APPEAL from the Circuit Court of Cook County; the Hon. WALTER
B. BIESCHKE, Judge, presiding.
MR. JUSTICE MEJDA DELIVERED THE OPINION OF THE COURT:
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). *fn1 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 10 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 (Ill. Rev. Stat. 1977, ch. 110, pars. 264 through 279), 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.
In 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. § 1716(b)(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 (FNMA) 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 New York Guardian Mortgagee Corp. v. Cleland (S.D.N.Y. 1979), 473 F. Supp. 409 and 422, as follows:
"A financial institution or mortgage servicing company wishing to participate must assemble or acquire a pool of government insured or guaranteed mortgages. GNMA then enters into a standard form `Guaranty Agreement' with the issuer * * *, under which, inter alia, GNMA agrees to guarantee timely payments of principal and interest as required by the terms of the securities [citation], and the issuer agrees to remit in a timely manner all payments required by the terms of the securities. [Citation.] Should the issuer fail to make timely payments as required, the security holder's sole recourse is against GNMA. [Citation.] However, GNMA may treat the issuer's failure to make required payments as an event of default under the Guaranty Agreement [citation], and this provides GNMA with the option of extinguishing the issuer's interest in the pooled mortgages and becoming owner of those mortgages `subject only to the unsatisfied rights of the holders of the securities * * *.'" Cleland, at 411.
"The statute authorizing the program provides for issuance of securities `based on and backed by' specified guaranteed mortgages in a `trust or pool.' 12 U.S.C. § 1721(g). The issuer, at the time the pool is created, assigns all its rights in the underlying mortgages (including its rights to all interest, principal, and other payments made on or with respect to such mortgages') to GNMA `[t]o provide a base and to back all securities issued * * *.' [Citation.] The authority of the issuer to `file, process and receive the proceeds from * * * guaranty claims' is specifically made subject to this assignment. [Citation.] * * * A `custodial account' is established, into which the issuer deposits proceeds from the pooled mortgages and from which withdrawals may generally be made only for payments to security holders. * * * Segregation of the cash flow from mortgages in the pool from the other assets of an issuer is strictly required. [Citation.] The issuer is paid a fee for its services in administering the pool based on and payable from the interest portion of each monthly installment. [Citation.] * * * The Guaranty Agreement insures that the issuer retains only bare legal title sufficient to enable it to service the mortgages." Cleland, at 428-29.
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:
"EXCEPT AS HEREINAFTER UNDERTAKEN, THIS CERTIFICATE DOES NOT CONSTITUTE A LIABILITY OF NOR EVIDENCE ANY RECOURSE AGAINST THE ISSUER, SINCE IT IS BASED ON AND BACKED BY THE AGGREGATE DEBT OF THE MORTGAGES INSURED OR GUARANTEED UNDER THE LAWS OF THE UNITED STATES, AS SET FORTH ABOVE, AND SINCE RECOURSE MAY BE HAD TO THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION IN THE EVENT OF ANY FAILURE OF TIMELY PAYMENT, AS PROVIDED FOR IN THE GUARANTY APPENDED HERETO. IT IS CERTIFIED THAT THIS CERTIFICATE IS LEGAL AND REGULAR IN ALL RESPECTS, AND IS DULY AND VALIDLY ISSUED PURSUANT TO TITLE III 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 OF BOTH, ADVERSELY AFFECTS THE RIGHTS AND POSITION OF THE HOLDER AS SET FORTH IN THIS CERTIFICATE."
The issuer's name follows this language and then the following guaranty on behalf of GNMA appears:
"GUARANTY: THE UNDERSIGNED, PURSUANT TO SECTION 306(G) OF THE NATIONAL HOUSING ACT, HEREBY GUARANTEES THE TIMELY PAYMENT OF THE PRINCIPAL AND INTEREST SET FORTH IN THE ABOVE INSTRUMENT, SUBJECT ONLY TO THE TERMS AND CONDITIONS THEREOF. THE FULL FAITH AND CREDIT OF THE UNITED STATES IS PLEDGED TO THE PAYMENT OF ALL AMOUNTS WHICH MAY BE REQUIRED TO BE PAID UNDER THIS GUARANTY."
Under the rule first enunciated in M'Culloch v. Maryland (1819), 17 U.S. (4 Wheat.) 316, 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, 89 L.Ed. 107, 110, 65 S.Ct. 157, 158-59.) To make this implied constitutional immunity explicit, Congress has provided for the exemption from ...