Illinois Court Holds GSEs Are Not Governmental Bodies for Tax Purposes

An Illinois intermediate appellate court ruled that GSEs Fannie Mae and Freddie Mac are not governmental bodies for purposes of an exemption to a City of Chicago real estate transfer tax.

The city imposes a real estate transfer tax on any transfer of real property within the city, though the tax contains an exemption for transfers involving real property acquired by or from any “governmental body.”  An individual who paid the tax after buying a property from Fannie Mae brought a class action for return of the tax payments to anyone who purchased a property from the GSEs in the city and who was subject to the transfer tax.  The individual claimed that the GSEs were governmental bodies, and that the purchases should have been exempt from the real estate transfer tax.

The trial court disagreed with the taxpayer, and the intermediate court of appeals affirmed.

The taxpayer claimed that the GSEs had originally been formed by acts of Congress and that after the 2008 financial crisis, both GSEs had been taken into conservatorship by the Federal Housing Finance Agency (FHFA)—a government agency.  The taxpayer likewise asserted that they served a public purpose—creating liquidity in the mortgage market—and that they were in effect federal instrumentalities.

The court, however, found that the term “governmental bodies” was limited to political subdivisions and government agencies, which did not go so far as to encompass an “instrumentality” of the government.  The GSEs had become fully private corporations, and they were not backed by the full faith and credit of the federal government.  The FHFA’s conservatorship did not change their fundamental character.  Likewise, the court found that its interpretation was supported by a bulletin issued by the city’s Department of Finance, which stated that the GSEs were not governmental bodies for purposes of the tax exemption.