City Hall can't tax mortgage transfers, because mortgages don't equal ownership, appeals panel says

By Dan Churney | Dec 27, 2016

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 appellate court. 

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 accordingly. 

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.

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City of Chicago Hinshaw & Culbertson LLP Illinois Department of Revenue Illinois First District Appellate Court

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