United States Court of Appeals
For the First Circuit
No. 13-2034
TOWN OF JOHNSTON, on behalf of itself and all others
similarly situated,
Plaintiff, Appellant,
v.
FEDERAL HOUSING FINANCE AGENCY, As Conservator for Federal
Mortgage and Federal Home Loan Mortgage, et al.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ronald R. Lagueux, U.S. District Judge]
No. 13-2116
COMMISSIONERS OF BRISTOL COUNTY,
Plaintiffs, Appellants,
v.
FEDERAL HOME LOAN MORTGAGE CORPORATION, a Federal Chartered
Corporation, et al.,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Howard and Kayatta, Circuit Judges,
and McCafferty,* District Judge.
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.
August 27, 2014
*
Of the District of New Hampshire, sitting by designation.
HOWARD, Circuit Judge. The Town of Johnston, Rhode
Island and the Commissioners of Bristol County, Massachusetts ("the
municipalities") brought separate actions against the Federal
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 and 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 themselves 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. 12 U.S.C. § 4501. As conservator, the FHFA
succeeded to all rights, obligations, and privileges of the two
corporations.
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The charters of Fannie Mae and 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 12 U.S.C. §§ 1723a(c)(2) (Fannie Mae),
1452(e) (Freddie Mac). The FHFA has an essentially identical tax
exemption. See id. § 4617(j)(2).
Massachusetts and Rhode Island each tax the transfer of
real estate. See Mass. Gen. Laws ch. 64D, §§ 1-3; R.I. Gen. Laws
§ 44-25-1. The Massachusetts real property transfer tax is an
excise tax "for and in respect of the deeds, instruments and
writings" or the materials upon which they are written. Mass. Gen.
Laws ch. 64D, § 1. The rate of the tax depends on the county in
which the real property is located, and the total tax imposed is a
function of the sale price of the property. The Bristol County
Commissioners are responsible for collecting this transfer tax
within their county, and do so through the Bristol County Register
of Deeds. Similarly, the Rhode Island transfer tax is imposed "on
each deed, instrument, or writing" used to transfer real estate.
R. I. Gen. Laws § 44-25-1. This transfer tax is also determined by
the purchase price of the property and is collected by the
municipality in which the deed is recorded.
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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 them 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 granted
the entities' Rule 12(b)(6) motions to dismiss, and the
municipalities appealed.
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 12 U.S.C. §§ 1723a(c)(2) (Fannie Mae), 1452(e)
(Freddie Mac), 4617(j)(2) (FHFA). The municipalities claim that
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the transfer taxes are taxes on real property and thus fit within
the real property exception. The entities disagree. We review
this question of statutory interpretation de novo. United States
v. Jimenez, 507 F.3d 13, 19 (1st Cir. 2007).
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 to 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
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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 part 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 an 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. Direct taxes on real property, see Mass. Gen.
Laws ch. 59, § 2;2 R.I. Gen. Laws § 44-3-1, are codified separately
1
See, e.g., Delaware Cnty., Pa. v. Fed. Hous. Fin. Agency,
747 F.3d 215, 223-24 (3d Cir. 2014); Montgomery Cnty., Md. v. Fed.
Nat. Mortgage Ass'n, 740 F.3d 914, 920 (4th Cir. 2014); Bd. of
Comm'rs of Montgomery Cnty. v. Fed. Hous. Fin. Agency, No. 13-4429,
2014 WL 3360830, *4 (6th Cir. July 10, 2014); Hennepin Cnty. v.
Fannie Mae, 742 F.3d 818, 822 (8th Cir. 2014); Bd. of Cnty. Comm'rs
of Kay Cnty v. Fed. Hous. Fin. Agency, 754 F.3d 1025, 1030 (D.C.
Cir. 2014); DeKalb Cnty. v. Fed. Hous. Fin. Agency, 741 F.3d 795,
801 (7th Cir. 2013).
2
Massachusetts law further defines "real property" for
purposes of taxation to "include all land within the commonwealth
and all buildings and other things thereon or affixed thereto,
unless otherwise exempted from taxation under other provisions of
law." Mass. Gen. Laws ch. 59, § 2(a).
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from transfer taxes, which are taxes specifically on the deeds or
writings used to transfer property, see Mass. Gen. Laws ch 64D,
§ 1; R.I. Gen. Laws § 44-25-1(a). Given the longstanding
distinction between a direct tax on real property and an excise
tax, and the fact that the transfer taxes are plainly excise taxes
triggered by the act of transferring property, we hold that the
transfer taxes are not included in the real property exception to
the Charter Exemptions from taxation.
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). So 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
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scrutiny rather than rational basis review in analyzing 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 essential 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 necessary and proper for carrying into
[e]xecution" Congress' enumerated powers, U.S. Const. art. I, § 8,
cl. 18. These include the power "[t]o regulate [c]ommerce with
foreign [n]ations, and among the several States . . . ." Id. at
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cl. 3. Congress' power over interstate commerce "extends to those
activities intrastate which so affect interstate commerce or the
exercise of the power of Congress over it as to make regulation of
them appropriate means to the attainment of a legitimate end, the
exercise of the granted power of Congress to regulate interstate
commerce." United States v. Darby, 312 U.S. 100, 118 (1941).
The municipalities attempt to narrowly sight the
analytical lens, arguing that we should focus on the fact that the
transfer taxes, on their own, are intrastate and non-commercial and
therefore cannot be regulated under the Commerce Clause. We,
however, do not consider the transfer taxes in a vacuum, but rather
as part of Congress' broader regulatory scheme aimed at the
development of a robust secondary mortgage market through Fannie
Mae and Freddie Mac. The proper question for purposes of the
Commerce Clause analysis is not whether the transfer taxes
themselves affect interstate commerce, but rather whether Congress
had a rational basis for believing that exempting the entities from
paying the transfer taxes would affect interstate commerce. The
answer to this question is an unequivocal yes.
If the mission of the entities as detailed in their
charters is not at the heart of interstate commerce, it surely
resides in one of 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
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residential mortgages," acts of financing and market-development
that are indisputably commercial. 12 U.S.C. § 1716. The goal was
one of "promot[ing] access to mortgage credit throughout the
Nation." Id. Similarly, Freddie Mac was created to enhance
competition in the secondary mortgage market, to "provide ongoing
assistance to the secondary market for residential mortgages," to
increase the availability of "mortgages on housing for low- and
moderate-income families," and, once again, to "promote access to
mortgage credit throughout the Nation." 12 U.S.C. § 1451 note.
Congress could easily have determined that local taxes on the
transfer of real property would impede the entities' mission, for
example by reducing the availability 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, 750 F.3d at
924. Congress' decision to exempt the entities from various state
and local taxes is therefore rationally related to Congress' desire
to have 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 are entitled to the automatic
constitutional immunity from state and local taxation enjoyed by
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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 has
passed legislation explicitly exempting the entities from taxation.
Accord Delaware Cnty. 747 F.3d at 228, n. 4; Bd. of Cnty. Comm'rs
of Montgomery Cnty., 2014 WL 3360830, *7 n.4; DeKalb Cnty., 741
F.3d at 802.
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 local services. See, e.g., New
York v. United States, 505 U.S. 144 (1992). This argument is
3
"[A] [s]tate may not, consistent with the Supremacy Clause,
U.S. Const., Art. VI, cl. 2, lay a tax 'directly upon the United
States.'" United States v. New Mexico, 455 U.S. 720, 733 (1982)
(quoting Mayo v. United States, 319 U.S. 441, 447 (1943)).
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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
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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 a 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.
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