Supreme Court Tax Decision May Aid Banks: Ruling Upholds Shares Levy, but Sends Signal to States

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NEW YORK -- A Supreme Court ruling that states may tax a portion of banks' holdings of federal securities may actually help banks in battling unfair tax laws, legal experts said Wednesday.

On Tuesday, the highest federal court upheld a year-old ruling by the Georgia Supreme Court that banks were required under a 1978 state law to pay taxes on a portion of their holdings in U.S. government obligations.

"This ruling, while technically adverse to the banking industry, ought to quiet things down and send a signal to states: 'No more funny business on tax law,'" said Robert S. Schwartz, an attorney for the Independent Bankers Association of America.

The state law in question, known as the sahres tax, was eliminated in a new tax law passed by the Georgia legislature in 1983 because of questions about the constitutionality of the shares tax. The new law became effective Jan. 1, 1984.

The shares tax law applied only to financial institutions. It permitted the state to levy taxes on banks based on their shareholders' equity, which it considered tangible personal property, allowing deductions for foreclosed property, the value of their buildings, and other items.

Banks argued that their holdings in tax-exempt federal obligations should also be deductible. Bartow County Bank, a $20.3 million-asset bank based in Cartersville, Ga., filed suit, and was joined by First National Bank of Atlanta and Citizens & Southern National Bank, also of Atlanta.

The constitutionality of the law was originally upheld in the Bartow County Superior Court and the Georgia Supreme Court. However, in July 1983, the U.S. Supreme Court struck down a similar law in Texas, stating that Congress meant to prohibit state taxes "to the extent they consider federal obligations in the computation of the tax." Georgia Court Compromises

Last year, the Georgia Supreme Court reconsidered its earlier ruling and struck a compromise position, stating that banks could deduct a portion of their federal obligations -- only those that it considered as assets.

The U.S. Supreme Court upheld the compromise Tuesday, ruling that exclusion "may be limited by charging the obligations and their interest a fair share of related expenses or burdens."

The high court warned, though, that the tax exemption on U.S. obligations "is not a tax shelter." It said, "Federal obligations may be acquired, in part, by liabilities, and, when they are, a pro rata method of allocating a fair share of the obligations to liabilities does not infringe upon the constitutional or statutory immunity the obligations enjoy."

Warren Akin, an attorney for Bartow County Bank, said: "I don't think the ruling is correct, but that's what they said, so we'll just have to pay tax on whatever it is. …