In this week’s ALWU, we share with you a decision from the 11th Circuit Court of Appeals and a decision from the Alabama Court of Civil Appeals. The first concerns a Congressional exemption from taxation granted to federal mortgage entities, and the second deals with the Alabama Business Privilege Tax Act.
Montgomery County Commission, et al. v. Federal Housing Fin. Agency, et. al., 2015 WL 223699 (11th Cir. Jan. 16, 2015) (holding that federal mortgage entities, including Fannie Mae and Freddie Mac, are exempt from paying real estate transfer fees)
This was a consolidated appeal from six district court actions in Alabama, Georgia, and Florida. The appellants are various counties, county commissions, probate offices and county court clerks across the three represented states. The appellees are the Federal Housing Finance Agency, Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”) (collectively, the “federal entities”). The key issue on appeal was whether these federal entities are exempt from paying property transfer taxes.
Alabama, Georgia, and Florida all impose taxes upon the transfer of real property; in Alabama, the grantor pays a tax to the judge of probate. However, as part of the creation of the federal entities by Congress, each of the federal entities was granted an exemption from “all taxation” imposed by a state or county, except that any real property “of the corporation/Agency shall be subject to State, . . . county, . . . or local taxation to the same extent according to its value as other real property is taxed.” See 12 U.S.C. § 1723a(c)(2), 12 U.S.C. § 1452(e), and 12 U.S.C. § 4617(j)(2).
The county-appellants argued that the exemption from taxation only exempts direct taxation and that transfer taxes are “indirect” taxes. However, the 11th Circuit disagreed, stating that the clear language of the statutes exempts the federal entities from “all taxation,” meaning that real estate transfer taxes are included in the exemption.
The court further explained that, although the right to transfer is a “privilege” of property ownership, transfer taxes are not a tax on the property itself and thus do not qualify for the limited real estate exception found within the tax exemption statutes.
Finally, the court performed an analysis of the tax exemption statutes under the Commerce, Necessary and Proper, and Supremacy Clauses. The court held that Congress had the authority to regulate local taxes because they have a “substantial effect on interstate commerce.” Further, Freddie Mac and Fannie Mae, although privatized, are fulfilling a federal policy found in their charters and can therefore be exempted by Congress from state taxes. The court lastly upheld the tax exemption under the Supremacy Clause.
This decision solidifies that federal entities Freddie Mac, Fannie Mae, and the Federal Housing Finance Agency are not subject to state or county real property transfer taxes.
Alabama Dept. of Rev., et al. v. American Equity Investment Life Ins. Co., No. 2130933, CV-12-900069 (Ala. Civ. App. Jan. 16, 2015) (holding that the Alabama Business Privilege Tax Act includes “annuities” in the definition of “premiums” used by insurance companies to determine net worth for tax purposes)
This case came before the Alabama Court of Civil Appeals on appeal by the Alabama Department of Revenue and Julie P. Magee, as commissioner of the Alabama Department of Revenue. The appellee, American Equity Investment Life Insurance Company (“American Equity”) is an out-of-state insurance company that does business in Alabama.
Under the Alabama Business Privilege Tax Act (“BPT”), businesses are taxed based on their net worth in Alabama. For insurance companies that are subject to the Alabama insurance premium tax, net worth for the BPT is apportioned based on specific ratio of the insurer’s Alabama premium income to its nationwide total direct premiums.
For several years, American Equity determined its taxable net worth by including both premiums and annuities in its premium ratio. In 2010, the Alabama Department of Revenue audited America Equity and concluded that the taxpayer should not have included annuities in its ratio; this conclusion caused the net worth ratios of American Equity to jump from .76% and .54% for the relevant years to 12.36% and 12.57% for the same years. American Equity appealed and the Circuit Court of St. Clair County found in favor of the taxpayer, determining that annuities should have been included in the taxpayers apportionment ratio under the BPT. The Department appealed to the Alabama Court of Civil Appeals.
The appeals court was tasked with determining whether the BPT was intended to exclude annuities. The Department cited to the Alabama Insurance Premium Tax Reform Act of 1983 and argued that because that statute defines “premiums” as excluding “annuities,” the BPT should be read accordingly. However the court looked to multiple places in the Alabama code where “premiums” is defined and found that the definition is not consistent in other statutes. The court stated that the insurance premium tax and business privilege tax could not be read in pari materia, meaning pertaining to the same subject matter, because the two statutes are administered by different departments and the BPT is also assessed against non-insurers. Further, the two statutes serve different purposes.
Finally the court considered the fact that the definition section of the Alabama premium Tax Reform Act that the Department cited to contained a provision that the definitions therein were only to be applied to the tax reform statute. The court stated that the legislature’s limiting the definition must be given deference.
The court’s decision, finding for American Equity, clarifies that that Business Privilege Tax does not require that annuity considerations be omitted from the calculation of a taxpayer’s Alabama net worth.