Fannie Mae and Freddie Mac Found Liable for Transfer Taxes

By Jonathan L. Engman, Esq.
Fabrizio & Brook, P.C.

In a ruling that could cost millions in unpaid transfer taxes, a federal judge in the Eastern District of Michigan has found that Fannie Mae and Freddie Mac must pay state and county transfer taxes when selling REO properties in Michigan. See Oakland County, et al. v Federal Housing Finance Agency, 2012 WL 987580 (E.D. Mich.). The Michigan statutes impose a transfer tax, based on the sales price, to be paid to the state and county when selling real property. For years, the entities avoided paying the transfer tax when selling REO properties in Michigan by claiming that federal statutes granted them immunity from "all taxation" which exempted them from paying the transfer tax. Generally, the federal charters provide that Fannie Mae and Freddie Mac are exempt from "all taxation" imposed by any state or by any county, except that real property shall be subject to state, county, or local taxation to the extent that other real property is taxed. See 12 U.S.C. §1723a(c)(2) and 12 U.S.C. §1452(e).

In ruling that the entities were subject to the transfer taxes, the federal court in Oakland County found that the exemption from "all taxation" did not include transfer taxes because a transfer tax was a form of excise tax and not a direct tax. Specifically the court relied on the case of United States v Wells Fargo Bank, 485 U.S. 351 (1988), in which the Supreme Court found a distinction between "direct taxation" which was generally exempt and the taxation on privileges of ownership including the right to transfer property. The Supreme Court stated, "Underlying this doctrine is the distinction between an excise tax, which is levied upon the use or transfer of property . . . and a tax levied upon the property itself. The former has historically been permitted even where the latter has been constitutionally or statutorily forbidden." Id. at 355. Furthermore, the Supreme Court in Wells Fargo stated that "exemptions from taxation are not to be implied; they must be unambiguously proved." Id. at 354.

Based on Wells Fargo, the court in Oakland County found that "[b]ecause there is a presumption against implied tax exemptions, and "all taxation" has been implied to mean "direct taxation," and the Michigan Transfer Taxes are an excise tax rather than a direct tax, Defendants are unambiguously liable for the transfer taxes."

Based on this ruling an appeal to the 6 th Circuit should be inevitable, but until there's a final decision, most of the counties in Michigan are now demanding that Fannie Mae and Freddie Mac pay transfer taxes on REO properties before they'll record any REO deeds.