In Matter of Young v Bragalini (3 N.Y.2d 602, 605), the court stated the rule of law as follows: "Where the question is one of specific application of a broad statutory term in a proceeding in which the agency administering the statute must determine it initially, the court's function is limited (Board v. Hearst Publications, 322 U.S. 111, 131).Summary of this case from Alvarez-Stelling v. Siebert
Argued October 16, 1957
Decided January 23, 1958
Appeal from the Appellate Division of the Supreme Court in the third judicial department.
Robert M. Benjamin, Frank A. Zunino, Jr., and Sidney D. Rosoff for appellants.
Louis J. Lefkowitz, Attorney-General ( Robert W. Bush and John R. Davison of counsel), for respondents.
Petitioners, members of a New York partnership, engaged in the insurance business, contend that they are "carrying on" business "both within and without the state" so as to entitle them to an allocation of the net income in computing the unincorporated business tax pursuant to section 386-g of the Tax Law.
The Tax Commission disallowed the claim for exemption and imposed assessments for unincorporated business tax on all the income received from Adams Porter, a Texas partnership, and Adams Porter Companhia Limitada, a Brazilian organization, on the ground the New York firm was not carrying on business in Texas or Brazil and that all the income was earned within New York and properly subject to the unincorporated business tax without apportionment. The Appellate Division found upon this record that "it is not unreasonable" to say that the New York partnership was not carrying on business without the State.
Petitioners concede that the enactment in 1931 of the Texas statute forced the partners to dissolve the partnership so far as it affected the insurance business transacted in Texas. They also admit that Adams had become a resident of Brazil in order to comply with Brazilian law; that Aprill, a Brazilian resident, contributed 24% of the original of the Brazilian company capital; that an attorney, Abreu, a Brazilian citizen, contributed 1%; and that Adams Porter of New York contributed the remaining 75% of the capital in compliance with the statutes of Brazil. Texas has a complete system of licensing and registration (Texas Insurance Code, ch. 21). Brazil permits nonresidents to place insurance through Brazilian companies or Brazilian agents subject to a nonresident income tax. Prior to 1947 the New York firm transacted its business through Brazilian interests, but in that year it formed Adams Porter Companhia Limitada. Thus during the tax years involved in all three proceedings, the three firms, Adams Porter of Houston, Adams Porter Companhia Limitada, and Adams Porter of New York were separately licensed entities.
Since Adams Porter of New York was not licensed by either Texas or Brazil to engage in business there, and had ceased carrying on its activities as a nonresident in Brazil, although authorized to do so, the Tax Commission decided that its business, if any, could have been conducted only in the State of New York.
It has been long recognized that the burden of proof to overcome assessments rests upon the taxpayer ( Matter of Calder v. Graves, 261 App. Div. 90, 94, 95, motion for leave to appeal denied 261 App. Div. 1025, affd. 286 N.Y. 643); and that if there are facts or reasonable inferences to be drawn from the record to support the determinations of the commission, the assessments must be confirmed ( People ex rel. Freeborn Co. v. Graves, 257 App. Div. 587). Ordinarily, therefore, determinations of the Tax Commission are not disturbed unless clearly shown to be erroneous ( People ex rel. Hull v. Graves, 289 N.Y. 173, 177).
Where the question is one of specific application of a broad statutory term in a proceeding in which the agency administering the statute must determine it initially, the court's function is limited ( Board v. Hearst Publications, 322 U.S. 111, 131). In such matters we may not substitute our judgment in place of the judgment of the administrative agency where reasonable minds may differ as to the probative force of the evidence ( Matter of Kopec v. Buffalo Brake Beam-Acme Steel Malleable Iron Works, 304 N.Y. 65, 71; Matter of Kilgus v. Board of Estimate, 308 N.Y. 620, 627). This is so even in face of the general rule that a tax statute is to be construed in favor of a taxpayer ( People ex rel. Mutual Trust Co. v. Miller, 177 N.Y. 51, 57; Matter of Voorhees v. Bates, 308 N.Y. 184, 188), for that rule does not supplant nor does it disregard classic standards. It is clear beyond dispute that, when we are dealing with a claim for exemption from taxation, "it must clearly appear, and the party claiming it must be able to point to some provision of law plainly giving the exemption" ( People ex rel. Savings Bank of New London v. Coleman, 135 N.Y. 231, 234). "`The policy of the law is to construe statutes exempting property from taxation somewhat rigidly, and not to permit such exemption to be established by doubtful implication'" ( People ex rel. Mizpah Lodge v. Burke, 228 N.Y. 245, 247-248). In this instance, the Legislature has specifically relegated the determination of these questions to the Tax Commission.
Guided by these principles, it seems to us that when the activities of petitioners, considered in the light of the laws of Texas and Brazil and petitioners' agreements with the out-of-State firms are weighed against this record, and the various standards given us by decisions of the courts, we cannot overrule the Appellate Division's determination that the denial of the exemption by the Tax Commission was reasonable.
There is ample support for this conclusion even if we consider, for purposes of comparison only, the liberal constructions applied in the cases establishing a company's "presence" in a State for jurisdictional purposes. We have said that the determination of whether a company is doing business in a particular jurisdiction depends upon the facts of the particular case ( Sterling Novelty Corp. v. Frank Hirsch Distr. Co., 299 N.Y. 208, 210), and that there is no precise formula which we may use to determine the extent of activities which will constitute the doing of business in a State. ( Tauza v. Susquehanna Coal Co. 220 N.Y. 259, 268.) But it is "requisite * * * that enough be done to enable us to say that the corporation is" there. ( Tauza v. Susquehanna Coal Co., supra, p. 268.) Of course, the fact that the company is represented in its local activities by a separate individual, corporation or partnership, rather than by a directly controlled subsidiary or branch office, is not in itself determinative. ( Sterling Novelty Corp. v. Frank Hirsch Distr. Co., supra, p. 211.) The circumstance that the company has not sought an authorization to do business in a State will not render the service of process ineffective ( Berner v. United Airlines, 3 N.Y.2d 1003). Nevertheless, if a company has been informed that it is disqualified from carrying on its business in a State, it can hardly claim to exercise the privilege of doing its business through an agent.
The evidence adduced by petitioners does not conclusively establish that they were "present" and carrying on their business in the out-of-State locations. These petitioners sold no insurance in Texas or Brazil and issued no bills therefor. Neither the Texas firm nor the Brazilian company regularly sold insurance for the account of the New York firm or collected premiums in its behalf (see Green v. Chicago, Burlington Quincy Ry., 205 U.S. 530, 533). There was no continuous flow of insurance policies placed by the New York firm into Texas and Brazil as there was a flow of products in the case of International Harvester v. Kentucky ( 234 U.S. 579, 586-587). The Texas and Brazilian companies delivered the insurance policies, billed the insured and collected the payments in their own names and for their own accounts (see Lillibridge, Inc., v. Johnson Bronze Co., 220 App. Div. 573, 574, affd. 247 N.Y. 548). Since the unlicensed New York firm had no power to make a contract of any kind, or receipt for or receive the premiums due on the insurance policies issued in Texas and Brazil, and as it could not delegate a power it did not have, the claim of carrying on business in Texas and Brazil is subject to serious challenge. The weakness of petitioners' proof is pointed up by the irrelevancy of the tax cases petitioners rely on. In People ex rel. Badische Fabrik v. Roberts ( 152 N.Y. 59, 65, 66), Fabrik had become a special partner in the New York firm which acted as agent for its products in this country. In Matter of Chapman v. Browne ( 268 App. Div. 806, motion for leave to appeal denied 293 N.Y. 933) the nonresident was a limited partner of the New York firm. But Adams Porter of New York was not a partner in the Texas and Brazil firms. In fact, its right to carry on its business in Texas had been withdrawn, and it voluntarily chose to discontinue carrying on its business through an agent in Brazil even though it could not open a branch office there. It elected to have Mr. Adams become a permanent resident of Brazil in order to legally organize a separate entity, Adams Porter Companhia Limitada. In Ramsey v. Investors Diversified Services ( 248 S.W.2d 263, 264 [Tex. Civ. App.]), the taxpayer was authorized to carry on business in Texas under a specific permit issued in 1941. Acting pursuant to this permit, Investors placed mortgages on Texas real property and recorded the mortgages in Texas. The present case is different in every essential particular.
We find no authority under the tax cases for the proposition that a company which was denied the privilege of carrying on a licensed business in a State did, in fact, carry on its business in the forbidden territory sans privilege through an agent. The acknowledged compliance by the petitioners with the provisions of the laws prohibiting the doing of insurance business by other than Texas and Brazilian firms is a sufficient basis for the determination of the Tax Commission that petitioners' alleged proof of carrying on its business outside the State did not warrant the granting of the exemption from taxation.
Since the petitioners were not licensed to transact insurance business in those jurisdictions, the local insurance concerns necessarily were transacting their own business. Indeed the dissolution agreement of 1932 and the agreement of 1949 indicate that the moneys paid to the New York firm by the Texas firm were considerations for the sale and assignment of the Houston business to the Texas partner and for the admission of the Texas partners to membership in the New York firm. This evidence does not establish an unequivocal lawful agency relationship or a relationship of joint venturers. The testimony and documentary proof may be interpreted as showing that petitioners were only deriving income from the other firms by way of contract and investment.
The denial of tax exemption after a hearing by an administrative agency should not be brushed aside on the assumption that the agreements do not mean what they plainly say, but are in reality devices designed to overcome an interdicted relationship between the New York firm and the Texas and Brazilian insureds, and that the employment of such private agreements revokes the denial of the privilege of doing business there entitling the petitioners to an exemption from taxation here.
Relief from discriminatory legislative acts of foreign jurisdictions which create inequities under our tax laws and regulations, should be sought from the Legislature not by way of judicial decree. If the enforcement of the tax laws and regulations under such circumstances warrant reconsideration, the necessary corrective remedies can be supplied only by the Legislature.
With the evidence that petitioners were debarred from doing insurance business in Texas and Brazil and with the standards formulated in prior decisions before us, we find that there was a rational basis for the conclusions of the Tax Commission that the petitioners were not carrying on business in Texas and Brazil within the meaning of the provisions of the statute.
Since it is agreed that the questions arising under different sections of the Tax Law (§§ 351, 351-a) involving personal income tax proceedings, entitled Proceeding No. 2 and Proceeding No. 3, are governed by the same principles, the order of the Appellate Division insofar as it confirms the determinations in those proceedings should be affirmed.
Accordingly the order of the Appellate Division should be affirmed.
The sole question presented is whether the firm of Adams Porter, a New York partnership engaged in the insurance business, "carried on" business "both within and without the state", so as to be entitled to an allocation, pursuant to section 386-g of the Tax Law, of its net income in computing the unincorporated business tax.
In 1907 Henry Adams and H.L. Porter organized the insurance brokerage firm of Adams Porter in Houston, Texas. William Young at that time conducted his own insurance business in New York. In 1918 the two firms consolidated under the name of Adams Porter with offices in both New York and Houston. The partners, other than Porter who died in 1924, were Adams, who moved to New Jersey, Young, a resident of Connecticut and Harry Hilliard, a Texan.
In 1931 Texas enacted a statute which provided, in substance, that all persons "engaging as partners in the insurance business" in that state, "must be residents of Texas" (Acts 1931, 42nd Leg., ch. 96, p. 150; 14 Tex. Civ. Stat., art. 21.14, § 3). Thereafter, effective January 1, 1932, the terms of the Adams Porter "partnership indenture" were "modified" by agreement of the partners: the partnership was dissolved "so far as it affects * * * [the] office in Houston, Texas"; "so much of the business of the partnership as belongs" to that office, including firm name and good will, was sold and transferred to Hilliard of Texas; and, upon his death, all of the assets of the Houston "business," except Hilliard's invested capital and accrued earnings, were to "pass to and belong to the surviving partners in the firm". Except "as [so] modified", the agreement provided, the partnership was to "continue to exist in accordance with [the] * * * indenture of partnership".
One of the firms' most important accounts had been the worldwide cotton merchant, Anderson, Clayton Company — hereafter referred to as ACCO — with headquarters in Houston. In 1932 Henry Adams and Hilliard succeeded in negotiating an agreement making the Texas partnership, "Adams Porter of Houston," the "Underwriting Managers" for all of ACCO's business in exchange for an undertaking by that firm not to handle other business without ACCO's consent. The agreement referred to petitioner's "New York office" and its "Houston office" and its provisions, Hilliard testified, were treated as binding on both firms. The Houston "office," according to the testimony of the partners, never acted "independently" of New York in dealing with ACCO and, "from time-to-time," partners and employees of Adams Porter, New York, worked on the ACCO account in Houston.
Since 1931 and that year's amendment of the Texas statute, some four new partners have come into the business; two, not resident in Texas, became partners only of Adams Porter, New York, while the other two, who were residents of Texas, became partners in both the New York and the Texas firms. Both firms, on stationery and forms and in advertisements and listings in professional directories, through the years, described themselves as having "offices" in both Houston and New York. Clients of Adams Porter, in corresponding with it, also seemed to assume that it was a single firm with offices in both cities and, indeed, Adams Porter carried but one "Errors and Omissions" policy with Lloyd's insuring personnel of its offices in New York, Houston and Brazil.
At any rate, Adams Porter, New York, received from Houston a share of the moneys realized from the ACCO account and reported it on its New York tax return as nontaxable income from business carried on "without the state". It is this income, plus income received from a Brazilian source — to which we now turn — which the Tax Commission seeks to reach.
In 1946, because of dissatisfaction with the manner in which the New York firm's "interests were being represented in Brazil", it was decided to open a branch office in that country. Advised, however, that Brazilian law forbade a foreign firm opening a branch, the New York partnership in 1947 organized Adams Porter Companhia Limitada, the form of organization in Brazil most closely resembling a limited partnership under New York law. From its inception, John Adams, a partner in the New York partnership, acted as the chief executive officer or "Managing Director" of the Brazilian firm and remitted its earnings to New York.
The State Tax Commission concluded that, during each of the years involved, 1945 through 1950, the partnership of Adams Porter, New York, carried on its business solely within the State of New York for the reason that it did not have an "office" or place of business "without the State" and that the New York partnership, the Texas firm and the Brazilian Companhia Limitada "were each separate legal entities". Accordingly, it determined that the taxpayer's entire income was subject to the unincorporated business tax. The Appellate Division confirmed that determination upon the ground that "it is not unreasonable" to conclude that the New York partnership had not, "in actuality," carried on business in Texas or Brazil. We do not agree; on this record, the conclusion is inescapable that the taxpayer "carried on", in the language of the Tax Law, business "both within and without the state" (Tax Law, § 386-g).
It is fundamental that "A statute which levies a tax is to be construed most strongly against the government and in favor of the citizen. The government takes nothing except what is given by the clear import of the words used, and a well-founded doubt as to the meaning of the act defeats the tax." ( People ex rel. Mutual Trust Co. v. Miller, 177 N.Y. 51, 57; Matter of Voorhees v. Bates, 308 N.Y. 184, 188.) Here, quite obviously, there is far more than mere "doubt" as to the taxable character of the income in dispute. Originally a Texas firm, Adams Porter consolidated in 1918 with the Young organization in New York and thereafter, for over a decade, operated as one business with offices in both New York and Houston. When, later, the partnership split up, it was only to the extent required by the Texas statute and when the Brazil firm was created, it was only because Brazilian law prohibited a branch office. Nor can it be denied — indeed, there is not the slightest evidence to the contrary — that the firms all along have maintained a cohesiveness and unity in their operations, both internally and with the outside world, that stamp their relationship one of principal and agent or, at least, mark them as joint venturers, and not, as the Commission contends, firms having only investment ties.
Thus, Hilliard, a partner in both the New York and Houston firms, stated that "We acted in conjunction with each other. We telephoned each other every day or so. We relayed everything that related to the Anderson, Clayton Company business * * * we consulted with [the New York office] * * * on almost every question in connection with the business"; "when important questions arose Houston would not act independently of the views of New York, but would seek agreement of the New York partners." Indeed, Hilliard stated in so many words that the Texas firm was acting "as an agent of the New York firm" and another partner declared, just as decisively, that the receipts from the ACCO business were received by the New York partnership "through the agency of the Houston firm".
Turning to the Brazil firm, there can be even less doubt that it acted in its business dealings as the arm and agent of the New York partnership. From its very inception the South American concern took not only life but direction from New York, there being no contention but that it responded solely and completely to the will of Adams Porter in New York. Its top decision-making executives at all times were either John Adams, a partner of the New York firm or, in his absence, two or three American resident managers acting under a power of attorney from him. As Adams put it, in his "management of the company", he acted "not on my own behalf" but as "representative of the firm"; his decisions were "always" made, he said, "in collaboration with [the other] partners" and were never made "independently of * * * Adams Porter, New York". Although it is true that Adams Porter "invested" in the Brazilian firm, it is also abundantly clear that this was not the type of capital investment that signifies in any way the carrying on of an investment business at the place where the investor maintains its office. Rather, the Brazilian company was simply and specifically organized by the New York firm for the purpose of permitting it, without running afoul of the local law, to carry on business in Brazil and derive an income from such business through the agency of Adams Porter Companhia Limitada.
The Tax Commission rests its case on the fact that the firms were "separate legal entities". That, however, is the beginning and not the end of our inquiry. Looking deeper, it is obvious that the existence of separate legal entities to accommodate the provisions of local law can be of no real consequence for purposes of section 386-g of the Tax Law. That statute, as already seen, excludes from taxable income and exempts from taxation the "net income" from "business * * * carried on * * * without the state". As is evident, the law suggests no distinction based on the fact that the income derived from business carried on through an agent or a joint venturer rather than by the taxpayer personally or one of its employees. In other words, it is not whether the firms are separate that is important, but whether the business is "carried on * * * without the state", and the New York partnership was under no legal disability from using an independent entity in another state as its agent. Indeed, courts, both here and in Texas, have held that, for purposes of tax liability, an entity organized in one jurisdiction may carry on business in another through the medium of an agent. (See People ex rel. Badische Fabrik v. Roberts, 152 N.Y. 59, 64-65; Matter of Chapman v. Browne, 268 App. Div. 806, motion for leave to appeal denied 293 N.Y. 933; Ramsey v. Investors Diversified Services, 248 S.W.2d 263, 267 [Tex. Civ. App.]; see, also, 1954 Atty. Gen. 221, 222-224.)
In addition, since Judge BURKE has remarked a number of cases — which we deem irrelevant — dealing with "a company's `presence' in a State for jurisdictional purposes" (opinion, p. 606), it is but fitting to note that this court has consistently held that a foreign corporation may do business in New York through an agent, even though the corporation itself is neither licensed nor "qualified to do business here". ( Sterling Novelty Corp. v. Frank Hirsch Distr. Co., 299 N.Y. 208, 210, 211; see, also, Berner v. United Airlines, 3 N.Y.2d 1003; Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 270.) It is significant, too, that the Tax Commission does not rely on these "jurisdictional" cases, and the reason is apparent. All we are here concerned with is whether Adams Porter, New York, carried on business "without the state" (Tax Law, § 386-g). Since, on this record, it cannot be controverted that the New York partnership received income through the agency of firms carrying on business in Texas and in Brazil, there is no need to establish that the New York partnership was otherwise "present" in those jurisdictions.
What we have said should conclude the appeal and end the case. However, it is asserted that the New York partnership may not be deemed to have carried on business in Texas and Brazil through agents authorized there to do business, because to have done so would have violated the laws of those jurisdictions. Such a charge misapprehends the applicable statutes and disregards the present record.
In the first place, the charge plainly misconceives the purpose of the statutes. The Texas provision is simply to the effect that all licensed agents "engaging as partners" in the insurance business in that state must be residents of Texas, while, so far as the record reveals, the law of Brazil merely forbids the opening of a "branch office" by a foreign firm. The statute of neither jurisdiction prohibits a foreign partnership from "doing business" through an agent duly licensed and authorized to do business there. The demands of the Texas statute, part of a broad regulatory scheme "for the protection of both the public and insurance companies" ( Gulf Ins. Co. v. Gaddy, 129 Tex. 481, 486), were met by the formation of a partnership consisting solely of residents of Texas, and the requirements of the law of Brazil, by the creation of the Companhia Limitada. By dint of local law, the New York partnership was not in a position to set up its own office in Texas or Brazil and itself act as insurance agent or broker, but that does not mean that it was not privileged to act in those jurisdictions through duly authorized agents and through them carry on business.
In the second place, the imputation of illegality completely overlooks the record. It contains not the slightest evidence to support a determination that the New York partnership was prohibited by local law from doing business in Texas and Brazil through the agency of the firms there located. On the contrary, as to Texas, the evidence is that the 1932 partnership arrangements were made to comply fully with that state's law and, as to Brazil, the testimony is undisputed that the organization and operation of the Companhia Limitada were in entire conformity with the law of that country. Beyond that, the Texas authorities — and, undoubtedly, those in Brazil as well — regularly scrutinized the activities of the local firm and raised no objection to its dealings with Adams Porter, New York. As already noted, the present record indisputably establishes that the New York partnership carried on its business through the medium of properly licensed and authorized local agents. If those transactions violated the laws of Texas or Brazil or offended against their public policy, it is for those jurisdictions to say so; in the absence of such pronouncement, the courts of this state should not take it upon themselves to declare that a principal-agent relationship is interdicted and prohibited by their laws.
Since, then, it was permissible for the New York partnership to do business in Texas, through the agency of Adams Porter, Houston, and in Brazil, through the medium of the Companhia Limitada, there is no element of illegality or any other fact in the record to support or justify the conclusion reached below that the taxpayer had not carried on business without the state. To put it another way, since the record reasonably admits of only one conclusion, that is, that the relationship between the firms is one of agency, the taxpayer, Adams Porter, New York, is entitled to apportion its net income so as to exclude that portion attributable to the business carried on in Texas and Brazil.
If we decide that the business of the partnership is carried on both within and without the state, then, it seems agreed, the individual nonresident members of the partnership, petitioners in Proceeding No. 2 and Proceeding No. 3, are personally chargeable only with income from the partnership derived from sources within this state. (Regs. of Tax Comm., art. 411; 3 Prentice-Hall, N Y Tax Service, par. 59,661, p. 59,552.)
We would reverse the order appealed from and annul the determination of the Tax Commission.
Chief Judge CONWAY and Judge DYE concur with Judge BURKE; Judge FROESSEL concurs for affirmance upon the opinion of the Appellate Division; Judge FULD dissents in an opinion in which Judges DESMOND and VAN VOORHIS concur.