FNB, Inc., the parent of First National Bank of Dennison and TuscValley Financial, has appealed the Ohio Board of Tax Appeal’s decision in FNB, Inc. v. McClain, No. 2018-323 (“FNB”), reported earlier in this April 16 Buzz. FNB concerned a refund claim related to the Financial Institutions Tax (“FIT”), in which FNB argued that the regulatory assessment credit (“assessment credit”), formerly available in R.C. 5726.51 and allowed to state-chartered banks for amounts paid as regulatory assessments to the Ohio Division of Financial Institutions but not allowed for comparable regulatory assessments paid by nationally-chartered banks to the Office of the Comptroller of the Currency (“OCC”), was in violation of federal law, specifically 12 U.S.C. 548, and it discriminated against nationally-chartered banks with their principal office in Ohio. The assessment credit applied to the tax years 2014 and 2015 and was repealed beginning tax year 2016. For purposes of simplicity, this SALT Buzz refers to the “2014-15 FIT.”
At the Ohio Board of Tax Appeals (“Board”), FNB argued that the 2014-15 FIT must be struck down and the full amount paid by FNB for both years refunded. Alternatively, FNB had claimed that it should be refunded the amount it would have received for the assessment credit, had the assessment credit applied to FNB. The Board agreed with FNB on its alternative argument, remanding the case to the Tax Commissioner to determine whether FNB pays any substantially similar fee or assessment to its federal regulator, and if so to calculate the assessment credit and grant an appropriate refund. The Board could not decide the constitutional claims made by FNB related to the discriminatory nature of the 2014-15 FIT while the assessment credit was in place, because it does not have jurisdiction to consider constitutional challenges to statutes. It is unclear based on the published record whether the Tax Commissioner would have granted FNB an assessment credit on remand from the Board. Despite its theoretical partial victory, FNB has appealed the Board’s decision to the Supreme Court of Ohio, arguing that its entire FIT liability for the two tax years at issue should be refunded.
In its notice of appeal to the Supreme Court of Ohio, FNB states that the Board “ignored several non-constitutional bases” upon which it should have concluded that “the FIT was void and unenforceable as applied to FNB.” However, all arguments presented in its notice of appeal ultimately contain a constitutional question, because those arguments asserting that the 2014-15 FIT was infirm for violating 12 U.S.C. 548 derive their force from the Supremacy Clause of Article VI of the U.S. Constitution, which gives federal law precedence over state law. This being so, the Board’s finding merit in FNB’s argument “that it should receive the benefit of a credit to which it would have been entitled had it been chartered under Ohio, rather than federal, law,” may be viewed as an attempt to resolve the case without exceeding the Board’s own jurisdiction. While the Board did not state so in its decision, it apparently construed R.C. 5726.51 to allow a credit for a regulatory assessment fee similar to that paid by Ohio-chartered banks to the Division of Financial Institutions, but paid instead by a national bank to its federal regulator. This would arguably avoid the invalidation of the statute under the Supremacy Clause as being in violation of 12 U.S.C. 548, which reads: “For purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located.” If the state’s treatment of regulatory fees is consistent between nationally and state-chartered banks, then the Ohio statute would be consistent with 12 U.S.C. 548, and there would be no issue under the Supremacy Clause.
In its appeal, however, FNB argues that such an interpretation of R.C. 5726.51 is incorrect. In its sixth assertion of error, FNB claims that the Board was in error for remanding the case to the Tax Commissioner to determine what assessment credit would be allowed, because such a determination is “without any statutory basis.” This claim relies on the fact that the credit applied only to banks paying Ohio regulatory assessments, so a credit based on a federal regulatory assessment is not authorized by the Ohio statute, regardless of whether such a credit would make the tax equitable and substantially satisfy 12 U.S.C. 548’s requirement to treat a nationally-chartered bank such as FNB “as a bank organized and existing under [state law].”
Nor does FNB view the Ohio and federal statutes to be consistent. It makes reference to a letter issued by the OCC on September 17, 2015, which stated that “the FIT is inconsistent with 12 U.S.C. 548” and reasoned that the 2014-15 FIT “provides a tax credit to Ohio-chartered state banks that is not available to national banks,” and therefore a national bank with its principal office in Ohio is not treated as a bank organized and existing under state law, in conflict with what is required by 12 U.SC. 548. This inconsistency with federal law, supported as it is by the OCC’s opinion, is the central thread of the first seven arguments in FNB’s notice of appeal, the last of which refers explicitly to the Supremacy Clause. In FNB’s opinion, these arguments invalidate the entire 2014-15 FIT as applied to FNB because the tax was void and unenforceable as applied to a bank in FNB’s position. (The OCC letter and potential refund opportunities related to it were the subject of this 2016 Buzz.)
FNB’s asserted constitutional claims are that the 2014-15 FIT violated:
- The Supremacy Clause of the U.S. Constitution because the 2014-15 FIT provided a credit for Ohio-chartered banks that was not provided to nationally-chartered banks, in violation of 12 U.S.C 548.
- The Equal Protection Clauses of both the U.S. Constitution’s 14th Amendment and the Ohio Constitution’s Article I, Section 2 because the credit mechanism was discriminatory in favor of Ohio-chartered banks that received the credit and thus got an unfair and unequal tax advantage over nationally-chartered banks such as FNB.
- The Dormant Commerce Clause of the U.S. Constitution because the 2014-15 FIT created an economic advantage for Ohio-chartered banks over competing nationally-chartered banks.
- The Due Process Clause of the 5th and 14th Amendments of the U.S. Constitution because “Ohio only had the power to tax nationally-chartered banks under 12 U.S.C. 548,” and the 2014-15 FIT exceeded that power to tax because it violated this section with its assessment credit provision. In the absence of a power to tax FNB, the collecting and retaining of FNB’s payments “constitutes an impermissible seizure and confiscation of FNB’s property.”
As with its other arguments, FNB views these constitutional arguments as invalidating the entire 2014-15 FIT as applied to nationally-chartered banks. Therefore, FNB seeks a refund of its entire assessment.
The Tax Commissioner’s Position
The Ohio Attorney General, in his cross-appeal representing the Ohio Tax Commissioner, effectively takes issue with the OCC opinion that the 2014-15 FIT treated Ohio-chartered and nationally-chartered banks differently. “The federal mandate in 12 U.S.C. 548 does not require that state and federal banks be regulated the same, or that they pay the same regulatory fees.” Since only the Ohio-chartered banks are regulated by the Ohio Division of Financial Institutions, and the assessment credit “was the functional equivalent of reducing or eliminating the fees imposed,” the error in the Board’s decision was its holding that FNB should receive the benefit of a credit to which it would have been entitled had it been chartered under Ohio, rather than federal, law.” Rather, since FNB does not pay the Ohio-specific regulatory assessment fees, “it was not entitled to benefit from the functional elimination of those fees.” Based on these arguments in the cross-appeal, it seems unlikely that the Tax Commissioner would have granted FNB an assessment credit even with the Board’s decision.
In the FNB decision, the Board attempted to provide partial relief to FNB, allowing it an equitably determined assessment credit to place it on equal footing with an Ohio-chartered bank. It is unclear whether the Tax Commissioner would have granted such relief; his arguments in the cross appeal suggest he would not. Further, FNB may have had to preserve its constitutional and other arguments by filing at the Ohio Supreme Court. Thus, the parties are now pitted in two diametrically opposite positions similar to a high stakes poker game. If FNB prevails based on the arguments in its appeal, it would pay no FIT at all for the 2014 and 2015 tax years and would receive a full refund of the tax paid. The Tax Commissioner, on the other hand, would not allow any assessment credit to FNB for regulatory fees paid to the OCC for comparable regulatory review, even though an Ohio-chartered bank would receive an assessment credit.
In the meantime, on June 15, 2020 the Board issued decisions in Central Ohio Bancorp v. McClain (Case No. 2018-436) and Cincinnati Federal Savings and Loan v. McClain (Case No. 2018-435), in both of which the Board held that “FNB controls the outcome” and remanded both cases to the Tax Commissioner to calculate an assessment credit based on federal regulatory assessments or fees that are paid by these banks and that are “substantially similar” to those paid by Ohio banks for the two years at issue, tax years 2014 and 2015. The Tax Commissioner had attempted to distinguish those other cases from FNB, but the Board appears to have disagreed.
NOTE: On June 26, 2020, the Ohio Supreme Court granted the joint motion of the parties to refer the appeal to mediation. In the joint motion the parties state that they have entered into settlement negotiations. This may have an impact in not only the FNB case but also in the appeals remanded to the Board as well as matters pending at the Board and before the Tax Commissioner.
If you would like to discuss the FNB decision or any other state and local tax matter, please contact Richard Farrin, Deb McGraw, Derek Heyman or any other ZHF professional.