Extras on Excise: Mortgage Giants Are Winning on Transfer Tax Litigation—Will Their Victories Continue?

Fannie Mae and Freddie Mac are playing legal Whac-A-Mole with state and local governments’ claims of the mortgage giants’ transfer tax liability—and the mortgage giants are winning.

The idea behind the real estate transfer tax (sometimes known as a document transfer tax or a deed transfer tax, depending on the state) is that people or organizations transferring real estate must pay a tax on the transfer, usually based on the amount for which the property is sold.  

In states that impose real estate transfer taxes, people generally do not get a pass on paying them.  But the problem with turning to the mortgage giants for transfer tax revenue, as it has played out in several cases across several U.S. Courts of Appeals and other federal courts, is that Fannie Mae and Freddie Mac, along with the Federal Housing Finance Agency as their conservator, have special protections from state and local taxes under their federal charters—which most other private companies and individuals do not have. 

Those protections include exemptions from all taxes imposed by any sate, with the exception of taxes on real property. And unfortunately for state and local governments, courts have generally found that transfer taxes are taxes on transfers of real property, not taxes on real property itself, so state and local governments cannot tax the agencies on those transfers.   

In one of the most recently issued cases, Board of Commissioners of Montgomery County, Ohio v. Federal Housing Finance Agency, No. 13-4429 (6th Cir. July 10, 2014), the court’s dismissal of the case brought by two Ohio counties hinged on the mortgage giants’ federal statutory exemptions from taxation. The findings, which are similar to findings in other circuits, include:

-transfer taxes fall within the government-sponsored entities’ statutory exemptions from tax.

-real property transfer taxes are excise taxes, not taxes on real property, and do not fall into the exception to the statutory exemption from tax.

-Congress’ commerce clause power allowed it to enact the tax exemptions.

-the enactment does not run afoul of any constitutional provision.

So why have courts generally rebuffed local governments’ arguments so far, and why does this keep coming up? Under the federal charters of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), one of their purposes is to create liquidity in the mortgage market by buying mortgages from lenders like banks that make mortgage loans, giving lenders more money to make more mortgage loans. 

When the mortgage bubble burst in 2008, Fannie Mae and Freddie Mac owned a large inventory of defaulted and overvalued subprime mortgages. At the same time, states’ revenues were declining from the financial crisis and economic depression, according to Circuit Judge Richard Posner in DeKalb County v. Federal Housing Finance Agency, 741 F.3d 795 (7th Cir. 2013), one of several circuit court opinions siding with government-sponsored entities regarding transfer taxes.

Mortgage companies started making frequent sales of the properties on which they had foreclosed, and states and their political subdivisions were in “dire need of additional tax revenues but reluctant to impose or increase taxes that would drive businesses and people to lower-tax states,” Posner wrote.

The challenges are not over yet—there are at least two cases pending in two different circuit courts of appeals (Town of Johnson v. Federal Housing Finance Agency, No. 13-2034, pending in the U.S. Court of Appeals for the First Circuit; and Montgomery County v. Federal Housing Finance Agency, No. 13-12615, pending in the U.S. Court of Appeals for the Eleventh Circuit). Whether these courts will give state and local governments a win—and a split in the circuits—remains to be seen.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think Fannie Mae and Freddie Mac’s state tax exemption should be amended to subject them to other types of tax besides real property tax?

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