ALBANY, N.Y. (12/20/11)--The Credit Union Association of New York (CUANY) and the Credit Union National Association (CUNA) have filed an amicus brief with the state's highest appellate court, the New York State Court of Appeals, in support of the Hudson Valley FCU, which is appealing a New York state mortgage recording tax (MRT) charged to the federal credit union.
The brief supports the Poughkeepsie, N.Y.-based Hudson Valley's argument that New York state's MRT is an unconstitutional tax on the power given to federal credit unions, their property and their franchises to provide mortgages, and that federal credit unions are federal instrumentalities and are therefore exempt from this kind of state taxation.
The term "franchises" encompass those specific powers granted to a federal chartered corporation, and absent congressional authorization, states have no right to tax the franchises granted to federal instrumentalities, said CUNA and CUANY in the brief. They also argue that contrary to the lower court's ruling, the power to write mortgage loans is a franchise granted to federal credit unions that cannot be taxed.
On the federal instrumentalities argument, the brief noted that federal credit unions advance an important government function by providing people of modest means an opportunity to obtain financial services in a not-for-profit member-owned cooperative.
"The federal instrumentality status of credit unions cannot seriously be questioned," said CUANY and CUNA. "Federal credit unions were created in 1934 to provide financial services at low cost and on liberal terms to their members, especially to persons of modest means. In so doing, they have carried out the intent of Congress to insure that more Americans can have access to credit and important financial products such as mortgage loans," the document filed said.
Federal credit unions meet the Supreme Court's test for finding a federal instrumentality to be immune from state taxation, the associations said. Section 1768 of Title 12 of the U.S. Code defines the limit to which credit unions can be taxed by immunizing federal credit unions from state taxation except where expressly permitted by statute. Also, statutes delineating the powers of federal instrumentalities are to be interpreted without deference to state court determinations.
In filing the brief, the associations "took these steps out of concern that in challenging the federal instrumentality status of credit unions, the department was in fact questioning the legal foundation of the dual charter system."
It also noted that "a proper reading of controlling U.S. Supreme Court precedent necessarily leads to the conclusion that New York State's MRT is an illegal tax on federal credit unions and their mortgage lending activity, both because of the fact that the tax is a tax on property and because it unduly burdens the franchise granted by Congress to federal credit unions to make mortgages."
Hudson Valley FCU, a $3.2 billion asset credit union, filed the suit on May 12, 2009, against the New York State Department of Taxation and Finance, Commissioner Robert L. Megna and the State of New York, seeking a declaratory judgment that the state may not impose the MRT on mortgages granted to secure loans made by the credit union because as a federal credit union, it has a federal tax exemption.
Last year, the New York Supreme Court, which is a lower trial court, dismissed Hudson Valley's suit, declaring it was not actionable. Justice Judith Gische in the original ruling described the MRT as a tax on the "privilege" of filing the mortgage under state law. New York, unlike most states that charge only administrative fees for recording a mortgage, charges a tax that amounts to more than 2% of the mortgage's face value in some areas such as New York City.
The credit union appealed to the Appellate Division of the Supreme Court of New York and oral arguments were heard in May. CUNA and CUANY also filed an amicus brief with the Appellate Division. The Appellate Division upheld the Supreme Court's ruling. The credit union's appellate petition with New York's highest appellate court, the New York State Court of Appeals, was granted in October.