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American Savings Bank v. Michael

64 N.Y.2d 397 Court N.Y. Decision date 1985-02-14 English

Delivered by Jasen, J.

Contents

Majority

p. 397
In the Matter of American Savings Bank, Formerly Known as Franklin Savings Bank of New York, Respondent, v Philip R. Michael, as Commissioner of Finance of the City of New York, et al., Appellants. In the Matter of Bowery Savings Bank, Respondent, v Philip R. Michael, as Commissioner of Finance of the City of New York, et al., Appellants.
Argued January 3, 1985;
decided February 14, 1985
p. 400
POINTS OF COUNSEL
Frederick A. O. Schwartz, Jr., Corporation Counsel (Gale Zareko, Stanley Buchsbaum and Maurice Ravage of counsel), for appellants.
The tax is imposed on interest or dividends actually credited to depositors during the taxable year or on the interest or dividends which “would have been credited” to them if “each interest or dividend credit” had been computed and credited at the rate of 3.5% per annum, whichever is less. In computing “each interest or dividend credit”, the entire amount on deposit during the quarter (or other period), including interest previously credited, must be used. There is no exclusion for interest earned on any moneys previously credited to the depositor, even though credited as interest. (Woodside Sav. & Loan Assn. v Gallman, 73 Misc 2d 357 , 34 NY2d 674 ; Matter of Herzog v Joy, 74 AD2d 372 , 53 NY2d 821 ; Matter of John P. v Whalen, 54 NY2d 89 ; People v Newman, 32 NY2d 379 ; Ostrer v Schenck, 41 NY2d 782 ; Matter of Fineway Supermarkets v State Liq. Auth., 48 NY2d 464 ; Matter of Mobil Oil Corp. v Finance Administrator of City of N. Y., 58 NY2d 95 ; Matter of American Sav. Bank v State Tax Commn., 121 Misc 2d 771 ; Matter of Steinbeck v Gerosa, 4 NY2d 302 .)
Thomas S. Howard, Douglas J. McClintock and Michael V. Kaprelian for respondent in the first above-entitled proceeding.
I. The court below properly held that the city’s administrative determination is erroneous as a matter of law. (Howitt v Street & Smith Pub., 276 NY 345 ; Matter of Crystal v City of Syracuse, 47 AD2d 29 , 38 NY2d 883 ; Matter of Thompson v Mealey, 290 NY 230 ; Matter of Good Humor Corp. v McGoldrick, 289 NY 452 ; Matter of Capital Cities Communications v State Tax Commn., 65 AD2d 25 ; Giventer v Arnow, 37 NY2d 305 ; Cherokee Nation v United States, 270 US 476 ; American Timber & Trading Co. v First Natl. Bank, 511 F2d 980 , 421 US 921 ; Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451 ; Matter of Overseas Natl. Airways v State Tax Commn., 91 AD2d 162 .) II. If the city’s arguments were accepted they would create an ambiguity that must be
p. 401
resolved in American’s favor. (Matter of Suffolk County Fed. Sav. & Loan Assn. v Bragalini, 5 NY2d 579 ; American Locker Co. v City of New York, 308 NY 264 ; People ex rel. Studebaker Corp. v Gilchrist, 244 NY 114 ; People ex rel. Mutual Trust Co. v Miller, 177 NY 51 ; Matter of Delmar Box Co. [Aetna Ins. Co.], 309 NY 60 .) III. The administrative interpretations of the State’s financial corporation tax statute are not entitled to any weight. (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451 .)
Terence F. Gilheany, Arnold J. Zurcher, Jr., and Rosemary C. Byrne for respondent in the second above-entitled proceeding.
The order of the court below should be affirmed, since the plain language of the statute, the applicable rules of statutory construction and case authority, the relevant legislative history, and analysis of the results produced by the respective methods of Bowery and the Department, all compel the conclusion that the 3.5% statutory interest rate imposed by section R46-37.53 (b) (2) is a simple, uncompounded, annual rate of interest which excludes from the tax base interest credited to an account during the taxable year. (Matter of Crystal v City of Syracuse, 47 AD2d 29 , 38 NY2d 883 ; Matter of Mobil Oil Corp. v Finance Administrator of City of N. Y., 58 NY2d 95 ; Matter of Good Humor Corp. v McGoldrick, 289 NY 452 ; Matter of Pardee v State Tax Commn., 89 AD2d 294 ; Matter of Grace v New York State Tax Commn., 37 NY2d 193 ; Matter of American Cyanamid & Chem. Corp. v Joseph, 308 NY 259 ; Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451 ; Giventer v Arnow, 37 NY2d 305 ; Williamsburgh Sav. Bank v Town of Solon, 136 NY 465 ; Centre Props. Co. v Arnold Constable Corp., 50 AD2d 16 .)

OPINION OF THE COURT

On this appeal, we are asked to determine the proper method of calculating the tax base upon which to premise the alternative minimum tax imposed by the City of New York upon savings banks and savings and loan associations.

Petitioner, Bowery Savings Bank (Bowery) is a mutual savings bank organized and existing under the Banking Law of the State of New York. Bowery timely filed New York City financial corporation tax returns for its taxable years 1973 through 1975, and computed its tax thereon on the basis of the alternative minimum tax imposed by the Administrative Code of the City of New York.[1] By notices of deficiency dated May 25,1977, respon

1 The alternative minimum tax was imposed under section R46-37.5 (b) (2) for taxable years ending on or before December 31,1973; section R46-37.51 (b) (2) for taxable years beginning on or after January 1,1974 and ending on or *402 before December 31, 1974; and section R46-37.53 (b) (2) for taxable years beginning on or after January 1,1975. These three sections are identical but for the rates of tax imposed thereunder, which are 1.43%, 1.716% and 2.574%, respectively. To simplify the discussion, all references will be to section R4637.53 (b) (2).

p. 402
dents, Philip R. Michael, as Commissioner of Finance of the City of New York, and the Department of Finance of the City of New York (hereinafter collectively referred to as “the Department”), asserted deficiencies in Bowery’s New York City financial corporation tax for the taxable years in issue. On August 22, 1977, Bowery filed petitions for redetermination of the alleged deficiencies in its financial corporation tax, and on May 21, 1981, Bowery filed amended petitions for redetermination of the proposed deficiencies. Formal hearings were conducted, at which the sole issue was the proper method of computing the alternative minimum tax under section R46-37.53 (b) (2). On March 10, 1983, the Department denied Bowery’s petitions and issued a final determination of the tax liability. The final determination was of a deficiency for the years 1973, 1974 and 1975 in the principal amount of $153,289.67, plus interest of $74,676.48, for a total of $227,966.15. On July 8, 1983, Bowery commenced a proceeding pursuant to CPLR article 78 seeking to annul the Department’s final determination, which was subsequently transferred to the Appellate Division, First Department, for disposition pursuant to CPLR 7804 (g).

The circumstances relevant to the petition of the American Savings Bank of New York are virtually identical to those surrounding Bowery’s financial corporation tax dispute. The American Savings Bank (American)*[2] is a mutual savings bank organized and existing under the Banking Law of the State of New York. In the taxable years 1973,1974 and 1975, American paid New York City financial corporation taxes in accordance with the alternative minimum tax. (See, Administrative Code § R46-37.53 [b] [2].) By notices of deficiency dated January 9, 1978, the Department advised American of alleged deficiencies in the amount of its financial corporation tax payments for the taxable years in question.

On March 1, 1978, American petitioned the Department far redetermination of the alleged deficiencies. As with the Bowery financial corporation tax dispute, the sole issue was the proper

2 During the years in question, American Savings Bank was known as Franklin Savings Bank of New York. On April 24,1981, the former American Savings Bank and the former Empire Savings Bank merged into Frankl in Savings Bank of New York. The resulting bank continued operating under the name American Savings Bank and on July 29, 1983 converted to a Federal charter under the name American Savings Bank, FSB.

p. 403
method of computing the alternative minimum tax under section R46-37.53 (b) (2). By a final determination dated June 30, 1982, the Department denied American’s petition and assessed a deficiency for the years 1973, 1974 and 1975 in the principal amount of $62,121.50, plus interest of $25,619.56, for a total of $87,741.06. American commenced this article 78 proceeding in Supreme Court, New York County, on October 27, 1982, to challenge the Department’s determination, and the matter was subsequently transferred to the Appellate Division. While American’s proceeding was pending, Bowery commenced an article 78 proceeding to annul a similar administrative determination by the Department. American’s proceeding was adjourned so that the two proceedings could be considered jointly in the Appellate Division.

The proceedings of both Bowery and American, having been transferred to the Appellate Division for resolution and involving identical issues of law, were jointly argued and decided at the Appellate Division. The focus of the dispute was, and continues to be, the proper method of calculating the tax base in a statutory scheme which requires the rate of tax to be applied to the interest or dividends credited to depositors or shareholders during the taxable year. It was the contention of petitioners before the Appellate Division that the 3.5% interest rate is a hypothetical rate to be applied to the balance of a depositor’s account exclusive of, and not in addition to, the actual interest credited to that account during the taxable year. It was further argued by petitioners that the statutory rate is an uncompounded interest rate, in which case a particular bank’s actual interest rates exceeding 3.5% per annum, its frequency of compounding or crediting, and the amount of interest actually computed and credited to a given account during the taxable years are not to be considered in computing the alternative minimum tax base. The Department, in contrast, maintained that the 3.5% per annum statutory rate should be applied to the actual interest generated by the bank’s compounding and crediting practices as included in the balance of a depositor’s account.

A sharply divided Appellate Division accepted the method of calculation advanced by petitioners, granted the petitions of Bowery and American, annulled, on the law, the final determinations of the Department of Finance of the City of New York assessing tax deficiencies against petitioners for the years 1973 through 1975 inclusive, and remanded the matters for recomputation. We now modify, for the following reasons.

p. 404
The imposition by the City of New York of a minimum tax on savings banks and savings and loan associations, as an authorized alternative to taxation upon the taxpayer’s entire .net income, should be based upon each interest or dividend credit applied to the balance of a depositor’s account. The alternative minimum tax under section R46-37.53 (b) (2) of part III of title R, chapter 46 of the New York City Administrative Code provides, in pertinent part: “a savings bank and savings and loan association [shall pay] two and five hundred seventy-four one-thousandths percent of the interest or dividends credited by it to depositors or shareholders during any taxable year, provided that, in determining such amount, each interest or dividend credit to a depositor or shareholder shall be deemed to be the interest or dividend actually credited or the interest or dividend which would have been credited if it had been computed and credited at the rate of three and one-half percent per annum, whichever is less.”

By providing that the alternative minimum tax base should be determined according to the amount of interest “which would have been credited if it had been computed and credited at th e rate of [3.5%] per annum”, in those instances where the 3.5% statutory rate is lower than the amount of interest actually credited to depositor’s accounts, section R46-37.53 (b) (2) dictates that the tax base for the alternative minimum tax include the interest earned by the account as if said interest was computed by resort to the 3.5% per annum statutory rate. For the purposes of the computation of the tax base upon which the New York City alternative minimum tax is premised, the tax base is arrived at by compounding and crediting interest at the hypothetical rate prescribed by statute: 3.5% per annum, notwithstanding the actual or stated rate of interest which had been utilized by the bank during the taxable year. The statute does not provide for a flat tax of 3.5% per annum upon the average daily balance of an account, nor does it authorize application of the 3.5% per annum rate to all funds in the account, including amounts actually credited as compound interest during the taxable year. Rather, the alternative minimum tax contemplates an interpretation which computes each account balance as if each interest credit were made at the statutory rate of 3.5% per annum.

For example, in the case of an account with an average dail;r balance of $100 and the statutory interest rate of 3.5% per annum, which is compounded and credited semiannually, the tax base would equal $3.53. This tax base results because the

p. 405
June 30 interest credit in the amount of $1.75 is included in the account balance from July 1 through December 31, and the 3.5% per annum statutory ceiling is therefore applied to an account balance of $101.75 during the second half of the taxable year. Under the foregoing computation, the tax base would be $3.53, rather than a $3.50 tax base arising from petitioners’ method of computation which excludes all interest credited or due to the account.[3]

This result is concordant with industry practice. Section R46-37.53 (b) (2) directs that the statutory rate be applicable to “each interest or dividend credit to a depositor or shareholder”. Pursuant to the General Regulations of the Banking Board, the terms “interest” and “dividend” are defined as “any amount accruing to or for the account of any depositor(s) in connection with the use of funds deposited in a savings or time deposit account, regardless of whether such earnings have been paid to the account of its holder(s)” (3 NYCRR 13.11 [e] [emphasis added]). It is, therefore, nonindicative that the terms “interest” or “dividend”, as utilized in the ascertainment of the tax base for computation of the New York City alternative minimum tax, do not explicitly incorporate the compounding and crediting practices of banking organizations. The broad concepts of “interest” and “dividend”, as recognized by the General Regulations of the Banking Board and utilized within section R46-37.53 (b) (2), embrace all earnings accruing to or for the account, regardless of whether the earnings constitute the product of the bank’s compounding practices or whether the earnings have been credited to depositors’ accounts. Administrative Code § R46-37.53 (b) (2), however, limits the interest or dividends for purposes of the alternative minimum tax, to the hypothetical interest rate of 3*5% per annum which is independent of the actual rates of interest applicable to depositors’ accounts. It is by means of application of the artificial interest rate ceiling of 3.5% per annum that the taxpayer is relieved of the potentially higher tax liability arising from consideration of all earnings accrued.

3 Further by way of example, assume an account balance of $10,000, compounded quarterly, and computed as if each interest credit was made at the statutory rate of 3.5% per annum. The tax base is arrived at in the following manner: 1/1 $10,000.00 3/31 10,087.50 6/30 10,175.77 9/30 10,264.80 12/31 10,354.62. The total interest credited to the depositor’s account is $354.62, which represents an effective annual interest rate of 3.55%.

p. 406
Thus, the tax base properly includes the interest produced, through application of the 3.5% per annum statutory rate, by the taxpayers’ compounding and crediting practices.

Accordingly, in each proceeding, the judgment of the Appellate Division should be modified, without costs, and the matter remitted to respondents for recomputation in accordance with this opinion.

Chief Judge Wachtler and Judges Meyer, Simons, Kaye and Alexander concur.

In each case: Judgment modified, without costs, and matter remitted to Supreme Court, New York County, with directions to remand to respondents for recomputation in accordance wifii the opinion herein and, as so modified, affirmed.

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