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From Banking and Finance Law Daily, October 31, 2017

Fannie Mae’s property buyers must pay Chicago transfer taxes

By Richard A. Roth, J.D.

Federal laws that govern the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac do not preempt a Chicago municipal ordinance that imposes real estate transfer taxes on property buyers, the U.S. Court of Appeals for the Seventh Circuit has determined. While such a tax cannot be imposed on the FHFA or either of the GSEs, those who buy property from a GSE are liable for the tax (Fannie Mae v. City of Chicago, Oct. 30, 2017, Kanne, M.).

Chicago imposes a transfer tax when real estate in the city is transferred. According to the court, the tax is separated into two parts: the "City portion" of the tax, which is to be paid by the transferee; and the "CTA portion" of the tax, which is to be paid by the transferor. However, if the transferor is exempt from the tax under federal or state law, the CTA portion becomes the liability of the transferee. (The CTA is the Chicago Transit Authority, which provides mass transportation services to the city and some suburbs).

Four individuals and one corporation bought property from Fannie Mae after the GSE foreclosed on the real estate, and they failed to pay the transfer taxes. When administrative rulings went against them, the buyers and the federal entities sued the city, and the federal district judge decided that the transfer tax ordinance was preempted.

Federal law provisions. The FHFA, Fannie Mae, and Freddie Mac are exempt from most state and local taxes under their respective governing laws. While the specific statutes differ slightly, they all provide exemptions for the entities’ assets and property, the court observed. In the case of Freddie Mac, the GSE’s activities are covered as well.

On the other hand, none of the statutes offer exemptions to those who enter into transactions with the federal entities, the court noted. Neither do they explicitly confer tax exemptions on the entities’ transactions, such as property sales.

Buyers’ tax liability. "Transactions are not assets or property," the court said. As a result, the plain language of the statutes cannot be seen as including transactions.

Transactions are not necessary elements of any of the assets listed in the governing laws, the court continued. "Transferring property is not an element of the entities’ franchise, capital, reserves, surplus, loans, or income," according to the opinion. Neither is transferring property an element of a mortgage. While a property transfer could be seen as an activity, and Freddie Mac’s activities are tax exempt, the transfer tax actually was imposed on the transferee’s receipt of the property, not the GSE’s sale, in the court’s view.

There was no reason to conclude that Congress intended to exempt transferees from transfer taxes, either, according to the court. The property buyers and the city reasoned that the obligation to pay a transfer tax reduced the value of the property, which meant that a GSE would realize less from a sale. That reduction would make it more difficult for the GSEs to invest in and stabilize the housing market, which is what Congress intended them to do.

The court conceded that the transfer tax would affect the federal entities, but added that "it is not clear that the burden falls on something Congress intended to shield." Congress apparently intended to shield the federal entities’ assets and revenue, not their property sales. A tax that affects an entity is not necessarily a tax on that entity, the court added.

A federal law will preempt states’ traditional power to tax only if is clear that Congress intended that result, the court said. The plain language of the federal entities’ governing statutes did not make an intent to preempt clear, and there was no other evidence that Congress had such an intent.

The case is No. 16-4140.

Attorneys: Kristen E. Hudson (Chuhak & Tecson, PC) for Federal National Mortgage Association, Federal Home Loan Mortgage Corp., and Federal Housing Finance Agency. Suzanne M. Loose for City of Chicago, Chicago Department of Finance, and City of Chicago Department of Administrative Hearings.

Companies: Fannie Mae; Freddie Mac

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