ALBANY, N.Y. (3/21/12)--The State of New York filed its response Monday to Hudson Valley FCU's appeal of lower court decisions on the state's mortgage recording tax (MRT) and to amicus briefs from a number of credit union organizations and federal government entities challenging the tax.
In its response, filed with the State of New York Court of Appeals, the state argued that the Federal Credit Union Act (FCU Act) does not bar collection of recording taxes on mortgages securing federal credit union loans because the tax "is not a property tax."
"The sweeping tax immunity Hudson Valley seeks has no statutory or constitutional basis. Although Congress exempted federal credit unions from some forms of taxation in the FCU Act, Congress did not exempt credit union members or credit union mortgages from state taxation," said the state's response. "This court has repeatedly held, contrary to Hudson Valley's claim, that the recording tax is a privilege tax imposed for the privilege of recording a mortgage, not a property tax assessed against lenders, like Hudson Valley, for possessing or owning the mortgage as a security interest," said the state.
The state argued that federal credit unions, including Hudson Valley, are not entitled to constitutional tax immunity as virtual arms of the U.S. government. It argued that Congress "expressly defined federal credit unions' tax exemptions" in the FCU Act and that denying federal credit unions the same tax immunity as government agencies lending government funds "is not unconstitutionally discriminatory."
"Hudson Valley is not entitled to constitutional tax immunity as an instrumentality of the U.S. government. Federal credit unions are privately owned and managed entities. They are not agencies of the U.S., and do not use public funds to make member loans. Moreover, because Congress expressly stated and limited the tax exemptions applicable to federal credit unions in the FCU Act, further constitutional analysis is unnecessary," said the state.
Hudson Valley, a $3.2 billion asset credit union based in Poughkeepsie, N.Y., has appealed two lower courts' decisions that denied its challenge to the MRT. It had filed suit on May 12, 2009, in the New York Supreme Court, a lower trial court, against the New York State Department of Taxation and Finance.
The lower court, in dismissing the case, said the MRT was a tax on the "privilege" of filing the mortgage under state law. The case then went to the Appellate Division, which upheld the lower court ruling. The credit union appealed and the New York Court of Appeal, the state's highest court, agreed on Oct. 18, 2011 to hear the appeal.
The credit union maintains that the FCU Act exempts federally chartered credit unions from the state tax, which it argues is not considered a "privilege tax" under federal law. Instead, credit unions' federal tax exemption and applicable U.S. Supreme Court rulings should control in the issue, it said.
Hudson Valley's lawsuit has been supported in various amicus briefs from the Department of Justice, Federal Housing Finance Agency, the Credit Union Association of New York, the Credit Union National Association and the National Association of Federal Credit Unions.
The Department of Justice's amicus brief said the lower courts' interpretation of the FCU Act "is inconsistent with the statute's plain language" exempting federal credit unions from all taxes except real property taxes and tangible personal property taxes.
"The lower courts misinterpreted Section 122 of the FCUA Act," said the department, adding the act "expressly immunizes federal credit unions from all state taxes, with the limited exception of real property taxes and tangible personal property taxes." It also pointed out, "The United States has an interest in the proper interpretation of the FCUA and in preserving the tax exemptions afforded federal credit unions by Congress."
"Under the clear terms of the FCUA, because the MRT is not a real property or tangible personal property tax--the only two taxes permitted under the FCUA--it cannot be levied against federal credit unions such as Hudson Valley," said the Justice Department. It pointed out that "even if the FCUA exempts federal credit unions from only certain categories of taxes, as the Appellate Division erroneously concluded, federal credit unions are still exempt from paying the MRT because the MRT can be characterized as a tax on a federal credit union and its property, two of the categories prohibited by the FCUA under the Appellate Division's construction of the statute."
Because the U.S. Supreme Court "has characterized mortgage recording taxes similar to the MRT as a tax on the mortgage, the MRT can be construed as an exempted tax on intangible personal property. The MRT is also a tax on a federal credit union itself when applied to mortgages issued by the federal credit union, and thus is exempted…," said the document.
New York's MRT requires a tax of 50 cents for each $100 of debt secured by a mortgage. Most states charge only administrative fees for recording a mortgage.