Shapiro v. City of New York

• Decision Date: 22 March 1973
• Parties: , 296 N.E.2d 230 Meyer SHAPIRO, on behalf of himself and all other self-employed professionals practicing individually and similarly situated, Appellant, v. CITY OF NEW YORK et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 323

343 N.Y.S.2d 323

32 N.Y.2d 96, 296 N.E.2d 230

Meyer SHAPIRO, on behalf of himself and all other self-employed professionals practicing individually and similarly situated, Appellant, v. CITY OF NEW YORK et al., Respondents.

Court of Appeals of New York.

March 22, 1973.

Stephen Rackow Kaye, New York City, Meyer Shapiro, pro se, Wilbur H. Friedman, Robert J. Levinsohn, New York City, Bernard Gold, Staten Island, and Peter E. Yaeger, New York City, for appellant.

Norman Redlich, Corp. Counsel (Samuel J. Warms, Max H. Finkelberg, New York City, and Raymond Herzog, Cedarhurst, of counsel), for respondents.

Vincent D. Farrell, New York City, for Brooklyn Bar Assn., amicus curiae.

Francis Currie and Vincent D. Farrell, New York City, for The Dental Society of the State of New York and other dental societies amici curiae.

FULD, Chief Judge.

On this appeal brought directly to our court from Special Term on constitutional grounds, pursuant to CPLR 5601 (subd. (b), par. 2), we are called upon to determine the validity of New York City's Local Law No. 36 of 1971 which extends the tax imposed under the city's Unincorporated Business Income Tax Law to previously exempted self-employed professionals.

An unincorporated business income tax law has been an integral part of this State's tax structure since 1935 (L.1935, ch. 33, § 1). ¹ In 1966, the Legislature enacted a statute 'to enable any city having a population of one million or more to raise tax revenue by authorizing the imposition of taxes * * * on unincorporated businesses' (L.1966, ch. 772). Pursuant to this legislation, the City of New York enacted Local Law No. 22 of 1966 which imposes the authorized tax (Administrative Code of City of New York, § S46--1.0 et seq.). Patterned after the State act (Tax Law, § 701 et seq.), the city law imposes a tax, at a flat rate of 4%, on the 'taxable income' of unincorporated businesses 'wholly or partly carried on within the city' and provides that such tax 'shall be in addition to any other taxes imposed' (Administrative Code, § S46--3.0, subd. (a)). Taxable income under that law is arrived at, as it is under the State statute, by deducting from gross income, among other things, all 'ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business' (Internal Revenue Code (U.S.Code, tit. 26), § 162, subd. (a); see Administrative Code, § S46--6.0; Tax Law, § 706). In addition, each unincorporated entity is entitled to a so-called 'entity exemption' of $5,000 (Administrative Code, § S46.--9.0, subd. (1); Tax Law, § 709, subd. (1)). Furthermore, the law allows each partner or proprietor to deduct as 'reasonable compensation' for his 'personal services' an amount which may not exceed $5,000 (Administrative Code, § S46--8.0, subd. (a); Tax Law, § 708, subd. (a).) ²

By way of contrast, under the city's General Corporation Tax Law, the net income of corporations is normally taxed at a rate of 6.7% (Administrative Code, § R46--4.0, subd. 1, par. (a), cl. (1)). However, that law provides alternative bases for computing the tax, the one to be used being that which yields the greatest amount of tax revenue. Significantly, the third alternative (§ R46--4.0, subd. 1, par. (a), cl. (3)) is designed to prevent a small closely held corporation from escaping the tax by deducting from gross earnings all or most of those earnings as salaries to its stockholders and officers. That provision, in effect, permits the deduction of the principals' salaries so far as they are reasonable--but, in so doing, it places a ceiling on such deductions equal to approximately 70% Of the corporation's net income.

Prior to the 1971 amendment here in question, the city tax law defined unincorporated business as 'any trade, business or occupation' (Administrative Code, § S46--2.0, subd. (a)). Just as under the State statute, the local law excluded from such definition salaried employees and a certain class of self-employed professionals (§ S46--2.0, subds. (b), (c)). In 1971, the State authorized the city to repeal the provision excluding or exempting professionals and to redefine an 'unincorporated business' to include not only trades, businesses and occupations but professions as well (L.1971, ch. 412, § 1) and in June of that year the city passed Local Law No. 36. A month later, the plaintiff--a self-employed attorney suing individually and on behalf of all others similarly situated and asserting a violation of due process and of equal protection of the laws--brought this action for a judgment (1) declaring the new law invalid and (2) enjoining its enforcement.

In a well-reasoned opinion (67 Misc.2d 1021, 325 N.Y.S.2d 787), Supreme Court Justice McGroarty, rejecting the plaintiff's contentions, upheld the local law as constitutional and dismissed the complaint on the merits. ³

In our court, the plaintiff, as well as a number of Amici curiae, advances basically the same arguments as were urged below. More specifically, he contends that Local Law No. 36(1) constitutes a taking of property in violation of the Due Process Clause; (2) violates the Equal Protection Clause by lumping together self-employed professionals and self-employed businessmen for tax purposes; and (3) offends against the Equal Protection Clause by imposing a tax on the earnings of self-employed taxpayers--including self-employed professionals--not applied to the earnings of salaried employees. He also urges for the first time in our court that (4) Local Law No. 36, insofar as it classifies the earnings of self-employed professionals as business income for tax purposes, constitutes treating the '(l)abor of human beings' as 'an article of commerce' in violation of section 17 of article I, of the State Constitution ⁴; and (5) the city Unincorporated Business Income Tax Law, before and after its amendment by Local Law No. 36, is violative of equal protection guarantees in that it imposes a heavier tax burden on self-employed individuals and unincorporated entities than that imposed on corporations under the city's General Corporation Tax Law (Administrative Code, § R46--2.0 et seq.). ⁵

Due Process Claim

There can be no doubt that the tax law with which we are concerned was enacted solely and simply as an exercise of the taxing power; it was not motivated by any purpose other than the raising of revenue. 'This being so, the due process clause may not here be availed of to condemn the statute. That clause, it has been said, 'is applicable to a taxing statute * * * only if the act be so arbitrary as to compel the conclusion that it does not involve an exertion of the taxing power, but constitutes, in substance and effect, the direct exertion of a different and forbidden power, as, for example, the confiscation of property.' (Magnano Co. v. Hamilton, 292 U.S. 40, 44, 54 S.Ct. 599, 78 L.Ed. 1109.)' (Ampco Print. Advs. Corp. v. City of New York, 14 N.Y.2d 11, 24, 247 N.Y.S.2d 865, 872, 197 N.E.2d 285, 289, app. dsmd. for want of a substantial Federal question, 379 U.S. 5, 85 S.Ct. 47, 13 L.Ed.2d 21; see Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351 (decided Feb. 22, 1973).) ⁶

Equal Protection Claims

So far as the plaintiff's equal protection claims are concerned, the governing principles are familiar and well settled. The rule is elementary that 'in taxation even more than in other fields, legislatures possess the greatest freedom in classification.' (Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 408, 84 L.Ed. 590; see also, e.g., Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351 (decided, Feb. 22, 1973), Supra; Allied, Stores of Ohio v. Bowers, 358 U.S. 522, 526--528, 79 S.Ct. 437, 3 L.Ed.2d 480; Walters v. City of St. Louis, 347 U.S. 231, 237--238, 74 S.Ct. 505, 98 L.Ed. 660; Wisconsin v. J.C. Penney Co., 311 U.S. 435, 445, 61 S.Ct 246, 85 L.Ed. 267; Lawrence v. State Tax Comm., 286 U.S. 276, 283, 52 S.Ct. 556, 76 L.Ed. 1102; Matter of Roosevelt v. County of Nassau, 18 N.Y.2d 30, 39, 271 N.Y.S.2d 662, 667, 218 N.E.2d 539, 542; app. dsmd. for want of a substantial Federal question 385 U.S. 453, 87 S.Ct. 614, 17 L.Ed.2d 510; Ampco Print. Advs. Corp. v. City of New York, 14 N.Y.2d 11, 24, 247 N.Y.S.2d 865, 871, 197 N.E.2d 285, 289, Supra.) As the Supreme Court observed, just about four weeks ago, in the Lehnhausen case (410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351 Supra), 'Where taxation is concerned and no specific federal right, apart from equal protection, is imperilled, the States have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation. As stated in Allied Stores of Ohio v. Bowers, 358 U.S. 522, 526--527, 79 S.Ct. 437, 3 L.Ed.2d 480: 'The States have a very wide discretion in the laying of their taxes. When dealing with their proper domestic concerns, and not trenching upon the prerogatives of the National Government or violating the guaranties of the Federal Constitution, the States have the attribute of sovereign powers in devising their fiscal systems of ensure revenue and foster their local interests. Of course, the States, in the exercise of their taxing power, are subject to the requirements of the Equal Protection Clause of the Fourteenth Amendment. But that clause imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation. The State may impose different specific taxes upon different trades and professions and may vary the rate of exercise upon various products. It is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value. " ⁷

The wide variety of classifications permitted under these principles goes far to dispose of the plaintiff's claim that Local Law No. 36 is arbitrary and capricious insofar as it treats...