Pardee v. State Tax Com'n

• Citation: 89 A.D.2d 294,456 N.Y.S.2d 459
• Court: New York Supreme Court Appellate Division
• Decision Date: 04 November 1982
• Parties: In the Matter of Byron S. PARDEE et al., Petitioners, v. STATE TAX COMMISSION of the State of New York, Respondent.

Page 459

456 N.Y.S.2d 459

89 A.D.2d 294

In the Matter of Byron S. PARDEE et al., Petitioners, v. STATE TAX COMMISSION of the State of New York, Respondent.

Supreme Court, Appellate Division,

Third Department.

Nov. 4, 1982.

Milbank, Tweed, Hadley & McCloy, New York City (Frederick C. Kneip, New York City, of counsel), for petitioners.

Robert Abrams, Atty. Gen., Albany (Francis V. Dow, Asst. Atty. Gen., Albany, of counsel), for respondent.

Before KANE, J.P., and MAIN, MIKOLL, WEISS and LEVINE, JJ.

LEVINE, Justice.

The facts of this case are not in dispute. Petitioner Byron S. Pardee was a salaried employee of the Chase Manhattan Bank (the bank) or its predecessors, primarily working in one of its New York offices from 1937 until his retirement in 1973. In 1952, the bank established an employee profit-sharing plan, qualified as such under the Internal Revenue Code, funded through a Federally tax-exempt trust to which the bank and its employees contributed, known as the Thrift-Incentive Plan (the plan). The plan has continued in operation ever since. Participation in the plan is totally voluntary on the part of the individual employee, and requires only that he contribute not less than 2% nor more than 10% of his base salary. The bank's contributions to the trust are keyed to a percentage of its annual net earnings, provided they exceed a given return on capital, and are allocated among all employee participants in proportion to their respective annual salaries. The fund sets up two separate accounts on behalf of each participant, an "allocation account" for bank contributions and a "current deposit account" for the employee's contribution. Additionally, each participant is given five investment program options, reflecting the major alternative individual investment objectives concerning yield, risk, capital appreciation, etc. The funds in each of the respective investment programs are revalued three times annually to reflect increases or decreases in value and income received, and then appropriate credits or debits are made accordingly to each participant's accounts. The participant bears all risk of loss on his selected investment program. Subject to certain limitations imposed for administrative reasons or in order to preserve the plan's qualified tax status, withdrawals of a participant's share in the fund are optional at any time. A participant is always 100% vested in the balance of his current deposit account, and vests in his allocation account at the rate of 5% per year of employment. Premature withdrawal by a participant from the plan by termination of employment or otherwise results in his forfeiture of the nonvested portion of his allocation account, but that portion remains part of the trust and is allocated among the remaining participants. When petitioner Pardee became a participant at the inception of the plan, because of his years of service he was already 70% vested, and he became totally vested by 1957. Thus, from 1957 on he could have withdrawn virtually the full amount of both accounts and, in fact, at different times, made partial withdrawals from both accounts for various extraordinary personal expenses.

Pardee, a resident of New Jersey throughout the pertinent period, retired in 1973. At that time, he was paid an aggregate of some $65,000 as a lump-sum distribution representing the then current value of his two accounts in the plan. He and his wife filed a joint nonresident New York State income tax return for 1973 in which they reported as income that portion of the distribution representing the aggregate of the bank's contributions, but omitted the portion representing dividends, interest, net gains and appreciation on the investments of his and the bank's contributions. A deficiency notice was thereupon issued to include all income and gains derived from both accounts, on the basis that they constituted deferred compensation. Upon review and after a hearing, respondent commission sustained the notice of deficiency, determining that income and gains arising from the portion of the fund representing the bank's contributions were taxable to petitioners as being derived from New York sources within the meaning of section 632 (subd. [a] ) of the Tax Law. Although the commission further determined that income and gains derived from Pardee's personal contributions to the plan (his current deposit account) were not subject to tax, it sustained the full deficiency assessed on the grounds that petitioners failed to prove an accurate allocation of income between the two accounts.

The issue thus presented is whether, upon lump-sum distribution of a nonresident's share of a corporate, employee profit-sharing plan, the income and gains derived from a New York employer's contributions to the plan are includable in New York State adjusted gross income. At the outset, we reject respondent's contention that its determination in the instant case must be upheld if not totally irrational or unreasonable. The issue is not whether petitioners are entitled to a statutory exemption or deduction from income admittedly subject to taxation (see Matter of Grace v. New York State Tax Comm., 37 N.Y.2d 193, 371 N.Y.S.2d 715, 332 N.E.2d 886); or the validity of an apportionment formula between New York and non-New York income under administrative construction of a broad statutory term (see Matter of Conde Nast Pub. v. State Tax Comm., 51 A.D.2d 17, 378 N.Y.S.2d 132, mot. to dsm. app. granted 39 N.Y.2d 942, 386 N.Y.S.2d 1029, 352 N.E.2d 897); or the construction of a term for the purpose of computing a use tax (see Matter of Cons. Freightways Corp. of Delaware v. Tully, App.Div., 456 N.Y.S.2d 457 [decided herewith] ). Clearly, the issue is rather "whether property, income, a transaction or event is subject to taxation" (Matter of Grace v. New York State Tax Comm., 37 N.Y.2d 193, 196, 371...