What Is an Instrumentality?

An instrumentality is a non-governmental agency that acts indepenܫdently but whose obligations are backed by the government because𝓀 of its role in providing a public service.

In the U.S., the Federal National Mortgage Association, known as Fannie Mae, is an example of an inst༺rumentality. Created during the Great Depression to enable more Americans to buy their own homes, Fannie Mae is both a government-sponsored entity and a publicly-traded company under the symbol FNMA.

Understanding an Instrumentality

An instrumentality may exist at the federal, state, or local level. It is created to fill a specific need that is deemed by the government to be in the public's interest.

The legal groundwork for instrumentality is based on the necessary and proper clause of the U.S. Constitution (Article 1, Section 8), which precludes federal and state governments from taxing each other's governmental operations.

This means that a state university, for example, may be an instrumental♈ity of the state and therefore is not subject🔜 to taxation by the federal government.

The concept of instrumentality also extends the backing of the federal government for the entity's financial obligations based on the full faith and credit of the federal government.

Examples of Instrumentality

The concept of instrumentality may be applied to a number of functions. For example, government-sponsored enterprises (GSE) including 澳洲幸运5官方开奖结果体彩网:Fannie Mae (Federal National Mortgage Association), 澳洲幸运5官方开奖结果体彩网:Ginnie Mae (Government National Mortgage Association), 澳洲幸运5官方开奖结果体彩网:Freddie Mac (Federal Home Loan Mortgage Corporation), and 澳洲幸运5官方开奖结果体彩网:Sallie Mae (Student Loan Marketing Association), are all federal 😼instrumentalities.

These entities were created to prov෴ide a service that is in the public interest. Fannie Mae, Ginnie Mae, and Freddie Mac have roles in keeping the U.S. mortgage system stable and making mortgages available to more Americans by guaranteeing them. Sallie Mae provides a similar function for student loans.

Libraries, schools, hospitals, and fire departments may be instrumentalities, along with other associations formed for public purposes, depending on the circumstances. To determine if an organization is an instrumentality, a number of factors must be considered, including state regulations, stat🧜e sponsorship requirements, and whether employees participate in a state-sponsored retඣirement system.

An instrumentality may be interstate in its reach. For example, an entity that is authorized by two or more states to provide a ser♔vice in the public interest, such as an interstate transit authority or port authority, water district, or planning authority, is an instrumentality.

Benefits of an Instrumentality

Organizations that perform a public service obtain substantial tax benefits if they qualify as instrumentalities. The benefits include exemption from federal taxes of any income that derives from performing an essential governmental or public utility function.

Such organizations include libraries, hospital districts, state colleges, and fire departments.

How to Set Up an Instrumentality

A number of tests are usꦬed to determine whether an organization qualifies as an in🍰strumentality:

• The organization performs a government function.
• It functions on behalf of a state or other government entity.
• If it is forced to liquidate its assets, a government entity will have the interest of an owner in the process.
• A government entity is represented on the governing board of the entity.
• A government entity authorized the creation of the entity.
• A government entity receives regular financial reports on the entity.

The History of Instrumentalities

The necessary and proper clause provided Congress with the power to create a key federal instrumentality—a national bank.

Since this first, pivotal assertion of the role of the federal government, America's national banking system has grown into the Federal Reserve System (FRS)🐻 and developed a national network of commercial banks, thrifts, credit unions, and insurance companies.

McCulloch v. Maryland (1819), which provided the legal groundwork for the necessary and proper clause, was a landmark court challenge to an attempt by the state of Maryland to tax a national bank branch in Baltimore. At its essence, the Constitution forbids states from taxing federal instrumentalities and vice versa. This is the doctrine of intergovernmental immunity.