Court Opinion

ID: 5261993
Source: CourtListenerOpinion
Date Created: 2022-01-06 18:45:55.023469+00
Date Added: 2024-06-11T08:28:05.534643
License: Public Domain

John M. Kellogg, P. J.
(dissenting):
The State is bound by its contracts which are based upon an actual and not a speculative consideration. (People ex rel. N. Y. C. & H. R. R. R. Co. v. Mealey, 224 N. Y. 187, 197; First Construction Co. v. State of New York, 221 id. 295.) Here, in order to induce the taking of real estate mortgages, the Legislature imposed a recording tax by sections 251, 253 and 254 of the Tax Law, and agreed with the relator, who corm plied with the act, to exempt “ all mortgages * * * and the debts and the obligations which they secure, together with the paper writings evidencing the same * * * from other taxation by the State,” and the subdivisions of the State, except from taxes imposed under certain sections of the statute which we are not interested in. In effect section 253 requires a payment in advance of a sum which is agreed to be in lieu of all future taxes on account of the mortgage, the debt and the obligation secured, together with the writings evidencing the same. Section 254, relating to mortgages made before the act, whether recorded or unrecorded, is a request to the owner to come within the act and obtain the benefits of the exemption. There the consideration of the contract more clearly appears.
The mortgage secured the payment of the interest as well as the principal; in fact the interest was clearly the moving *137reason for making the loan and taking the mortgage. The relator would have kept its money if it was to be returned without interest; it loaned it to secure the interest. The interest is not, therefore, a mere incident to the mortgage, but is an essential part of it, and is a part of the debt secured.
Where the law gives interest' as damages for the breach of a contract, it may be considered an incident to the debt; but where the original contract requires the payment of interest, the agreement to pay the interest is as much a part of the debt and obligation as is the agreement to pay the principal. (Southern Central R. R. Co. v. Town of Moravia, 61 Barb. 180, 189; Fake v. Eddy, 15 Wend. 76; Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, 583.)
The State income tax is imposed upon net incomes. Interest, to be taxable as income, need not be actually paid. Unpaid interest, which has accrued and is payable, is subject to the tax. (Tax Law, § 350, subd. 6.) The taxpayer must include in his return all interest which .is accrued and payable. Subdivision 1 of section 359 speaks of income “ received,” but subdivision 6 of section 350 provides that the word “ received ” means “ received or accrued.” “ Accrued ” means “ due.” (Allen v. Armstrong, 58 App. Div. 427; 1 C. J. 733.) In Pollock v. Farmers’ Loan & Trust Co. (supra) it was held, under the old Federal Income Tax Law of 1894 (28 U. S. Stat. at Large, 509, chap. 349; Id. 553, § 27 el seq.), that income from municipal bonds could not be taxed by the Federal authorities, as they had no right to tax the bonds themselves.
The past due interest upon a mortgage, which by its terms draws interest, forms a part of the net income for taxation. It has not been paid, and the only right to it is that it is payable by the terms of the mortgage, the obligation upon which the tax has been paid; it is a part of the debt secured by the mortgage, and is exempt. Needless to say that mortgage loans were made under the act, and old mortgage loans were continued, in rebanee upon the exemption provision. The State is bound to keep its obligation with the mortgagees and cannot be permitted to change its position.
If there is a fair doubt as to the proper construction of section 359 of the Tax Law, the court will be solicitous to adopt the construction which makes for validity rather than *138for invalidity. In construing the statute it will be assumed that the State meant to meet its fair obligations and deal honorably with its citizens and is not seeking to avoid its just obligations. The following cases sustain these views: People ex rel. Cooper Union v. Wells (180 N. Y. 537); People ex rel. Cooper Union v. Gass (190 id. 323); People ex rel. Roosevelt Hospital v. Raymond (194 id. 189). In each case it was claimed that an exemption from taxation in the charter of a corporation was not destroyed by a subsequent general tax law. In the Wells case it was held that the charter of the relator exempting it from taxation prevented the Legislature from destroying the exemption. The case was without opinion in the Appellate Division (98 App. Div. 623) and the Court of Appeals, but is explained in People ex rel. Roosevelt Hospital v. Raymond (194 N. Y. 198, 199). In the Gass case it was held that the charter exemption could be repealed by virtue of section 1 of article 8 of the Constitution, which permits all general laws and special laws with reference to corporations to be altered from time to time or repealed. The Roosevelt Hospital case explains the other cases, and considers that a general statute embracing the subject of taxation ordinarily repeals an exemption contained in a special charter, but that where the exemption is a matter of contract, a proposition by the State which has been acted upon by the party claiming the exemption, the presumption is that it is not repealed and that the exemption survives the general statute. It could not be presumed that the Legislature intended to violate the good faith and the agreement of the State, but it is presumed to have intended to keep faith and to observe its contracts by continuing the exemption. The constitutional provision has no application here and the agreed exemption continues.
In my. judgment a fair construction of the Tax Law exempts the interest upon mortgages which have paid a recording tax. If this construction is wrong, then the part of the statute attempting to destroy the exemption is unconstitutional. I favor reversal.
Determination confirmed, with fifty dollars costs and disbursements.