Brady v. State

• Decision Date: 22 December 1992
• Citation: 80 N.Y.2d 596,607 N.E.2d 1060,592 N.Y.S.2d 955
• Parties: , 607 N.E.2d 1060, 61 USLW 2405 Lawrence J. BRADY et al., Appellants, v. STATE of New York et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 955

592 N.Y.S.2d 955

80 N.Y.2d 596, 607 N.E.2d 1060, 61 USLW 2405

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

Court of Appeals of New York.

Dec. 22, 1992.

[80 N.Y.2d 597] [607 N.E.2d 1061] Kohn, Nast & Graf, P.C. (David H. Weinstein and Robert S. [80 N.Y.2d 598] Kitchenoff, of the Pennsylvania Bar, admitted pro hac vice, of counsel), Krekstein, Wolfson & Krekstein, P.C. (Scott H. Mustin, of the Pennsylvania Bar, admitted pro hac vice, of counsel), and Goodkind, Labaton, Rudoff & Sucharow, New York City, for appellants.

Robert Abrams, Atty. Gen., Albany (Daniel Smirlock, Jerry Boone and Peter H. Schiff, of counsel), for respondents.

[80 N.Y.2d 599] Dowd & Reilly, Red Bank, NJ (William F. Dowd, of the New Jersey Bar, admitted pro hac vice, of counsel) and Morrison & Foerster, New York City (Paul H. Frankel, Arthur R. Rosen, Saul Heckelman and Hollis L. Hyans, of counsel), for New Jersey State Assembly, amicus curiae.

OPINION OF THE COURT

KAYE, Judge.

Plaintiffs Lawrence Brady and Barbara Brady are married and reside in New Jersey. Plaintiffs Deborah Labovitz and Judah Labovitz are married and reside in Pennsylvania. At all relevant times, Lawrence Brady and Deborah Labovitz earned income in New York, and Barbara Brady and Judah Labovitz earned income outside New York; in addition, the Labovitzes had a combined adjusted gross income of more than $100,000 and received unearned income from non-New York sources. Both couples filed joint Federal tax returns. Plaintiffs challenge New York's method of determining the nonresident tax on income earned in New York, whereby New York takes into account both New York and non-New York source income in calculating the tax rate to be applied to the New York income.

The laws at issue are Tax Law § 601(d) and (e), sections of the Tax Reform and Reduction Act of 1987 (L 1987, ch 28) (TRARA). Under Tax Law § 601(e)(1), the tax of a nonresident is first calculated "as if [the taxpayer] were a resident." Thus, the nonresident's tax base (as that term is used by the parties) is determined by applying the appropriate graduated rate in Tax Law § 601(a) through (c) to the taxpayer's total income from all sources (less any statutory deductions, exemptions or credits [Tax Law §§ 606, 611(a) ]. ¹ The taxpayer's total income is derived from "New York adjusted gross income" (Tax Law § 611[a], which is determined by reference to the taxpayer's "federal adjusted gross income" (Tax Law § 612[a].

Residents pay their entire tax base. For nonresidents, however, the amount is reduced by the percentage of income earned in New York compared to total income (Tax Law § 601[e][1]. Therefore, while residents and nonresidents with the same total income are taxed at the same rate, the nonresident pays tax only on the percentage of income attributable to New York.

Assuming, for example, an effective tax rate of 6% for incomes of $25,000 or less, and an effective tax rate of 7% for incomes above $25,000, a resident with total income of $50,000 would have a tax base of $3,500 and would pay that amount. So would a nonresident with the same income entirely attributable to New York sources. However, a nonresident with $25,000 of New York income and $25,000 of non-New York income, while having the same $3,500 tax base, would pay half that amount--$1,750--because only half of the income would be subject to the New York tax.

In addition, in 1988 only, the taxpayer's effective rate was increased with reference to unearned income if the taxpayer had New York adjusted gross income over $100,000 (Tax Law § 601[d]. Thus, the hypothetical resident taxpayer with a total 1988 income of $110,000, including total unearned income of $10,000 from non-New York sources, would have an initial tax base of $7,700. That tax base would be increased by $20, which is derived by multiplying $10,000 by 2% and then multiplying the resulting figure of $200 by (110,000-100,000)/100,000. A resident with such income would be liable for a tax of $7,720. A nonresident, however, would pay only $7,025, since the nonresident's tax base would be apportioned by the percentage of New York income (here 100,000/110,000 or 91%).

Plaintiffs challenge this tax scheme, complaining that New York unconstitutionally disadvantages nonresidents. They urge us not to compare residents and nonresidents of the same total income, but to look only to New York income in reviewing the legality of the tax rate. Thus, plaintiffs argue, the same tax rate must apply to a resident with total income of $25,000 and a nonresident with New York income of $25,000, regardless of the nonresident's total income reported on the tax return.

Plaintiffs seek a declaration, for themselves and a class of similarly situated persons, that these provisions violate due process because presumably higher taxes arising from higher tax rates demonstrate that New York is in effect impermissibly taxing out-of-State income. They also claim the scheme violates the constitutional Privileges and Immunities and Equal Protection Clauses since a New York resident having no income other than New York earnings may pay a lower tax than a nonresident with the same New York earnings who has additional income from other sources.

Supreme Court denied plaintiffs' motion for class certification and granted defendants' motion for summary judgment dismissing the complaint. The Appellate Division modified by declaring Tax Law § 651(b)(2) unconstitutional and remitting for further proceedings on that issue, but otherwise affirmed. 172 A.D.2d 17, 576 N.Y.S.2d 896. On plaintiffs' appeal from the Appellate Division order, we now affirm. ²

I.

Plaintiffs first claim that by setting tax rates with reference to adjusted gross income New York taxes non-New York income, thus taking property in violation of due process. They point to three instances: (1) income of the nonresident taxpayer earned outside New York and included on the taxpayer's Federal return; (2) income of the nonresident spouse earned outside New York and included on the taxpayer's joint Federal return; and (3) for 1988 only, unearned out-of-State income referenced for purposes of the section 601(d) surcharge on those with a total adjusted gross income over $100,000. Each of these is included in the tax base solely for purposes of rate determination. Thus, the inquiry with respect to each category is the same: in these circumstances, is out-of-State income being impermissibly taxed?

We start with the proposition that legislative enactments enjoy a presumption of constitutionality (Montgomery v. Daniels, 38 N.Y.2d 41, 54, 378 N.Y.S.2d 1, 340 N.E.2d 444). States, of course, have the power to tax nonresidents on income derived from sources within their borders (Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 75, 40 S.Ct. 228, 230, 64 L.Ed. 460; Shaffer v. Carter, 252 U.S. 37, 52, 40 S.Ct. 221, 225, 64 L.Ed. 445). Similarly, progressive tax systems, which apportion the tax burden based on the taxpayer's ability to pay, are unquestionably constitutional (Brushaber v. Union Pac. R.R., 240 U.S. 1, 25, 36 S.Ct. 236, 244, 60 L.Ed. 493), and indeed are "widespread among the United States and firmly imbedded in the federal tax structure" (Wheeler v. State, 127 Vt. 361, 365, 249 A.2d 887, 890, appeal dismissed for want of a substantial Federal question 396 U.S. 4, 90 S.Ct. 24, 24 L.Ed.2d 4). ³

It has long been the rule that States may refer to nontaxable out-of-State assets in setting their rates for taxable assets (see, Atlantic & Pac. Tea Co. v. Grosjean, 301 U.S. 412, 57 S.Ct. 772, 81 L.Ed. 1193; Maxwell v. Bugbee, 250 U.S. 525, 40 S.Ct. 2, 63 L.Ed. 1124). Maxwell involved a New Jersey inheritance tax that required the inclusion of the entire estate of the decedent, wherever located, to determine the rate by which the New Jersey property would be taxed. The actual tax was calculated, as here, by applying the rate applicable to the entire estate, but then reducing the tax to reflect only the percentage of the estate located in New Jersey. The United States Supreme Court found the statute constitutional, holding:

"[T]he subject-matter here regulated is a privilege to succeed to property which is within the jurisdiction of the State. When the State levies taxes within its authority, property not in itself taxable by the State may be used as a measure of the tax imposed * * * In the present case the State imposes a privilege tax, clearly within its authority, and it has adopted as a measure of that tax the proportion which the specified local property bears to the entire estate of the decedent * * * It is in no just sense a tax upon the foreign property." (Id., at 539, 40 S.Ct. at 6.)

Similarly, in Grosjean, the Supreme Court upheld a Louisiana license tax on in-State chain stores that was calculated on the basis of the taxpayer's nationwide operation, stating "[i]n legal contemplation the state does not lay a tax upon property lying beyond her borders" (id., 301 U.S. at 425, 57 S.Ct. at 777).

Since Maxwell and Grosjean, high courts in other States have upheld tax schemes similar to the one at issue here. (See, Stevens v. State Tax Assessor, 571 A.2d 1195 [Me.], cert denied 498 U.S. 819, 111 S.Ct. 65, 112 L.Ed.2d 40; Wheeler v. State, 127 Vt. 361, 249 A.2d 887, supra; cf., United States v. State of Kansas, 810 F.2d 935 [10th Cir.] [upholding validity of including nonresident military income--which was not taxable by State--in determining State tax rate]; Aronov v. Secretary of Revenue, 323 N.C. 132, 371 S.E.2d 468 [upholding requirement that nonresident taxpayer reduce net operating loss from North Carolina partnership by amount of out-of-State income], cert. denied 489 U.S. 1096, 109 S.Ct. 1568, 103 L.Ed.2d 935.)

As in Stevens and Wheeler, the subject matter here regulated is a tax on in-State income, which is within the jurisdiction of the State. When the State levies taxes within its authority, ...