TAX NEWS - JUNE 2010

US Tax: Hudson Valley Federal Credit union loses Round 1 of tax case

by Christian Livermore, 03 June 2010 -- A local credit union has lost round one of a lawsuit it filed claiming it is exempt from mortgage recording tax.

State Supreme Court Justice Judith Gische dismissed Hudson Valley Federal Credit Union's claim that it is exempt from taxation for recording mortgages, citing previous state appeals court rulings that found the tax is allowed because it is not a tax on property, but an excise tax for the privilege of recording a mortgage.

The credit union plans to appeal the ruling to the state Supreme Court Appellate Division.

Dale Lois, a partner in Quartararo & Lois, the Fishkill firm that represents the credit union, was "not entirely unhappy" with the judge's ruling because it knocked down the state's other arguments — that the credit union had to first exhaust administrative remedies before resorting to the courts and that the credit union did not have the burden of the tax because it could pass it on to members.

"The judge ruled against that because, either way, Hudson Valley (Credit Union) was responsible for it, and in any case, it increased the cost of borrowing, which is exactly what the Credit Union Act was meant to prevent," Lois said.

The credit union filed the lawsuit on May 12, 2009, saying the act that created federal credit unions prohibits such taxes on them so that they can offer inexpensive loans to members.

In her ruling, the judge noted that the U.S. Supreme Court found in two separate cases that other states could not collect mortgage recording taxes from other federally created institutions.

Even so, Gische wrote that she felt constrained by the New York State Court of Appeals, which has ruled that mortgage recording taxes on credit unions are allowed.

At stake are millions of dollars in mortgage recording taxes collected each year from credit unions and their customers.

Meanwhile, a separate, federal class-action lawsuit is still pending against the credit union by a group of borrowers seeking refunds on mortgage recording taxes they paid. The borrowers also cited the 1934 act creating credit unions.