New York Law Review

Tag: Franchise 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.

  • Consolidated Edison Co. v. State Tax Commission, 24 N.Y.2d 114 (1969): Defining Gross Earnings for Utility Franchise Tax

    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.

  • Central Trust Co. v. N.Y.C. & N.R.R. Co., 110 N.Y. 250 (1888): Priority of State Taxes in Receivership

    Central Trust Co. v. N.Y.C. & N.R.R. Co., 110 N.Y. 250 (1888)

    When a corporation is in receivership, the state retains a paramount right to collect taxes due on the corporation’s franchise from the receiver, especially when the receiver is operating the business and generating revenue.

    Summary

    In this case, the New York Court of Appeals addressed the issue of whether the state’s claim for unpaid corporation taxes had priority over other claims against a railroad company in receivership. The court held that the state’s claim for taxes on the corporation’s franchise took precedence over other claims, including those of mortgagees. This decision emphasizes the state’s inherent power to collect taxes necessary for its functioning, even when a corporation is insolvent and its assets are managed by a court-appointed receiver. The court reasoned that the receiver’s operation of the railroad benefited from the franchise granted by the state and thus was subject to the associated tax obligations.

    Facts

    A receiver was appointed for the New York City and Northern Railroad Company in foreclosure proceedings. The company owed taxes to the state under the corporation tax act of 1880. The Attorney General filed a petition seeking an order directing the receiver to pay these taxes from the funds in his possession, which were generated from the gross earnings of the railroad operation. The receiver argued that the taxes were the sole responsibility of the corporation and should not be prioritized over the claims of mortgagees.

    Procedural History

    The Special Term granted the Attorney General’s petition, ordering the receiver to pay the taxes and, if necessary, issue receiver’s certificates to raise funds. The General Term reversed this decision, holding that the statutory proceedings for tax collection were the exclusive remedy and had not been followed. The Attorney General appealed to the New York Court of Appeals.

    Issue(s)

    Whether the statutory remedies for collecting corporation taxes are the exclusive means of enforcing such claims against a corporation in receivership, or whether the court can directly order the receiver to pay the taxes from available funds.

    Holding

    No, because when a corporation’s property is sequestrated and in the hands of a receiver, the court has the authority to directly order the receiver to pay outstanding taxes, especially when the receiver is operating the business under the corporate franchise and has sufficient funds to cover the tax liability.

    Court’s Reasoning

    The Court of Appeals reasoned that the statutory procedures for tax collection were designed for ongoing, solvent corporations. When a corporation is insolvent and in receivership, these procedures are impractical and ineffective. The court emphasized that the receiver’s operation of the railroad relied on the franchise granted by the state, making the state’s claim for taxes a paramount right. The court stated, “We are of the opinion that the railroad when in the receiver’s hands and operated by him, is operated under and by virtue of the franchise which has been conferred upon the corporation by the state…” The court further explained that the state’s right to collect taxes is an essential power of government, and the court has the discretion to ensure these obligations are met. The court distinguished the Massachusetts case cited by the receiver, noting that in that case, the corporation’s franchise had effectively ceased to exist, whereas, in this case, the franchise was actively being used by the receiver. The court also cited Union Trust Company v. I. M. R. R. Co., noting that the Supreme Court prioritized state tax claims. The court modified the Special Term order to remove the provision for issuing receiver’s certificates, as sufficient funds were available to pay the taxes.