New York World-Telegram Corp. v. McGoldrick

In January, 1931, the organization became interested in acquiring the New York World and the New York Telegram and this was accomplished by acquiring through various corporations the names, good will and intangible assets of the morning and evening World and all the assets, tangible and intangible, of the Nevo York Telegram. As the result of various changes of corporate names and intercorporate transactions the properties were vested in two companies: World-Telegram Building and Equipment Corporation (which will be referred to as the Equipment Company) and New York World-Telegram Corporation (which will be referred to as the Publishing Company).

The Equipment Company had acquired possession of the premises at the northeasterly corner of West and Barclay Streets under lease from Ehinelander Real Estate Company and was obligated to pay the rentals reserved in the lease. It had acquired all of the equipment used in the business of publishing the New York World-Telegram from the Publishing Company, for which it had given its 6% notes to the Publishing Company to cover the cost of the equipment. The Equipment Company had also borrowed from the Publishing Company sums required for rent under the Ehinelander lease and additional sums to meet the building costs of a new ten-story building, which were also evidenced by its 6% notes.

The purpose of thus vesting all of the physical property in the Equipment Company, which was not engaged in the conduct of the newspapers, was to make available as security for an issue of preferred stock assets costing some three and a half million dollars plus the obligations of the Publishing Company as lessee of the building and equipment. Accordingly, the Equipment Company entered into a lease of the real estate and all of the equipment to the Publishing Company, which owned all of its stock. This lease was executed as of October 1, 1931.

There was no sales tax in the city of New York when these transactions occurred. Pursuant to the enabling act (L. 1934, ch. 873), both branches of the municipal assembly of the Gitj

The word “ sale ” or “ selling ” was defined in subdivision (e) of section 1, as follows (Local Laws, 1934, p. 165): “ (e) The word ‘ sale ’ or ‘ selling ’ means any transfer of title or possession or both, exchange or barter, license to use or

Subdivision (a) of section 11 of Local Law No. 20, as amended (published as No. 21), authorized and empowered the comptroller to make, adopt and amend rules and regulations appropriate to the carrying out of this local law and the purposes thereof, and on February 11,1935, the comptroller promulgated the official regulations provided for in subdivision (a) of section 11 (N. Y. City Sales Tax Eules and Eegulations —1935). Among other problems, the comptroller’s regulation^ dealt with the taxability of receipts from sales made before December 10, 1934, and in this connection provided:

“ Article 29.— The tax is imposed upon the receipts of every sale of tangible personal property (except such property as is specifically exempted therefrom) at retail in the city of New York on and after December 10, 1934. * * *

“ Where tangible personal property was sold and delivered to the purchaser thereof prior to December 10, 1934, no tax is imposed upon the amount of the receipts therefrom even though all or any part of the purchase price was paid after December 10, 1934.

“ Where a contract for the sale of tangible personal property was made prior to December 10, 1934, and such property was sold to the purchaser on and after December 10, 1934, the purchaser is required to pay the- tax to his vendor on the total selling price thereof. If at the time the contract was made, the purchaser made a down payment, he is required to pay the tax on the unpaid balance due on and after December 10, 1934.

“ Where tangible personal property was sold on the installment plan and delivered to the purchaser before December 10, 1934, the tax does not apply to the receipts therefrom even though payment therefor is made on and after December 10, 1934.”

The incidence of the tax is sale after December 10,1934. The statute and the regulations leave no doubt that sales made before its effective date are not to be taxed. By express statutory definition conditional sales are sales within the meaning of the statute. Therefore, a conditional sale of tangible per

Tbe agreement is cast in tbe form, style and language of a lease, but we must look to tbe rights it confers and tbe obligations it imposes to determine whether it has tbe essential attributes of a contract of conditional sale or of an installment sale (Central Union Gas Co. v. Browning, 210 N. Y. 10 ). If tbe conditional vendee has possession of tbe chattel, is obligated to pay for it and, having paid, becomes or has an option to become tbe owner of it, tbe vendor retaining tbe right to retake tbe goods if tbe conditional vendee defaults in bis obligation to pay for them, there is a conditional sale (Central Union Gas Co. v. Browning, supra; Gardner v. Town of Cameron, 155 App. Div. 750 , affd. 215 N. Y. 682 ; Ohl & Co. v. Standard Steel Sections, Inc., 179 App. Div. 637 ; Equitable General Providing Co. v. Eisentrager, 34 Misc. 179 ).

Section 61 of tbe Personal Property Law, which is taken from section 1 of tbe Uniform Conditional Sales Act, is a statement declaratory of tbe law generally prevalent throughout tbe United States. See 2 Uniform Laws Annotated, section 1, Commissioner’s Note, citing many cases in which leases have been construed to be conditional sales contracts where tbe buyer upon payment of rentals became or bad tbe option to become tbe owner of tbe goods. Additional authorities are collected in Uniform Laws Annotated (Yol. 2A, § 13, p. 21). Section 61 of tbe Personal Property Law reads as follows:

“ § 61. Definitions. In this article ‘ conditional sale ’ means (1) any contract for tbe sale of goods under which possession is delivered to tbe buyer and tbe property in tbe goods is to vest in tbe buyer at a subsequent time upon tbe payment of part or all of tbe price, or upon tbe performance of any other condition or tbe happening of any contingency; or (2) any contract for tbe bailment or leasing of goods by which tbe bailee or lessee contracts to pay as compensation a sum substantially equivalent to tbe value of tbe goods, and by which it is agreed that tbe

bailee or lessee is bound to become, or bas the option of becoming the owner of such goods upon full compliance with the terms of the contract,”

All of the essential attributes of a conditional sale will be found in the provisions of the agreement and lease under the terms of which the Publishing Company regained possession of the equipment which it had transferred to the Equipment Company in exchange for its notes; the use of the land which the Equipment Company had acquired under the Rhinelander lease upon which the Publishing Company paid the rent, and and also the use of the building on this land the cost of which it had advanced to the Equipment Company. The Publishing Company owning all of the stock of the Equipment Company, its apparent purpose was to take advantage of a separate corporate structure to insulate valuable assets against the risks of the publishing business, but both the building and the equipment had been acquired for use in that business, and so the lease was made giving the Publishing Company possession and control of these properties but requiring the Publishing Company to make payments, called installments of rent, which would cover all costs and expense which it would have been,required to if there had been no Equipment Company. It was even required to pay as “rental ” the interest on the Equipment Company’s notes which the Equipment Company was obligated to pay to it — no doubt to give these notes security which might make them attractive investments. Under these circumstances it is not surprising to find that the lease carefully provided that the Publishing Company upon performance of its obligations under the lease should become, or have the option to become, the owner of all of the leased property. It is quite obvious from the relation of the parties, the character of the transaction, the properties involved and the frame and structure of the documents used that the instrument was much more than a lease upon the termination of which the real and personal property would revert to the lessor, and that it had all the attributes of a conditional sale under which the lessee upon performance of its obligations would become the owner of all the leased property.

The agreement is called an agreement and lease. In terms it is a lease to the lessee and a hiring from the lessor of real

“ (c) Personal Property: The following-described goods and chattels, to wit:

“ Presses, type, typesetting and stereotyping machinery, desks, filing cabinets, and all other machinery, equipment, furniture and fixtures belonging to the Lessor and located or contained in the building situated on the above-described tract of land and in premises occupied by the Lessee at 305 East 45th Street, 460 West 34th Street and elsewhere in the City of New York or State of New York, together with all other machinery and equipment hereafter acquired by the Lessor; it being the intent and purpose of this instrument to sublease to the Lessee all rights of the Lessor herein and in and to said real estate, and all buildings, improvements and appurtenances upon the said premises covered by said Rhinelander lease, and to lease all tangible personal property of the Lessor wherever located.”

The term of the lease is for twenty years, with three further terms of twenty-one years each at the lessee’s option. The lease required the lessee to pay rent beginning October 1, 1931:

(a) the equivalent of the rentals payable by the Equipment Company under the Rhinelander lease;

(b) one-half per cent per month on the par value of all shares of preferred stock of the Equipment Company issued and outstanding, being the amount required to pay dividends upon this stock;

(c) an additional amount, payable quarterly through a sinking fund or otherwise, sufficient to redeem the Equipment Company’s preferred stock in accordance with its certificate of incorporation;

(d) all taxes upon the assets, earnings and business of the Equipment Company;

(e) all other obligations assumed and undertaken by the Equipment Company under the Rhinelander lease; other expenses of the Equipment Company, “ including a reasonable charge for or on account of depreciation on said building, machinery, equipment and all Leased Property above specified.”

It should be noted that all these obligations are definite except “ a reasonable charge for or on account of depreciation on said building, machinery, equipment and all Leased Property above

It was further provided that the agreement and lease should “ continue in full force and effect during the term of any renewal or renewals of said Rhinelander lease (whether or not made at the request of the Lessee herein) so long as (a) any Preferred stock of the Lessor shall remain outstanding and/or (b) any of the notes of the Lessor outstanding on October 1, 1931, shall remain unpaid; unless and until the Lessee herein shall sooner exercise its option as provided in Paragraph (11) hereof and shall have paid the price therein specified. ’ ’

Thus, except by mutual consent, the agreement and lease contemplated by the parties was to continue until all of the lessor’s preferred stock had been redeemed and all of its notes, representing the cost of the building, had been paid, unless the tenant (the lessee) exercised its option under paragraph (11) of the lease to purchase all the right, title and interest of the lessor in the Rhinelander lease and the described premises with the buildings thereon, together with all machinery, equipment and other property covered by the lease and owned by the lessor at any time after October 1, 1937. The price to be paid in the exercise of this option was the cost of the machinery and equipment, less depreciation paid, and the cost of the buildings and improvements thereon, less depreciation paid thereon, and in this connection the lessor agreed that all moneys paid to it under this option should be used to redeem its outstanding preferred stock and to pay its said notes before said moneys were used for any other purpose, and further agreed to apply the proceeds from all sales of its preferred stock, first, to pay outstanding notes of the lessor representing the costs of buildiqg, machinery and equipment, and thereafter as its board of directors might deem best.

The option clause in paragraph (11) of the agreement and lease reads as follows: “ (11) The Lessor agrees that, all the

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, and the determination of the comptroller annulled.

(dissenting). In disregard of settled restrictions on judicial review of a determination by an administrative agency, the majority of the court is upsetting an administrative decision which, depending upon a finding of fact, has reasonable support in the record. (See, e.g., Matter of Miller v. Kling, 291 N. Y. 65 ; cf. Matter of Mounting & Finishing Co. v. McGoldrick, 294 N. Y. 104 , 108.)

Whether the agreement was one or the other was essentially a question as to the underlying intent of the parties. (See Cutler Mail Chute Co. v. Crawford, 167 App. Div. 246 , 253; cf. Gardner v. Town of Cameron, 155 App. Div. 750 , 753-757, affd. 215 N. Y. 682 .) As the majority itself has observed, that question must be viewed in the light of the nature of the transaction, the situation and relationship of the parties and the purposes sought to be achieved by them. From examination of these circumstances, their intent emerges, for the most part, as a matter of fact and not as a question of law. Principally for that reason, I conceive that, on this record, it is a usurpation of the function of the administrative official to whom determination of the question was committed, for the court to declare, as a matter of law, that the intent of the parties was to accomplish a conditional sale of the personalty.

Indeed, the majority opinion itself goes far to refute the conclusion that a conditional sale was intended. It notes that the apparent purpose of the parties was “ to take advantage of a separate corporate structure to insulate valuable assets against the risks of the publishing business ” (p. 19). That purpose would have been defeated if the Publishing Company’s present position that the contract was one of conditional sale be accepted, for it does not appear that the contract was filed, as required by the conditional'sales law, and such failure to file would have subjected the property to the claims of creditors of the Publishing Company (Personal Property Law, § 65). In other words, to credit the contention that the parties, in 1931, intended their agreement as a conditional sale, the comptroller would have been required to conclude that they intended to frustrate their principal objective of removing the

It is, indeed, highly doubtful whether the 1931 agreement can be held to have accomplished a conditional sale, even if we view the matter as involving a pure question of law. This was a complex transaction, far removed from the simple situation envisaged by section 61 (2) of the Personal Property Law — a “ contract for the bailment or leasing of goods by which the bailee or lessee contracts to pay as compensation a sum substantially equivalent to the value of the goods, and by which it is agreed that the bailee or lessee is bound to become, or has the option of becoming the owner of such goods upon full compliance with the terms of the contract.”

Thus, the lease in this case embraced both realty and personalty, and the clause giving the Publishing Company the option to purchase was, by its terms, exercisable only by payment of the agreed price of both the realty and the personalty. A lease of personalty containing an option to purchase is not treated as a conditional sale if the price largely exceeds the aggregate rentals payable thereunder. (See Cutter Mail Chute Co. v. Crawford, supra; see, also, 1 Williston on Sales [2d ed.], § 336, p. 783.) In the present case, the lessee was not entitled to acquire title to the personal property except by paying a substantial additional amount for the real property as well; and the situation was not within the. ambit of section 61 (2) of the Personal Property Law — i.e., where payment of the specified annual rentals for the use of the personalty would per se result in payment of the agreed purchase price.

Moreover, apart from that consideration, the rental payments which, according to the majority, were bound to accomplish full payment of the purchase price, were not definitely fixed in the agreement. The court’s opinion thus proceeds on the assumption that the lessee was obligated to pay the entire agreed cost of the personalty in the form of rental payments within the term of the lease, by reason of the annual payments of depreciation at the rate of 10% of the cost of the personalty and at the rate of 2% of the cost of the realty. The agreement did

Beyond all this, section 61 (2) of the Personal Property Law appears to be aimed primarily at the evil of attempted evasion of the filing requirements of the conditional sales law to the prejudice of creditors or bona fide purchasers who rely on the apparent title of the party put in possession of the goods, by the device of cloaking in the guise of a bailment or lease a transaction which is in substance a conditional sale. (See Bogert, Commentaries on Conditional Sales, 2A, Uniform Laws Annotated, pp. 22, 23.) But, in the present case, no evidence appears of any aim to disguise the real nature of the transaction, and there is no challenge by any creditor or bona fide purchaser. Nor was the retention of title by the lessor here intended to serve the purpose only of securing payment of the purchase price.

Consideration of all the circumstances of the case, it seems to me, clearly points the conclusion that the determination reached by the comptroller' is not without reasonable support. That being so, the courts may not interfere.

I would affirm the order of the Appellate Division.

LotjghraN, Ch. J., Lewis, CoNway and Dye, JJ., concur with Thachee, J.; Ftjld, J., dissents in opinion in which Desmoud, J., concurs.

Order reversed, etc.