Was an interstate trust bank exempt from Virginia corporate income tax when it was subject to the bank franchise tax but had no approved apportionment method?

Subject

AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation

Plain-English summary

The Norfolk Circuit Court held that AMG was subject to Virginia's bank franchise tax and therefore exempt from corporate income tax. AMG was an interstate trust bank with a Virginia branch that accepted no deposits. The court had already ruled that AMG qualified as a "bank" because the statute included trust companies and did not require Virginia deposit-taking.

Virginia's ordinary bank-franchise apportionment method used deposits. AMG instead filed using a cost-of-performance method and requested approval of that alternative, but the Department had not approved it. The Department argued that AMG's resulting zero bank-franchise liability meant it was not "subject" to that tax and could be assessed corporate income tax.

The court rejected that interpretation. AMG remained subject to the bank franchise tax even if the amount currently calculated was zero. Its zero liability resulted from the absence of an approved alternative apportionment method, not from being outside the tax. The court therefore granted AMG relief requiring a corporate-income-tax refund and barring the challenged corporate-income-tax assessments.

The court denied AMG's request for attorneys' fees and costs. It also declined to choose among three possible interstate-bank apportionment methods or decide the Department's authority over non-deposit local apportionment because those questions were not before the court and were not ripe.

What this means for you

• Being "subject to" the bank franchise tax did not depend on owing a positive amount under the circumstances presented.
• A bank without Virginia deposits still needed an approved alternative method to calculate bank-franchise-tax liability.
• The opinion did not approve AMG's cost-of-performance method or any other alternative.
• This is a trial-court opinion concerning the named parties, not a Tax Commissioner ruling.

Citations and references

• Va. Code §§ 58.1-1200, 58.1-1201, and 58.1-1211.
• Va. Code § 58.1-401.
• AMG National Trust Bank v. Commonwealth of Virginia, Department of Taxation, Civil Docket No. CL10-3031 (Norfolk Circuit Court, July 6, 2011).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-152

Original ruling text

FOURTH JUDICIAL CIRCUIT OF VIRGINIA

CIRCUIT COURT OF THE CITY OF NORFOLK

July 6, 2011

Mr. Jeffrey F. Talbert

Mr. Andrew M. Hendrick

Shuttleworth, Ruloff, Swain, Haddad & Morecock, P.C.

2525 South Boulevard, Suite 300

Virginia Beach, Virginia 23452

Ms. Elizabeth Myers, Assistant Attorney General

Office of the Attorney General of Virginia

900 East Main Street

Richmond, Virginia 23219

RE: AMG National Trust Bank v. Commonwealth of Virginia,

Department of Taxation

Civil Docket No.: CL10-3031

Dear Counsel:

The matter comes before the Court on the remaining issues raised by the Complaint for Declaratory Judgment in this matter. The parties are proceeding on stipulated facts, which are recited in the Court's prior letter opinion of April 7, 2011.

This case involves the interpretation of the Virginia Bank Franchise Tax Act, Va. Code § 58.1-1200. The difficulty presented by the facts at bar primarily arise from the fact that the statute fails to address or instruct how the bank franchise tax is to be calculated for an interstate bank with a branch office in Virginia.

The Commissioner previously urged the Court to reject the conclusion that AMG is a "bank" within the meaning of the Act because AMG does not accept deposits in Virginia. The definitional section of the Act, however, includes no requirement that an entity accept deposits in order to be considered a bank; and indeed it specifically includes trust companies, which are not authorized to accept deposits, to be defined as banks for purposes of the statute. By its prior letter ruling, the Court ruled that AMG is a "bank" within the meaning of the Act and therefore subject to the bank franchise tax.

At the hearing on the Department's motion to reconsider, held on June 7, 2011, Defendant asked the Court to reconsider or, in the alternative, to clarify its ruling in a manner to provide guidance to the Commissioner on how to collect the bank franchise tax, from an interstate banking corporation with a branch office in Virginia:

The Department files this motion to request that the Court clarify its decision as to the impact that AMG's status as a bank under Va. Code § 58.1-1201 has on its liability for payment of corporate income tax, state and local bank franchise tax, and other taxes. Should the Court hold that AMG is subject to the bank franchise tax, the Department requests guidance as to how such tax should be administered and apportioned for both state and local purposes, in light of the fact that AMG does not accept deposits at the Virginia location, which is the statutory basis of bank franchise tax apportionment for local purposes and the published administrative method for apportionment among the states.

Defendant's Motion to Reconsider at 1-2, (May 19, 2011).

The Act assesses tax on banks based upon the net capital of the bank. The Act fails to specify a means for apportioning the total net capital of a multi­state bank to the Virginia portion of that capital that may be subject to Virginia tax liability. Cognizant of the Constitutional limitations on calculating Virginia tax liability on the entire net capital of a multi-state bank, and with no statutory direction on how to prorate the bank's total net capital to arrive at the portion that may be subject to Virginia tax, the Department has adopted a method that models the statutory procedure for apportioning tax between branch offices of banks located in two or more political subdivisions of Virginia. Section 58.1-1211 permits a branch office to apportion the taxable value of its net capital to the proportion that represents the total deposits of the office within the political subdivision to the total deposits of the bank.

The Instructions provided by the Department of Taxation which accompany the Forms and Schedules for filing a Virginia Bank Franchise Tax, offer this advice regarding a Virginia office of a multi-state bank::

In the event that a multi-state bank becomes subject to the Virginia Bank Franchise Tax, TAX permits those accepting deposits at branch offices in another state, including the District of Columbia, to apportion net capital based on a deposit oriented methodology similar to that currently specified by the General Assembly for apportionment among Virginia localities. …

Those that do not accept deposits must request permission to use an alternative method of apportionment from the Tax Commissioner. In order to request an alternative method, the bank must:

file a return using the alternative method of apportioning capital;

provide a statement of why the statutory method is inapplicable or inequitable a s applied to the taxpayer; and

submit an explanation of the proposed method of apportionment in sufficient detail for the department to make a meaningful review.

Virginia Bank Franchise Tax 2011 form 64, Schedules and Instructions, Plaintiff's Exhibit 1.

Consistent with the Instructions quoted above, AMG filed returns using an apportionment method that apportions its net capital according to its costs of performance. It did provide the required statement of why the statutory method is inapplicable and the required explanation of the proposed method of apportionment. AMG claims that a Department representative orally instructed the bank over the telephone to use this apportionment method. The Department does not stipulate that it provided this advice, and it argues that AMG's proposed alternative method has never been approved. The Department did not provide its response to AMG's request for approval of its proposed method of apportionment, apparently because of the issuance of the Letter Ruling of March 1, 2010 that is the subject of the Complaint for Declaratory Judgment.

The Department argues that AMG's bank franchise tax liability under the Act is zero, because a proposed alternative method has not been approved for AMG. Opposing AMG's request for a declaratory judgment determining its nonliability for corporate income tax, the Department argues that a bank with no liability for bank franchise tax may be assessed a corporate income tax.

Virginia Code § 58.1-400 et seq. addresses the taxation of corporations. Section 58.1-401 provides: "No tax levied pursuant to §§ 58.1-400, 58.1- 400.1, or 58.1-400.2 is imposed on: ...3. State and national banks, banking associations and trust companies to the extent such companies are subject to the bank franchise tax on net capital." The Department argues that if a bank's liability for bank franchise tax is $0, then that bank is not "subject" to the bank franchise tax; and it may therefore be assessed a corporate income tax. AMG argues in opposition, that if a bank is "subject" to the bank franchise tax, it is exempt from corporate income tax irrespective of the amount of its bank franchise tax liability. The liability for the tax might be $0, but the bank is nonetheless "subject" to the tax.

The Court agrees with AMG's interpretation of the exemption in Section 58.1-400.1. AMG is indeed "subject" to the bank franchise tax; and if its tax liability is zero, as the Department claims, that is only because the Department has failed to approve an alternative method of apportioning AMG's net capital such that the, tax may be assessed. Under an approved alternative method, the liability would not be zero.

The Court therefore holds that because AMG is "subject" to the bank franchise tax, it is exempt from corporate income tax liability. AMG's second, third, and fourth requests for declaratory relief from this Court ask for an order directing the Department to refund corporate income tax collected from AMG, prohibiting tile Department from assessing corporate income tax from AMG in the future, and prohibiting the Department from assessing corporate income tax while this matter is pending. The Court finds that AMG is entitled to an Order granting that requested relief.

The Court addresses the Department's request for "guidance" that appears in its Motion to Reconsider, quoted in pertinent part on page 1 of this letter. The Department did not file its own request for declaratory relief on issues regarding assessment of the bank franchise tax against banks that accept no deposits in Virginia, and this issue is not ripe for determination. It appears to the Court, however, that the Department has consistently maintained that it has the authority to establish an alternative method of apportioning net capital for those banks that do not accept deposits in Virginia; and indeed it has advised the public that it has such authority. AMG has properly requested approval of an alternative Method of apportionment, and upon the Commissioner's approval of such request or direction to AMG to utilize a different method, nothing prevents the Department from collecting an appropriate amount of bank franchise tax from AMG.

In response to the Court's direction that the Department respond to AMG's request for approval of an alternative method of apportionment, the Department has filed a memorandum from Craig M. Burns, Tax Commissioner, detailing the three plausible methods for interstate banks to apportion capital. Which of those three methods the Department can or should employ is not before the Court, and the Court makes no ruling respecting that request. It does appear, however, that alternative methods are available to the Department for apportioning and assessing the bank franchise tax on interstate banking corporations. The dilemma that the Department has highlighted whereby AMG pays neither corporate income tax (because it is a bank) nor bank franchise tax (because it has no deposits in Virginia) will not exist if the Department approves an alternative method and directs that AMG use that method in calculating its bank franchise tax liability.

As Commissioner Burns' memorandum thoughtfully points out, the use of any non deposit-based method to ascertain bank franchise tax liability leads to other difficulties relating to apportionment of tax among Virginia localities. The Court makes no ruling about the Department's authority to specify alternative methods for apportionment that are not addressed by Va. Code § 58.1-1211 because that issue is not before the Court. The gaps in the statute that have become obvious by the issues litigated in this case, do not mandate a determination that AMG's request for relief in this matter should be denied.

AMG's first four requests for declaratory relief are granted. Its fifth request, seeking attorneys' fees and costs, is denied. Counsel for AMG is directed to submit an order incorporating the Court's ruling within two weeks.

Sincerely,

Mary Jane Hall

Judge

MJH/nm