Persons purchasing property from Fannie Mae are not exempt from City transfer taxes, according to the Seventh Circuit

The Seventh Circuit held that private persons who purchase property from Federal Fannie Mae are not exempt from the City of Chicago’s Real Property Transfer Tax.

In Federal National Mortgage Association v. City of Chicago, 16-4140 (7th Cir. October, 30, 2017) a group of buyers purchased real property in Chicago from Fannie Mae which acquired the properties in foreclosure. The buyers failed to pay the City’s real property transfer tax after they received or recorded titles to the property. An administrative law judge in the City’s Department of Finance ruled that each buyer was liable for the transfer tax and the Department director affirmed. The buyers sought review of that decision in federal court.

The U.S. District Court for the Northern District of Illinois granted summary judgment to the purchasers concluding that the transfer tax was preempted by the federal exemption statute. It thereby enjoined the City from collecting the taxes from Fannie Mae or the buyers. The City appealed.

On appeal, the purchasers contended that the transfer tax conflicted with the tax exemption provisions in the federal statutes governing Fannie Mae, Freddie Mac, and FHFA and was therefore without effect under the Constitution’s Supremacy Clause. The Seventh Circuit acknowledged that every circuit has found that a transfer tax charged to Fannie Mae, Freddie Mac, and FHA is preempted. But no case has examined whether the scope of the exemption extended so far as to exempt individuals who purchase property from the federal entities.

In reviewing the plain language of the applicable statues, the Seventh Circuit noted that the exemption provisions are specific to the federal entity and its various assets; they do not mention “transactions” entered into by the federal entities. But because “transactions” are not assets or property — they are “the act or an instance of conducting business or other dealings, esp., the formation, performance, or discharge of a contract” — a “transaction” exemption cannot be read into the plain language of the statutes.

The court rejected the purchaser’s argument that this interpretation of the statutes runs contrary to what Congress intended. The transfer tax is better understood as one imposed on the transferee’s receipt of property rather than a tax imposed on the act of selling property by a federal entity. The sale was not an element of a mortgage held by a federal entity as the entity had already acquired the property through judicial sale and then sold it to the plaintiffs. The Seventh Circuit found no other evidence that Congress intended for the exemptions to apply to those who buy property from the exempt entities. Because it was not the clear and manifest intent of Congress to exempt from state or local taxation entities that transact with Fannie Mae, Freddie Mac, or FHFA, the transactions were subject to the tax.

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