Hudson Valley Federal Credit Union v. New York State Department of Taxation & FinanceHudson Valley Federal Credit Union v. New York State Department of Taxation & Finance
Lead Opinion
OPINION OF THE COURT
We are asked in this case whether mortgages issued by federal credit unions are subject to the New York State mortgage
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 (
First enacted in 1906,
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 anyreal 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 “[flederal 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.,
In response to the lack of a statutory reference to mortgages, Hudson Valley submits that the term “property” in
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
The Supreme Court holdings cited by Hudson Valley do not alter our conclusion (see Laurens Fed. Say. & Loan Assn. v South Carolina Tax Comm'n,
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, § 2, 48 US Stat 1216, 1216 [73rd Cong, 2d Sess, June 26, 1934]). It argues that permitting the MET 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 MET. Moreover, contrary to its assertions, there appears little danger that the MET 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), issue first and second residential mortgages, make automobile and personal loans, extend lines of credit (including credit cards) and offer other services (see
Lastly, we reject Hudson Valley’s contention that it is a federal instrumentality entitled to exemption from the MRT under the Supremacy Clause. Although Hudson Valley cites authority in support of its argument that federal credit unions are federal instrumentalities,
In sum, based on principles of statutory interpretation and the legislative history of the FCUA, we hold that federal credit union mortgages are not exempt from the State’s MET.
Accordingly, the order of the Appellate Division should be modified, with costs to defendants, by declaring that federal credit unions are not exempt from the New York State mortgage recording tax and, as so modified, affirmed.
Notes
.
“A tax of [500] for each [$100] and each remaining major fraction thereof of principal debt or obligation which is, or under any contingency may be secured at the date of the execution thereof or at any time thereafter by a mortgage on real property situated within the state recorded on or after [July 1, 1906], is hereby imposed on each such mortgage, and shall be collected and paid as provided in this article.”
. The dissent contends that the U.S. Supreme Court’s decision in Federal Land Bank of St. Paul v Bismarck Lumber Co. (
. At the time, the act permitted state taxation of members’ shares in federal credit unions as well as taxation of federal credit unions themselves and their property (see Pub L 73-467, § 18, 48 US Stat 1216, 1222 [73rd Cong, 2d Sess, June 26, 1934]). The states commonly taxed domestic banking corporations based primarily on their share capital (see HR Rep 1579, 75th
. The Supreme Court held in Laurens that the term “advances” in
. Hudson Valley and amici also cite two Federal District Court decisions standing for the proposition that a state tax imposed on the recording of an entity’s instrument is the same as a tax on the entity itself and, since the entity is exempt from “all taxation,” it is necessarily exempt from the state recording tax (see Hager v Federal Natl. Mtge. Assn.,
. Instead of causing the negative consequences predicted by Hudson Valley, the elimination of the MRT on credit union mortgages could conceivably lure mortgage business away from banks by offering lower closing costs to credit union borrowers, thereby giving credit unions a competitive advantage over the banking industry in New York. Had Congress intended to alter the mortgage-lending playing field between federal credit unions and banks, it could have stated such an intention.
. In each of those cases, the federal circuit courts considered the instrumentality status of federal credit unions in other contexts (see California Credit Union League v City of Anaheim,
Dissenting Opinion
The Federal Credit Union Act (the FCUA) (
New York’s mortgage recording tax (MET) (
The United States Supreme Court’s decision in Federal Land Bank of St. Paul v Bismarck Lumber Co. (
“every Federal land bank . . . , including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank . . . First mortgages executed to Federal land banks, or to joint stock land banks, and farm loan bonds issued under the provisions of this Act, shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation” (Pub L 64-158, § 26, 39 US Stat 360, 380 [emphases added]; see 12 USC former §§ 931-933).
At issue in Bismarck was whether building materials purchased by a federal land bank for use in the repair and improvement of foreclosed properties were subject to state sales tax. Like the MRT, a sales tax is an excise tax. In upholding imposition of the state sales tax, the North Dakota Supreme Court concluded that because section 26 contained specific exemptions for “capital and reserve or surplus therein and the income derived therefrom,” all other taxes were authorized except for taxes on real estate (see Federal Land Bank of St. Paul v Bismarck Lbr. Co.,
The Supreme Court reversed, concluding that “the broad exemption accorded [by section 26] to ‘every Federal land bank’ ” barred the state from imposing any tax of any kind, unless it fell within the express statutory exception for real estate taxes (see Bismarck,
The Court emphasized that section 26’s list of exempt items— i.e., “including the capital and reserve or surplus therein and the income derived therefrom”—simply illustrated and substantiated the breadth of the entity’s general exemption from all taxes except for taxes on real estate. It did not limit or modify the general exemption (id. at 100 [“(T)he term ‘including’ is not one of all-embracing definition, but connotes simply an illustrative application of the general principle”]). Indeed, as the Court explained, “[i]f the broad exemption accorded to ‘every Federal land bank’ were limited to the specific illustrations mentioned in the participial phrase introduced by ‘including’, there would have been no necessity to except from the purview of [the statute] the real estate held by the land banks” (id.).
Finally, the Court noted that “[t]he additional exemptions granted to farm loan bonds and first mortgages executed to the land banks” did not suggest a contrary result: “The bonds [might] be held by private persons, and, of course, the general exemption of section 26 would not extend to them. Likewise the general exemption would protect mortgages executed to the land banks and held by them, but it would not survive a transfer” (id. [emphasis added]). In short, the general exemption from taxation for the federal land banks included mortgages “executed to .. . and held by” the entity, although the word “mortgages” did not appear in the “illustrative application of the general principle” (cf. majority op at 8 [ascribing significance to whether the word “mortgages” appears in illustrative lists in federal statutes]).
Thus, Bismarck establishes that (1) a statutory exemption of an entity from taxation protects that entity and its transactions from all taxes for which it would otherwise be liable; (2) a clause in such a statute listing specific items that are exempt from taxation is illustrative, not limiting; and (3) exceptions to the grant of immunity from taxation must be stated expressly, not implied by the courts. These principles control the outcome of this case. Section 122 of the FCUA (
Applying Bismarck, the United States District Court for the District of Columbia recently held that Fannie Mae and Freddie Mac are exempt from the District of Columbia’s recordation tax, reasoning that “to hold otherwise would contravene Supreme Court case law”—namely, Bismarck—“interpreting language [that was] virtually identical” (see Hager v Federal Natl. Mtge. Assn.,
In relying on Bismarck as “the on-point comparison for interpreting the statutes at issue,” the District Court judge rejected the notion, also advanced by the State in this case, that the United States Supreme Court’s decision in United States v Wells Fargo Bank (
“[bjecause the Wells Fargo provision exempted property from taxation, and because an excise tax like the estate tax is imposed on something other than the property itself, the statutory provision did not reach the estate tax. In other words, the exemption at issue did not match up with the tax imposed.
“The statutory provisions at issue in this case, on the other hand, exempt an entity from all taxation. A recordation tax for a deed [that Fannie Mae or Freddie Mac] records is indisputably a tax on that entity. It thus falls within the statutory exemption. An example illustrates the difference: if the statute had provided that ‘Fannie Mae’s real property shall be exempt from all taxation,’ Fannie Mae would still be liable for the recordation tax because it is a tax on the real property’s transfer rather than on the real property. But because the statute instead exempts Fannie Mae itself, neither its property nor its activities can be taxed” (882 F Supp 2d at 112 ).
Finally, the District Court judge remarked that, accepting the argument that Fannie Mae and Freddie Mac were subject to the District of Columbia’s recordation tax “would lead to near absurdity” as “[i]t would leave the statutory provisions, so sweeping in their language, virtually meaningless: Fannie Mae and Freddie Mac would be free only from capitations and taxes upon personal property,” since only these two taxes and a tax upon real property “are definitely known to be direct” (
IL
While pledging fidelity to the statutory text, the majority avoids
The majority then attaches great significance to Congress’s neglect to amend
Finally, the majority “decline[s] to follow Hager and Hertel ... in light of our own prior holdings as to the nature of the MRT” in Matter of S.S. Silberblatt, Inc. v Tax Commn. of State of N.Y. (
In sum,
Chief Judge Lippman and Judges Ciparick, Pigott and Jones concur with Judge Graffeo; Judge Eead dissents and votes to reverse in a separate opinion; Judge Smith taking no part.
Order modified, etc.