New York Court of Appeals: Hudson Valley Federal Credit Union v. New York State Department of Taxation and Finance

The issue before the Court of Appeals was whether mortgages issued by federal credit unions were subject to the New York state mortgage recording tax (“MRT”) under article 11 of the Tax Law.  The plaintiff, Hudson Valley Federal Credit Union (“Hudson Valley”), sought a declaratory judgment against the New York State Department of Taxation and Finance (“State”) claiming that Hudson Valley was not required to pay a MRT.  Hudson Valley offered two bases for its claim.  First, the Federal Credit Union Act (“FCUA”) exempts federal credit unions from state taxation.  Second, federal credit unions are instrumentalities of the United States and are immune from state taxation.  The supreme court granted the State’s motion to dismiss.  The appellate division affirmed.  The Court of Appeals held that federal credit unions are not exempt or immune.

First, the Court considered Hudson Valley’s claim that it was exempt from the MRT based on the language of the FCUA.  The Court considered the general rule that courts strictly construe federal tax exemptions of state taxing authority and decline to extend exemptions beyond express provisions.  The Court then looked to acts of Congress dealing with tax exemptions of mortgages.  It found that other acts explicitly stated that a tax on mortgages was exempt.  Here, the Court held that if Congress intended for mortgages to be included as an exemption, it would have explicitly included that language in the statute.  The absence of such language was held to show an intent that mortgages were not exempt from taxation.

The Court further stated that the term “property” does not include mortgages within its definition.  The Court looked at the legislative history of the FCUA, finding that when the act was created and amended, federal credit unions did not have the authority to issue mortgage loans.  Therefore, when federal credit unions were given the authority to issue mortgages, Congress would have amended the statute to include mortgages within the definition.

Hudson Valley further claimed that the MRT went against the purpose of the statute and will cause serious financial problems.  The Court rejected this argument and stated that the tax will not drive them out of business.  Further, the Court stated, Congress expanded the powers of credit unions so that they can offer more services and serve a larger area.  Contrary to Hudson Valley’s implication, the Court found that there has been growth in the number of federal credit unions rather than a decrease.

The Court also dismissed Hudson Valley’s second main claim that it is a federal instrumentality entitled to exemption because it is so closely connected to the government that they cannot be viewed as separate entities.  The Court rejected this argument by stating that the credit unions are private associations chartered under federal law that are wholly-owned and managed by their members.  The unions elect the board members and have a significant amount of autonomy in running the union.  The Court held that the credit union was not a federal instrumentality entitled to exemption.

The dissent rejected the majority’s interpretation of the FCUA statute, stating that the language of the statute provides federal credit unions with an exemption from all taxes except in two instances: real property and personal property.  In prior cases, the Court had determined that the MRT was an excise tax on the privilege of transferring title.   Therefore, the federal credit unions would be exempt from paying the MRT because they do not fall within the real or personal property exception.  The dissent examined case law, finding that “all taxation” meant “all direct taxation.”  Therefore, the dissent concluded, the credit union was exempt.

The dissent stated that, in examining the statute, if Congress had included mortgages, it would have created a third exception, rather than the two that are explicitly stated.  Since Congress did not include this term, the majority’s reasoning inferred an additional exception, which was not within the Court’s authority.  The dissent would find that Hudson Valley is required to pay the tax under the statute because the MRT does not fall under the real or personal property exception.

20 N.Y.3d 1, 980 N.E.2d 473, 956 N.Y.S.2d 425 (2012)

 View full decision on Westlaw

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