What is Instrumentality?

An instrumentality is a government agency or corporation that acts independently in carrying out work for the public good. Instrumentalities may exist and operate at the federal, state, or municipal levels depending on the entity.

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 either's governmental operations. Instrumentality also provides for the backing of government agency obligations based on the full faith and credit of the federal government.

How Instrumentality Works

The concept of instrumentality may be applied to a number of contexts. For example, Fannie Mae, Ginnie Mae, Freddie Mac, and Sallie Mae are all federal instrumentalities that provide mortgages and student loans to borrowers. Their public purpose is to promote homeownership and higher education.

Instrumentalities like Frannie Mae and Freddie Mac provide access to low-interest mortgages, affordable student loans, and provide a way for borrowers to improve and build their credit.

Instrumentality: IRS Definition

The U.S. Internal Revenue Service (IRS) defines instrumentality as such:

"An instrumentality is an organization created by or pursuant to state statute and operated for public purposes. Generally, an instrumentality performs governmental functions, but does not have the full powers of a government, such as police authority, taxation, and eminent domain. A wholly-owned instrumentality of one or more states or political subdivisions is treated as a state or local government employer for purposes of the mandatory social security and Medicare provisions and also applies to entities covered under Section 218 of the Social Security Act."

Key Takeaways

  • Privately owned or operated organizations are not instrumentalities, as recognized by the federal government or otherwise.
  • Some organizations that carry out a public purpose may not always be an instrumentality.
  • A public park or recreational public swimming pool may be considered an instrumentality.

An instrumentality also may be interstate in nature, as well. For example, a formal legal entity that is set up by two or more states to engage in governmental functions, such as an interstate transit or port authority, water district, or interstate planning authority, is an instrumentality.

Libraries, schools, and hospitals 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, such as state regulation of activities, state sponsorship of the entity, and whether employees participate in a state-sponsored retirement system, among others

The History of Instrumentality

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 federal power, America's national banking system has since grown into the Federal Reserve System (FRS), and from that national banks, commercial banks, most thrifts, credit unions, and insurance companies.

McCulloch v. Maryland (1819), which provided the legal groundwork for the Necessary and Proper Clause, involved a landmark court case that saw Maryland attempt to levy a tax on a national bank branch in Baltimore. At its essence, instrumentality forbids states from taxing federal instrumentalities and vice versa, otherwise known as the doctrine of intergovernmental immunity.