Summary
In People ex rel. Standard Oil Company v. Law, 237 N.Y. 142, it was held as a matter of statutory construction that the "entire net income" specified by the act then in force was gross income as defined by the applicable provisions of the federal income tax law, less specified deductions, and that consequently income from state and municipal bonds and some federal bonds was not included in the measure of the tax.
Summary of this case from Educational Films Corp. v. WardOpinion
Argued October 19, 1923
Decided December 4, 1923
Robert E. Whalen, Peter M. Speer and Courtland Palmer for relator, appellant and respondent. Dudley F. Sicher for A.C. Israel Co., Inc., amicus curiæ.
Eustace Seligman, amicus curiæ. Carl Sherman, Attorney-General ( C.T. Dawes of counsel), for defendants, respondents and appellants.
In 1917 a tax was imposed upon corporations for the privilege of exercising their franchises and doing business within this state. It was based upon their net income, "upon which income such corporation is required to pay a tax to the United States." (Laws 1917, chap. 726, sec. 209.) We, therefore, necessarily accepted the definitions of "gross" and "net" income contained in the federal statute, purely arbitrary as those definitions were. It was soon seen, however, that no opportunity was given for a hearing to the taxpayer here, before the tax was imposed upon it, and during the next year the law was amended. The tax was still based upon net income, but now such income was only "presumably the same as the income upon which such corporation is required to pay a tax to the United States." The taxpayer was to report to the tax commission its return as made to the national government but if that return was claimed to be inaccurate it might be heard. So there might be correction for fraud, evasion or error in the return. (Laws of 1918, chap. 276.)
In the statute there was no definition of "net income." The bare words were used and there was a reference to the federal law. So we held that its definition as contained in that law was adopted by our legislature. The commission was, because of the amendment, "free to fix, from the return and any other information, the true and correct amount of the net income, but not to change the nature or definition of it." ( People ex rel. Barcalo Mfg. Co. v. Knapp, 227 N.Y. 64, 71.) Taking the definition of net income contained in the federal statute our legislature also took the like definition of "gross income" therein contained. The one proposition involves the other.
As defined by the Federal Income Tax Law, "gross income" includes all gains, profits or income received except interest on state and municipal bonds; on certain described obligations of the United States and on certain obligations issued under its authority. (Sec. 213, a and b.) "Net income" is gross income less business expenses and certain other items that might also be deducted. (Sections 232, 233.) After "net income" was so determined, some credits were allowed before the tax was imposed. In the case of corporations these were interest on some obligations of the United States, the amount paid during the year for war and excess profits taxes, and also $2,000. (Sec. 236.)
The question then arose whether in this state such credits should or should not be deducted before we fixed the "net income" which was to be the basis of our tax. We held that no deduction should be made. Having adopted the federal definition of "net income" the meaning of these words was fixed. In defining net income the United States made no reference to such credits. After fixing what constituted "net income" that government might or might not allow further deductions before the tax was stated. Whether it did or did not the definition of "net income" was not affected. ( People ex rel. Barcalo Mfg. Co. v. Knapp, supra.)
Again our statute was amended. Carefully, wherever mentioned, the term "net income" was changed to "entire net income." And for the first time the legislature, feeling perhaps as had we that reference to a foreign statute for a definition was unsatisfactory, gave its own definition to the words it used. "The term `entire net income' means the total net income before any deductions have been made for taxes paid or to be paid to the government of the United States on either profits or net income or for any losses sustained by the corporation in other fiscal or calendar years whether deducted by the government of the United States or not." (L. 1919, ch. 628, sec. 208) No word was said as to the equally essential phrase "gross income." Evidently the definition of the federal statute which we had held to have been adopted by our own statute was thought to be satisfactory.
Turning, therefore, to the words "entire net income" and to their definition, what was the intent of the legislature? It must have supposed that the use of the words "entire" and "total" had some significance. It must have supposed that the adoption of the definition was of some importance. It knew that the question as to the credits allowed under the federal act had arisen. It may well have desired to make less arbitrary the definition of the words "net income" yet it did not desire that this basis for the tax should be reduced by subtracting from it certain taxes paid to the United States and losses for other calendar or fiscal years. It may also have desired to clarify the situation as to dividends received from other corporations. ( People ex rel. Northern Finance Corp. v. Law, 236 N.Y. 286.) As to these we had already failed to follow the United States definition.
The idea was to replace the federal definition of "net income" by one of our own — one having, with the two exceptions specified and those two only, a meaning generally understood. Net income is gross income less proper deductions, a rule that may be readily applied by the commission and by the courts.
This conclusion is not inconsistent with other provisions of the statute. The corporation is to pay a tax measured by its entire net income which is presumably the same as the entire net income reported to the United States (Sec. 209) and it is to make a report of its return of such income to the United States. (Sec. 211.) Ordinarily this presumption would be correct. Gross income would include all proper receipts except interest on certain tax free bonds. (Fed. Inc. Tax Law, § 213.) From that would be deducted under the federal law most business charges. (§ 234.) Generally, therefore, the results would be the same. This is all that "presumably" now means.
In brief the present rule should be stated as follows: Take the gross income as defined by the federal statute. Deduct from it proper business charges except the United States taxes specified and losses of other fiscal years. The result is the entire net income as intended by our statute.
If this is so the result reached below is not wholly correct. As there fixed there was included in gross income interest on bonds of the United States and also on bonds of New York and various political subdivisions. The interest on the United States bonds should have been included unless they came within the exception mentioned in subdivision 4 of section 213b of the federal statute. It does not appear that they do. Otherwise as to the other interest. It forms no part of the gross income and should not be considered. As to the foreign taxes they were a proper business expense to be deducted from gross to find net income.
The order of the court below should be modified as indicated and as so modified affirmed, without costs, and proceedings remitted to state tax commission to proceed in accordance with opinion.
HISCOCK, Ch. J., McLAUGHLIN and CRANE, JJ., concur; HOGAN, CARDOZO and POUND, JJ., dissent from exclusion from net income of taxes paid, and otherwise concur in result.
Ordered accordingly.