Bowery Savings Bank v. Michael, 63 N.Y.2d 41 (1984)
When calculating the alternative minimum tax for savings banks based on interest credited to depositors, the tax base should include interest earned as if computed at the statutory rate of 3.5% per annum, considering the bank’s compounding and crediting practices.
Summary
Bowery Savings Bank and American Savings Bank challenged New York City’s method of calculating the alternative minimum tax, arguing that the 3.5% statutory rate should apply to the account balance excluding actual interest. The city contended the rate should apply to the actual interest generated. The Court of Appeals held that the tax base should include interest earned as if computed at the 3.5% rate, considering the bank’s compounding and crediting practices. This requires calculating each account balance as if each interest credit were made at the statutory rate, not a flat tax on the average daily balance. This approach aligns with banking industry practices and regulations regarding interest and dividend credits.
Facts
Bowery Savings Bank and American Savings Bank, mutual savings banks, filed New York City financial corporation tax returns for 1973-1975, computing tax on the alternative minimum tax. The Department of Finance asserted deficiencies, arguing for a different method of calculating the tax base. The dispute centered on how to apply the 3.5% per annum statutory rate to interest or dividends credited to depositors.
Procedural History
Bowery and American filed petitions for redetermination, which were denied by the Department of Finance. Bowery commenced an Article 78 proceeding, later transferred to the Appellate Division. American commenced a similar proceeding, also transferred to the Appellate Division and adjourned to be considered jointly with Bowery’s case. The Appellate Division accepted the banks’ method of calculation, but the Court of Appeals modified that decision.
Issue(s)
Whether, in calculating the alternative minimum tax for savings banks under New York City Administrative Code § R46-37.53(b)(2), the tax base should be determined by applying the 3.5% per annum statutory rate to the actual interest generated by the bank’s compounding and crediting practices or to the account balance exclusive of the actual interest credited.
Holding
No, because the alternative minimum tax base should be determined according to the amount of interest which would have been credited if it had been computed and credited at the rate of 3.5% per annum, including the effects of compounding.
Court’s Reasoning
The court reasoned that section R46-37.53(b)(2) dictates that the tax base for the alternative minimum tax include the interest earned by the account as if said interest was computed by resort to the 3.5% per annum statutory rate. The statute does not provide for a flat tax of 3.5% per annum upon the average daily balance of an account, nor does it authorize application of the 3.5% per annum rate to all funds in the account, including amounts actually credited as compound interest during the taxable year. Rather, the alternative minimum tax contemplates an interpretation which computes each account balance as if each interest credit were made at the statutory rate of 3.5% per annum. The court emphasized that the statute refers to “each interest or dividend credit” and that banking regulations define these terms broadly. The court noted that the 3.5% rate serves as an artificial ceiling, relieving the taxpayer from potentially higher liability based on actual earnings. “Thus, the tax base properly includes the interest produced, through application of the 3.5% per annum statutory rate, by the taxpayers’ compounding and crediting practices.”