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August 10, 1990.


The Board of County Commissioners of Meade County (County) appeals from the order of the Shawnee County District Court granting the Small Business Administration (SBA) relief from real estate taxes.

The County does not challenge the facts found by the trial court. In a journal entry filed September 29, 1989, the court stated the facts as follows:
"This case represents an appeal by the Small Business Administration, an agency of the United States, from orders on rehearing made by the Board of Tax Appeals of the State of Kansas. The orders of the Board modified its original order granting exemption from, and refund of, certain real estate taxes paid on certain real property held by the Small Business Administration in Meade County, Kansas, from the date of November 12, 1985, to an effective date of November 12, 1986, as requested on original rehearing by Meade County. No one disputes that the Small Business Administration, as an agency of the United States government, is entitled to an exemption from taxation at least from and after November 12, 1986.
"The real estate in question consisted of approximately 156.6 acres. The Small Business Administration held a second mortgage which was foreclosed along with a first mortgage in favor of Travelers Insurance Company by a judgment of the Meade County District Court under date of October 1, 1985, on this parcel and other parcels of which the debtors, Robert C. and Wilma F. Norsworthy, had given mortgages to Travelers Insurance Company among others. The priority of the liens among the mortgagees is not an issue here. A personal judgment on the Small Business Administration's claim in the amount of $60,371.28 as of October 1, 1985, with interest thereafter, was entered against the Norsworthys and foreclosure of the subject realty decreed with the proceeds of the sale of this particular tract to be first applied to the costs of the action and sale, then to payment of taxes and tax liens, if any, then to the judgment of Travelers Insurance Company, then to the judgment of the Small Business Administration, and then others, junior, so enumerated. The period of redemption in the Norsworthys was fixed at 12 months per the governing statute. An order of sale was duly issued October 14, 1985, notice of sale was duly 5 given for November 12,

[14 Kan. App. 2d 602]

      1985, and on that date the property was sold to the Small Business Administration on its bid of $75,000 which sale was confirmed by order of the Court under the date of November 22, 1985, directing that a certificate of purchase be issued for such sale. Subsequently, the Norsworthys remained in possession during the period of redemption, but did not redeem and on November 12, 1986, a Sheriff's Deed was issued to the Small Business Administration and possession assumed by the Small Business Administration."

  The district court held SBA to be immune from payment of the taxes which accrued during the redemption period.

  The issue presented in this case is whether an agency of the United States, which bids in and acquires a certificate of purchase from the sheriff in a mortgage foreclosure action, is liable for taxes accruing on the real estate during the redemption period and before the agency receives the sheriff's deed.

  There is no dispute in this case as to the County's authority to impose a tax directly on the United States or any agency or instrumentality thereof. A state may not, consistent with the Supremacy Clause, United States Const., art. VI, cl. 2, lay a tax "directly upon the United States." Mayo v. United States, 319 U.S. 441, 447, 87 L.Ed. 1504, 63 S.Ct. 1137 (1943). This prohibition applies to ad valorem taxes imposed by a state or county on real estate owned by the United States. Clallam County v. United States, 263 U.S. 341, 68 L.Ed. 328, 44 S.Ct. 121 (1923). Kansas law also recognizes the prohibition. K.S.A. 79-201a exempts "[a]ll property belonging exclusively to the United States, except property which congress has expressly declared to be subject to state and local taxation," from all property or ad valorem taxes.

  SBA is an agency of the United States and operates under the general direction and control of the President. 15 U.S.C. § 633 (1988). It is an integral part of the government mechanism, not merely a separate legal entity. Small Business Adm'n v. McClellan, 364 U.S. 446, 450, 5 L.Ed.2d 200, 81 S.Ct. 191 (1960). Absent a waiver, SBA stands in the shoes of the United States and is entitled to the same exemption from state and local taxation as is the United States. United States v. City of Roanoke, 258 F. Supp. 415 (W.D. Va. 1966).

  In United States v. New Mexico, 455 U.S. 720, 71 L.Ed.2d 580, 102 S.Ct. 1373 (1982), the Court recognized the difficulty

[14 Kan. App. 2d 603]

      that the immunity issue has given the courts> through the years. The Court said:
"With the famous declaration that `the power to tax involves the power to destroy,' McCulloch v. Maryland, 4 Wheat. [U.S.] 316, 431 (1819), Chief Justice Marshall announced for the Court the doctrine of federal immunity from state taxation. In so doing he introduced the Court to what has become a `much litigated and often confused field,' United States v. City of Detroit, 355 U.S. 466, 473 (1958), one that has been marked from the beginning by inconsistent decisions and excessively delicate distinctions." 455 U.S. at 730.
  In determining whether a federal agency is immune from state or local taxes, the deciding factor is not whether the tax has an effect on the United States but whether the tax is imposed directly on property owned by the United States. The Court in United States v. New Mexico expressed that view as follows:
"We have concluded that the confusing nature of our precedents counsels a return to the underlying constitutional principle. The one constant here, of course, is simple enough to express: a State may not, consistent with the Supremacy Clause, U.S. Const., Art. VI, cl. 2, lay a tax `directly upon the United States.' . . .
"But the limits on the immunity doctrine are, for present purposes, as significant as the rule itself. Thus, immunity may not be conferred simply because the tax has an effect on the United States, or even because the Federal Government shoulders the entire economic burden of the levy." 455 U.S. at 733-34.
  Unquestionably, property owned absolutely in fee simple by the SBA is immune from state or local taxation. United States v. Roanoke, 258 F. Supp. 415. For the purpose of immunity, it is not necessary that the federal agency be in possession of the property. Thus, it has been held that both the federal government and its bailee were immune from taxation of machinery owned by the government. United States v. Allegheny County, 322 U.S. 174, 189, 88 L.Ed. 1209, 64 S.Ct. 908 (1944). Although it is not necessary for the federal agency to have legal title to the property, immunity must rest on sufficient ownership that it can be said the property was "owned" by the United States. Rohr Corp. v. San Diego County, 362 U.S. 628, 4 L.Ed.2d 1002, 80 S.Ct. 1050 (1960). There, property owned by the Reconstruction Finance Corporation was declared to be surplus property and the War Assets Administration took possession of the property

[14 Kan. App. 2d 604]

      for purposes of management and disposition. Even though the property was still titled in the Reconstruction Finance Corporation, the Court held:

"[T]he general rule is `that lands owned by the United States of America or its instrumentalities are immune from state and local taxation.' We think the land here was `owned' by the United States.
". . . We believe that the appropriate test would turn on practical ownership of the property rather than the naked legal title." 362 U.S. at 634.
  Did the SBA in the instant case acquire sufficient ownership in the property, as a result of being the successful bidder at the sheriff's sale, to justify a finding that it "owned" the property during the redemption period? The answer requires a ...

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