In Short:
A recent Michigan case in which Fannie Mae and Freddie Mac were held liable for real estate transfer taxes on foreclosed properties sold to buyers may be the first of many such cases, and could cost the federal government billions of dollars if the entities are eventually found liable by the courts.
The Full Story:
Today’s tax quote: “Virtually all persons or objects in this country…may have tax problems.” Justice Potter Stewart
A fine illustration of Justice Stewart’s observation is the current problem being faced by the mortgage giants Fannie Mae and Freddie Mac, which in addition to the billions in federal subsidies they have required are now facing additional billions in possible state transfer tax liabilities.
In a case of first impression, a United States District Court has held that the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac are liable for real estate transfer taxes on foreclosed properties sold to buyers. See Oakland County v. Federal Housing Finance Agency, U.S. District Court for the Eastern District of Michigan, #11-12666 (March 26, 2012). Although federal law exempts these entities from “all taxation,” the Court held that the term “all taxation” does not refer to excise taxes such as Michigan’s real estate transfer tax, which are levied on the privilege of transferring property, and not on the property itself. The court also held that Fannie and Freddie are not federal instrumentalities for purposes of an exemption in the Michigan statute for transfers by the United States.
The potential for back taxes is enormous, particularly if the decision stands and is adopted by other courts. Estimates of damages in Michigan alone are $50 million to $100 million. FHFA, which took over control of Fannie and Freddie for the federal government in 2008, is expected to appeal.
The case has also sparked activity in other jurisdictions seeking to collect back transfer taxes from the housing entities or FHFA.
On July 25, 2012, the Board of Commissioners of Montgomery County in Ohio filed a class action lawsuit in the U.S. District Court for Southern District of Ohio on behalf of all 88 Ohio counties, seeking state and county transfer taxes from FHFA, Fannie, and Freddie. See Board of Commissioners of Montgomery County v. Federal Housing Finance Agency, Civil Action No. 3:12-cv-245. Citing the Michigan case, Montgomery County contends that FHFA is liable for transfer taxes on properties of which it is the grantor in all Ohio counties. In addition, it contends that FHFA is liable for transfer taxes on properties that Fannie and Freddie purchase from the mortgagor under their loan guarantees, since such properties are transferred to them on the county records systems. On such properties, apparently taxes would be due not only on the transfer from the lender to Fannie or Freddie, but on the latter’s subsequent sale to a third party.
Other states have also taken notice of the Michigan case. In Massachusetts, for example, a Register of Deeds has written to the State Attorney General urging her to pursue a similar action, and in Florida the Department of Revenue has addressed the issue in a new notice published in May.
Florida’s DOR has not adopted the Michigan court’s holding that federal laws exempting these entities from “all taxation” do not apply to real estate transfer taxes. However, the DOR holds that all transactions involving one of these entities and anyone not exempt from tax are subject to the documentary stamp tax, which must be paid by the nonexempt party. TIP 12B04-01 contains an example in which a lending institution that acquires property through foreclosure and then deeds it to FNMA, GNMA, or FHLMC is subject to the documentary stamp tax, and an example illustrating that when one of those entities deeds property to an individual or nonexempt entity, the recipient of the deed is subject to the tax.
Consequently, it would appear that Florida will collect the transfer tax, but not from one of the government entities, producing much the same result as the Michigan litigation except that the money would come from private pockets. The DOR also says it will monitor developments in the Michigan litigation, and react accordingly, suggesting that it too will seek to recover transfer taxes directly from these entities if the result in that case is ultimately upheld.
So far as is known, there has as yet been no move to address this problem in Congress, although given the enormous amount of money potentially at stake, Congressional attention would not be surprising.
Worldwide ERC® members should monitor this situation as it develops, and be aware of the potential transfer tax liabilities when dealing with foreclosed properties.
Posted by Peter K. Scott