Bankers Trust Corporation, &c.,
Appellant,
v.
New York City Department of
Finance, et al.,
Respondents.
2003 NY Int. 142
In this action, the New York City Department of Finance
denied a tax refund to plaintiff, Bankers Trust Corporation,
based upon certain adjustments it made to plaintiff's reported
income. The Appellate Division agreed with the trial court that
the doctrine of exhaustion of administrative remedies was
inapplicable but reversed on the merits, concluding that the City
had properly denied the refund. We conclude that Administrative
I.
At the time of this action, Bankers Trust was a bank holding company with headquarters in New York City and more than 800 subsidiaries and affiliates across the United States and worldwide. It paid State and City taxes for income derived from doing business in both.
The calculation of State and City taxes owed begins with and
is based upon entire net income, which is generally defined as
income reported to the Federal government (Tax Law § 1453[a];
Administrative Code of the City of New York § 11-641[a]). In
1985, the State and City tax laws were amended to permit a
deduction in determining entire net income of seventeen percent
of interest income from subsidiary capital (Tax Law §
1453[e][11][1]; Administrative Code § 11-641[e][11][i]). A
subsidiary is defined as a corporation in which the taxpayer owns
over 50 percent of the voting shares (Tax Law § 1450[d];
Administrative Code § 11-602[2]). Bankers Trust claimed a
deduction for the years 1986 and 1987.[1] Multiplying the adjusted net
income by the allocation percentage yields $190,033,062.
Multiplying this number by the tax rate of 9 percent yields a tax
of $17,102,976.[4] Since Bankers Trust paid $18,375,451, it claimed
it was owed $1,272,475. The following year, Bankers Trust again
claimed the deduction.
In 1992, the State and City, after audits, disallowed the
deduction to the extent it applied to interest income from
second- or lower-tier subsidiaries. As the name suggests, a
second-tier subsidiary is owned by a subsidiary in which the
taxpayer owns over 50 percent of the voting stock. A third-tier
subsidiary would be owned by the second-tier subsidiary and so
on. After the disallowance, Bankers Trust signed a consent and
waiver form with the City, agreeing to a deficiency for the years
1985, 1986 and 1987, and paying the amount. The agreement
provided that it did not preclude Bankers Trust from filing a
claim contesting the assessment and seeking a refund. The State
entered into a similar agreement covering the same years and in
April 1997, the City and Bankers Trust again entered into a
similar agreement covering the year 1993.
In May 1993, in a different case, the New York State Tax
Appeals Tribunal affirmed a determination of an Administrative
Law Judge, holding that interest income from a second-tier
subsidiary is deductible where a corporation controls all
aspects of a second-tier subsidiary's operation and management
( Matter of the Racal Corporation and Decca Electronics, TSB-D-
93[5]C). Several months later, Bankers Trust filed claims for
refunds with the State Department of Taxation and Finance,
Bankers Trust then filed a claim with the City reporting the terms of the agreement with the State, pursuant to Administrative Code section 11-646(e), and seeking a refund for the years 1986, 1987 and 1993, of $1.2 million, $1.3 million, and $3.8 million, respectively. The City disallowed the refunds, thus giving rise to this action.
The threshold issue is whether plaintiff is excused from having to exhaust its exclusive statutory remedy, which for us is determinative.
II.
During the initial audits, the City had allowed Bankers
Trust deductions for home office and foreign branch
administrative expenses associated with the second-tier
subsidiaries. After the changes by the State were reported,
Bypassing its exclusive administrative remedy, Bankers Trust
commenced a declaratory judgment action in the Supreme Court
seeking a refund for the years 1986, 1987 and 1993, arguing that
the City should have conformed its City taxable income in
accordance with the changes made by the State and should have
allowed the deductions without analyzing any other issues.
Following plaintiff's motion for summary judgment, Supreme Court
agreed with Bankers Trust that it was not required to exhaust
administrative remedies because the issue was the interpretation
and application of statutes that did not involve the special
expertise of the relevant agencies, and the exhaustion of
administrative remedies would cause irreparable harm.
On the merits, Bankers Trust relied on Administrative Code
section 11-678(3), which governs a taxpayer's claim for a refund
(c) shall be computed without change of the allocation of income or capital upon which the taxpayer's return (or any additional assessment) was based, and
(d) shall not exceed the amount of the reduction in tax attributable to such decrease or increase in federal or New York state taxable income, alternative minimum taxable income or other basis of tax or federal or New York state tax or to such federal or New York state change or correction or renegotiation, or computation or recomputation of tax
(Administrative Code § 11-678[3][c],[d]).
The mirror image of this rule is section 11-674(3)(c), (g), which governs the City's assessment as a result of a change by the State or the Federal government. Between these two sections is section 11-677(1), which provides that:
The commissioner of finance, within the applicable period of limitations, may credit an overpayment of tax and interest on such overpayment against any liability in respect of any tax imposed by any of the named subchapters of this chapter or on the taxpayer who made the overpayment, and the balance shall be refunded out of the proceeds of the tax.
Supreme Court agreed with Bankers Trust that the City reallocated
Bankers Trust income when it re-audited the returns. The court
rejected the City's claim that the re-audit was lawful under
section 11-677(1) since the City was bound to determine whether
On appeal, the Appellate Division agreed with Supreme Court on the procedural issue, but reversed on the merits. On exhaustion of administrative remedies, the court found that Bankers Trust's challenge involved statutory interpretation and was based on the general nature of the adjustments, and does not require us to determine their accuracy by delving into the underlying facts or computations on which they were made. On the merits, the court disagreed with the motion court that there had been a change in the allocation of income. The court found that the phrase allocation of income referred to allocation percentage. While the City had shifted income from the subsidiaries to Bankers Trust, there had been no change in the allocation percentage. The court also agreed with the City that it had to determine whether Bankers Trust had overpaid taxes before issuing a refund.
We conclude that plaintiff failed to utilize its exclusive
administrative remedy, and we do not address the merits.
III.
Actions by taxing officers can be reviewed only in the
manner prescribed by statute ( National Bank of Chemung v City of
Elmira, 53 NY 49, 59 [1873]; Dun & Bradstreet v City of New York,
276 NY 198 [1937]; Matter of First National City Bank v City of
The review of a decision of the tax appeals tribunal provided by this section shall be the exclusive remedy available to any taxpayer for the judicial determination of the liability of the taxpayer for the taxes imposed by the named subchapters.
There are two exceptions to the exclusive remedy
requirement: [w]hen a tax statute * * * is alleged to be
unconstitutional, by its terms or application, or where the
statute is attacked as wholly inapplicable ( First National City
Bank, 36 NY2d at 92; Richfield Oil Corp. of New York v City of
Syracuse, 287 NY 234, 239 [1942]). In these two circumstances,
the invalidity or total inapplicability affects the entire
statute, including the limitations and restrictions on the remedy
provided in it ( First National City Bank, 36 NY2d at 92-93).
To challenge a statute as wholly inapplicable, the taxpayer
must allege that the agency had no jurisdiction over it or the
matter that was taxed. As we stated in National Bank of Chemung,
[a]ssessors must have jurisdiction over the person and subject-
matter. The person must be an inhabitant of the town, and the
property must be taxable. Otherwise, the assessment is illegal
and void (53 NY at 59). In National Bank of Chemung, the
assessors had imposed a tax on the capital stock of the bank in
direct violation of a statute providing that such property was
not taxable. In Dun & Bradstreet, the City of New York had the
authority to impose a tax on certain public utility companies and
Where the statute at issue in a dispute does not provide
how judicial review may be obtained, resort must be made to the
judicially-created rule that administrative remedies must be
exhausted. The judicial doctrine of exhaustion of remedies is
subject to exceptions not available when the statute has an
exclusive remedy provision. The exceptions include when
exhaustion of administrative remedies would be futile or would
cause irreparable harm ( Watergate II Apts. v Buffalo Sewer Auth.,
, 46 NY2d 52, 57). Courts lack the discretion to rely on these
exceptions where the Legislature itself has specifically
delineated the exclusive steps a party must undertake in order to
seek judicial relief.
Here, the statute includes an exclusive remedy provision.
Yet neither the motion court nor the Appellate Division
determined that the statute was unconstitutional or wholly
inapplicable. It is true that in its complaint, Bankers Trust
argued that the City acted wholly beyond the [City's]
In determining that the plaintiff was not required to
exhaust its exclusive statutory remedy, the Appellate Division
relied on Watergate II Apts, a case involving the judicially-
created exhaustion of remedies doctrine not -- as here, the
statutory exclusive remedy provision. In Watergate, moreover,
the plaintiff there argued that sewer rent charges imposed by the
Buffalo Sewer Authority were actually taxes, and that the
Authority lacked the power to impose taxes. The argument that
the Authority lacked the power to impose the charges would have
made the statute wholly inapplicable. Bankers Trust did not make
a similar argument here.
Accordingly, the order of the Appellate Division should be modified, with costs to defendants by deleting the declaration in favor of defendant and substituting a provision dismissing the complaint, and, as so modified, affirmed.
Footnotes
1 In 1986, Bankers Trust's entire net income was
$351,273,989. With the 17 percent deduction Bankers Trust
claimed for that year in its State and City tax forms, entire net
income was reduced to $326,948,726. The portion of that income
derived from business done within the City, or the allocation
percentage, was 58.1232 percent.
4 The alternative method of calculating City taxes is pegged to assets located in the City, which yielded a lower number, but the actual tax owed is the larger number of the two.
2 As a result of the [a]llocated expenses, as the City put
it in its notice, Bankers Trust's entire net income for 1986 was
$415,092,737. Multiplying that number by 58.1232 percent (the
allocation percentage) yields $241,265,182. The tax (of 9
percent) due on that amount is $21,713,866, which is more than
the $18,375,451 Bankers Trust paid for that year. The same is
the case for the years 1987 and 1993.