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Shawnee Bank, Inc. v. Paige, 200 W.Va. 20, 488 S.E.2d 20

Facts

Shawnee Bank, Inc., as successor by merger to 2nd Avenue Bank of South Charleston, appealed an assessment for Business and Occupation tax issued by the State Tax Department for the period of January 1, 1982, through June 30, 1987. The assessment, totaling $4,231.11 plus interest, arose from the disallowance of certain exclusions and deductions claimed by the bank, specifically regarding interest earned from securities issued by the F NMA and the deduction of bad debt reserves. After a hearing, the Tax Commissioner affirmed the assessment, leading to the bank's appeal to the Circuit Court.

Shawnee Bank, Inc., successor by merger to 2nd Avenue Bank of South Charleston, appeals an order of the Circuit Court of Kanawha County, which affirmed a decision of the Commissioner of the State of West Virginia Department of Tax and Revenue. Shawnee Bank contends that the circuit court erred in finding that the decision of the Tax Commissioner was not plainly wrong to the extent that such decision found that, for purposes of the state Business and Occupation tax, (1) interest received by a bank on certain securities of the Federal National Mortgage Association is taxable as gross income to the bank, and (2) a bank's bad debt deduction is limited to the accrued interest on such debt for which Business and Occupation tax has been paid.

Issue

Whether the F NMA is an instrumentality of the United States for tax exemption purposes and whether the bank's bad debt deduction is limited to accrued interest on such debt for which business and occupation tax has been paid.

Whether the F NMA is an instrumentality of the United States for tax exemption purposes and whether the bank's bad debt deduction is limited to accrued interest on such debt for which business and occupation tax has been paid.

Rule

The court applied the principle that interpretations of statutes by bodies charged with their administration are given great weight unless clearly erroneous, and that laws imposing a license or tax are strictly construed against the person claiming the exemption.

1. “Interpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review.” Syllabus point 1, Appalachian Power Co. v. State Tax Dep't of West Virginia, 195 W.Va. 573, 466 S.E.2d 424 (1995). 2. “Once a full record is developed, both the circuit court and this Court will review the findings and conclusions of the Tax Commissioner under a clearly erroneous and abuse of discretion standard unless the incorrect legal standard was applied.” Syllabus point 5, Frymier–Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995). 3. “Interpretations of statutes by bodies charged with their administration are given great weight unless clearly erroneous.” Syllabus point 4, Security National Bank & Trust Co. v. First W. Va. Bancorp., Inc., 166 W.Va. 775, 277 S.E.2d 613 (1981). 4. “ ‘ “Where a person claims an exemption from a law imposing a license or tax, such law is strictly construed against the person claiming the exemption.” Syl. pt. 2, State ex rel. Lambert v. Carman, State Tax Commissioner, 145 W.Va. 635, 116 S.E.2d 265 (1960) .’ Syl. pt. 5, Pennsylvania & West Virginia Supply Corp. v. Rose, 179 W.Va. 317, 368 S.E.2d 101 (1988) .” Syllabus point 2, Tony P. Sellitti Construction Co. v. Caryl, 185 W.Va. 584, 408 S.E.2d 336 (1991).

Analysis

The court analyzed the status of the F NMA, concluding that it is not an instrumentality of the United States as defined by West Virginia law. The court referenced various legal precedents and statutory interpretations to support its conclusion that the F NMA's interest income is taxable. Additionally, the court determined that the bank's bad debt deduction is limited to accrued interest on debts for which the business and occupation tax has been paid, as there was no provision allowing for the deduction of bad debt principal.

We believe the authorities cited by the Tax Commissioner establish that a state may tax interest income from securities issued by the F NMA without violating the intergovernmental tax immunity doctrine. However, this does not resolve the question of whether such income is in fact subject to taxation under West Virginia law. To answer that question we must determine whether the F NMA is an agency or instrumentality of the United States as contemplated by W. Va.Code § 11–13–2k (1983) (Repl.Vol.1983) (Repealed 1989).

Conclusion

The court affirmed the Circuit Court's decision, ruling that the F NMA is not an instrumentality of the United States and that the bank's bad debt deduction is limited to accrued interest on such debt for which business and occupation tax has been paid.

For the foregoing reasons, we conclude that the circuit court did not err in upholding the decision of the Tax Commissioner as not plainly wrong to the extent that the commissioner found, for purposes of the State B & O Tax, that (1) the F NMA was not an instrumentality of the United States as contemplated by W. Va.Code § 11–13–2k (1983) (Repl.Vol.1983) (Repealed 1989), and thus, interest received by a bank on certain securities of the F NMA was taxable as gross income to the bank, and (2) a bank's bad debt deduction is limited to the accrued interest on such debt for which business and occupation tax has already been paid.

Who won?

The State Tax Department prevailed in the case as the court upheld the Tax Commissioner's assessment and interpretation of the law regarding the F NMA and the bad debt deduction.

The court affirmed the lower court's ruling.

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