Fights over taxes usually find credit unions and the U.S.government on opposite sides. But the Justice Department has takenthe unusual step of filing briefs in a tax case on the side of acredit union in its battle with its state tax authority.

The Poughkeepsie, N.Y.-based $2.7 billion Hudson Valley FederalCredit Union has taken the State of New York to court over a taxthat the state applies to recording mortgages. The credit unioncontends that as a federally chartered credit union, it should nothave to pay the state tax. The state has countered with theobservation that the CU has not yet exhausted its administrativeremedies to the tax and argued that the tax is not on the creditunion but on the mortgage borrower.

Oral arguments before the Supreme Court of the State of New Yorkhave been scheduled for April 13.

“We consider our case very strong, and we are hopeful for apositive outcome,” said Dale Lois, partner in the law firm ofQuartararo & Lois, the credit union's law firm headquartered inFishkill, N.Y. “Either at this level or certainly on appeal.”

Lois considered the case so strong because the credit union haspointed to what he said is a very clear set of precedentsrecognizing federally chartered credit unions as instrumentalitiesof the federal government. He also noted that credit unions weremade tax exempt as part of the government's effort to bringaffordable financial products and services to lower andmiddle-income people.

Since part of the point of making credit unions tax exempt wasto lower the cost of financial products like mortgages, Loisargued, its immaterial whether the borrower pays the mortgagerecording tax directly or whether the credit union pays it for themor folds the cost into the cost of the mortgage.

In its filing in the case, the Justice Department agreed withthe CU. Federally chartered credit unions are “instrumentalities ofthe United States and may not be taxed absent a specific waiver,”the department argued in its filing. “Therefore, unless the Stateof New York can demonstrate that Congress has specifically waivedimmunity for the mortgage tax at issue, the tax is barred by thedoctrine of sovereign immunity,” it added.

Although it may seem like this is a case primarily overprinciple-are federally chartered credit unions in New York subjectto state mortgage recording tax or not-the filings reveal that agood sum of money is at stake as well. Although Lois indicated thecost of the tax is difficult to quantify from year to year, ifHudson Valley wins the case it stands to recoup more than $1.8million in previously filed mortgage recording taxes.

For its part, New York attacked the notion that federallychartered credit unions are instrumentalities of the federalgovernment for purposes of these taxes.

“In order for plaintiff to be a federal instrumentality, theactivity taxed must be 'so intimately connected with the exerciseof a power or the performance of a duty by the government thattaxation of it would be a direct interference with the functions ofgovernment itself,' the state argued citing a case called UnitedStates vs. New Mexico. “Where this is true, under the supremacyclause, the federal instrumentality is entitled to an impliedimmunity from the state taxation challenged,” the statecontended.

But the Justice Department cited McCullough vs. Maryland andother cases to argue for the “longstanding rule that property ofthe United States, its agencies and its instrumentalities isconstitutionally immune from taxation absent express congressionalconsent to the contrary.”

CUNA has also weighed in on the case along with the Credit UnionAssociation of New York drawn, its filing read, by the largerquestions that the case raised.

When arguing in favor of Hudson Valley being consider a federalinstrumentality, CUNA cited case where the State of North Dakotahad tried to impose a sales tax on a federally chartered land bank,an approach which CUNA suggested could render almost everythingfederally chartered banks or credit unions do subject to statetaxes.

NAFCU also weighed in on the matter, arguing that credit unions'activities met the standard for things having a “governmentalpurpose.”

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