The U.S. Court of Appeals for the Seventh Circuit recently held that federal laws exempting federal entities from state and local taxation do not apply when the transfer tax is charged to a private buyer who purchases real estate from Fannie Mae, Freddie Mac, or the Federal Housing Finance Agency ("FHFA").
A copy of the opinion is available at: Link to Opinion
A group of buyers (the "buyers") purchased real property in Chicago from Fannie Mae.
The City of Chicago imposes a Real Property Transfer Tax on the transfer of real property located within Chicago. Chi. Municipal Code § 3-33-030. The "primary incidence of the tax and the obligation to pay the tax are on the purchaser, grantee, assignee, or other transferee of the property." Id. § 3-33-030(C). This was the "City portion" of the transfer tax.
A supplemental tax, referred to as the "CTA portion" of the transfer tax, was to be paid by the transferor, unless the transferor was exempt by operation of state or federal law, in which case the transferee was held responsible for that portion of the tax as well. Id. § 3-33-030(F).
The Illinois Department of Finance assessed the buyers for the tax, and the buyers argued that they should be exempt from taxation like the exempt federal entities. An administrative law judge in the Department of Finance ruled that each buyer was liable for the tax, and the director of the Department affirmed. The buyers and the federal entities sued the City of Chicago and its taxing officials in federal court seeking review of the Department's decision.
The trial court held that the tax was preempted by the federal exemption statutes, and issued an injunction barring the City of Chicago from collecting the taxes from the federal entities or the buyers. This appeal followed.
As you may recall, the Seventh Circuit recently held that the federal tax exemptions preempted property transfer taxes insofar as the tax was charged to the exempted federal entities. Dekalb County v. Fed. Hous. Fin. Agency, 741 F.3d 795 (7th Cir. 2013). All other circuits that have addressed this issue have reached the same conclusion.
The sole issue on appeal in this matter was whether the exemption applied as to the individuals who purchased property form the exempt federal entities.
The Seventh Circuit began its analysis by examining the plain language of the federal tax exemption provisions.
The statute governing Fannie Mae states:
"The Corporation, including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income, shall be exempt from all taxation now or hereafter imposed by any State, territory, possession, Commonwealth, or dependency of the United States, or by the District of Columbia, or by any county, municipality, or local taxing authority, except that any real property of the corporation shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed."
12 U.S.C. § 1723a(c)(2).
The statute governing Freddie Mac states:
"The Corporation, including its franchise, activities, capital, reserves, surplus, and income, shall be exempt from all taxation now or hereafter imposed by any territory, dependency, or possession of the United States or by any State, county, municipality, or local taxing authority, except that any real property of the Corporation shall be subject to State, territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed."
12 U.S.C. § 1452(e).
And, the statute governing the FHFA states:
"The Agency, including its franchise, its capital, reserves, and surplus, and its income, shall be exempt from all taxation imposed by any State, county, municipality, or local taxing authority, except that any real property of the Agency shall be subject to State, territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed, except that, notwithstanding the failure of any person to challenge an assessment under State law of the value of such property, and the tax thereon, shall be determined as of the period for which such tax is imposed."
12 U.S.C. § 4617(j)(2).
The Seventh Circuit noted that each provision was specific to the federal entity, and its various assets, and nothing in these provisions mentioned parties that transact with the exempt entities. Because the exemption provisions did not specifically address transactions entered into by the federal entities, the Seventh Circuit determined that such transactions should not be read into the "including" phrases of the provisions.
Additionally, the Court found that by definition, transactions were not considered assets or property. See Black's Law Dictionary (8th ed. 2004) (defining "transaction" as "the act or an instance of conducting business or other dealings, esp., the formation, performance, or discharge of a contract").
Moreover, the Seventh Circuit did not interpret such transactions to be considered an element of any of the specified exempt assets listed in the statutes.
As you may recall, in Pittman, the U.S. Supreme Court reviewed whether a tax on recording deeds was preempted by a federal law exempting the former Home Owners' Loan Corporation from state and local taxation; the Supreme Court focused on the term "loans" and determined that the use of that term was meant to shield from taxation the entire process of lending, including mortgages, and held that the Home Owners' Loan Act preempted the recording tax regardless of who recorded the deed. Pittman v. Home Owners' Loan Corp. of Wash., D.C., 308 U.S. 21, 32 (1939).
However, the Seventh Circuit found that for Pittman to apply, it would need to find that transferring property was an "indispensable element" of one of the exempt assets listed in the exemption provisions. In the Seventh Circuit's view, transferring property was not an element of the entities' franchise, capital, reserves, surplus, loans, or income assets.
Further, while the Fannie Mae provision exempted the corporation's mortgages, the Seventh Circuit found that the sale of property did not involve any mortgage held by Fannie Mae. Similarly, Fannie Mae's exemption of "activities" from all taxation could be logically understood to include the transfer of property, but the Seventh Circuit concluded that the transfer tax was a tax imposed on the transferee's receipt of property rather than a tax imposed on the act of selling property.
Therefore, the Seventh Circuit held that there was nothing in the plain language of the exemptions that indicated "clear and manifest purpose of Congress" to exempt from taxation persons or entities that transact with Fannie Mae, Freddie Mac, and FHFA.
The buyers alternatively argued that this interpretation was contrary to what Congress intended, because if a buyer was required to pay the real estate transfer tax, Fannie Mae, Freddie Mac, and FHFA will have to lower the price of the real estate they sell. As a result, the federal entities will have less capital available for investing in the secondary mortgage market.
The Seventh Circuit rejected the argument because a tax that has an effect on an entity did not make it a tax on that entity. See, e.g., United States v. New Mexico, 455 U.S. 720, 734 (1982) ("[Constitutional] 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.").
In sum, the Seventh Circuit concluded that a statute preempted the traditional state power of taxation only if that result was the "clear and manifest purpose of Congress." Because the plain language of the federal tax exemption provisions did not shield from state and local taxation of individuals or corporations that transact with Fannie Mae, Freddie Mac, or FHFA, and there was no evidence that Congress intended for the exemptions to apply to who buy property from the exempt entities, the Seventh Circuit held that the exemption did not apply to the buyers.
Accordingly, the Seventh Circuit reversed the judgment and orders of the trial court, and dissolved the injunction barring the City of Chicago from collecting the taxes.
Ralph T. Wutscher
Maurice Wutscher LLP
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