsupported by any legislative history — to read the removal of dead language as Congress silently conferring a sweeping new immunity it had never intended.

Didn't the Supreme Court side with these associations?
No. In the parallel Arkansas case, the Supreme Court reversed on jurisdictional grounds under the Tax Injunction Act and expressly did not decide whether production credit associations are immune from state tax under the Supremacy Clause. It also stressed that the associations make commercial loans and are privately owned.

How much was at stake here?
PCA sought refunds of all New Mexico corporate income tax it paid for 1992 through 1996 — $56,745 for 1992 and $287,037 for 1993–1996 — plus statutory interest. All of it was denied.

Verbatim citations

The original 1933 exemption and its express limitation (Farm Credit Act of 1933, § 63):

Such banks, associations or corporations, their property, their franchises, capital, reserves, surplus and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial or local taxing authority . . . . The exemption provided herein shall not apply with respect to any Production Credit Association or its property or income after the stock held in it by the Production Credit Corporation has been retired . . . .

The Hearing Officer on why implied immunity did not fit:

Congress has not been silent with respect to the taxability of production credit associations. Under these circumstances, it makes no sense to blindly apply a doctrine of implied immunity developed and intended to apply when Congress has been silent, to create an immunity from state income taxes which the legislative history of the applicable federal statutes clearly demonstrates was never intended to apply to privately owned production credit associations.

The U.S. Supreme Court on the associations' character (Arkansas v. Farm Credit Services):

The PCA's' business is making commercial loans, and all their stock is owned by private entities. Their interests are not coterminous with those of the Government any more than most commercial interests.... PCA's do not have or exercise power analogous to that of the NLRB or any of the departments or regulatory agencies of the United States.

The holding (Conclusions of Law 4–5):

Congress did not intend, by the enactment of the Farm Credit Amendments Act of 1985, to confer an implied immunity from state income taxes for privately owned production credit associations.... PCA is not immune from the imposition of New Mexico Corporation Income Tax under the Supremacy Clause of the United States Constitution.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Production Credit Association of Eastern New Mexico
• Decision PDF: D&O 98-58

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
PRODUCTION CREDIT ASSOCIATION
OF EASTERN NEW MEXICO NO. 98-58
ID. NO. 01-508114-001, PROTEST TO
DENIAL OF CLAIMS FOR REFUND OF
CORPORATE INCOME TAXES FOR
TAX YEARS 1992,1993,1994,1995 AND 1996.

DECISION AND ORDER

This matter comes on for determination before Gerald B. Richardson, Hearing Officer,

based upon a stipulation of facts, stipulated exhibits and briefs of the parties. Production Credit

Association of Eastern New Mexico, hereinafter, “PCA”, was represented by Curtis W.

Schwartz, Esq., of Modrall, Sperling, Roehl, Harris & Sisk, P.A. The Taxation and Revenue

Department, hereinafter, “Department”, was represented by Frank D. Katz, Chief Counsel.

Based upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. PCA timely filed New Mexico corporate income tax returns and timely paid New

Mexico corporate income taxes for the tax years 1992, 1993, 1994, 1995 and 1996.

2. On April 23, 1996, PCA submitted a claim for refund of all New Mexico income

tax paid for its 1992 tax year in the amount of $56,745.

3. On September 9, 1997, PCA submitted claims for refund of all New Mexico

income taxes paid for the tax years 1993, 1994, 1995, and 1996 in the total amount of $287,037.

4. PCA based its claims for refund for tax years 1992-1996 upon its understanding

that, as a matter of law, it is a federal instrumentality immune or exempt from state income

taxation pursuant to the Supremacy Clause of the United States Constitution.

5. The Department did not act on PCA’s claim for refund for its 1992 tax year within

the 120-day time period provided for by § 7-1-26 NMSA 1978, rendering the claim for refund

deemed denied.

6. On September 18, 1996, PCA timely filed a protest to the Department’s deemed

denial of its claim for refund for its 1992 tax year.

7. On January 26, 1998, in a letter from Mike D. Baca, Supervisor, Corporate

Income Tax Unit, to PCA, the Department denied PCA’s claims for refund for its 1993 through

1996 tax years.

8. On April 23, 1998, PCA timely filed a protest to the department’s denial of its

claims for refund for its 1993-1996 tax years.

9. In this consolidated protest proceeding, PCA seeks all amounts claimed as refunds

for its 1992-1996 tax years, plus interest thereon, as provided in § 7-1-68 NMSA 1978.

10. PCA is a component of the federal Farm Credit System.

11. The Farm Credit System is a network of farmer and rancher-owned cooperative

lending institutions.

12. The lending and financial activities of PCA are under the direct supervision and

approval of, and subject to standards prescribed by, the Farm Credit Bank of Texas and,

ultimately, the federal Farm Credit Administration.

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13. Production credit associations were initially capitalized and owned entirely by the

United States, though Congress hoped that production credit association earnings could be used

to retire its stock.

14. Congress hoped that as the production credit associations retired government held

stock, that they could become local lenders, owned by borrowers.

15. Congress’ hope was realized by the 1960’s, by which time the production credit

associations were owned entirely by borrowers with the United States not having any ownership

interest.

16. The Production Credit Association of Eastern New Mexico (PCA) has its

principal place of business in Clovis, New Mexico.

17. PCA is a federally chartered corporation incorporated pursuant to the provisions

of the Farm Credit Act of 1933.

18. PCA was incorporated pursuant to federal law utilizing a Farm Credit

Administration pre-printed set of Articles of Incorporation dated February 15, 1934.

19. PCA was duly chartered on February 27, 1934 as an agricultural credit

cooperative pursuant to the provisions of the Farm Credit Act of 1933.

20. The charter was issued by the Farm Credit Administration.

21. Pursuant to federal statute, PCA is a federal instrumentality. 12 U.S.C. §§

2071(a), 2071 (b)(7), 2077. See also, 12 U.S.C. § 2279c(b).

22. The United States Farm Credit Administration chartered PCA in 1934 under its

original name, the “Clovis Production Credit Association.”

23. PCA subsequently changed its name to the current one, effective March 1, 1984.

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24. The corporate purpose for PCA was and is to exercise powers granted to it by

Congress under the Farm Credit Act of 1933 as it existed or may be amended.

25. Pursuant to a “Certificate of District To Be Served” issued by the Farm Credit

Administration, the Farm Credit Administration limited PCA to lending in Quay, Curry, DeBaca,

Guadalupe and Roosevelt Counties in New Mexico.

26. PCA loans money for periods of ten years or less.

27. PCA does not lend to the general public, but only to qualified ranchers or farmers.

28. PCA is not a depository bank and has no deposit insurance.

29. Pursuant to bylaws imposed by the Farm Credit Administration, PCA is

authorized to issue Class A and Class B stock with a par value of five dollars.

30. Though its bylaws authorize PCA to offer other classes of common and preferred

stock at $5 par value, it has never done so.

31. All PCA borrowers as a requirement of obtaining a loan are required to purchase

Class B $5 par voting stock of PCA in an amount equal to 10% of the unpaid principal balance of

the loan.

32. As part of the loan, sufficient proceeds are generally advanced to purchase the

required Class B Stock.

33. Class B stock is not entitled to dividends.

34. Each holder of Class B voting stock has only one vote in PCA affairs, regardless

of the number of shares held. In the case of a joint loan, only one of the joint borrowers may

vote, as authorized by the other joint borrowers.

35. Class B stock may be retired at the lesser of par or book value as the loan is paid

down, as long as the borrower maintains the prescribed stock-to-loan balance ratio.

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36. Alternatively, Class B stock may be converted to non-voting Class A stock also

with a par value of five dollars.

37. Class A stock may be retired for the lesser of par or book value.

38. Class A stock is not entitled to dividends.

39. PCA obtains its funds from the Farm Credit Bank of Texas; though until March

1991, it obtained funds from the Farm Credit Bank of Wichita.

DISCUSSION

This case presents the issue of whether New Mexico is permitted under the Supremacy

Clause of the United States Constitution to impose income tax upon the income of the

Production Credit Association of Eastern New Mexico, hereinafter, “PCA.” It is undisputed that

PCA, as a production credit association of the federal Farm Credit System, is a federal

instrumentality. See, 12 U.S.C. §§ 2071(a), 2071(b)(7), 2077 and 2279d(b). PCA argues that its

status as a federal instrumentality stands as an absolute bar to state taxation and that no further

inquiry is either necessary or proper. The Department argues that not every federal

instrumentality is immune from tax, that Congress explicitly waived the exemption from state

taxation of production credit associations when the Federal Government no longer owned stock

in them, and that even though the language waiving the exemption from state tax was dropped in

later amendments of the Farm Credit Act, application of principles of statutory construction leads

to the conclusion that Congress did not intend to confer tax immunity upon production credit

associations by those amendments.

The Intergovernmental Tax Immunity Doctrine

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The immunity of the Federal Government and its instrumentalities from state taxation

was first announced in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). In that case,

Chief Justice Marshall ruled that the Supremacy Clause prevented Maryland from levying a

stamp tax on bank notes issued by the Baltimore branch of the Bank of the United States, a

corporation chartered by Congress. This decision contains the now famous dictum by the Court,

“[T]hat the power to tax involves the power to destroy;...”, Id. at 431. The Court, recognizing

the sovereign power of the states to tax, sought to reconcile the states’ taxing power with the

recognition in the Constitution that the Constitution is the supreme law of the land. It concluded:

If the controlling power of the states be established; if their
supremacy as to taxation be acknowledged; what is to restrain their
exercising control in any shape they may please to give it? Their
sovereignty is not confined to taxation; that is not the only mode in
which it might be displayed. The question is, in truth, a question
of supremacy; and if the right of the states to tax the means
employed by the general government be conceded, the declaration
that the constitution, and the laws made in pursuance thereof, shall
be the supreme law of the land, is empty and unmeaning
declamation.

17 U.S. at 431. It thus struck down Maryland’s tax because it interfered with the federal banking

function established by Congress. The Court also recognized that ultimately, the power to

determine the extent of immunity from state taxation and regulation rests with Congress, which

is best situated to determine whether a state tax interferes with a federal function, stating:

In the legislature of the Union, alone, are all represented. The
legislature of the Union alone, therefore, can be trusted by the
people with the power of controlling measures which concern all,
in the confidence that it will not be abused.

17 U.S. at 431. Accordingly, since McCulloch, the rule with respect to taxation of federal

instrumentalities has been that if Congress does not authorize state taxation or regulation, the

possibility of interference with substantive federal policy is sufficient to raise a presumption of

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immunity. See, Osborn v. Bank of U.S., 22 U.S. (9 Wheat.) 738, 865 (1824) which rejected the

argument that when Congress is silent, the presumption is in favor of a state’s ability to impose a

tax on a federal instrumentality.

As the law of intergovernmental tax immunity developed, immunity from state taxation

was accorded by the Federal Courts not only to the Federal Government and its instrumentalities,

but also to persons dealing with the Federal Government, because the cost of the tax would

ultimately be passed on to the Federal Government. See, Panhandle Oil Co. v. Mississippi ex

rel. Knox, 277 U.S. 218 (1928). Beginning with James v. Dravo Contracting Co., 302 U.S. 134

(1937), which upheld the imposition of a state tax on a federal contractor building locks and

dams, however, the modern trend, with respect to federal contractors, has been to uphold a state

tax if it is non-discriminatory and where the legal incidence of the tax is on the private party and

not on the Federal Government or agency. See, also, U.S. v. New Mexico, 455 U.S. 720 (1982).

There has also been litigation over what constitutes a federal instrumentality entitled to

state tax immunity. Thus, it has been held that instrumentalities do not include independent

contractors, employees or others dealing for their own purposes with the Federal Government,

but only those entities, “so assimilated by the government as to become one of its constituent

parts.” U.S. v. Township of Muskegon, 355 U.S. 484, 486 (1958). In this case, because

production credit associations are statutorily designated instrumentalities of the Federal

Government, their status as an instrumentality is not in dispute. Because of the rather unique

history of congressional enactments addressing their taxability, however, their immunity from

taxation is hotly contested by the parties.

The Farm Credit Systems and Production Credit Associations

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The Farm Credit System is a nationwide network of farmer and rancher owned

cooperative lending institutions designed to serve the credit needs of the agricultural sector. The

system began in 1916 with the enactment of the Federal Farm Loan Act which authorized the

creation of twelve regional federal land banks. Pub. L. No. 64-158, § 4 (1916). Federal land

banks could only make loans secured by first mortgages on farm and ranch property. Pub. L. No.

64-158, § 12. In 1923, Congress created federal intermediate credit banks to make other types

of agricultural loans which were not secured by mortgages on farm lands. In 1988, federal land

banks and federal intermediate credit banks were merged into farm credit banks. Pub. L. No.

100-233, Title IV, § 410 (1988).

Production credit associations were created by Congress in the Farm Credit Act of 1933

to provide short to intermediate term loans to ranchers and farmers. Pub. L. No. 73-98, § 20

(1933). Production credit associations were created during the Great Depression in response to

the failure of commercial banks to provide adequate and affordable credit to farmers and the

inefficiencies, costs and inflexibility of centralized government lending programs. S. Rep. No.

124, 73rd Congress, 1st Session, at 2 (1933). As stated in the Senate Committee on Banking and

Currency Report on the legislation:

The policy of this bill is to provide the stimulus in the form of
Government capital and supervision to the establishment of local
institutions in which farmers are participants and owners and
through which necessary credit may be provided on a safe business
basis and at reasonable cost.

S. Rep. No. 124, 73rd Cong., 1st Sess at 2 (1933). Production credit associations were initially

capitalized and owned entirely by the Federal Government, but Congress hoped that earnings of

the associations could be used to retire stock held by the Government so that they would

eventually be owned entirely by their own members and borrowers. Id. In fact, by 1968, all

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production credit associations were owned entirely by their borrower-members. See, H.R. Rep.

No. 593, 92nd Cong., 1st Sess. (1971), reprinted in 1971 U.S.C.C A.N. 2091, 2098. At their

creation, production credit associations were organized, chartered and regulated by the Governor

of the Farm Credit Administration. Pub. L. No. 73-98, § 20. They remain subject to the

regulation of the Farm Credit Administration, an independent agency of the Executive Branch of

the Federal Government responsible for the regulation and examination of entities within the

Farm Credit System. See, 12 U.S.C. §§ 2252 and 2241. The Farm Credit System and the Farm

Credit Administration were reorganized by Congress by the Farm Credit Amendments Act of

1985, Pub.L. 99-205. One of the purposes of these amendments was to lessen the Government’s

day-to-day control of the Farm Credit System.

The Farm Credit Administration would abandon past practices that
amounted to day-to-day participation in management of the System
activities and would become an arm’s length regulator like other
similar federal agencies....Stronger federal oversight and regulation
of the System will result in cutting the principal organizational ties
between the Farm Credit Administration, the regulator, and the
Farm Credit System banks and associations.

H.R. Rep. No. 425 at 3,12, 1985 U.S.C.C.A.N. at 2589, 2598. These changes recognized that the

banks and associations, including production credit associations, were no longer owned by the

Federal Government. Thus, they were to be treated as independent, but regulated entities. The

governing structure of the Farm Credit Administration was also modified. The Farm Credit

Administration had been directed by a part time board that chose a full-time governor to run the

agency. The 1985 Act, however, shifted the management of the Farm Credit Administration to a

full time, three member presidentially appointed board, which became more of an arm’s length

regulator of the Farm Credit System institutions, and references to the Governor of the Farm

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Credit Administration were removed from the laws concerning production credit associations.

See, H.R. Rep. No. 425 at 3 and 28, 1985 U.S.C.C.A.N.at 2589 and 2616.

The Legislative History of the Taxability of Production Credit Associations

Commencing with the legislation creating production credit associations in 1933,

Congress chose to expressly provide guidance with respect to the extent to which the

associations, and their property and obligations would be taxable. Specifically, it chose to limit

the immunity from taxation which would otherwise be accorded a federal instrumentality,

providing as follows:

The Central Bank for Cooperatives, the Production Credit
Corporations, Production Credit Associations, and Banks for
Cooperatives, organized under this Act, and their obligations, shall
be deemed to be instrumentalities of the United States, and as such,
any and all notes, debentures, bonds and other such obligations
issued by such banks, associations, or corporations shall be
exempt both as to principal and interest from all taxation (except
surtaxes, estate, inheritance and gift taxes) now or hereafter
imposed by the United States or by any State, Territorial, or local
taxing authority. Such banks, associations or corporations, their
property, their franchises, capital, reserves, surplus and other
funds, and their income shall be exempt from all taxation now or
hereafter imposed by the United States or by any State, Territorial
or local taxing authority; except that any real property and any
tangible personal property and any tangible property of such
banks associations and corporations shall be subject to Federal,
State, Territorial, and local taxation to the same extent as other
similar property is taxed. The exemption provided herein shall not
apply with respect to any Production Credit Association or its
property or income after the stock held in it by the Production
Credit Corporation has been retired, or any Production Credit
Corporation or Bank for Cooperatives, or its property or income
after the stock held in it by the United States has been retired.

Pub. L. No. 73-98, § 63, 48 Stat. at 267 (emphasis added). Thus, from the outset of their

creation, the exemption from state income taxation accorded to production credit associations

was expressly stated and expressly limited to periods in which some portion of the stock of an

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association was owned by the Production Credit Corporation, a federally chartered and owned

corporation created by the same Farm Credit Act of 1933 to capitalize production credit

associations.

Although Congress made a number of changes in the Farm Credit System in the Farm

Credit Act of 1971, and although there were no production credit associations entitled to income

tax immunity, because all such associations were now owned entirely by their members, the

provisions were retained which limited the income tax immunity of production credit

associations to those which still had some portion of their stock owned by the Governor of the

Farm Credit Administration. As amended by the 1971 Act, these provisions read as follows:

Each production credit association and its obligations are
instrumentalities of the United States and as such any and all notes,
debentures, and other obligations issued by such associations shall
be exempt, both as to principal and interest from all taxation
(except surtaxes, estate, inherintance and gift taxes) now and
hereafter imposed by the United States, any state, territorial or local
taxing authority. Such associations, their property, their
franchises, capital reserves, surplus, and other funds and their
income shall be exempt from all taxation now and hereafter
imposed by the United States and any State, territorial or local
taxing authority; except that interest on the obligations of such
associations shall be subject only to federal income tax in the
hands of the holder thereof pursuant to the Public Debt Act of
1941 (31 U.S.C. 742(a)) and except that any real and personal
property of such associations shall be subject to federal, State,
territorial and local taxation to the same extent as similar property
is taxed. The exemption provided in the preceding sentence shall
apply only for any year or part thereof in which stock in the
production credit association is held by the Governor of the Farm
Credit Administration.

Farm Credit Act of 1971, Title II, § 2.17, complied at 12 U.S.C. § 2077 (emphasis added).

In 1985, as part of the amendments enacted by the Farm Credit Amendments Act of 1985,

the last two sentences of 12 U.S.C. § 2098, which are italicized in the quotation directly above,

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were removed from the statute. Pub. L. 99-205, Title II, § 205(e)(16), 99 Stat. 1678, 1705

(1985). Thus, the language providing for income tax exemption and the language qualifying the

income tax exemption to instances where the the stock in a production credit association is held

by the Governor of the Farm Credit Administration was removed.

There is nothing in the legislative history of the 1985 amendments to indicate that

Congress, by removing the language concerning the limited immunity of production credit

associations from taxes on their income, property, funds and reserves, intended to confer broad

and unlimited tax immunity on such associations, beyond the immunity for their notes,

debentures and other obligations conferred by the first sentence of 12 U.S.C. § 2077. Rather,

with reference to Section 205, which contained these amendments, the House Report states:

[Section 205] contains numerous technical and conforming
amendments to the provisions of the Farm Credit Act of 1971
affected by changes in the basic powers, duties and authorities of
the Farm Credit Administration. This section would amend the
appropriate provisions of the Act to delete the requirement for
specific approvals by the Farm Credit Administration of certain
activities of the banks and associations by deleting the general
authority of the Farm Credit Administration to supervise System
institutions. These changes are consistent with one of the major
purposes of the legislation which is to establish the Farm Credit
Administration as an arms length regulator of the system
institutions and to take it out of certain activities of the System
which would involve it in management discretion of such
institutions.

H.R. Rep. No. 425 at 28, 1985 U.S.C.C.A.N. at 2615. Thus, the amendments are described as

technical and conforming amendments, intended to be consistent with the purpose of the 1985

Amendments Act to change the management function of the Farm Credit Administration to being

a regulator rather than day-to-day manager of production credit associations. There is no

mention of any tax implications whatsoever.

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Are Production Credit Associations exempt from income taxation by virtue of their status

as a federal instrumentality?

The issue of the state tax immunity of production credit associations first arose after the

1985 amendments to the Farm Credit Act. Four production credit associations in Arkansas

brought suit in the United States District Court of the Eastern District of Arkansas seeking

declaratory judgment and injunction that they were exempt from Arkansas sales and income

taxation. The District Court granted summary judgment on behalf of the production credit

associations based upon their status as federal instrumentalities whose immunity from state

taxation was not expressly waived by Congress. Arkansas appealed, raising the same arguments

the Department raises herein. The Court of Appeals affirmed by a divided panel. Farm Credit

Services of Central Arkansas, PCA v. State of Arkansas, 76 F.3d 961 (8th Cir. 1996). The

majority opinion concluded, as did the District Court below, that because the federal statutes no

longer contained an express waiver of the Production Credit Associations’ implied immunity as

federal instrumentalities, they were immune from Arkansas taxes. Id., at 964. Judge Loken

wrote a dissenting opinion, stating that Congress was best qualified to balance the competing

interests involved in applying the doctrine of intergovernmental immunity to federal

instrumentalities and that the application of normal rules of statutory construction could lead only

to the conclusion that the 1985 technical amendments were not intended to confer an implied

constitutional immunity from tax. Id., at 965-967.

The Supreme Court granted certiorari and reversed the Court of Appeals. Arkansas v.

Farm Credit Services of Central Arkansas, __ U.S. ___, 117 S.Ct. 1776 (1997). It did not reach

the issue of whether production credit associations were immune from state tax under the

Supremacy Clause. Rather, it held that the Federal District Court lacked subject matter

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jurisdiction to determine the issue of immunity from state tax because of the operation of the Tax

Injunction Act, 28 U.S.C. § 1341, which provides:

The district courts shall not enjoin, suspend or restrain the
assessment, levy or collection of any tax under State law where a
plain, speedy and efficient remedy may be had in the courts of such
State.

The Court recognized that the Tax Injunction Act was a congressional statement with respect to

the balance of powers between the States and the Federal Government that federal courts should

not interfere with the ability of the States to define and elaborate their own laws and

administrative processes, especially in an area as important as taxation, which is a power held

concurrently by the States and the Federal Government. Id., 117 S.Ct. at 1779-1780. Although

the only exception to the jurisdictional bar contained in the Tax Injunction Act is where a plain,

speedy and efficient remedy is not available from the state courts, the Court has recognized that

under our constitutional system, the Federal Government has sovereign interests which it must be

allowed to protect. Thus, the Court has also recognized an exception to the jurisdictional bar of

the Tax Injunction Act when the United States sues to protect itself or its instrumentalities from

state taxation. Department of Employment v. United States, 385 U.S. 355, 358 (1966). In the

Department of Employment case, however, the United States was a co-plaintiff with the federal

instrumentality, the Red Cross, in challenging the imposition of a state tax. In the litigation

involving the four Arkansas production credit associations, they sued on their own. Thus, the

issue before the Supreme Court in the Arkansas v. Farm Credit Services case was whether

federal instrumentalities fall under the exception to the Tax Injunction Act when they sue without

the United States as co-plaintiff. In concluding that the federal instrumentality status of

production credit associations is not sufficient for them to escape the prohibition of the Tax

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Injunction Act, the Court distinguished production credit associations from the United States or

its agencies, such as the National Labor Relations Board, stating:

Whatever may be the rule under the Tax Injunction Act where a
federal agency or body with substantial regulatory authority brings
suit, PCA’s [Production Credit Associations] are not entities of
that description. PCA’s are not granted the right to exercise
government regulatory authority but rather serve specific
commercial and economic purposes long associated with various
corporations chartered by the United States.

The PCA’s’ business is making commercial loans, and all their
stock is owned by private entities. Their interests are not
coterminous with those of the Government any more than most
commercial interests. Despite their formal and undoubted
designation as instrumentalities of the United States, and despite
their entitlement to those tax immunities accorded by the explicit
statutory mandate, PCA’s do not have or exercise power analogous
to that of the NLRB [National Labor Relations Board] or any of the
departments or regulatory agencies of the United States. This
sufficies for us to conclude that instrumentality status does not in
and of itself entitle an entity to the same exemption the United
States has under the Tax Injunction Act.

Id., 117 S.Ct. at 1782.

After the Supreme Court reversed the lower court determinations that the Arkansas

associations were immune from Arkansas income and sales taxes, suit was brought in the

Chancery Court of Pulaski County, Arkansas by the same production credit associations to

determine the issue of tax immunity. On July 1, 1998, the Chancery Court granted summary

judgment to the associations. The Chancery Court ruled on the same basis as the majority of the

Eighth Circuit Court of Appeals panel, that in the absence of an express congressional waiver of

immunity, production credit associations are immune from Arkansas’ taxes based upon their

federal instrumentality status. The decision is unreported but is contained in the record herein.

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Farm Credit Services of Central Arkansas, PCA, et al. v. State of Arkansas, Chancery Court of

Pulaski County Arkansas, No. 94-4931.

The Department draws from the language of the Court in Arkansas v. Farm Credit

Services of Central Arkansas, quoted on page 16, herein, which strongly distinguished the

activities and powers of production credit associations from those of the Federal Government, to

argue that the federal instrumentality status of production credit associations, in and of itself,

should not immunize them from state income taxation. In support, the Department cites to the

following language from the Supreme Court’s opinion in United States v. New Mexico, 455 U.S.

720 (1982):

What the Court’s cases leave room for, then, is the conclusion that
tax immunity is appropriate in only one circumstance: when the
levy falls 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.

455 U.S. at 735, 102 S.Ct at 1383 (emphasis added). The Department thus argues that the result

in the Arkansas Farm Credit Services case, which effectively held that all federal

instrumentalities are not so closely aligned with the Federal Government to support granting

them the same exemption from the jurisdictional bar of the Tax Injunction Act, and the language

from U.S. v. New Mexico which appears to limit the tax immunity under the Supremacy Clause

to instrumentalities which are closely aligned with the Federal Government, demonstrate that the

Supreme Court has drawn away from the concept of absolute tax immunity based solely upon

federal instrumentality status.

PCA correctly points out that the language with respect to federal instrumentalities

quoted from United States v. New Mexico is dicta, since it is undisputed that the entities taxed in

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that case were federal contractors, and not federal instrumentalities. While the trend in twentieth

century federal jurisprudence with respect to intergovernmental tax immunity has clearly been to

narrow the breadth of the tax immunity of entities associated with the Federal Government, and

while courts often use dicta to foreshadow trends in jurisprudence, the fact remains that there are

no reported decisions which have restricted the immunity of federal instrumentalities based upon

an insufficient congruency in the activities and powers of the instrumentality and the Federal

Government itself. The State of Arkansas raised the identical argument in its dispute with the

Arkansas Production Credit Associations and the argument was rejected by both the Eighth

Circuit Court of Appeals and the Chancery Court of Pulaski County, Arkansas. In the absence of

any authority which distinguishes the tax immunity of federal instrumentalities based upon how

closely their activities are connected to those of the Federal Government, the Department’s

argument must be rejected.

This leaves us with the primary issue presented by this case. PCA argues that federal

instrumentality status is talismanic with respect to immunity from state taxes in the absence of

congressional authorization to tax. PCA maintains that because the the 1985 amendments to the

Farm Credit Act removed the congressional authorization, the imposition of state income tax is

clearly prohibited by a line of federal jurisprudence unbroken since McCulloch v. Maryland,

supra. The Department argues that it would ignore congressional intent to apply immunity from

state income taxes to production credit associations given the legislative history of the federal

statutes addressing the tax immunity of those entities.

Were we to engage in an effort to discern congressional intent behind the 1985

amendments to Section 2077, I have no doubt that Congress did not intend to confer state income

tax immunity upon production credit associations by the amendments. Since at least 1968, there

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have been no production credit associations immune from state income taxes under the language

omitted by the 1985 amendments because there were no longer any production credit associations

whose stock was wholly or partially owned by the Federal Government. The House Report on

the amendments makes no reference to the removal of the language addressing exemption from

tax, referring to the amendments as merely “technical” and “conforming” amendments consistent

with the purpose of the 1985 amendments to restructure the Farm Credit Administration. Thus,

the reference to the “Governor of the Farm Credit Administration” in the last sentence of Section

2077, which limited the exemption from tax to production credit associations whose stock was

held by the Governor of the Farm Credit Administration was no longer needed because the

amendments restructured the Farm Credit Administration and did away with the Governor’s

position.

Not only were there no production credit associations that qualified for the waiver of tax

immunity contained in Section 2077 when the language conferring it was removed in 1985, but

that waiver of immunity had been part of the federal statutes since production credit associations

were created by the Farm Credit Act of 1933. In fact, the federal scheme with respect to taxation

of production credit associations had never relied upon the implied tax immunity conferred upon

federal instrumentalities to confer such tax immunity. Since their creation, Congress provided an

express statutory exemption from tax for production credit associations and limited the

exemption to those production credit associations which were either partially or wholly owned by

the Federal Government. It would defy all logic to conclude that somehow, by removing an

exemption from tax and a limitation on that exemption that had been part of the federal scheme

for production credit associations for more than fifty years, but was no longer applicable, that

Congress intended to create an implied common law tax immunity which had never been part of

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the federal scheme from the outset. To further conclude that Congress did this without a single

mention or acknowledgement of this result anywhere in the legislative history pushes legal

reasoning beyond reason and into the realm of absurd and unintended results.

We are thus left to choose between two legal doctrines, both of which are so well

established and founded upon sound legal reasoning as to be beyond challenge as to their

propriety, but which lead to diametrically opposing results. PCA argues that McCulloch v.

Maryland and 179 years of unwavering federal jurisprudence under the Supremacy Clause

dictates that the imposition of New Mexico’s tax be barred. The Department argues that this

result in contrary to the intent of Congress behind the 1985 amendments to the Farm Credit Act

and that in construing the effect of amendments to statutes, the legislative intent must govern our

determination. While both sides have done an excellent job in arguing the merits of their

respective positions, neither have presented a conceptual basis which can reconcile the two

conflicting legal doctrines and provide a persuasive basis as to which approach should govern

this determination. For that matter, the parties in the parallel litigation in the federal courts and

now the courts of Arkansas have similarly failed to come up with an approach which provides a

rationale to harmonize the conflicting approaches to the resolution of this issue.

To resolve this quandry, we must examine the conceptual underpinnings of the federal

instrumentality tax immunity doctrine and examine the appropriateness of applying the doctrine

to the facts of this case. We must bear in mind that from the outset, the doctrine of immunity for

federal instrumentalities has been a doctrine of implied immunity. As noted by Professor Tribe

in his discussion of the development of the intergovernmental immunity doctrine:

McCulloch thus announced the prophylactic per se rule that has
been followed ever since. If Congress does not authorize state
taxation or regulation of Federal instrumentalities, the possibility of

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interference with substantive federal policy is sufficient to raise a
presumption of immunity.

Laurence H. Tribe, Intergovernmental Immunities in Litigation, Taxation and Regulation:

Separation of Powers Issues in Controversies About Federalism, 89 Harv. L.R. 682, 701

(1976)(emphasis added). Thus, immunity is implied because of a presumption of interference in

the absence of a congressional expression which addresses the state-federal balance.

One is led to inquire, then, on what conceptual basis can we apply a doctrine of

intergovernmental tax immunity whose underpinnings rest upon an implied immunity based on

congressional silence to federal instrumentalities whose tax immunity was never dependent upon

such implied immunity? As noted earlier herein at pp. 10-13, since their creation, the tax

immunity of production credit associations was expressly stated and expressly limited by explicit

congressional enactments. Even to this day, the exemption from taxation for the notes,

debentures, bonds and other obligations of production credit associations remains express, rather

than implicit. 12 U.S.C. § 2077. Congress has not been silent with respect to the taxability of

production credit associations. Under these circumstances, it makes no sense to blindly apply a

doctrine of implied immunity developed and intended to apply when Congress has been silent,

to create an immunity from state income taxes which the legislative history of the applicable

federal statutes clearly demonstrates was never intended to apply to privately owned production

credit associations. Rather, we should look to the congressional intent behind the 1985

amendments to determine whether Congress intended to confer an immunity from state income

taxes upon privately owned production credit associations. If we do so, it is clear that no such

intent to confer immunity existed.

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Although it is noted that this approach to the tax immunity of production credit

associations relies upon distinguishing the treatment of these federal instrumentalities from those

where there has not been an express congressional waiver of immunity and a subsequent

amendment to that waiver, this approach to the issue of intergovernmental immunity does no

violence to the underlying concept of implied immunity. Since McCulloch v. Maryland, the

Court has noted that Congress is best situated to determine the circumstances under which a state

tax interferes with the execution of federal policy, Id., 17 U.S. at 431, and in the absence of such

a determination, immunity would be implied. In this case, where Congress stated that there

would be no state income tax immunity for privately owned production credit associations, it

does no violence to the balance of power between the States and the Federal Government to look

to the intent of Congress when it enacted the 1985 amendments to the Farm Credit Act to

determine whether Congress intended to confer a level of state tax immunity which had not

heretofore existed for privately owned production credit associations.

CONCLUSIONS OF LAW

1. PCA filed timely protests to the Department’s denials of its claims for refund of

corporate income tax for the 1992-1996 tax years and jurisdiction lies over both the parties and

the subject matter of this protest.

2. PCA is a federal instrumentality.

3. Since the creation of production credit associations by the Farm Credit Act of

1933, Congress expressly waived the immunity of privately owned production credit associations

from the imposition of state income taxes upon their income.

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4. Congress did not intend, by the enactment of the Farm Credit Amendments Act of

1985, to confer an implied immunity from state income taxes for privately owned production

credit associations.

5. PCA is not immune from the imposition of New Mexico Corporation Income Tax

under the Supremacy Clause of the United States Constitution.

For the foregoing reasons, the protest of PCA IS HEREBY DENIED.

DONE, this 21st day of December, 1998.

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