[This opinion has been published in Ohio Official Reports at
87 Ohio St.3d 238.]
KEYCORP, SUCCESSOR IN INTEREST TO SOCIETY CORPORATION [AND
TRUSTCORP, INC.], APPELLANT, v. TRACY, TAX COMMISSIONER, APPELLEE.
[Cite as KeyCorp v. Tracy, 1999-Ohio-43.]
Taxation—Franchise tax—Amount of bank holding company’s repurchase
agreements, Eurodollar deposits, cash deposits, and certificates of
deposits it had with its wholly owned banking subsidiary are not the types
of indebtedness that are excluded by R.C. 5733.05(A)(5)(c) in determining
value of bank holding company’s issued and outstanding shares of stock.
(No. 98-1608—Submitted September 15, 1999—Decided December 1, 1999.)
APPEAL from the Board of Tax Appeals, No. 96-M-954.
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{¶ 1} KeyCorp, appellant, is a bank holding company owning both banking
and nonbanking subsidiaries. KeyCorp was created in 1994 when Trustcorp, Inc.
and Society Corporation (“Society”) merged. Society, the surviving corporation,
changed its name to KeyCorp after the merger. Society’s wholly owned banking
subsidiary was Society National Bank (“SNB”).
{¶ 2} Prior to the merger, for tax years 1990, 1991, and 1992, Society1
calculated and paid its franchise tax using net worth as the tax base. Finding error
in its calculations, the Tax Commissioner issued assessments against Society as
follows: $1,194,791.62 for 1990, $198,664.73 for 1991, and $826,533 for 1992.
Society filed timely petitions for reassessment. After a hearing, the commissioner
reduced the assessments (tax and interest) to $752,256.13 for 1990, $141,566.04
for 1991, and $680,084.74 for 1992.
1. We refer to appellant as “Society,” since the assessments were prior to the KeyCorp merger and
the franchise tax returns in dispute were filed by Society.
SUPREME COURT OF OHIO
{¶ 3} Society appealed the commissioner’s decision to the Board of Tax
Appeals (“BTA”) on two issues: (1) whether Society was a quiescent holding
company and (2) whether the amounts of the repurchase agreements, Eurodollar
deposits, cash deposits, and certificates of deposit that it had with SNB on the last
day of its fiscal year were excluded by R.C. 5733.05(A)(5)(c) in determining the
value of Society’s issued and outstanding stock.
{¶ 4} The first issue was resolved in Society’s favor and the Tax
Commissioner has not appealed that finding. As to the second issue, the BTA ruled
against Society, finding that these transactions were not the types of indebtedness
that were excluded by R.C. 5733.05(A)(5)(c) in determining the value of Society’s
issued and outstanding shares of stock.
{¶ 5} The matter is now before us upon an appeal as of right.
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Baker & Hostetler L.L.P., Edward J. Bernert, George H. Boerger and
Christopher J. Swift, for appellant.
Betty D. Montgomery, Attorney General of Ohio, and Richard C. Farrin,
Assistant Attorney General, for appellee.
Vorys, Sater, Seymour & Pease L.L.P., Raymond D. Anderson and Scott J.
Ziance; and Jeffrey D. Quayle, urging reversal for amicus curiae, Ohio Bankers
Association.
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FRANCIS E. SWEENEY, SR., J.
{¶ 6} At issue is whether Society’s placement of its excess cash in
repurchase agreements, Eurodollar deposits, and cash deposits2 with SNB creates
the types of investments in indebtedness that are excluded by R.C.
2. In its notice of appeal to the BTA, Society included certificates of deposit as another type of
disputed transaction. However, Society has apparently abandoned this claim, since there is no
mention of certificates of deposit in the notice of appeal filed with this court or in the submitted
briefs.
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January Term, 1999
5733.05(A)(5)(c) from the value of the issued and outstanding shares of Society’s
stock at issue. We answer this issue in the negative, finding that the transactions in
question do not constitute investments in the issued indebtedness of SNB and,
therefore, should not be excluded under R.C. 5733.05(A)(5)(c). We affirm the
BTA’s decision.
{¶ 7} Franchise tax is an excise tax paid by domestic and foreign for profit
corporations for the privilege of doing business within the state. R.C. 5733.01(A);
Gulf Oil Corp. v. Lindley (1980), 61 Ohio St.2d 23, 25,
15 O.O.3d 42, 43,
398
N.E.2d 790, 791. R.C. 5733.05 is the statute that provides two bases for the
calculation of corporate franchise tax. One measure is based upon the net worth of
the corporation and the other measure is based upon the net income of the
corporation. Tax is due upon the greater sum of the two methods of calculation.
R.C. 5733.06. For the tax years involved, Society paid its tax using its net worth
as the tax base.
{¶ 8} The net worth basis calculation begins with the value of the issued
and outstanding shares of stock of a corporation, which is described in former R.C.
5733.05(A), as in effect during the period in question, as “[t]he total value, as
shown by the books of the company, of its capital, surplus, whether earned or
unearned, undivided profits, and reserves, but exclusive of: ….” Seven specific
exclusions are then set forth in R.C. 5733.05(A)(1) through (7). Society relies on
the exclusion found in R.C. 5733.05(A)(5)(c):
“(5) A portion of the value of the issued and outstanding shares of stock of
such corporation equal to the amount obtained by multiplying such value by the
quotient obtained by:
“…
“(c) Dividing (1) the amount of the corporation’s assets, as shown on its
books, represented by investments in the capital stock and indebtedness of financial
institutions of which at least twenty-five percent of the financial institution’s issued
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and outstanding common stock is owned by the corporation by (2) the total assets
of such corporation as shown on its books.” (Emphasis added.) 141 Ohio Laws,
Part II, 4166.
{¶ 9} Thus, these provisions allow corporations owning at least a twenty-five-percent interest in financial institutions to exclude the value of those interests.
{¶ 10} Society owned the requisite amount of SNB’s common stock. This
is not disputed. Instead, the question presented by this case involves the
interpretation of the phrase “investments in the capital stock and indebtedness” of
a qualifying subsidiary.
{¶ 11} During the tax years in question, Society had excess cash (income
over operating expenses) at the end of each business day. Society would use this
money to purchase investments that provide a greater rate of return than a savings
account. The funds were placed in either repurchase agreements or Eurodollars.
Society also had general cash deposits with SNB.
{¶ 12} Society argues that the repurchase agreements, Eurodollars, and cash
deposits it had with SNB at the end of each fiscal year represent excludable
investments by it in the indebtedness of SNB. Society focuses on the word
“indebtedness,” contending that there is no basis in the express language of R.C.
5733.05(A)(5)(c) to limit the scope of indebtedness.
{¶ 13} However, the Tax Commissioner contends that the word
“indebtedness” cannot be read in isolation. Instead, it must be considered along
with the word “investments” as part of the phrase that excludes “investments in the
capital stock and indebtedness.” Thus, the commissioner contends that the entire
exclusionary phrase contained in R.C. 5733.05(A)(5)(c) must be considered. Once
this is done, the repurchase agreements, Eurodollars, and cash deposits are not
investments by Society in the indebtedness of SNB.
{¶ 14} Statutory construction principles direct us to “ascertain and give
effect to the intent of the lawmaking body which enacted it.” Slingluff v. Weaver
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January Term, 1999
(1902), 66 Ohio St. 621,
64 N.E. 574, paragraph one of the syllabus. Moreover,
“[i]n looking to the face of a statute or Act to determine legislative intent,
significance and effect should be accorded to every word, phrase, sentence and part
thereof, if possible.” State v. Wilson (1997),
77 Ohio St.3d 334, 336-337,
673
N.E.2d 1347, 1350. See, also, R.C. 1.42: “Words and phrases shall be read in
context and construed according to the rules of grammar and common usage.
Words and phrases that have acquired a technical or particular meaning, whether
by legislative definition or otherwise, shall be construed accordingly.”
{¶ 15} A review of the statutory history of the phrase “investments in the
capital stock and indebtedness” shows that it was enacted in the franchise tax
statutes in 1969 as part of Am.Sub.S.B. No. 55. 133 Ohio Laws, Part I, 127. At
first, the exclusion was applicable only to public utility holding companies.
{¶ 16} Am.Sub.H.B. No. 475 amended the franchise tax law in 1971. This
amendment treated insurance and financial holding companies the same as public
utility holding companies, thereby allowing them to exclude their “investments in
the capital stock and indebtedness” of qualifying subsidiaries. 134 Ohio Laws, Part
II, 1559. By choosing to retain the same exclusionary language, the General
Assembly indicated that the criterion for determining excludable “investments in
the capital stock and indebtedness” for insurance and financial institution holding
companies was to remain the same as it had been for public utility holding
companies.
{¶ 17} R.C. Chapter 4905 contains the general powers of the Public Utilities
Commission relating to the issuance of stocks, bonds, notes, and other evidences of
indebtedness by public utility companies. When Am.Sub.S.B. No. 55 was enacted
(and as it remains today), R.C. 4905.40(A), (C), (D), (F)(2), (F)(3), and (G) all
contained a phrase, similar to that now under consideration, relating to the issuance
by public utilities of “stocks, bonds, notes, and [or] other evidences of
indebtedness,” “stocks, bonds, and other evidences of indebtedness,” or “bonds,
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notes, or other evidence[s] of indebtedness.” Thus, at the time Am.Sub.S.B. No.
55 was enacted, the only investments available to a public utility holding company
would have been “stocks, bonds, notes, or other evidences of indebtedness.”
{¶ 18} After considering this history, we believe that the types of
indebtedness that would have been available to a public utility for investment were
not limited to stock, bonds, and notes. Instead, other evidences of indebtedness
were permitted. Additionally, all of the types of indebtedness listed represented
indebtedness “issued” by the public utility. Finally, we note that while “other
evidences of indebtedness” are permitted, they must be of the same character as
stock, bonds, and notes. We make these conclusions based upon the rule of ejusdem
generis — “where in a statute terms are first used which are confined to a particular
class of objects having well-known and definite features and characteristics, and
then afterwards a term having perhaps a broader signification is conjoined, such
latter term is, as indicative of legislative intent, to be considered as embracing only
things of a similar character as those comprehended by the preceding limited and
confined terms.” State v. Aspell (1967), 10 Ohio St.2d 1,
39 O.O.2d 1,
225 N.E.2d
226, paragraph two of the syllabus. Applying this principle, we find that the phrase
“other evidences of indebtedness” is not open-ended. Instead, it is limited to and
would include only indebtedness issued by the public utility that is similar to stocks,
bonds, and notes.
{¶ 19} A repurchase agreement is best described as a type of hybrid
transaction that is not exactly a security, not exactly a loan, and not exactly a sale.
In Nebraska Dept. of Revenue v. Loewenstein (1994), 513 U.S. 123, 126,
115 S.Ct.
557, 560,
130 L.Ed.2d 470, 475, the court described the repurchase agreement used
by the parties as “a two-part transaction, commonly called a ‘repo,’ between a party
who holds federal securities and seeks cash … and a party who has available
cash and seeks to earn interest on its idle funds.”
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January Term, 1999
{¶ 20} In part one of the transaction, SNB sold a set amount of government
securities to Society for a set price. In part two of the transaction, SNB agreed to
buy the securities back from Society at a certain time, usually the next day. The
predetermined price paid by SNB to repurchase the securities was higher than the
initial purchase price paid by Society for the securities. This difference is interest
and is determined by a mutually agreed-upon rate, based generally on certain
market rates. Any interest earned or paid on the securities during the term of the
repurchase agreement stayed with the initial seller (SNB).
{¶ 21} A witness for Society described the repurchase transaction as a
“collateralized borrowing” with “similar features to a secured loan.” Yet, while the
repurchase transaction may be conceptualized as a secured loan, it is not. When
the United States Supreme Court described the repurchase agreement in
Loewenstein, 513 U.S. at 126,
115 S.Ct. at 560,
130 L.Ed.2d at 475, it was careful
not to characterize repurchase agreements for federal income tax law or debtor
creditor law. However, the court pointed out features of the repurchase agreement
that were consistent with a normal lender-borrower relationship. It also alluded to
testimony about possible consequences that might develop if repurchase
agreements were to be characterized as secured loans for purposes of federal
bankruptcy and banking law or of commercial and local government law.
Id.,513
U.S. at 136,
115 S.Ct. at 565,
130 L.Ed.2d at 481-482. The court went on to say,
“Our decision today, however, says nothing about how [repurchase agreements]
should be characterized for those purposes.”
Id. at 136,
115 S.Ct. at 565,
130
L.Ed.2d at 482.
{¶ 22} In Schroeder, Repo Madness: The Characterization of Repurchase
Agreements Under the Bankruptcy Code and the UCC (1996), 46 Syracuse L.Rev.
999, 1008, Professor Schroeder points out that the characterization of a repurchase
agreement as a security interest would be disastrous to the multi-trillion-dollar
repurchase agreement market because the remedies of Article 9 of the U.C.C.,
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rather than the contractual remedies of this agreement, would apply. Likewise,
characterization of a repurchase agreement is important when considering whether
it should be regulated as a security, or its status in a bankruptcy context.
{¶ 23} Turning now to the record, we find that the only documentary
evidence concerning Society’s repurchase transactions consisted of Exhibits 4 and
5, which are merely confirmation receipts for the transactions. The confirmation
receipts contain a clause under the section entitled “Additional Terms and
Conditions Governing Repurchase Agreements,” which states that “a repurchase
agreement is not a deposit of the bank and is not insured by the FDIC.”
{¶ 24} We do not find a sample master repurchase agreement in the
evidence. A master repurchase agreement would provide definitions, and specify
such terms as the rights and remedies of the parties in the event of a default,
substitution of collateral, margin requirements, and notice requirements.
{¶ 25} By not being characterized as a deposit, the repurchase money SNB
received from Society was not subject to any charge for FDIC insurance, nor was
the bank subject to any reserve requirement on the money. While we know the
general characteristics of a repurchase agreement, we know nothing about the
specifics of the repurchase agreements involved in this case.
{¶ 26} The second type of financial transaction between Society and SNB
involved deposits made by Society with SNB’s Grand Cayman branch. Again, the
only documentary evidence of the Eurodollar transactions consisted of
confirmation receipts.
{¶ 27} Eurodollar deposits are dollar deposits in a foreign bank or a foreign
branch of an American bank outside the United States. When Eurodollar deposits
are payable only outside the United States, they are exempt from bank reserve
requirements and FDIC assessments.
{¶ 28} Society’s witness testified that whether a repurchase agreement or a
Eurodollar deposit was used to employ excess cash was a function of whether SNB
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January Term, 1999
had collateral at the time of the transaction. If SNB had collateral available a
repurchase agreement was used; if not, a Eurodollar deposit was used.
{¶ 29} The third type of financial transaction employed by Society was a
cash deposit. Society’s witness testified that such deposits were “like a checking
account you or I would have.”
{¶ 30} Society believes that any indebtedness owed to Society by SNB
should be excluded. According to Society, any general deposit made by Society
with SNB creates an excludable indebtedness, based on the debtor-creditor
relationship that a general deposit creates between a bank and its customer.
{¶ 31} In Speroff v. First-Cent. Trust Co. (1948), 149 Ohio St. 415,
37 O.O.
98,
79 N.E.2d 119, paragraph one of the syllabus, this court held: “The relationship
between a bank and general depositor is that of debtor and creditor.” Here, the
Eurodollar and cash deposits represent the type of general deposits that would
create a debtor-creditor relationship between Society and SNB. In addition, from
Society’s point of view, to the extent that Society expected to earn interest on these
deposits, they represented a type of investment. We reject Society’s contention.
{¶ 32} Instead, we determine that the repurchase agreements, Eurodollar
deposits, and cash deposits do not represent excludable types of indebtedness issued
by a subsidiary corporation. These transactions are banking customer products.
For example, a checking account is a banking customer product created for the use
of the customer; it is not issued indebtedness of the bank in which an investment is
made. Likewise, while the Eurodollar deposits may create a debtor-creditor
relationship, they do not represent indebtedness issued by the bank.
{¶ 33} The repurchase agreements present a somewhat different situation.
If the repurchase agreement is interpreted as an actual sale and repurchase of
securities, then the transaction clearly would not be an investment by Society in the
issued indebtedness of its subsidiary, SNB. Even if the repurchase agreement is
interpreted as a collaterized loan to SNB, it still does not meet the criterion of being
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an investment in an issued indebtedness of the bank. If the repurchase transactions
are viewed as collateralized loans, they could be considered to have created a
debtor-creditor relationship. However, the contractual terms of the repurchase
transactions are unknown because the record does not contain any evidence of the
repurchase agreements between the parties.
{¶ 34} Moreover, investments in capital stock and other forms of
indebtedness, such as bonds and notes, issued by a corporation are sold to investors
by the bank, and do not constitute banking customer products. Customer products
are for the use and benefit of the customer. Investments in indebtedness are issued
for the benefit of the bank.
{¶ 35} R.C. 5733.05(A)(5) states, “investments in the capital stock and
indebtedness.” The word “in” appears to have been ignored by the parties. The
investments must be “in” the indebtedness. To be an investment in the indebtedness
of the subsidiary requires that the subsidiary first have created an indebtedness in
which an investment can be made, e.g., stock, bonds, or notes. This concept
parallels that set forth in the sections of R.C. Chapter 4905 discussed above,
wherein the investments must be ones “issued” by the public utility holding
company’s subsidiary. Eurodollar deposits and other deposits with a bank do not
represent an indebtedness issued by the bank, nor do they represent any type of
security issued by the bank. Securities issued in the indebtedness of a bank are sold
to investors, who in turn may resell the security; this is not the case with deposits
and repurchase agreements. Not all debt creates an investment in the indebtedness
of the debtor within the meaning of R.C. 5733.05(A)(5)(c).
{¶ 36} Therefore, we find that when Society placed its excess cash with
SNB in repurchase agreements, Eurodollars, and cash deposits, it was dealing with
SNB as a bank customer, and not as an investor investing in the indebtedness issued
by SNB. Thus, since these transactions are not investments in the issued
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January Term, 1999
indebtedness of SNB, they cannot be excluded under R.C. 5733.05(A)(5)(c). We
affirm the BTA’s decision.
Decision affirmed.
MOYER, C.J., DOUGLAS, SUNDERMANN, PFEIFER, COOK and LUNDBERG
STRATTON, JJ., concur.
J. HOWARD SUNDERMANN, JR., J., of the First Appellate District, sitting for
RESNICK, J.
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