American Tel. & Tel. Co. v. State Tax Com'n

• Decision Date: 29 March 1984
• Citation: 61 N.Y.2d 393,474 N.Y.S.2d 434,462 N.E.2d 1152
• Parties: , 462 N.E.2d 1152 In the Matter of AMERICAN TELEPHONE AND TELEGRAPH COMPANY, Appellant- Respondent, v. STATE TAX COMMISSION, Respondent-Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 434

474 N.Y.S.2d 434

61 N.Y.2d 393, 462 N.E.2d 1152

In the Matter of AMERICAN TELEPHONE AND TELEGRAPH COMPANY,

Appellant- Respondent,

v.

STATE TAX COMMISSION, Respondent-Appellant.

Court of Appeals of New York.

March 29, 1984.

Edward N. Costikyan, Alan Pfeffer, Howard J. Trienens, Martin J. Eisen and Clarin S. Schwartz, New York City, for appellant-respondent.

Robert Abrams, Atty. Gen. (Wayne L. Benjamin and Peter H. Schiff, Asst. Attys. Gen., of counsel), for respondent-appellant.

OPINION OF THE COURT

MEYER, Judge.

A New York transmission company which provides telephone and other communication service throughout the continental United States through subsidiary corporations but carries on in New York the financial studies necessary to meet the capital requirements of the subsidiaries, is subject to the franchise tax imposed by section 183 of the Tax Law on capital stock measured by "gross assets * * * employed in any business within this state" on money advanced to subsidiaries and on cash temporarily invested pending such advances. It is, however, not taxable under that section on interest or dividends receivable from, but not yet paid by, the subsidiaries. Nor is the company subject to the franchise tax imposed by section 184 of the Tax Law on "gross earnings from all sources within this state" on interest received by it from out-of-State subsidiaries or out-of-State obligors on such temporary investments, notwithstanding its financial operations in New York. The judgment of the Appellate Division should, therefore, be modified to annul so much of the State Tax Commission's determination as imposed section 183 capital stock tax upon interest and dividends receivable from, but not yet paid by, subsidiaries and, as so modified, should be affirmed, without costs.

I

Involved in this appeal are the tax returns under sections 183 and 184 of the Tax Law of American Telephone and Telegraph (AT & T) for the years 1969 through 1972. The facts have been stipulated. AT & T is incorporated in New York as a transmission company and maintains its principal offices in New York City in a building owned by 195 Broadway Corporation, a wholly owned subsidiary. It does no intrastate communication business in New York, but through some 23 subsidiaries, in 21 of which it owns either the entire stock or a majority interest, it operates a communications network throughout the continental United States which interconnects with communication systems in most other countries throughout the world.

Under its license agreement with the various subsidiaries in effect during the period in question AT & T agreed, in return for 1% of the subsidiary's gross earnings, to conduct research in telephony and make the results available to the subsidiary, to furnish advice and assistance to it in general engineering, plant, traffic, operating, commercial, accounting, patent, legal, administrative and other matters, and with respect to finances of the subsidiary to furnish advice and assistance, to aid in securing funds on fair terms, to assist actively in marketing the subsidiary's securities, and to give other necessary financial support and assistance.

To support its own and the subsidiaries' need for funds, AT & T offered its own securities in the financial market. The funds raised, to the extent not immediately required by the needs of the system, were temporarily invested by AT & T in short-term securities, the turnover in the temporary cash investment account in each of the years in question being in excess of $5,000,000,000 and the year-end balance in all but one of the years approximating $1,000,000,000. Management of these funds was carried out by a full-time AT & T treasury department staff, which prepared and reviewed investment plans, maintained day-to-day contact with the subsidiaries with regard to funds needed or to be repaid, and made all required decisions. A portion of the temporary investment account was segregated for use outside New York State. Advances to or investments in subsidiaries outside New York in 1970, 1971 and 1972 were between $1,500,000,000 and $2,000,000,000.

AT & T advanced money to all of its subsidiaries other than New York Telephone Company. Advances were all interest bearing and, with two open account exceptions, were evidenced by demand notes, custody of which was maintained by AT & T's treasury department in New York. Advances were also made to 195 Broadway Corporation, which used the advances principally in New Jersey. The subsidiaries sold stock either to AT & T or to others and from the proceeds of such sales repaid the advances received from AT & T.

AT & T's capital stock tax returns have since 1923 or before treated advances to subsidiaries as assets employed in New York only to the extent that a subsidiary's assets were allocated to New York and have treated temporary investments as pre-employment capital rather than assets employed in New York. Its capital stock tax return for 1924 and all subsequent years has had annexed a statement reading as follows: "The company operates long distance telephone lines throughout the United States, connecting the lines of local telephone companies. Its principal activity however consists in the financing of its subsidiary companies constituting part of the system, the securities of which are owned or controlled by it. This activity involves the advance to system companies of large amounts of capital to be permanently used by them to construct plants. These advances constitute a permanent employment of capital by this company represented by securities of such system companies. These large sums must frequently be provided in advance of the actual needs of the system companies and in such cases this company temporarily holds them through the acquisition of short term marketable securities, such as federal securities or certificates of deposit." Not until the audit of capital stock tax reports for the years in issue had such reports been questioned. Likewise it had since 1908 excluded from its gross earnings tax reports interest on obligations issued by debtors located outside New York and its doing so had never been questioned until the audit for the years in issue.

The State Tax Commission determined advances to subsidiaries for use outside New York, the temporary cash investments and interest and dividends receivable from, but not yet payable by, subsidiaries to be assets employed in New York within the meaning of section 183 of the Tax Law and interest income from advances to out-of-State subsidiaries and from obligations of out-of-State obligors held in the temporary cash investment account to be earnings from sources within New York within the meaning of section 184 of the Tax Law. The article 78 proceeding begun by AT & T to review the commission's determination having been transferred to the Appellate Division, that court modified by annulling so much of it as held the gross earnings tax applicable to income from out-of-State obligors and otherwise confirmed. One Justice dissented as to the capital stock tax on the ground that in view of the long-standing contrary interpretation by the commission and by the Attorney-General (1909 Opns.Atty.Gen. 357), with which AT & T had complied without challenge, the ruling of the commission could not be applied retroactively. AT & T appeals, on dissent grounds, so much of the Appellate Division judgment as relates to the capital stock tax and the State appeals from the annulment of the gross earnings tax determination. We modify, as above stated, and affirm.

II

Whether assets are "employed" in business within this State, although a matter of statutory interpretation, is governed by the rule that "where the question is one of specific application of a broad statutory term in a proceeding in which the agency administering the statute must determine it initially, the reviewing court's function is limited" (National Labor Relations Bd. v. Hearst Pub., 322 U.S. 111, 131, 64 S.Ct. 851, 860, 88 L.Ed. 1170 [whether newsboys are "employees"] ). That rule has been applied by us a number of times with respect to the construction of tax statutes (Matter of Koner v. Procaccino, 39 N.Y.2d 258, 264, 383 N.Y.S.2d 295, 347 N.E.2d 658 [whether freelance photographers "practice" a "profession"]; Matter of Young v. Bragalini, 3 N.Y.2d 602, 605, 170 N.Y.S.2d 805, 148 N.E.2d 143 [where insurance partnership is "carrying on" business]; Matter of Colgate-Palmolive-Peet Co. v. Joseph, 308 N.Y. 333, 338, 125 N.E.2d 857 [whether cartons in which goods sold for resale are delivered are subject to sales tax]; Matter of Mounting & Finishing Co. v. McGoldrick, 294 N.Y. 104, 108, 60 N.E.2d 825 [whether materials purchased for production of displays into which are incorporated items received by the manufacturer from its customers are purchased "for resale in the form of tangible personal property"] ). If the agency's determination is not supported by substantial evidence or it constitutes a clearly erroneous interpretation of the law or the facts, it will be annulled (Matter of Koner v. Procaccino, 39 N.Y.2d at p. 264, 383 N.Y.S.2d 295, 347 N.E.2d 658), but if it is supported by facts or reasonable inferences that can be drawn from the record and has a rational basis in the law, it must be confirmed (Matter of Young v. Bragalini, 3 N.Y.2d, at p. 605, 170 N.Y.S.2d 805, 148 N.E.2d 143; Matter of Colgate-Palmolive-Peet Co. v. Joseph, 308 N.Y., at p. 338, 125 N.E.2d 857). Applying those rules we conclude that moneys advanced to subsidiaries and cash temporarily invested pending such advances are assets employed in New York, but that interest and dividends receivable from, but not yet paid by, subsidiaries are not.

A

AT & T argues that it is a transmission company, not an investment company, that in effect the commission has held assets taxable by New York "if the bookkeeping functions connected with them are located in New...