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The Eighth Circuit and the Fourth Circuit Court of Appeals recently rejected efforts of counties in Maryland, Minnesota and South Carolina to collect millions in alleged unpaid taxes from Fannie Mae and Freddie Mac. In both cases, the appellate courts held that a county's ability to tax real property owned by Fannie Mae and Freddie Mac does not extend to the transfer of real property.

The issue before the Eighth Circuit Court of Appeals was whether Hannepin County, Minnesota could collect $5 million in alleged unpaid taxes from Fannie Mae and Freddie Mac. The State of Minnesota imposes a tax on each deed or instrument by which real property in Minnesota is granted, assigned, transferred or otherwise conveyed. The Federal National Mortgage Association and the Federal Home Loan Mortgage Company have acquired and sold mortgages on thousands of real properties in Minnesota, including many in Hannepin County. Neither Fannie Mae nor Freddie Mac have paid any state taxes on deed transfers related to their property transactions in Hannepin County or in Minnesota generally. Hannepin County sued Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency, claiming that they owed the state more than $5 million in back taxes. The trial court dismissed Hannepin County's lawsuit, holding that Fannie Mae, Freddie Mac, and the FHFA are exempt from the Minnesota deed transfer tax. Hannepin County appealed.

The U.S. Court of Appeals for the Eighth Circuit affirmed the decision of the trial court. The charters of Fannie Mae, Freddie Mac, and the FHFA each state that they are exempt from taxation imposed by any state, with the exception of their real property. The appellate court held that the Minnesota deed transfer tax is a tax on the transfer of real property, not on the real property itself. Therefore, all three entities are exempt from Minnesota's deed transfer tax.

The issue before the Fourth Circuit Court of Appeals was whether counties in Maryland and South Carolina could require Fannie Mae and Freddie Mac to pay transfer taxes and recordation fees upon transfer of real property that they acquired through foreclosures. Fannie Mae and Freddie Mac refused to pay transfer taxes and recordation fees, claiming that they were exempt under statutes that provide that the entities are exempt from state and local taxes "except that any real property ... shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed." The Maryland and South Carolina counties sued to recover the transfer taxes and recording fees. The trial court ruled in favor of Fannie Mae and Freddie Mac, concluding that the exclusion from the tax exemption covered only real property taxes and not transfer taxes.

The U.S. Court of Appeals for the Fourth Circuit affirmed. The appellate court concluded that the exclusion allowing for the taxation of real property refers to taxes imposed on the ownership of real property and not the transfer of real property. The appellate court also rejected the counties' argument that Congress acted impermissibly when it provided Fannie Mae and Freddie Mac with exemptions from state and local transfer taxes.

Hannepin County v. Federal National Mortgage Association, 2014 U.S. App. LEXIS 2160 (8th Cir. (D. Minn.) February 5, 2014); Montgomery County, Maryland v. Federal National Mortgage Association, 2014 U.S. App. LEXIS 1578 (4th Cir. (D. Md.) January 27, 2014).

Frank Bishop is an associate in the Maine office of Hudson Cook, LLP. Frank can be reached at 207-541-9554 or by email at fbishop@hudco.com.

Shawnielle Predeoux is an associate in the Maryland office of Hudson Cook, LLP. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.