Rockford Life Insurance Company v. Illinois Department of Revenue

PETITIONER:Rockford Life Insurance Company
RESPONDENT:Illinois Department of Revenue
LOCATION:United States District Court for the Western District of North Carolina, Charlotte Division

DOCKET NO.: 86-251
DECIDED BY: Rehnquist Court (1986-1987)
LOWER COURT: Supreme Court of Illinois

CITATION: 482 US 182 (1987)
ARGUED: Mar 31, 1987
DECIDED: Jun 08, 1987

ADVOCATES:
Erwin N. Griswold – on behalf of Appellant
Patricia Rosen – on behalf of Appellees

Facts of the case

Question

Audio Transcription for Oral Argument – March 31, 1987 in Rockford Life Insurance Company v. Illinois Department of Revenue

William H. Rehnquist:

We will hear arguments next in No. 86-251, Rockford Life Insurance Company against Illinois Department of Revenue, et al.–

Mr. Griswold, you may proceed when you are ready.

Erwin N. Griswold:

May it please the Court, this case is here on appeal from the Supreme Court of Illinois.

The question, summarily stated, is whether certificates of the Government National Mortgage Association, popularly known as Ginnie Mae and I shall refer to it as Ginnie Mae in the argument, guaranteed as to interest and principal by the full faith and credit of the United States, pursuant to an Act of Congress, are subject to an ad valorem property tax of the State of Illinois.

I will seek to show that the bonds are exempt from taxation.

First, under general constitutional principles, including the Supremacy Clause, since the unqualified Government guarantee which they contain is the key and essential element in carrying out an important policy deliberately adopted by the Government of the United States under the Commerce Clause and in providing for the general welfare.

And, second, pursuant to the express terms of Section 742 of Title 31 of the United States Code, in which the Congress has long provided, since the Civil War, that, and I quote:

“All stocks, bonds and other obligations of the United States shall be exempt from State taxation. “

Rockford Life Insurance Company bought the bonds involved here in 1977 at a time when Illinois did not impose its property tax on Ginnie Mae bonds.

However, on December 31, 1978, the Illinois Department of Local Government changed its rule and imposed the tax for 1978.

That led to administrative and Court proceedings, as a result of which the tax was sustained by the Supreme Court of Illinois.

Rockford then brought the case here and this Court noted probable jurisdiction on November 10th.

In considering both the constitutional and the statutory questions, it is important to have a clear picture of the history of the Government National Mortgage Association and the role which it plays in the housing policy of the United States.

The origins go back more than 50 years, to 1934.

Some of us remember and others have learned that real estate markets then were moribund.

Housing starts had dropped from 937,000 units in 1925 to 93,000 in 1933.

Foreclosures were at epidemic levels, as this Court’s decision in Home Building and Loan Association against Blaisdell clearly records.

Before that time, many efforts had been made by insurance companies and others to insure mortgage debt but the experience was disastrous.

It was in this situation that President Roosevelt established a Commission to explore housing finance and out of its report came the First National Housing Act, enacted in 1934.

One of the proposals embodied in that Act was the grant of authority for the creation of Federally chartered, privately owned national mortgage associations with power to buy and sell mortgages and issue bonds against them to the general public.

Several national policy objectives were expressed.

One, to provide new sources of mortgage funds.

Two, to provide liquidity for mortgage lenders.

That is, marketability and I suggest that is a very key element here.

Three, to lower the cost of mortgage funds by increasing the supply of funds.

And four… and this is another important one… to move mortgage funds from localities where funds were available to areas where credit was in shorter supply.

Despite the authorization and the hopes that lay behind it, the program under the 1934 Act was a complete failure.

No private mortgage association was ever established under the program and in 1948, fourteen years later, the program was repealed.

In 1938 the Federal National Mortgage Association, sometimes called Fannie Mae, was chartered.

One of its purposes was to create a secondary market for mortgages, thereby channeling Federal credit to the housing industry but Fannie Mae did not issue mortgage backed securities.

Erwin N. Griswold:

In 1954 it was reorganized under a new charter as a mixed ownership Government corporation.

It’s secondary market function was to be financed by bonds, by funds borrowed in the private market and these obligations were not secured by the United States.

It was a number of years later, in 1968, thirty-four years after the beginning of only meagerly successful efforts in this area, that Fannie Mae was divided into two corporations.

One of these, Ginnie Mae, Government National Mortgage Association, was established as a wholly-owned Government corporation.

The other corporation retained the Fannie Mae name and Government ownership in it was terminated on September 30, 1968.

By the terms of the statute, Ginnie Mae is, and I quote Section 1717(a)(2)(A) of Title 12 of the U.S. Code:

“Ginnie Mae is in the Department of Housing and Urban Development. “

“It has no Board of Directors and its powers are, by statute, exercised by the Secretary of Housing and Urban Development. “

“It has a President who is nominated by the President and confirmed by the Senate. “

“Its other officers are appointed by the Secretary of Housing and Urban Development. “

Thus Ginnie Mae is unquestionably an instrumentality of the United States and its obligations are clearly, in the normal sense, obligations of the United States.

William H. Rehnquist:

Mr. Griswold, who is the obligor on these bonds?

Erwin N. Griswold:

The only obligor on these bonds is the United States.

William H. Rehnquist:

There isn’t any intermediary between the holder or the payee of the bond and the United States?

Erwin N. Griswold:

There is an understructure but the only obligation is the United States.

The Joint Appendix at Pages 56 to the end, has in bold type the text of the bond.

I have lodged with the clerk one of the exhibits which shows what they look like.

Actually, the original is a little more impressive.

It’s got a green background and a brown border and this is the Seal of the United States in the center of it.

But the language is on Page 58.

It’s also on the bond or the certificate, a copy of which has been given to you.

William H. Rehnquist:

Well, there it says at the beginning on Page 56, “The Issuer, Named Below”.

Now, is that the United States?

Erwin N. Griswold:

No.

That is the entrepreneur who assembles the package and takes the lot to the Government National Mortgage Association.

William H. Rehnquist:

Well, here it says,

“The Issuer, Named Below, Promises to Pay to the Order of. “

That is certainly some form of a promise of payment.

Erwin N. Griswold:

But, Mr. Chief Justice, let me just point a little further in it.

Page 58 of the Joint Appendix, the upper righthand corner of the certificate:

Erwin N. Griswold:

“Except as hereafter undertaken, this certificate does not constitute a liability of nor evidence any recourse against the issuer. “

and then the things which are hereafter undertaken is that the issuer promises that these are true and valid bonds and properly handled but no promise to pay and then, at the bottom of Page 58 appears the Guaranty.

John Paul Stevens:

Mr. Griswold, may I interrupt Mr. Griswold.

The Joint Appendix at 56 reads this way:

“The Issuer, Named Below, Promises to Pay to the Order of Rockford Life Insurance Company. “

and the issuer named below is the Kissell Company.

Doesn’t that make the Kissell Company–

Erwin N. Griswold:

That’s what it says, Mr. Justice, but also it says on Page 58:

“Except as hereafter undertaken, this certificate does not constitute a liability of nor evidence any recourse against the issuer. “

and it is perfectly clear, I submit, that the holder of this certificate could not sue the issuer and get a judgment.

Byron R. White:

–And nobody contends in this case that is the case; do they?

Erwin N. Griswold:

Nobody contends that that is the case.

Byron R. White:

Including the Government?

Erwin N. Griswold:

Yes, I think the Government agrees in its amicus brief.

The issuer is an agent.

He remains an agent for Ginnie Mae.

He collects a service fee.

He makes what he gets on the original sale of the bonds but he carries no liability to the holder of this instrument, despite what it says in the first, because that’s taken back.

John Paul Stevens:

Mr. Griswold, who does make the payments?

Who does pay to the Rockford Life Insurance Company the money that’s–

Erwin N. Griswold:

That all depends upon what actually happens along the way.

In normal course, I suppose it’s the mortgagor who pays.

He pays in wherever he is supposed to pay, which has been arranged by the issuer to accumulate the funds and the issuer then makes the payment, if he has the funds and is able and hasn’t gone bankrupt and various other things, to the holder of the certificate.

Antonin Scalia:

–Well, wouldn’t the issuer’s stockholders object to that and sue the issuer, if the issuer doesn’t have any obligation to make those payments?

I mean, you’re telling us that the issuer has no obligations.

Erwin N. Griswold:

No, on the contrary.

The issuer has obligations, as stated here, to collect the amounts and to account for them and to remit them as they are collected but he has no obligation to the holder of the certificate.

His obligation is to Ginnie Mae.

Antonin Scalia:

But he’s paying the money to the holder of the certificate.

Erwin N. Griswold:

That’s because that’s the nature of the arrangement.

Antonin Scalia:

It’s because somewhere there must be a promise to do it, because otherwise he would be sued to death by his stockholders.

Erwin N. Griswold:

His promise is effectively to Ginnie Mae as the underlying guarantee to help Ginnie Mae to be in the position to carry out its unqualified guarantee of the payment of interest and principal.

I think we cannot overlook that language which is printed on Page 58, which is clear and straight.

The only obligation, suable obligation on this bond is that undertaken by Ginnie Mae, pledging the full faith and credit of the United States.

Antonin Scalia:

Is there another… you’re saying that the holder of the bond is a third-party beneficiary of an agreement between the issuer and Ginnie Mae?

Erwin N. Griswold:

Of that he is, but he is the direct promisee of the unqualified pledge of the full faith and credit of the United States made pursuant to an Act of Congress by the Government National Mortgage Association and that is the heart of the case and it is because of that unqualified guarantee that these things have worked.

Contrary to the prior experience, where mortgage financing was not very successful, Ginnie Mae bonds are now approaching a 120 billion dollars.

Not million but billion.

As Senator Dirksen used to say,

“After a while it adds up to quite a lot of money. “

John Paul Stevens:

Mr. Griswold, can I interrupt you again?

Toward the bottom of Page 57, there’s a sentence:

“The Issuer shall remit to the holder all such monthly payments required under this certificate by the fifteenth, 15th, day of each calendar month. “

Does not that mean that pursuant to this instrument, the Kissell Company has a duty to pay over to the Rockford Life Insurance Company the monthly payments?

Erwin N. Griswold:

That language says that and that calls upon the issuer to perform under an obligation to Ginnie Mae but the only obligation on this certificate, as clearly stated at the top of Page 58, is by Ginnie Mae and it does not constitute a liability of nor evidence any recourse against the issuer.

John Paul Stevens:

Is it your view that it the Kissell Company just kept the monthly payments and took them to South America with them and just turn them over, they would not be liable to Rockford Life Insurance Company?

Erwin N. Griswold:

It is my view that there is nothing that the holder could do except to sue Ginnie Mae and, incidentally, it would clearly have a good case in the now United States Claims Court because of a contractual obligation of the United States to the holder of the certificate.

Byron R. White:

But Ginnie Mae can do some things to it; can’t it?

Erwin N. Griswold:

Ginnie Mae could do things; yes.

Ginnie Mae can remove the issuer.

It can require the transfer, not only of the custody of the mortgages but their title.

It can deal with them.

It can do all kinds of things but the only obligation to the holder, is that of Ginnie Mae.

Now, Ginnie Mae is unquestionably an instrumentality of the United States.

Its obligations are clearly, in the normal sense, obligations of the United States.

The Congressional reports leading up to this suggested the creation of a mortgage-backed securities program and the desirability of Federal Government guarantee of such securities.

Congress adopted such a program, including for the first time the Federal guarantee.

The program has been a great success and it is quite clear that making the Federal Government’s credit available through the guarantee has been the key to that success.

Harry A. Blackmun:

Mr. Griswold, one thing strikes me rather peculiarly on the instrument you’ve given us, and that’s in the Joint Appendix, the Kissell Company is named but there isn’t anyone who purports to sign on behalf of the Kissell Company, in contrast to immediately below, Ginnie Mae’s Secretary and President both attest.

Is there any significance in that?

Erwin N. Griswold:

Well, that is a point made in our brief, that the only signer of this is Ginnie Mae.

The only obligation expressed on it with a signature is Ginnie Mae and the terms of the document are that the only liability which is carried by the instrument is that of Ginnie Mae.

Antonin Scalia:

You wouldn’t need a signature to have liability on it.

I mean, you can type your name and be rendered liable.

There’s nothing in the law that requires you to have a signature.

It looks nicer.

But you could type in the Kissell Company and that’s enough to make you liable.

Erwin N. Griswold:

But I think it is irrelevant in view of that language, “Except as hereinafter undertaken”.

It could hardly be clearer and was intended.

There’s an aspect of the 1968 reorganization which seems of special significance.

Two corporations were established by that Act.

One of these, Fannie Mae, is privately owned and Congress expressly provided, twice in the Federal Housing Act, now found in Section 17/19 of Title 12:

“The corporation #”–

That is Fannie Mae.

“# shall insert appropriate language in all of its obligations issued under this sub-section, clearly indicating that such obligations, together with the interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any Agency or Instrumentality thereof, other than the corporation. “

And the contrast with the powers granted to Ginnie Mae, just two sections later, is very great.

I may add that Ginnie Mae issues are quoted daily in the Wall Street Journal.

This is the current column… it’s not all Ginnie Mae… Ginnie Mae is down here under the heading Government Agency Issues.

Ginnie Mae futures are quoted in the New York Times daily.

Baron’s, which is a widely-used financial sheet under the heading Bonds, Government, has two places where Ginnie Maes are quoted.

One of futures.

Mortgage securities dealers make primary and secondary cash markets in these securities, providing for both immediate and future transfer.

There are futures markets in Ginnie Maes and on major exchanges, and exchange-based Ginnie Mae options have been authorized by the Securities and Exchange Commission.

Any broker can get current quotations on Ginnie Mae bonds by ticker.

John Paul Stevens:

Mr. Griswold, can I ask you another question?

Some of these underlying mortgages, as I understand the record here, are also guaranteed by the Federal Housing Authority or the Veterans Administration.

Erwin N. Griswold:

All of these mortgages have to be guaranteed by the Veterans Administration, the Federal Housing Authority and one or two other–

John Paul Stevens:

Do those guarantees precede the liability of Ginnie Mae?

Erwin N. Griswold:

–They precede it and that is the explanation of why, as appears in the briefs, for the two State briefs, that Ginnie Mae has only paid a nominal sum under its guarantee.

The underlying guarantee has Ginnie Mae protected by the fact that it–

John Paul Stevens:

If they were already guaranteed by one or two other Government agencies, would there have been obligations by the United States within the meaning of the statute, even if they didn’t have the Ginnie Mae guarantee?

Erwin N. Griswold:

–Very likely not.

And this is one reason why I have been stressing this marketability quoted, treated like bonds.

The Veterans Administration undertaking is mortgage-by-mortgage.

You’re still responsible if you have the mortgage, if they don’t pay, you’ve got to go out and find them and it there has to be foreclosure, you have to do it.

The Federal Housing Administration is an insurance program and there are a number of limitations, including the fact that the interest isn’t insured.

The thing that has made these things marketable and which has attracted large sums of money into it, is this unqualified promise of the United States, pursuant to an Act of Congress, pledging the full faith and credit of the United States.

Antonin Scalia:

Mr. Griswold, this has troubled me from the outset in this case.

Do you have any notion as to what the phrase, “Except as hereinafter undertaken” means in that magic paragraph?

Erwin N. Griswold:

Yes, I think I do.

Antonin Scalia:

I keep reading it and reading it and I can’t find anything that’s hereinafter undertaken.

It says, “Except as hereinafter undertaken”.

Erwin N. Griswold:

It is certified that this certificate is legal and regular in all respects.

If Kissell has forged them in some way or has not complied with the law, they would still be liable and,–

“It is duly and validly issued, pursuant to Title 3 of the National Housing Act and that no rule, regulation or other like issuance and no contract or other agreement of either the Government National Mortgage Association or the issuer, or both, adversely affects the rights. “

That is really a guarantee of regularity.

Antonin Scalia:

That much is a commitment of the Kissell Company and nothing else.

I see.

Erwin N. Griswold:

Now, there is a good deal of talk in the other side’s briefs about the case of Smith and Davis.

That is dealt with extensively in our brief and in our reply brief and I think I will leave it to that now.

The introduction of the full faith and credit of the United States in the Ginnie Mae certificate opened the floodgates.

Thereafter, the financing of home mortgages was like traffic on a four-lane highway, with the money flowing freely to a total now approaching, as I’ve said, 120 billion dollars.

Prior to that, without the guarantee, mortgages were not effectively marketable.

In those pre-Ginnie Mae days it was like a winding country road with speed blocks and the money only trickled, and this serves, as I have said, to distinguish the Ginnie Mae certificates from Veterans Administration guarantees or from FHA insurance.

Congress has spoken in broad and unqualified terms in Section 742.

Within both the ordinary and the technical meaning of the language, the certificates clearly state an obligation involving the full faith and credit of the United States.

There is no reason to give that language an artificial construction.

Whether the language is too broad is essentially a political question.

The statute can be changed by Congress where the many competing factors can be appropriately considered and I would call attention to the State’s brief, Page 33/34 where they say essentially that.

The statutory language seems unusually clear and applicable and it should not be rewritten by this Court.

Erwin N. Griswold:

The judgment below should be reversed.

William H. Rehnquist:

Thank you, Mr. Griswold.

We’ll hear now from you Ms. Rosen.

Patricia Rosen:

Mr. Chief Justice and may it please the Court.

I would like to first talk for a moment, if I might, about the Ginnie Mae certificates themselves and who is obligated on the face of the certificates.

As the Court pointed out, the certificate itself states that the issuer, who is named on the face of the certificate, undertakes to promise to pay to Rockford Life Insurance Company payments of both principal and interest on the certificate.

In addition, I would like to point out that as the Appellate Court noted in its opinion, the certificates involved in this case are what is generically known as modified pass-through certificates.

That is, the issuer undertakes to pay both principal and interest, not only as a straight pass-through, that is, as those payments are received by the mortgagor… paid in by the mortgagor, but whether or not those payments are received.

Specifically, I would like to invite the Court’s attention to page 57, in the center of the second paragraph.

The line I’m referring to reads:

“However, the issuer shall pay to holder, whether or not collected by the issuer, and shall remit as set forth below, monthly payment on both principal and interest. “

Sandra Day O’Connor:

Ms. Rosen, do you agree, however, that the liability of the issuer is without recourse?

Patricia Rosen:

Yes, Your Honor, I agree that the holder of the certificate has no recourse against the issuer.

However, counsel for the taxpayer here tries to make that the determinative factor in the case and we strongly disagree with such excessive reliance on simple enforceability by the holder of the certificate.

There are other agreements, as pointed out by both the Appellate Court and the Supreme Court, in rejecting this argument of the taxpayer.

The issuer has promised, not only on the face of the certificate but also in the guarantee agreement which is signed with Ginnie Mae and, as pointed out by the Court in the opening argument, Ginnie Mae is the one who enforces this obligation of this issuer.

It is not the holder of the certificate but it is Ginnie Mae.

But certainly the issuer, in this case the Kissell Company, is liable on these certificates and that liability is enforced.

William H. Rehnquist:

But not liable to the holder?

Patricia Rosen:

That’s correct.

William H. Rehnquist:

But liable to Ginnie Mae?

Patricia Rosen:

That’s correct.

As to the nature of the constitutional and statutory immunity which is being discussed in this case,–

William H. Rehnquist:

Well, I thought the reason it might be important that there was an obligor to respond to any complaints on the part of the holder, other than a Government corporation, was part of the language in Smith against Davis, where it says that one of the characteristics of the obligation of the United States is a binding promise by the United States to pay specified sums and specified dates.

Patricia Rosen:

–But I believe what the Court was referring to in Smith versus Davis is that the promise should not be, as it is in this case, only activated in the event of the default on the basis of the primary obligor, but it should be a binding promise from the beginning.

In other words, a bond, a stock, something where the United States is obligated to–

William H. Rehnquist:

The primary obligor is the–

Patricia Rosen:

–Yes.

And here, the United States is not the primary obligor.

William H. Rehnquist:

–Who is?

Patricia Rosen:

The Kissell Company, in this instance that we are discussing.

The primary obligor–

Byron R. White:

What obligations does it have?

Patricia Rosen:

–It’s obligated to make payments of principal and interest, in this case, whether or not it receives those payments.

Byron R. White:

So you just disagree with Mr. Griswold about its obligations?

Patricia Rosen:

Yes, we do as the Appellate and the Supreme Court disagree with Mr. Griswold that the Kissell Company is not the primary obligor in the certificates.

Antonin Scalia:

If I understand it, you say it is the obligor but can’t be sued to enforce its obligations?

Patricia Rosen:

It can only be sued by Ginnie Mae to enforce its obligations.

It cannot be sued by the holder of the certificate.

It’s not that the obligation is unenforceable.

The obligation, number one, is there.

It’s printed on the face of the certificate.

It is in the guarantee agreement, so it is obligated.

Byron R. White:

If it doesn’t collect from the people who signed the mortgages.

Patricia Rosen:

Ginnie Mae does sue.

Byron R. White:

I know, but Ginnie Mae can’t sue this company.

Patricia Rosen:

Kissell Company.

Yes, they can.

Byron R. White:

Suppose all the mortgagees default… all the mortgagors default?

The mortgagors just default.

They don’t pay.

Patricia Rosen:

Yes, Your Honor.

Byron R. White:

Now, is the Kissell Company independently liable to Ginnie Mae–

Patricia Rosen:

Yes, Your Honor, under the language–

Byron R. White:

–for the amount that is not paid to it?

Patricia Rosen:

–Yes, Your Honor.

Under the language which I just read to you, which I quoted to you, that’s the difference between a straight pass-through certificate and a modified pass-through.

Under a straight pass-through the mortgagor is the primary obligor.

Under a modified pass-through, which is what we have here, the Kissell Company itself undertook–

Byron R. White:

If we disagree with you on that, what if we agree with Mr. Griswold, then do you lose the case?

Patricia Rosen:

–Let me understand what you’re disagreeing with me on.

Byron R. White:

The extent of the obligation of the Kissell Company.

Patricia Rosen:

If you agree that Ginnie Mae is the one who has the primary obligation here… is that what you are–

Byron R. White:

If we agree with Mr. Griswold that this company, the issuer, has no obligation except to Ginnie Mae.

It has no obligation to the holder of the certificate, does it?

Patricia Rosen:

–It is obligated under the terms of the certificate to pay the amounts to the holder.

That obligation cannot be enforced by the holder.

It can only be enforced by Ginnie Mae.

Byron R. White:

So it has no obligation to the holder?

Patricia Rosen:

Yes.

William H. Rehnquist:

That’s almost… it sounds like a little bit of gobbledy-gook because on Page 57 it says,–

“However the issuer shall pay to the holder, whether or not collected by the issuer, and shall remit as set forth below, monthly payments…. “

et cetera.

Now, I would think that would help you in your case it that meant what it says but you are saying, in effect, it doesn’t mean what it says.

Patricia Rosen:

I’m saying it does mean what it… I don’t understand why… it means what it says but that obligation cannot be enforced by the person holding the certificate.

William H. Rehnquist:

But it says you shall pay to the holder but it can’t be enforced by the holder.

Patricia Rosen:

Yes.

The holder has no recourse against the person issuing the certificate.

Sandra Day O’Connor:

It’s an obligation to the holder, without recourse?

Patricia Rosen:

Yes.

Sandra Day O’Connor:

That’s what it is.

Patricia Rosen:

That’s correct.

Sandra Day O’Connor:

It’s an obligation without recourse.

But what does it mean,

“whether or not collected by the issuer? “

That sounds the very opposite of a non-recourse obligation.

Patricia Rosen:

Because that’s the nature of the modified pass-through program, is that the issuer must pay whether or not he collects from the mortgagor.

William H. Rehnquist:

But he must pay to the holder; is that what you’re saying?

Patricia Rosen:

Yes.

William H. Rehnquist:

But the holder can’t enforce it?

Patricia Rosen:

But it’s enforceable by Ginnie Mae, not the holder.

Essentially, the language which is relied upon by the taxpayer in this case, is simply the language of the Federal guarantee itself and that is, that in the event of a default… and only in the event of a default… the liability of the United States, under the terms of its guarantee, is triggered and in the event of a default… and when I say default, I’m referring to the default of the issuer or the primary obligor on the certificate.

In the event of a default, then the holder of the certificate turns to Ginnie Mae.

John Paul Stevens:

May I ask you another question about the intervening layers here?

Patricia Rosen:

Yes, Your Honor.

John Paul Stevens:

Supposing somebody defaults on a mortgage.

It is guaranteed by the Veterans Administration.

Patricia Rosen:

Yes, Your Honor.

John Paul Stevens:

And eventually the Veterans Administration makes good on the mortgage and so forth, what happens in the interim?

Now, the issuer here must continue to make the monthly payments and it eventually reimburses itself from the Veterans Administration; is that right?

Patricia Rosen:

Yes.

John Paul Stevens:

So that in a normal default situation, Ginnie Mae doesn’t have to become involved at all?

Patricia Rosen:

That’s correct.

Under the circumstances which, hopefully, I have just described to you, the question involved in this case concerns the ability of the States, in particular Illinois here, to impose a tax on these mortgage-backed securities which are guaranteed by Ginnie Mae.

More broadly, it involves a question of the doctrine of intergovernmental tax immunity, which unquestionably provides that both the State Governments themselves, and the Federal Government, the property of those Governments, their instrumentalities and their obligations must be free from taxation by the other Government.

The purpose of this doctrine is to allow both Governments, both at the State and Federal level, to coexist without undue interference by the other Government, through the exercise of its taxing power.

It is important, when deciding any question under this doctrine, however, to recognize that the power to raise revenue by taxation is, itself, essential to the operation of any sovereign Government, because it is the only way through which that Government is able to raise the funds necessary to its operation and, therefore, this Court has always been unwilling to broadly interpret either the constitutional or the statutory immunity from taxation.

Harry A. Blackmun:

Of course, Illinois has not always taxed these; have they?

Patricia Rosen:

No.

That’s correct, Your Honor.

Harry A. Blackmun:

All right.

Patricia Rosen:

I believe because, under an earlier interpretation by the Department of Local Government Affairs, they didn’t think they were able to impose the tax.

There was a question raised at the Appellate Court and Supreme Court level of estoppel, relying on a previous interpretation of the Department, which was later changed.

It is unquestionably true that any securities which are issued directly to raise money for the operation of a Government cannot be taxed.

And examples of those securities would be stocks, bonds, certificates of indebtedness, Treasury bills and the like.

However, we submit that this immunity should not be extended to cover obligations which are issued by private institutions merely because they are Federally guaranteed and the investor has no recourse against the private issuer, in the event the issuer defaults.

The taxpayer in this case wants the Court to focus upon this investment transaction from the perspective of the private investor in a default situation and we submit that this is an inappropriate focus for the Court, for several reasons.

First of all, it gives a distorted view of the program and does not take into consideration the primary focus of the Court should be on the degree of interference caused with the operation of the Federal Government and the operation of the program itself.

As pointed out by amicus on National Governors Association and the like in their brief, 38 States and the District of Columbia, impose not property taxes but income taxes, which would also be barred under the interpretation which is being advanced by the taxpayer in this case, since neither the obligations themselves, nor the income from those obligations could be subject to State taxation, if you adopt the view proposed by the private taxpayer here.

Sandra Day O’Connor:

How many states impose a tax like Illinois?

Patricia Rosen:

Very few impose a property tax.

In fact, Illinois no longer imposes the tax which is at issue in this case.

Only four states were listed as imposing a property tax on Ginnie Mae bonds but 38 and the District of Columbia tax the income from the bonds.

Harry A. Blackmun:

Was there a replacement tax of some kind?

Why did they repeal this?

Patricia Rosen:

Yes, there were a number of replacement taxes issued.

Under the Illinois constitution, all taxation of intangible personal property was repealed and the State legislature was required to enact replacement taxes, to cover the income which would be lost by abolishing those taxes.

Harry A. Blackmun:

What kind of taxes?

Patricia Rosen:

I believe it was a wide variety and I can’t specifically name a particular… they were state-wide taxes, called replacement taxes but the tax itself was not abolished having anything to do with the issues which are presented by this Court.

It was abolished along with all other property taxes on intangibles.

And as I pointed out previously, focusing on the recourse by a private investor in the event of a default, is inappropriate because it gives a distorted view of the Ginnie Mae program.

Default, as pointed out by the statistics which are reproduced in several of the briefs, are quite rare and, therefore, it has not been shown that the State taxation imposes any real impediment to the success of the Federal program or interferes in any significant way with the operation of the program.

As of fiscal 1984, as the briefs point out, the cumulative total of the securities issued by Ginnie Mae was in excess of 215 billion dollars.

Contingent liability as of that year was 175 1/2 billion dollars a actual liability amounted to $98,532.

To require the States to refrain from taxing a program in excess of 215 billion dollars on the basis of liability somewhat less than $100,000, is not a sensible construction of constitutional or statutory tax immunity.

Furthermore, the task which the taxpayer proposes in this case completely ignores the real consideration whenever this Court seeks to determine whether securities should be exempted from State taxation.

The focus here should be exclusively on the degree of interference with the Federal Government’s program and such interference has not been shown here.

In this case, the immunity which the taxpayer seeks, would primarily serve to shield private investments from State taxation.

So that immunity is not mandated either by the Constitution or by the Statute.

Unlike stocks, bonds or Treasury bills, Ginnie Mae certificates are issued by private banking institutions, not the Government and those private institutions are primarily liable on these certificates.

The Government’s liability is contingent and unliquidated.

The issuance if Ginnie Maes does not increase the public debt, nor does it secure funds for the operation of the Federal Government and these were essentially the tasks which this Court stressed in the Smith case.

In Smith the Court looked to several factors, but the factors which essentially we would ask the Court to consider here are, first of all, there is no credit instrument or instrument which is utilized by the Federal Government in order to raise revenue.

This is the most important factor because, essentially, what this Court is doing when it says the State cannot impose a tax on these obligations, it is excluding an entire area from the ability of the States to impose taxes.

Where the area relates to the ability of the Federal Government to raise revenue, certainly the function involved is an essential one to the operation of–

Byron R. White:

What will be the economic result of permitting taxation?

It will probably require the interest rate to be raised on the instruments or what?

Patricia Rosen:

–Well, these instruments, as I pointed out, at least the income on the instruments is already taxed and, so, I don’t–

Byron R. White:

So this would be an additional tax?

Patricia Rosen:

–No.

Patricia Rosen:

To date neither the Department of Housing and Urban Development, nor Ginnie Mae itself, nor any branch of the Federal Government, has ever… nor any case has ever found that these instruments were Federally tax exempt, so they are taxed in most states.

Byron R. White:

What will be the economic effect of the tax, if any?

Patricia Rosen:

I don’t know that there would be a direct economic impact.

Byron R. White:

Who pays this tax?

Patricia Rosen:

Well, in this case, Rockford Life.

We pay the tax.

Byron R. White:

Do you think if it knows it is going to have to pay the tax, that it would be as eager to buy these certificates in the future or not?

At that interest rate.

Patricia Rosen:

That is the argument which is advanced by the taxpayer in attempting to argue that there is an interference with the Federal program.

Byron R. White:

If it would force the interest rate to rise, it will certainly increase the potential liability of Ginnie Mae.

Patricia Rosen:

Well, Your Honor, I would point out first of all, that there has… since tax is imposed, at least on the income on these certificates in most States, there hasn’t been shown to be any serious adverse impact on the operation of the program.

Ginnie Mae started issuing these certificates in 1970.

By approximately 1980 the cumulative total issued was something like 82 billion and by 1984 it was 215 billion.

Byron R. White:

And you say that Ginnie Mae isn’t complaining?

Patricia Rosen:

Ginnie Mae has not complained and certainly under those statistics, should not complain.

This program has been phenomenally successful without any declaration that these securities are tax exempt.

Sandra Day O’Connor:

Well Ms. Rosen, I understood the Solicitor General’s position to be that they are subject to tax and that the interest rates and costs of these certificates have already taken that into effect.

Am I wrong?

Patricia Rosen:

No, Your Honor, that is correct and that is the point I’m attempting to make, is that these are taxed and there has been no adverse impact on the program to date and, therefore, I don’t see that there would be any additional impact if you sustain this tax, Your Honor.

Lewis F. Powell, Jr.:

May I ask this question?

These instruments are guaranteed to the extent of the full faith and credit of the United States.

Patricia Rosen:

That’s correct.

Lewis F. Powell, Jr.:

Has the United States Government ever had to pay anything on any of them?

Patricia Rosen:

Yes, Your Honor, they have.

As I pointed out a little bit earlier when I went through the statistics for 1984, it’s about one thousandth of one percent per year and that statistic has held valid.

I checked six years and, basically, it’s been less than one thousandth of one per cent of the total outstanding liability each year that I checked.

Sandra Day O’Connor:

The issuers are required to furnish bonds to guarantee, fidelity bonds and bonds to guarantee the payments that they undertake to make?

Patricia Rosen:

Yes, Your Honor, that is correct.

That is part of the initial agreements which are entered into.

When a mortgage lending institution wants to become an issuer of Ginnie Maes, they assemble a pool of mortgages generally in excess of a million dollars and then they apply to become an issuer and, in doing that, their financial situation is scrutinized and also they must supply fidelity bonds to guarantee performance.

Patricia Rosen:

Essentially, what the taxpayer seeks to do in this case is to expand the doctrine of Federal tax immunity to cover a Federally guaranteed, private investment transaction.

Such immunity should not be conferred in the absence of a decision that it is necessary to the success of the Federal program and we submit that decision is one which should be made by Congress–

Here Congress has never indicated either in the statute creating Ginnie Mae, that these bonds… that it intended to, in the language itself nor in the legislative history, is there any indication that it intended, when it authorized Ginnie Mae to guarantee these obligations, that it intended to confer immunity from State taxation and this Court has many, many times indicated that the question of whether the constitutional and statutory immunity should be expanded is one which is best left to Congress, because it is a question which is essentially legislative in nature.

Congress here has not indicated that immunity from State taxation is necessary to the success of this program.

The program has been phenomenally successful without immunity from State taxation and we would ask this Court to agree with the decisions of the Illinois Appellate and Supreme Courts and to hold that Ginnie Mae securities are not obligations of the Federal Government and they are not entitled to either statutory or constitutional immunity.

Thank you.

William H. Rehnquist:

Thank you, Ms. Rosen.

Mr Griswold, you have two minutes remaining.

Erwin N. Griswold:

Ms. Rosen’s final argument simply ignores Section 742, which is the whole basis of our claim for exemption.

Byron R. White:

If you win, would State income taxes on the interest earned be immune?

Erwin N. Griswold:

That question isn’t here.

Byron R. White:

Well, I’m asking.

Erwin N. Griswold:

I have thought about it and I can see arguments on both sides of it.

Byron R. White:

Under the section you rely on, doesn’t it say interest?

Erwin N. Griswold:

It says “income” but the question is whether the income is actually paid by the United States or is paid by the mortgagees through the issuer to the holder.

That is a real problem.

It is not here and–

Byron R. White:

In any event, States have been taxing the income?

Erwin N. Griswold:

–In any event, States have been taxing the income.

On the other hand, States generally did not impose property taxes.

There are only four states which now impose property taxes.

They came to it lately, particularly after there was an Illinois decision sustaining it and now Illinois has abandoned the property tax.

It is perfectly clear that the key to the success of this program is the Government guarantee.

Using patent language,

“that was a stroke of genius. “

It changed things from one level to a wholly higher level.

As one of the witnesses in this record, Joint Appendix on Page 54, said:

“But rather than taxpayer money for it, the Ginnie Mae was one of the real beautiful devices that has come along to attract private capital but you use the Government’s credit in order to make it credit worthy. “

And this is a situation where the Government has wisely and successfully used its credit but it is the Government’s credit which is being used through an instrumentality of the United States and that should make it not subject to State property taxes.

William H. Rehnquist:

Thank you, Mr. Griswold.

William H. Rehnquist:

The case is submitted.

The Honorable Court is now adjourned until tomorrow at 10:00.