Lunding v. Tax Appeals Tribunal of State of N.Y.

• Decision Date: 18 December 1996
• Citation: 89 N.Y.2d 283,675 N.E.2d 816,653 N.Y.S.2d 62
• Parties: , 675 N.E.2d 816, 65 USLW 2451 In the Matter of Christopher H. LUNDING et al., Respondents, v. TAX APPEALS TRIBUNAL OF the STATE OF NEW YORK, Respondent, Commissioner of Taxation and Finance of the State of New York, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 62

653 N.Y.S.2d 62

89 N.Y.2d 283, 675 N.E.2d 816, 65 USLW 2451

In the Matter of Christopher H. LUNDING et al., Respondents, v. TAX APPEALS TRIBUNAL OF the STATE OF NEW YORK, Respondent,

Commissioner of Taxation and Finance of the State of New

York, Appellant.

Court of Appeals of New York.

Dec. 18, 1996.

Dennis C. Vacco, Attorney General, Albany (Andrew D. Bing and Peter H. Schiff, of counsel), for appellant.

Christopher H. Lunding, pro se.

Cleary, Gottlieb, Steen & Hamilton, New York City, for respondents Christopher H. Lunding and another.

OPINION OF THE COURT

KAYE, Chief Judge.

In this combined action for a declaratory judgment and CPLR article 78 relief petitioners challenge the constitutionality of Tax Law § 631(b)(6), which disallows nonresidents a full deduction for alimony payments from their New York State income tax liability. The central question before us is whether Tax Law § 631(b)(6) violates the Privileges and Immunities Clause of the United States Constitution. We conclude the statute is constitutional.

Petitioners Christopher H. Lunding and his wife Barbara J. Lunding are Connecticut residents. In 1990, Mr. Lunding, a partner in a New York City law firm, derived substantial income from the practice of law in this State. On their joint New York nonresident tax return filed for the year 1990, they reported a Federal adjusted gross income of $788,210, which included an adjustment of $108,000 for the full amount of alimony that Mr. Lunding had paid that year to his former spouse, also a Connecticut resident. On their return petitioners adjusted their New York State gross income by 48.0868% of the alimony payments--equaling $51,934--which represented the percentage of Mr. Lunding's 1990 claimed New York business income.

Relying on Tax Law § 631(b)(6) the Audit Division of the Department of Taxation and Finance denied the alimony deduction and recalculated petitioners' New York tax liability, concluding that they owed an additional $3,724. A Notice of Deficiency in that amount followed.

Petitioners then filed an administrative petition with the Division of Tax Appeals challenging the Notice of Deficiency on the ground that Tax Law § 631(b)(6) was unconstitutional. Specifically, petitioners claimed that the tax which was the subject of the Notice of Deficiency cannot be collected because the statute and the Department's actions discriminate illegally against nonresidents in violation of the Privileges and Immunities, Equal Protection and Commerce Clauses of the United States Constitution.

The Administrative Law Judge sustained the disallowance, holding that the Tax Appeals Tribunal lacked authority to declare the statute unconstitutional. In their exception petitioners conceded that the Tribunal's jurisdiction did not encompass their constitutional challenge but asserted that principles of collateral estoppel and stare decisis applied, relying on the Third Department's ruling in Matter of Friedsam v. State Tax Commn., 98 A.D.2d 26, 470 N.Y.S.2d 848, affd. 64 N.Y.2d 76, 484 N.Y.S.2d 807, 473 N.E.2d 1181. The Tribunal affirmed the decision of the ALJ, agreeing that Friedsam was not dispositive.

Thereafter, petitioners commenced an article 78 proceeding. The Appellate Division converted the constitutional challenge into a declaratory judgment action and retained as an article 78 proceeding the remaining portion seeking annulment of the Tribunal's decision. While recognizing both that this Court had affirmed Friedsam solely on statutory grounds and that the statutory provisions in the two cases are different, the Appellate Division declared the statute violative of the Privileges and Immunities Clause. Respondent Commissioner appealed as of right (CPLR 5601[b][1] ). We now reverse.

Statutory Scheme

Tax Law § 631(b)(6), enacted as part of the Tax Reform and Reduction Act of 1987 (L. 1987, ch. 28) (TRARA), specifies that

"[t]he deduction allowed by section two hundred fifteen of the internal revenue code, relating to alimony, shall not constitute a deduction derived from New York sources."

New York source income of a nonresident is defined under Tax Law § 631 as:

"(a) * * * the sum of the net amount of items of income, gain, loss and deduction entering into his federal adjusted gross income, as defined in the laws of the United States for the taxable year, derived from or connected with New York sources, including:

"(1) his distributive share of partnership income, gain, loss and deduction * * *

"(b) * * *

"(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".

Beginning with the 1988 taxable year nonresidents' income from all sources is used in calculating their rate of New York tax. As we explained in Brady v. State of New York, 80 N.Y.2d 596, 600, 592 N.Y.S.2d 955, 607 N.E.2d 1060, cert denied 509 U.S. 905, 113 S.Ct. 2998, 125 L.Ed.2d 692, under Tax Law § 601(e)(1) the tax of a nonresident is first calculated "as if [the taxpayer] were a resident," and the sum is then reduced by the percentage of income earned in New York compared to total income. While residents and nonresidents with the same total income are taxed at the same rate, the nonresident thus is taxed only on the percentage of income attributable to New York.

Consequently, Tax Law § 601(e)(1) provides:

"There is hereby imposed for each taxable year on the taxable income which is derived from sources in this state of every nonresident * * * a tax which shall be equal to the tax computed under subsections (a) through (d) of this section * * * as if such nonresident * * * were a resident, multiplied by a fraction, the numerator of which is such individual's * * * New York source income determined in accordance with part III of this article [§ 631] and the denominator of which is such individual's * * * federal adjusted gross income for the taxable year."

The hypothetical "as if a resident" tax liability includes all deductions available to a resident, including a deduction for alimony payments. However, the numerator of the fraction (referred to as the "apportionment percentage")--the nonresident's New York source income--is not reduced by any nonbusiness deductions (including alimony payments). The denominator--the nonresident's Federal adjusted gross income--has under the Internal Revenue Code been reduced by any alimony payments (26 U.S.C. § 215).

Petitioners urge that Tax Law § 631(b)(6) is discriminatory because, without justification, it denies nonresidents the benefit of an alimony deduction from New York State tax liability. The Appellate Division agreed that the Privileges and Immunities Clause was violated. We answer the question differently.

Analysis

We begin with the familiar proposition that statutes--the enactments of a coequal branch of government--enjoy a presumption of constitutionality. Moreover, "in taxation, even more than in other fields, legislatures possess the greatest freedom in classification." (Austin v. New Hampshire, 420 U.S. 656, 661-662, 95 S.Ct. 1191, 1195, 43 L.Ed.2d 530 [citing Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 408, 84 L.Ed. 590; Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351].)

The Privileges and Immunities Clause (U.S. Const., art. IV, § 2), entitling the "Citizens of each State * * * to all Privileges and Immunities of Citizens in the several States," was intended to create a national economic union and establish a norm of comity between States. The Clause in essence ensures that citizens of State A may do business in State B on terms of substantial equality with the citizens of that State. (See, Supreme Ct. of N.H. v. Piper, 470 U.S. 274, 279-280, 105 S.Ct. 1272, 1275-76, 84 L.Ed.2d 205; Toomer v. Witsell, 334 U.S. 385, 396, 68 S.Ct. 1156, 1162, 92 L.Ed. 1460.)

In two seminal decisions on State income taxation of nonresidents under the Privileges and Immunities Clause--Shaffer v. Carter (252 U.S. 37, 40 S.Ct. 221, 64 L.Ed. 445) and Travis v. Yale & Towne Mfg. Co. (252 U.S. 60, 40 S.Ct. 228, 64 L.Ed. 460)--the Supreme Court established that limiting taxation of nonresidents to their in-State income was a sufficient justification for similarly limiting their deductions to expenses derived from sources producing that in-State income. Further, the Court made clear that in testing the constitutionality of a tax law, a court should put aside "theoretical distinctions" and look to "the practical effect and operation" of the scheme (Shaffer v. Carter, 252 U.S. at 56, 40 S.Ct. at 227).

Thus, in Shaffer the Court upheld a provision of the Oklahoma income tax law that taxed nonresidents' income derived from local property and business and limited their deductions to losses related to these in-State activities, where Oklahoma also taxed all income of its own citizens. Similarly in Travis, the Court considered a New York statutory provision limiting a nonresident's income tax deductions to such as "are connected with income arising from sources within the state" (Travis, 252 U.S. at 73, 40 S.Ct. at 230). In upholding the provision the Court noted that

"there is no unconstitutional discrimination against citizens of other States in confining the deduction of expenses, losses, etc., in the case of non-resident taxpayers, to such as are connected with income arising from sources within the taxing State, likewise is settled by [Shaffer ]." (Id. at 75-76, 484 N.Y.S.2d 807, 473 N.E.2d 1181.)

The Travis Court, however, considered an additional provision of the Tax Law that disallowed nonresidents any personal exemptions and found this an unreasonable discrimination because New York's proffered hope of reciprocity did not justify the statute's discriminatory effect (id. at 81-82, 40 S.Ct. at 232-33).

More recently, the Supreme Court in Austin v. New Hampshire, 420 U.S. 656, 95 S.Ct....