79 N.Y.2d 453 (1992)
A tax levied on a corporation for the privilege of doing business in a city, measured by net income, qualifies as a franchise tax, allowing the inclusion of income from federal securities in the tax calculation without violating the Federal Public Debt Statute.
Summary
Bankers Trust challenged New York City’s Financial Corporation Tax, arguing it was an income tax, not a franchise tax, and thus couldn’t include income from federal securities due to the Federal Public Debt Statute. The New York Court of Appeals held that the City’s tax, though measured by income, was indeed a franchise tax imposed for the privilege of doing business in the city. The court reasoned that the tax’s imposition was contingent on doing business within the city, distinguishing it from a direct income or property tax. Therefore, including income from federal securities in the tax calculation was permissible.
Facts
Bankers Trust, a bank holding company, earned interest on federal debt obligations in 1976. This interest was included in their 1976 New York City Financial Corporation Tax return. Bankers Trust sought a refund, arguing that the Federal Public Debt Statute exempted federal obligations from state or municipal taxation, except for non-discriminatory franchise taxes or non-property taxes in lieu thereof. The Department of Finance denied the refund, asserting that the City Financial Corporation Tax was a franchise tax.
Procedural History
The Commissioner of Finance upheld the disallowance of the refund claim. Bankers Trust commenced a CPLR article 78 proceeding challenging the Commissioner’s determination. The Supreme Court transferred the proceeding to the Appellate Division, which confirmed the determination and dismissed the petition. Bankers Trust then appealed to the New York Court of Appeals.
Issue(s)
Whether the New York City Financial Corporation Tax is a franchise tax or an income tax for the purposes of the Federal Public Debt Statute, thereby determining if the City can include income from federal securities in the tax calculation.
Holding
Yes, the New York City Financial Corporation Tax is a franchise tax because it is levied on financial corporations for the privilege of doing business in the City, and its imposition ceases if the corporation dissolves or ceases doing business there.
Court’s Reasoning
The court determined that the critical factor is the nature of the tax, not its label. The court emphasized that the tax is imposed “for the privilege of doing business in the city in a corporate or organized capacity.” The court distinguished between organization taxes (privilege of existing as a corporation) and doing business taxes (privilege of doing business within the jurisdiction). New York City was authorized by the state to levy a doing business tax. The court stated, “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 US 379, 387).”
Further, the court noted that simply because a tax on a franchise is measured by income does not disqualify it as a franchise tax. The true distinction lies in whether the earning of income coincides with the prerogative of doing business in the corporate form. If the taxpayer could still be liable for the tax despite dissolution or cessation of business, it is an income or property tax, not a franchise tax. Here, the tax ceases upon dissolution or cessation of business in the City. The court cited Educational Films Corp. v. Ward, 282 U.S. 379, 388 (1931) to highlight the requirement 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.