Hudson Valley Fed. Credit Union v. N.Y. State Dep't of Taxation & Fin.

• Decision Date: 18 October 2012
• Docket Number: No. 154,154
• Citation: 2012 NY Slip Op 06986
• Parties: Hudson Valley Federal Credit Union, Appellant, v. New York State Department of Taxation and Finance, et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

2012 NY Slip Op 06986

Hudson Valley Federal Credit Union, Appellant,

v. New York State Department of Taxation and Finance, et al., Respondents.

No. 154

Court of Appeals of New York

Decided October 18, 2012

Eli R. Mattioli, for appellant.

Brian A. Sutherland, for respondents.

United States of America; Credit Union Association of New York et al.; The National Association of Federal Credit Unions; Federal Housing Finance Agency; American Bankers Association et al.; New York State Conference of Mayors and Municipal Officials, amici curiae.

GRAFFEO, J.:

We are asked in this case whether mortgages issued by federal credit unions are subject to the New York State mortgage recording tax under article 11 of the Tax Law. We answer in the affirmative.

In 2009, plaintiff Hudson Valley Federal Credit Union commenced this declaratory judgment action against defendants State Department of Taxation and Finance, its Commissioner and the State of New York (collectively the Department). Hudson Valley asserted that it was not required to pay the mortgage recording tax (MRT) on mortgage obligations issued to members because (1) the Federal Credit Union Act (FCUA) exempts federal credit unions and their property from state taxation and (2) as instrumentalities of the United States, federal credit unions are immune from state taxation under the Supremacy Clause. Supreme Court granted the Department's motion to dismiss the complaint and the Appellate Division affirmed (85 AD3d 415, 415 [1st Dept 2011]). Hudson Valley appeals by leave of this Court.

First enacted in 1906, Tax Law § 253 imposes a MRT of 50 cents for every $100 of principal debt on each mortgage of real property situated within the State ¹ . Payment of the tax is a condition precedent to the proper recording of a mortgage (see Tax Law § 258 [1]). Although the Tax Law does not specify whether the lender or the borrower is obligated to pay the MRT, the Attorney General is authorized to commence an action for nonpayment against either the mortgagor or the mortgagee or both (see Tax Law § 266).

Hudson Valley's challenge to the imposition of the MRT relies primarily on federal statutory language contained in the FCUA, which provides that

"[t]he Federal credit unions organized hereunder, their property, their franchises, capital, reserves, surpluses, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed"

(12 USC § 1768). Hudson Valley urges us to interpret the phrase "[f]ederal credit unions . . . shall be exempt from all taxation" as excluding all mortgage loans issued by federal credit unions from payment of the MRT.

As a general rule, courts strictly construe federal tax exemptions in derogation of state taxing authority and decline to extend such exemptions beyond their express provisions (see California State Bd. of Equalization v Sierra Summit, Inc., 490 US 844, 851-852 [1989]; UnitedStates v Wells Fargo Bank

, 485 US 351, 354 [1988]; Hale v State Bd. of Assessment and Review, 302 US 95, 103 [1937]; Yazoo & Mississippi Valley R. Co. v Thomas, 132 US 174, 185 [1889]). Consistent with this principle, in other contexts, when Congress has intended to immunize "mortgages" of federally chartered lending entities from state taxation, it has done so explicitly. Examples of such express intent are found in the National Housing Act (see 12 USC § 1723a [c] [1], [2] [exempting from state taxation National Mortgage Associations, their "franchise[s], capital, reserves, surplus[es], mortgages or other security holdings, and income" (emphasis added)]); the National Consumer Cooperative Bank Act (see 12 USC § 3019 [a] ["The Bank, including its franchise, capital, reserves, surplus, mortgages, or other security holdings and income shall be exempt from taxation now or hereafter imposed by any State" (emphasis added)]); the Farm Credit Act of 1971 (see 12 USC § 2098 ["The mortgages held by the Federal land bank associations and the notes, bonds, debentures, and other obligations issued by the associations shall be considered and held to be instrumentalities of the United States and, as such, they and the income therefrom shall be exempt from all Federal, State, municipal, and local taxation" (emphasis added)] and 12 USC § 2023 [same for Farm Credit Banks]); and the Higher Education Act of 1965 (see 20 USC § 1087-2 [b] [2] [The Student Loan Marketing "Association, including its franchise, capital, reserves, surplus, mortgages, or other security holdings, and income shall be exempt from all taxation now or hereafter imposed by any State" (emphasis added)]). Concomitantly, where Congress has used identical terminology in similar statutes to allow an exclusion, the absence of that terminology in an analogous statute represents a strong indication of a contrary intent (see Whitfield v United States, 543 US 209, 216-217 [2005]; FCC v NextWave Personal Communications Inc., 537 US 293, 302 [2003]; Franklin Nat. Bank of Franklin Square v New York, 347 US 373, 378 n 7 [1954]). Given the uniform choice of language in these other federal acts, one would expect that if federal credit union mortgages were intended to be excluded from state MRTs, such immunity would have been plainly stated in the FCUA. Instead, although the FCUA contains an extensive list of exemptions relevant to federal credit unions, it makes no mention of mortgages or loans of any kind (see 12 USC § 1768). This omission weighs against Hudson Valley's argument.²

In response to the lack of a statutory reference to mortgages, Hudson Valley submits that the term "property" in section 1768 can be construed broadly to encompass mortgage loans. Citing several United States Supreme Court decisions, it argues that mortgage recording taxes, such as the MRT, are taxes on "property" covered by the prohibition against state taxation. In the alternative, Hudson Valley contends that the MRT is tantamount to an illegal direct tax on the credit unions themselves. We do not agree.

The legislative history of the Act refutes Hudson Valley's interpretation of the term "property." Congress enacted the FCUA in 1934, authorizing the formation of federal credit unions. The statute was amended three years later to address the disproportionate tax burden borne by those entities as compared to banks — resulting in the addition of the provisions at issue in 12 USC § 1768 ³ (see Pub L 75-416, § 4, 51 Stat 4 [75th Cong, 2d Sess, December 6, 1937]). But from the Act's inception and, more importantly, at the time of the 1937 amendment, federal credit unions were not empowered to issue mortgage loans to their members (see Pub L 73-467, § 7, 48 Stat 1216, 1218 [73d Cong, 2d Sess, June 26, 1934] [permitting credit unions only "[t]o make loans with maturities not exceeding two years"]). Congress could not have intended section 1768 to exempt from state taxation the particular lending activity at issue here — the issuance of mortgage loans — since credit unions could not engage in such activity. Furthermore, when Congress finally granted federal credit unions the power to offer residential mortgages (see Pub L 95-22, § 302, 91 Stat 49 [95th Cong, 1st Sess, April 19, 1977]), it did not amend section 1768 to specifically include "mortgages," nor did it otherwise articulate an intent to include mortgages within the definition of the "property" exempt from state taxation.

The Supreme Court holdings cited by Hudson Valley do not alter our conclusion (see Laurens Fed. Sav. & Loan Assn. v South Carolina Tax Comm'n, 365 US 517 [1961]; Pittman v Home Owners' Loan Corp.

, 308 US 21 [1939]; Federal Land Bank of New Orleans v Crosland, 261 US 374 [1923]). In those cases, the Supreme Court concluded that the financial institutions involved — a Federal Savings and Loan Association, a Home Owners' Loan Corporation and a Federal Land Bank — were exempt from state mortgage recording taxes by virtue of the federal tax exemption statutes pertaining to those institutions (see Laurens, 365 US at 521; Pittman, 308 US at 31-32; Crosland, 261 US at 378). In sharp contrast to the provisions of the FCUA, however, the federal acts examined in Laurens, Pittman and Crosland provided for an exemption from state mortgage recording taxation by direct statutory reference to "advances"⁴ , "loans" and "mortgages" (see 12 USC § 1433; section 4 [c] of the former Home Owners' Loan Act of 1933; section 26 of the former Federal Farm Loan Act of 1916). As we have noted, section 1768 of the FCUA fails to incorporate similar terminology. Consequently, these Supreme Court cases are not controlling in determining Congressional intent related to the FCUA.⁵

Hudson Valley further maintains that federal credit unions were established for the purpose of making credit more accessible for "provident or productive purposes" to "people of small" or modest means (see Pub L 73-467, Preamble, 48 Stat 1216, 1216 [73d Cong, 2d Sess, June 26, 1934]). It argues that permitting the MRT to apply to federal credit unions thwarts the FCUA's purpose and has serious financial ramifications for federal credit unions. This contention is unfounded.

Hudson Valley does not dispute that prior to the initiation of this action in 2009, it voiced no objection to the assessment of the MRT. Moreover, contrary to its assertions, thereappears little danger that the MRT will drive federal credit unions out of business. Over the years, Congress has greatly expanded the powers of the credit unions and they now provide many of the same services traditionally offered by banks. For example, credit unions may accept deposits in "share" and "share draft" accounts (equivalent to bank savings and checking accounts respectively),...