WASHINGTON - Banking industry officials said Wednesday that a Supreme Court decision this week represents a key advance in their legal battle against Farm Credit lenders.

The largest of these lenders, Denver-based CoBank, had sued the state of Missouri for a refund of $1.5 million of state and local taxes because, CoBank argued, 16-year-old changes in federal law granted it tax-exempt status.

Siding with the banking industry, the Supreme Court on Tuesday reversed a ruling of the Missouri Supreme Court, saying that CoBank and some other Farm Credit lenders must continue to pay state and corporate income taxes.

"The Farm Credit System had a major blow dealt to it by this decision," said John Blanchfield, director of the American Bankers Association's center for agricultural and rural banking. "Because the Supreme Court, in their unanimous decision, found that Congress never intended to eliminate state and local taxation" when the law was updated in 1985.

A CoBank executive downplayed the loss, saying that it was not disappointed by the decision and had only pursued the case because it felt it had a duty to its shareholders.

"There hasn't been a lot of whining and gnashing of teeth here about it," said Jack Cassidy, CoBank's senior vice president for corporate relations.

Mr. Cassidy said that CoBank, which operates in 46 states, pays between $3 million and $4 million a year in state taxes. He said a favorable court ruling would "have reduced the cost, but it would have had other consequences. We would just as soon not have our tax status be an issue when we work with policymakers about our role in lending to middle America."

The ruling does not apply to all 147 Farm Credit lenders - only CoBank and the approximately 50 so-called production credit associations. These associations, the most common members of the Farm Credit System, specialize in short-term loans to farmers and agricultural businesses.

Nonetheless, banking industry representatives said that the implications of the case were far-reaching. Any tax credits earned by CoBank and other entities, they said, would have constituted an unfair advantage over commercial banks. They argued that those tax benefits could be used to underprice loans to agricultural cooperatives and squeeze commercial banks out of the business.

"If you don't pay state taxes, you are starting a 100-yard race 50 yards ahead before the gun is even fired," said Mark Scanlan, director of agricultural finance with the Independent Community Bankers of America. "This decision helps to level the playing field a little bit."

The case centered on the intent of Congress when it amended the Farm Credit Act in 1985. In doing so, it removed a tax exemption that had been granted to most Farm Credit lenders, but retained an exemption for "instrumentalities of the United States."

CoBank had argued that it met that description. Though CoBank continued to pay the taxes, it filed in Missouri court in 1995 asking for its money back there.

Last January, Missouri's highest court decided in favor of CoBank, and said that the 1985 changes to the law gave the bank immunity from state taxes.

But the Supreme Court rejected that argument, saying that had "Congress intended to confer upon banks for cooperatives the more comprehensive exemption from taxation that it provided to Farm Credit banks and Federal Land Bank associations, it would have done so expressly as it had done elsewhere in the Farm Credit Act."

Mark Baran, the ABA's senior tax counsel, said the court decision would effectively keep either CoBank or production credit associations, whose tax status is similarly defined under the law, from claiming any state tax exemptions. "It was obvious that Congress never intended to provide a blanket tax immunity to CoBank and PCAs," he said.

The decision is not the only issue facing the Farm Credit Administration this week. Former House Banking Committee Chairman Jim Leach, R-Iowa, and Kenneth A. Guenther, executive vice president of ICBA, have both written letters to the Treasury Department asking it to look into a Farm Credit Administration plan to create a national charter. The plan will be the subject of hearings next week by the Senate and House Agriculture Committees.


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