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Rockford Life Ins. Co. v. Dep't of Rev.

OPINION FILED APRIL 4, 1986.

ROCKFORD LIFE INSURANCE COMPANY, APPELLANT,

v.

THE DEPARTMENT OF REVENUE ET AL., APPELLEES.



Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Winnebago County, the Hon. John E. Sype, Judge, presiding.

JUSTICE MILLER DELIVERED THE OPINION OF THE COURT:

Rehearing denied June 2, 1986.

The Illinois Department of Local Government Affairs assessed the capital stock of the Rockford Life Insurance Company for the year 1978 at $6,937,000. Included in the Department's computation were certain obligations that had not been included in the assessment in previous years and that Rockford Life believed were exempt from State and local taxation. The company sought administrative review of the assessment. The circuit court of Winnebago County affirmed the assessment and, in a related proceeding brought by the Winnebago County treasurer, entered judgment against Rockford Life in the amount of $723,053.70, representing the amount of personal property tax due and interest on that sum. The appellate court affirmed both judgments in a consolidated appeal. (128 Ill. App.3d 302.) We allowed Rockford Life's petition for leave to appeal (94 Ill.2d R. 315(a)) and now affirm the judgment of the appellate court.

Rockford Life presents two arguments against the assessment made here. The company argues first that the securities in question were obligations of the Federal government and therefore, under Federal law, were immune from State and local taxation. Alternatively, the company contends that the Department is estopped from making the 1978 assessment because in preceding years these or similar obligations were not included in the calculation of its capital stock; the company says that in planning its investments it relied on the Department's earlier practice.

I

The assessment of Rockford Life's capital stock was to be used by the county clerks in determining the amount of personal property tax payable by the company. Ad valorem property taxes were to be abolished on or before January 1, 1979 (Ill. Const. 1970, art. IX, sec. 5(c)), and the assessment for 1978 was to be the last for that purpose. The three general categories of securities in question here are mortgage-backed certificates guaranteed by the Government National Mortgage Association (see 12 U.S.C. § 1721(g) (1976)) (GNMA), obligations guaranteed under the New Communities Act of 1968 (see 42 U.S.C. § 3902 (1976)) or under the Urban Growth and New Community Development Act of 1970 (see 42 U.S.C. § 4514 (1976)), and ship financing bonds guaranteed under the Merchant Marine Act of 1936 (see 46 U.S.C. § 1273(a) (1976)).

The greatest part of Rockford Life's holdings in question here consisted of GNMA mortgage-backed securities. GNMA is a wholly owned government corporation, created in 1968 "to attract private capital into housing." (New York Guardian Mortgagee Corp. v. Cleland (S.D.N.Y. 1979), 473 F. Supp. 409, 411.) Describing the operation of the mortgage-backed securities program, the court there explained, "In connection with this program, GNMA was authorized to issue securities `based on and backed by' a pool of mortgages guaranteed by one of several government agencies, * * * and to authorize qualifying private parties to issue such securities. Id. GNMA was further authorized to guarantee with the full faith and credit of the United States the timely payment of principal and interest falling due on such securities. Id." (473 F. Supp. 409, 411.) The court noted, "The general purpose of these provisions was to foster a secondary market for home mortgages by providing a safety and liquidity not available to those investing directly in mortgages and to insulate GNMA investors from problems inherent in the management of mortgage portfolios. [Citations.]" 473 F. Supp. 409, 411.

As the appellate court described them, the other obligations in question here reflect a similar intent to attract private money into the credit markets by providing for government guarantees of the obligations. (128 Ill. App.3d 302, 308-09.) The appellate court found that these securities "all have certain characteristics in common: they are issued by private parties, guaranteed by the full faith and credit of the United States government, and the United States government receives the fee for the guarantees." (128 Ill. App.3d 302, 309.) The appellate court held that the securities involved here were not immune from State or local taxation. This same result was reached in an earlier case, Montgomery Ward Life Insurance Co. v. Department of Local Government Affairs (1980), 89 Ill. App.3d 292, which also involved the inclusion of mortgage-backed GNMA securities in the assessment of an insurance company's capital stock.

The parties agree that the relevant Federal statutory provision regarding the immunity of Federal obligations from State and local taxation is the following:

"[A]ll stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes." (Pub. L. No. 86-346, 73 Stat. 622; see 31 U.S.C. § 742 (1976).)

In 1982, when title 31 of the United States Code was reformulated, the provision in question, generally referred to as section 3701, was replaced by section 3124(a) of title 31 without substantive change (31 U.S.C. § 3124(a) (1982)). See American Bank & Trust Co. v. Dallas County (1983), 463 U.S. 855, 859 n. 1, 77 L.Ed.2d 1072, 1076 n. 1, 103 S.Ct. 3369, 3372 n. 1.

The Supreme Court has described section 3701 "`as principally a restatement of the constitutional rule'" of the immunity of Federal obligations from taxation by States and their political subdivisions. (First National Bank v. Bartow County Board of Tax Assessors (1985), 470 U.S. 583, 593, 84 L.Ed.2d 535, 543, 105 S.Ct. 1516, 1522, quoting Memphis Bank & Trust Co. v. Garner (1983), 459 U.S. 392, 397, 74 L.Ed.2d 562, 567, 103 S.Ct. 692, 695.) The court explained the constitutional basis for the rule in Society for Savings v. Bowers (1955), 349 U.S. 143, 144, 99 L.Ed. 950, 955, 75 S.Ct. 607, 608:

"In 1829 this Court decided in Weston v. City Council of Charleston [(1829), 27 U.S. (2 Pet.) 449, 7 L.Ed. 481], that obligations of the Federal Government are immune from state taxation. This rule, aimed at protecting the borrowing power of the United States from state encroachment, was derived from the `Borrowing' and `Supremacy' Clauses of the Constitution, and the constitutional doctrines announced in McCulloch v. Maryland [(1819), 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579]."

The required immunity has been recognized in the decisions of this court. See Federal Life Insurance Co. v. Department of Local Government Affairs (1976), 65 Ill.2d 320, 324; Price Flavoring Extract Co. v. Lindheimer (1938), 368 Ill. 450, 452; see also Ill. Rev. Stat. 1979, ch. 120, par. 500.4 (exempting from taxation "[p]roperty of the United ...


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