ALBANY, N.Y. – The state’s highest court will open its fall session today with lawyers for Hudson Valley FCU arguing that federally chartered credit unions should be exempt from the state’s mortgage recording tax, and the federal government defense of the credit union case could prove to be the deciding factor.

The U.S. Department of Justice has submitted a brief arguing that the Federal CU Act exempts all federal credit unions from state taxes. According to the Justice Department, the federal government has an interest in the proper interpretation of the federal law and in preserving the tax exemptions afforded federal credit unions by Congress.

“Under the clear terms of the FCUA,” argues the federal government, “because the MRT is not a real property or tangible personal property tax – the only two taxes permitted under the FCUA – it cannot be levied against federal credit unions such as Hudson Valley.”

The argument by the credit unions and its allies, including Fannie Mae, CUNA and NAFCU, have been rejected by two lower courts which ruled that the state levy is a tax on the act of the borrower recording a deed and not on the credit union.

Joining the case on the other side are the Association of Towns of the State of New York, which represents the state’s 600 cities and towns, and the American Bankers Association, which argues an exemption from the state tax would put credit unions at a significant advantage to banks and other mortgage lenders.

The Justice Department argues that the lower courts erred when they ruled the mortgage tax is not a tax on credit unions. According to the brief, the U.S. Supreme Court has ruled that mortgage recording taxes, such as the New York levy, are taxes on the mortgage. It follows, then, according to the Justice lawyers, that the New York tax is a tax on the property of a credit union and thus exempt under the Federal CU Act.

Eli Mattioli, an attorney for K&L Gates, who is representing the $3.5 billion former IBM employees’ credit union in today’s oral argument before the Court of Appeals for the State of New York, said they hope to convince the state high court that the lower panels erred.

While the credit union is seeking some $2 million in back taxes in the case, the stakes in the tax battle are enormous because a ruling for the credit union would mean that hundreds of federally chartered New York credit unions are exempt from tens of millions of mortgage taxes they pay annually. What’s more, lawyers for the Poughkeepsie-based credit union have indicated they plan to bring similar challenges to other states if they are victorious in New York.

A defeat in the state court could also precipitate a challenge in the federal courts, which are usually more amenable to cases brought challenging federal authority.

In this afternoon’s oral arguments, the credit union’s attorney will be given ten minutes before the state’s justices, who will grill them on the facts of their case, as will the state’s assistant attorney general, who is representing the State Department of Taxation and Finance, the main defendant in the case.

A decision by the high court in the next 30 to 60 days, according to Hudson Valley’s Mattioli.




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