Goodwin v. State Tax Commission

Citation146 N.Y.S.2d 172,286 A.D. 694
PartiesApplication of Charles GOODWIN, Jr., Petitioner, v. The STATE TAX COMMISSION, Respondent, to review a determination made under Article 16 of the Tax Law.
Decision Date23 November 1955
CourtNew York Supreme Court Appellate Division

Charles Goodwin, Jr., pro se.

Jacob K. Javits, Atty. Gen. (James O. Moore, Jr., Sol. Gen., Buffalo, Lawrence H. Wagner, Asst. Atty. Gen., of counsel), of respondent.

Before FOSTER, P. J., and BERGAN, COON, HALPERN and ZELLER, JJ.

HALPERN, Justice.

This case presents the question of the constitutionality of the provisions of section 360 of the New York State Tax Law which allow residents to make certain deductions in computing their net income which nonresidents are not allowed to make. It is asserted that the provisions discriminate against nonresidents in violation of section 2 of Article IV of the Federal Constitution which provides that 'The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States'. 1

The petitioner is a lawyer residing in Tenafly, New Jersey, and practicing in New York City. All his income for the year in question, 1951, was earned within the State of New York. In his income tax return, the petitioner claimed and was allowed deductions for expenses connected with the production of his income, such as bar association dues, subscriptions for legal periodicals, and entertainment and car expense. He was also allowed to deduct certain charitable contributions. There is no dispute as to these items.

In addition, the petitioner claimed the right to deduct real estate taxes on his home in Tenafly, New Jersey, interest on the mortgage on his home, medical expenses (in excess of 5% of his net income), and life insurance premiums in the amount of $150. These deductions were disallowed, upon the ground that, under subdivision 11 of section 360 of the Tax Law, a nonresident was not entitled to deductions of this type, although a resident would have been allowed to make them under subdivisions 2, 3, 15 and 16 of section 360. Subdivision 11, so far as here relevant, reads as follows:

'In the case of a taxpayer other than resident of the state the deductions allowed in this section * * * shall be allowed only if, and to the extent that, they are connected with income arising from sources within the state and taxable under this article to a nonresident taxpayer'.

The petitioner concedes that the deductions claimed were not 'connected with income arising from sources within the State' and that he is not entitled to make these deductions under the terms of section 360 but he challenges the constitutionality of the statute on the ground that is discriminates improperly against nonresidents. If his challenge is well-founded, the entire state income tax law in its present from is unenforceable as against nonresidents. People ex rel. Stafford v. Travis, 231 N.Y. 339, 348-349, 132 N.E. 109, 112, 15 A.L.R. 1319.

The question raised by the petitioner is not a new one. Immediately after the enactment of the New York State Income Tax Law in 1919, Ch. 627, L.1919, the validity of the statute was challenged in Travis v. Yale & Towne Manufacturing Co., 252 U.S. 60, 40 S.Ct. 228, 64 LEd. 460. That case was decided by the United States Supreme Court on March 1, 1920, together with a case involving the constitutionality of the Oklahoma Income Tax Law, Shaffer v. Carter, 252 U.S. 37, 40 S.Ct. 221, 64 LEd. 445.

The first question presented in the two cases was the general question of whether a state had the power to tax any part of the income of the residents of other states. In the Shaffer case, 252 U.S. at page 56, 40 S.Ct. at page 227, the Supreme Court upheld the state's power to tax nonresidents upon income earned within the state. It then passed to a consideration of the specific question of the validity of the provision of the Oklahoma Income Tax Law, Laws 1915, c. 164, similar to the provision in the New York State law, allowing 'residents to deduct from their gross income not only losses incurred within the state of Oklahoma but also those sustained outside of that state, while nonresidents may deduct only those incurred within the state'. The Court held this provision to be valid:

'The difference, however, is only such as arises naturally from the extent of the jurisdiction of the state in the two classes of cases, and cannot be regarded as an unfriendly or unreasonable discrimination. As to residents it may, and does, exert its taxing power over their income from all sources, whether within or without the state, and it accords to them a corresponding privilege of deducting their losses wherever these accrue. As to nonresidents, the jurisdiction extends only to their property owned within the state and their business, trade, or profession carried on therein, and the tax is only on such income as is derived from those sources. Hence there is no obligation to accord to them a deduction by reason of losses elsewhere incurred.' 252 U.S. 57, 40 S.Ct. 227.

In the Travis case (the New York State income tax case), the Court first considered the provision of section 360 of the Tax Law 'for deducting in the computation of net income expenses, taxes, losses, depreciation charges, etc.;' but limiting such deducations in the case of a nonresident to such as "are connected with income arising from sources within the state," 252 U.S. at page 73, 40 S.Ct. at page 230. The Court held this provision to be valid, upon the basis of its decision in the Shaffer case:

'That there is no unconstitutional discrimination against citizens of other states in confining the deduction of expenses, losses, etc., in the case of nonresident taxpayers, to such as are connected with income arising from sources within the taxing state, likewise is settled by that decision [Shaffer v. Carter]'. 252 U.S. at pages 75-76, 40 S.Ct. at page 230.

Next, the Court considered the provision of section 362 of theTax Law as it read in 1919, dealing with exemptions. Under that section, resident taxpayers were allowed an exemption of $1,000 in the case of a single person, $2,000 in the case of a married person and $200 additional for each dependent but nonresident taxpayers were not allowed any exemption. The Court held this to be unconstitutional as an unreasonable discrimination between residents and nonresidents. 252 U.S. at pages 79-81, 40 S.Ct. at pages 231-232.

Immediately after the handing down of the decision in the Travis case, the Legislature of New York State passed Chapter 191 of the Laws of 1920, amending section 362 of the Tax Law, so as to make the exemptions applicable to residents and nonresidents alike, and reimposing an income tax on the 1919 income of nonresidents under the Tax Law as amended. This statute was upheld in People ex rel. Stafford v. Travis, 231 N.Y. 339, 132 N.E. 109, 15 A.L.R. 1319, supra. The specific point upon which the New York tax statute had been held unconstitutional by the United States Supreme Court was thus cleared up and the statute, as amended, has been enforced ever since as against nonresidents, without any challenge to its constitutionality in the courts, until the filing of the petition for review in the present case.

The Attorney General maintains that the Travis v. Yale & Towne Mfg. Co. case disposes of the very point which the petitioner seeks to raise here. He directs attention to the fact that, in the brief submitted on behalf of the appellee in the Supreme Court in that case, its counsel pointed out, as an illustration of the discriminatory nature of the New York statute, that, under section 360, a resident of New York could deduct real estate taxes upon his home while a resident of Connecticut, working in New York, would not be allowed to do so. The statement by the Supreme Court quoted above, upholding the provisions of section 360, seems to have been intended as a direct answer to this contention.

The provision with respect to the deduction of taxes in the 1919 law was substantially the same as the provision in the present law. The provision with respect to the deduction of interest was different, and the provisions for the deduction of life insurance premiums and medical expenses came into the law later, Ch. 245, L.1943 and Ch. 333, L.1944. However, the principle of the Supreme Court's decision holding that a distinction could validly be made between residents and nonresidents with respect to real estate taxes is equally applicable to the other types of deductions.

The petitioner argues that the statement by the Supreme Court upholding the validity of the provision limiting deductions in the case of nonresidents was an obiter dictum since the statute was held unconstitutional as to nonresidents on other grounds.

We cannot regard the Supreme Court's statement as a mere obiter dictum in view of the fact that the alleged invalidity of the deduction provision was squarely presented to the Court as one of the grounds upon which the statute was claimed to be unconstitutional. The rejection of that ground of attack by the Court is just as authoritative a part of the Court's decision as its upholding of the other ground of attack, the denial of exemptions to nonresidents.

Furthermore, apart from the binding authority of the Supreme Court's decision, we believe that the statutory provision under attack here is valid and constitutional. The provision limiting deductions by nonresidents is a necessary corollary of the principle of federal constitutional law which prohibits a state from taxing the income of nonresidents except to the extent that the income was derived from sources within the state. Under this principle, it is obviously proper, in determining the net income of a nonresident, to limit the deductions to expenses which are connected with gross income derived from sources within the taxing state, since the income derived from any other source is not subject to the...

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