Franklin Soc. for Home Bldg. & Sav. v. Bennett

• Decision Date: 28 December 1939
• Citation: 282 N.Y. 79,24 N.E.2d 854
• Court: New York Court of Appeals Court of Appeals
• Parties: FRANKLIN SOC. FOR HOME BUILDING & SAVINGS v. BENNETT, Atty. Gen., et al.

282 N.Y. 79

24 N.E.2d 854

FRANKLIN SOC. FOR HOME BUILDING & SAVINGS

v.BENNETT, Atty. Gen., et al.

Court of Appeals of New York.

Dec. 28, 1939.

Appeal from Supreme Court, Appellate Division, Third Department.

Proceeding by the Franklin Society for Home Building & Savings against John J. Bennett, Jr., as Attorney General for the state of New York, and others, to recover a sum of money paid to a county recording officer in connection with the recording of certain mortgages. The controversy was submitted upon an agreed statement of facts. From a judgment of the Appellate Division, 257 App.Div. 486, 14 N.Y.S.2d 49, the plaintiff appeals.

Affirmed.

HUBBS and RIPPEY, JJ., dissenting. James A. Davis, and Leon Quat, both of New York City, for appellant.

John J. Bennett, Jr., Atty. Gen. (Henry Epstein, Sol. Gen., of counsel), for respondents.

LEHMAN, Judge.

The plaintiff is a savings and loan association, organized under the provisions of article X, section 375 et seq., of the Banking Law (Consol.Laws, ch. 2). By section 386 (now s 380 subd. 5) of that article it is required to record immediately every mortgage taken by it. The Register of the County of Queens, the recording officer of that county, refused to accept four mortgages tendered to him by the plaintiff for record unless the plaintiff paid to him the amount of the ‘recording tax,’ which the Legislature had attempted to impose upon each mortgage recorded after the 1st day of July, 1906. (Tax Law (Consol.Laws, ch. 60), s 253). The plaintiff claimed that under the Constitution of the State of New York and the Constitution of the United States, the tax could not lawfully be imposed, but paid the tax under protest. The controversy has been submitted to the Appellate Division of the Third Department upon an agreed statement of facts and that court has sustained the validity of the tax.

The Legislature for more than a century has made provision for recording instruments affecting real property. Laws of 1810, ch. 175; 1 Revised Laws of 1813, ch. 97, p. 369. Cf. Felix v. Devline, 90 App.Div. 103, 86 N.Y.S. 12. Article 9,section 290 et seq., of the Real Property Law (Consol.Laws, ch. 50) now regulates the recording of such instruments and defines the rights and privileges of owners of recorded instruments. The advantage that may be acquired by recording is a compelling inducement to record and mortgages are withheld only in exceptional cases. Indeed, savings and loan associations like the plaintiff, which are regulated by the Banking Law, are allowed no choice there. They must record their mortgages. Other intangible personal property may easily be concealed from the tax collector; but few mortgages escape a tax collector, who lies in wait to demand the tax when the mortgage is recorded. A special tax upon mortgages, payable at the time when the mortgages are recorded, reaches a ‘form of intangible property, which is likely to evade taxation under the general property tax.’ That is the purpose and effect of the recording taxes which have become part of the taxing system of many States. Cf. Dissenting opinion of Brandeis, J., in Louisville Gas & Electric Co. v. Coleman, 277 U.S. 32, 47, 48 S.Ct. 423, 72 L.Ed. 773. A special tax on mortgages, payable when they are recorded and annually thereafter, was imposed by chapter 729 of the Laws of 1905. Though that statute required the application of a rule or system of taxation for mortgages recorded after July 1, 1905, different from that which was applied to those recorded before that date and to other personal property, yet such classification does not deprive the taxpayer of his property without due process of law, or deny him the equal protection of the law. People ex rel. Eisman v. Ronner, 185 N.Y. 285, 77 N.E. 1061. The tax imposed by that statute was an annual tax ‘payable to the proper officer at the recording office where the mortgage is first offered for record in this state, until the same is satisfied of record in said office.’ Section 296.

In 1906 the Legislature passed a statute (Laws of 1906, ch. 532), which, the court has said, provided ‘a different scheme of mortgage taxation * * * to take effect July 1st of that year, and applicable to mortgages recorded on or after that date. It prescribed a recording tax of 50 cents on each $100 in lieu of the annual property tax prescribed by the statute of 1905.’ (Italics are new.) People v. Trust Company of America, 205 N.Y. 74, 76, 98 N.E. 207. With few changes the provisions of the 1906 statute are now embodied in article XI, section 250 et seq., of the Tax Law. Lest the inducement to record offered by the Real Property Law should in some cases be nullified by reluctance to pay a recording tax, the Legislature, in section 258 of the Tax Law, has provided an effective form of economic compulsion to supplement the inducement by restricting, if not, indeed, prohibiting, the use of an unrecorded mortgage for any practical purposes.

Many of the provisions of the statute of 1906 now part of the Tax Law were contained, also, in chapter 729 of the Laws of 1905, which was supplanted by the later statutes. For the taxpayer the significant difference was that under the earlier statute the tax was payable annually; under the later statute, the tax is payable only once at the time the mortgage is recorded. Upon payment of the tax the owner of the mortgage might secure the benefit of the recording acts. Until the tax was paid, the use of the mortgage was subject to the drastic restrictions upon its use which were imposed by the Tax Law. The ‘recording tax’ was unquestionably intended as a substitute for the property tax previously imposed on mortgages as a species of personal property. It has been referred to as ‘a remnant of the old system of taxing personal property,’ and argument has been made that with the passing of all taxes on personal property this ‘remnant’ of an abandoned system should be cast aside by the Legislatures. (Cf. Report of the New York State Commission for the Revision of the Tax Laws, Legislative Document (1932), vol. 18, No. 77, p. 219; Report of the Joint Legislative Commission on State Fiscal Policies, Legislative Document (1938), No. 41, p. 222). The Legislature has not been moved by such arguments. Article XI of the Tax Law is unrepealed. When the Legislature enacted the statute imposing a ‘recording tax’ on mortgages, the label or classification of the tax could not affect the power of the Legislature to enact it. In 1938 article XVI, entitled ‘Taxation,’ was added to the Constitution of the State and placed restrictions upon the taxing power exercised by the Legislature. In section 3 of that article it was provided, among other things, that ‘Intangible personal property shall not be taxed ad valorem nor shall any excise tax be levied solely because of the ownership or possession thereof, except that the income therefrom may be taken into consideration in computing any excise tax measured by income generally.’ Now the validity of the tax depends upon whether it is properly labelled or classified as a ‘recording tax,’ which is not levied solely because of the ownership or possession of a mortgage or, is, as the plaintiff maintains, an ad valorem tax on property, within the meaning of the constitutional provision.

The substantial rights of a taxpayer are ordinarily not affected by the form of a tax or by the characterization of the tax by the Legislature or the court. ‘The name by which the tax is described in the statute is, of course, immaterial. Its character must be determined by its incidents.’ Dawson v. Kentucky Distilleries & Warehouse Co., 255 U.S. 288, 292, 41 S.Ct. 272, 274, 65 L.Ed. 638. Substance rather than form should determine legal consequences and usually ‘the controlling test is found in the operation and effect of the statute as applied and enforced by the state.’ Cf. Gregg Dyeing Co. v. Query, 286 U.S. 472, 476, 52 S.Ct. 631, 633, 76 L.Ed. 1232, 84 A.L.R. 831. Where a taxpayer challenges in court his obligation to pay a tax which the State demands, the court is called upon to determine the operation and effect of the taxing statute upon the matters in dispute. Characterization by the court of a tax as a ‘tax on property’ or as ‘an excise tax’ or as a ‘recording tax’ is a convenient method of describing the operation and effect of the tax statute its legal consequences but it must be remembered that characterization or description is dictated by the legal consequences of the statute and never dictates those...