On February 13, 2013, the Honorable Judge Kapala for the Northern District of Illinois partially granted declaratory judgment for Plaintiffs Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (“FHFA”), entering judgment that Plaintiffs were exempt from Illinois real estate transfer tax by virtue of their charters which are incorporated in the U.S. Code.  Similar cases were brought within the past year with mixed results in the Eastern and Western Districts of Michigan and the District Court for the District of Columbia.  This post provides a summary of some key highlights of Judge Kapala’s decision in Fannie Mae el al. v. Hamer et al.

Background

Freddie Mac and Fannie Mac are private corporations chartered by the federal government.  Following the mortgage crisis in 2008, the FHFA took control of Freddie and Fannie as conservator.  The charters for Freddie, Fannie, and the FHFA’s conservatorship exempt each party from “all taxation” imposed by any state, county, municipality, or local taxing authority.  Despite this language, the Director of the Illinois Department of Revenue and six county officials from various counties (collectively “the Defendants”) attempted to enforce the Illinois real estate transfer tax by failing to record documents and demanding payment of taxes with threats to sue Plaintiffs.

Generally speaking, the real estate transfer tax is imposed on the privilege of transferring title to real estate located in Illinois, transferring beneficial interest in real property located in Illinois, and transferring a controlling interest in a real estate entity owning property in Illinois.  35 ILCS 200/31-10.  The rate of tax is 50 cents for every $500/value transferred or a fraction of $500 stated in the transfer declaration.  Id.; see also 35 ILCS 200/31-25.

Defendants’ Motion to Dismiss for Lack of Jurisdiction Denied

The Defendants first argued that the Tax Injunction Act (the “TIA”) prevented the Court from exercise its jurisdiction over the case.  The TIA provides, among other things, that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”  28 U.S.C. § 1341.  The Court disagreed with Defendants, finding that the facts at hand fit squarely within one of the two major exceptions to the TIA. 

In addition, the Defendants also argued that the District Court was restrained from exercising jurisdiction under principles of comity, which has “particular force when lower federal courts are asked to pass on the constitutionality of state taxation of commercial activity.”  Levin v. Commerce Energy, Inc., 130 S. Ct. 2323, 2330 (2010).  The Court did not agree, stating that the question before the Court is not the invalidation of the real estate transfer tax but is instead a question of statutory interpretation (interpreting Plaintiffs’ charters in the U.S. Code).  Further, said the Court, if the scope of Plaintiffs’ exemption was a matter to be determined in state court, the exemption likely could have conflicting interpretations without a decision from a federal court.

Analyzing Plaintiffs’ Tax Exemption

Although the statutory language exempting Plaintiffs from state and local tax is clear, the Court was obligated to complete further analysis due to “contradictory lines of cases” from the United States Supreme Court—the Wells Fargo “line” versus the Bismarck “line.”  In Wells Fargo, the United States Supreme Court found that certain bonds issued by state and local housing authorities that were exempt from “all taxation” were only exempt from direct taxes and not excise taxes.  See generally U.S. v. Wells Fargo Bank, 485 U.S. 351 (1988).  In contrast, the Bismarck court held that a Federal Land Bank’s unqualified exemption from “taxation” clearly encompassed state sales tax and found that the lower court, in reaching the opposite conclusion, ignored the plain language of the statute.  See generally Fed. Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95 (1941). 

In addition to considering which line of case law from the Supreme Court was more persuasive for the purposes of this case, the Court also looked to three other suits brought by Plaintiffs against various state and local officials seeking to impose similar transfer taxes in other states.  Oakland Cnty. v. Fed. Hous. Fin. Agency, 871 F. Supp. 2d 662 (E.D. Mich. 2012); Hertel v. Bank of Am., N.A., 2012 WL 4127869 (W.D. Mich. Sept. 18, 2012); Hager v. Fed. Nat’l. Mortg. Assoc., 2012 WL 3228658 (D.D.C. Aug. 9, 2012). 

The Court was persuaded by Bismarck, Hager, and Hertel, which reached their decisions based on the plain language of the exemptions and found that an “all taxation” exemption included excise taxes.  The Court distinguished Wells Fargo, as the case dealt with an exempt property but not an exempt entity such as the Plaintiffs.  Further, the Court noted that the Defendant’s restrictive interpretation of the exemption would surely frustrate Congressional intent.  The Plaintiffs were created to enhance security in the secondary mortgage market with lower operational costs, among other things, and exempting Plaintiffs from only direct taxes would provide a very “meager” exemption and impose many common taxes on Plaintiffs.

Plaintiffs Declaratory Judgment Partially Granted

The Court granted declaratory judgment that Plaintiffs are immune from taxation, including the real estate transfer tax.  The Plaintiffs asked the Court to go a step further and also declare that all real estate transactions in which Plaintiffs engage are immune from taxation.  The Court declined to issue declaratory relief for such transactions, which invariably include both Plaintiff(s) and a third party.  The Court supported its decision by noting a lack of clear Illinois precedent on which party the real estate transfer tax is imposed upon, the fact that it had interpreted the federal law and vindicated the interests at issue, and that the issue of exempting the full transaction involving an unknown third party was not ripe for consideration.