Opinion
Argued June 4, 1923
Decided July 13, 1923
Nathan L. Miller and H. Bartow Farr for appellant.
Carl Sherman, Attorney-General ( C.T. Dawes of counsel), for respondents.
The statute imposes upon every domestic corporation, and also upon every foreign corporation doing business within the state, a franchise tax to be computed upon the basis of its entire net income, which income is presumably the same as the entire net income "upon which such corporation is required to pay a tax to the United States" (Tax Law [Cons. Laws, ch. 60], art. 9a, § 209). In the computation of net income, the United States permits deduction of "amounts received as dividends from a corporation taxable under this title upon its net income" (U.S. Revenue Act of 1918, § 234). The state tax commission and the Appellate Division have disallowed a like deduction under our statute. The question is whether the disallowance is to be upheld.
We find it unnecessary in answering this question, to determine broadly that the meaning of "entire net income" under our statute is unaffected by the definition in the federal act of the same words. We think it enough to say that the statute manifests an intention to disallow this particular deduction, whether others are allowed or not. That conclusion follows, we think, inevitably from section 214 of the act (Tax Law, art. 9a) as successively amended (L. 1917, ch. 726; L. 1918, chs. 271, 276, 292, 419; L. 1919, chs. 138, 629; L. 1920, ch. 640; L. 1921, ch. 705), and from our decision in People ex rel. Alpha Portland Cement Co. v. Knapp ( 230 N.Y. 48).
Section 214 prescribes the rule for allocating income between this state and another when business is conducted both here and elsewhere. It establishes a proportion, the ratio of net income earned here to the entire net income being the same as the ratio of certain assets which have their situs here to the like assets everywhere. The statute as first enacted, and as it stood till 1921, included in the latter ratio the shares in other corporations, owned by the corporation to be taxed, subject, however, to an arbitrary limitation of ten per cent of a prescribed maximum. An amendment adopted in 1921 (L. 1921, ch. 705) struck out the limitation. The legislature surely did not mean that stocks in other corporations should be considered in allocating the income between one state and another, and that dividends earned upon the stocks should be disregarded in the computation of the income by which the tax was to be measured.
People ex rel. Alpha Portland Cement Co. v. Knapp ( supra) is, indeed, decisive of the controversy. There a tax had been laid upon a foreign corporation for the privilege of doing business in New York. Its income included dividends from other corporations. The state tax commission in allocating this income to its source followed the command of the statute and limited the shares without the state to the prescribed percentage of ten per cent. We held this limitation unconstitutional in its application to foreign corporations. We said that the state could not include the total dividends in estimating income and reject an arbitrary percentage of the shares in allocating income to the situs of its origin. Of course, if dividends were to be excluded from the first ratio, the shares might be excluded from the second. We assumed without discussion that dividends were income. We refused in the ascertainment of the situs to segregate the shares in obedience to an arbitrary formula.
The amendment of 1921 (L. 1921, ch. 705) shows that we did not misread the intention of the legislature in holding that dividends were to be included in the income. Our decision in the Alpha Portland Cement case was accepted as correctly interpreting the statute, and the final term of the proportion was changed by substituting all the stocks for an unvarying percentage. Here, then, we may find a plain recognition by the legislature of the propriety of the holding that there was to be no deduction of the dividends, and an amendment of the rule of allocation so as to continue to include them.
We are confirmed in this conclusion when we remember that the allowance permitted by the federal act would result, if extended to this act, in withdrawing large sums of money from taxation by an unreasonable and arbitrary exemption. The government of the nation might well exclude dividends declared by corporations which had already paid to that government a tax upon their income. The state would have no reason for permitting a like exclusion unless the corporations declaring them were taxable by the state.
The order should be affirmed with costs.
HISCOCK, Ch. J., HOGAN, CARDOZO, POUND, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.
Order affirmed.