Friedsam v. State Tax Com'n

• Decision Date: 15 December 1983
• Parties: In the Matter of Lance J. FRIEDSAM, Respondent, v. STATE TAX COMMISSION, Appellant.
• Court: New York Supreme Court — Appellate Division

Page 848

470 N.Y.S.2d 848

98 A.D.2d 26

In the Matter of Lance J. FRIEDSAM, Respondent, v. STATE TAX COMMISSION, Appellant.

Supreme Court, Appellate Division,

Third Department.

Dec. 15, 1983.

Robert Abrams, Atty. Gen., Albany (Dianne DeFurio Foody, Asst. Atty. Gen., Albany, of counsel), for appellant.

White & Case, New York City (Rayner M. Hamilton, New York City, of counsel), for respondent.

Before SWEENEY, J.P., and KANE, CASEY, WEISS and LEVINE, JJ.

WEISS, Justice.

In this appeal, we are required to determine whether section 632 of the Tax Law, as applied by respondent, violated the privileges and immunities clause of the United States Constitution (art. IV, § 2, cl. 1) by denying a nonresident petitioner an income tax adjustment for payment of alimony. The facts are undisputed. Petitioner, a Connecticut resident employed in New York State, claimed alimony payments made to his former wife (also a Connecticut resident) as an adjustment to income on his 1979 nonresident tax return. In the due course of its procedures, respondent disallowed the alimony adjustment as a deduction from taxable income and rejected the argument that its application of section 632 (subd. [b], par. [1], cl. [B] ) of the Tax Law was a constitutional violation. Special Term granted petitioner's CPLR article 78 application by annulling the determination, holding that because a resident is allowed alimony paid as an adjustment against income while a nonresident is not, the disparity in treatment without a substantial reason is violative of the privileges and immunities clause in the Federal Constitution (U.S. Const., art. IV, § 2, cl. 1).

Respondent urges that this court's decision in Matter of Golden v. Tully, 88 A.D.2d 1058, 452 N.Y.S.2d 748, affd. 58 N.Y.2d 1047, 462 N.Y.S.2d 626, 449 N.E.2d 406) should be distinguished because the Court of Appeals' affirmance was based upon an "erroneous" admission by the Tax Commission, i.e., " * * * it was admitted that petitioners' nonresidence in 'New York State was determinative of the disallowance of said moving expenses.' No other rationale was then proffered to justify the discrepancy in treating residents and nonresidents" (Matter of Golden v. Tully, 58 N.Y.2d 1047, 1049, 462 N.Y.S.2d 626, 449 N.E.2d 406). Respondent additionally urges distinction because the moving expenses disallowed in Matter of Golden are different from alimony in that the latter arises solely from the personal life of the taxpayer. We decline respondent's invitation to depart from our holding in Matter of Golden and affirm the judgment annulling respondent's determination.

Initially, it should be noted that the amount paid as alimony was not claimed as a deduction from income in the nature of a business expense or an expense of earning income from other sources. Rather, the alimony paid had already been subtracted from petitioner's Federal gross income as an allowable adjustment on his Federal income tax return for the year 1979 (U.S.Code, tit. 26, § 62, par. [13], as added by the Tax Reform Act of 1976). The New York adjusted gross income of a nonresident includes all items of income, gain, loss or deduction which enter into the taxpayer's Federal adjusted gross income, limited, however, to those items derived from or connected with New York sources (Tax Law, § 632, subd. [a], par. [1] ). Subdivision (b) of the same section defines income and deductions as "(1) Items of income, gain, loss and deduction derived from or connected with New York sources shall be those items attributable to * * * (B) a business, trade, profession or occupation carried on in this state". Respondent's reason for disallowance of the alimony paid was "[t]hat alimony is not a deduction attributable to petitioner's profession carried on in this state, within the meaning of section 632(b)(1)(B) of the Tax Law. SeeMatter of Daniel C. Maclean, New York State Tax Commission, May 15, 1981".

Respondent contends that, unlike Matter of Golden v. Tully (supra), a valid and substantial reason for disparity in tax treatment between residents and nonresidents has been furnished which satisfies the "substantial reason" test evolved in Toomer v. Witsell, 334 U.S. 385, 68 S.Ct. 1156, 92 L.Ed. 1460 and applied by this court in Matter of Goodwin v. State Tax Comm., 286 App.Div. 694, 701, 146 N.Y.S.2d 172, affd. 1 N.Y.2d 680, 150 N.Y.S.2d 203, 133 N.E.2d 711, app. dsmd. 352 U.S. 805, 77 S.Ct. 47, 1 L.Ed.2d 38. Respondent asserts that the determination is correct by contending that alimony payments are purely personal in nature and, as such, are related solely to a nonresident's state; ergo, it is not violative of the privileges and immunities clause to permit deduction by a resident but prohibit the same deduction for a nonresident. We disagree and, in so holding, find neither a State governmental policy expressing a reason for the disparity in treatment accorded nonresidents, nor any showing that the factor of residence has a legitimate connection with the allowance of the deduction (see Matter of Golden v. Tully, supra, 88 A.D.2d p. 1059, 452 N.Y.S.2d 748). Respondent has simply asserted that alimony payments are purely personal in nature and not related to income producing activities in New York, and are thus nondeductible.

The policy behind the Federal statutory provision relating to taxing of alimony is, at best, that there be uniformity of tax treatment for situations arising in the various States and that the tax fall upon those who receive the income and benefit therefrom (Porter v. Commissioner of Internal Revenue, 388 F.2d 670 (6 Cir.1968); Bardwell v. Commissioner of Internal Revenue, 318 F.2d 786, 789 (10 Cir.1963); see U.S.Code, tit. 26, §§ 71, 215). The absence of New York policy behind allowance of the alimony deduction solely to residents, and the failure to relate the deduction to New York residency only, requires us to hold that no substantial reason for disparate treatment between residents and nonresidents exists. To be valid, the discrimination must bear a "substantial relationship" to the reason given (see Zobel v. Williams, 457 U.S. 55, 76, 102 S.Ct. 2309, 2321, 72 L.Ed.2d 672; Hicklin v. Orbeck, 437 U.S. 518, 525-526, 98 S.Ct. 2482, 2487-2488, 57 L.Ed.2d 397). Under respondent's interpretation, it makes no difference where an alimony recipient lives, where the marriage and divorce took place, where the awarding divorce court was situated, or whether the recipient is taxed by New York. The only criterion is whether the payor is a resident or nonresident. Without more, there results a constitutional violation which we may not condone (Toomer v. Witsell, supra; Matter of Golden v. Tully, supra ).

The judgment should be affirmed, with costs.

LEVINE, Justice (dissenting).

I respectfully dissent. The majority, in further extending its holding in Matter of Golden v. Tully, 88 A.D.2d 1058, 452 N.Y.S.2d 748, affd. 58 N.Y.2d 1047, 462 N.Y.S.2d 626, 449 N.E.2d 406, effectively overrules Matter of Goodwin v. State Tax Comm., 286 App.Div. 694, 146 N.Y.S.2d 172, affd. 1 N.Y.2d 680, 150 N.Y.S.2d 203, 133 N.E.2d 711, app. dsmd. 352 U.S. 805, 77 S.Ct. 47, 1 L.Ed.2d 38 and with it casts into serious doubt the standing policy of this State since the Income Tax Law of 1919 (L.1919, ch. 627) with respect to the taxation of the New York income of nonresidents. That policy has been to limit the ability of out-of-Staters to take full advantage of deductions available to State residents as to expenses unrelated to the production of New York income. This policy is a corollary to this State's inability to tax non-New York income of nonresidents, as it does with its own citizens. In Goodwin, a New Jersey taxpayer challenged the disallowance of real estate taxes paid on his residence, interest payments, medical expenses and insurance premiums, all of which could have been subtracted from the gross income of a New York resident for tax purposes. ^* Toomer v. Witsell, 334 U.S. 385, 68 S.Ct. 1156, 92 L.Ed. 1460, had already been decided as the leading case interpreting the privileges and immunities clause (U.S. Const., art. IV, § 2, cl. 1). Responding to the Supreme Court's holding in that case that disparity in tax treatment between residents and nonresidents is not invalid "in the many situations where there are perfectly valid independent reasons for it" (Toomer v. Witsell, supra, p. 396, 68 S.Ct. p. 1162), this court in Goodwin gave three distinct, alternative rationales to uphold the statutory disallowance of deductions for such expenses on the part of a nonresident, each of which was held to be sufficient. The first of these reasons to permit favoring New York residents regarding deductions was that...