Astoria Federal Sav. & Loan Ass'n v. State
| Decision Date | 08 July 1996 |
| Citation | 222 A.D.2d 36,644 N.Y.S.2d 926 |
| Court | New York Supreme Court — Appellate Division |
| Parties | ASTORIA FEDERAL SAVINGS & LOAN ASSOCIATION, Appellant, v. STATE of New York, et al., Respondents, City of New York, Intervenor-Respondent. |
Hutton & Solomon, L.L.P., New York City (Stephen L. Solomon, Roy F. Hutton, Kenneth I. Moore, and R. Gordon Abitbol, of counsel), for appellant.
Dennis C. Vacco, Attorney-General, New York City (Carol E. Fiske and Bernadine M. Koch, of counsel), for respondents.
Paul A. Crotty, Corporation Counsel, New York City (Edward F.X. Hart and Amy F. Nogid, of counsel), for intervenor-respondent.
Before ROSENBLATT, J.P., and COPERTINO, ALTMAN and FRIEDMANN, JJ.
On this appeal, we are asked to consider whether Public Authorities Law § 1045-u(3), as originally enacted, exempted the bonds issued by the New York City Municipal Water Finance Authority and the interest they generate from inclusion in a corporate bondholder's entire net income for the purpose of calculating the corporation's New York State and New York City franchise tax obligations. Should the section be susceptible of such a construction, we are additionally asked to determine whether the retroactive application of a 1991 amendment to Public Authorities Law § 1045-u(3) violated existing bondholders' contractual or constitutional rights.
In 1984 the New York State Legislature enacted the New York State Local Water and Sewer Authority Act (hereinafter the Act) (see, L 1984, ch 510; Public Authorities Law § 1196-a et seq.). The purpose of the Act was to enable local governments to provide safe and adequate supplies of water and sewerage services to the public, with ease and expedition (see, Public Authorities Law § 1196-a). In furtherance of that aim, it authorized local authorities to obtain financing for water and sewer improvements (see, Public Authorities Law § 1196-a). Under the Act, the New York State Legislature had the power to create local water and sewerage authorities (see, Public Authorities Law § 1196-c[1] ). In addition, the legislation set forth, among other things, the general powers of such authorities (see, Public Authorities Law § 1196-d) and the tax consequences of their creation (see, Public Authorities Law § 1196-l).
Simultaneously with the passage of this Act, the New York State Legislature passed the New York City Municipal Water Finance Authority Act (). The purpose of the latter was to create alternative financing methods for New York City water projects (see, L.1984, ch. 513, § 1). This legislation created the corporation known as the New York City Municipal Water Finance Authority (see, Public Authorities Law § 1045-c[1] ), and gave that Authority the power to issue bonds in order to obtain capital (see, Public Authorities Law § 1045-d[3] ). Between 1984 and 1990, the State Legislature passed similar legislation creating 11 additional local water and sewer public authorities, all of which were similarly empowered to issue bonds.
The provision at issue here, Public Authorities Law § 1045-u(3), as enacted in 1984, reads as follows:
On December 18, 1990, the New York State Department of Taxation and Finance issued a memorandum which addressed the question, posed by some corporate bondholders, of whether bonds issued by public authorities (including the New York City Municipal Water Finance Authority [hereinafter the Authority], or the interest from those bonds, were "exempt" from New York State corporate franchise taxation under the language of Public Authorities Law § 1045-u(3). The Department concluded that "the term 'franchise taxes' " in, inter alia, Public Authorities Law § 1196-l(3) and § 1045-u(3), "refers to and modifies the exemption from taxation of the activities of the Authority but not the bonds or the interest from the bonds of the Authority". Accordingly, the Department concluded, the interest on the bonds should be included in a corporation's computation of its "entire net income" used to determine its franchise taxes. This reading was consistent with the long-standing policy of the New York State Department of Taxation and Finance, which had always required that the interest earned on comparable bonds be considered as income for franchise tax purposes.
In 1991, the New York State Legislature amended Public Authorities Law § 1045-u(3) and related sections (see, L.1991, ch. 166, §§ 22-36), to read as follows:
(see, L.1991, ch. 166, § 26).
The Preamble to the 1991 amendment set forth that its purpose was to make it "unquestionably clear" and to "reaffirm" that the bonds issued by the Authority and the interest from those bonds had always been subject to indirect taxation, including State and local franchise, estate, gift, and transfer taxes (see, L.1991, ch. 166, § 22). The effective date of the 1991 amendments was retroactive to July 24, 1984 (see, L.1991, ch. 166, § 406[d].
In 1986, the plaintiff, a Federal savings and loan association, purchased Water and Sewer revenue bonds, Series A, issued by the Authority. The bonds, which accrue interest at an annual rate of .25%, are scheduled to mature on June 15, 2015. The offering statement of the bonds declared: "In the opinion of Bond Counsel, under existing law interest on the Series A Bonds is exempt from Federal income taxes and from personal income taxes levied by New York State or any political subdivision thereof, including The City of New York". Over the ensuing several years, the plaintiff included the revenues from these bonds in its computation of income for franchise tax purposes.
On or about February 26, 1993, the plaintiff commenced this action against the State of New York and the New York State Department of Taxation and Finance, seeking a judgment declaring, inter alia, that the language of Public Authorities Law § 1045-u(3), as originally enacted in 1984, exempted the bonds issued by the Authority, and the interest they generate, from inclusion in a corporate bondholder's entire net income for the purpose of calculating a corporation's franchise tax obligations. According to the plaintiff's reading of Public Authorities Law § 1045-u(3), as originally enacted, the exemption from franchise taxes accorded to the Authority in the first sentence of the statute was carried over into the "covenant" with purchasers in the second sentence's promise that all purchasers would similarly be "free from such taxes, except for transfer and estate taxes" (emphasis added). To the extent that the 1991 amendment altered the latter promise, the plaintiff argued, it violated constitutional guarantees of due process and rights of contract. In an order dated November 18, 1993, the Supreme Court, Nassau County, granted the City of New York's unopposed motion to intervene.
Thereafter, the plaintiff moved for summary judgment and the State and City cross-moved for summary judgment. The Supreme Court denied the plaintiff's motion, granted the State's and the City's cross motions, and declared that Public Authorities Law § 1045-u(3), as originally enacted, did not exempt bonds issued by the Authority and the interest they generate from inclusion in a corporate bondholder's total net income for the purpose of calculating the corporation's New York City and New York State franchise tax obligations.
We now affirm.
Franchise taxes are excise taxes imposed on corporate entities for the privilege of carrying on a business as a corporation (see, e.g., Black's Law Dictionary 593 [5th ed 1979]; 71 AmJur2d, State and Local Taxation, § 266, at 583-584; 24 N.Y.Jur., Franchises, § 1, at 2-4; 37 CJS, Franchises, § 1, at 141-147; 12 McQuillin, Municipal Corporations, Franchises § 34.03, at 10-11 [3d ed]. A franchise tax is an indirect rather than a direct tax on a corporation's entire net income (see, Werner Mach. Co. v. Director of Div. of Taxation, 350 U.S. 492, 76 S.Ct. 534, 100 L.Ed. 634; Matter of Anchor Sav. Bank v. Chu, 117 A.D.2d 889, ...
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