New York Law Review

Tag: Source of Income

  • American Tel. & Tel. Co. v. State Tax Com’n, 61 A.D.2d 1 (1978): Determining “Employed” Assets and “Source” of Earnings for Corporate Franchise Tax

    American Tel. & Tel. Co. v. State Tax Com’n, 61 A.D.2d 1 (1978)

    For purposes of New York franchise tax, assets are “employed” in New York when the corporation carries on sufficient activity in New York with respect to those assets, but the “source” of earnings is determined by the location of the obligor, not the location of the recipient’s activities.

    Summary

    American Telephone and Telegraph (AT&T), a New York corporation, challenged a State Tax Commission determination that certain assets were employed within New York and certain income was derived from sources within New York, making them subject to franchise taxes. AT&T conducted financial studies and managed investments in New York for its subsidiaries operating nationwide. The court held that advances to subsidiaries and temporary cash investments were taxable assets because AT&T actively managed them in New York. However, interest and dividends receivable from subsidiaries, but not yet paid, were not taxable, nor was interest income from out-of-state obligors, as the source of that income was outside New York. The Appellate Division’s judgment was modified accordingly.

    Facts

    AT&T, a New York-incorporated transmission company, operates a communications network through subsidiary corporations across the United States. AT&T’s principal offices are in New York City, where it conducts financial studies to meet the capital requirements of its subsidiaries. AT&T raises funds by offering its own securities and temporarily invests excess funds in short-term securities. It also advances money to its subsidiaries, evidenced by interest-bearing demand notes held in New York. AT&T’s treasury department in New York manages these funds, prepares investment plans, and maintains contact with subsidiaries regarding their financial needs.

    Procedural History

    The State Tax Commission determined that advances to subsidiaries, temporary cash investments, and interest/dividends receivable were assets employed in New York, and that interest income from out-of-state subsidiaries and obligors constituted earnings from New York sources. AT&T filed an Article 78 proceeding to review this determination. The Appellate Division modified the determination, annulling the gross earnings tax applied to income from out-of-state obligors but confirming the capital stock tax. AT&T appealed the capital stock tax ruling based on a dissenting opinion, and the State appealed the annulment of the gross earnings tax determination.

    Issue(s)

    1. Whether advances to subsidiaries and temporary cash investments constitute assets “employed” in business within New York under Section 183 of the Tax Law.

    2. Whether interest and dividends receivable from, but not yet paid by, subsidiaries constitute assets “employed” in business within New York under Section 183 of the Tax Law.

    3. Whether interest income from advances to out-of-state subsidiaries and from obligations of out-of-state obligors held in the temporary cash investment account constitutes earnings from a “source” within New York under Section 184 of the Tax Law.

    Holding

    1. Yes, because AT&T carries on sufficient activity in New York with respect to the advances and investments that it can be said to employ the funds advanced in New York.

    2. No, because there is nothing in the stipulated facts to support a determination that the asset (interest and dividends receivable) was in fact used in New York.

    3. No, because moneys paid to AT&T by out-of-state obligors, subsidiary or unaffiliated, has its source in the activities of AT&T within New York.

    Court’s Reasoning

    The court reasoned that the commission’s interpretation of what constitutes assets “employed” in New York had a rational basis. The distinction between advances and investments in stock follows the Tax Law’s exclusion of stock. The court focused not on the subsidiary’s use of funds, but on whether AT&T carried on sufficient activity in New York concerning the advances. The court emphasized AT&T’s full-time staff managing investments, the dollar volume and number of transactions involved, and AT&T’s concession that financing subsidiaries was its principal activity. Regarding interest and dividends receivable, the court found no evidence that these assets were actually used or employed in New York. While these receivables might improve AT&T’s balance sheet, there was no proof they were used as collateral or impacted loan terms. Concerning the “source” of earnings, the court stated that the commonly accepted meaning of “source” refers to the location of the obligor, not where AT&T’s financial activities occur. The court distinguished the language used in section 184 from section 183. The court stated, “Only in the most metaphysical sense can it be said that moneys paid to AT&T by out-of-State obligors, subsidiary or unaffiliated, has its source in the activities of AT&T within New York.”