New York Law Review

Tag: Financial Corporation Tax

  • Bankers Trust New York Corp. v. Department of Fin. of City of New York, 79 N.Y.2d 453 (1992): Defining Franchise Taxes for Federal Securities Exemption

    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.

  • Bowery Savings Bank v. Michael, 63 N.Y.2d 41 (1984): Computing Alternative Minimum Tax for Savings Banks

    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.”