Wednesday, March 4, 2015

FYI: 9th Cir Confirms Fannie Mae and Freddie Mac Exempt from State and Local Excise Taxes on Transfers of Real Property

The U.S. Court of Appeals for the Ninth Circuit recently held that the statutory charters of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) exempts them from paying state and local excise taxes on the transfer of real property. 

In so ruling, the Ninth Circuit joins the First, Third, Fourth, Sixth, Seventh, Eighth, and D.C. Circuits, in finding that the statutory exemptions granted to Fannie Mae and Freddie Mac did not exceed Congress’s authority under the Commerce Clause.

This appeal is part of a wave of similar lawsuits brought throughout the country against Fannie Mae, Freddie Mac, and their conservator the Federal Housing Finance Agency (“FHFA”).  The city here (“City”) sued Fannie Mae and Freddie Mac, arguing that they are required to pay state and local real property transfer taxes because such taxes fall under their statutory carve-out provision for taxes on real property. 

As you may recall, Fannie Mae and Freddie Mac “shall be exempt from all [state and local] taxation, . . . except that any real property of [Fannie Mae and Freddie Mac] shall be subject to State [and] local taxation  to the same extent . . . as other real property is taxed”.  See 12 U.S.C. §§ 1452(e) and 1723a(c)(2).

The Ninth Circuit rejected the City’s arguments, noting that the United States Supreme Court recognizes “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.”  United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988).  According to the Ninth Circuit, this distinction was apparent from state laws at issue. 

Under Washington law, taxes on real property are located in the “Property Taxes” title of Wash. Rev. Code title 84, and taxes on the conveyance of real property are located in the “Excise Taxes” title of Wash. Rev. Code title 82.  The transfer taxes at issue in this case were of the latter type under Wash. Rev. Code 82.45.060 (imposing “an excise tax upon each sale of real property”), and Wash. Rev. Code 82.46.010(2)(a) (authorizing cities and counties to impose a similar “excise tax on each sale of real property”). 

Because of the clear distinction in the statutory scheme, the Ninth Circuit concluded that Fannie Mae and Freddie Mac are statutorily except from paying transfer taxes on real property in the State of Washington.

The City also argued that the statutory exemptions to Fannie Mae and Freddie Mac exceeded Congress’s authority under the Commerce Clause, because state and local taxation is not commerce, but rather “the State exercising its sovereign duties” in taxing local intrastate activity.

As you may recall, the United States 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.  See, e.g., United States v. Lopez, 514 U.S. 549, 558-59 (1995).

Moreover, Congress is authorized to enact laws “necessary and proper for carrying into Execution” the powers “vested by th[e] Constitute in the Government of the United States.”  U.S. Const. art. I, § 8, cl. 18.  “[T]he Necessary and Proper Clause makes clear that the Constitution’s grants of specific federal legislating authority are accompanied by broad power to enact laws that are ‘convenient, or useful’ or ‘conducive’ to the authority’s ‘beneficial exercise.’”  United States v. Comstock, 560 U.S. 126, 133-34 (2010).  The court must therefore “look to see whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.”  Id. at 134.

In rejecting the City’s argument, the Ninth Circuit reasoned that Congress is empowered under the Commerce Clause to regulate the national secondary mortgage market.  Chartering Fannie Mae and Freddie Mac was a means rationally related to Congress’s regulation of the secondary mortgage market – e.g., to establish secondary market facilities for residential mortgage, to provide stability in the secondary market for residential mortgages, and to promote access to mortgage credit throughout the nation. 

If Congress had the power to create Fannie Mae and Freddie Mac, according to the Ninth Circuit, then it must have the power to protect their statutory mission by exempting them from state and local taxes.   In fact, the United States Supreme Court previously recognized that Congress is authorized to exempt another federally chartered corporation from state and local taxes.  See, e.g., Pittman v. Home Owners’ Loan Corp. of Washington, D.C., 308 U.S. 21, 33 (1939).  

The Ninth Circuit determined that the Congress could rationally have believed that states might be tempted to target Fannie Mae and Freddie Mac with large taxes, given the sheer volume of their mortgage portfolios and their statutory obligations to continue purchasing and guaranteeing mortgages throughout the country.  Moreover, Congress might rationally have believed that, without the exemptions, Fannie Mae and Freddie Mac would be exposed to inconsistent taxation, and their statutory mission to increase mortgage liquidity throughout the country would be undermined.

In short, the Ninth Circuit concluded that because Congress has power to regulate the secondary mortgage market under the Commerce Clause, it has power under the Necessary and Proper Clause to exempt them from state and local taxes.

Next, the Ninth Circuit rejected the City’s argument that the exemptions violated the Tenth Amendment because they are tantamount to congressional commandeering of state employees, and they violate general principles of federalism enshrined in the Tenth Amendment.
The Ninth Circuit disagreed.  The exemptions at issue did not impose any new affirmative obligation on municipalities.  Rather, they simply preclude state and local governments from enforcing preempted tax laws against Fannie Mae and Freddie Mac. 

Moreover, nothing in the text or structure of the Constitution categorically immunizes state taxation from federal preemption.  In fact, Congress’s dormant commerce authority precludes state taxation that improperly burdens interstate commerce, and the Constitution’s Supremacy Clause precludes state taxation of federal instrumentalities.

For all these reasons, the Ninth Circuit concluded that the exemptions neither commandeered state and local officials nor transgressed the general principles of federalism.

Accordingly, the Ninth Circuit affirmed the district court’s judgment.

Eric Tsai
McGinnis Wutscher LLP
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