Hudson Valley Federal Credit Union v. New York State Department of Taxation & Finance

980 N.E.2d 473, 20 N.Y.3d 1

Opinions

OPINION OF THE COURT

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 (28 Misc 3d 1001 [Sup Ct, NY County 2010]) 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 500 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 “[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., 490 US 844, 851-852 [1989]; United States v Wells Fargo Bank, 485 US 351, 354 [1988]; Hale v State Bd. of Assessment & 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)]; 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 MET, are taxes on “property” covered by the prohibition against state taxation. In the alternative, Hudson Valley contends that the MET 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 § 1768³ (see Pub L 75-416, § 4, 51 US Stat 4 [75th Cong, 2d Sess, Dec. 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 US Stat 1216, 1218 [73rd 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&emdash;the issuance of mortgage loans&emdash;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 US Stat 49 [95th Cong, 1st Sess, Apr. 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. Say. & 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; former Home Owners' Loan Act of 1933 § 4 [c] [Pub L 73-43, 48 US Stat 128, 130]; former Federal Farm Loan Act of 1916 § 26 [Pub L 64-158, 39 US Stat 360, 380]). As we have noted, section 1768 of the FCUA falls to incorporate similar termino1ogy~ 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, § 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 12 USC § 1757; 12 CFR 701.21, 701.35). In 1998, Congress passed the Credit Union Membership Access Act (CUMAA) that enlarged their permissible membership (see Pub L 105-219, § 101, 112 US Stat 913, 914 [105th Cong, 2d Sess, Aug. 7, 1998], amending 12 USC § 1759 [b]). Thereafter, the National Credit Union Administration revised its regulations, making it easier for federal credit unions to qualify for community charters to serve larger geographic territories. According to a recent United States Government Accountability Office study, this has resulted in the dramatic growth in the number of credit unions with community-based charters (see U.S. Government Accountability Office, Report to Chairman, Committee on Ways and Means, House of Representatives, Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements at 10 [GAO-07-29, Nov. 2006] [stating that membership in community-chartered federal credit unions had “nearly tripled” and the assets of those credit unions had “nearly quadrupled” between 2000 and 2006]).⁶

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,⁷ the United States Supreme Court has clarified that constitutional “tax immunity is appropriate in only one circumstance: when the levy falls on the United States itself, or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned” (United States v New Mexico, 455 US 720, 735 [1982]). Federal credit unions are private associations chartered under federal law. Although they are regulated by the National Credit Union Administration—a federal agency—they are wholly owned, funded and managed by their members (see 12 USC §§ 1753, 1759, 1761, 1761b). Members elect credit union boards of directors (see 12 USC § 1761). The directors have a significant amount of autonomy in administering credit unions’ daily operations, including controlling investments, setting the maximum number of share accounts and designating the classes of shares (see 12 USC § 1761b). Further, subject to some limitations contained in the FCUA, boards of directors have the authority to “determine the interest rates on loans [including mortgages], the security[ ] and the maximum amount which may be loaned and provided in lines of credit” (12 USC § 1761b [8]). We therefore do not view federal credit unions as so “closely connected” to the United States Government that they “cannot realistically be viewed as separate entities” with respect to mortgage-lending activities.

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.

Footnotes

1

. Tax Law § 253 (1) reads as follows:

“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.”

2

. The dissent contends that the U.S. Supreme Court’s decision in Federal Land Bank of St. Paul v Bismarck Lumber Co. (314 US 95 [1941]) interpreting the Federal Farm Loan Act of 1916 requires that mortgages issued by federal credit unions should similarly be included in the FCUA. In Bismarck, the Supreme Court held that the Farm Loan Act was written in a manner that allowed the enactment to encompass additional tax exemptions because the use of the word “including” indicated that the list of those exemptions was not exhaustive (id. at 99-100). Since the structure of the FCUA differs, it should not be interpreted to permit courts to add new exemptions beyond those specified. Hence, Bismarck is distinguishable and the dissent’s reliance on it is misplaced.

3

. 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 Cong, 1st Sess at 2 [Aug. 17, 1937]). Because federal credit unions, unlike banks, were not permitted to accept deposits, their share capital represented a higher proportion of their total resources and, therefore, they paid significantly more in taxes (see id.). Congress amended section 1768 in order to level the playing field. Although credit unions soon obtained the authority to accept member deposits, the relevant portion of the statute has remained unaltered.

4

. The Supreme Court held in Laurens that the term “advances” in 12 USC § 1433 is synonymous with “loans” (365 US at 521 n 9).

5

. 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., 882 F Supp 2d 107, 111-112 [D DC 2012]; Hertel v Bank of Am. N.A, 897 F Supp 2d 579, 582, 585 [WD Mich 2012]). We note that at least one other Federal District Court examined the same issue and reached a contrary conclusion (see Oakland County v Federal Hous. Fin. Agency, 871 F Supp 2d 662, 669-670 [ED Mich 2012]). Further, we decline to follow Hager and Hertel in this case in light of our own prior holdings as to the nature of the MET (see Matter of S.S. Silberblatt, Inc. v Tax Commn. of State of N.Y., 5 NY2d 635, 640, 642 [1959]; Franklin Socy. v Bennett, 282 NY 79, 86 [1939]).

6

. 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.

7

. 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, 95 F3d 30, 31 [9th Cir 1996] [holding that federal credit union employees were exempt from the transient occupancy tax applied to their hotel rates], vacated on other grounds 520 US 1261 [1997]; TI Fed. Credit Union v DelBonis, 72 F3d 921, 935 [1st Cir 1995] [rejecting an attempt to discharge, through bankruptcy, certain student loan debt held by a federal credit union]; United States v State of Michigan, 851 F2d 803, 807 [6th Cir 1988] [concluding that federal credit unions, as purchasers, were constitutionally immune from state sales tax]).