A Chicago appeals panel has ruled the city of Chicago can’t
impose its real estate transfer tax on mortgage assignments for two properties
– one on the Gold Coast – because mortgages don’t confer ownership, and so are
not “beneficial interests” as defined by the tax ordinance.
The Dec. 22 decision was penned by Justice Nathaniel Howse
Jr. in Illinois’ First District Appellate Court, with concurrence from justices
David Ellis and Eileen O’Neill Burke. Howse knocked down a lower court decision
and reinstated the ruling by an administrative law judge, which had lifted the
tax City Hall tried to apply to two companies.
Since 1973, the city has taxed the transfer of “title to, or
beneficial interest in, real property,” as the ordinance worded it. The city
tried to exact the tax on two limited liability companies, Halsted West and Elm
State Property, which resisted the tax.
In late 2009, Halsted West bought a defaulted loan for $4
million, with the mortgage then assigned to the company. In March 2011, the
city sent Halsted a $78,109 bill for unpaid transfer tax.
In 2009, Elm State Property bought a defaulted loan for
$8.25 million for the Gold Coast property at 1149-59 North State St., with the
mortgage then assigned to Elm State. The city sent Elm State a $105,906 bill
for unpaid transfer tax.
In both cases, the city claimed the mortgage assignments
constituted transfers of a “beneficial interest” in the properties and thus
were subject to the transfer tax. Halsted paid under protest, Elm State did
not, with both entities challenging their tax bills before an administrative
law judge. The judge favored Halsted and Elm State, declaring the assignments
did not transfer beneficial interests. As a result, the judge said the
companies did not have to pay the tax.
The city then took the question to Cook County Circuit
Court, where Judge Carl Walker overturned the administrative law judge’s
decision. Walker found the transfer tax covered mortgages, because mortgages
convey beneficial interests in property.
Halsted and Elm State then sought and found relief in
Justice Howse made short shrift of the notion the tax
applied to mortgages.
Howse started by noting the term “beneficial interest”
typically refers in Illinois law to an interest in a land trust. Going further,
Howse said a mortgage does not convey ownership or confer a right to possess or
control a piece of real estate. Even when a loan defaults, the remedies
available to the holder of the mortgage do not grant a “degree of control
necessary for ownership.”
The key to having a financial interest in a property is
possession, which a mortgage does not provide, according to Howse. What a
mortgage conveys is a “security interest,” in that a lien is laid on the
property, Howse asserted.
Howse pointed out that a look at the history of the transfer
tax ordinance shows mortgages have never been taxed. Bolstering his view, Howse
noted the Illinois Tax Transfer Law does not define a mortgage as a beneficial
interest, and the Illinois Department of Revenue has always interpreted the law
In sizing up the city’s case, Justice Howse took city
attorneys to task, saying that in one part of their presentation they used
“fallacious logic” and in another employed a “novel” interpretation of the law.
Elm State and Halsted West have been represented by the
Chicago firm of Hinshaw & Culbertson.