Our utility company issued a new series of bonds under a new 1975 trust indenture, and as additional collateral, pledged old first-mortgage bonds that were originally authorized under a pre-existing 1951 mortgage indenture -- but no NEW money was advanced under that old 1951 mortgage. We already paid mortgage recording tax on the new 1975 bonds. Do we owe additional mortgage recording tax on the old first-mortgage bonds pledged as collateral?

Plain-English summary

Long Island Lighting Company (Lilco) had, since 1951, issued 26 series of "first mortgage bonds" under an original Indenture of Mortgage and Deed of Trust with Citibank as trustee, securing over $800 million of debt. By 1975, Lilco wanted a new financing vehicle: it executed a brand-new trust indenture (the "1975 Indenture") with a different trustee, Manufacturers Hanover Trust Company, to issue "General and Refunding Bonds" ("general bonds"). Under the 1975 Indenture, Lilco agreed it would no longer issue new first-mortgage bonds for its own use -- the ONLY first-mortgage bonds it would still issue would be pledged with the 1975 trustee as ADDITIONAL collateral security for holders of the new general bonds, capped at the same dollar amount as the general bonds actually issued.

Between 1975 and 1977, Lilco executed five parallel sets of supplements: a supplement to the OLD 1951 first-mortgage indenture (23rd through 27th supplements, authenticated by Citibank and delivered to the 1975 trustee purely as collateral) paired on the same date with a corresponding supplement to the NEW 1975 Indenture (1st through 5th supplements, securing the actual new general bonds issued to the public). Lilco paid mortgage recording tax -- roughly $3.1 million total across the five dates -- on the 1975 Indenture supplements, since those secured the real new advances. It paid NO tax on the paired first-mortgage supplements, reasoning that those merely certified and pledged already-existing borrowing authority as collateral, without any new money being advanced under the OLD 1951 mortgage itself.

Citibank, as trustee under the original 1951 mortgage, sought confirmation that no further tax was owed on those first-mortgage supplements. It flagged the specific legal risk: Tax Law § 259 taxes a "further amount... advanced under the original mortgage, or [that] shall accrue thereon or become secured thereby," and expressly deems "the certification of any bond or bonds by the trust mortgagee" to BE such an advance -- meaning the very act of Citibank certifying the new first-mortgage bond supplements could, on its face, look like a taxable event under the old mortgage.

The Department agreed no additional tax was due. Section 259 taxes further amounts advanced, accrued, or secured under the ORIGINAL mortgage -- and here, "the sole amount advanced in these transactions was advanced under the 1975 Indenture," on which tax was already paid. Nothing new was advanced, accrued, or became secured under the 1951 first mortgage itself; the old bonds were simply repurposed as a collateral pledge for the new financing, not a fresh extension of credit under the old instrument. That conclusion tracked a prior Declaratory Ruling (78-01, issued January 31, 1978) reaching the same result on similar facts.

What this means for you

Public utilities and large corporate borrowers refinancing through new trust indentures

If you're layering a new bond financing on top of an existing mortgage structure -- pledging old, already-authorized mortgage bonds as ADDITIONAL collateral for new bonds issued under a separate, newly recorded indenture -- pledging the old bonds as collateral doesn't by itself trigger a second round of mortgage recording tax, as long as no new money is actually advanced under the OLD mortgage.

Bond trustees under legacy corporate trust mortgages

Watch the specific mechanics of Tax Law § 259: it deems a trust mortgagee's CERTIFICATION of bonds to be a taxable "advance," which can look alarming when you're simply certifying old bonds for a collateral-pledge purpose. The controlling question is whether real NEW money was advanced under that particular mortgage, not the formal act of certification alone.

Bond counsel structuring multi-tier collateral financings

This ruling and the Declaratory Ruling 78-01 it cites establish a workable template for "old bonds as collateral for new bonds" refinancing structures, letting you avoid double taxation on the same underlying economics as long as the new advance is properly taxed once, under the new instrument.

Common questions

Q: Doesn't certifying new bonds under a corporate trust mortgage automatically trigger mortgage recording tax under Section 259?
A: Normally yes, since § 259 deems a trust mortgagee's bond certification to be an "advance" -- but only if it corresponds to a genuine new advance, accrual, or securing of debt under THAT mortgage. Here, no new money was advanced under the 1951 mortgage itself.

Q: Why wasn't Lilco taxed twice on the same underlying financing?
A: Because the real new money was advanced and already taxed under the separate 1975 Indenture; the paired first-mortgage supplements were simply a collateral pledge of already-authorized (and previously taxed, when originally issued) bonds, not a second source of new debt.

Q: Is this a novel legal theory, or an established rule?
A: Established -- the Department's conclusion aligns with a prior 1978 Declaratory Ruling (78-01) that reached the same result on similar facts, so the reasoning wasn't new even in 1981.

Q: Can another utility or corporate borrower rely on this specific ruling?
A: No. It binds the Department only as to this petitioner (Citibank as trustee) and these facts, though the underlying § 259 "further advance" principle is of general application.

Citations and references

Statutes:

• Tax Law § 259 (additional mortgage recording tax on further amounts advanced, accrued, or secured under an original corporate trust mortgage; deeming a trust mortgagee's bond certification to be such an advance)

Prior authority cited:

• Declaratory Ruling 78-01 (State Tax Commission, January 31, 1978) (same conclusion on similar collateral-pledge facts)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a81_2m.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-81 (2) M
Mortgage Tax
September 8, 1981

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M810107A

On January 7, 1981, a Petition for Advisory Opinion was received from Citibank, N.A., (as
Trustee), c/o Eric Parets, Assistant Vice President, 5 Hanover Square, New York, New York.
The issue raised is whether the issuance of certain series of bonds under an existing recorded
Indenture of Mortgage and Deed of Trust, as additional collateral security, to series of bonds issued
under a new trust indenture duly recorded covering the same property upon which mortgage
recording tax was paid pursuant to Section 259 of the Tax Law, results in further mortgage recording
tax due on the bonds given as additional collateral security.
By an Indenture of Mortgage and Deed of Trust ("the first mortgage"), dated September 1,
1951, executed by Long Island Lighting Company ("Lilco") to City Bank Farmers Trust Company,
Trusteed Citibank, N.A., successor Trustee ("Citibank"), Lilco has issued series of bonds from time
to time.
Prior to June 1, 1975, Lilco executed 22 supplemental indentures creating 26 series of first
mortgage bonds securing indebtedness of $812,000,000. As of June 1, 1975, 23 series of bonds were
outstanding, securing $745,000,000.
On June 1, 1975, Lilco executed to Manufacturers Hanover Trust Company, Trusteed
("MHTC") a new mortgage indenture ("1975 Indenture") providing for the issuance of series of
General and Refunding Bonds ("general bonds"). The 1975 Indenture provides, in part, that Lilco
will not issue any more mortgage bonds under the first mortgage other than first mortgage bonds to
be pledged with MHTC, as Trusteed as additional security for holders of general bonds. These bonds
are to be issued in a principal amount up to but not to exceed the principal amount of general bonds
issued under the 1975 Indenture.
Each of these supplements to the 1951 and 1975 Indentures were recorded in the offices of
the Recording Officers of Nassau, Queens and Suffolk Counties. Mortgage recording tax was paid
to the Recording Officer of Nassau County, that being the County wherein the Indentures were first
recorded, at recording of the supplements to the 1975 Indenture as follows:
On the following dates Lilco issued five series of first bonds under
the 1951 Indenture, which were authenticated by Citibank, and
delivered by Lilco to MHTC as security for a first companion series
of general bonds contemporaneously issued by Lilco and
authenticated by MHTC:
Date

Supplements to
1951 Indenture

Supplements to
1975 Indenture

June 19, 1975

23rd Supplement
$39,000,000

1st Supplement
$80,000,000

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (2) M
Mortgage Tax
September 8, 1981

Sept. 29, 1975

24th Supplement
$44,000,000

2nd Supplement
$90,000,000

June 3, 1976

25th Supplement
$63,000,000

3rd Supplement
$70,000,000

Dec. 2, 1976

26th Supplement
$50,000,000

4th Supplement
$50,000,000

May 5, 1977

27th Supplement
$50,000,000

5th Supplement
$85,000,000

Date of Record

Supplement to
1975 Indenture

Tax Paid

6/19/75
9/29/75
6/3/76
12/2/76
5/5/77

1st
2nd
3rd
4th
5th

$646,055.53
723,894.67
563,029.19
401,063.75
694,654.20

No mortgage recording tax was paid upon the recording of Supplements 23 to 27 to the first
mortgage, which were recorded on even date with the Supplements to the 1975 Indenture.
Section 259 of the Tax Law provides, in pertinent part, that
". . . Whenever a further amount is to be advanced under the original
mortgage, or shall accrue thereon or become secured thereby, the
corporation making such mortgage shall pay the tax on such amount
at or before the time when such amount is to be advanced, accrues or
becomes secured and shall, at the time of paying such tax, file in the
office of the recording officer where such mortgage has been or is
first recorded and with the tax commission a statement, verified by
the secretary, treasurer or other proper officer, of said corporation of
the amount of principal indebtedness to be so advanced, accruing or
becoming secured, and the certification of any bond or bonds by the
trust mortgagee shall be deemed an advance under this article . . . . "
Since the certification of the bonds issued under the first mortgage is deemed an
advance, pursuant to Section 259 of the Tax Law, Citibank, as Trustee, would be
injured if proper mortgage recording tax was not paid upon the recording of
Supplements 23 to 27 to the first mortgage.

-3­
TSB-A-81 (2) M
Mortgage Tax
September 8, 1981

The sole amount advanced in these transactions was advanced under the 1975 Indenture.
Section 259 of the Tax Law provides that tax is payable only when a further amount is advanced,
accrues thereon or becomes secured by a corporate trust mortgage. No further amount was advanced,
accrued thereon or became secured by the first mortgage. Accordingly, no mortgage recording tax
was due with respect to the bonds issued under the first mortgage, as evidenced by Supplements 23
to 27 and pledged as further security for bonds issued under Supplements 1 to 5 to the 1975
Indenture, upon which proper tax was paid. This conclusion is in accord with a Declaratory Ruling
of the State Tax Commission issued on January 31, 1978 (Declaratory Ruling 78-01).

DATED: April 6, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau