City of Spokane v. Federal National Mortgage Ass'n
2014 U.S. App. LEXIS 24593
9th Cir.2014Background
- Spokane, WA sued Fannie Mae and Freddie Mac (and FHFA as conservator) seeking transfer taxes on real property sales, arguing the federal charter tax exemptions do not cover excise/transfer taxes.
- Fannie’s and Freddie’s charters exempt them from "all" state and local taxation except taxes on their real property (12 U.S.C. §§1452(e), 1723a(c)(2)); FHFA’s statute contains a similar exemption.
- Washington law separates property taxes (title for "Property Taxes") from conveyance/transfer excise taxes (title for "Excise Taxes"). The disputed taxes are excise taxes levied on each sale/conveyance.
- Spokane argued (1) the statutory carve-out for taxes on real property means transfer taxes apply; (2) Congress lacked Commerce Clause authority to preempt state transfer taxes; and (3) the exemptions violate the Tenth Amendment (commandeering and federalism).
- The Ninth Circuit affirmed the district court, joining multiple other circuits that rejected identical statutory and constitutional challenges.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of statutory exemption: do Fannie/Freddie owe state/local real estate transfer excise taxes? | The carve-out "except any real property... shall be subject to State and local taxation" encompasses transfer/excise taxes. | The carve-out refers to taxes on the property itself (ad valorem property taxes), not excise/transfer taxes; statutes and state codes treat them separately. | Exemption covers transfer taxes; the carve-out does not reach excise/transfer taxes. |
| Commerce Clause: Did Congress exceed its power by exempting these entities from state transfer taxes? | Taxation is a sovereign state function, and taxing local real-estate transactions is intrastate activity outside Congress’s commerce power. | Congress may regulate the national secondary mortgage market and under Necessary and Proper may create and protect Fannie/Freddie (including tax exemptions) to preserve that market. | Congress acted within Commerce Clause and Necessary and Proper authority; exemption is constitutional. |
| Tenth Amendment — commandeering: Do the exemptions unlawfully commandeer state officials (e.g., clerks recording deeds)? | Requiring local officials to record deeds without charging effectively commandeers state employees and budgets. | The exemptions do not impose affirmative duties; they preclude enforcement of preempted state tax laws—permissible under Supremacy Clause. | No commandeering; mere non-enforcement of preempted laws is not unconstitutional commandeering. |
| Tenth Amendment — federalism: Do exemptions impermissibly intrude on state sovereignty? | Broad federal preemption of state taxation undermines federalism and state taxing authority. | When Congress validly exercises enumerated powers, it may limit state taxation that conflicts with federal objectives; precedents allow such preemption. | Exemptions do not violate Tenth Amendment federalism principles. |
Key Cases Cited
- United States v. Wells Fargo Bank, 485 U.S. 351 (distinguishing excise/transfer taxes from property taxes)
- McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (federal creation implies power to preserve; power to tax involves power to destroy)
- United States v. Comstock, 560 U.S. 126 (Necessary and Proper Clause permits laws rationally related to enumerated powers)
- Gonzales v. Raich, 545 U.S. 1 (Congress can regulate economic activity affecting interstate commerce)
- United States v. Morrison, 529 U.S. 598 (limits on aggregating noneconomic activity under Commerce Clause)
- Pittman v. Home Owners’ Loan Corp., 308 U.S. 21 (Congressional tax immunity can safeguard federally chartered entities)
- Reno v. Condon, 528 U.S. 141 (distinguishing permissible federal preemption from unconstitutional commandeering)
- Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (state taxing power has limits vis-à-vis federal functions)
- First Agricultural National Bank v. State Tax Commission, 392 U.S. 339 (federal instrumentalities and tax immunity principles)
- Montgomery County v. Federal National Mortgage Ass’n, 740 F.3d 914 (4th Cir. decision upholding similar exemptions)