Grace v. New York State Tax Commission

• Decision Date: 12 June 1975
• Parties: , 332 N.E.2d 886 In the Matter of Michael P. GRACE, Respondent, v. NEW YORK STATE TAX COMMISSION, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 715

371 N.Y.S.2d 715

37 N.Y.2d 193, 332 N.E.2d 886

In the Matter of Michael P. GRACE, Respondent, v. NEW YORK STATE TAX COMMISSION, Appellant.

Court of Appeals of New York.

June 12, 1975.

Louis J. Lefkowitz, Atty. Gen. (Francis V. Dow, Ruth Kessler Toch and Vincent P. Molineaux, Albany, of counsel), for appellant.

Walter J. Rockler, Washington, D.C., for respondent.

BREITEL, Chief Judge.

In an article 78 (CPLR) proceeding, the State Tax Commission appeals from a judgment, denominated an order, of the Appellate Division modifying its determination. The commission had determined that, under article 16 of the Tax Law, Consol.Laws, c. 60 governing personal inco tax, taxpayer was not entitled in reporting his 1955 State taxable income to deduct full amortization of bond premiums paid by him in excess of the face value of corporate bonds purchased by him. The Appellate Division modified, holding that taxpayer was entitled to such a deduction.

The issue is whether, absent authorization by statute or regulation, a taxpayer may claim a deduction from taxable income.

There should be a reversal. Absent authorization by statute or regulation, a taxpayer is not entitled to deductions against taxable income. Section 360 of the Tax Law and applicable regulations, in effect in 1955, did not authorize a deduction for the amortization of bond premiums for individual taxpayers.

Taxpayer purchased for investment purposes Appalachian Electric Power Company 3 1/8% Series 1977 bonds, aggregating $1,050,000, by paying a premium of $105,000 over the face value. Taxpayer amortized the full premium and claimed a deduction in his 1955 State tax return. On December 11, 1958, the State Department of Taxation and Finance notified taxpayer that an additional tax of $7,697.96 was due on his 1955 State income tax, predicated an a net increase on audit in his taxable income of $109,970.88. Taxpayer disputed two of the items which the Department of Taxation and Finance had disallowed, the deduction for the amortization of the bond premiums, and another no longer challenged by taxpayer.

A premium may be paid for a bond because of a relatively high nominal interest rate. Bond premium consists of the excess of the price of bonds over their face value, and generally reflects the difference between the nominal interest rate borne by such bonds and the actual or effective rate of return determined by the current market. When a premium has been paid for a bond, the nominal interest perforce exceeds the actual or effective rate of return (see, generally, Hanover Bank v. Commissioner of Internal Revenue, 369 U.S. 672, 677, 82 S.Ct. 1080, 8 L.Ed.2d 187). Hence, the nominal interest paid includes economically a partial return of capital investment. Under State tax procedure in 1955, premium was treated as part of the purchase price of the bond and would be so treated in calculating gain or loss when the bonds were later sold or redeemed. There was no provision in the Tax Law or the regulations of the Tax Department at that time authorizing full or annual amortization of bond premiums and deduction as an offset against taxable income.

True, the Internal Revenue Code and Federal Regulations since 1942 have authorized as deductible the amortization of bond premiums (see Internal Revenue Code of 1954, § 171; 56 U.S.Stat. 822--823; Treas.Reg., 26 CFR 1.171--1). However, conformity of New York State income tax with Federal income tax law was not in effect until 1960, and thus did not apply to the year 1955 (see N.Y.Const., art. III, § 22; L.1960, ch. 563, § 1). Hence, taxpayer's claim for a deduction must rest upon applicable State tax law in effect for the year when the deduction was claimed.

The burden of proof to overcome tax assessments rests upon the taxpayer (see Matter of Young v. Bragalini, 3 N.Y.2d 602, 605, 170 N.Y.S.2d 805, 807, 148 N.E.2d 143, 145 (opn. per Burke, J.); Matter of Hillman v. State Tax Comm., 30 A.D.2d 362, 364, 292 N.Y.S.2d 233, 235; Matter of Calder v. Graves, 261 App.Div. 90, 94--95, 24 N.Y.S.2d 797, 800, affd.286 N.Y. 643, 36 N.E.2d 688). If there are any facts or reasonable inferences from the facts to sustain it, the court must confirm the Tax Commission's determination. Thus, a determination of the Tax Commission will not be disturbed by the courts unless shown to be erroneous, arbitrary or capricious (see, also, People ex rel. Maloney v. Graves, 289 N.Y. 178, 180, 45 N.E.2d 164, 165; People ex rel. Hull v. Graves, 289 N.Y. 173, 177, 45 N.E.2d 161, 163; People ex rel. Freeborn & Co. v. Graves, 257 App.Div. 587, 590, 14 N.Y.S.2d 4, 7).

It is often said, but sometimes misapplied in oversimplification, that 'A statute which levies a tax is to be construed most strongly against the government and in favor of the citizen. The government takes nothing except what is given by the clear import of the words used, and a well-founded doubt as to the meaning of the act defeats the tax' (People ex rel. Mutual Trust Co. v. Miller, 177 N.Y. 51, 57, 69 N.E. 124, 126; Matter of Voorhees v. Bates, 308 N.Y. 184, 188, 124 N.E.2d 273; see Matter of American Cyanamid & Chem. Corp. v. Joseph, 308 N.Y. 259, 263, 125 N.E.2d 247, 248; American Locker Co. v. City of New York, 308 N.Y. 264, 269, 125 N.E.2d 421, 423; cf. Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211). The principle is, however, applicable only in determining whether property, income, a transaction or event is subject to taxation. Thus, in each of the cases cited above, the issue was whether taxpayer's affairs were subject to the taxing statute at all (see People ex rel. Mutual Trust Co. v. Miller, 177 N.Y. 51, 53, 69 N.E. 124, Supra (corporate franchise tax); Matter of Voorhees v. Bates, 308 N.Y. 184, 187--188, 124 N.E.2d 273, 274, Supra (unincorporated business tax); Matter of American Cyanamid & Chem. Corp. v. Joseph, 308 N.Y. 259, 262, 125 N.E.2d 247, 248, Supra (sales tax); American Locker Co. v. City of New York, 308 N.Y. 264, 267, 125 N.E.2d 421, 422, Supra (sales tax); Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211, Supra (individual income tax)).

When, however, it is undisputed that the taxpayer's income is subject to the taxing statute, but he claims an exemption from taxation, a different rule applies. An exemption from taxation 'must clearly appear, and the party claiming it must be able to point to some provision of law plainly giving the exemption' (People ex rel. Savings Bank of New London v. Coleman,135 N.Y. 231, 234, 31 N.E. 1022; see Matter of Young v. Bragalini, 3 N.Y.2d 602, 605--606, 170 N.Y.S.2d 805, 807--808, 148 N.E.2d 143, 145--146, Supra). Indeed, if a statute or regulation authorizing an exemption is found, it will be 'construed against the taxpayer', although the interpretation should not be so narrow and literal as to defeat its settled purpose (see Engle v. Talarico, 33 N.Y.2d 237, 240, 351 N.Y.S.2d 677, 678, 306 N.E.2d 796, 797; People ex rel. Watchtower Bible & Tract Soc. v. Haring,8 N.Y.2d...