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Within the meaning of Section 1568 of the Civil Practice Act, this proceeding was begun by the service, on November 13th, 1939 (f. 3), of a notice of motion dated November 10th (f. 18), and returnable November 24th (f. 15). Petitioner prays for a review of the determination above referred to on the law and the facts (ff. 15 to 18 and 51 to 53).
Petitioner, then a business corporation, had filed a return based on the calendar year 1930. It reported, as returned to the United States Treasury, a net income of $70,690.47 (f. 89). It stated that that amount was incorrect, in that it included a so-called deferred income item of $39,190 (ff. 90, 91, 56). This sum, in petitioner's view, represented, not income of 1930, but moneys collected in 1930 on account of outstandings resulting from sales made by petitioner in earlier years.
The Commission had rejected petitioner's contention and had assessed a tax based on the sum so reported to the Federal treasury, plus dividends received. On August 2nd, 1932 petitioner, pursuant to Section 218 of the Tax Law, had applied for a revision and a hearing (ff. 68 and 69). Hearing was had October 6th, 1938 (f. 96). On October 18th, 1939 (f. 70) the Commission affirmed the assessment as made (ff. 72 and 73). That determination is now here for review.
Questions of fact do not arise; none of petitioner's figures are questioned and no allegation of a basic fact is specifically denied. As petitioner reads the answer and return, respondents have so phrased their pleading as to present, as question of law, the contention, that the taxpayer is precluded from going behind the Federal return (ff. 104 and 105).
Incorporated in 1888 (f. 20), petitioner, until 1929, reported and paid franchise taxes under Article 9 of the Tax Law (f. 23) as a real estate corporation (ff. 21 and 22). Net worth constituted the tax base. That net worth had increased annually, in substantial accord with the net income of each year. With the increasing tax base, the franchise tax naturally also increased. This increase may be graphically represented as follows (ff. 79, 91, 125, 126). Fractions of thousands are disregarded:
Differences between some of the above figures and figures given at folio 79 are explained in note b at folio 80. On three occasions petitioner, in order to decrease the net worth, that is to say, the tax base, had reported as an offset to assets a sum called deferred income, which sum represented uncollected balances of outstandings, resulting from capital gains made in earlier years. In each instance the Commission had refused to allow the offset. It had, thus, increased the taxable net worth to the several sums appearing in the foregoing table, and had exacted a correspondingly higher tax.
On the above showing petitioner contends that it had been taxed, not once but repeatedly, on the profits of every year prior to 1930. Petitioner furthermore contends that it was not permitted by the Commission to decrease its tax liability by claiming a net worth in which the uncollected portion of its outstandings did not figure.
By 1929 petitioner had disposed of its holdings and had acquired purchase money mortgages in their stead (ff. 24 and 134). In that year it had itself transferred to the list of 9A corporations (f. 25). Since then it has reported under Article 9A of the Tax Law.
The return involved in the present controversy mirrors the corporate transactions for the calendar year 1930 (f. 88). Entire net income for that year as reported to the Federal Treasury is given as $70,690.47. Included in that total however was a so-called deferred income item of $39,190.00. Petitioner claimed that the total was incorrect (ff. 90, 55 and 91). That is to say, petitioner contended and still contends that the deferred income was not income of 1930 and should not have figured in the controverted tax base.
Petitioner alleges that it had made two sales, one in 1923 and one in 1926 (ff. 29, 30 to 33); that each sale resulted in a substantial profit and that, for franchise tax purposes, it reported the profit in its entirety, in like manner as though the entire gain had immediately been realized in cash (ff. 30, 31 and 33). Petitioner further alleges that, these sales having been made on installment terms (f. 29), the entire gain arising from them was not immediately taxed by the Government, the right to tax a substantial part thereof being reserved to a later date. In 1930 petitioner collected the balance payable on the said two transactions, then still quite substantial, and, because of that collection, became subject to a Federal income tax, augmented by the delayed levy on said sum of $39,190.00 (ff. 36 and 37).
Petitioner contends that none of the allegations just summarized are put in issue by the answer and the return. The denials in the answer raise merely the contention of law that, notwithstanding the specific facts alleged, the sum of $39,190 is to be regarded as part of the net income of the year 1930.
Deducting the sum of $39,190 from $70,690.47 and adding to the remainder $1,764 as dividends received, results in a tax base of $33,264.47. This, petitioner contends, is the correct tax base, on which the tax of 412%, amounting to $1,496.90 should have been assessed and paid.
Tax Law, Section 9A
In 1931 petitioner was a business corporation (f. 25). It maintained no regular place of business outside of this State (f. 40). Article 9A of the tax law, as changed by successive amendments, including Chapter 515 of the laws of 1931, effective April 21st, 1931, determined petitioner's tax liability. The act imposed a tax of 412% (Sect. 214, subd. 10) upon the basis of the “entire net income as defined in subdivision three of Section two hundred and eight of the tax law for its fiscal or the calendar year next preceding as (thereafter) provided which entire net income is presumably the same as the entire net income which such corporation is required to report to the United States, plus any income received as dividends” (Sect. 209). Entire net income was defined by the act as total net income from all sources without deduction of dividends (Sect. 208, subd. 3). The corporation was required to report the amount of its entire net income as provided by subdivision 3 of Section 208 and to state the correct net income if it claims that the return to the United States Treasury Department was inaccurate (Sect. 211, subd. 2).
In its original form, as enacted by Chapter 726 of the laws of 1917, Article 9A provided for a franchise tax of three percent (Sect. 215) on business corporations. The tax was
The tax was to be computed on the basis of the corporation's net income for the appropriate year, as “hereinafter provided, upon which income such corporation is required to pay a tax to the United States” (Sect. 209). If the entire business of the corporation was transacted within the State, the tax was to be “based upon the entire net income of such corporation as returned to the United States treasury department” (Sect. 214). No measure other than the Federal return was provided.
Chapter 276, laws of 1918, made this rigid standard slightly flexible by inserting in Section 209 the word "presumably” and by adding to Section 214, after the words “treasury department” the words “subject however, to any corrections thereof for fraud, evasion or error, as ascertained by the state tax commission”. A further change permitted the taxpayer to claim inaccuracy in the amount of net income shown on the Federal return (Sect. 211, subd. 2). That