Do Deeds in Lieu of Foreclosure Give Rise to Transfer Tax Obligations in Chicago?
Transfer taxes can be tricky when it’s not a simple buy-sell transaction. Sometimes looking at the statute and the documentation can be confusing, even for the government entity imposing the tax. Do the parties involved owe transfer taxes or don’t they? From the parties’ perspective, it’s always nice to find a situation when they don’t, which is what happened in City of Chicago v. Elm State Property LLC, 2016 IL App (1st) 152552 (December 22, 2016) Cook Co., 4th Div.
Back in 2009, one of the defendants, Halsted West, purchased a mortgage from PNC Bank. The loan was in default, and the borrower transferred title to the property to Halsted West in 2010 via deed in lieu of foreclosure. The deed in lieu of foreclosure was subsequently recorded, along with the City of Chicago transfer tax forms, claiming a transfer tax exemption. In 2011, the City of Chicago sent a notice to Halsted West, claiming they owed over $78,000 in transfer tax, including interest and penalties. Halsted West paid the tax under protest. The matter went to the City of Chicago’s Department of Administrative Hearings, where an Administrative Law Judge found in favor of Halsted West.
Also in 2009, the second defendant, Elm Street, purchased a loan from Suburban Bank. In 2010, Elm Street also received the real property that was subject to the loan via deed in lieu of foreclosure. The city claimed over $103,000 in transfer taxes, interest and penalties, and Elm Street protested. Since Elm Street didn’t pay, the City of Chicago subsequently increased the amount due to over $105,000. This matter also went before an Administrative Law Judge, who stated that Elm Street did not have to pay transfer taxes.
The City of Chicago appealed both cases in the Circuit Court, where the cases were consolidated into one. While the Administrative Law Judge had ruled that a deed in lieu of foreclosure was not the transfer of a beneficial interest in property, thereby making it exempt from transfer tax, the Circuit Court disagreed and found in favor of the City of Chicago. As a result, both defendants appealed.
The Appellate Court stated that under established state law, a mortgage is not a beneficial interest in real property and is exempt from transfer tax. The court cited a number of cases in support of this, and further stated that the City of Chicago had “advanced a novel interpretation” of what beneficial interest actually means. The statutory definition of beneficial interest limits it to beneficial interests in Illinois land trusts, the lessee’s interest in a ground lease and related improvements, and indirect interest in real estate by way of a controlling interest in the entity that owns the real estate. The city’s definition of beneficial interest did not fall into any of these categories. The court also analyzed the history of the City of Chicago Real Property Transfer Tax Ordinance, and stated that it was clear that the intent was not to assess taxes on mortgages.
The Appellate Court agreed with Halsted West and Elm Street, and reinstated the Administrative Law Judge’s decision, overturning the Circuit Court.