Friedsam v. State Tax Commission, 64 N.Y.2d 78 (1984)

A nonresident taxpayer is entitled to an income tax deduction for alimony payments proportional to the ratio of their New York income to their income from all sources, consistent with the treatment of resident taxpayers.

Summary

The New York Court of Appeals addressed whether the State Tax Commission properly denied a nonresident taxpayer an income tax deduction for alimony payments, a deduction available to resident taxpayers. Lance Friedsam, a Connecticut resident working in New York, sought to deduct a portion of his alimony payments from his New York income tax return, proportional to his New York-sourced income. The Tax Commission disallowed the deduction. The Court of Appeals reversed, holding that denying the proportional deduction violated the state’s policy of substantial equality in taxation between residents and nonresidents, as reflected in Tax Law § 635(c)(1), even though the change mirrored changes to Federal tax policy.

Facts

Lance Friedsam, a Connecticut resident, was employed by IBM in White Plains, New York. In 1979, Friedsam earned $61,750 from IBM, with $52,710 attributed to work performed in New York. His total income for the year was $65,836. In July 1979, Friedsam divorced his wife, who resided in Connecticut with their children. Pursuant to the divorce decree, Friedsam paid $10,417 in alimony during 1979.

Procedural History

Friedsam filed a New York State Income Tax Nonresident Return (Form IT-203) for 1979, claiming an alimony deduction proportional to his New York income. The State Income Tax Audit Division disallowed the deduction. Friedsam appealed to the State Tax Commission, arguing the disallowance violated his constitutional rights and his statutory right to substantial equality in taxation under Tax Law § 635(c)(1). The Tax Commission upheld the disallowance. Friedsam then commenced an Article 78 proceeding, which Special Term granted, holding that the disparate treatment violated the privileges and immunities clause. The Appellate Division affirmed, but the Court of Appeals affirmed on statutory grounds, not constitutional.

Issue(s)

Whether the State Tax Commission’s denial of a proportional alimony deduction to a nonresident taxpayer, when such a deduction is available to resident taxpayers, violates the New York Tax Law’s policy of substantial equality in taxation.

Holding

Yes, because the Commission’s determination supporting a disparate tax classification between resident and nonresident taxpayer is contrary to the statute and tax policy of New York State, specifically Tax Law § 635(c)(1).

Court’s Reasoning

The Court emphasized New York’s policy of conforming its tax laws with federal income tax laws to simplify tax preparation, improve enforcement, and aid interpretation. Quoting from the legislative history, the court stated: “Any term used in this article shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required.” (Tax Law, § 607.) The court acknowledged that the Federal Tax Reform Act of 1976 changed the alimony deduction from an itemized deduction to a deduction from income in determining adjusted gross income, benefiting all taxpayers, regardless of whether they itemized. New York residents automatically benefited from this change. The court noted that Tax Law § 635(c)(1) reflects a policy decision “that nonresidents be allowed the same non-business deductions as residents, but that such deductions be allowed to nonresidents in the proportion of their New York income to income from all sources.” Denying Friedsam’s proportional alimony deduction violated this policy. The Court found the Tax Commission improperly applied section 632(a)(1) of the Tax Law and failed to apply section 635(c)(1) of the Tax Law. The court quoted from Memorandum of Governor, L 1961, ch 68, NY State Legis Ann, 1961, p 398, highlighting that this policy of substantial equality, embodied in section 635 (subd [c], par [1]) of the Tax Law, serves to invalidate the challenged determination of the State Tax Commission.