Hunt v. State Tax Com'n
| Decision Date | 30 April 1985 |
| Citation | 65 N.Y.2d 13,489 N.Y.S.2d 451,478 N.E.2d 967 |
| Parties | , 478 N.E.2d 967 In the Matter of Robert J. HUNT et al., as Personal Representatives of the Estate of Dwight W. Winkelman, Deceased, et al., Appellants, v. STATE TAX COMMISSION, Respondent. In the Matter of Louis MARX, Jr., et al., Appellants, v. STATE TAX COMMISSION et al., Respondents. In the Matter of Howard ROSS et al., Appellants, v. STATE TAX COMMISSION, Respondent. |
| Court | New York Court of Appeals Court of Appeals |
The issue on these appeals is whether the Federal tax benefit rule applies to exclude State and local income taxes when computing New York items of tax preference subject to New York minimum income tax under Tax Law §§ 622 and 623 for the tax years 1976 and 1977. We hold that it does and reverse the order of the Appellate Division, 103 A.D.2d 905, 478 N.Y.S.2d 133, in each proceeding.
New York State imposes a "minimum income tax" on the New York "minimum taxable income" of every individual, estate or trust (Tax Law § 601-A). 1 Its purpose is to limit the ability of high income taxpayers to avoid any tax burden through various tax shelters by requiring such taxpayers to pay a tax on certain "items of tax preference" from which they benefit. Thus, the minimum income tax is the sum of the "items of tax preference" reduced by specified amounts (Tax Law § 622). The term "items of tax preference" is defined as "the federal items of tax preference", subject to certain modifications found in the State statute (Tax Law § 622). In 1976 and 1977, the years at issue in these proceedings, the statute did not modify the Federal rule which included deductions for State and local income taxes as items of tax preference to be included in the minimum tax computations. 2 Nevertheless, petitioners did not include their deductions for New York State and city income taxes in computing their New York State and city minimum income tax for those years and thereby diminished their minimum income tax liability. They did so claiming they had received no State tax benefit from the payments because the payments were not deductible on the State tax returns. The State Department of Taxation sent petitioners notices of deficiency stating that the Tax Law "does not currently allow a modification to be made for State and local income taxes in the computation of New York items of tax preference." Following a hearing in the Hunt case and after review of submissions in Marx and Ross, respondent State Tax Commission sustained the notices of deficiency and ruled that petitioners incorrectly computed their New York items of tax preference subject to New York minimum tax.
These article 78 proceedings seek review of respondent's determinations. Petitioners contend that the imposition of the New York minimum tax on the itemized deduction for State and local income taxes was contrary to law because they received no New York income tax benefit as a result of their payment of New York income taxes and this violated the Federal tax benefit rule applicable to the computation of New York taxes through the conformity principle (see, Tax Law § 607 see also, Tax Law § 622). In Marx and Hunt, Special Term annulled respondent's determination, concluding that the deductions used in the computation of minimum income tax at the Federal level must be permitted under State law as a matter of fundamental fairness. In Ross, Special Term dismissed the petition holding that there was no recognized legal basis to exclude the deduction for State and local taxes from the computation of State items of tax preference subject to the minimum tax. The Appellate Division held against the taxpayers, reversing in Marx and Hunt and affirming in Ross. It held that the tax benefit rule does not apply for New York minimum tax purposes because of the existence of specific provisions in our statute modifying Federal items of tax preference which do not include the tax benefit rule for city or State taxes. It held that these provisions of Tax Law § 622(b)(2)-(4) are exclusive and indicate that the Legislature did not intend general application of the tax benefit rule for New York minimum tax purposes.
In 1960, New York revised its personal income tax law to achieve close conformity with the Federal system of income taxation. The purpose of the revision was to simplify tax preparation, improve enforcement, and aid interpretation of tax law provisions (see, Matter of Friedsam v. State Tax Commn., 64 N.Y.2d 76, 79-80, 484 N.Y.S.2d 807, 473 N.E.2d 1181). In doing so, the Legislature provided that: "Any term used in this article shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required" (Tax Law § 607). Subsequently, in 1969, the Federal Government enacted a minimum tax and New York adopted a similar tax in 1970 (Pub.L. 91-172, tit. III, § 30183 U.S.Stat. 581; L.1970, ch. 1005, § 10). In 1976 the Federal Government enacted a new item of tax preference used in computing the minimum tax--"excess itemized deductions"--defined as a taxpayer's itemized deductions which exceed 60% of his adjusted gross income (26 U.S.C. § 57 ). For the years in question, State and local taxes were a Federal itemized deduction (26 U.S.C. § 164). Thus, in applying the Federal minimum tax, petitioners were taxed on the deductions they had claimed for State and local taxes because they had received a corresponding benefit for those items in the form of reductions in their Federal adjusted gross income. Under New York law this item was included as a tax preference item subject to the minimum tax by principles of conformity although taxpayers received no benefit from it because they could not deduct State and local taxes on their State returns. They thus paid a minimum tax to the State based in part on taxes previously paid to the State. Petitioners contend that to avoid this inequity the Federal tax benefit rule should be applied to New York's tax assessments, through principles of conformity, and that the application of that rule authorizes the exclusion of the State and local taxes they paid from petitioners' Federal tax preference items used in computing New York minimum tax.
The tax benefit rule is found in section 58(h) of the Internal Revenue Code (26 U.S.C. § 58). It provides that the Secretary of the Treasury shall prescribe regulations "under which items of tax preference shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's tax under this subtitle for any taxable years." Inasmuch as Tax Law § 607(a) provides that all present and future provisions of the Federal income tax laws shall be incorporated in our tax laws this Federal tax benefit rule applies to the computation of petitioners' New York minimum tax for the years in question, unless the Commissioner's failure to promulgate regulations on the Federal level renders section 58(h) nugatory or, as the Appellate Division held, the existence of specific provisions of the State law modifying Federal items of tax preference manifests the Legislature's intention to exclude application of the Federal tax benefit rule.
Contrary to respondent's contention, the tax benefit rule found in section 58(h) is not a rule to be applied administratively to Federal taxes. The statute was given full effect by the United States Tax Court in Occidental Petroleum Corp. v. Commissioner, 82 USTC 819, 829, notwithstanding the failure to promulgate regulations interpreting it, when it held that: "the failure to promulgate the required regulations can hardly render the new provisions of section 58(h) inoperative * * * Congress could hardly have intended to...
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