Montgomery Ward Life Ins. Co. v. State, Dept. of Local Government Affairs, 79-1612
Decision Date | 26 September 1980 |
Docket Number | No. 79-1612,79-1612 |
Parties | , 44 Ill.Dec. 607 MONTGOMERY WARD LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. STATE of Illinois, DEPARTMENT OF LOCAL GOVERNMENT AFFAIRS, Defendant-Appellee. |
Court | United States Appellate Court of Illinois |
Henry DeVos Lawrie and Frank P. VanderPloeg of Hopkins, Sutter, Mulroy, Davis & Cromartie, Chicago, for plaintiff-appellant.
William J. Scott, Atty. Gen. of Illinois (Imelda Terrazino, Asst. Atty. Gen., Chicago, of counsel), for defendant-appellee.
Montgomery Ward Life Insurance Company (Ward Life) brought this action to review the 1977 assessment of its capital stock by the Department of Local Government Affairs (the Department) pursuant to the Revenue Act of 1939. (Ill.Rev.Stat.1977, ch. 120, pars. 482 through 811.) 1 Ward Life challenged the Department's inclusion of certain Government National Mortgage Association (GNMA) securities (Ginnie Maes) in the assessment of its capital stock. The trial court upheld the Department's position and this appeal followed. The issues on appeal are: (1) whether Ginnie Maes are obligations of the United States which are exempt from state taxation; and (2) assuming that the Ginnie Maes are not exempt, is the Department precluded from assessing the Ginnie Maes because of its published assessment standards set forth in the Illinois Property Tax Manual.
On May 31, 1977, Ward Life filed its Intangible Property Return for 1977 with the Department. On November 11, 1977, the Department informed Ward Life that its capital stock had been assessed at $2,298,000 which was almost ten times its value in the previous two years. Ward Life filed a complaint with the Department and upon review the value was determined to be $1,349,000. Ward Life appealed from the revised assessment and an administrative hearing was held on April 6, 1978. Ward Life introduced an amended return claiming certain deductions which it had not taken on its original return. Included among these was a deduction for the Ginnie Maes. Ward Life's claim for the deduction was denied because the Ginnie Maes were not found to be obligations of the United States.
Pursuant to the Administrative Review Act ( ) Ward Life brought the instant action alleging the foregoing facts. Following briefing and argument, the trial court determined that the Ginnie Maes were not exempt from the tax and entered judgment for the Department. Ward Life brought this appeal.
OPINIONIn order to understand the nature and purpose of the securities involved in this appeal, a brief digression into their background and content is necessary. In 1968, Congress, in an effort to attract private capital into the secondary mortgage market of private housing, created GNMA as a wholly-owned government corporation (see 12 U.S.C. § 1716b (1976)) and authorized it to implement what has become known as the Mortgage Backed Securities Program. (12 U.S.C. § 1721(g) (1976).) A "secondary market" is, in general, the means whereby initial mortgage lenders, such as banks and savings and loan associations, can refinance mortgages that have already been written, thereby freeing their capital to make more mortgage loans. Specifically, GNMA and its counterpart, the Federal National Mortgage Association MA are to assist this secondary market "by providing a degree of liquidity for mortgage investments, thereby improving the distribution of investment capital available for home mortgage financing." (12 U.S.C. § 1716(a) (1976).) New types of securities were authorized; Fannie Maes issued by FNMA under 12 U.S.C. § 1719(d) (1976), Mortgage Participation Certificates issued by GNMA under 12 U.S.C. § 1717(c) (1976), and Ginnie Maes issued by GNMA under 12 U.S.C. § 1721(g) (1976). The instant appeal involves the latter type of certificates.
The basic operation of the program was described in The New York Guardian Mortgagee Corp. v. Cleland (S.D.N.Y.1979), 473 F.Supp. 409 and 422, as follows:
GNMA is authorized to collect a reasonable fee from the issuer of the Ginnie Mae for the guaranty and for the analysis of the mortgage pool. 12 U.S.C. § 1721(g) (1976).
The Ginnie Mae certificates contain a promise by the issuer (here a California bank) to pay a sum certain with interest in monthly installments to the holder (in this case Ward Life) until payment of all amounts due under the certificate and provide that the holder is the owner of an undivided beneficial interest in a certain proportion of the mortgage pool. The certificate also contains the following language:
The issuer's name follows this language and then the following guaranty on behalf of GNMA appears:
Under the rule first enunciated in McCulloch v. State of Maryland (1819), 17 U.S. 316 (4 Wheat.), 4 L.Ed. 579, all properties, functions and instrumentalities of the federal government are immune from state and local taxation. (See Smith v. Davis (1944), 323 U.S. 111, 113, 65 S.Ct. 157, 158-59, 89 L.Ed. 107, 110.) To make this implied constitutional immunity explicit, Congress has provided for the exemption from state and local taxes for certain written obligations in 31 U.S.C. § 742 (1976). That section provides:
The basis of this statutory exemption is "the fact that a tax upon the obligations of the United States is virtually a tax upon the credit of the Government, and upon its power to raise money for the purpose of carrying on its civil and military operations." Hibernia Savings & Loan Society v. San Francisco (1906), 200 U.S. 310 at 313, 26 S.Ct. 265 at 266, 50 L.Ed. 495 at 496.
The question raised by this appeal is whether Ginnie Mae certificates issued under 12 U.S.C. § 1721(g) (1976), guaranteed by GNMA, and backed by the full faith and credit of the United States, are constitutionally immune from the Illinois Capital Stock...
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