TOWN OF JOHNSTON, оn behalf of itself and all others similarly situated v. FEDERAL HOUSING FINANCE AGENCY, As Conservator for Federal Mortgage and Federal Home Loan Mortgage, et al.; Commissioners of Bristol County v. Federal Home Loan Mortgage Corporation, a Federal Chartered Corporation, et al.
Nos. 13-2034, 13-2116
United States Court of Appeals, First Circuit.
Aug. 27, 2014.
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Warren T. Burns, with whom Terrell W. Oxford and Susman Godfrey, LLP were on brief, for appellant Town of Johnston.
John Roddy, Elizabeth Ryan, Baily & Glasser LLP, Steven P. Sabra and Sabra and Aspden, P.A. on brief for appellants Commissioners of Bristol County.
Michael A.F. Johnson, with whom Howard N. Cayne, Asim Varma, Dirk C. Phillips, Arnold & Porter LLP, Michael J. Ciatti, Merritt E. McAlister, King & Spalding LLP, Michael D. Leffel, Jill L. Nicholson and Foley & Lardner LLP were on brief, for appellees.
Patrick J. Urda, Tax Division, Department of Justice, with whom Kathryn Keneally, Assistant Attorney General, Tamara W. Ashford, Principal Deputy Assistant Attorney General, Gilbert S. Rothenberg, Chief, Appellate Section and Jonathan S. Cohen, Attorney, Tax Division, Department of Justice, were on brief for intervenor United States.
Before HOWARD and KAYATTA, Circuit Judges, and McCAFFERTY,* District Judge.
The Town of Johnston, Rhode Island and the Commissioners of Bristol County, Massachusetts (“the municipalities“) brought separate actions against the Federаl National Mortgage Association (“Fannie Mae“), the Federal Home Loan Mortgage Corporation (“Freddie Mac“), and the Federal Housing Finance Agency (“FHFA“) (collectively, “the entities“), alleging that the entities failed to pay taxes on the transfer of property. Federal district courts in Massachusetts аnd Rhode Island granted the entities’ motions to dismiss based on statutory exemptions from taxation. The municipalities appeal the district courts’ decisions, claiming that the transfer tax is a tax on “real property” and therefore falls outside the entities’ tax exemptions, and that the entities’ tax exemptions themselvеs are unconstitutional. We affirm the dismissals of both complaints for failure to state a claim.
I. Background
Fannie Mae and Freddie Mac are private, publicly traded corporations that were created by federal charter to support the development of the secondary mortgage market. In September 2008, the two corporations entered conservatorship under the FHFA, an independent federal agency, pursuant to the Housing and Economic Recovery Act of 2008.
The charters of Fannie Mae аnd Freddie Mac contain similar exemptions concerning taxation (the “Charter Exemptions“). Both are exempt from “all taxation” imposed by any state, county, or local taxing authority, “except that any real property of the corporation shall be subject to State, territorial, county, municipal, or local taxation to the same extent ... as other real property is taxed.” See
Massachusetts and Rhode Island each tax the transfer of real estate. See
As is the case throughout the country, a significant number of mortgaged properties in the municipalities have gone into foreclosure since the 2008 financial crisis. Through the foreclosure process, the entities have taken possession of many of these properties and then sold thеm to third-party purchasers. The entities have not paid any state taxes related to the transfer of the properties.
In their separate actions, the municipalities sought declaratory judgments that the entities owe the respective transfer taxes, as well as money damages and equitable relief to recover the unpaid taxes, plus interest and costs. The district courts
II. Analysis
The municipalities argue on appeal that their claims were erroneously dismissed, because (1) a real property exception in the Charter Exemptions applies to the transfer taxes and (2) the Charter Exemptions are unconstitutional.
a. Real Property Exception
The Charter Exemptions excuse the entities from paying all state and local taxes except for taxes on the entities’ real property, which is taxed at the same rate as real property generally. See
The municipalities claim that the transfer tax is a tax on real property because, they argue, real property includes deeds and the transfer process in addition to the physical premises. The municipalities draw on the “common idiom describ[ing] property as a ‘bundle of sticks‘—a collection of individual rights which, in certain combinations, constitute property.” United States v. Craft, 535 U.S. 274, 278 (2002). They argue that one of these “sticks” is the right tо transfer property and that a tax on the transfer of property is therefore a tax on real property. The municipalities claim that we should read the real estate exception broadly because “taxation is the rule and exemption the exception.” Gagne v. Hanover Water Works Co., 92 F.2d 659, 661 (1st Cir. 1937).
We do not write on a clean slate. Six other circuits have recently considered this attempt to shoe-horn a transfer tax into a real property tax, and they have unanimously rejected the argument.1 We join the other circuits, adding only two brief observations of our own.
First, while the ability to transfer property properly may be viewed as рart of the bundle of rights that comes with property ownership, the transfer tax is not imposed merely because a person has the ability to transfer property. Rather, the tax must be paid only when property is actually transferred. The Supreme Court has recognized a longstanding and clear “distinction between аn excise tax, which is levied upon the use or transfer of property even though it might be measured by the property‘s value, and a tax levied upon the property itself.” United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988).
Second, this distinction between direct taxes on real property and indirect taxes is reflected in both Massachusetts and Rhode Island law. Direсt taxes on real property, see
b. Constitutionality of Charter Exemptions
The municipalities also challenge the constitutionality of the Charter Exemptions, arguing that they exceed the bounds of Congress’ power under the Commerce Clause and violate the Tenth Amendment. We review the municipalities’ constitutional challenge to the Charter Exemptions de novo. United States v. Coccia, 446 F.3d 233, 242 (2006).
Our inquiry into whether a statute is justified under the Commerce Clause is a narrow one. Hodel v. Virginia Surface Mining and Reclamation Ass‘n, Inc., 452 U.S. 264, 276 (1981). Sо long as there is a rational basis for Congress to have found that a regulated activity affects interstate commerce and the means of regulation are reasonably adapted to that end, we must defer to that finding. Id.; see also Gonzales v. Raich, 545 U.S. 1, 22 (2005); Heart of Atlanta Motel v. United States, 379 U.S. 241, 258, 262 (1964). The municipalities nonetheless urge us to apply strict scrutiny rather than rational basis review in аnalyzing the entities’ Charter Exemptions. They argue that strict scrutiny is appropriate because a state‘s ability to tax is essential to the state‘s status as a sovereign entity.
As the municipalities necessarily concede, there is no precedent in favor of this wishful argument. While a state‘s ability to tax is certainly an essеntial attribute, it is treated no differently than other areas of conflict between state and federal authority. “[L]ike all the other concurrent powers of the States, this power of taxation is subject, in its exercise, to that general implied restriction which necessarily results from the supreme and paramount authority of the Union.” Brown v. Maryland, 25 U.S. 419, 421 (1827). The district courts saw no reason to depart from a rational basis analysis, and neither do we. Accord Delaware Cnty., 747 F.3d at 224-26; Montgomery Cnty., 740 F.3d at 922.
On the merits, the municipalities argue primarily that the exemptions do not fall within Congress’ powers under the Commerce Clause.
The Constitution grants Congress the power “[t]o make all [l]aws which shall be neсessary and proper for carrying into [e]xecution” Congress’ enumerated powers,
If the mission of the entities as detailed in their charters is not at the heart of interstate commerce, it surely resides in one оf the main arteries. Fannie Mae was created by Congress to “establish secondary market facilities for residential mortgages” and to “provide stability in the secondary market for residential mortgages,” acts of financing and market-development that are indisputably commercial.
Congress could easily have determined that local taxes on the transfer of real property would impede the entities’ mission, for example by reducing the availаbility of capital that would otherwise be used to purchase mortgages or by diverting the entities’ investments away from higher-tax states and thereby limiting their national mission. Accord Montgomery Cnty., 740 F.3d at 924. Congress’ decision to exempt the entities from various state and local taxes is therefore rationally related to Congress’ desire to havе the entities be as effective as possible in carrying out their purpose. The municipalities’ primary argument fails.
In addition to their main constitutional challenge, the municipalities also offer subsidiary arguments. For one, they question whether the entities are federal instrumentalities, and therefore whether the entities аre entitled to the automatic constitutional immunity from state and local taxation enjoyed by the federal government and institutions acting as federal instrumentalities.3 This focus on whether the entities are federal instrumentalities is off-target. Private entities may be shielded from paying a state tax by either “constitutional immunity or congressional exemption.” Arizona Dept. of Revenue v. Blaze Const. Co., Inc., 526 U.S. 32, 36 (1999). Where, as here, the tax exemption is statutory, status as a federal instrumentality is not necessary. As in First Agricultural National Bank v. State Tax Commission, 392 U.S. 339, 341 (1968), we need not determine whether the entities are federal instrumentalities entitled to automatic constitutional immunity from state taxes because Congress
The municipalities also advance two arguments based on the Tenth Amendment. First, they argue that preventing them from collecting the transfer tax when a property is transferred, yet still expecting them to register deeds, is tantamount to unconstitutionally commandeering loсal services. See, e.g., New York v. United States, 505 U.S. 144 (1992). This argument is misguided. Whereas the anti-commandeering cases concern the federal government‘s requiring a state to take particular types of affirmative action, see id. at 162 (rejecting the federal government‘s attempt to require a state legislature to enact a particular law); Printz v. United States, 521 U.S. 898, 935 (1997) (rejecting the federal government‘s conscripting state officers to administer or enforce a federal regulatory program), the subject tax exemptions only require the state to refrain from imposing taxes on the entities. They are not addressed to the state process of registering deeds. The mere fact that the Charter Exemptions interfere with what the states otherwise would do—here, impose a tax—is not an obstacle under the Tenth Amendment. The Supreme Court has noted that “[a]ny federal regulation demands compliance,” and merely requiring a state to comply with a federal law does not present a constitutional defect. South Carolina v. Baker, 485 U.S. 505, 514-15 (1988).
Finally, the municipalities argue more broadly that the Charter Exemptions violate the general principles of federalism enshrined in the Tenth Amendment. We have “no license to employ freestanding conceptions of state sovereignty when measuring congressional authority under the Commerce Clause.” Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 550 (1985). Having concluded that the Charter Exemptions are a constitutional exercise of Congress’ power under the Commerce Clause, we necessarily must also conclude that the municipalities’ efforts to invoke abstract principles of federalism through the Tenth Amendment fail. See New York, 505 U.S. at 155-56 (“If а power is delegated to Congress in the Constitution, the Tenth Amendment expressly disclaims any reservation of that power to the States.“).
III. Conclusion
For the above reasons, we affirm the dismissal of all claims.