Grumman Aircraft Engineering Corp. v. Board of Assessors of Town of Riverhead

• Decision Date: 08 March 1957
• Citation: 141 N.E.2d 794,2 N.Y.2d 500,161 N.Y.S.2d 393
• Parties: , 141 N.E.2d 794 GRUMMAN AIRCRAFT ENGINEERING CORPORATION, Appellant, v. BOARD OF ASSESSORS OF the TOWN OF RIVERHEAD et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 393

161 N.Y.S.2d 393

2 N.Y.2d 500, 141 N.E.2d 794

GRUMMAN AIRCRAFT ENGINEERING CORPORATION, Appellant, v. BOARD OF ASSESSORS OF the TOWN OF RIVERHEAD et al., Respondents.

Court of Appeals of New York.

March 8, 1957.

John P. Ohl and Ralph O. Winger, New York City, for appellant.

Reginald G. Smith, Riverhead, for respondents.

Horace A. Demarest, Jr., Riverhead, for Central School Dist. No. 2, Towns of Riverhead, Brookhaven and Southampton, amicus curiae, in support of respondents' position.

Edwin S. Lapham, Riverhead, for Common School Dist. No. 1, Town of Riverhead, amicus curiae, in support of respondents' position.

DYE, Judge.

The Grumman Aircraft Engineering Corporation, hereinafter called Grumman, instituted this special proceeding under article 13 of the Tax Law, Consol.Laws, c. 60 against the Assessors of the Town of Riverhead, Suffolk County, New York, hereinafter called Assessors, for an order striking from its assessment rolls an assessment made against Grumman's alleged interest in real property lying in said town and leased by it from the United States, hereinafter called Government, on the ground that such leasehold interest is not subject to assessment and tax within the provisions of the State Tax Law. Grumman now appeals as of right from an order of the Appellate Division, Second Department, which reversed an order of the Supreme Court, Suffolk County, denying respondents' motion to dismiss Grumman's petition for insufficiency, and dismissed the petition.

Under date of January 23, 1952, Grumman made a contract with the Government known as Facilities Contract NOa-1151, which, in brief, dealt with the acquisition of machine equipment and tools and the design, layout and construction of what is now known as the Naval Industrial Reserve Aircraft Plant at Calverton, Suffolk County, New York. This was under the direction of the Secretary of the Navy. The construction work cost the Government about $23,500,000. In addition, Grumman contributed engineering, design and supervisory work amounting to $2,356,112 or a total cost of $25,856,112 for the completed facility.

Upon completion of the work, the Government leased the whole facility to Grumman by written lease dated April 1, 1954 for a term of five years ending March 31, 1959, with the right of renewal on the same terms at the option of the tenant for two successive five-year periods, the rental, however, for the latter periods being subject to renegotiation prior to the commencement of such renewal or extended term. Various other terms and conditions are dealt with which need not be mentioned except to call attention to the lease provision dealing with termination before the end of the term when and if the Secretary determines the facilities or a major portion thereof are excess to the further needs of the Navy Department (art. VII, par. (d)) ¹ and, if so terminated, the tenant's option to purchase (art. X, par. (a)) ² The assessments complained of were levied pursuant to provisions of subdivision 17 of section 4 of the Tax Law ³ and in reliance on a waiver of immunity as contained in Federal Statute, U.S.Code, tit. 34, §§ 522a, 522c, 522e, 34 U.S.C.A. §§ 522a, 522c, 522e ⁴ as follows:

The petitioner-appellant challenges the validity of such assessments (1) for lack of statutory authority; (2) if deemed authorized by subdivision 17 of section 4 of the Tax Law, then such statute is constitutionally invalid as violative of the immunity of the Federal Government from taxation by the States, United States v. County of Allegheny, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209; and (3) that, in any event, the petition should not have been dismissed but, instead, remanded to the Supreme Court, Suffolk County, for further proceedings.

The Special Term sustained the petitioner's objections and granted an order directing the Assessors to remove the assessment from its tax rolls. This ruling was on the theory that Grumman's interest in the facilities, at best, was personalty, and as such not liable to assessment and tax as real property, Tax Law, § 3. Upon appeal, the Appellate Division took a contrary view, reversed the order and dismissed the petition on the ground that Grumman's interest was taxable within the meaning of subdivision 17 of section 4 of the Tax Law.

Initially let it be said that Grumman does not assert that it is exempt from taxation. Its assertion is that it has no interest in the subject premises, otherwise immune from taxation, which can be said to fall within the purview of any tax statute.

In New York, all real property within the State is taxable unless specially exempt by law, Tax Law, § 3. Property of the United States is exempt unless made subject to taxation under the Constitution and laws of the United States, Tax Law, § 4, subd. 1. On the other hand, personal property whether tangible or intangible is not liable to taxation locally for State or local purposes, Tax Law, § 3. Although it is fundamental that the Legislature may classify property for tax purposes in any manner it deems proper, People ex rel. Hudson Riv. Day Line v. Franck, 257 N.Y. 69, 177 N.E. 312, its power in that regard is not without limitation, for the classification must have some reasonable basis, People ex rel. Farrington v. Mensching, 187 N.Y. 8, 79 N.E. 884, 10 L.R.A., N.S., 625. It is significant to note that nowhere in the Tax Law has the Legislature characterized a leasehold as taxable real property. Such omission is understandable, as a lease for years is deemed personalty, Matter of Althause's Estate, 63 App.Div. 252, 71 N.Y.S 445, affirmed without opinion 168 N.Y. 670, 61 N.E. 1127; Fifth Ave. Bldg. Co. v. Kernochan, 221 N.Y. 370, 117 N.E. 579; First Trust & Deposit Co. v. Syrdelco, Inc., 249 App.Div. 285, 292 N.Y.S. 206; Ehrsam v. City of Utica, 37 App.Div. 272, 55 N.Y.S. 942; Restatement, Property, § 8, 1949 Atty.Gen. 90, 91. We do not read subdivision 17 of section 4 of [141 N.E.2d 798] the Tax Law as changing this basic concept.

Subdivision 17 of section 4 of the Tax Law was enacted following our decision in People ex rel. Donner-Union Coke Corp. v. Burke, 204 App.Div. 557, 198 N.Y.S. 601, affirmed without opinion 236 N.Y. 650, 142 N.E. 320. In that case, the Donner Company was in possession of the plant which it had purchased from the United States Government under an executory contract of sale, the Government retaining the legal title as security analogous to a mortgage. We struck down an assessment against Donner on the theory that to apply the principle that a vendee in possession of real property under an executory contract of sale is to be regarded as the owner for purposes of taxation, might cause embarrassment to the title of the United States in the event of a tax sale. It was the illegality of such assessment which the Legislature sought to cure by enacting subdivision 17 of section 4. See People ex rel. Donner-Hanna Coke Corp. v. Burke, 248 N.Y. 507, 162 N.E. 503.

Grumman is not in the same position as Donner. It is not in possession under an executory contract of purchase as was Donner, but is in possession under a long-term lease which casts the parties in the relationship of landlord and tenant. Under the lease, the Government retains legal title, not as an equitable mortgagee, but as an owner in fee together with all rights of ownership including the right to terminate the lease at will. Nothing in the lease is tantamount to an equitable ownership such as is contemplated by the statute. According to the lease, Grumman has no more than an option 'to purchase the Facilities at their original cost to the Government less depreciation' (art. X, subd. (a) for full text, see Note 2 above, 2 N.Y.2d at page 504, 161 N.Y.S.2d 395) which, however, may not be exercised until after 90 days' written notice to the lessee that 'the Secretary has determined that the Facilities, or the major portion thereof, are excess to the further needs and responsibilities of the Department; provided, however, that if, within such ninety (90) day period, the Lessee shall notify the Department of its intention to exercise the right to purchase the Facilities as provided in Article X hereof, termination of this lease * * * shall not become effective unless and until the Department shall have obtained all necessary authorizations and approvals required to effectuate such sale * * * and shall have notified Lessee that it has obtained such necessary authorizations and approvals' (art. VII; for full text see Note 1 above, 2 N.Y.2d at page 504, 161 N.Y.S.2d 395).

When this so-called option is read in its most favorable light, it confers upon the lessee nothing more than a right of first refusal to purchase the facilities at a price to be fixed at the time and conditioned upon a variety of circumstances that only affirmative action of the secretary can bring to pass and even then it is subject at all times to the secretary's having obtained 'all necessary authorizations or approvals'. Until these prerequisite conditions are met, the lessee is in no position to exercise its right of first refusal. Grumman's connection with the property will come to an end at the termination of the lease. Since Grumman is under no obligation to purchase the property and in no position to bring about an opportunity in which to exercise its right of first refusal, it cannot be said, as matter of fact or as matter of law, that Grumman is a vendee in possession under an executory contract of purchase. So viewed, Grumman has no interest in the facilities subject to assessment and taxation within the meaning of subdivision 17 of section 4. It is only when the Government holds a bare legal title analogous to a mortgage that the immunity of the United States no longer attaches, Tax Law, § 4, subd. 1. When such is the case, the assessment for taxation 'shall be at the full value of such property without deduction', the same as if the legal title were held by the...