Opinion
November 13, 1967
Proceeding under CPLR article 78 (transferred to the Appellate Division of the Supreme Court in the Third Judicial Department by order of the Supreme Court at Special Term, entered in Albany County) to review a determination of the State Tax Commission which sustained a corporation franchise tax assessment imposed upon petitioner, classified as a real estate corporation, under section 182 Tax of the Tax Law. Section 182, in effect at the time herein involved, imposed upon corporations an additional annual franchise tax on apportioned "dividends paid" during the preceding calendar year. The petitioner, having previously mortgaged its leasehold to secure a $7,000,000 bond issue, entered into a plan of modification on May 16, 1946 under which the bondholders exchanged their old bonds for new ones of the same face value, together with a corresponding number of shares of class A stock. The plan provided for the waiver of all unpaid interest amounting to $1,486,767.91 on the old bonds and further that all rights under the new issue would be extinguished and the stock surrendered if the face amount of each outstanding bond was paid off within 12 years of the issuance of the new bonds and stock. Simultaneous with the acceptance of this plan, petitioner's lessor agreed to waive $405,856.13 of arrears in ground rent. Later in 1946, by reason of its taking a new lease with different terms not here material, petitioner's classification was changed from a business corporation taxable under article 9-A, to that of a real estate corporation taxable under section 182 Tax of the Tax Law. Within the 12-year-redemption period, petitioner paid all its new bonds and cancelled its class A stock and in June, 1957 it made a distribution of cash and securities to its sole stockholder in the amount of $1,833,114.80 and paid a 2% dividend tax of $36,662.30 on this distribution. The parties agree that, "The taxability of this distribution as a dividend is the matter to be determined in this proceeding". Sometime thereafter it filed an application for a refund on the ground that this distribution was not taxable as it constituted payment from capital and, in the alternative, claimed that if the waiver of bond interest and ground rent was determined to be earned surplus, the amount distributed was not taxable as a dividend because of the exclusion in subdivision 2 of section 182 Tax of the Tax Law. We are unable to accept petitioner's claim that the distribution to its stockholder was from paid-in capital and thus not properly classified as a dividend. It appears that on its balance sheet for the year when the plan of modification was adopted, the forgiven bond interest and ground rent were identified as surplus from modification. The distribution of cash and securities to Kentucky Farm and Cattle Co., the owner of the taxpayer's class B stock and its sole stockholder, was properly considered as a dividend within the meaning of section 182 Tax of the Tax Law since this distribution was from a surplus which was then available. Furthermore, these forgiven items had been deducted in the profit and loss statement in the years prior to the plan of modification and constituted proper additions to the earned surplus account. Whether any distribution is a dividend for income tax purposes is neither conclusive to the issue before us nor controlling upon the levy of corporate franchise taxes ( Matter of Garvey Carting Stor. v. State Tax Comm., 27 A.D.2d 337) as we are here concerned solely with the question as to whether dividends were paid for franchise tax purposes. We are unable to say that the commission's rationale is unreasonable or that it acted arbitrarily in determining that the forgiven items of ground rent and bond interest "constituted proper additions to the earned surplus account of taxpayer and increased taxpayer's earnings and profits since these expense items of rent and interest had been deducted in the profit and loss statements in the years prior to 1946"; and that, a surplus having thus been constituted, "the distribution of $1,833,114.80 in 1957 was a dividend within the meaning of section 182, subdivision 1 of the Tax Law since there was a surplus available for dividends"; and, finally, for the reasons hereinbefore indicated, that "the exclusion provided in the next to the last paragraph of section 182 Tax of the Tax Law is not applicable". Determination confirmed and petition dismissed, without costs. Gibson, P.J., Herlihy, Reynolds, Staley, Jr., and Gabrielli, JJ., concur in memorandum by Gabrielli, J.