1 IN THE SUPREME COURT OF THE UNITED STATES 2 - - - - - - - - - - - - - - - -X 3 DIRECTOR OF REVENUE OF : 4 MISSOURI, : 5 Petitioner : 6 v. : No. 99-1792 7 CoBANK ACB, AS SUCCESSOR TO : 8 THE NATIONAL BANK FOR : 9 COOPERATIVES : 10 - - - - - - - - - - - - - - - -X 11 Washington, D.C. 12 Tuesday, November 28, 2000 13 The above-entitled matter came on for oral 14 argument before the Supreme Court of the United States at 15 11:13 a.m. 16 APPEARANCES: 17 JAMES R. LAYTON, ESQ., State Solicitor, Jefferson City, 18 Missouri; on behalf of the Petitioner. 19 DAVID C. FREDERICK, ESQ., Assistant to the Solicitor 20 General, Department of Justice, Washington, D.C.; on 21 behalf of the United States, as amicus curiae, 22 supporting the petitioner. 23 RICHARD A. HANSON, ESQ., Chicago, Illinois; on behalf of 24 the Respondent. 25 1 1 C O N T E N T S 2 ORAL ARGUMENT OF PAGE 3 JAMES R. LAYTON, ESQ. 4 On behalf of the Petitioner 3 5 ORAL ARGUMENT OF 6 DAVID C. FREDERICK, ESQ. 7 On behalf of the United States, as amicus curiae, 8 supporting the petitioner 14 9 ORAL ARGUMENT OF 10 RICHARD A. HANSON, ESQ. 11 On behalf of the Respondent 19 12 REBUTTAL ARGUMENT OF 13 JAMES R. LAYTON, ESQ. 14 On behalf of the Petitioner 43 15 16 17 18 19 20 21 22 23 24 25 2 1 P R O C E E D I N G S 2 (11:13 a.m.) 3 CHIEF JUSTICE REHNQUIST: We'll hear argument 4 next in Number 99-1792, the Director of Revenue of 5 Missouri v. CoBank ACB. 6 Mr. Layton. 7 ORAL ARGUMENT OF JAMES R. LAYTON 8 ON BEHALF OF THE PETITIONER 9 MR. LAYTON: Mr. Chief Justice and may it please 10 the Court: 11 In 1933, when Congress authorized the 12 organization of banks for cooperatives, it implicitly 13 authorized the States to tax them. That authority became 14 effective for each bank when it retired the Government 15 shares. The National Bank for Cooperatives paid taxes to 16 Missouri until 1995, but according to the Missouri supreme 17 court the bank's tax liability ended in 1985. That court 18 failed to recognize the bank's exemption from taxes is and 19 always has been provided by statute, and that staute, now 20 12 U.S.C. 2134, exempts from taxation only the bank's 21 notes, debentures, and other obligations, not its income. 22 In deciding what section 2134 means, the 23 Missouri supreme court erred in three respects. It 24 transformed a technical and conforming amendment into a 25 significant change in the Farm Credit Act, it made that 3 1 transformation by adding to the plain language of the 2 statute, and it turned the statute into something that is 3 incongruous to the rest of the Farm Credit Act. 4 Before 1985, the statute provided that CoBank 5 and its predecessors would always pay taxes on real and 6 tangible personal property and, at any time when the 7 Government did not own shares, they would pay other taxes 8 to State and local governments and perhaps even to the 9 Federal Government. The question arises here as to what 10 happened in 1985, and the position being taken by CoBank 11 is that in 1985 suddenly they were freed from all taxes, 12 and yet that is not what the statute said in 1985. 13 There was a technical and conforming amendment 14 that appeared in title 2 of the 1984 -- 5 act. Title 2 15 was the part of the act that was dedicated to making the 16 Farm Credit Administration an arm's length regulator for 17 the farm credit system, something more akin to what we see 18 at the FDIC and other bank regulators in the Federal 19 system. Title 1 of that act also included conforming 20 amendments. Title 1 dealt with the credit corporation 21 which CoBank cites here as a new vehicle for investment 22 into the farm credit system. 23 The second point that the Missouri court erred 24 on is transforming the plain language by adding to it. 25 The plain language of the statute is simply that this 4 1 entity is exempt from taxation as to its notes, debentures 2 and other obligations. Ever since 1933, the entire scope 3 of the exemption given to the banks for cooperatives has 4 been contained in statutes. 5 The only thing that anyone can point to in the 6 statute today that goes beyond notes, debentures, and 7 obligations is the reference to this entity as a Federal 8 instrumentality, but this Court has at various times 9 suggested or, in fact, held that Federal instrumentality 10 does not have the kind of meaning that CoBank ascribes to 11 it. 12 QUESTION: It has, I take it, been described as 13 such by statute from the very beginning. 14 MR. LAYTON: From the very beginning, Your 15 Honor, and that's significant, because even in 1933, what 16 rights or ablities a Federal instrumentality had was 17 unclear. Certainly -- 18 QUESTION: But don't we have -- isn't the 19 statute -- as I understand the statute, it used to say, 20 your bonds are exempt and your income is exempt as long as 21 the stock's being held by the Board of Governors. 22 MR. LAYTON: That's right. 23 QUESTION: All right. Now, they get rid of the 24 second part because nobody holds the stock any more. 25 MR. LAYTON: That's right. 5 1 QUESTION: All right. So we're left with the 2 first part. 3 MR. LAYTON: That's right. 4 QUESTION: And what you rather briliantly say 5 is, ha-ha, that means McCulloch clicks in. 6 MR. LAYTON: Well -- 7 QUESTION: And since McCulloch clicks in, since 8 it doesn't say it doesn't, they're exempt anyway as a 9 Federal instrumentality. 10 MR. LAYTON: Well, I think that's what they say. 11 That isn't what we would say. 12 QUESTION: Right. Right. That's what they say. 13 MR. LAYTON: We would say that they're not -- 14 QUESTION: Exactly, right. 15 MR. LAYTON: That's right, and this Court, and 16 in fact Congress has never suggested that there could be 17 this kind of a hybrid provision for exemption. In each of 18 the instances where we have a financial institution that 19 seeks an exemption from taxes, Congress has either defined 20 the whole scope of that exemption, or left it blank. 21 QUESTION: All right. Now, given that's their 22 argument, and given we're left with the remnant, why 23 doesn't McCulloch click in? 24 MR. LAYTON: Well, first off that -- the 25 McCulloch -- well, McCulloch holds that a Federal 6 1 instrumentality cannot be taxed discriminatorily and in 2 fact goes beyond that to say you can't import -- impose 3 certain kinds of taxes. McCulloch, however, does not 4 suggest that anything that might be labeled a Federal 5 instrumentality qualifies. 6 QUESTION: One obvious reason -- one obvious 7 reason would be because they're not a Federal 8 instrumentality. That's A. 9 MR. LAYTON: That's A. 10 QUESTION: Now, is there a second argument 11 lurking here, that -- 12 MR. LAYTON: Yes. 13 QUESTION: That's what I'm -- 14 MR. LAYTON: That McCulloch is restricted to an 15 instrumentality of the type that this Court addressed in 16 the New Mexico case, and we can see the comparison fairly 17 bluntly here. 18 The Second Bank of the United States was run by 19 presidential appointees. The Federal Government owned 20 20 percent of the shares in that bank, and that bank 21 performed governmental functions, not just functions in 22 which the Government had an interest, but it actually 23 issued currency. It did things that the Government itself 24 must do. In that sense, the Second Bank of the United 25 States was a little like the Red Cross that this Court 7 1 addressed in the Department of Employment case. Again, 2 presidential appointees run the Red Cross, and that entity 3 fulfills treaty obligations that the United States assumed 4 under the Geneva Convention. 5 The -- CoBank mentions the Rural Telephone Bank 6 in their brief. Well, the Rural Telephone Bank has a 13- 7 member board of directors. Seven of them are appointed by 8 the President of the United States. The Governor of the 9 Rural Telephone Bank is appointed by the Secretary of 10 Agriculture, and there is a direct appropriation from 11 Congress in a -- over a 10-year period of -- or 20-year 12 period of $600 billion for the Rural Telephone Bank. 13 By contrast, here we have an entity that from 14 the beginning has been controlled by a board of directors 15 that is appointed by its voting shareholders, which did 16 not include the United States. That is, by the borrowers. 17 It has always been a private entity, quite distinct from 18 the things that we see in McCulloch. 19 So what's the distinction from McCulloch? 20 McCulloch holds that if you have something that is an 21 instrumentality of the type that is the Second Bank of the 22 United States, then in fact there is, absent any 23 congressional language, immunity. 24 QUESTION: Well, I guess on the side of your 25 opponent is the fact that these banks were created to 8 1 perform an important governmental function by extending 2 reliable credit to farmers at the lowest possible cost. 3 MR. LAYTON: And that's certainly true. 4 QUESTION: Right? I mean, that was an important 5 governmental interest. 6 MR. LAYTON: Yes. 7 QUESTION: And by subjecting them to taxation, 8 it's going to drive up that cost. 9 MR. LAYTON: Well, it may or may not drive up 10 that cost. It's interesting to look a little at the 11 history of what happened here. In 1933 -- 12 QUESTION: Assuming it does -- 13 MR. LAYTON: Assuming it does, assuming that it 14 does drive up the cost, then that would certainly affect 15 the ability of these entities to fulfill that interest in 16 which the Government has an interest, yes, it would. 17 QUESTION: Is that enough, then, to exempt them 18 from that interest? 19 MR. LAYTON: No, it is not. It is not. If that 20 were enough, then anything that Congress creates within 21 its power and says it has a governmental interest could be 22 exempted, or inherently exempted from State tax. 23 QUESTION: Would you amend your answer to say, 24 anything the Government calls an instrumentality? 25 MR. LAYTON: Well, no. I don't know that the 9 1 Government has to call something an instrumentality in 2 order to give it the exemption under that approach. 3 Again, instrumentality doesn't have a meaning that is 4 precise as CoBank wishes that it did. 5 QUESTION: Did the statute in McCulloch say -- 6 use the term, instrumentality of the United States? 7 MR. LAYTON: No. There was no statute in 8 McCulloch that referred to a tax exemption, and that is 9 one of the distinctions. 10 QUESTION: No, I mean, but the statute creating 11 the Bank of the United States. 12 MR. LAYTON: As far as I know, it did not. 13 QUESTION: Did it call it an instrumentality of 14 the United States? 15 MR. LAYTON: No. 16 QUESTION: My recollection is that it didn't. 17 MR. LAYTON: I -- there's no mention in the case 18 suggesting that it did, and that matters in the sense 19 that -- well, not just that it didn't use that phrase, but 20 there's no exemption statute at issue in McCulloch. That 21 is, Congress, when it created the Second Bank of the 22 United States, didn't say, okay, you have the following 23 exemptions from State and local taxes, but that's what 24 Congress at least since 1916, when it started the farm 25 credit system, has done consistently for the financial 10 1 entities within the farm credit system. 2 QUESTION: Mr. Layton, there's a reason that the 3 other side gives for the exemption of the debt 4 obligations, because, they say, those obligations are held 5 not in the hands of CoBank but in the hands of the 6 lenders, so you need an exemption so that those lenders, 7 who are private and not government instrumentalities, 8 won't be taxed. 9 MR. LAYTON: Well, it's curious that they make 10 that claim in a brief where they also cite the Memphis 11 case in section 742 of, I beileve it's title 31, which, if 12 this entity is part of the United States, that is, if this 13 bank of cooperatives has the inherent authority that they 14 ascribe to it, then 742 would cover them, and this 15 provision would be superfluous in 2134. But it doesn't 16 cover them, because they are not an instrumentality of 17 this sort, and Congress has defined the scope of their 18 authority. 19 In 1928, this Court in the Shaw v. Gibson- 20 Zahniser Oil case, just a few years before the 1933 act 21 that created the Bank for Cooperatives, pointed out that 22 there are instrumentalities of the United States that do 23 not have exemptions unless Congress gives them an 24 exemption, and then 5 years later Congress in this 25 instance defines what the exemption is, and what CoBank 11 1 and what the Missouri supreme court have done is to say, 2 well, that definition by Congress doesn't really matter. 3 The third point that I mentioned was that it 4 turns the statute into something in Congress with the rest 5 of the Farm Credit Act. That is, in each instance in the 6 Farm Credit Act, where Congress has created an entity that 7 is even -- that is analogous to this particular one, 8 Congress has said, okay, here is the kind of exmeption 9 that you have from State and local taxes. It always is a 10 comprehensive statement, and does not leave room for some 11 kind of an argument that there is an additional exemption 12 based on some kind of inherent immunity, and in each 13 instance it permits taxation of real property and in many 14 instances taxation of tangible personal property. 15 And one of the differences that occurred in 16 1985, according to CoBank, is all of a sudden the statute 17 changed from allowing State and local governments to tax 18 tangible personal property to including only a real 19 property exemption which they ascribe back to the dicta in 20 McCulloch. 21