4000 - Advisory Opinions
Legal Memorandum in Support of FDIC and RTC Statements of Policy Regarding Payment of State of Local Property Taxes
May 31, 1991
Alfred J. T. Byrne, General Counsel
Since the United States Supreme Court's seminal decision in 1819 in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), holding that the Supremacy Clause embodied in Article VI of the United States Constitution prohibits the states from levying a tax on the United States without its consent, the federal government and its instrumentalities have enjoyed immunity from state taxation. See, e.g., United States v. New Mexico, 455 U.S. 720 (1982).
It is clear, however, that Congress can waive such immunity by statute. As with many federal instrumentalities, Congress has waived such immunity in the case of the Federal Deposit Insurance Corporation ("FDIC") for state and local ad valorem real property taxation. From its inception, and prior to the adoption of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), section 15 of the Federal Deposit Insurance Act (12 U.S.C. § 1825) ("FDIA'') provided that the FDIC "shall be exempt from all taxation now or hereafter imposed by any State, county, municipality, 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 according to its value as other real property is taxed."
Section 402(e) of the National Housing Act (12 U.S.C. § 1725(e)) ("NHA'') contained an identical provision regarding the Federal Savings and Loan Insurance Corporation ("FSLIC").
During the 1980's, as appointment of the FDIC and FSLIC as receiver for insolvent financial institutions became more common, the question arose whether the constitutional immunity expressed in sections 15 of the FDIA and 402(e) of the NHA applied to failed banks and thrifts for which the FDIC or FSLIC was acting as receiver. Congress resolved this issue in section 219 of FIRREA by redesignating section 15 of the FDIA as section 15(a) and adding an express subsection (b) to clarify that the FDIC's immunity extends to receiverships.
Section 15(b) of the FDIA confirms that the FDIC has the same immunity from state taxation when acting as a receiver as it does in its corporate capacity. Moreover, Congress expressly set forth in section 15(b)(2) and (3) certain limitations on the waiver of immunity for ad valorem real property taxes. In many instances these limitations previously had been implied by the courts.
The increasing number of thrift and bank failures that preceded the adoption of FIRREA has continued unabated to the present. The Resolution Trust Corporation ("RTC"), which was created in FIRREA to replace the FSLIC as receiver for failed thrifts, and the FDIC, through appointment as receiver for failed financial institutions, have been called upon to control and administer an unprecedented amount of real estate assets, both in number and value. For example, at the end of 1990 the RTC had a real estate portfolio consisting of 41,509 properties, having an aggregate book value of $19.4 billion. These figures exclude delinquent real estate mortgage loans which, in many instances, will ultimately be foreclosed. These delinquent loans, together with the estimates of future institutions to be closed, indicate that the RTC's real estate portfolio is likely to grow before it subsides. Although the FDIC's present portfolio is not as large, it is larger than at any time in its history, and also is expected to increase.
The burden of dealing with such a large volume of real estate is considerable. The FDIC and RTC generally have only a limited ability to prepare in advance for managing the assets of a financial institution for which they are appointed receiver. Moreover, the sheer volume of assets and the number of institutions makes it difficult to assimilate the necessary information quickly. Finally, the difficulties of administration may be affected by the quality of the affected institution's records. In many cases, the records are either incomplete, in disarray or both.
Often, records are not current regarding ad valorem real property tax liabilities. In many cases, taxes that are already delinquent at the time the receiver is appointed become further delinquent, and taxes which are not delinquent become so. Because of the importance of property tax revenues for state and local budgets, the magnitude of the FDIC and RTC holdings of real property and the specific provisions in section 15(b) of the FDIA, each of the FDIC and the RTC (collectively, the "Corporations") proposes to adopt a Statement of Policy Regarding the Payment of State and Local Property Taxes (each referred to as the "Policy") to provide guidance for the payment of such taxes consistent with the provisions of section 15.
Application to the FDIC and the RTC. The Policy applies to both the FDIC and the RTC. Although section 15(b) of the FDIA, by its terms, only provides for the FDIC, other language in FIRREA indicates that Congress intended that the RTC have an identical immunity status. Section 501 of FIRREA added section 21A(g) to the Federal Home Loan Bank Act ("FHLBA") (12 U.S.C. § 1421 et. seq.) to confirm the RTC's immunity from all state taxation generally and to waive such immunity for ad valorem real property taxation. The provision is similar to section 15(a) of the FDIA regarding the FDIC. Section 21A(b)(1)(B) of the FHLBA, in establishing the RTC, provides that the RTC "when it is acting as a conservator or receiver of an insured depository institution shall be deemed to be an agency of the United States to the same extent as the Federal Deposit Insurance Corporation when it is acting as a conservator or receiver of an insured depository institution." Similarly, section 21A(b)(4) of the FHLBA affords to the RTC the same powers and rights as the FDIC to carry out its duties. In particular, it explicitly confirms that section 15(b) applies to assets or liabilities transferred under section 13 of the FDIA to the RTC in its corporate capacity by the RTC as receiver.
A. Scope and Applicability
Section 15 of the FDIA is silent about the immunity of the FDIC or the RTC when acting as conservator. However, the legislative history of section 15(b), as well as the similarity of powers and duties of conservators and receivers, implies that the FDIC and the RTC, as conservator, enjoy similar tax immunity. On the other hand, the Corporations recognize that financial institutions in conservatorship continue to operate as business entities. Similar considerations obtain with respect to a bridge bank, and when a Corporation is managing a special asset pool arising out of a large bank assisted transaction. Accordingly, the Policy provides that the Corporations, when acting in such capacities, will not assert the tax immunity recognized in section 15(b) at this time, although the Corporations reserve the right to reconsider this position in the future.
The Corporations are often appointed as conservator for an institution which has acquired certain assets and assumed certain liabilities from a receiver pursuant to a purchase and assumption agreement. In such cases, the liabilities assumed generally do not include all tax obligations. The Policy states that the Corporations, as conservators, will not be liable for those obligations not assumed from the receiver. This disclaimer of liability is not based on a claim of conservatorship immunity; instead liability is disclaimed because the institution in conservatorship has not legally assumed those obligations. A bridge bank that has acquired assets and assumed liabilities in a similar manner, is also entitled to disclaim tax-related obligations it has not legally assumed.
Section 15 of the FDIA is similarly silent as to whether immunity applies to the operations of a subsidiary of an institution in receivership or conservatorship, which is controlled indirectly by the ownership of the stock of the subsidiary. Strong legal and policy considerations support the position that immunity applies to the operations of a subsidiary in the same manner as it applies to the operations of the receivership or conservatorship. Nevertheless, because of various concerns, including the maintenance of the separate corporate identities of subsidiaries, the Corporations reserve the right to reconsider whether immunity applies to the operation of subsidiaries. Accordingly, the Policy provides that such immunity will not be asserted at this time.
1. Payment of Taxes: The Policy provides that the Corporations will pay proper tax obligations, but recognizes that prompt payment must be consistent with sound business judgment and the orderly administration of receiverships.
2. Taxes on Owned Real Property: Section 15(b)(1) expressly waives the Corporations' constitutional immunity with respect to ad valorem real property taxation. Accordingly, the Policy acknowledges that property which the Corporations own in fee, however acquired, is subject to ad valorem real property taxation. However, the Policy recognizes that the waiver of immunity in section 15(b) is only for real property taxes assessed according to the property's value. Accordingly, immunity has not been waived for taxes imposed on real property that are not based on value and the Policy so states. For example, some types of special assessments, which traditionally are based on property factors other than value, such as front footage, are not ad valorem real property taxes and, therefore, the Corporations are not liable for them. See, Federal Reserve Bank of St. Louis v. Metrocentre Improvement District #1, City of Little Rock, Arkansas, 657 F.2d 183 (8th Cir. 1981); United States v. City of Adair, 539 F.2d 1185 (8th Cir. 1976).
3. Taxes on Secured Interests in Real Property: The largest category of assets which the Corporations acquire as receiver are loans secured by mortgage interest in real property. The Policy acknowledges that real property which is the subject of such interests is also subject to ad valorem real property taxes.
4. Taxes on Personal Property: Because section 15(b)(1) waives immunity only for ad valorem real property taxation, the Policy provides that the Corporations are immune from all forms of personal property taxation.
5. Other Related Taxes: The Policy makes clear that the Corporations are immune from taxes imposed on them as a result of transactions involving real property, even if the tax is measured by the value of the property. Such taxes are not taxes on the property itself, but rather excise taxes on transactions involving real property.
C. Interest and Penalties
State statutes typically provide for the accrual of interest and penalties if real property taxes are not paid when due. The character and amount of such charges vary from state to state. Section 15(b)(3) of the FDIA expressly provides that the Corporations are not liable for amounts "in the nature of penalties or fines, including those arising from the failure of any person to pay any . . . tax . . . when due." This provision expresses the common law rule, see, e.g., Missouri Pacific Railway Co. v. Ault, 256 U.S. 554 (1921), and is consistent with the general rule that receivers (and innocent creditors) should not be burdened by punitive assessments. See Professional Asset Management v. Penn Square Bank, 566 F.Supp. 134 (W.D. Okla. 1983). Section C of the Policy reiterates this provision by providing that the Corporations will neither pay, nor recognize liens for, such amounts. Similarly, the Corporations will not pay attorneys' fees or other costs which state law may impose upon delinquent taxpayers.
Historically, the United States and its instrumentalities have always been immune from claims for interest, except where Congress has expressly waived such immunity. See, e.g., Library of Congress v. Shaw, 478 U.S. 310 (1986). The statute is silent whether immunity is waived for interest accruing on delinquent tax amounts, and that silence suggests immunity has not been waived. In analogous situations, the courts have utilized varying analytical approaches to determine whether the waiver of immunity from real property taxes implicitly carried with it a waiver for interest. Compare, Reconstruction Finance Corporation v. Texas, 229 F.2d 9 (5th Cir. 1956), cert. denied, 351 U.S. 907 (1956), with United States v. Consumers Scrap Iron Corporation, 384 F.2d 62 (6th Cir. 1967). Recent Supreme Court decisions raise further uncertainty whether immunity from interest should be considered to be waived in the absence of an express provision. Compare, Loeffler v. Frank, 486 U.S. 549 (1988), with Library of Congress v. Shaw, 478 U.S. 310 (1986). The Corporations recognize the importance to state and local governments of revenues derived from real property taxes and, for now, the Policy provides that the Corporations generally will pay interest, but not penalties, on delinquent taxes.
However, the Corporations also recognize that the purpose of interest is to compensate for the loss of the use of funds resulting from the failure to pay taxes when due. Thus, interest is to be distinguished from additional amounts which are charged as punishment for failure to pay when due. There is no uniformity among the states regarding the imposition of interest or penalties for late payment of taxes. Some states impose both an interest charge and a penalty, while others impose only interest or a penalty.
For purposes of federal instrumentality liability, the characterization of the charge under state law as "interest," "penalty," or "compensatory" or "punitive" is not determinative. That is a question determined under federal law. See Missouri Pacific Railroad v. Ault, 256 U.S. 554 (1921). Compare United States v. La Franca, 282 U.S. 568 (1931). Nonetheless, the Corporations have determined to follow generally the characterization of additional charges as "interest" or "penalty" as determined by the law of the state, and will pay those charges which state law denominates as "interest" at the state statutory rate. In some states such as Texas, although the state statute denominates a charge as "interest," the Supreme Court of the state has held that the charge is a penalty. In such instances, the judicial rule will be applied and no interest will be paid. Additionally, state law will continue to be monitored and, in the event that a state legislature or court characterizes as interest a charge which is clearly and demonstrably a penalty, the Corporations will not pay such amount. (This could be the result, for example, if a fixed "interest" amount is charged without reference to the time the base amount is delinquent.) Each of the Corporations specifically reserves all rights to challenge any interest charge it believes is a penalty.
D. Tax Liens
1. Foreclosures: Section 15(b)(2) of the FDIA provides that "no property of the Corporation shall be subject to levy, attachment, garnishment, foreclosures or sale without the Corporation's consent." Even in the absence of such an express provision, the courts had held that a real estate tax lien could not be foreclosed in derogation of an interest (whether a fee interest or a mortgage interest) held by a federal instrumentality, where immunity has not been waived. See New Brunswick v. United States, 276 U.S. 547 (1928); Rust v. Johnson, 597 F.2d 174 (9th Cir. 1979). The statute makes clear that notwithstanding the waiver of immunity, state and local taxing authorities may not sell or foreclose against property in which the Corporations hold an interest without fully protecting that interest. This prohibition recognizes the considerable burden faced by the Corporations in administering the assets involuntarily acquired by them, and that substantial value would be lost to the Corporations solely because of lack of knowledge of the property interest if real estate tax liens could be enforced through traditional sale or foreclosure remedies. Section D of the Policy reiterates this prohibition, absent the Corporations' consent. As the Supreme Court held in New Brunswick, the taxing authority can seek to sell its interest so long as the FDIC's or the RTC's interest is protected, i.e., the Corporations can continue to enforce their interest as provided in the Policy.
2. Attachment: Section 15(b)(2) of the FDIA provides that no involuntary lien shall attach to the property of the Corporation. One example of an involuntary lien is a lien that automatically attaches for delinquent taxes. Because the assets of a financial institution for which one of the Corporations has been appointed as receiver do not become "the property of the Corporation" until the receivership appointment, any involuntary liens that are attached prior to the appointment of the receiver are valid. Although in most states, a real estate mortgage interest represents an interest in the real property, it is not tantamount to ownership of the property itself. Because the involuntary lien for delinquent real property taxes attaches to the property itself, nonconsensual liens purporting to attach to property owned in fee by a corporation are considered void, but liens may attach to property in which a corporation holds only a mortgage interest as security for a loan. See New Brunswick v. United States, 276 U.S. 547 (1928).
3. Priority: The waiver of immunity from ad valorem real property taxes indicates that, with respect to liens that properly attached to property before the Corporation obtains fee title to such property (whether by appointment as receiver, lien foreclosure, or otherwise), the taxing authority is entitled to have its lien satisfied, from any residual value redounding to the Corporation. With respect to property owned in fee, therefore, the effect of the prohibition against foreclosure or sale is that the Corporations, by granting or withholding consent, can control the time and manner in which property is sold.
The Corporations will take the same position with respect to such tax liens when one of the Corporations holds only a mortgage interest in the property. Thus a valid lien for ad valorem real property taxes and interest will be recognized as being entitled to priority over a Corporation's mortgage interest (assuming that the tax lien would be entitled to priority under state law over a non-Federal mortgage holder).
The Corporations will recognize the priority of non ad valorem real property tax liens that attached prior to a Corporation's obtaining any interest in the property. However, because immunity is not waived for personal property taxes, any liens that attach to personal property after a Corporation acquires a lien or security interest in such property will be subordinate to each of the Corporation's interest. Such subordination is required because if the value of the personal property is not sufficient to cover both a Corporation's lien and the tax lien, to provide priority for the tax lien would diminish the value of a Corporation's interest, thereby subjecting it to the taxation from which it is immune.
4. Sale of Tax Liens: Some states provide for a different, usually higher rate of interest if the tax lien has been sold in satisfaction of tax claims. Moreover, this rate is applied to the entire amount of taxes, interest and penalties paid by the tax lien or property purchaser. In this case, if a tax sale takes place before a corporation obtains an interest in the property or with respect to a tax lien that has priority over the Corporation's lien, the Corporation will pay the entire amount due to the purchaser of the lien. The charges are considered to be merged together in the hands of the purchaser to whom the amount paid is simply the purchase price for the release of the lien or property, subject to redemption. If the sale takes place with respect to a lien that is junior to the lien of a Corporation, the sale must protect fully the Corporation's lien. Some states may provide for the accrual of an additional penalty after the tax lien on the property has been sold in satisfaction of the tax claims. Pursuant to the Policy such penalties will not be paid.
E. Challenges to Assessed Valuation: Section 15(b)(1) of the FDIA provides that "notwithstanding the failure of any person to challenge an assessment under state law of such property's value, such value, and the tax thereon, shall be determined as of the period for which such tax is imposed." This language permits the receiver to challenge the asserted value of a property whether or not the receiver was the owner of the property at the time of assessment.
The statute is very broad on its face. For example, literally it authorizes a receiver to challenge a prior assessment which served as the basis for a tax paid by a borrower prior to the receivership, when the institution only held a mortgage interest. The apparent purpose of the provision, however, was to permit the receiver to contest tax assessments made at the time property was owned in fee and especially where such tax has not been paid, on the ground that the taxes were based on an incorrect assessed valuation. Because high assessed valuations could help a troubled institution avoid required regulatory writedowns, is was often not in the institution's interest to challenge overstated assessment valuations. The Policy focuses on this and provides that challenges generally will be limited to the current and preceding tax year, and to situations involving previously filed tax protests. However, the Policy also recognizes that where substantial amounts are at issue, and the likelihood of success if great, assessments may be challenged to the full extent permitted under FIRREA and the FDIA, including periods when the property was owned in fee by the FDIC or the RTC as receiver or by an institution subsequently placed in receivership. Although under the statute the Corporations are not obligated to pay any amounts based on a challenged assessment until the challenge is resolved, the Policy permits the Corporations to tender payment of taxes during the pendency of a challenge based on the assessment level they deem appropriate, provided such payment will not prejudice any challenge.