Federal National Mortgage Ass'n v. City of Chicago
Docket: No. 16-4140
Court: Court of Appeals for the Seventh Circuit; October 30, 2017; Federal Appellate Court
State and local taxing authorities cannot impose real estate transfer taxes on the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or the Federal Housing Finance Agency (FHFA) due to federal laws that exempt these entities from all taxation. The current case evaluates whether these federal exemptions extend to a private buyer who acquires real estate from one of these exempt federal entities. The district court found the transfer tax unconstitutional, reasoning that it affects the sale price by the federal entities, but this conclusion contradicts the explicit language of tax exemption provisions. The judgment of the district court is reversed.
Fannie Mae and Freddie Mac are federally chartered, privately owned corporations created by Congress to support the housing market via a secondary mortgage market. After their conservatorship in 2008, the FHFA became their conservator. These entities purchase mortgages, bundle them, and sell mortgage-backed securities, foreclosing on properties when borrowers default.
From August 2013 to December 2014, several buyers acquired properties in Chicago from Fannie Mae, which is subject to a Real Property Transfer Tax imposed by the City. The tax primarily falls on the buyer, but if the transferor is exempt, the transferee becomes responsible for the tax. None of the buyers paid the tax, leading the Illinois Department of Finance to assess them. The buyers contested the assessment based on the federal tax exemptions, and an administrative law judge ruled them liable, a decision later affirmed by the department director. Subsequently, the buyers and federal entities sued the City of Chicago in federal court. The district court sided with the plaintiffs, ruling the tax preempted by federal statutes, granting summary judgment in their favor, declaring the transactions tax-exempt, and issuing an injunction against the City's tax collection efforts. The City’s motion to dismiss for lack of jurisdiction was denied but not challenged on appeal.
The Supremacy Clause establishes that federal laws take precedence over state laws. In this context, the appellees argue that the Chicago Real Property Transfer Tax conflicts with federal tax exemptions for Fannie Mae, Freddie Mac, and FHFA, rendering it ineffective. The court previously ruled in DeKalb County v. Federal Housing Finance Agency that these federal exemptions preempt such taxes, a stance supported by numerous other circuits. The court must now decide whether the exemptions extend to individuals purchasing properties from these federal entities. The review of the district court's summary judgment favoring the appellees is de novo, as there are no remaining factual disputes. While state taxation is a fundamental aspect of state sovereignty, the court is cautious about broadly interpreting exemptions. It emphasizes that any preemption of state powers must be clearly articulated by Congress. The interpretation of statutory language is critical, as it is the primary indicator of legislative intent, and the appellants assert that the statutory language confines the tax exemption to federal entities without indicating a broader intent.
The statutes for Fannie Mae, Freddie Mac, and the FHFA provide broad exemptions from all taxation for these entities, covering their franchises, capital, reserves, and income. Fannie Mae's exemption specifically includes its mortgages, while Freddie Mac's pertains to its activities. Each statute establishes that these corporations are exempt from taxation imposed by various governmental units, but real property owned by them is subject to local taxation equivalent to other real properties. The statutes emphasize that the exemptions are entity-specific, and the language does not address the tax implications for parties engaging in transactions with these exempt entities. Courts have consistently characterized these exemptions as applying solely to the entities themselves.
Exemption provisions do not apply to transactions made by federal entities, as these transactions are not included in the illustrative lists of exempt assets. The term "including" suggests a non-exhaustive list, but the items listed pertain strictly to assets or property, such as "franchise," "capital," "reserves," "surplus," "mortgage," and "income." In contrast, transactions are defined as actions or instances of conducting business and do not qualify as assets or property. The U.S. Supreme Court's decision in Pittman v. Home Owners’ Loan Corp. indicates that a tax exemption for loans pertains to the entire lending process, including mortgages. However, for Pittman to apply, transferring property would need to be an essential element of the exempt assets, which it is not. Although Fannie Mae's provision exempts its mortgages, the sale of property is not inherently part of these mortgages. The Freddie Mac provision does exempt its activities, but the transfer tax is imposed on the recipient of property, not on the act of selling by Freddie Mac. Therefore, the exemptions do not reflect a congressional intent to exempt transactions involving Fannie Mae, Freddie Mac, and the FHFA from taxation.
Appellees argue that the imposition of real estate transfer taxes contradicts Congress's intent to exempt Fannie Mae, Freddie Mac, and the FHFA from taxation. They assert that such taxes impact both buyers and sellers, leading to increased costs for real estate transactions, which would require federal entities to lower prices, thereby reducing their capital for investment in the secondary mortgage market. This contradicts the entities' purpose of stabilizing that market. Citing Laurens Fed. Sav. Loan Ass’n v. S. Carolina Tax Comm’n, they claim the tax is preempted because it ultimately raises the cost of obtaining funds from the Home Loan Bank, which Congress intended to shield from state taxation. The Supreme Court in Laurens found that taxes imposed on transactions with the bank were effectively taxes on the bank's advances, covered by the exemption. While the appellees recognize that the tax affects federal entities, they fail to provide evidence that transferring property is a component of the entities' exempt assets. Furthermore, the argument that a tax's effect on an entity renders it a tax on that entity is countered by precedent, indicating that constitutional immunity cannot be granted solely based on economic impact on the federal government.
In United States v. City of Detroit, the Supreme Court addressed whether states could tax private corporations leasing property from the federal government. The Court determined that a state tax on leased property did not constitute a tax on the federal government or its property, rejecting the argument that such taxation imposed an increased financial burden on the government. The Court emphasized that Congress did not extend tax immunity to parties doing business with federal entities and that tax exemptions must be explicitly stated, following principles established in prior decisions. Consequently, it ruled that the plain language of federal tax exemption provisions does not protect individuals or corporations dealing with entities like Fannie Mae or Freddie Mac from state and local taxes. The ruling indicated that imposing a transfer tax on buyers does not equate to taxing the exempt entities directly. As a result, the Supreme Court reversed the district court's judgment, dissolved the injunction against tax collection, and remanded the case for further proceedings aligned with this opinion.
