| Matter of Astoria Fin. Corp. v Tax Appeals Trib. of State ofN.Y. |
| 2009 NY Slip Op 04779 [63 AD3d 1316] |
| June 11, 2009 |
| Appellate Division, Third Department |
| In the Matter of Astoria Financial Corporation, Petitioner, v TaxAppeals Tribunal of State of New York et al., Respondents. |
—[*1] Andrew M. Cuomo, Attorney General, Albany (Julie S. Mereson of counsel), forrespondents.
Mercure, J.P. Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to TaxLaw § 2016) to review a determination of respondent Tax Appeals Tribunal which, amongother things, sustained a notice of deficiency.
Petitioner, a bank located in the Village of Lake Success, Nassau County, claimed aninvestment tax credit in the amount of $701,785 on its 1999 banking corporation franchise taxreturn in connection with a building that it purchased and used exclusively for its mortgagebanking operations. These operations consisted of originating, purchasing, selling andterminating mortgage loans. Following an audit, the Division of Taxation disallowed theinvestment tax credit in its entirety and issued a notice of deficiency assessing additional tax andsurcharges in the amount of $820,086, plus interest.[FN1]The Division concluded that while [*2]petitioner's activities inbuying and selling mortgage loans qualified it as a "broker or dealer" of securities within themeaning of Tax Law § 1456 (i) (2), petitioner did not prove that the building wasprincipally used for these qualifying dealer activities, as opposed to the origination andtermination of mortgages.
Thereafter, a hearing was held before an Administrative Law Judge (hereinafter ALJ), whodetermined that petitioner cannot be deemed a dealer with respect to the mortgage loans that itoriginates but does not sell or the loans that it terminates via foreclosure, payoff or write off. TheALJ further concluded that inasmuch as over 50% of the income generated in the building wasderived through these nonqualifying activities, petitioner was not entitled to the investment taxcredit. Upon petitioner's appeal, respondent Tax Appeals Tribunal affirmed in relevant part.Petitioner then commenced this proceeding seeking review of the Tribunal's determination.
We confirm. The dispute herein centers on whether the property at issue is principally usedin the ordinary course of petitioner's business as a dealer in connection with the "purchase orsale" of securities. As relevant here, Tax Law § 1456 (i) (2) (A) provides for a credit withrespect to certain tangible property, including buildings that are, among other things, "principallyused in the ordinary course of the taxpayer's trade or business as a broker or dealer in connectionwith the purchase or sale (which shall include but not be limited to the issuance, entering into,assumption, offset, assignment, termination, or transfer) of . . . securities as definedin" Internal Revenue Code (26 USC) § 475 (c) (2). Respondent Commissioner of Taxationand Finance concedes that a mortgage loan is "evidence of indebtedness" that is a "security"within the meaning of the statute, but determined that petitioner's activities in creating andservicing mortgage loans that it holds to conclusion—i.e., until payoff, foreclosure orcharge off—do not constitute the business of a securities broker or dealer within the scopeof Tax Law § 1456 (i) (2) (A). Petitioner, in turn, asserts that the origination of mortgageloans—that is, creating a mortgage loan by attracting and lending to aborrower—constitutes a "purchase" of securities under the statute, and that it need not sellthe loans in order to qualify for the credit.
Initially, it is well settled that when the question before us is not one of pure statutoryreading and analysis but a matter that falls within an agency's expertise, "the construction givenstatutes and regulations by an agency responsible for their administration will, if not irrational orunreasonable, be upheld" (Matter of Mobil Intl. Fin. Corp. v New York State TaxCommn., 117 AD2d 103, 106 [1986]; see Matter of Emigrant Bancorp, Inc. v Commissioner of Taxation &Fin., 59 AD3d 30, 32 [2008]; Matter of Muraskin v Tax Appeals Trib., 213AD2d 91, 94 [1995], lv denied 87 NY2d 806 [1996]; Matter of General Mills Rest.Group v Chu, 125 AD2d 762, 763 [1986]). Moreover, "[t]o prevail over [the Tribunal's]construction of the statute, petitioner must demonstrate that . . . its own [reading] isthe only reasonable construction" of the statute (Matter of Brooklyn Navy Yard Cogeneration Partners, L.P. v Tax AppealsTrib. of State of N.Y., 46 AD3d 1247, 1248 [2007], lv denied 10 NY3d 706[2008]; Matter of Federal Deposit Ins. Corp. v Commissioner of Taxation & Fin., 83NY2d 44, 49 [1993]; Matter of Emigrant Bancorp, Inc. v Commissioner of Taxation &Fin., 59 AD3d at 32; Matter ofGropper v Tax Appeals Trib. of State of N.Y., 9 AD3d 796, 798 [2004]). Ultimately,the "issue is whether the Tribunal's determination has a rational basis," not whether petitioner'salternative interpretation of the statute is reasonable (Matter of Muraskin v Tax AppealsTrib., 213 AD2d at 94; Matter of [*3]Federal Deposit Ins.Corp. v Commissioner of Taxation & Fin., 83 NY2d at 48-49; Matter of CBS Corp. v Tax Appeals Trib.of State of N.Y., 56 AD3d 908, 909 [2008], lv denied 12 NY3d 703 [2009]).
In our view, it cannot be said that the Tribunal acted irrationally in determining thatmortgage origination is not the "purchase" of a security within the meaning of Tax Law §1456 (i) (2) (A). As the Commissioner contends, the creation of a mortgage—lendingmoney to a borrower who secures that promise with a mortgage on real property—isdistinct from purchasing a mortgage by paying the purchase price to the seller. Moreover, theCommissioner properly notes that section 1456 (i) (2) itself draws a distinction between the"origination" and "purchase" of a security. While the provision at issue, clause (A), does notrefer to origination, clause (B) permits a separate tax credit for buildings principally used in ataxpayer's business providing "loan origination services to customers in connection withthe purchase . . . of securities" (Tax Law § 1456 [i] [2] [B] [emphasisadded]). Inasmuch as all provisions of a statute must be read and construed together, and wordswithin a provision are not to be rejected as superfluous when they may instead be given a distinctand separate meaning (see McKinney's Cons Laws of NY, Book 1, Statutes§§ 97, 231; Leader v Maroney, Ponzini & Spencer, 97 NY2d 95, 104[2001]), the Tribunal properly distinguished between the terms "purchase" and "origination" indetermining that mortgage origination is not a credit-eligible activity under section 1456 (i) (2)(A).
Furthermore, we reject petitioner's argument that Tax Law § 1456 (i) (2) (A) must beread in conformity with Internal Revenue Code (26 USC) § 475 (c) (1). Pursuant to thedoctrine of federal conformity, " 'courts [should] adopt, whenever reasonable and practical, the[f]ederal construction of substantially similar tax provisions," particularly where "the statestatute is modeled on [the] federal law" (Matter of Delese v Tax Appeals Trib. of State of N.Y., 3 AD3d612, 613 [2004], appeal dismissed 2 NY3d 793 [2004], quoting Matter of Marxv Bragalini, 6 NY2d 322, 333 [1959]). Here, the state statute incorporates by reference thedefinition of "security" found in Internal Revenue Code (26 USC) § 475 (c) (2) and, indefining "purchase or sale," uses language similar to that in a portion of the federal provision'sdefinition of "dealer in securities" (compare Tax Law § 1456 [i] [2] [A]with 26 USC § 475 [c] [1] [B]). Nevertheless, the federal and state provisions arenot substantially similar because the purpose of the federal statute is simply to define whichentities must comply with "mark to market" accounting rules—it does not address theprovision of investment tax credits, the purpose of Tax Law § 1456 (i) (2) (A). Inasmuchas petitioner has failed to demonstrate any substantive relation between the tax credit provided inthe state statute and the mark-to-market accounting rules set forth in the federal provision, it hasnot demonstrated that its interpretation of section 1456 (i) (2) (A)—which is based whollyon its reading of the federal provision—is the only reasonable construction (see Matterof Federal Deposit Ins. Corp. v Commissioner of Taxation & Fin., 83 NY2d at 49;Matter of Brooklyn Navy Yard Cogeneration Partners, L.P. v Tax Appeals Trib. of State ofN.Y., 46 AD3d at 1248; Matter of Gropper v Tax Appeals Trib. of State of N.Y., 9AD3d at 797-798).[FN2][*4]
Finally, contrary to petitioner's argument, when itsmortgage origination operations are excluded, the ratio of qualifying activities to totalactivities—which petitioner then applies to usable floor space in the building to determineits principal use (see 20 NYCRR 5-2.4 [c]; see also Matter of Reader's Digest Assn. vState Tax Commn., 103 AD2d 926, 926 [1984])—is less than the 50% required to beconsidered a principal use. Assuming without deciding that loan termination constitutes aqualifying activity, such activities would be petitioner's loan purchasing, selling and termination.Using the figures that petitioner provides, the loan amounts associated with these qualifyingactivities total $2,861,655,000. This figure added to $3,338,905,000, the value of loansoriginated, yields the amount associated with petitioner's total activities, $6,200,560,000. Theratio of qualifying activities to total activities is, thus, $2,861,655,000 divided by$6,200,560,000, or 46%—which is below the 50% threshold that is concededlyrequired.[FN3]In short, given the absence of any evidence of actual use of the building, petitioner has failed tomeet its burden of proving that it is entitled to the investment tax credit (see Matter ofGeneral Mills Rest. Group v Chu, 125 AD2d at 763), and the Tribunal's determination mustbe confirmed.
Petitioner's remaining argument has been considered and found to be lacking in merit.
Rose, Malone Jr., Stein and Garry, JJ., concur. Adjudged that the determination isconfirmed, without costs, and petition dismissed.
Footnote 1: Petitioner thereafter filed anamended 1999 tax return claiming an additional credit for building improvements; the partieshave stipulated that this additional refund claim in the amount of $330,206 remains in disputealong with the assessed deficiency.
Footnote 2: We further note that althoughtreasury regulations promulgated pursuant to the federal provision state that loan origination isthe "purchase" of a security (26 CFR 1.475 [c]-1 [c] [1] [i]), mortgages that are originated andheld to maturity, rather than held for sale, are not subject to mark-to-market rules (26USC § 475 [b] [1] [B]).
Footnote 3: While petitioner deducts anadditional $120,636,000 in "commercial loans" from the amount of its total activities, it has notexplained what these commercial loans are. In any event, even if we were to deduct this amount,the resulting ratio is 47%, which remains lower than the necessary threshold.