ROCKFORD LIFE INS. CO. v. ILL. DEPT. OF REV., 482 U.S. 182 (1987)

APPEAL FROM THE SUPREME COURT OF ILLINOIS
No. 86-251.
Argued March 31, 1987 Decided June 8, 1987

Under financial instruments commonly known as “Ginnie Maes,” the issuing private financial institution has the primary obligation of making timely principal and interest payments. However, in order to attract investors into the private mortgage market, Ginnie Maes also contain a provision whereby the Government National Mortgage Association, a Government corporation, guarantees payment if the issuer defaults. After state taxing officials included the value of appellant’s Ginnie Mae portfolio in calculating net assets, appellant filed suit challenging its annual property tax assessment. The state courts rejected appellant’s contention that the Ginnie Maes could not be taxed under the constitutional principle of intergovernmental tax immunity and under Revised Statutes § 3701, which exempts from state taxation “all stocks, bonds, Treasury notes, and other obligations of the United States.”

Held: Ginnie Maes are not exempt from state taxation under § 3701. The statutory phrase “other obligations of the United States” refers only to obligations or securities of the same type as those specifically enumerated. Ginnie Maes are fundamentally different from the enumerated instruments in that the Government’s obligation as guarantor is secondary and contingent. Nor is the indirect, contingent, and unliquidated promise that the Government makes in Ginnie Maes the type of obligation that is protected by the constitutional principle of intergovernmental tax immunity. The purpose of that principle is to prevent States from taxing federal obligations in a manner which has an adverse effect on the United States’ borrowing ability. Ginnie Maes’ failure to include a binding governmental promise to pay specified sums at specified dates renders any threat to the federal borrowing power far too attenuated to support constitutional immunity. Pp. 187-192.

112 Ill.2d 174, 492 N.E.2d 1278, affirmed.

STEVENS, J., delivered the opinion for a unanimous Court.

Erwin N. Griswold argued the cause for appellant. With him on the briefs were Karl L. Kellar, Ira L. Burleson, an John C. McCarthy.

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Patricia Rosen, Assistant Attorney General of Illinois, argued the cause for appellees. With her on the brief for appellees Illinois Department of Revenue et al. were Neil F. Hartigan, Attorney General, and Roma Jones Stewart, Solicitor General. Charles J. Prorok filed a brief for appellee Aurand.[*]

JUSTICE STEVENS delivered the opinion of the Court.

This case involves financial instruments commonly known as “Ginnie Maes.” These instruments are issued by private financial institutions, which are obliged to make timely payment of the principal and interest as set forth in the certificates. The Government National Mortgage Association (GNMA) guarantees that the payments will be made as scheduled. The question presented today is whether these instruments are exempt from state taxation under the constitutional principle of intergovernmental tax immunity, or under the relevant immunity statute.[1]

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Prior to 1979 changes in Illinois’ tax law, Rockford Life Insurance Company (Rockford) paid an annual property tax on the assessed value of its capital stock. In 1978, the Illinois taxing authorities included the value of Rockford’s portfolio of Ginnie Maes in their calculation of the corporation’s net assets. Rockford challenged the assessment in the Illinois courts and the County Treasurer filed an action to collect the full amount of the assessment ($723,053.70). The Illinois courts uniformly rejected Rockford’s contention that the securities were exempt from state property taxes,[2] reasoning that “the securities in question here were not `other obligations of the United States’ within the meaning of § 3701,” and that the constitutional and statutory inquiries were identical in this case. 112 Ill.2d 174, 176-184, 492 N.E.2d 1278, 1279-1283 (1986). We noted probable jurisdiction,[3] 479 U.S. 947 (1986), and now affirm.

I
The instruments involved here are standard securities bearing the title “Mortgage Backed Certificate Guaranteed by Government National Mortgage Association.” App. 56.

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True to that title, the instruments contain a provision in which GNMA pledges the “full faith and credit of the United States” to secure the timely payment of the interest and principal set forth in the instrument. The purpose of the guarantee, and the function of GNMA, which is a wholly owned government corporation within the Department of Housing and Urban Development, is to attract investors into the mortgage market by minimizing the risk of loss.[4] See 12 U.S.C. § 1716(a). There is uncontradicted evidence in the record supporting the conclusion that GNMA’s guarantee is responsible for the ready marketability of these securities. That guarantee is not the primary obligation described in the instrument, however. The duty to make monthly payments of principal and interest to the investors falls squarely on the issuer of the certificate.[5]

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The issuer of the certificate is a private party, generally a financial institution, that possesses a pool of federally guaranteed mortgages.[6] Those individual mortgages are the product of transactions between individual borrowers and private lending institutions. It is this pool of private obligations that provides the source of funds, as well as the primary security, for the principal and interest that the issuer promises to pay to the order of the holder of the instrument. After a pool of qualified mortgages is assembled by a qualified issuer, the issuer enters into an agreement with GNMA authorizing the issuer to sell one or more certificates, each of which is proportionately based on and backed by all the mortgages in the designated pool, and each of which is also guaranteed by GNMA. The issuer thereafter may sell the “mortgage-backed certificates” to holders such as Rockford. The issuer administers the pool by collecting principal and interest from

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the individual mortgagors and remitting the amounts specified in the certificates to the holders. GNMA’s costs for the regulatory duties is covered by a fee charged to the issuer. Unless the issuer defaults in its payments to the holder of a certificate, no federal funds are used in connection with the issuance and sale of these securities, the administration of the pool of mortgages, or the payments of principal and interest set forth in the certificates.

Under the type of Ginnie Maes involved in this case, see n. 5, supra, the issuer is required to continue to make payments to the holders even if an individual mortgage in the pool becomes delinquent. In such event, the issuer may pursue its remedies against the individual mortgagor, or the guarantor of the mortgage, but the issuer does not have any rights against GNMA. GNMA’s guarantee is implicated only if the issuer fails to meet its obligations to the holders under the certificates. In that event the holder proceeds directly against GNMA, and not against the issuer. But the risk of actual loss to GNMA is minimal because its guarantee is secured not only by the individual mortgages in the pool but also by the separate guarantee of each of those mortgages, and by a fidelity bond which the issuer is required to post. See 24 C.F.R. § 390.1 (1986).

II
The GNMA guarantee of payment that is contained in the mortgage-backed certificates held by Rockford is a pledge of the “full faith and credit of the United States.”[7] But that does not mean that it is the type of “obligation” of the United States which is subject to exemption under the Constitution or the immunity statute. Because the statutory immunity

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provision now codified at 31 U.S.C. § 3124(a) is “principally a restatement of the constitutional rule,” see Memphis Bank Trust Co. v. Garner, 459 U.S. 392, 397 (1983), we shall first decide whether the statute requires that Ginnie Maes be exempted from state property taxes, and then consider whether the constitutional doctrine of intergovernmental tax immunity requires any broader exemption.

At the time relevant to this case,[8] Rev. Stat. § 3701, as amended, 31 U.S.C. § 742 (1976 ed.), provided that “all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority” (emphasis added). The full text of the sentence in which these words appear, rules of statutory construction, and the earlier legislation that was codified by the enactment of this statute, are all consistent with the conclusion that the phrase “other obligations” refers “only to obligations or securities of the same type as those specifically enumerated.” Smith v. Davis, 323 U.S. 111, 117 (1944). This longstanding interpretation resolves the statutory question before us. GNMA certificates are fundamentally different from the securities specifically named in the statute. Most significantly, they are neither direct nor certain obligations of the United States. As the certificate provides, it is the issuer that bears the primary obligation to make timely payments — the United States’ obligation is secondary and contingent.[9] In short, the United States is the

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guarantor — not the obligor. This distinction is more than adequate to support our conclusion that Ginnie Maes do not qualify as “other obligations of the United States” for the purposes of this statute.

Nor does the constitutional doctrine of intergovernmental tax immunity exempt these instruments from state property taxes. In Smith v. Davis, supra, the United States owed money to a construction company for work that the company had performed on open account. In computing its assets for state tax purposes, the company sought to exclude the amount owed to it by the Federal Government, but a unanimous Court held that the debt was not exempt. The Court concluded that “a unilateral, unliquidated creditor’s claim, which by itself does not bind the United States and which in no way increases or affects the public debt, cannot be said to be a credit instrumentality of the United States for the purposes of tax immunity,” 323 U.S., at 114, and went on to explain that the claim differed

“vitally from the type of credit instrumentalities which this Court in the past has recognized as constitutionally exempt from state and local taxation. Such instrumentalities in each instance have been characterized by (1) written documents, (2) the bearing of interest, (3) a binding promise by the United States to pay specified sums at specified dates and (4) specific Congressional authorization,

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which also pledged the full faith and credit of the United States in support of the promise to pay.” Id., at 114-115.

With respect to Ginnie Maes, the third element described in Smith v. Davis is clearly lacking, and its absence is critical in view of the purposes behind the intergovernmental tax immunity doctrine. That doctrine is based on the proposition that the borrowing power is an essential aspect of the Federal Government’s authority and, just as the Supremacy Clause bars the States from directly taxing federal property, it also bars the States from taxing federal obligations in a manner which has an adverse effect on the United States’ borrowing ability. See Weston v. City Council of Charleston, 2 Pet. 449 (1829); McCulloch v. Maryland, 4 Wheat. 316 (1819). The lack of a fixed and certain obligation by the United States in the Ginnie Mae context makes this concern far too attenuated to support constitutional immunity.[10] Cf Willcuts v. Bunn, 282 U.S. 216, 225 (1931); Hibernia Savings

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Society v. San Francisco, 200 U.S. 310, 315 (1906) Plummer v. Coler, 178 U.S. 115, 136 (1900). Moreover, none of the proceeds of the issuance and sale of the GNMA certificates are received by the Federal Government or used to finance any governmental function. Indeed, given the fixed fees that GNMA charges issuers, and the lack of any GNMA profit sharing, it has not been suggested here that the federal fisc would at all benefit from a holding that Ginnie Maes are exempt from state taxation.[11]

Appellant asserts that Congress authorized the GNMA’s guarantee for the salutary purpose of facilitating the financing of private mortgages, and that an exemption from state taxation will further this purpose. But our job is neither to assess the underlying merits of the program, nor to opine on whether Congress would be wise to exempt Ginnie Maes from state taxation. Our task is simply to decide whether the indirect, contingent, and unliquidated promise that GNMA is authorized to make is the type of federal obligation for which the Constitution, in Congress’ silence, imposes an exemption from state taxation. We hold that it is not.

III
A court must proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly established. We do well to remember the concluding words in Smith, which although spoken in reference to the statute, are relevant to our role in applying the constitutional doctrine as well:

“All of these related statutes are a clear indication of an intent to immunize from state taxation only the

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interest-bearing obligations of the United States which are needed to secure credit to carry on the necessary functions of government. That intent, which is largely codified in § 3701, should not be expanded or modified in any degree by the judiciary.” 323 U.S., at 119.

The judgment is

Affirmed.

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