Summary
noting that a franchise tax is "imposed the privilege of carrying on a business"
Summary of this case from Hughes Commc'ns India Private Ltd. v. The DirecTV Grp.Opinion
Argued March 25, 1992
Decided May 12, 1992
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department.
David Sachs for appellants.
O. Peter Sherwood, Corporation Counsel (Amy F. Nogid, Edith I. Spivack, Edward F.X. Hart and Stanley Buchsbaum of counsel), for respondents.
The New York City Financial Corporation Tax is imposed on financial corporations for the privilege of doing business in the City in a corporate or organized capacity. The issue presented is whether this tax is a franchise tax or a nonproperty tax in lieu thereof, thus allowing the City to take into account when calculating the tax, income petitioners received from Federal securities without violating the Federal Public Debt Statute (former 31 U.S.C. § 742, as amended 31 U.S.C. § 3124 [a]). We agree with the Appellate Division that the City Financial Corporation Tax functions as a franchise tax, making its application to the interest income earned by petitioners on Federal obligations held by them proper.
(I)
In 1976, petitioners Bankers Trust New York Corporation, a bank holding company, and its principal New York subsidiary, Bankers Trust Company, which are organized under the laws of New York State and maintain their principal offices in New York City, earned interest in an aggregate amount of $47,701,000 on certain debt obligations of the Federal Government and its agencies that they held in inventory and for investment purposes. This amount was included in full in their consolidated 1976 New York City Financial Corporation Tax return; all expenses incurred by petitioners to produce such interest income were deducted. The tax was ultimately paid in 1983 and in June 1984 petitioners filed a claim for a refund of $3,997,479 plus interest, the portion of the City Financial Corporation Tax imposed on interest earned on these Government obligations. They claimed that subjecting this income to the Financial Corporation Tax is precluded by the Federal Public Debt Statute (Rev Stat of US § 3701, former 31 U.S.C. § 742), which exempted United States Government obligations and interest thereon from State or municipal taxation "except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations."
In 1982, United States Revised Statutes of 1878 § 3701 (31 U.S.C. § 742) was reformulated without substantive change as 31 U.S.C. § 3124 (a) (American Bank Trust Co. v Dallas County, 463 U.S. 855, 859, n 1, reh denied 463 U.S. 1250).
In August 1984, respondent Department of Finance issued a notice of disallowance, stating that the City Financial Corporation Tax (which is measured by a corporation's entire net income) prohibited deductions or exclusions for "any part of any income from * * * interest on any kind of stock, securities or indebtedness" (Administrative Code of City of New York former § R46-37.3 [b] [1] [recodified at § 11-641 (b) (1) (B)]). After a hearing, respondent Commissioner of Finance sustained the notice of disallowance and denied petitioners' refund claim, concluding that the City Financial Corporation Tax was a franchise tax, or at the very least a nonproperty tax in lieu of a franchise tax, within the meaning of the Federal Public Debt Statute.
This CPLR article 78 proceeding, timely commenced by petitioners, challenges the Commissioner's determination. Upon transfer of the proceeding by Supreme Court, the Appellate Division unanimously confirmed the determination and dismissed the petition, holding that, although the City Financial Corporation Tax does not employ the words "franchise tax" and is measured by income, it nonetheless functions as a franchise tax, not an income tax, and therefore is immune from the provisions of the Federal Public Debt Statute. This appeal ensued.
(II)
Petitioners' principal arguments are that (1) the City of New York has no authority to impose a corporate franchise tax, only the State can do so and it already does (Tax Law § 1451; 20 N.Y.CRR 16-1.1) and (2) even were the City so empowered, its Financial Corporation Tax is not in fact a franchise tax. For the reasons that follow, we conclude that petitioners' arguments are unpersuasive.
(1)
There are two types of franchise taxes, "organization taxes" (taxes established for the privilege of existing as a corporation) and "doing business" taxes (taxes imposed on the corporation's privilege of doing business within the boundaries of the taxing authority) (see, Werner Mach. Co. v Director of Div. of Taxation, 17 N.J. 121, 125-126, 110 A.2d 89, 91, affd 350 U.S. 492). That the State Legislature circumscribed the authority it has granted to the City to that of merely setting "doing business" taxes (Administrative Code of City of New York former § R46-37.1), while retaining solely unto itself the prerogative to impose "organization taxes", is a seductive but hardly compelling reason to conclude, as petitioners suggest, that the tax at issue is not a franchise tax.
The State is empowered to grant franchises allowing corporations to exist as well as to do business here (see, People ex rel. Bass, Ratcliff Gretton v State Tax Commn., 232 N.Y. 42, affd 266 U.S. 271). Pursuant to New York Laws of 1966 (ch 772) and the accompanying Model Local Law § 12 (1), the State Legislature authorized New York City as its agent to levy a franchise tax on corporations for the privilege of doing business in the City, with the revenue collected remaining in the City's control (see, N Y Const, art IX, § 2 [c] [ii] [8]; see, e.g., Sonmax, Inc. v City of New York, 43 N.Y.2d 253, 257; Matter of Kesbec, Inc. v McGoldrick, 278 N.Y. 293, 295; New York Steam Corp. v City of New York, 268 N.Y. 137, 145; City of Schenectady v State of New York, 80 Misc.2d 223, 225; cf., Albany Area Bldrs. Assn. v Town of Guilderland, 74 N.Y.2d 372, 379). Collection of this tax by the City does not make it any less a State authorized franchise tax. The further answer to petitioners' argument in this regard is the fact that a State may collect a franchise tax on national banking associations or banks incorporated under the laws of other jurisdictions (see, Tradesmens Bank v Tax Commn., 309 U.S. 560, 563-565; see also, State Dept. of Assessments Taxation v Maryland Natl. Bank, 310 Md. 664, 665, 531 A.2d 294, 295, appeal dismissed 486 U.S. 1048), even though it does not possess the power to grant such corporations the license "to exist" in the State.
New York Laws of 1966 (ch 772, § 1) authorizes "any city having a population of one million or more * * * to adopt and amend local laws imposing * * * taxes on * * * financial corporations".
The enabling legislation's Model Local Law § 12 provides that a "[t]ax based on net income" be imposed "[f]or the privilege of doing business in the city" (L 1966, ch 772, § 1).
Moreover, the presence of the coexisting State franchise tax does not require the conclusion that the City's Financial Corporation Tax is not a franchise tax. A number of acceptable forms of taxation can be imposed within the nondiscriminatory franchise tax exemption; the Federal Public Debt Statute does not limit the State to condition the exercise of corporate powers upon the payment of only one tax (see, First Am. Natl. Bank v Olsen, 751 S.W.2d 417, 421 [Tenn], appeal dismissed sub nom. First Am. Natl. Bank v Taylor, 485 U.S. 1001).
Tax Law § 1451 (a) imposes a tax on every banking corporation "[f]or the privilege of exercising its franchise or doing business in this state in a corporate or organized capacity." The amount of the tax owed is measured by the "taxpayer's entire net income" with certain adjustments not relevant here (Tax Law § 1455).
(2)
Whether the City Financial Corporation Tax is a bona fide franchise tax, is a matter to be "determined by its operation rather than by particular descriptive language which may have been applied to it" (Educational Films Corp. v Ward, 282 U.S. 379, 387). That the tax does not contain the word "franchise" in its title or text is not determinative (see, e.g., Reuben L. Anderson-Cherne, Inc. v Commissioner of Taxation, 303 Minn. 124, 126-127, 226 N.W.2d 611, 614, appeal dismissed sub nom. Reuben L. Anderson-Cherne, Inc. v Commissioner of Revenue, 423 U.S. 886; Pacific First Fed. Sav. Bank v Department of Revenue, 308 Or. 332, 334, 779 P.2d 1033). And, the Supreme Court has repeatedly recognized that simply because a tax on a franchise is measured by income, as is the tax at hand, does not connote that it cannot qualify as a franchise tax within the meaning of the statute (see, e.g., Werner Co. v Director of Taxation, 350 U.S. 492, 493-494; Pacific Co. v Johnson, 285 U.S. 480, 489; Educational Films Corp. v Ward, supra, at 387-391; Home Ins. Co. v New York, 134 U.S. 594, 600, affg 92 N.Y. 328).
Insofar as petitioners advert to the fact that the New York City unincorporated business tax has consistently been held to be an income tax (see, Matter of Byrn v Chu, 105 A.D.2d 963, lv denied 64 N.Y.2d 606), we note that tax is "expressly imposed on the `taxable income of every unincorporated business'" (Matter of Berardino v New York State Tax Commn., 78 A.D.2d 936, 937, quoting Administrative Code of City of New York § S46-3.0 [emphasis added]).
A true distinction between an income or property tax and a bona fide franchise tax imposed upon a corporation for the privilege of doing business in the State is that a franchise tax — unlike an income or property tax — requires the earning of income, or the possession of property, to coincide with the prerogative of doing business in the corporate form (see, Educational Films Corp. v Ward, supra, at 388; Reuben L. Anderson-Cherne, Inc. v Commissioner of Taxation, supra, at 614-615; Savings League v Wisconsin Dept. of Revenue, 141 Wis. 2d 918, 924-925, 416 N.W.2d 650, review denied 144 Wis.2d 956, 428 N.W.2d 554, appeal dismissed 488 U.S. 806). If the taxpayer could still be liable for the tax despite corporate dissolution or the complete cessation of business, it is a tax on property or income, not on the franchise of doing business.
The Department of Finance correctly observes that we previously affirmed on the opinion of Supreme Court a decision stating that the New York City Financial Corporation Tax was a franchise tax (see, Woodside Sav. Loan Assn. v Gallman, 73 Misc.2d 357, 360, affd on opn of Special Term 34 N.Y.2d 674, appeal dismissed 419 U.S. 810). However, that case did not involve whether the Financial Corporation Tax was a franchise tax within the meaning of the Federal Public Debt Statute.
That the New York City Financial Corporation Tax is indeed a franchise tax is borne out by the fact that, tracking the language of the enabling statute's Model Local Law § 12 (1), it is levied "[f]or the privilege of doing business in the city in a corporate or organized capacity" and if petitioners were to dissolve or cease doing business in the City they would no longer be subject to the tax (Administrative Code of City of New York former § R46-37.1 [a] [recodified at § 11-639]).
The New York City Financial Corporation Tax being a franchise tax within the meaning of the Federal Public Debt Statute, inclusion of interest on Federal Government obligations to determine the amount owed by petitioners for the tax year 1976 under such tax was expedient. Accordingly, the judgment of the Appellate Division should be affirmed, with costs.
Chief Judge WACHTLER and Judges KAYE, TITONE, HANCOCK, JR., and BELLACOSA concur; Judge SIMONS taking no part.
Judgment affirmed, with costs.