Brady v. State

• Decision Date: 27 November 1991
• Citation: 172 A.D.2d 17,576 N.Y.S.2d 896
• Parties: Lawrence J. BRADY et al., Appellants, v. STATE of New York et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 896

576 N.Y.S.2d 896

172 A.D.2d 17

Lawrence J. BRADY et al., Appellants, v. STATE of New York et al., Respondents.

Supreme Court, Appellate Division Third Department.

Nov. 27, 1991.

Goodkind, Labaton & Rudoff (David H. Weinstein of Kohn, Klein, Nast & Graf, P.C., Philadelphia, Pa., of counsel), New York City, for appellants.

Robert Abrams, Atty. Gen. (Daniel Smirlock, of counsel), Albany, for respondents.

James J. Haggerty (Gregory E. Dunlap, of counsel), Harrisburg, Pa., for Commonwealth of Pennsylvania, amicus curiae.

Before MAHONEY, P.J., and WEISS, YESAWICH, LEVINE and MERCURE, JJ.

LEVINE, Justice.

Appeals (1) from an order of the Supreme Court (Prior Jr., J.), entered September 12, 1990 in Albany County, which, inter alia, granted defendants' motion for summary judgment dismissing the complaint, (2) from an order of said court, entered February 15, 1990 in Albany County, which, inter alia, denied plaintiffs' motion for class action certification, (3) from two orders of said court, entered February 15, 1990 in Albany County, which granted defendants' motions for protective orders, and (4) from the judgments entered thereon.

Plaintiffs Lawrence J. Brady and Barbara A. Brady are married and reside in New Jersey. Lawrence Brady was employed and earned income in New York in 1988. Plaintiffs Judah I. Labovitz and Deborah R. Labovitz are husband and wife and reside in Pennsylvania. During 1988, Deborah Labovitz was employed and earned income in New York. Neither Barbara Brady nor Judah Labovitz had any New York source income in 1988. The Labovitz couple had unearned income from non-New York sources and had combined adjusted gross income of over $100,000. Both couples filed joint Federal income tax returns for 1988. They have brought this action to challenge the validity of New York's income tax treatment of nonresident taxpayers.

Under Tax Law § 601(e)(1), New York imposes a tax "on the taxable income which is derived from sources in this state of every nonresident". Section 601(e) provides for what is essentially a two-step process to determine the tax due. First, a preliminary tax is calculated "as if such nonresident * * * were a resident" (Tax Law § 601[e][1]. For residents, that tax is determined by applying the appropriate tax rate to the taxpayer's "New York taxable income" (Tax Law § 601[a]-[c], adding any additional tax due on unearned income if the taxpayer had New York adjusted gross income in excess of $100,000 (see, Tax Law § 601[d] and deducting various statutory credits (see, Tax Law § 606). New York taxable income is derived from "New York adjusted gross income" (less deductions and exemptions) (Tax Law § 611[a], and New York adjusted gross income is in turn derived from the taxpayer's Federal adjusted gross income (see, Tax Law § 612). Once the tax is thus initially fixed as though the nonresident was a resident taxpayer, it is then multiplied by a fraction, the numerator of which is the nonresident's New York income and the denominator of which is that person's Federal adjusted gross income, in order to arrive at the final tax due (see, Tax Law § 601[e][1]. Thus, as agreed to by all parties, the initial tax computation for the liability of a nonresident taxpayer takes into account the taxpayer's income from all sources, within and without the State, but the actual tax due is that fraction of the tax initially determined that is equivalent to the ratio of the taxpayer's New York income to total income. Because the State's income taxation system is based upon progressive rates, a New York resident having no income except New York earnings will pay less tax on those earnings than a nonresident having the same New York earnings plus additional income from non-New York sources.

One additional facet of the State income tax structure affects the tax paid by non-New York residents on their New York source income. Under Tax Law § 651(b)(2), nonresident taxpayers and their nonresident spouses, like resident taxpayers and their resident spouses, must file a joint State income tax return (thereby reporting their aggregate incomes) if they filed a joint Federal tax return. Contrastingly, if one of the spouses is a resident and the other is a nonresident, they may elect to file either separate or joint State income tax returns, irrespective of whether they filed a joint Federal return (see, Tax Law § 651[b][4].

Plaintiffs in this action seek a declaration of the unconstitutionality of Tax Law § 601(d) and (e) and § 651(b)(2), an injunction against the enforcement of those sections, and damages for loss of the use of their money paid for taxable years 1988 and thereafter in excess of what they would have paid had Lawrence Brady and Deborah Labovitz been permitted to file individual State tax returns reporting only their New York source incomes and had their respective tax rates been based solely on such New York source income. They allege that the enforcement of State income tax liability against them under those sections denied them substantive due process and equal protection under the 14th Amendment of the U.S. Constitution, and violated the Privileges and Immunities Clause (U.S. Const., art. IV, § 2, cl. 1) and the Commerce Clause (U.S. Const., art. I, § 8, cl. 3). Plaintiffs brought this action as a class action on behalf of one plaintiff class, i.e., all nonresidents required to file a New York income tax return, and two plaintiff subclasses, i.e., (1) those members of the nonresident class who have no New York source income but who are compelled to file a joint New York income tax return with their spouses, and (2) those members of the nonresident class who are subject to the tax imposed by Tax Law § 601(d) upon unearned income from non-New York sources.

Plaintiffs sought disclosure by way of production of documents concerning, inter alia, State administrative and legislative deliberations regarding the taxation of nonresidents and concerning the actual fiscal impact of the changes in the system of taxing nonresidents from 1986 to 1988. Supreme Court granted protective orders as to the disclosure sought because it viewed the requests as overbroad and not relevant to the constitutional issues. Next, plaintiffs moved for an order pursuant to CPLR article 9 certifying that the action could be maintained as a class action. Supreme Court denied plaintiffs' motion on the ground, inter alia, that plaintiffs did not show that a class action against the State in this matter is superior inasmuch as the doctrine of stare decisis could be asserted against defendants in the future. Finally, defendants moved for summary judgment dismissing the complaint and plaintiffs cross-moved for partial summary judgment declaring Tax Law § 601(d) and (e) and § 651(b) unconstitutional. Supreme Court granted defendants' motion and denied plaintiffs' cross motion. Plaintiffs appeal from all of the foregoing adverse determinations.

Because the resolution of the constitutional issues involved in this appeal necessarily will affect the disposition of the remaining procedural issues, we address first whether Supreme Court properly dismissed plaintiffs' challenges to the validity of the provisions of the Tax Law in question. In our view, there is merit to plaintiffs' due process objection to Tax Law § 651(b)(2). By virtue of that provision, a nonresident having no New York source income whatsoever is compelled to file a joint New York income tax return solely because that person's nonresident spouse earned New York income and the couple filed a joint Federal income tax return for the same taxable year. Concededly, a person obligated to file a State tax return or one who is a signatory to a joint return is civilly liable for the tax obligation arising therefrom, plus penalties (see, Tax Law § 685), and may also be exposed to criminal liability (see, Tax Law §§ 1801, 1804). In Miller Bros. Co. v. Maryland, 347 U.S. 340, 74 S.Ct. 535, 98 L.Ed. 744 the United States Supreme Court held, with respect to a state's power to tax extraterritorily, that there was a settled "consistent adherence to one time-honored concept: that due process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax" (id., at 344-345, 74 S.Ct. at 539). Out-of-state cohabitation with a spouse having New York income and filing a joint Federal income tax return with that spouse cannot constitute the necessary minimum connection for the extraterritorial exercise of New York's taxing power. Thus, we have concluded that Tax Law § 651(b)(2) violates due process insofar as it may be applied to require a nonresident spouse of a nonresident taxpayer to file a joint State tax return solely by reason of the marital relationship and the filing by the couple of a joint Federal income tax return.

The foregoing ruling regarding Tax Law § 651(b)(2) renders academic plaintiffs' constitutional challenges to the validity of Tax Law § 601(d) and (e) that were based upon the interaction of those sections with section 651(b)(2). The language of Tax Law § 601(d) and (e) is "marriage neutral". Once a nonresident spouse having no New York income is no longer obligated to file a joint return, the remaining sections of the Tax Law at issue here are not subject to the objection that they increase a nonresident taxpayer's State tax liability on the basis of the non-New York income of that taxpayer's nonresident spouse.

Plaintiffs nonetheless argue that Tax Law § 601(e) is unconstitutional even in the absence of the joint filing requirement of Tax Law § 651(b)(2). They claim that the section violates due process because its inclusion of the nonresident's non-New York income in the initial determination of the tax before applying the apportionment formula is the functional equivalent of a tax on that out-of-State income. Alternatively, they assert that section 601(e) discriminates against...