Federal Mortgage Programs are Exempt from County Transfer Tax

February 4, 2015 | Bulletin No. 1173054.1

In City of Spokane v. Fed. Nat. Mortgage Ass'n (December 30, 2014, No. 13–35655) ____ F.3d.___, the Ninth Circuit Court of Appeal recently affirmed that federal mortgage programs and administering entities, such as Fannie Mae and Freddie Mac, are exempt from paying county-imposed transfer taxes on real property transfers, and that such exemption does not exceed congressional authority under the Commerce Clause.

Summary

Generally, when real property is transferred, it is subject to a transfer tax designed to pay for the administrative costs borne by the subject county in relation to the transfer. However, many federal mortgage programs and administrators are statutorily exempt from application of local taxes. For example, pursuant to 12 U.S.C. § 1723(a)(c)(2) the Federal National Mortgage Association ("Fannie Mae") is exempt from payment of all state and local taxes, excepting property taxes; other federal mortgage programs have similar exemptions. Although these entities are not usually involved in real property transfers, as a result of foreclosures stemming from the mortgage crisis, the number of transactions involving federal mortgagees has spiked, leading to a spate of lawsuits across the country related to transfer tax exemptions. The City of Spokane, Washington, sued Fannie Mae, and other similar mortgage programs, arguing that the programs are not statutorily exempt from paying real property transfer taxes because such taxes fall under the programs' obligation to pay real property taxes. The district court disagreed and the City of Spokane appealed.

Legal Discussion

The City made two primary arguments. First, that transfer taxes should be considered property taxes and thus payable by defendants. Second, that even if the defendants were exempt from paying the transfer tax by statute, such exemption violated the Commerce Clause of the United States Constitution. The Court of Appeal disagreed on both points, stating that 'courts have long recognized "the distinction between an excise tax, which is levied upon the use or transfer of property even though it might be measured by the property’s value, and a tax levied upon the property itself.’” The Court found that, based on existing case law, it is clear that the statutory carve-outs allowing for the taxation of real property as “other real property is taxed” encompass only property taxes, not excise taxes. Thus, defendants are exempt from paying documentary transfer taxes on real property transactions.

The bulk of the Court's attention was directed towards the City’s novel argument that the defendants’ exemption from the transfer tax violates the Commerce Clause.  In its review, the Court noted that the Supreme Court has identified three broad categories of activity that Congress may regulate under the Commerce Clause: (1) channels of interstate commerce; (2) instrumentalities of interstate commerce, or persons or things in interstate commerce; and (3) activities that substantially affect interstate commerce. The Court determined that regulating the secondary mortgage market fell within Congress’s powers under the Commerce Clause.

Further, Congress is authorized to enact laws “necessary and proper for carrying into execution” the powers “vested by th[e] Constitution.” Thus, if Congress may regulate the secondary mortgage market, then it may also enact accessory laws necessary and proper to ensure the exercise of its power in that area. The Court relied on previous case law to find that “[i]f Congress had the power to create Fannie and Freddie, it follows that it had the power to protect their statutory mission by exempting them from state and local taxes.” “[T]he power to tax involves the power to destroy, a power to create implies a power to preserve.” The Court found that the tax exemptions could be intended to prevent excessive taxation on defendants, or that the exemptions prevented exposure to inconsistent taxation which could undermine defendants’ statutory mission to increase mortgage liquidity throughout the country.

The Court also dismissed the City’s arguments that the exemption violated Washington State’s sovereignty pursuant to the Tenth Amendment of the United States Constitution. Such challenges are rarely upheld except in cases where the federal government compels a state to enforce federal law; there were no such facts in this case.

What This Means To You

Federally established mortgagees, who are acting as property owners, and who are exempt from payment of local and state taxes, should not be charged transfer tax on the transfer of real property.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Brett Price | 661.864.3800
Maggie Stern | 916.321.4500