Xerox Corp. v. N.Y. State Tax Appeals Tribunal

• Decision Date: 24 October 2013
• Citation: 2013 N.Y. Slip Op. 06899,110 A.D.3d 1262,973 N.Y.S.2d 458
• Parties: In the Matter of XEROX CORPORATION, Petitioner, v. NEW YORK STATE TAX APPEALS TRIBUNAL et al., Respondents.
• Court: New York Supreme Court — Appellate Division

110 A.D.3d 1262

973 N.Y.S.2d 458

2013 N.Y. Slip Op. 06899

In the Matter of XEROX CORPORATION, Petitioner,

v.NEW YORK STATE TAX APPEALS TRIBUNAL et al., Respondents.

Supreme Court, Appellate Division, Third Department, New York.

Oct. 24, 2013.

Hodgson Russ, LLP, Buffalo (Christopher L. Doyle of counsel), for petitioner.

Eric T. Schneiderman, Attorney General, Albany (Paul Groenwegen of counsel), for Commissioner of Taxation and Finance, respondent.

Before: STEIN, J.P., McCARTHY, SPAIN and EGAN Jr., JJ.

SPAIN, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal which denied petitioner's request for a refund of corporate franchise tax imposed under Tax Law article 9–A.

Petitioner is a New York corporation that manufactures and sells office equipment and supplies and provides related services. It sells its goods and services outright and, more commonly, through a variety of contractual pay-over-time financing agreements that bundle the goods, services and/or supplies for its governmental and nongovernmental customers. At issue here are two types of financing agreements provided to petitioner's governmental customers: (1) fixed purchase option leases in which petitioner retains ownership of the equipment for the term of the agreement, at the end of which the customer has the option of purchasing it, and (2) equipment equity plans, known as installment sales, in which title is transferred to the customer at the beginning of the contract term with the purchase price paid in installments that include principal, interest and sometimes service or supply charges. Petitioner filed corporate franchise tax returns ( see Tax Law art. 9–A) for years 1997, 1998 and 1999 in which it treated the subject financing agreements with its governmental customers (hereinafter the finance agreements) as “business capital” and the interest income portion of the government customers' monthly payments as “business income” ( seeTax Law § 208[7], [8] ). In 2001, petitioner filed amended franchise tax returns that treated the subject finance agreements as “other securities” for purposes of the definition of “investment capital” under Tax Law § 208(5), thus reclassifying the interest income that it received under the finance agreements as “investment income” under Tax Law § 208(6). Based upon these changes, petitioner requested refunds from respondent Department of Taxation and Finance for the tax years in issue.

In 2005, after an audit, the Department issued a notice of disallowance of the refunds requested and, in 2008, after a conciliation conference, the refunds were denied and the disallowance sustained. Upon petitioner's administrative appeal and the parties' stipulation,¹ an Administrative Law Judge determined that the interest income qualified as investment income and granted the refunds requested. On the Department's appeal, respondent Tax Appeals Tribunal reversed and denied the refunds, determining that income derived from the finance agreements is not “investment income” under Tax Law § 208(6) because the agreements are not “stocks, bonds [or] other securities,” i.e., they do not constitute income from “investment capital” under Tax Law § 208(5). Petitioner instituted this CPLR article 78 proceeding seeking review of the Tribunal's determination ( seeTax Law § 2016).

Petitioner's corporate franchise tax for the years in issue was computed using separate calculations for its business income and its investment income ( see Tax Law former §§ 210[1][a]; [3][a], [b] ). The disputed issue here is whether petitioner's income from the subject finance agreements constitutes business income, as the Tribunal concluded, or investment income, as petitioner contends.² Business income is defined as “entire net income minus investment income” ( Tax Law § 208[8] ); investment income, as relevant here, is defined as “income ... [derived] from investment capital” less allowable deductions ( Tax Law § 208[6] ), which is “investments in stocks, bonds and other securities, corporate and governmental, not held for sale to customers in the regular course of business” ( seeTax Law § 208[5] [emphasis added] ). The corporate franchise tax statutes do not offer a definition of the term security or the phrase “other securities.” The Department's regulations provide that the phrase “stocks, bonds and other securities,” among other things, means “debt instruments issued by ... government[s]” ( 20 NYCRR 3–3.2[c][2] ). Petitioner's main argument is that the finance agreements in issue constitute such debt instruments and, thus, the income derived therefrom is investment income under Tax Law § 208(5) and (6). The Tribunal rejected this interpretation, and we confirm.

Under well-established law, “an agency's interpretation of the statutes it administers must be upheld absent demonstrated irrationality or unreasonableness” ( Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 322, 756 N.Y.S.2d 108, 786 N.E.2d 7 [2003] [internal quotation marks and citation omitted]; see Matter of Chesterfield Assoc. v. New York State Dept. of Labor, 4 N.Y.3d 597, 604, 797 N.Y.S.2d 389, 830 N.E.2d 287 [2005];Matter of Island Waste Servs., Ltd. v. Tax Appeals Trib. of the State of N.Y., 77 A.D.3d 1080, 1082, 909 N.Y.S.2d 790 [2010],lv. denied16 N.Y.3d 712, 2011 WL 1675376 [2011] ). “While as a general rule courts will not defer to administrative agencies in matters of pure statutory interpretation, deference is appropriate where the question is one of specific application of ... broad statutory term[s]” by the agency charged with administering the statute, here, the Department (Matter of O'Brien v. Spitzer, 7 N.Y.3d 239, 242, 818 N.Y.S.2d 844, 851 N.E.2d 1195 [2006] [internal quotation marks and citations omitted]; see Lorillard Tobacco Co. v. Roth, 99 N.Y.2d at 322–323, 756 N.Y.S.2d 108, 786 N.E.2d 7;Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451, 459, 426 N.Y.S.2d 454, 403 N.E.2d 159 [1980];Matter of Mobil Intl. Fin. Corp. v. New York State Tax Commn., 117 A.D.2d 103, 106–107, 501 N.Y.S.2d 947 [1986];compare Matter of Elmer W. Davis, Inc. v. Commissioner of Taxation & Fin., 104 A.D.3d 50, 53, 957 N.Y.S.2d 427 [2012];Matter of Michael A. Goldstein No. 1 Trust v. Tax Appeals Trib. of the State of N.Y., 101 A.D.3d 1496, 1497, 957 N.Y.S.2d 433 [2012],lv. denied21 N.Y.3d 860, 971 N.Y.S.2d 80, 993 N.E.2d 758 [2013] ). Likewise, “[t]he interpretation given to a regulation by the agency which promulgated it and is responsible for its administration is entitled to deference if that interpretation is not irrational or unreasonable” (Matter of 427 W. 51 St. Owners Corp. v. Division of Hous. & Community Renewal, 3 N.Y.3d 337, 342, 786 N.Y.S.2d 416, 819 N.E.2d 1032 [2004] [internal quotation marks and citation omitted] ). “The task of evaluating the evidence and making a decision rests solely upon the administrative agency ... and, if there are any facts or reasonable inferences from the facts to support the determination, it must be confirmed” (Matter of Mobil Intl. Fin. Corp. v. New York State Tax Commn., 117 A.D.2d at 107, 501 N.Y.S.2d 947 [citations omitted]; see Matter of Liberman v. Gallman, 41 N.Y.2d 774, 777, 396 N.Y.S.2d 159, 364 N.E.2d 823 [1977] ), regardless of “whether a rational alternative construction exists” (Matter of Custom Shop Fifth Ave. Corp. v. Tax Appeals Trib. of State of N.Y., 195 A.D.2d 702, 703, 600 N.Y.S.2d 295 [1993] ). According deference to the Department's interpretation ( see Lorillard Tobacco Co. v. Roth, 99 N.Y.2d at 322–323, 756 N.Y.S.2d 108, 786 N.E.2d 7;Matter of Siemens Corp. v. Tax Appeals Trib., 89 N.Y.2d 1020, 1022, 657 N.Y.S.2d 592, 679 N.E.2d 1072 [1997] ), we conclude that the Tribunal rationally determined that the finance agreements do not constitute “stocks, bonds [or] other securities” within the meaning of Tax Law § 208(5) and (6) or 20 NYCRR 3–3.2(c) and, thus, income derived therefrom is business income and not investment income.

The franchise tax statutes do not define a security or the phrase “other securities,” and the regulation similarly does not provide a test to determine what constitutes a security for franchise tax purposes, but merely lists generic instruments that are included within the phrase “other securities,” creating some ambiguity as to what is included (20 NYCRR 3–3.2 [c]; see Matter of Mobil Intl. Fin. Corp. v. New York State Tax Commn., 117 A.D.2d at 107, 501 N.Y.S.2d 947). The parties agree that the finance agreements here do not constitute “stocks” or “bonds.” By definition, to be included as “other securities” and, thus, investment capital, the agreements must be “ securities ” (Tax Law § 208[5] [emphasis added] ). We discern no basis upon which to disturb the Tribunal's reasoned determination that the agreements here do not, under any definition or test, qualify as “securities,” and that classifying as securities what are essentially no more than basic sale or lease contracts between petitioner and its governmental customers, as urged by petitioner, would be contrary to the statutory language and legislative intent.

To begin, under statutory principles of construction, in context the phrase “other securities” is limited to security instruments similar or of a like nature to stocks and bonds ( see Uribe v. Merchants Bank of N.Y., 91 N.Y.2d 336, 340, 670 N.Y.S.2d 393, 693 N.E.2d 740 [1998] [under the principle of ejusdem generis—of the same kind—the scope of general statutory language, if unclear, is limited by specific terms or phrases that precede it, where the preceding terms/phrases are themselves of a similar nature]; McKinney's Cons. Laws of N.Y., Book 1, Statutes § 239[b] ). Further, in the absence of a statutory test or definition, we look to the “plain meaning” of the words (Matter of Raynor v. Landmark Chrysler, 18 N.Y.3d 48, 56, 936 N.Y.S.2d 63, 959 N.E.2d 1011 [2011] [internal quotation...