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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