In a tax dispute that could be far-reaching, the U.S. Department of Justice told the New York Court of Appeals, the state's highest appellate court, it believes that federally chartered credit unions should be exempt from the state's Mortgage Recording Tax because of the provisions of the Federal CU Act which exempt federal credit unions from almost all state taxes.
The filing by Preet Bharara, U.S. Attorney for the Southern District of New York in a suit brought by Hudson Valley FCU challenging the state levy, is significant because it indicates even if the state's High Court rules against the credit unions the dispute is likely to find its way to the federal courts, which are more amenable to issues surrounding federal immunity. Dale Lois, a Fishkill, N.Y., lawyer representing the $3 billion Poughkeepsie credit union in the case, said yesterday they might challenge an adverse decision to the U.S. Supreme Court.
In an amicus brief filed on behalf of the one-time IBM employees credit union, the U.S. Attorney says the Federal CU Act expressly immunizes federally chartered credit unions from all state taxes except real property or tangible personal property tax and because the state mortgage tax is neither it cannot be levied against Hudson Valley FCU.
The stakes in the case are enormous for not only New York, which stands to lose tens of millions of dollars in tax revenues on mortgages issued by the state's 410 federally chartered credit unions, but as many as a dozen other states which have similar taxes on mortgages.
Two lower state courts have rejected the credit union's suit against the New York Department of Taxation and Finance, ruling the mortgage recording tax is not a tax on the credit union but on the borrower for the privilege of taking out a mortgage.
But the U.S. Attorney, which asserts the U.S. has an interest in preserving the tax exemptions afforded by Congress, disagrees and says the U.S. Supreme Court has ruled several times that mortgage recording taxes similar to the New York levy are in fact a tax on the mortgage itself, and thus an exempted tax for federally chartered credit unions.
The New York tax charges 50 cents per $100 of debt secured by a mortgage in the state and the lender pays the tax as part of the recording process.
Also entering the legal dispute on behalf of credit unions is the Federal Housing Finance Agency, the federal regulator for Fannie Mae and Freddie Mac, which argues in its brief that federally chartered credit unions should not have to pay the state tax. Both CUNA and NAFCU have also filed briefs in the case.
Hudson Valley Federal first filed the suit in May 2009 seeking a declaration that it and other federal charters are exempt from the levy and asking for more than $3 million in back taxes and interest. The local court, which in New York is known as the Supreme Court, rejected the claim in May 2010, and the appeals court upheld the lower court in June 2011. The Court of Appeals is the state's high appellate court.
Oral arguments in the case are not expected until this fall.
