Court Opinion

ID: 5487718
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:18:52.659196+00
Date Added: 2024-06-11T08:33:42.653664
License: Public Domain

Read, J. (dissenting).
The Federal Credit Union Act (the FCUA) (12 USC §§ 1751-1795k) 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” a government “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” (see 12 USC § 1768 [emphases added]). I interpret this provision to mean what it plainly says: a federal credit union is exempt from all taxation except that upon real and tangible personal property.
New York’s mortgage recording tax (MET) (Tax Law § 253) is an excise tax on the privilege of transferring title, not a tax on the real property subject to the mortgage issued to secure a loan. Further, the MET is not a tax on tangible personal property, such as portable machinery and equipment, tools, vehicles or other assets (other than land or buildings) with a physical form. Because the MET is not a tax on real or tangible personal property—the only two carve-outs from the FCUA’s exemption of federal credit unions from “all taxation”—New York may not impose the MET on plaintiff Hudson Valley Federal Credit Union (Hudson Valley).
*14L
The United States Supreme Court’s decision in Federal Land Bank of St. Paul v Bismarck Lumber Co. (314 US 95 [1941]) confirms the correctness of this result. The Court there held that a statutory provision exempting a federal entity from all taxation does not allow the courts to create exceptions different or broader than those expressly stated by Congress. The statute considered in Bismarck, section 26 of the Federal Farm Loan Act, provided that
“every Federal land bank . . . , including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank . . . First mortgages executed to Federal land banks, or to joint stock land banks, and farm loan bonds issued under the provisions of this Act, shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation” (Pub L 64-158, § 26, 39 US Stat 360, 380 [emphases added]; see 12 USC former §§ 931-933).
At issue in Bismarck was whether building materials purchased by a federal land bank for use in the repair and improvement of foreclosed properties were subject to state sales tax. Like the MRT, a sales tax is an excise tax. In upholding imposition of the state sales tax, the North Dakota Supreme Court concluded that because section 26 contained specific exemptions for “capital and reserve or surplus therein and the income derived therefrom,” all other taxes were authorized except for taxes on real estate (see Federal Land Bank of St. Paul v Bismarck Lbr. Co., 70 ND 607, 627-628, 297 NW 42, 52 [1941]). This is the same reasoning employed explicitly by the Appellate Division and implicitly by the majority here (see Hudson Val. Fed. Credit Union v New York State Dept. of Taxation & Fin., 85 AD3d 415, 417 [1st Dept 2011]; majority op at 8-9).
The Supreme Court reversed, concluding that “the broad exemption accorded [by section 26] to ‘every Federal land bank’ ” barred the state from imposing any tax of any kind, unless it fell within the express statutory exception for real estate taxes (see Bismarck, 314 US at 100). The Court observed that *15“[t]he unqualified term ‘taxation’ used in section 26 clearly encompasse[d the sales tax] within its scope,” and thus afforded the entity an important “protection” that could not “be frittered away” (see id. at 99). Further, “[i]n reaching an opposite conclusion,” the North Dakota Supreme Court “ignored the plain language, ‘That every Federal land bank . . . shall be exempt from Federal, State, municipal, and local taxation’ ” (id.).
The Court emphasized that section 26’s list of exempt items— i.e., “including the capital and reserve or surplus therein and the income derived therefrom”—simply illustrated and substantiated the breadth of the entity’s general exemption from all taxes except for taxes on real estate. It did not limit or modify the general exemption (id. at 100 [“(T)he term ‘including’ is not one of all-embracing definition, but connotes simply an illustrative application of the general principle”]). Indeed, as the Court explained, “[i]f the broad exemption accorded to ‘every Federal land bank’ were limited to the specific illustrations mentioned in the participial phrase introduced by ‘including’, there would have been no necessity to except from the purview of [the statute] the real estate held by the land banks” (id.).
Finally, the Court noted that “[t]he additional exemptions granted to farm loan bonds and first mortgages executed to the land banks” did not suggest a contrary result: “The bonds [might] be held by private persons, and, of course, the general exemption of section 26 would not extend to them. Likewise the general exemption would protect mortgages executed to the land banks and held by them, but it would not survive a transfer” (id. [emphasis added]). In short, the general exemption from taxation for the federal land banks included mortgages “executed to .. . and held by” the entity, although the word “mortgages” did not appear in the “illustrative application of the general principle” (cf. majority op at 8 [ascribing significance to whether the word “mortgages” appears in illustrative lists in federal statutes]).
Thus, Bismarck establishes that (1) a statutory exemption of an entity from taxation protects that entity and its transactions from all taxes for which it would otherwise be liable; (2) a clause in such a statute listing specific items that are exempt from taxation is illustrative, not limiting; and (3) exceptions to the grant of immunity from taxation must be stated expressly, not implied by the courts. These principles control the outcome of this case. Section 122 of the FCUA (12 USC § 1768) grants federal credit *16unions immunity from “all taxation.” Although the FCUA does not use the word “including,” the list of exemptions in the FCUA is either illustrative, or in addition to, the exemption of federal credit unions themselves, and in either case, the exemption for the entity itself is sufficient under Bismarck. Because the FCUA explicitly excepts only taxation upon real and tangible personal property, and the MET does not fall into either category, collection of the MET from plaintiff Hudson Valley is foreclosed (see Bismarck, 314 US at 99; see also California Credit Union League v City of Anaheim, 95 F3d 30, 31-32 [9th Cir 1996] [employees of federal credit unions immune under section 1768 from city’s transient occupancy tax while in the city on business], vacated on other grounds 520 US 1261 [1997], on remand 190 F3d 997 [9th Cir 1999]; United States v State of Michigan, 851 F2d 803, 807 [6th Cir 1988] [federal credit unions held to be immune from portions of state sales tax]).
Applying Bismarck, the United States District Court for the District of Columbia recently held that Fannie Mae and Freddie Mac are exempt from the District of Columbia’s recordation tax, reasoning that “to hold otherwise would contravene Supreme Court case law”—namely, Bismarck—“interpreting language [that was] virtually identical” (see Hager v Federal Natl. Mtge. Assn., 882 F Supp 2d 107, 112 [D DC 2012]; accord Hertel v Bank of Am. N.A., 897 F Supp 2d 579 [WD Mich 2012] [Fannie Mae and Freddie Mac are exempt from a Michigan recording tax]; but see Oakland County v Federal Hous. Fin. Agency, 871 F Supp 2d 662 [ED Mich 2012] [Fannie Mae and Freddie Mac are not exempt from Michigan’s state and local real estate transfer taxes]). The provisions at issue in Hager—12 USC § 1723a (c) (2) (Fannie Mae) and 12 USC § 1452 (e) (Freddie Mac)—are likewise “virtually identical” to 12 USC § 1768. All three provisions exempt federally chartered entities from “all taxation,” with specified exceptions for real property (Fannie Mae and Freddie Mac) and real and tangible personal property (federal credit unions).
In relying on Bismarck as “the on-point comparison for interpreting the statutes at issue,” the District Court judge rejected the notion, also advanced by the State in this case, that the United States Supreme Court’s decision in United States v Wells Fargo Bank (485 US 351 [1988]) required him to interpret “all taxation” to mean only “all direct taxation,” and so *17“compelled] the conclusion that Fannie Mae and Freddie Mac are subject to excise taxes,” as was held in Oakland County (Hager, 882 F Supp 2d at 112-113). But as the judge pointed out, rather than construing an exemption that applied to a particular entity, the Court in Wells Fargo examined how a statutory exemption of certain property—“Project Notes”—from “all taxation” affected the computation of a federal estate tax, an excise tax (like the sales tax in Bismarck or the MRT here). He explained that
“[bjecause the Wells Fargo provision exempted property from taxation, and because an excise tax like the estate tax is imposed on something other than the property itself, the statutory provision did not reach the estate tax. In other words, the exemption at issue did not match up with the tax imposed.
“The statutory provisions at issue in this case, on the other hand, exempt an entity from all taxation. A recordation tax for a deed [that Fannie Mae or Freddie Mac] records is indisputably a tax on that entity. It thus falls within the statutory exemption. An example illustrates the difference: if the statute had provided that ‘Fannie Mae’s real property shall be exempt from all taxation,’ Fannie Mae would still be liable for the recordation tax because it is a tax on the real property’s transfer rather than on the real property. But because the statute instead exempts Fannie Mae itself, neither its property nor its activities can be taxed” (882 F Supp 2d at 112).
Finally, the District Court judge remarked that, accepting the argument that Fannie Mae and Freddie Mac were subject to the District of Columbia’s recordation tax “would lead to near absurdity” as “[i]t would leave the statutory provisions, so sweeping in their language, virtually meaningless: Fannie Mae and Freddie Mac would be free only from capitations and taxes upon personal property,” since only these two taxes and a tax upon real property “are definitely known to be direct” (882 F Supp 2d at 113 [internal quotation marks and citations omitted]). He commented that “[i]f that were all Congress meant to accomplish, surely it would have done so with a narrowly *18phrased provision rather than the sweeping ‘all taxation’ formulation it chose” (882 F Supp 2d at 113).
IL
While pledging fidelity to the statutory text, the majority avoids section 1768’s unambiguous meaning in several ways. First, as already noted, the majority emphasizes the absence of the word “mortgages” in section 1768 because “in other contexts, when Congress has intended to immunize ‘mortgages’ of federally chartered lending entities from state taxation, it has done so explicitly” (majority op at 8). This statement directly contradicts Bismarck, which makes clear that where an entity is exempt from all taxation, an illustrative list does not limit or modify this general exemption. And of course, as the majority correctly points out, the FCUA did not authorize federal credit unions to offer residential mortgages until 1977 whereas the exemption set out in section 1768 was added to the FCUA long before, in 1937 (id. at 9-10).
The majority then attaches great significance to Congress’s neglect to amend section 1768 in 1977 so as “to specifically include ‘mortgages,’ [or to] otherwise articulate an intent to include mortgages within the definition of the ‘property’ exempt from state taxation” (id. at 10). This gets it exactly backwards, given Bismarck. That is, since section 1768 exempts federal credit unions from all state taxes except those imposed upon real and tangible personal property, Congress did not need to add the word “mortgages.” Rather, Congress would have to have created a third exception to cover taxes on mortgages and/or the transfer of real property in order to remove such taxes from the general exemption for “all taxation now or hereafter imposed” (emphasis added). Congress did not do this, and it is not for the courts to infer an additional exception.
Finally, the majority “decline[s] to follow Hager and Hertel ... in light of our own prior holdings as to the nature of the MRT” in Matter of S.S. Silberblatt, Inc. v Tax Commn. of State of N.Y. (5 NY2d 635 [1959]) and Franklin Socy. v Bennett (282 NY 79 [1939]) (majority op at 11 n 5). We held in both cases that the MRT is not a property tax; rather it is “a tax on the privilege of recording the mortgage” (Silberblatt, 5 NY2d at 642), a species of excise tax (Franklin Socy., 282 NY at 86). But in determining whether a federal statutory exemption precludes a particular form of state taxation, the characterization of the *19tax is a question of federal, not state, law (see First Agricultural Nat. Bank of Berkshire Cty. v State Tax Comm’n, 392 US 339, 347 [1968]; see also Federal Land Bank of New Orleans v Crosland, 261 US 374, 378 [1923] [noting that the Supreme Court was not bound by the Alabama Supreme Court’s characterization of that state’s mortgage recording tax for purposes of determining whether a first mortgage was exempt from taxation under the Federal Farm Loan Act]). And the Supreme Court has held that a state mortgage recording tax is a tax on the mortgage (see Crosland, 261 US at 378-379; Pittman v Home Owners’ Loan Corp., 308 US 21, 31 [1939]).
In sum, 12 USC § 1768 exempts federal credit unions from all state taxation with the exception of taxes on real and tangible personal property, and the MET is neither; therefore, plaintiff Hudson Valley, a federal credit union, is not subject to the MET. The statute’s text and federal case law, including Supreme Court precedent, call for this result. Accordingly, I respectfully dissent.
Chief Judge Lippman and Judges Ciparick, Pigott and Jones concur with Judge Graffeo; Judge Eead dissents and votes to reverse in a separate opinion; Judge Smith taking no part.
Order modified, etc.