While federal law bars the city of Chicago and other local governments from slapping taxes on homes acquired by federal home mortgage lending giants Fannie Mae and Freddie Mac, the law does nothing to stop such cities from merely passing on those tax bills to the people who later buy the property from Fannie or Freddie, a federal appeals panel says.

On Oct. 30, a three-judge panel for the U.S. Seventh Circuit Court of Appeals said a federal judge had erred in finding Fannie and Freddie’s tax exemption should be limited only to transactions in which the federal mortgage lenders are the buyers of property, and should not extend to those in which they are the sellers.

The judges based their ruling on a strict interpretation of the “clear and manifest purpose of Congress,” as expressed in the wording of the law exempting the Fannie- and Freddie-owned properties from taxation.

Seventh Circuit Judge Michael Kanne authored the panel’s opinion. The panel’s other members, Circuit Judge Daniel A. Manion and Senior U.S. District Judge Robert L. Miller Jr., of the Northern District of Indiana, concurred in the decision.

The case dates to October 2015, when Fannie Mae and the Federal Housing Finance Agency first filed suit in Chicago federal court against the city of Chicago, asserting the city has no authority under the law to collect its so-called real estate transfer taxes either from the federal lenders themselves or from the people purchasing foreclosed homes from the federal lenders.

Typically when a property is sold in Chicago, the city seeks to collect taxes equivalent to $3.75 per every $500 of the assessed value, plus an additional special tax for the Chicago Transit Authority of $1.50 per $500. The real estate transfer tax is typically paid by the buyer at the time the title to the property is transferred to the new owner.

Federal law prohibits cities and other local governments from levying such taxes to property held by federal lenders. In this case, though, the city sought to sidestep that law by waiting for the properties to be sold and then sending the tax bills to the buyers.

In four specific instances cited by Fannie Mae in its lawsuit, the city sent tax bills of as much as $3,200 to people buying homes from Fannie Mae.

“The City cannot lawfully impose excise taxes on an Enterprise’s sale of real property or collect such taxes from any party to such a transaction,” Fannie Mae said in its original complaint. “Yet, that is what the City and its officials purport to do.”

In September 2016, U.S. District Judge Sara L. Ellis sided with the federal lenders, finding the exemption should apply to the federal lenders’ property transactions from beginning to end, “regardless of whom Defendants (the city) require to pay the tax.”

On appeal, City Hall maintained its assertion a plain reading of the law should limit the exemption only to property acquired or held by the federal lenders, not any transactions in which they may be parties.

The Seventh Circuit panel this time sided with the city.

“Transferring property can logically be understood as an activity,” Judge Kanne wrote.  “However, given the transfer tax is owed by the transferee upon delivery or recording of the instrument of transfer, the tax is better understood as one imposed on the transferee’s receipt of property rather than a tax imposed on the act of selling property by Freddie Mac.

“Thus, there is nothing in the plain language of the exemptions that indicates that the ‘clear and manifest purpose of Congress’ was to exempt from taxation entities that transact with (Fannie and Freddie),” the judges said.

Fannie Mae, Freddie Mac and the FHFA were represented in the action by attorneys with the firms of Winston & Strawn, of Chicago; Arnold & Porter, of Washington, D.C.; King & Spalding, of Washington, D.C.; and Chuhak & Tecson, of Chicago.

The buyers of the Fannie Mae properties who were assessed the transfer taxes were represented in the case by the firm of Stahl Cowen Crowley Addis, of Chicago.

The city was represented by attorneys with its Department of Law.

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Organizations in this Story

Arnold & Porter LLP City of Chicago King & Spalding LLP U.S. Court of Appeals for the Seventh Circuit U.S. District Court for the Northern District of Illinois U.S. Federal Housing Finance Agency Winston and Strawn LLP

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