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.
482 U. S.
187-192.
112 Ill. 2d
174,
492 N.E.2d
1278, affirmed.
STEVENS, J., delivered the opinion for a unanimous Court.
Page 482 U. S. 183
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. [
Footnote 1]
Page 482 U. S. 184
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, [
Footnote 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,
[Footnote 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.
Page 482 U. S. 185
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.
[
Footnote 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.
[
Footnote 5]
Page 482 U. S. 186
The issuer of the certificate is a private party, generally a
financial institution, that possesses a pool of federally
guaranteed mortgages. [
Footnote
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
Page 482 U. S. 187
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 CFR § 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." [
Footnote 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
Page 482 U. S. 188
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,
459 U. S. 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, [
Footnote 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,
323 U. S. 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. [
Footnote 9] In short, the United States
is the
Page 482 U. S. 189
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
323 U. S. 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,
Page 482 U. S. 190
which also pledged the full faith and credit of the United
States in support of the promise to pay."
Id. at
323 U. S.
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. [
Footnote 10]
Cf. Willcuts v. Bunn, 282 U.
S. 216,
282 U. S. 225
(1931);
Hibernia
Savings
Page 482 U. S. 191
Society v. San Francisco, 200 U.
S. 310,
200 U. S. 315
(1906);
Plummer v. Coler, 178 U.
S. 115,
178 U. S. 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. [
Footnote
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
Page 482 U. S. 192
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
323 U. S. 119.
The judgment is
Affirmed.
[
Footnote 1]
At the time relevant to this case, that statute was Rev.Stat. §
3701, as amended, and provided:
"Except as otherwise provided by law, 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. This exemption extends to every form of taxation that
would require that either the obligations or the interest thereon,
or both, be considered, directly or indirectly, in the computation
of the tax, except nondiscriminatory franchise or other nonproperty
taxes in lieu thereof imposed on corporations and except estate
taxes or inheritance taxes."
31 U.S.C. § 742 (1976 ed.). The 1982 reformulation of the
statute was "without substantive change,"
see Pub.L.
97-258, § 4(a), 96 Stat. 1067, and now appears at 31 U.S.C. §
3124(a) with some minor variations in its language which are not
relevant to this case. As in
First National Bank of Atlanta v.
Bartow County Tax Assessors, 470 U. S. 583
(1986), the tax at issue here was levied prior to the
recodification, and "the pre-1982 form of the statute technically
controls this case."
Id. at
470 U. S. 585,
n. 1.
[
Footnote 2]
Appellant's state court action also involved a variety of state
law claims, and claims that some other federally guaranteed
securities were exempt from state taxation.
See 112 Ill. 2d
174, 177, 185-187,
492 N.E.2d
1278, 1279, 1283-1284 (1986). These claims are not at issue
here.
[
Footnote 3]
The issue presented is not the type that would usually merit our
attention if presented in a petition for certiorari. The issue has
divided neither the federal courts of appeals nor the state courts.
Indeed, aside from the Illinois courts, no court has ever
considered whether Ginnie Maes are exempt from state taxes. Nor
does it appear that this case presents an overly important question
of federal law "which has not been, but should be, settled by this
Court." This Court's Rule 17.1(c). The fact is that the Illinois
property tax imposed here was repealed in 1979. Nonetheless, this
case arises under our mandatory jurisdiction, 28 U.S.C. § 1257(2),
and Congress has not allowed us to consider these factors in
deciding whether to rule on this case on its merits.
[
Footnote 4]
"The Mortgage-Backed Securities Program provides a means for
channeling funds from the Nation's securities markets into the
housing market. The U.S. Government full faith and credit guaranty
of securities makes them widely accepted in those sectors of the
capital markets that otherwise would not be likely to supply funds
to the mortgage market. The funds raised through the securities
issued are used to make residential and other mortgage loans.
Through this process, the program serves to increase the overall
supply of credit available for housing, and helps to assure that
this credit is available at reasonable interest rates."
Dept. of Housing and Urban Development, Handbook GNMA 5500.1
Rev. 6, GNMA I Mortgage Backed Securities Guide 1-1 (1984)
(hereinafter GNMA Guide).
[
Footnote 5]
The promises set forth in the representative GNMA certificate in
the record read as follow:
"THE ISSUER, NAMED BELOW, PROMISES TO PAY TO THE ORDER OF:"
"ROCKFORD LIFE INSURANCE COMPANY"
"36 1695690 F"
"(HEREINAFTER CALLED THE HOLDER) The sum of $1,018,717 DOLS 20
CTS in principal amount, together with interest thereon and on
portions thereof outstanding from time to time at the fixed rate
set forth hereon, such payment to be in monthly installments,
adjustable as set forth below. All monthly installments shall be
for application first to interest at such fixed rate and then in
reduction of principal balance then outstanding, and shall continue
until payment in full of the principal amount, and of all interest
accruing thereon."
"
* * * *"
"[T]he issuer shall pay to the holder, whether or not collected
by the issuer, and shall remit as set forth below, monthly payments
of not less than the amounts of principal being due monthly on the
mortgages and apportioned to the holder by reason of the aforesaid
base and backing, together with any apportioned prepayments or
other early recoveries of principal and interest at the fixed
rate."
App. 56-57. Sample certificates are published in the GNMA Guide,
at App. 39-43.
The Ginnie Maes held by Rockford, are "modified pass-through
securities" that provide for the payment of specific amounts
whether or not timely collections are made from the individual
mortgagors in the pool.
See 128 Ill.App.3d 302, 313, 470
N.E.2d 596, 603 (2d Dist.1984). GNMA also guarantees "straight
pass-through securities" which provide that the issuer shall pay
the holders of the securities the amounts collected from the pool,
"as collected," less specified administrative costs.
See
24 CFR § 390.5(a) (1986); GNMA Guide, at 1-1.
[
Footnote 6]
The issuer must satisfy various financial requirements imposed
by the Federal Housing Authority (FHA) and GNMA.
See 24
CFR § 390.3 (1986). In addition, each of the individual mortgages
in the pool must be guaranteed by the FHA, the Veterans
Administration, or another Government agency.
Ibid.
[
Footnote 7]
GNMA is authorized to make this guarantee under 12 U.S.C.
§1721(g). The fact that the guarantee is executed by a federal
agency, rather than by the United States itself, does not avoid the
application of the immunity doctrine and statute.
See Memphis
Bank & Trust v. Garner, 459 U. S. 392,
459 U. S. 396
(1983).
[
Footnote 8]
See n 1,
supra.
[
Footnote 9]
Appellant contends that the issuer is not an obligor at all,
because the certificate provides that the holder's sole recourse is
against the GNMA. We disagree. That GNMA is willing to pay the
investor in case of default and then pursue its own remedies
against the issuer does not detract from the reality that the
primary obligor is, in fact, the issuer, and not the GNMA. While
the holder of the certificate may not enforce the obligation
through a direct action against the issuer, GNMA may, upon default,
institute a claim against the issuer's fidelity bond or extinguish
the issuer's interest in the underlying mortgages, thereby making
the mortgages the absolute property of GNMA "subject only to
unsatisfied rights therein of the holders of the securities." 24
CFR § 390.15(b) (1986);
see also 12 U.S.C. § 1721(g);
New York Guardian Mortgagee Corp. v.
Cleland, 473 F.
Supp. 409, 411 (SDNY 1979). As the GNMA Guide provides: An
"issuer of GNMA-guaranteed mortgage-backed securities is
responsible for . . . making the full and timely payment of all
amounts due to securities holders."
GNMA Guide, at 2-1. This statement is supported by the
regulations which prohibit GNMA from guaranteeing securities
"if the pool arrangement proposed by the issuer does not
satisfactorily provide for . . . [t]imely payment of principal and
interest, in accordance with the terms of the guaranteed
securities."
24 CFR § 390.9(c) (1986).
See also GNMA Guide, at
App.19, § 4.01 (issuer's contractual agreement with GNMA binds
issuer to "remit to the holders all payments . . . in a timely
manner").
[
Footnote 10]
"But when effort is made, as is the case here, to establish the
unconstitutional character of a particular tax by claiming that its
remote effect will be to impair the borrowing power of the
government, courts, in overturning statutes, long established and
within the ordinary sphere of state legislation, ought to have
something more substantial to act upon than mere conjecture. The
injury ought to be obvious and appreciable."
Plummer v. Coler, 178 U. S. 115,
178 U. S.
137-138 (1900).
The proposition that a federal guarantee of a loan does not
preclude state taxation is a "long-established" one.
See Board
of Comm'rs of Montgomery County v. Elston, 32 Ind. 27, 32
(1869);
S.S. Silberblatt, Inc. v. Tax Comm'n of New York,
5 N.Y.2d 635, 641, 159 N.E.2d 195, 197-198,
cert. denied,
361 U.S. 912 (1969);
see also 47 Op.N.C.Atty.Gen.19 (1977)
(concluding that Ginnie Maes are not "obligation of the United
States" for these purposes, and indicating that the Assistant
Director of GNMA agreed with this position). In fact, during the
debate on one of the predecessors to the current immunity statute,
Senator Sherman assured the Senate that bonds of the Pacific
Railroad, which had been guaranteed by the United States, were not
subject to immunity.
See Cong.Globe, 41st Cong., 2d Sess.,
1591 (1870), discussing Act of July 14, 1870, 16 Stat. 272.
[
Footnote 11]
Even if there were a somewhat more certain effect, state
taxation of these privately issued instruments would not
necessarily be invalid.
See Alabama v. King & Boozer,
314 U. S. 1 (1941);
Graves v. New York ex rel. O'Keefe, 306 U.
S. 466 (1939);
James v. Dravo Contracting Co.,
302 U. S. 134
(1937). Immunity from taxation "may not be conferred simply because
the tax has an effect on the United States."
United States v.
New Mexico, 455 U. S. 720,
455 U. S. 734
(1982).