Sunday, October 28, 2012

FYI: NY Ct of Appeals Rules Mortgage Loans Extended by Federal Credit Unions Are Subject to State Mortgage Recording Tax

The New York Court of Appeals recently affirmed that mortgage loanextended by federal credit unions are subject to the New York State mortgage recording tax, even though federal credit unions themselves are not subject to taxation
A federal credit union filed a declaratory judgment action against the New York State Department of Taxation and Finance (the "Department"), arguing that (1) it was exempt from paying New York's mortgage recording tax under the Federal Credit Union Act ("FCUA") and (2) that federal credit unions are immune from state taxation as federal instrumentalities, under the Supremacy Clause. 
The lower court granted the Department's motion to dismiss, and the lower appellate court affirmed.  The credit union appealed again, by leave of the Court. 
As you may recall, New York's Tax Law Sec. 253 imposes a mortgage recording tax of 50 cents per $100 of principal debt on each mortgage of real property located in New York.
Further, the FCUA provides that "Federal credit unions organized hereunder...shall be exempt from all taxation now or hereafter imposed by the United States or by any State..."   12 U.S.C. Sec. 1768. 
The Court began its analysis by examining the credit union's FCUA argument.  It recited the "general rule" that "courts strictly construe federal tax exemptions in derogation of state taxing authority and decline to extend such exemptions beyond their express provisions."  Accordingly, the Court observed that when Congress intends to "immunize 'mortgages' of federally chartered lending entities from state taxation, it is has done so explicitly."
With that standard in place, the Court noted that although the FCUA contains an "extensive list" of exemptions, it does not mention mortgage or loans - an omission which "weighs heavily against [the credit union's] argument." 
Although the credit union attempted to argue that a reference to "property" within the FCUA could be construed broadly to include mortgage loans, the Court found this argument unpersuasive.  It noted that when the FCUA was enacted and amended, federal credit unions could not issue mortgage loans to their members.  Accordingly, the Court held that "Congress could not have exempt from state taxation the particular lending activity at issue here..." 
The Court also rejected the credit union's argument that it was immune from state taxation as a federal instrumentality, under the Supremacy Clause.  The Court cited precedent establishing that tax immunity is appropriate only where the tax falls on the U.S. government itself, or on "an instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities..."  United States v. New Mexico, 455 US 720, 735 (1982). 
Because "Federal credit unions are private associations chartered under federal law," the Court held that federal credit union mortgages are not exempt from the mortgage recording tax. 
Accordingly, the Court affirmed the lower court's decision. 

Ralph T. Wutscher
McGinnis Wutscher LLP
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Chicago, Illinois 60602
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