Court Holds Federal Instrumentality Subject to State Tax

February 03, 2000

Summary
On February 1, 2000, the New Mexico Court of Appeals held that a federally chartered production credit association is not immune from state taxation under the Supremacy Clause of the United States Constitution. Production Credit Association of Eastern New Mexico v. Taxation and Revenue Department, Court of Appeals Docket No. 20, 078. The court's decision held that while production credit associations are federal instrumentalities that would otherwise have constitutional immunity from state taxation, Congress's 1985 express repeal of a statutory waiver of such immunity for production credit associations was not a repeal. The court acknowledged that its holding rejected that of all other courts to decide the issue, including those in Indiana, Arkansas, Louisiana, Missouri and the Federal Eighth Circuit.

New Mexico Court of Appeals Holds That Federal Production Credit Association, a Federal Instrumentality, is Subject to State Taxation


On February 1, 2000, the New Mexico Court of Appeals held that a federally chartered production credit association is not immune from state taxation under the Supremacy Clause of the United States Constitution. Production Credit Association of Eastern New Mexico v. Taxation and Revenue Department, Court of Appeals Docket No. 20, 078. The court's decision held that while production credit associations are federal instrumentalities that would otherwise have constitutional immunity from state taxation, Congress's 1985 express repeal of a statutory waiver of such immunity for production credit associations was not a repeal. The court acknowledged that its holding rejected that of all other courts to decide the issue, including those in Indiana, Arkansas, Louisiana, Missouri and the Federal Eighth Circuit.

Production Credit Association of Eastern New Mexico ("PCA") is a federally chartered lending institution for farmers and ranchers that is part of a larger federal Farm Credit System. Congress created cooperative production credit associations in 1933 during the Great Depression to provide affordable credit when agricultural credit for farmers and ranchers was either not available at all, or the interest rates were prohibitive. Congress declared production credit associations to be federal instrumentalities, which since McCulloch v. Maryland was decided in the early days of the United States have been held to be constitutionally immune from state taxation under the Supremacy Clause unless Congress expressly waives that immunity. Congress provided the initial capital for production credit associations. The Farm Credit Act of 1933 declared that production credit associations were immune from state taxation until the federal government ceased to hold stock in an association. By the 1960's, the waiver of immunity had taken effect because the production credit associations were owned entirely by their borrowers. However, in 1985, Congress repealed the redundant immunity language, as well as the waiver of immunity. The legislative history is silent as to the reason for the repeal, but at the time the Farm Credit System as a whole was facing a substantial defaults because of a severe depression in the American agricultural economy.

Rejecting contentions of the New Mexico Taxation and Revenue Department, the Court of Appeals held that production credit associations are federal instrumentalities as Congress declared, notwithstanding the fact that they now are privately owned and in some ways resemble private commercial banks. The court also rejected a Department contention that the 1933 legislation declaring production credit associations to be immune from state taxation somehow superceded the Supremacy Clause immunity, such that forever after state tax immunity could only be granted by statute, not the Constitution. The court recognized the inherent production credit association constitutional immunity from taxation, subject to the limited statutory waiver enacted in 1933. The court also found that the waiver of immunity in the 1933 legislation took effect in the 1960's, as the taxpayer had conceded.

The court, however, held that the congressional repeal of the language reiterating production credit association constitutional state tax immunity and the accompanying waiver of that immunity was not actually a repeal of the waiver of the underlying constitutional immunity. In the face of Congressional silence for the reason for the repeal, the Court determined that Congress could not have intended to silently remove state taxing authority over production credit associations. The court stated that in light of waiver language enacted fifty years previously, Congress would not have enacted such a "major substantive change in legislative direction" without some statement in the legislative history. Accordingly, ignoring the plain language of the repealing statute and the dire condition of the Farm Credit System at the time, the court held that the repeal was not evidence a congressional intent to repeal the waiver of immunity. The court rejected the holdings of other courts that Congress's repeal restored production credit association constitutional Supremacy Clause immunity as "a logical but incorrect result." Therefore, the court affirmed the determination of the Department's internal hearing officer and denied Production Credit Association of Eastern New Mexico's claim for refund of erroneously paid state taxes.

If upheld, the New Mexico Court of Appeals' decision, rejecting the position taken by other courts, has a potential for substantial adverse impact on the competitiveness of New Mexico's substantial farm and ranch economy. Production Credit Association of Eastern New Mexico intends to appeal the Court of Appeals' decision.