99 Cal. Daily Op. Serv. 2814, 1999 Daily Journal D.A.R. 3649 United States of America, Plaintiff-Appellant-Cross-Appellee v. Lewis County, Wa Bill Brooks, County Assessor, Lewis County, Washington Donna Karvia, Clerk, Lewis County Superior Court Joe Cooke, Treasurer, Lewis County, Washington Gary Zandel, and Kevin E. Murphy Bernice Murphy, Defendants-Appellees-Cross-Appellants
Docket: 97-35510
Court: Court of Appeals for the Ninth Circuit; April 19, 1999; Federal Appellate Court
A federal statute, 7 U.S.C. § 1984, allows state and local governments to tax farm property owned by the federal Farm Service Agency (FSA) similarly to other properties, thus waiving some federal immunity to state taxation. Lewis County, WA, imposed taxes, interest, and penalties on several FSA-owned parcels and foreclosed on one. The United States challenged these actions, arguing that the County's taxation was discriminatory since it did not tax a comparable state agency, which violates the statute's requirement that federal property be taxed on the same basis as other property. The United States also contended that the County lacked authority to impose interest and penalties or to foreclose on the properties. Additionally, the U.S. disputed the application of a higher non-agricultural tax rate on certain parcels.
The Ninth Circuit Court reviewed the district court's judgment favoring Lewis County and determined that while the County can tax the FSA properties, it cannot impose interest and penalties or foreclose on them. The court also found that the United States has grounds to challenge the higher tax rate as discriminatory. The appeal resulted in a partial affirmation and reversal, with a remand for further proceedings.
The United States named Kevin and Bernice Murphy as co-defendants since they purchased an FSA parcel at a tax foreclosure sale. As cross-appellants, the Murphys sought to exclude a witness's declaration and obtain attorney fees while asserting affirmative defenses. The court did not address most of their claims, deeming them improperly or prematurely raised. The FSA, part of the Department of Agriculture, provides loans to farmers and can acquire property through default under relevant statutes.
State and local authorities are permitted to levy a nondiscriminatory tax on property acquired by the Farm Service Agency (FSA) through loan defaults. Lewis County assessed property taxes on twenty parcels of farmland owned by the FSA, which initially refused to pay the taxes, interest, and penalties, particularly contesting the higher non-agricultural tax rate on three parcels. Following foreclosure actions by the County, the FSA paid the taxes on nineteen parcels to facilitate clear titles for eligible buyers, while the Murphys purchased the remaining parcel at foreclosure.
The United States subsequently filed a lawsuit for damages and declaratory relief, which the district court dismissed due to jurisdictional issues under the Tax Injunction Act. An appeal led to a reversal and remand to address substantive issues. On remand, the court found that 7 U.S.C. 1984 provided a broad waiver of federal immunity from state taxation concerning agricultural properties acquired by the FSA, leading to a judgment in favor of the Murphys and the County.
The discussion highlights that Washington’s property tax laws exempt federal, state, and local government properties, yet allow taxation of federally owned property when authorized by federal law. The United States argued that because Lewis County cannot tax properties held by the Washington State Housing Finance Commission, it should similarly be unable to tax FSA properties. However, the court rejected this narrow interpretation of "other property" in 7 U.S.C. 1984, asserting that Congress intended to maintain local tax bases in areas where the FSA operates, thereby allowing Lewis County to tax FSA property like other non-exempt properties.
The principle of intergovernmental tax immunity prohibits states from discriminating against federal taxpayers based on their federal affiliation, as established in key cases like Davis v. Michigan and Phillips Chemical Co. Significant differences must justify any tax treatment discrepancies. Washington's tax scheme discriminates between farmland owned by the Farm Services Agency (FSA) and that owned by the state, although traditionally, state and local governments exempt themselves from taxation to avoid revenue loss. However, taxing federally owned property can generate state revenue, which may not be a significant enough distinction without congressional action. Congress has indicated its interest in 7 U.S.C. § 1984, aiming to prevent federal repossession from affecting farmland taxation, thereby allowing states to impose such distinctions.
Additionally, Lewis County's tax on FSA farmland also applies to privately owned farmland, creating a political check against excessive taxation, as citizens can influence tax rates through voting. This political accountability mitigates the risk of unfair burdens on the federal government.
The parties also dispute whether federal or state law governs Congress's waiver of federal immunity from taxation. The court agrees with the United States that this issue is a matter of federal law. The scope of Congressional intent regarding tax immunity must be interpreted through federal law, but Congress may also choose to apply established state rules, as illustrated in Reconstruction Finance Corp. v. Beaver County, which addressed local taxation of federally owned property.
Two circuit courts have interpreted the Beaver County ruling concerning whether interest and penalties qualify as "taxation" under the 1984 statute. The Fourth Circuit determined that the Federal Reserve Bank was liable for interest and penalties based on Virginia law categorizing those charges as taxes. Conversely, the Fifth Circuit found that the Reconstruction Finance Corporation was not liable under Texas law, which did not classify interest and penalties as taxes.
Disagreeing with both circuits, the text argues that Beaver County should not be broadly interpreted. It emphasizes that the Supreme Court recognized state traditions in defining "real estate," while the question of federal liability for state-imposed interest and penalties should be governed by federal law. The Sixth Circuit's perspective is favored, asserting that waivers of immunity from state "taxes" must be assessed under federal law.
Additionally, it is established that, under federal law, interest can only be recovered from the United States if explicitly authorized by Congress, and this principle applies equally to penalties. The Supreme Court has consistently stated that waivers of sovereign immunity must be construed favorably towards the sovereign. Consequently, it concludes that Congress has not waived the United States' immunity from interest and penalties, and the term "taxation" does not clearly encompass these charges.
The provision in the 1984 statute indicating that FSA-held property is taxed "in the same manner and to the same extent as other property" raises further questions regarding potential waiver of immunity. While the County argues this provision suggests a broad waiver allowing states to enforce their entire taxation system against the United States, past interpretations have tended to preserve certain historical immunities enjoyed by the United States.
The County's argument regarding taxation of federally-held property lacks clarity, as Congress did not explicitly indicate its intent to waive immunity from interest, penalties, and foreclosure. The phrase "in the same manner" can be interpreted in various ways, leading to ambiguity. Consequently, foreclosure against federally-owned property is treated as a suit against the United States, which requires consent for prosecution. The district court had concluded that 7 U.S.C. § 1984 allowed Lewis County to foreclose on property owned by the FSA, suggesting that the phrase referred to tax collection procedures, including foreclosure. However, this interpretation is rejected as it does not represent an unequivocal waiver of immunity.
Furthermore, allowing foreclosure would disrupt the FSA's statutory obligations, such as offering forfeited properties for resale to qualified farmers, which is not a requirement for state tax foreclosures. Congress likely did not anticipate such conflicts when enacting § 1984. Although the inability to foreclose complicates the County's tax collection efforts, such issues are common when one sovereign interacts with another. It is assumed that the United States will pay taxes owed, as this is necessary to convey marketable title. Therefore, the district court's judgment regarding the County's foreclosure is reversed.
Additionally, Lewis County implemented a higher non-agricultural tax rate on specific FSA parcels and a recapture tax for prior years, which the United States contested, arguing that the parcels remained agricultural. This issue, unlike the tax collection questions, is governed by state law, as established in Beaver County. The determination of any discriminatory practices against the United States in these tax rates will be remanded to the district court for further evaluation according to state law standards.
The Murphys' cross-appeal includes several claims against the district court's judgment. They argue that: 1) the court erred in striking parts of declarations; 2) if remanded, they should receive relief for costs incurred in property improvements; 3) the United States failed to exhaust state remedies and is now barred by limitations; and 4) they are entitled to attorneys' fees under the Equal Access to Justice Act. However, claims 1 and 2 are dismissed because the Murphys were not aggrieved by the district court's ruling, which favored them against the United States. Claim 3 is also deemed improper for cross-appeal, although it can be raised in the main appeal. The court asserts that the United States does not need to exhaust state remedies before raising federal claims. The issue regarding the classification of three parcels as non-agricultural land is left for the district court to determine on remand. The Murphys' request for attorneys' fees is premature as they have not established themselves as a "prevailing party" under the Equal Access to Justice Act, and may renew their request after further proceedings. The court concludes that Lewis County can tax property held by the FSA, rejecting the claim of federal sovereign immunity against local taxation. Consequently, the Murphys' cross-appeal lacks merit, and the parties are to bear their own costs in the appeals. The main appeal is affirmed in part and reversed in part, while the cross-appeal is affirmed in part and dismissed in part.
A contention regarding whether the state has established a tax exemption system resulting in a disproportionate tax burden on the United States is not present in this case. The focus is on the claim that the state has improperly taxed three farmland parcels at higher non-agricultural rates, which will be addressed in Section IV. It is noted that even if state law were decisive, the County would not succeed due to the Washington Supreme Court's ruling that interest for tax delinquency is not considered part of the tax itself. This ruling is echoed in the treatment of penalties. Although Washington law defines "tax" to include interest and penalties for refund applications, it does not alter their classification for other contexts. The Third Circuit has allowed civil penalties against the Postal Service without a clear waiver, distinguishing it from the federal government, which retains immunity from such penalties. Additionally, the Murphys claim compensation for property improvements, a matter reserved for the district court on remand, and Claim (2) is deemed premature as it pertains to issues to be resolved on remand.
