Federal Statutes Exempting Fannie Mae and Freddie Mac from State Taxation Also Preclude Real Estate Transfer Taxes

In Montgomery County Commission v. Federal Housing Finance Agency, No. 13-12615 (Jan. 16, 2015), the Eleventh Circuit affirmed that Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency are exempt from paying state real estate transfer taxes, and that the exempting federal statutes are otherwise constitutional.

Congress enacted statutory exemptions from “all taxation . . . imposed by any State” for Fannie Mae and Freddie Mac, and the Federal Housing Finance Agency which operates the two corporations. At the same time, however, Congress provided an exception “that any real property of the [corporation or Agency] shall be subject to State . . . taxation to the same extent as other real property is taxed.” See, e.g., 12 U.S.C. § 1723a(c)(2) (2012).

The six appellants in this consolidated appeal argued that the district courts erred in excluding transfer taxes from the real property exceptions. They argued alternatively that, even if the exemptions encompass transfer taxes, the exemptions themselves are unconstitutional under the Commerce, Necessary and Proper, and Supremacy Clauses. The Eleventh Circuit disagreed with appellants on both arguments.

The Court began by finding the statutory exceptions for taxation on real property did not include transfer taxes, and so the States were prevented from imposing them. It reasoned, “[a]lthough transfer taxes are imposed on the exercise of privileges stemming from the ownership of real property, they are not taxes on the property itself, and thus do not qualify for the real property exception.” Put simply, “[a] deed is not real estate, any more than car title is a car.”

Appellants’ first constitutional argument was that Congress exceeded its Commerce Clause authority in enacting the exemptions because the transfer taxes were merely intrastate activity. However, the Court noted that regulation of even local activities is permissible under the Commerce Clause if those activities “are part of an economic ‘class of activities’ that have a substantial effect on interstate commerce.” The Court then applied a rational basis standard of review to determine whether Congress had a “rational basis for finding the . . . tax interfered with interstate commerce.” It found Congress created the federal entities with the intention of reducing mortgage transaction costs nationally, and that state taxation on transfers, aggregated nationally, would substantially interfere with that goal. Accordingly, Congress acted with a rational basis in enacting the tax exemptions.

Appellants final constitutional argument was that Congress violated the 10th Amendment in enacting the tax exemptions by “commandeering state officials to record deeds from the federal entities free of charge.” The Eleventh Circuit again disagreed, finding it commonplace and presenting no constitutional defect “[t]hat a State wishing to engage in certain activity must take administrative . . . action to comply with federal standards regulating that activity.”

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