The American Bankers Association has opened a new front in its legal assault on tax-exempt competitors. The trade group has filed a friend of the court brief with the Supreme Court arguing that production credit associations should be subject to state taxes.
"We don't have any interest in acquiring another tax-exempt competitor," said Michael F. Crotty, deputy general counsel at the ABA. "We have enough of those out there already."
The ABA already is challenging before the Supreme Court the ability of tax-exempt credit unions to serve employees at more than one company.
Congress created production credit associations in 1933 as part of the Farm Credit System. They provide short-term loans for seed and equipment. The federal government initially owned the associations, which meant they were exempt from state taxes. The government, however, sold its stake in all credit associations in 1968. Yet the institutions retained their state tax exemption, although they must pay federal income tax.
Arkansas challenged the tax exemption of Farm Credit Services of Central Arkansas Production Credit Association but lost last year in a federal appeals court in St. Louis.
The ABA raised four arguments in support of taxing production credit associations.
First, it said, the appeals court had failed to review changes Congress made in the Farm Credit Act in 1985, which the ABA claims repealed the production credit associations' tax-exempt status.
Second, it said production credit associations are no longer owned by the federal government and thus should lose its exemption from state taxes. Their "structure, activities, and operation do not warrant" classification of production credit associations as government agencies, the group wrote.
Third, the ABA said, Congress never explicitly exempted these farm lenders from state taxes.
"Congressional silence should not present an opportunity to the courts to create an immunity from state sales and income tax to the detriment of similarly situated commercial lenders who offer similar loan products and services," the ABA wrote.
It noted that Congress had specifically exempted federal credit unions from state taxes and that credit unions are nonprofit lenders like production credit associations.
Finally, the ABA argued that public policy supports taxing these nonprofit organizations.
"Production credit associations are direct retail lenders and fierce competitors of banks," it said. The tax exemption allows them to offer "much lower rates on their short- and intermediate-term loans and, in turn, provide their private owners with significant return on their investments to the detriment of similarly situated taxpaying banks and their shareholders."
But Richard Hanson, a partner in the Chicago law firm of McDermott, Will & Emery who represents the credit associations, said the ABA is full of hot air. Several federal laws describe production credit associations as part of the federal government, he said, and any entity that is part of the federal government is automatically exempt from state taxes. The only exception, he said, would be if Congress passed a law eliminating the tax exemption, which it has not done.
"We feel pretty good about the case," Mr. Hanson said. "We think we are right."
The Supreme Court will hold oral arguments April 21. A decision is expected in late June.