New York Law Review

Tag: State Taxation

  • Burton v. New York State Dept. of Taxation & Finance, 25 N.Y.3d 734 (2015): Nonresident Tax on S Corporation Income Derived from Deemed Asset Sale Not Unconstitutional

    25 N.Y.3d 734 (2015)

    New York’s Constitution does not prohibit the state from taxing the New York-source income of nonresidents derived from the sale of stock in an S corporation, even if the sale is structured as a deemed asset sale for federal tax purposes.

    Summary

    Nonresident shareholders of an S corporation challenged a New York State tax assessment on their pro rata share of gains from a stock sale, arguing that the tax violated the New York Constitution. The shareholders elected to treat the transaction as a “deemed asset sale” for federal tax purposes. The Court of Appeals held that the tax, imposed on New York-source income, was constitutional. The court found that the constitutional provision regarding taxation of nonresidents’ intangible personal property did not apply to income taxes, and the election to treat the sale as a deemed asset sale did not shield the income from state taxation. The court emphasized that the tax was based on the income’s source within New York, not merely on the ownership of intangible property.

    Facts

    Nonresident former shareholders of JBS Sports, Inc., an S corporation, sold their stock to Yahoo, Inc. They elected to treat the transaction as a “deemed asset sale” under the Internal Revenue Code. As a result, JBS realized substantial gains, which were passed through to the shareholders. The shareholders reported and paid federal taxes on their share of the gains, but did not pay New York State taxes. The New York State Department of Taxation and Finance assessed state income taxes, relying on Tax Law § 632 (a) (2), which treats gains from deemed asset sales as New York source income. The shareholders challenged the assessment, arguing it violated the New York Constitution.

    Procedural History

    The shareholders filed a declaratory judgment action against the New York State Department of Taxation and Finance, challenging the tax assessment. The Supreme Court granted the state’s motion for summary judgment, upholding the constitutionality of the tax. The Court of Appeals retained jurisdiction over a direct appeal from the Supreme Court under CPLR 5601 (b) (2) and affirmed the lower court’s decision.

    Issue(s)

    1. Whether Tax Law § 632 (a) (2), which treats gains from deemed asset sales as New York source income, violates Article XVI, § 3 of the New York Constitution when applied to nonresident shareholders of an S corporation.

    Holding

    1. No, because the New York Constitution does not prohibit the taxation of income derived from a New York source, even if that income is realized from the sale of intangible personal property by a nonresident.

    Court’s Reasoning

    The court began by noting the clear language of the relevant New York tax laws, which allowed the state to tax the pass-through income of S corporation shareholders based on the income’s source. The court examined Article XVI, § 3 of the New York Constitution, which addresses the taxation of intangible personal property. The court held that the constitutional provision did not prohibit the state from taxing the income derived from the sale of the stock. The court reasoned that Article XVI, § 3 primarily addressed the location for tax purposes of nonresidents’ intangible personal property and prohibits ad valorem taxes and excise taxes based solely on ownership or possession of such property. The Court emphasized that the tax in question was not an ad valorem or excise tax. The tax was an income tax based on the income’s connection to New York, due to the corporation’s activities, and the shareholders’ election of a deemed asset sale which resulted in the recognition of gain. The court referenced the history of Article XVI, § 3, which indicated that the goal was to attract and retain nonresidents’ wealth, particularly in the form of stocks and securities, and to eliminate the ad valorem system as applied to intangible personal property.

    Practical Implications

    This case clarifies the scope of Article XVI, § 3 of the New York Constitution, specifically concerning income taxes on nonresidents’ intangible property. Lawyers advising clients on tax matters, particularly those involving S corporations and nonresident shareholders, must understand this ruling. It confirms that New York can tax income from intangible property (like stock) if the income is derived from New York sources. This case emphasizes the importance of understanding both federal and state tax implications of business transactions, especially those involving cross-state activities or nonresident ownership. This case affects tax planning for S corporations with nonresident shareholders, and similar cases, and highlights the need to analyze whether income is derived from New York sources.

  • British Land (Maryland), Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995): Limits on State Taxation of Extraterritorial Income

    British Land (Maryland), Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995)

    A state’s formula-based tax on income is unconstitutional if it unfairly attributes income to the state that is disproportionate to the business transacted within the state, particularly when the factors driving the income’s generation occurred primarily outside the state.

    Summary

    British Land (Maryland), Inc. challenged New York State’s corporation franchise tax assessment on the gain from the sale of its Baltimore property. The New York Tax Appeals Tribunal determined that British Land operated a unitary business in New York and Maryland, thus justifying the state’s apportionment formula to tax a portion of the Baltimore property sale. The New York Court of Appeals reversed, finding that the application of the statutory formula resulted in an unfair taxation of extraterritorial values because the factors leading to the property’s appreciation occurred predominantly in Maryland before the company established significant operations in New York.

    Facts

    British Land (Maryland), Inc., a Delaware corporation, purchased a Baltimore office building in 1973. In 1982, the company acquired an office building in New York City. In 1984, it sold the Baltimore property for a substantial gain. The New York Department of Taxation and Finance sought to tax a portion of the gain, arguing that the company operated a unitary business across state lines. Key factors contributing to the Baltimore property’s appreciation included an improved economic climate due to the Baltimore Harbor Redevelopment Project, sound management, renovations, and acquisition of the fee interest. These factors primarily occurred before the company’s significant activities in New York.

    Procedural History

    The Department of Taxation and Finance issued deficiency notices. British Land appealed to the State Tax Appeals Tribunal, which upheld the assessment. The Appellate Division confirmed the Tribunal’s determination. The New York Court of Appeals granted review due to substantial constitutional questions.

    Issue(s)

    Whether New York violated the Due Process and Commerce Clauses by taxing a disproportionate share of a corporation’s gain from the sale of out-of-state property, when the property’s appreciation was primarily due to factors unrelated to the corporation’s in-state activities.

    Holding

    Yes, because the application of the statutory formula resulted in the taxation of extraterritorial values by unfairly attributing income to New York that was not generated by activities within the state.

    Court’s Reasoning

    The Court of Appeals acknowledged that a state can tax a proportional share of a multistate corporation’s income if it operates a unitary business. However, this power is limited by the principle that a state cannot tax income unfairly attributed to activities outside the state. The court determined that the Tax Appeals Tribunal correctly identified the New York City and Baltimore real estate activities as part of a unitary business. However, the court found that British Land presented “clear and cogent evidence” that the statutory formula resulted in taxation of extraterritorial values.

    The court emphasized that the factors primarily responsible for the Baltimore property’s appreciation occurred before British Land’s significant activities in New York. “In this respect, therefore, and particularly because the single gain from the sale of the Baltimore property so dwarfed petitioner’s other net income, clear and cogent evidence supports the conclusion that two thirds of petitioner’s $13 million gain on the sale of the Baltimore property ‘cannot in fairness be attributed to [petitioner’s] activities within [New York] State.’ ”

    Additionally, the court noted the distorting effect of the vast difference in value between the New York and Baltimore properties on the apportionment formula. The court remanded the case, directing the Tax Appeals Tribunal to redetermine the allocation of British Land’s income to more fairly reflect its business activities in New York.

  • Continental Bank International v. City of New York, 61 N.Y.2d 277 (1984): State Taxation of Edge Act Bank Branches

    Continental Bank International v. City of New York, 61 N.Y.2d 277 (1984)

    Edge Act bank branches, chartered by the federal government for international banking, are not federal instrumentalities immune from nondiscriminatory state taxation unless Congress clearly prohibits such taxation.

    Summary

    This case addresses whether a New York City branch of Continental Bank International, an Edge Act bank, is exempt from city taxation. The City of New York assessed deficiencies against Continental Bank for failing to pay the financial corporation tax. The bank argued that as an Edge Act bank, it was either immune from state taxation, or that Congress had implicitly prohibited such taxation. The New York Court of Appeals held that Edge Act banks are not federal instrumentalities and are subject to nondiscriminatory state taxation, as Congress had not expressly prohibited it.

    Facts

    Continental Bank International was chartered under the Edge Act in 1980, with its home office in Chicago. In 1980, the bank established a branch office in New York City and subsequently in other U.S. cities. Previously, Continental Illinois National Bank and Trust Company (parent company) owned three separately incorporated Edge Act banks with home offices in New York, Miami and Houston. These separately incorporated Edge Act banks did not dispute New York City’s right to tax them. However, Continental Bank International refused to pay New York City’s financial corporation tax.

    Procedural History

    Continental Bank International initiated an Article 78 proceeding challenging the city’s power to tax a branch office of an Edge Act bank. The Supreme Court, New York County, transferred the proceeding to the Appellate Division, First Department. The Appellate Division confirmed the city’s determination. The bank appealed to the New York Court of Appeals on constitutional grounds.

    Issue(s)

    1. Whether 12 U.S.C. § 627 reflects a congressional intent to prohibit taxation of branch offices of Edge Act banks by states other than the state where the home office is located?
    2. Whether Edge Act banks are federal instrumentalities, similar to national banks, and therefore immune from state taxation absent express congressional authorization?

    Holding

    1. No, because the authorization of taxation by the home office state was not an expression of immunity for branch offices that did not exist when the law was passed.
    2. No, because Edge Act banks do not meet the criteria to be considered a federal instrumentality for tax immunity purposes.

    Court’s Reasoning

    The Court reasoned that Congress has the power to grant or withhold immunity from state tax if it furthers federal legislation. 12 U.S.C. § 627 authorizes nondiscriminatory taxation of Edge Act banks by the home office state, but is silent regarding branch offices. Since domestic branch offices were not authorized when the Edge Act was initially enacted, the authorization of taxation by the home office State could not have been an expression of immunity for nonexistent branch offices. The court found no clear intent by Congress to prohibit state taxation of Edge Act bank branches.

    The Court also rejected the argument that Edge Act banks are federal instrumentalities immune from state taxation, as national banks once were. Quoting United States v. New Mexico, 455 U.S. 720, 735, the court stated that tax immunity is appropriate only when the tax falls on the U.S. itself, or an agency so closely connected to the government that they cannot realistically be viewed as separate entities. The court distinguished Edge Act banks from entities like the Red Cross (Department of Employment v. United States, 385 U.S. 355) which perform traditionally governmental acts and receive substantial government assistance. The Court highlighted that Edge Act banks operate with a profit motive, separating their purpose from the government’s and negating a finding of federal instrumentality status. The court noted, “Absent congressional action or the clearest constitutional mandate, a State’s power to tax may not be denied”.

  • Citibank, N. A. v. City of New York Finance Administration, 43 N.Y.2d 425 (1977): State Taxation of National Banks

    43 N.Y.2d 425 (1977)

    A state’s amendment of its tax laws, even if not explicitly referring to national banks, constitutes “affirmative action” allowing the state to tax national banks under federal law; commercial rent tax is considered a tax on tangible personal property, permitting taxation of national banks without further legislative action.

    Summary

    Citibank and Chase Manhattan Bank challenged the City of New York’s commercial rent tax for the period of 1970-1972, arguing that as national banks, they were immune under federal law (Public Law 91-156). This law allowed states to tax national banks equally with state banks but included a “saving provision” requiring “affirmative action” by the state legislature to impose such taxes. The banks argued that the 1970 amendment to the city’s rent tax, which increased rates but did not expressly mention national banks, did not constitute affirmative action. The court held that the amendment was affirmative action and that the commercial rent tax was a tax on tangible personal property, thus not requiring affirmative action under the federal statute.

    Facts

    Citibank and Chase Manhattan Bank, national banking associations with principal places of business in New York City, were assessed commercial rent tax by the city for the period of June 1, 1970, through May 31, 1972. The banks challenged the tax, asserting immunity under federal law, specifically Public Law No. 91-156, which governed state taxation of national banks. The city’s commercial rent tax had been in effect since 1963. In 1970, the New York State Legislature amended the law to increase the rates of the tax. The banks argued this amendment did not constitute the “affirmative action” required by the federal law to subject them to the tax.

    Procedural History

    The banks initiated separate CPLR article 78 proceedings challenging the Finance Administration’s determination. The Appellate Division confirmed the Finance Administration’s determinations and dismissed the banks’ petitions. The banks appealed to the Court of Appeals of the State of New York.

    Issue(s)

    1. Whether the New York State Legislature’s amendment to the city’s commercial rent tax, which increased rates but did not explicitly mention national banks, constituted “affirmative action” as required by Public Law No. 91-156, thus allowing the city to tax national banks.
    2. Whether the New York City commercial rent tax is a tax on tangible personal property, which under federal law does not require “affirmative action” by the state legislature to be imposed on national banks.

    Holding

    1. Yes, because the amendment, even without explicitly mentioning national banks, constituted “affirmative action” since it was a conscious decision to increase tax rates, and amendments are considered re-enactments of the amended statute.
    2. Yes, because the New York City commercial rent tax has been consistently regarded as a tax on tangible personal property, and such taxes are expressly excepted from the “affirmative action” requirement under federal law.

    Court’s Reasoning

    The court reasoned that the 1970 amendment to the commercial rent tax law constituted “affirmative action” because it involved a conscious legislative decision to increase tax rates. The court noted that amendments are considered re-enactments of the statutes they amend. The court stated, “From the point of view of Congress, it was the possibility that inequitable or double taxation might be imposed immediately on national banks that was the crux of its concern.”

    Furthermore, the court held that the commercial rent tax was a tax on tangible personal property, specifically a leasehold interest. Quoting Ampco Printing-Advertisers’ Offset Corp. v City of New York, the court emphasized that a leasehold is deemed personalty and tangible. Because Public Law No. 91-156 explicitly exempts taxes on tangible personal property from the “affirmative action” requirement, the city was permitted to levy the tax on national banks without further legislative input. The court noted, “* * * [P]rior to January 1, [1973], no tax may be imposed on any class of banks by or under authority of any State legislation in effect prior to the enactment of this Act unless (1) the tax was imposed on that class of banks prior to the enactment of this Act, or (2) the imposition of the tax is authorized by affirmative action of the State legislature after the enactment of this Act.”

    The dissenting judge argued that the 1970 amendment was merely an increase in rates and did not demonstrate a conscious decision to subject national banks to the tax. The dissent also contested the majority’s characterization of the commercial rent tax as a tax on tangible personal property in the context of federal law.

  • Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976): State Taxation of Imported Goods

    Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)

    A state tax on imported goods is not unconstitutional if it is non-discriminatory, applies to goods no longer in import transit, and does not violate the Commerce Clause.

    Summary

    Michelin Tire Corp. challenged the constitutionality of a state property tax levied on imported tires stored in a warehouse. The Supreme Court reversed its prior precedent, holding that the Import-Export Clause does not bar a state from imposing a non-discriminatory ad valorem property tax on imported goods that are no longer in transit. The Court reasoned that such a tax does not interfere with the federal government’s regulation of foreign commerce or generate revenue for the states at the expense of the federal government.

    Facts

    Michelin Tire Corporation imported tires from France and Nova Scotia and stored them in a warehouse in Gwinnett County, Georgia. Gwinnett County assessed a non-discriminatory ad valorem property tax on the tires. Michelin argued that the tax violated the Import-Export Clause of the U.S. Constitution.

    Procedural History

    The Georgia state courts upheld the tax. The Supreme Court granted certiorari to reconsider the scope of the Import-Export Clause in light of modern commerce realities.

    Issue(s)

    Whether the Import-Export Clause of the United States Constitution prohibits a state from levying a non-discriminatory ad valorem property tax on imported goods stored in a warehouse, when those goods are no longer in transit.

    Holding

    No, because a non-discriminatory ad valorem property tax is permissible under the Import-Export Clause when applied to goods that are no longer in transit and is non-discriminatory.

    Court’s Reasoning

    The Supreme Court overruled its prior holding in Low v. Austin, which had established a broad prohibition against state taxation of imported goods. The Court re-examined the history and purpose of the Import-Export Clause, concluding that its primary aims were to prevent states from impeding federal regulation of foreign commerce and from generating revenue at the expense of the federal government. The Court stated that the prohibition was meant to prevent states from levying “imposts or duties” not to provide blanket immunity for goods from taxation. The Court reasoned that a non-discriminatory ad valorem property tax, like the one imposed by Gwinnett County, did not offend these core principles. It did not discriminate against imported goods, it applied to all property within the state, and it did not interfere with the federal government’s power to regulate commerce. The Court emphasized that the tires were no longer in import transit and were indistinguishable from other property subject to state taxation. The Court clarified that “It is obvious that such nondiscriminatory property taxation can have no impact whatsoever on the Federal Government’s exclusive regulation of foreign commerce, because it is not imposed on imports as such as a class nor is it discriminatory.” The Court effectively shifted the focus from the physical location of the goods to the nature of the tax and its potential impact on federal prerogatives. Justice Blackmun concurred, emphasizing that the crucial factor was the non-discriminatory nature of the tax. He argued that this ensured that the tax did not unduly burden foreign commerce or give local businesses an unfair advantage.

  • Liberty Nat. Bank & Trust Co. v. Buscaglia, 21 N.Y.2d 335 (1968): State Taxation of National Banks

    Liberty Nat. Bank & Trust Co. v. Buscaglia, 21 N.Y.2d 335 (1968)

    National banks are not automatically entitled to constitutional immunity from state taxation, especially when the tax is non-discriminatory and does not impede the bank’s governmental function.

    Summary

    Liberty National Bank & Trust Company challenged New York State and Erie County sales and use taxes, arguing that as a national bank, it was an instrumentality of the federal government and thus immune from state taxation. The New York Court of Appeals reversed the lower court, holding that national banks are not automatically immune from non-discriminatory state taxes that do not impede their governmental functions. The court reasoned that modern national banks, unlike those in the past, are privately owned and operated for the benefit of their owners and their regulation is not enough to warrant tax immunity.

    Facts

    Liberty National Bank & Trust Company, a national bank, was subjected to sales and use taxes imposed by New York State and Erie County. The bank claimed immunity from these taxes, asserting its status as an instrumentality of the U.S. government. The bank argued that historical precedent established national banks as tax-immune entities.

    Procedural History

    The case was initially decided in favor of the bank, granting it tax-immune status. The Appellate Division upheld this decision. The New York Court of Appeals then reviewed the case, ultimately reversing the lower court’s decision and dismissing the bank’s petition.

    Issue(s)

    Whether a national bank is an instrumentality of the United States Government and, therefore, as a purchaser, is immune from sales and use taxes imposed by a State and its counties.

    Holding

    No, because modern national banks are privately owned and operated, and are not so closely related to governmental activity as to become a tax-immune instrumentality.

    Court’s Reasoning

    The court acknowledged the historical precedent of granting tax immunity to national banks, particularly citing M’Culloch v. Maryland. However, the court distinguished the role and function of national banks in the present day from those in the past. The court emphasized that national banks are now privately owned and operated primarily for the benefit of their owners. While they are subject to government regulation, this regulation is not sufficient to render them instrumentalities of the federal government deserving of tax immunity.

    The court referenced Railroad Co. v. Peniston, noting that private corporations performing services for the government are not per se immune from non-discriminatory state taxation that does not impede their service. The court observed a general trend towards curtailing the class of instrumentalities considered tax-immune, stressing the actual effect of the tax on governmental functions rather than a mechanical application of immunity.

    The court addressed the bank’s reliance on Department of Employment v. United States, which granted tax immunity to the American National Red Cross. The court distinguished the Red Cross, highlighting its close ties to the government and its role in fulfilling national commitments. The court found the activities and functions of the Red Cross to be vastly different from those of a national bank.

    Furthermore, the court addressed 12 U.S.C. § 548, noting that it was designed to ensure non-discriminatory taxation of national banks, not to provide blanket immunity. It stated, “[T]he various restrictions [§ 548] * * * places on the permitted methods of taxation are designed to prohibit only those systems of state taxation which discriminate in practical operation against national banking associations or their shareholders as a class.”

    Ultimately, the court concluded that the bank had not presented a rational argument for why it should be exempt from contributing to state and local taxes, especially considering the essential services it benefits from. The court explicitly stated that until the Supreme Court rules that modern national banks are immune from such taxation, it would decline to do so itself.

  • Amoskeag Savings Bank v. Purdy, 196 U.S. 42 (1904): U.S. Supreme Court Clarifies Grounds for Equitable Intervention in State Taxation

    Amoskeag Savings Bank v. Purdy, 196 U.S. 42 (1904)

    A federal court will not interfere with a state’s tax assessment unless there is a clear showing of fraud, discrimination, or a violation of constitutional rights; mere errors or inequalities in valuation are insufficient grounds for equitable intervention.

    Summary

    Amoskeag Savings Bank sued tax assessors in federal court, alleging that the assessors systematically undervalued real estate while assessing bank stock at full value, resulting in unequal taxation. The Supreme Court affirmed the dismissal of the suit, holding that equitable intervention was not warranted. The Court reasoned that absent a showing of fraudulent intent or a violation of federal law, mere inequalities or errors in judgment by state tax officials do not justify federal court interference with state tax administration. The Court emphasized principles of comity and the reluctance of federal courts to disrupt state fiscal affairs.

    Facts

    Amoskeag Savings Bank, acting on behalf of its shareholders, filed suit to prevent the collection of taxes assessed on its stock. The bank alleged that the tax assessors systematically undervalued real estate in the city at approximately 60% of its actual value, while assessing the bank’s stock at its full value. The bank argued this disparity resulted in an unfair and unequal tax burden on its shareholders. The bank sought an injunction to restrain the collection of the tax. The bank argued that this violated the state law requiring assessment at “full and true value.”

    Procedural History

    The case originated in a lower federal court. The lower court dismissed the bank’s suit. The Supreme Court affirmed the lower court’s decision, holding that the bank had not presented sufficient grounds to justify equitable intervention by a federal court in state tax matters.

    Issue(s)

    Whether a federal court can enjoin the collection of state taxes based on allegations of unequal valuation of property, absent a showing of fraud, intentional discrimination, or a violation of federal constitutional rights.

    Holding

    No, because mere errors or inequalities in valuation by state tax officials, without evidence of fraud, intentional discrimination, or violation of federal constitutional rights, do not justify equitable intervention by a federal court to enjoin the collection of state taxes.

    Court’s Reasoning

    The Supreme Court emphasized that federal courts should be hesitant to interfere with a state’s fiscal operations. The Court acknowledged the principle that taxation should be equal, but recognized that perfect equality is often unattainable. The Court noted the absence of any allegation of fraudulent intent or bad faith on the part of the assessors. The Court distinguished the case from prior cases where equitable relief was granted, noting that those cases involved intentional discrimination against a class of persons or species of property, or violations of federal law, like the National Banking Act. The Court stated, “Equity will go far to afford relief in cases of mistake; or for the prevention of fraud; or to secure to the citizen the equal protection of the laws; but it is not its province to interfere with the collection of a tax, in a case where the grievance assigned does not relate to some question of fraud, or of illegal discrimination, or classification.” The Court indicated that the bank’s grievance was essentially a challenge to the valuation methodology, which is within the discretion of state officials. The court held that absent a showing of fraud, discrimination, or other grounds for equitable intervention, federal courts should defer to state processes for resolving tax disputes.