Court Opinion

ID: 5797678
Source: CourtListenerOpinion
Date Created: 2022-01-12 18:21:35.009138+00
Date Added: 2024-06-11T08:42:28.743557
License: Public Domain

Kane, J. (dissenting)
Petitioners filed two unincorporated business income tax returns for the year of 1970; the first, as to which there is no dispute, covered the period from January 1 until decedent’s death on September 25; the second, as to which the instant claim for a refund is made, ran from that point until the end of the calendar year. It is apparent that decedent had previously filed such returns on a calendar year basis using the cash method of accounting. In our view, the Leyendecker (11 AD2d 747, affd 9 NY2d 707) decision does nothing more than recognize that, after liquidation, an unincorporated business generates no further taxable income subject to the reach of what is now article 23 of the Tax Law. The *384insurance partnership there involved was fully liquidated by the end of 1949 yet the Tax Commission sought to bring renewal commission payments made from 1952 to 1955 within the purview of unincorporated business income and tax it as such. This they were not permitted to do, not because the sums involved were unrelated to the activities of the former enterprise, for they clearly were, but because those payments no longer retained their character as business income after the physical liquidation was finished. The unincorporated business income tax is imposed " for each taxable year on the * * * taxable income * * * of every unincorporated business” which entities are defined as including any "business * * * conducted, engaged in or being liquidated ” (Tax Law, § 701, subd [a]; § 703, subd [a]; emphasis supplied). Taxable income is dependent upon the sum of items "includible in gross income for the taxable year" (Tax Law, § 705, subd [a]; emphasis supplied). If decedent here had survived and elected to terminate his business at any point during his self-chosen taxable year, it is obvious that he would have taken the same number of limited steps to effect such a liquidation that his fiduciaries found necessary to undertake on his behalf. He would have been required to include whatever commissions he received during 1970 as unincorporated business gross income for that taxable year.
Following their appointment, but before the end of the year, petitioners began and completed the liquidation of decedent’s business affairs. Had the process entailed efforts in successive tax periods, a more difficult question would be presented, but the record is unambiguous in describing the chronology of events which took place and the legal conclusion to be drawn from the wording of the applicable statutes and the Leyendecker decision is inescapable: commissions received by decedent’s estate in 1970 were properly taxed under article 23; those received thereafter are not subject to taxation as unincorporated business income. As a consequence, it becomes necessary to review petitioner’s further contention that respondent improperly disallowed its claimed deduction from 1970 gross income for personal services. Within certain limited amounts, subdivision (a) of section 708 of the Tax Law permits such a deduction "for reasonable compensation * * * for personal services of the proprietor”. Respondent relied exclusively upon its regulation excluding fiduciaries from the category of proprietors as the basis for disallowing the claimed *385deduction (cf. 20 NYCRR 208.1 [a]). Not elsewhere defined by statute, the construction given the term proprietor by the responsible agency would ordinarily be upheld provided it has a warrant in the record and a reasonable foundation in law (cf. Matter of Howard v Wyman, 28 NY2d 434). However, here it is plain that the intendment of the statute is to provide a deduction from income for the value of services rendered to an unincorporated business by its active operators, be they partners or some other form of management, so that the plan of taxation will closely parallel the deductions similarly allowed when franchise taxes are imposed upon corporations (cf. Tax Law, § 209, subd 3; § 208, subd 9; § 210, subd 1, par [a]). Respondent has offered no acceptable reason for its regulation and none appears. Therefore, it was arbitrary for respondent to disallow the instant deduction in toto and the matter should be remitted to consider the reasonableness of the amount so claimed by petitioners.
Larkin and Reynolds, JJ., concur with Herlihy, P.J.; Sweeney and Kane, JJ., dissent and vote to confirm in an opinion by Kane, J.
Determination annulled, and petition granted, with costs.