New York Law Review

Tag: Savings Banks

  • 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.”

  • New York State Bankers Assn. v. Albright, 38 N.Y.2d 430 (1975): Savings Banks Cannot Offer Checking Account Services Without Explicit Statutory Authorization

    New York State Bankers Assn. v. Albright, 38 N.Y.2d 430 (1975)

    Savings banks cannot offer checking account services, such as NOW accounts, without explicit statutory authorization from the legislature, even if they possess the power to accept deposits without passbooks.

    Summary

    The New York State Bankers Association sued the Superintendent of Banks and several savings banks, arguing that savings banks lacked the authority to offer Negotiable Order of Withdrawal (NOW) accounts, which function like checking accounts. The Court of Appeals held that savings banks could not offer NOW accounts without explicit legislative authorization, even though existing laws allowed them to accept deposits without passbooks. The court reasoned that the legislature had repeatedly rejected bills that would have allowed savings banks to offer checking account services, indicating a clear intent to reserve that function for commercial banks. The court acknowledged the blurring lines between commercial and savings banks but emphasized that any expansion of powers must come from the legislature.

    Facts

    Since 1974, New York savings banks have offered NOW accounts, which are non-interest-bearing accounts that allow depositors to write negotiable drafts payable to third parties. These accounts function similarly to checking accounts at commercial banks. The Superintendent of Banking issued regulations explicitly authorizing NOW accounts and prescribing operational details. The commercial banks challenged the legality of these accounts, arguing that savings banks lacked statutory authorization to offer checking account services.

    Procedural History

    The case was initially submitted to the Appellate Division on an agreed statement of facts. The Appellate Division ruled in favor of the commercial banks, declaring that savings banks lacked the power to offer NOW accounts and that the superintendent’s regulations were invalid. The savings banks and the Superintendent of Banks appealed to the New York Court of Appeals. The Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether, under the New York Banking Law, savings banks are authorized to offer checking account services, specifically NOW accounts, to their customers.

    Holding

    No, because nothing in the Banking Law explicitly authorizes savings banks to provide checking account services, and the legislative history indicates a consistent rejection of proposals to grant such powers to savings banks. The power to accept deposits without a passbook does not implicitly grant the power to offer full checking account services.

    Court’s Reasoning

    The court emphasized that while statutes may appear unambiguous on their face, a proper interpretation requires examining legislative history and context. The court noted the legislature had repeatedly refused to authorize savings banks to offer checking accounts. The court cited the legislative history of subdivision 6 of section 238 of the Banking Law, added in 1965, which allowed savings banks to accept deposits without passbooks. This amendment was intended to enable savings banks to use new technology and compete with commercial bank savings accounts, not to authorize checking accounts. The court stated, “Only upon a literal and atomistic reading of the statutes, a reading blind to the legislative history antecedent to their enactment and even afterward, could one conclude that savings banks may offer checking account services.” The court acknowledged the blurring lines between savings and commercial banks but stressed that each encroachment had typically been authorized by explicit legislation. The court also noted the broad regulatory powers of the Superintendent of Banks but stated that these powers are defined by statute and do not extend to authorizing new services without clear statutory support. The court recognized the policy implications and stated that the issue should be resolved by the Legislature, not the courts. The court acknowledged pending federal legislation that could resolve the problem, but emphasized that the current state law does not allow NOW accounts. The court ultimately stayed the enforcement of the judgment until March 31, 1976, to allow for legislative action, stating: “Since these accounts have presumably been used widely by many customers of savings banks, it would be unduly disruptive to terminate these services abruptly.”