The U.S. Court of Appeals for the Seventh Circuit recently held that state and local governments cannot levy transfer taxes on the sale of real property by Fannie Mae or Freddie Mac. A copy of the opinion is attached.
Several state and local governments attempted to impose a real estate transfer tax on sales of foreclosed property by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
The lower court held that Fannie Mae and Freddie Mac are exempt from such taxes, and the state and local government bodies appealed.
As you may recall, both Fannie Mae and Freddie Mac are exempt from all state or local taxation, except for real property taxation. See 12 U.S.C. Sec. 1723(a)(2);12 U.S.C. Sec. 1452(e).
On appeal, the state and local governments argued that the statutory term "all taxation" does not include excise taxation, and in the alternative that the statutes exempting Fannie Mae and Freddie Mac from taxation are unconstitutional.
The Seventh Circuit began its analysis by noting that a tax on a real estate sale is not a tax on property, but rather a tax on the transfer of property -- a distinction it described as "well recognized." Accordingly, the Court held that the exception - providing that Fannie Mae and Freddie Mac are subject to real property taxation - was not relevant here.
The Seventh Circuit further observed that, because Congress saw fit to enumerate one exception to Fannie Mae's and Freddie Mac's exemption from taxation, "Congress could be expected to make an express exception for any other type of tax that it wanted state and local governments to be permitted to levy..."
Accordingly, the Seventh Circuit held that both Fannie Mae and Freddie Mac are exempt from real estate transfer taxes levied by state or local governments.
One of the appellees - a county - argued in the alternative that its real estate transfer tax was in fact a property tax, and therefore is excluded from the tax exemptions for Fannie Mae and Freddie Mac. This argument was premised on contention that "the term 'real property' includes deeds recorded by [Fannie Mae] because deeds are 'indispensable' to ownership of real property."
The Seventh Circuit had little difficulty in rejecting this argument, noting that "[a] deed is not real estate, any more than a car title is a car."
Finally, the appellant counties argued that statutes exempting Fannie Mae and Freddie Mac from transfer taxes is unconstitutional, in that statutes authorized by the commerce clause must be subordinated to state and local tax statutes because taxation is fundamental to state sovereignty.
The Seventh Circuit again found little merit in the appellant counties' position, observing that "[n]o provision of the Constitution insulates state taxes from federal powers granted by the Constitution, which include of course the power of Congress 'to regulate Commerce with foreign Nations, and among the several States...'" Art. I, Sec. 8, cl. 3.
Accordingly, the Seventh Circuit affirmed the ruling of the lower court.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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