Trump v. Chu

• Decision Date: 30 April 1985
• Citation: 65 N.Y.2d 20,489 N.Y.S.2d 455,478 N.E.2d 971
• Parties: , 478 N.E.2d 971 Donald J. TRUMP et al., Appellants, v. Roderick CHU, Individually and as Commissioner of the Department of Taxation and Finance, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 455

489 N.Y.S.2d 455

65 N.Y.2d 20, 478 N.E.2d 971

Donald J. TRUMP et al., Appellants, v. Roderick CHU, Individually and as Commissioner of the Department of Taxation and Finance, Respondent.

Court of Appeals of New York.

April 30, 1985.

Milton S. Gould, Roy M. Cohn, Stuart A. Smith, Alice P. Henkin and Louis Biancone, New York City, for appellants

Robert Abrams, Atty. Gen., Albany (Robert Hermann, Peter H. Schiff, Albany, Richard G. Liskov and August L. Fietkau, New York City, of counsel), for respondent.

John T. DeGraff, Jr., and Michael T. Wallender, Albany, for New York State Association of Realtors, Inc., amicus curiae.

John G. McGarrahan and Roy A. Klein, New York City, for Citizens Tax Council, Inc., amicus curiae.

OPINION OF THE COURT

SIMONS, Judge.

Plaintiffs Donald J. Trump and Richard Pellicane seek a judgment declaring that Tax Law article 31-B which imposes a 10% tax on gains derived from real property transfers (see, Tax Law §§ 1440--1449-c), violates the equal protection clause of both the United States Constitution (U.S. Const. 14th and the New York State Constitution (N.Y. Const., art. I, § 11) and a permanent injunction prohibiting defendant Commissioner of the Department of Taxation and Finance from enforcing it. Special Term upheld the statute and plaintiffs are before us by direct appeal from its judgment (see, N.Y. Const., art. VI, § 3 CPLR 5601). We affirm Special Term's holding but modify the judgment to declare that Tax Law article 31-B (L.1983, ch. 15, § 181) does not violate either the State or Federal Constitution (see Lanza v. Wagner, 11 N.Y.2d 317, 334, 229 N.Y.S.2d 380, 183 N.E.2d 670).

Article 31-B was enacted in 1983 as part of a comprehensive package of tax measures designed to provide necessary revenues for the 1983-1984 State budget (L.1983, ch. 15). It imposes a tax of 10% on gains derived from the transfer of real property within the State payable by the transferor (see, Tax Law §§ 1441, 1442). The statute defines "gain" as "the difference between the consideration for the transfer of real property and the original purchase price of such property, where the consideration exceeds the original purchase price" (id. § 1440). It also contains several exemptions from the tax, but for purposes of this appeal the only relevant exemption is for transfers in which the consideration is less than one million dollars (see, id. § 1443). In determining whether a transfer is for one million dollars or more, the statute provides different modes of treatment for condominiums or cooperatives sold by the developer, on the one hand, and subdivided parcels of real property improved with residences on the other. In the former situation, if the aggregate consideration to the developer for the sale of the entire development equals or exceeds one million dollars and there is a gain, the initial sale of any individual unit will be taxed on a proportionately allocated basis. When a developer sells a subdivided plot of land improved with individual residences, however, the price of the single residence is deemed the consideration for purposes of the one million dollar exemption (see, id. § 1440). ¹

Plaintiff Donald Trump is a real estate developer who holds a beneficial interest in a joint venture known as the Trump-Equitable Fifth Avenue Company, the developer of Trump Tower in Manhattan. The 38 floors of Trump Tower house 266 residential units that are being sold pursuant to a condominium plan for a projected gross revenue of $277 million. Since the passage of article 31-B, Trump-Equitable has sold several units in Trump Tower and, as transferor, has paid the 10% gains tax imposed by that statute under protest. Plaintiff Richard Pellicane is a real estate developer in Suffolk County who is the fee owner of several parcels of real property in that county that are subject to the 10% gains tax imposed by article 31-B.

Plaintiff Trump instituted an action in Supreme Court, New York County, and plaintiff Pellicane brought his action in Supreme Court, Suffolk County. Both plaintiffs asserted that the 10% gains tax violates the equal protection clause of the Federal and State Constitutions in that it creates arbitrary and discriminatory classifications between: (1) transferors who sell their real property for one million dollars or more and those who sell property for less than one million dollars, (2) condominium/cooperative developers and developers of subdivided residential plots and (3) transferors of real property and transferors of other tangible and intangible property. In addition, plaintiff Pellicane alleged that the gains tax violates the due process clause of the United States and New York State Constitutions because it is a retrospective tax (see, U.S. Const. 14th amend.; N.Y. Const., art. I, § 6). After answering, defendant moved to dismiss the Trump complaint and the Pellicane amended complaint for failure to state a cause of action and plaintiffs cross-moved for summary judgment. Plaintiffs' motion to consolidate the actions and remove the Pellicane action to Supreme Court, New York County, was granted and the actions were consolidated. Special Term upheld the gains tax in its entirety, denied plaintiffs' cross motions for summary judgment and granted defendant's motion to dismiss.

On this appeal, plaintiffs raise two equal protection challenges to the constitutionality of the gains tax. First, they assert that by exempting transfers for less than one million dollars the gains tax treats identically situated taxpayers differently on the basis of varying levels of gross receipts, e.g., a taxpayer who sells his property for $999,999 and has a gain of $500,000 owes no tax whereas a taxpayer who sells his property for $1,000,001 and has a similar $500,000 gain must pay a tax of $50,000. Thus, plaintiffs allege that the gains tax is indistinguishable from gross receipts taxes that have been declared unconstitutional based upon findings that the gross receipts have no rational correlation to the amount of the gain. Second, plaintiffs contend that by requiring the aggregation of consideration in connection with the sale of condominium and cooperative dwellings for purposes of meeting the one million dollar taxing threshold, but not for the sale of subdivided parcels with improved residences, the gains tax unconstitutionally discriminates against developers of condominiums and cooperative dwellings.

The scope of our review is narrow. Taxing statutes, like other social and economic legislation that neither classify on the basis of a suspect class nor impair a fundamental right, must be upheld if the challenged classification is rationally related to achievement of a legitimate State purpose (Western & S. Ins. Co. v. Board of Equalization, 451 U.S. 648, 657, 101 S.Ct. 2070, 2077, 68 L.Ed.2d 514). Moreover, the statute enjoys a presumption of constitutionality which "can be overcome only by the most explicit demonstration that classification is a hostile and oppressive discrimination against particular persons and classes. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it" (Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 408, 84 L.Ed.2d 590 see, Maresca v. Cuomo, 64 N.Y.2d 242, 250, 485 N.Y.S.2d 724, 475 N.E.2d 95; Allied Stores v. Bowers, 358 U.S. 522, 527-528, 79 S.Ct. 437, 440-42, 3 L.Ed.2d 480). When examining classification, it should be remembered that in the field of taxation the Legislature is "not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value" (Allied Stores v. Bowers, supra, at p. 527, 79 S.Ct. at p. 441) but rather it has "large leeway in making classifications and drawing lines which in judgment producereasonable systems of taxation" (Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359, 93 S.Ct. 1001, 1003-04, 35 L.Ed.2d 351; Shapiro v. City of New York, 32 N.Y.2d 96, 103, 343 N.Y.S.2d 323, 296 N.E.2d 230). Thus, the equal protection clause does not prevent State Legislatures from drawing lines that treat one class of individuals or entities differently from others unless the difference in treatment is "palpably arbitrary" or amounts to an "invidious discrimination" (see, Lehnhausen v. Lake Shore Auto Parts Co., supra, at 410 U.S. p. 360, 93 S.Ct. at 1004; Allied Stores v. Bowers, supra, at p. 527, 79 S.Ct. at p. 441; Shapiro v. City of New York, supra, at p. 103, 343 N.Y.S.2d 323, 296 N.E.2d 230).

Addressing the discriminatory effect of the exemption for transfers of real property for less than one million dollars, plaintiffs contend that our decision is controlled by Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 55 S.Ct. 525, 79 L.Ed. 1054; see also, Merit Oil v. State Tax Commn., 111 Misc.2d 118, 443 N.Y.S.2d 604. In Stewart Dry Goods, the United States Supreme Court invalidated a graduated gross receipts tax imposed on the sale of retail merchandise because the rate of tax increased as the total gross receipts of sales increased. The statute taxed similar transactions differently, therefore, depending on the amount of receipts obtained from previous transactions. ² The only conceivable justification for this different treatment was that a merchant's net income and consequently his ability to pay the tax increased as his volume of sales increased (id., 294 U.S. at pp. 557-558, 55 S.Ct. at pp. 528-29). The court held this was not a rational basis for the tax because the gross receipts tax was imposed regardless of whether a merchant made a profit. Thus, merchants with a large volume of business but an actual net loss paid more tax than a low volume merchant with a substantial profit (id., at pp. 560-561, 55 S.Ct. at p. 529-30). Similarly, the statute at issue in Merit Oil imposed a 2% gross receipts tax on all companies engaged in importing, extracting, producing, refining, manufacturing,...