Consolidated Edison Co. v. State Tax Commission, 24 N.Y.2d 114 (1969)

Gross earnings, for purposes of a utility franchise tax, include receipts derived from the employment of capital to manufacture, distribute, and sell utility services, but do not include proceeds from the destruction or confiscation of capital assets.

Summary

Consolidated Edison (Con Ed) challenged the State Tax Commission’s assessment of franchise tax on receipts from property damage claims, insurance claims, and the sale of capital assets. The tax was based on the state’s definition of “gross earnings.” The Court of Appeals held that proceeds from property damage and insurance claims, as well as the sale of capital assets no longer used in business (real property, scrap, and used machinery), are not considered “gross earnings” derived from the “employment of capital” and are therefore not subject to the franchise tax. The Court emphasized that the legislature intended to tax the employment of capital, not the destruction or confiscation of it.

Facts

Con Ed received a notice of assessment from the Tax Commission for franchise tax allegedly due. Con Ed paid the assessed amount under protest and then applied for a refund. The assessment was based on cash Con Ed received from: (1) property damage and insurance claims, and (2) the sale of capital assets no longer used in its business, including real property, scrap, and used machinery. These transactions were treated as capital transactions, and none of the receipts were credited to Con Ed’s income account.

Procedural History

Con Ed applied for a refund of the tax paid under protest. The Tax Commission denied the refund. The Appellate Division affirmed the Tax Commission’s determination regarding the taxation of receipts from the sale of capital assets but reversed the determination regarding receipts from property damage and insurance claims. Con Ed appealed to the New York Court of Appeals.

Issue(s)

Whether cash reimbursements from property damage claims, insurance claims, and the sale of capital assets constitute “gross earnings” from the “employment of capital” as defined in Section 186 of the Tax Law, and are therefore subject to the state franchise tax?

Holding

No, because the legislature intended to tax the employment of capital to produce utility services, not the proceeds from the destruction or confiscation of capital assets.

Court’s Reasoning

The Court focused on interpreting the legislative intent behind the 1907 amendment to Section 186 of the Tax Law, which defined “gross earnings” as “all receipts from the employment of capital without any deduction.” The Court explained that the amendment was enacted in response to a prior court decision, People ex rel. Brooklyn Union Gas Co. v. Morgan, which allowed utility companies to deduct the cost of raw materials from gross receipts when calculating the franchise tax. The legislature intended to eliminate this deduction, not to fundamentally alter the definition of “gross earnings.” The Court reasoned that Con Ed does not employ its capital for the purpose of having it damaged or destroyed, or to have it sold as scrap. “The proceeds from these transactions represent the amounts realized from the destruction or confiscation of capital, not the employment of it.” The Court also noted that the Tax Commission had not previously sought to tax these types of transactions in the 53 years since the amendment, which created a presumption against taxing them now. The court stated, “…such inaction should create a presumption in favor of the taxpayer which can only be rebutted by a clear manifestation of legislative intent to the contrary.” The court distinguished receipts representing the employment of capital to manufacture, distribute and sell utility services from receipts that represent amounts realized from the destruction or confiscation of capital.