text:
    The People of the State of New York ex rel. Robert S. Clark, Appellant, v. John F. Gilchrist et al., Constituting the State Tax Commission, Respondents.
    Tax — income tax — stock dividends — retroactive amendment of Tax Law pending appeal — Court of Appeals will apply law as it stands at time of its decision — stock dividend allocated by trustee to beneficiary of trust is received by beneficiary as a shareholder and is not subject to income tax — no distinction between stock dividends in hands of shareholder of record and' stock dividends in hands of beneficiary of trust — retroactive statute no infraction of any constitutional limitation — constitutional provision that money shall not be paid from State treasury except in pursuance of appropriation not infringed.
    1. Where, pending appeal from a decision of the Appellate Division in a proceeding to review an income tax assessment, the Legislature amends the law in regard to the matter in question by statute declared to be retroactive as of a time prior to the assessment, the Court of Appeals will apply the law as it stands at the time of its decision.
    2. Under the provisions of chapter 543 of the Laws of 1926 amending sections 350 and 359 of the Tax Law (Cons. Laws, ch. 60) and defining the word “ dividend ” as meaning “ any distribution made by a corporation out of its earnings or profits,” the words “ stock dividends ” as meaning “ new stock issued for surplus or profits capitalized to shareholders in proportion to their previous holdings,” and providing that “ stock dividends when received by a shareholder shall not be subject to tax,” a stock dividend, though allocated by a trustee to the beneficiary of a trust, is received by the beneficiary as a shareholder within the meaning of the statute and should not be added to the annual tax return as part of the income of the year.
    3. A contention that a distinction is to be drawn between stock dividends in the hands of a shareholder of record and stock dividends in the hands of a beneficiary of a trust, that upon allocation or payment to the beneficiary, the quality of capital is lost and that of income re-established, cannot be sustained. The Legislature had no apparent thought of thus distinguishing the incidents of an equitable right from those of legal ownership or title. The beneficiary receives the shares through the conduit of the trust, yet the substance of the transaction is the same as if1 he were the legal owner of an estate for life and had gathered in the dividends for himself.

      (Argued May 3, 1926;
    decided July 9, 1926.)
    4. There is no infraction of any constitutional limitation upon legislative power in the provision that the statute (L. 1926, ch. 543) shall be retroactive in effect. It does not relieve the taxpayer of an undisputed burden as a mere largess or gratuity, but readjusts public revenues for the promotion of a public purpose. The methods and subjects of taxation are matters of governmental policy. What the Legislature determines in respect of policy, it is also competent to change, and the changes may work backward as well as forward.
    5. Nor does the act go counter to section 21 of article 3 of the State Constitution providing that “ no money shall ever be paid out of the treasury of this State or any of its funds, or any of the hinds under its management, except in pursuance of an appropriation by law.” The question is not hero whether in default of adequate appropriation, the reaudit will be effective to give the relator back his money. The result would be the same, however, though present appropriation were lacking. If necessary it may be afterwards supplied.

      People ex rel. Clark v. Gilchrist, 214 App. Div. 117, reversed.
    Appeal, by permission, from an order of the Appellate Division of the Supreme Court in the third judicial department, entered September 15, 1925, which unanimously confirmed, on certiorari, a determination of the State Tax Commission in a proceeding for the revision of an income tax assessment.

      Nathan L. Miller, D. A. Embury and H. Bartow Farr for appellant.
    The determination of the Attorney-General and the State Tax Commission that “ true ” stock dividends were not intended to be taxed as income by the Personal Income Tax Law is the correct interpretation of that law. (Eisner v. Macomber, 252 U. S. 189; Matter of Osborne, 209 N. Y. 450; Towne v. Eisner, 245 U. S. 418; Leland v. Hayden, 102 Mass. 542; Greene v. Bissell, 79 Conn. 547; Hartley v. Pioneer Iron Works, 181 N. Y. 73; Insurance Press v. Montauk Wire Co., 103 App. Div. 472; McCallum v. Corn Products Co., 131 App. Div. 617; U. S. Trust Co. v. Heye, 224 N. Y. 242; Peabody v. Eisner, 247 U. S. 349.) Since a stock dividend is not taxable income to an individual it is not taxable income to a trust and since it is not taxable income to a trust, it is not taxable income to a beneficiary of a trust. (Smietanka v. First Trust & Savings Bank, 257 U. S. 602; Beebe v. Griffing, 14 N. Y. 235; Bellegard v. Union Bag & Paper Co., 90 App. Div. 577; 181 N. Y. 519; De Filippis v. Falkenberg, 170 App. Div. 153; 219 N. Y. 581; People ex rel. Klauber v. Wendell, 196 App. Div. 627; 232 N. Y. 549.) The act is constitutional because it is, and was intended to be, declaratory of existing law. (People v. Davenport, 91 N. Y. 574.) The act, however construed, does not violate article VIII, section 9, of the Constitution. (Matter of Guiteras, 122 Misc. Rep. 523; 214 App. Div. 722; Matter of Burnham, 236 N. Y. 608; Wrought Iron Bridge Co. v. Town of Attica, 119 N. Y. 204; Lehigh Valley Railroad Co. v. Canal Board, 204 N. Y. 471; Munro v. State, 223 N. Y. 208; People v. Westchester Co. National Bank, 231 N. Y. 465; People ex rel. Eckerson v. Board of Education, 126 App. Div. 414; 193 N. Y. 601; Matter of Borup, 182 N. Y. 222.) The Legislature has the power to correct its own mistake or inadvertence or to clear up an ambiguity which would otherwise result in taxing stock dividends as income when they were not in fact income. (People ex rel. Lucey v. Molloy, 35 App. Div. 136; 161 N. Y. 621; People ex rel. Eckerson v. Board of Education, 126 App. Div. 414; 193 N. Y. 601; Matter of Rochester Trust Co., 42 Misc. Rep. 581.)

      Charles E. Hughes, George Welwood Murray, Winthrop W. Aldrich and Harrison Tweed, amici curios."

    A stock dividend does not constitute a distribution of any of the earnings or profits of the corporation. (Eisner v. Macomber, 252 U. S. 189; Towne v. Eisner, 245 U. S. 418.) A stock dividend is not gain, profit or income to an individual or fiduciary stockholder. (Weiss v. Steam, 265 U. S. 242; Marr v. United States, 268 U. S. 536; Trefry v. Putnam, 227 Mass. 522.) The construction placed upon the words of the statute by the Attorney-General and the State Tax Commission was impliedly ratified by the Legislature in its failure to amend at five consecutive sessions, and expressly ratified at the last session, immediately after the Appellate Division questioned the correctness of that construction. (People v. Davenport, 91 N. Y. 574; Tiger v. Western Investment Co., 221 U. S. 286; New York Central & Hudson River R. R. Co. v. Williams, 199 N. Y. 108.)

      Albert Ottinger, Attorney-General (Henry S. Manley of counsel), for respondents.
    Section 359 and section 350, subdivision 8, of the Tax Law together are a clear legislative direction that true stock dividends be taxed as income under the Personal Income Tax Law. (People ex rel. Pullman Company v. Glynn, 130 App. Div. 332; 198 N. Y. 605; De Ganay v. Lederer, 250 U. S. 376; Eisner v. Macomber, 252 U. S. 200.) If chapter 543 of Laws of 1926 intends the repeal of the tax previously imposed upon appellant in relation to the stock dividends received by him it is unconstitutional and void. (People ex rel. Western Union Tel. Co. v. Roberts, 30 App. Div. 78; 156 N. Y. 693; Matter of Waterman, 33 Misc. Rep. 569; Rockaway Pacific Corporation v. Stotesbury, 255 Fed. Rep. 345.) On the assumptions stated, chapter 543 of Laws of 1926 violates section 1 of article VII and section 9 of article VIII of the Constitution. (Matter of Guiteras, 122 Misc. Rep. 523; 214 App. Div. 722; Matter of Burnham, 205 App. Div. 893; 236 N. Y. 608; People v. Westchester Co. Nat. Bank, 231 N. Y. 465; Munro v. State, 223 N. Y. 208; Lewis v. State, 197 App. Div. 712; 234 N. Y. 587.)
   Cardozo, J.

The Singer Manufacturing Company capitalized its surplus in December, 1920, and declared a stock dividend. By force of that declaration, a dividend of 10,642 shares was received by the trustees under the will of Alfred Corning Clark, stockholders of record. Following the rule in Matter of Osborne (209 N. Y. 450) the trustees paid the shares to the appellant, a beneficiary of the trust. The question is whether the dividend' should be added to the annual tax return as part of the income of the year.

The Income Tax Law of New York (Cons. Laws. ch. 60) is framed upon the model of the Federal Income Tax Act, though the two differ in some particulars. The correspondence is so close, however, that decisions under the Federal act are important aids to the construction of the statute of the State.

The Federal act of 1913 (38 Stat. 114) imposes a tax on the net income, gains or profits, derived from interest, rents or dividends. The Supreme Court of the United States held in Towne v. Eisner (245 U. S. 418) that the word dividend as there used does not include stock dividends which capitalize the profits of the company declaring them.

The next Federal act, that of 1916 (39 Stat. 756), adds a provision that dividends shall include any distribution out of earnings or profits accruing since March 1, 1913, whether in cash or in stock of the corporation, which stock dividend shall be considered income to the amount of its cash value. Construing this act, the Supreme Court of the United States held in Eisner v. Macomber (252 U. S. 189) that the intention of Congress was to tax stock dividends as income, but that the intention could not prevail for the reason that the power of Congress under the Sixteenth Amendment to the Federal Constitution is confined to the taxation of income ” in the proper sense, and does not extend to income enlarged by artificial definitions. No such limitation affects the power of the States.

A third Federal act, that of 1918, was adopted before the decision in Eisner v. Macomber, and its provisions as to dividends do not differ in essentials from the provisions there considered.

Our own income tax was adopted in February, 1919. The term “ income ” is defined (§ 359, subd. 1) as including “ gains, profits and income” derived from interest, rent and dividends, and a “ dividend ” is defined (§ 359, subd. 8) as meaning “ any distribution made by a corporation out of its earnings or profits to its shareholders or members, whether in cash or in other property or in stock of the corporation.”

In March, 1920, the Attorney-General filed with the Comptroller an opinion to the effect that under the statute of New York, a stock dividend in the strict sense is not a gain, profit or income, and is not taxable as such. This ruling did not apply to dividends payable in the stock of a subsidiary corporation or of any corporation other than the one by which the dividend was declared (Peabody v. Eisner, 247 U. S. 347; U. S. v. Phellis, 257 U. S. 156). It did not apply to dividends of treasury stock, i. e., stock previously issued, but lawfully reacquired by the corporation for later distribution. The stock dividends which, in the view of the Attorney-General at that time, yere excluded from the tax, are those distributed among shareholders in proportion to their previous holdings as evidence of a new capitalization of surplus or undivided profits. .

The administrative officers of the State accepted this ruling, and adhered to it thereafter in the enforcement of the statute. Article 61 of the Personal Income Tax Regulations issued by the Comptroller in November, 1921, contains the statement: "A true stock dividend is not taxable as a dividend.” Taxpayers made their returns upon the faith of this pronouncement. Successive Legislatures came together and dissolved without condemning or' annulling it. Till the decision under review, taxgatherer and taxpayer rested upon the Comptroller’s regulation, whether it was legal or illegal, and conformed to it in practice.

The State Tax Commission in ruling against the taxpayer in this case, drew a distinction between the receipt of a stock dividend by virtue of one’s legal title as a shareholder, and the receipt of a like dividend as the beneficiary of a trust. To the shareholder the stock ' dividend is not a profit, for the “ old and new certificates together are worth only what the old ones were worth before” (Towne v. Eisner, supra). To the cestui que trust for life, the splitting up of the certificates is a distribution of what would otherwise be corpus for the use of the remaindermen. In the view of the Commission, what is income within the meaning of a will or deed of trust is income also, and not corpus, within the meaning of the statute. Undoubtedly, the same conclusion would have been reached if the appellant, instead of being the beneficiary of a trust, had been the holder of a legal estate for fife. The owner of the fee, to borrow the phraseology of the law of real estate, is exempt; the beneficiary or life tenant is held.

The Appellate Division disregarded that distinction in its disposition of the appeal. By its ruling, stock dividends are taxable as income unconditionally and always. Apart from the special definitions of the statute they may be classified as capital. None the less, they have the quality of income for the purpose of taxation, and this for the reason that, in the view of the Appellate Division, the statute (§ 350, subd. 8) so describes them. That premise accepted, the conclusion, of course, follows that the Comptroller’s regulation, in force since 1921, is an unauthorized exercise of power. The ruling, therefore, was that stock dividends whether paid to the legal owner of the shares or to the beneficiary of a trust, are gains, profits and income subject to the tax.

We find it unnecessary to determine whether the statutory definitions as they stood at the time of the decision of the court below, confirm that decision or ando it. Conflicting readings of the statute, or, more accurately, of the meaning of the lawmakers, have been pressed upon us at our bar with subtle and ingenious argument. Later legislation reheves us of the duty of making choice between them. The decision of the Appellate Division was made in September, 1925. At the first opportunity thereafter, the Legislature (L. 1926, ch. 543) changed the definition of a dividend by excluding therefrom stock dividends in the strict sense, and did this by a statute declared to be retroactive as of January 1, 1919. In such circumstances, we apply the law as it stands at the time of our decision (Robinson v. Robins Dry Dock & Repair Co., 238 N. Y. 271, 281; McMaster v. Gould, 240 N. Y. 379, 385).

By section 1 of the new act, “ the word ‘ dividend ’ means any distribution made by a corporation out of its earnings or profits to its shareholders or members, whether in cash or in other property or in stock of the corporation, other than stock dividends. as herein defined. ‘ Stock dividends ’ means new stock issued, for surplus or profits capitalized, to shareholders in proportion to their previous holdings.”

By section 2, “ Stock dividends when received by a shareholder shall not be subject to tax but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation' or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the' stock shall be treated as a taxable dividend and included in gross income; provided, however, that any stock dividend shall be considered in computing gain, profit or income upon the sale, exchange or other disposition of the stock upon which a stock dividend has been declared or of the stock included in such stock dividend.”

By section 3, the act is to take effect immediately, with retroactive operation.

The Attorney-General would have us hold that even under this act a distinction is to be drawn between stock dividends in the hands of a shareholder of record and stock dividends in the hands of the beneficiary of a trust. He concedes that in the one situation, the dividends are no longer to be classed as income. He insists that in the other, i. e., upon allocation or payment to the beneficiary, the quality of capital is lost, and that of income re-established. We are persuaded that the Legislature had no thought of thus distinguishing the incidents of an equitable right from those of legal ownership or title. The propriety of such a distinction was pressed upon its notice. In the bill as introduced, the words were added: Where a stock dividend is received by a fiduciary shareholder, and is paid under a will, deed of trust, or other agreement, to a beneficiary taxable under this article, it shall constitute taxable income and be included by the beneficiary in gross income for the year of its receipt.” This sentence was dropped from the bill before its passage. The opportunity was at hand to establish a distinction by words too clear for misconstruction. The Legislature did not reject it only to baffle the uncertain taxpayer by cloaking the same distinction in words of doubtful implication. “ Taxation is a hard fact ” (Matter of Hoffman, 143 N. Y. 327, 334), and for the determination of its incidence, the realities of “ actual and practical ownership ” (Matter of Hoffman, supra) must count for more in any just system than the style or label of estates. The beneficiary receives the shares through the conduit of the trust, yet the substance of the transaction is the same as if he were the legal owner of an estate for life, and had gathered in the dividends for himself. The Tax Law in its entire framework joins the burden to the usufruct (People ex rel. Field v. Gilchrist, 240 N. Y. 301). The fiduciary, where there is a trust for payment, makes a return, but a return for information only (Tax Law, § 365). The beneficiary pays. What is intermediate is ignored. What is ultimate controls.

We may reach the same end by another path. The shares, while in the hands of the fiduciary, were not gains or income of the trust.” The trust was not increased by the subdivision of its parts (Towne v. Eisner, supra). That being so, the dividends would have no place in the information return to be made by the fiduciary. He is not required to make report of changes of the corpus. If the dividends were not “ income of the trust ” in the hands of the fiduciary, they were not transmuted into “ income of the trust ” as they passed out of his hands into those of the beneficiary. Payment is indeed an irrelevant circumstance in the measurement of the tax. The beneficiary must bear a tax upon his distributive share of the net income of the trust, “ whether distributed or not ” (Tax Law, § 365, subd. 4). The “ income of the trust ” as reported in his return should be the same as that reported in the return of the trustee.

There are other signposts of intention, if these be thought inadequate. The same Legislature that excluded stock dividends from the category of income for the purpose of taxation, went farther and amended the Personal Property Law (Cons. Laws, ch. 41) by enacting that under any will or deed hereafter made, unless otherwise therein provided, stock dividends shall be principal and not income of a trust (L. 1926, ch. 843; Pers. Prop. Law, § 17-a). The rule previously applied had resulted in so many complications and obscurities as to be almost unworkable in practice (U. S. Trust Co. v. Heye, 224 N. Y. 242; Bourne v. Bourne, 240 N. Y. 172). It involved elaborate accountings for the purpose of determining how far the dividends were the result of profits accumulated before the creation of the trust, and how far the result of profits accumulated thereafter. The Legislature evinced its will that there should be an end to these complexities hereafter in the administration of the law of trusts. It had no thought of keeping them alive in the administration of the Tax Law. If stock dividends are still taxable as income to the extent that they belong to life tenant or beneficiary, the State may contest the propriety of the apportionment between fife estate and remainder. So to read the statute is to misread it. In effect, the Legislature has said that stock dividends in their intrinsic nature are merely readjustments of the corpus. Testator or settlor may provide, if he please, that in the event of readjustment a part of the corpus corresponding to the dividends shall be deducted from the shares of the remaindermen and given to the life tenant. There is nothing unheard of in the diminution of the principal before the falling in of a remainder. The founder of the trust may vary the devolution of the dividend as the needs of life tenant or of remaindermen are uppermost in his thoughts. He cannot vary with his wishes the conception of the dividend embodied in the law. Corpus it remains, whether the enjoyment is by one or by another.

We hold, then, that a stock dividend, though allocated by a trustee to the beneficiary of a trust, is received by the beneficiary as a shareholder within the meaning of the statute. There is reinforcement for this view in the thought that the tax upon the dividend is not abolished altogether. When the stock included within the dividend is sold, the proceeds are to be considered (to what extent or how there is no need to inquire at this time) in computing gains or profits (L. 1926, ch. 543, § 2). The State would have us say that the beneficiary of a trust is not to be reckoned as a shareholder within the meaning of section 2, though he receive the shares from the trustee and thereafter hold them until sale. We cannot bring ourselves to the acceptance of a reading so narrow in its literalism. In the circumstances stated, the beneficiary of a trust is chargeable as a shareholder within the meaning of section 2. If chargeable under section 2, he is exempt under section 1.

We find no infraction of any constitutional limitation upon legislative power in the provision that the statute (L. 1926, ch. 543) shall be retroactive in effect. This is not a statute relieving the taxpayer of an undisputed burden as a mere largess or gratuity. If such were its quality, there would be need to consider whether remission of a tax already paid would be subject to condemnation as a gift of public moneys (Loan Assn. v. Topeka, 20 Wall. 655; Lewis v. State, 197 App. Div. 712; 234 N. Y. 587). This is not a gift at all, but a readjustment of the public revenues for the promotion of a public purpose. There existed a situation fraught with opportunities for confusion and injustice. Returns had been made in reasonable reliance on the Comptroller’s regulation. If there had been mistake, it was mistake induced by the agents of the State itself. Taxpayers thus misled had regulated their affairs on the assumption that their tax accounts were closed. To reaudit returns so made might impose a grievous burden. Mistake, even mistake of law, will lay the basis of an equity which lawmakers may heed (People ex rel. Eckerson v. Bd. of Ed., 126 App. Div. 414; 193 N. Y. 601; U. S. v. Realty Co., 163 U. S. 427, 438). There was the menace of inequality besides to accentuate the hardship. The Tax Law prohibits a reaudit after three years have gone by (§ 373). As a consequence taxpayers who made returns in 1919-1922 would be exempt. Those of later years would pay. But the advantage flowing from the new act was not solely for the individual. There was advantage also, or the fair promise of it, for the State. The Commission would be spared the labor of unraveling and reauditing a vast number of returns. The tax, moreover, would not be lost forever. By the terms of the statute, it might be collected when the shares were sold, and then the dividends would be considered in the computation of the gains (L. 1926, ch. 543, § 2). The opportunity would thus be offered to lay a tax upon shares omitted from old returns which were unimpeachable through lapse of time (Tax Law, § 373). The net result to the State by force of the transfer of the tax from the receipt to the later sale might thus be profit, and not loss.

The methods and subjects of taxation are matters of governmental policy. What the Legislature determines in respect of policy, it is also competent to change. The changes may work backwards as well as forwards (People ex rel. Lucey v. Malloy, 35 App. Div. 136; affd., on opinion below, 161 N. Y. 621; Matter of Pardee v. Rayfield, 192 App. Div. 5, 10, 11; 230 N. Y. 543). The discretion of the lawmakers is not subject for that alone to the revision of the courts. The statute now before us is not one to refund the moneys in the public treasury to groups or individuals singled out for arbitrary favor. It is not in plan or essence a refunding scheme at all. The refunds, if any, are incidental merely, and exceptional. They will not be necessary in any number, for in general the tax has not been paid, and it has not been paid because the administrative agents of the State had said it was not due. In plan and essence, the statute is one to revise the system of taxation upon the basis of a not irrational conception of equality and justice. Very likely the Legislature thought that the existing statute, if properly construed, would have revealed the same conception at its core. The belief may have been error, yet in that event the need was all the greater for the adoption of a new system to the end that the conception might prevail. As an incident to this plan of revision and readjustment, the appellant may become entitled to a refund of the tax which he paid under protest to make his challenge of the tax effective. The special benefit to him remains an incident and accidént. What has been purposed by the Legislature is not a gratuity to one, but equity to all. The Constitution does not prohibit readjustment of the public burdens in the pursuit of ends so high (People ex rel. Lucey v. Malloy, supra; Matter of Pardee v. Rayfield, supra; Matter of Borup, 182 N. Y. 222; Oswego & Syracuse R. R. Co., v. State, 226 N. Y. 351.)

A point is made that the act of 1926 goes counter to article III, section 21, of the Constitution of the State. By that section, no money shall ever be paid out of the treasury of this State or any of its funds, or any of the funds under its management, except in pursuance of an appropriation by law.” The question is not here whether in default of adequate appropriation, the reaudit will be effective to give the appellant back his money. • In point of fact, a fund is established by section 382 of the Tax Law for the repayment of taxes erroneously collected (c/. § 373, subd. 3, as amended by L. 1926, ch. 329). The result would be the same, however, though present appropriation were lacking altogether. Appropriation, if necessary, may be afterwards supplied.

The order of the Appellate Division should be reversed and the determination of the State Tax Commission annulled, with costs in the Appellate Division and in this court, and the proceeding remitted to said Commission to reaudit the tax in accordance with this opinion.

His cock, Ch. J., Pound, McLaughlin, Crane and Lehman, JJ., concur; Andrews, J., absent.

Ordered accordingly.


source: Caselaw Access Project

author: McLaughlin, J.

license: Public Domain

text:
    Glenbrook Company, Inc., Appellant, v. Abraham S. Phillips, Respondent.
    Landlord and tenant •— real property — fair return or rental — each tenant should pay fair proportion which his apartment bears to entire rent roll of building — erroneous dismissal of complaint in action to recover balance due for rent — erroneous exclusion of evidence of market value and cost of reconstruction of building.
    1. No general rule can be laid down which will establish in every ease what is a fair return or rental on real estate. Each case must necessarily depend upon the peculiar circumstances involved and usually presents a question of fact. In fairness, however, each tenant should pay for the apartment occupied by him the fair proportion which his apartment would bear to the entire rent roll of the building.
    (Argued June 7, 1926;
    decided July 9, 1926.)
    2. In an action to recover a balance alleged to be due for rent for an apartment in the city of New York, defended on the ground that the difference between the amounts paid and claimed was increased rental, which was unjust, unreasonable and oppressive, where at the close of the evidence there was a question of fact as to what was a fair and reasonable rental of the apartment, that question should have been submitted to the jury and a dismissal of the complaint on the theory that the amount paid was fair, because the income from all the apartments, excluding the fair market value of the property and the cost of reconstructing the building, gave the landlord a net income in excess of eight per cent was error.
    3. It was also error for the court to refuse to admit evidence of the fair market value of the plaintiff’s premises and as to the cost of reconstructing the building as of the time to which the question under consideration relates.

      Glenbrook Co. v. Phillips, 216 App. Div. 702, reversed.
    Appeal, by permission, from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered February 16, 1926, unanimously affirming a judgment in favor of plaintiff entered upon a dismissal of the complaint by the court at a Trial Term.

      Lewis M. Isaacs for appellant.
    It was error to hold that, assuming the aggregate rent roll from all tenants netted the plaintiff eight per cent, no increase could be obtained from the defendant, even though he was not paying his proportionate share of the aggregate fair rental to which the landlord was entitled. (Elvira Realty Co., Inc., v. Bracegirdle, 115 Misc. Rep. 197; Stephens v. American Realty Co., 279 Fed. Rep. 435; Rust v. Tucker, 287 Fed. Rep. 1018.) Facts and inferences favorable to plaintiff's claim, drawn from the evidence, required that the case be submitted to a jury. (Lincoln Gas Co. v. Lincoln, 250 U. S. 256.) Under the doctrine of judicial notice, the trial court was bound to submit to the jury the question of whether the proposed increase of defendant’s rent in 1921 or any increase over that paid in 1918, was reasonable.- (Lincoln Gas Co. v. Lincoln, 250 U. S. 256; Elizabethtown Gas Light Co. v. Board of Public Utility Comrs., 111 Atl. Rep. 729; Joplin & Pittsburgh Ry. Co. v. Pub. Serv. Comm., 267 Fed. Rep. 584; St. Joseph, etc., Ry. Co. v. Pub. Serv. Comm., 268 Fed. Rep. 267; Banton v. Belt Line Ry. Co., 268 U. S. 413; Ward v. Cathey, 210 S. W. Rep. 289; Hurst v. Chicago, etc., Ry. Co., 219 S. W. Rep. 566; People ex rel. N. Y. C. & H. R. R. R. Co. v. Pub. Serv. Comm., 215 N. Y. 241; People ex rel. Jamaica Water Supply Co. v. Tax Comrs., 196 N. Y. 39; People ex rel. Third Avenue R. R. Co. v. Tax Comrs., 157 App. Div. 731; 212 N. Y. 472; New Haven Trust Co. v. Doherty, 74 Conn. 468; Collins v. Wardwell, 63 N. J. Eq. 371.) The trial court erred in refusing to admit evidence of fair market value of plaintiff’s property as of the time to which the inquiry related. (Glenbrook v. Hall, 209 App. Div. 869; 240 N. Y. 570; Karrick v. Cantrill, 51 App. Cas. [D. C.] 176; 277 Fed. Rep. 578; Wilcox v. Consolidated Gas Co., 212 U. S. 19; Minnesota Rate Cases, 230 U. S. 352; Denver v. Denver Union Water Co., 246 U. S. 178; People ex rel. Iroquois Natural Gas Co., v. Pub. Serv. Comm., 194 App. Div. 578; People ex rel. N. Y. State Railways Co. v. Pub. Serv. Comm., 202 App. Div. 576; Matter of Simmons, 130 App. Div. 350.) The court erred in refusing to admit evidence of reconstruction costs as of the time to which the action related. (Smyth v. Ames, 169 U. S. 466; Missouri ex rel. Southwestern Bell Telephone Co. v. Pub. Serv. Comm., 262 U. S. 276; Bluefield Water Works v. Pub. Serv. Comm., 262 U. S. 679.)

      Benjamin Beass for respondent.
    The trial justice was clearly correct in excluding evidence both of market value and of cost of' reproduction as of the time to which the inquiry related. (Knoxville v. Water Co., 212 U. S. 18;
      Block v. Hirsh, 256 U. S. 136; Hall v. Moos, 200 App. Div. 66; Glenbrook v. Hall, 209 App. Div. 869; 240 N. Y. 24.) Upon the record in the case at bar, the court was correct in holding unsound the contention of the plaintiff -that it was entitled to receive from the defendant its proportionate share of such rental as would, when fairly distributed throughout the entire apartment building, produce the fair rental to which the landlord was entitled. (Schwartz v. Levy, 190 N. Y. Supp. 520; Alabama Holding Corporation v. Conrey, 201 App. Div. 565; Anmore Realty Co. v. Baumer, 196 N. Y. Supp. 520.)
   McLaughlin, J.

On October 22, 1918, the plaintiff and the defendant entered into a written lease by which the former leased to the latter apartment No. 5 South on the fifth floor of the apartment house located at 993 Park avenue. The term of the lease was two years and eleven months. The tenancy was to commence on November 1, 1918, and end on September 30, 1921. The rental which the defendant stipulated to pay was $4,300 per year, payable in equal monthly payments in advance. Some time prior to August 1, 1921, the plaintiff notified the defendant that after the expiration of the lease the rent for the apartment would be increased from $4,300 to $7,000 per year. The defendant refused to pay the increased rental and thereupon the plaintiff demanded possession of the apartment. The defendant refused to surrender possession and he continued therein after the expiration of the lease. He also refused to pay the rental at the increased rate for fourteen months, beginning October 1, 1921, and ending November 30, 1922. The increased rate required a monthly payment of $583.33 which, for the fourteen months, amounted to $8,166.62. The defendant, however, did pay the rental stipulated in the written lease, which was $383.33 and for the fourteen months aggregated $5,016.62. This left a balance due, according to the claim of the plaintiff, of $3,150.04, which with interest amounted to $3,375.04. To recover such amount this action was brought.

The foregoing facts were set up in the complaint. The answer alleged that the increased rental was unjust, unreasonable and oppressive; that the amount stipulated to be paid in the written lease was a fair and reasonable rental value of the apartment; that this was the amount to which the plaintiff was. entitled, and nothing moire.

Much evidence was given at the trial bearing on the question of the net income of the entire building. Efforts were made on the part of the plaintiff to show what the fair market value of the property was at the time to which the question in controversy related, and also to show the cost of reconstruction during the same time. These were ineffectual, the court excluding all evidence bearing on these subjects.

At the close of the evidence, defendant moved to dismiss the complaint on the ground that the plaintiff had failed to establish facts which would-justify a finding that he was entitled to a rental in excess of that stipulated in the lease. It was contended, on the part of the defendant, that after deducting a certain amount for depreciation and repairs the evidence showed that there was a net income from the entire building of between seventeen and eighteen per cent, and that under the rule laid down in Hall v. Moos (200 App. Div. 66) this was all or more than that to which the plaintiff was entitled.

The trial judge granted defendant’s motion and dismissed the complaint. Judgment was entered to this effect and, on appeal, the judgment was unanimously affirmed and leave to appeal to this court denied. Application was subsequently made to this court and the appeal allowed.

No general rule can be. laid down which will establish in every case what is a fair return or rental on real estate. Each case must necessarily depend upon the peculiar circumstances involved. Assessments, cost of maintenance and repairs, the rate of interest, and many other elements may enter into the determination of that question. As well might it be said that a fixed price could be established for a suit of clothes, a pound of sugar, or a barrel of flour, as that a fixed sum could be established as a fair rental for the use of real estate. Usually, such prices are regulated by the supply and demand. What is a fair price in each case must necessarily depend upon evidence, which is but another way of saying that usually a question of fact is presented. It would indeed be an unusual case where the court could hold, as a matter of law, what is a fair return. Yet this is precisely what the trial court did, and the Appellate Division approved. The basis of the trial court’s holding, it seems, was that the income from all the apartments, excluding the fair market value of the property and the cost of reconstructing the building, gave to the landlord a net income in excess of eight per cent. Argument is unnecessary to show that such conclusion is erroneous. Assume that tenants occupying ninety per cent of the apartments in a building pay largely in excess of what they should pay, and the other ten per cent pay less than they should, could it for a moment be contended that the ten per cent are paying all they should because the landlord is getting a - rental from the entire building in excess of what he should? In fairness, each tenant should pay for the apartment occupied by him the fair proportion which his apartment would bear to the entire rent roll of the building. This is what the tenant is obligated to pay and what the landlord may expect. Indeed, this is precisely what was held in Glenbrook Co. v. Hall (209 App. Div. 869; affd., 240 N. Y. 570).

At the conclusion of the evidence there was a question of fact as to what was a fair and reasonable rental of the apartment occupied by the defendant, and that question should have been submitted to the jury. It could not be determined as a matter of law. (Markwin Realty Corporation v. Geisler, 210 App. Div. 845; Stephens, Inc., v. American Real Estate Co., 279 Fed. Rep. 435; Rust v. Tucker, 287 Fed. Rep. 1018; Lincoln Gas Co. v. Lincoln, 250 U. S. 256, p. 268.)

I am also of the opinion that the court erred in refusing to admit evidence of the fair market value of the plaintiff’s premises as of the time to which the question here under consideration relates. (Glenbrook Co. v. Hall, supra; Willcox v. Consolidated Gas Co., 212 U. S. 19; Minnesota Rate Cases, 230 U. S. 352.) This very question was passed upon in Glenbrook Co. v. Hall, and the ruling there made was affirmed by the Appellate Division and subsequently by this court.

I am of the opinion that the court erred in refusing to admit evidence of the cost of reconstructing the building as of the time involved in the trial of the issues. This point was also directly raised in Glenbrook Co. v. Hall (supra). There the court charged the jury as follows: “ The cost of reconstruction obviously is a factor in fixing the market value.” To this charge an exception was taken, which was one of the grounds of error alleged on appeal not only at the Appellate Division but in this court. (See, also, Smyth v. Ames, 169 U. S. 466; Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276; Bluefield Water Works v. Public Service Commission of West Virginia, 262 U. S. 679, p. 689.)

The order and judgment appealed from should be reversed and a new trial granted, with costs to abide the event.

His cock, Ch. J., Cardozo, Pound, Crane, Andrews and Lehman, JJ., concur.

Judgment reversed, etc.


author: Pound, J.

text:
    In the Matter of the Transfer Tax upon the Estate of Dellora R. Gates, Deceased. John J. Mitchell et al., as Executors, Appellants; The State Tax Commission, Respondent.
    Tax — transfer tax — subdivision 2 of section 220 of Tax Law taxing transfer of property evidenced by shares of stock or bonds representing real property within State, neutralized by its limitation — statute seeks to reach transfer of stock in all corporations and may not be upheld as to domestic corporations alone —• act may not be construed as if stockholders owned property of corporation — tax erroneously assessed on transfer of bonds of foreign and stock of domestic corporation owned by non-resident decedent and within this State at time of his death.
    1. Subdivision 2 of section 220 of the Tax Law (Cons. Laws, ch. 60), in effect November 28, 1918, which seeks to impose a tax on the transfer of intangible property evidenced by or consisting of shares of stock or bonds “ when the property represented by such shares of stock, bonds * * * consists of real property, which is located wholly or partly, within the State of New York,” is neutralized by its limitation. The tax is sought to be imposed, not on the basis of the situs, either of the shares or bonds, within the State, but on the basis of decedent’s ownership of real property within the State. Neither stock nor bonds represent any property other than the intangible rights of the shareholders or bondholders, and such rights do not constitute real property.
    2. The statute may not be upheld as to domestic corporations alone without ignoring the legislative concept of taxability. It has attempted to tax the transfer of stock in all non-excepted corporations, foreign or domestic, only so far as the property represented by such shares consists of real property within the State, in order to reach the transfer of shares in all corporations, foreign or domestic. Nor may the act be construed as if the stockholders owned the property of the corporation. The corporate entity is not a mere form or technicality to be disregarded and a taxing statute must be construed most strong] / against the government and in favor of the citizen. (Riggs v. C. M. Ins. Co., 125 N. Y. 7, distinguished.)

      (Argued May 14, 1926;
    decided July 9, 1926.)
    3. It was error, therefore, to impose a transfer tax upon a transfer of bonds of a foreign corporation and shares of stock of a New York corporation, belonging to a non-resident decedent, but within this State at the time of his death.

      Matter of Gates, 215 App. Div. 669, reversed.
    Appeal, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered October 16, 1925, which affirmed an order of the New York County Surrogate’s Court modifying a pro forma transfer tax order entered upon the report of an appraiser.

      Milward W. Martin, A. L. Humes and Ben LeRoy Stowell for appellants.
    The Tax Law was unconstitutional in so far as it attempted to tax the transfer of the bonds in the present case. (Matter of Bronson, 150 N. Y. 1; Matter of Fearing, 200 N. Y. 340; State Tax on Foreign Held Bonds, 15 Wall. 300; Matter of Barbour, 185 App. Div. 445; 226 N. Y. 639; Matter of City of Buffalo, 139 N. Y. 422; Pennoyer v. Neff, 95 U. S. 714; Frick v. Pennsylvania, 268 U. S. 473; Matter of Gordon, 186 N. Y. 471; Matter of Houdayer, 150 N. Y. 37; Matter of Ward’s Estate, 157 N. W. Rep. 1076; Bliss v. Bliss, 109 N. E. Rep. 148.) The fact that the bonds — tangible instruments evidencing intangible property — were physically within the State of New York is immaterial, for the Legislature expressly stated that it did not intend to tax the transfer of the tangible part of the bonds, but intended to tax only the transfer of the intangible property evidenced by the bonds. That intangible property was not in New York. (Matter of Richards, 182 App. Div, 572; 225 N. Y. 671; Matter of Whiting, 150 N. Y. 27; Matter of McMullen, 199 App. Div. 393; 236 N. Y. 518.)

      Charles A. Curtin for respondent.
    The bonds of the United States Realty and Improvement Company were properly taxed. (Matter of Richards, 182 App. Div. 572; 225 N. Y. 671; Matter of Whiting, 150 N. Y. 27; Matter of Lowell, 208 App. Div. 201; 239 N. Y. 30.) The stock of the Plaza Operating Company was properly taxed. (Matter of Richards, 182 App. Div. 572; Matter of Lowell, 208 App. Div. 201; Matter of Bronson, 150 N. Y. 1.)
   Pound, J.

Securities of a non-resident were taxed under section 220, subdivision 2, of the Tax Law (Cons. Laws, ch. 60), in effect November 28, 1918, which reads as follows:

When the transfer is by will or intestate law, of tangible property within the State or of any intangible property, if evidenced by or consisting of shares of stock, bonds, notes or other evidences of interest in any corporation, joint-stock company or association wherever incorporated or organized, except a corporation, foreign or domestic, or joint-stock company or association constituting, being or in the nature of a moneyed corporation, a railroad or transportation corporation, or a public service or manufacturing corporation as defined and classified by the laws of this State, and the property represented by such shares of stock, bonds, notes or other evidences of interest consists of real property which is located, wholly or partly, within the State of New York, or of an interest in any partnership business conducted, wholly or partly, within the State of New York, in such proportion as the value of the real property of such corporation, joint-stock company or association, or as the value of the entire property of such partnership located in the State of New York bears to the value of the entire property of such corporation, joint-stock company or association or partnership, and the decedent was a non-resident of the State at the time of his death * *

The taxability of two items is challenged. 1. $1,326,000 par value of the 5% gold debenture bonds of the United States Realty and Improvement Company, a New Jersey corporation; 2. 750 shares of the capital stock of Plaza Operating Company, a New York corporation. Both the bonds and stock certificates above mentioned were within the State of New. York at the time of decedent’s death and there is no question as to the value fixed upon said securities by the appraiser.

So far as the decision of this case is affected we may assume that State Tax on Foreign-Held Bonds (15 Wall. 300) does not prohibit the Legislature, for the purpose of taxing transfers, from fixing the legal situs of stock either where the corporation exists or where the stockholder has his domicile or from fixing the situs of bonds at either the owner’s domicile or within the State where he keeps them. (Blackstone v. Miller, 188 U. S. 189; Matter of Tiffany, 202 N. Y. 550; sub nom. Wheeler v. New York, 233 U. S. 434; Matter of McMullen, 199 App. Div. 393; affd., 236 N. Y. 518; Rhode Island Hospital Trust Co. v. Houghton, 46 Sup. Ct. Rep. 256; Goodrich, Problems of Foreign Administration, 39 Harv. L. R. 797, 805.)

The section of the Tax Law above quoted seeks to tax transfers of corporate stock and bonds, not on the basis of the situs, either of the bonds or the stock in the State of New York, but on the basis of decedent’s ownership of real property within the State. The tax is on the transfer of intangible property evidenced by or consisting of shares of stock or bonds only when “ the property represented by such shares of stock, bonds * * * consists of real property, which is located, wholly or partly, within the State of New York.” But neither the bonds nor the stock represent any property other than the intangible rights of a bondholder or shareholder. The limitation neutralizes the entire subdivision. Property represented by shares of stock or bonds does not consist of real property. The property represented by the bond is not an interest in real estate. It is the bare right to collect the bond. “ The owner of the shares of stock in a company is not the owner of the corporation’s property. He has a right to his share in the earnings of the corporation, as they may be declared in dividends, arising from the use of all its property. In the dissolution of the corporation he may take his aliquot share in what is left, after all the debts of the corporation have been paid and the assets are divided in accordance with the law of its creation. But he does not own the corporate property.” (Rhode Island Hospital Trust Co. v. Houghton, supra.)

The State of New York might not tax the transfer of shares in foreign corporations owned by a non-resident. It might have taxed the transfer of the shares of the New York corporation. It might have taxed the transfer proportionately. It has not done so. It has taxed the transfer of stock in all non-excepted corporations, foreign or domestic, only so far as the property represented by such shares consists of real property within the State. It has adopted this classification in order to reach the transfer of shares in all corporations, foreign or domestic. To uphold the statute as to domestic corporations alone would be to ignore the legislative concept of taxability and substitute our own theory of jurisdiction. The statute should not be thus mutilated to save a dismembered fragment. (Yu Cong Eng v. Trinidad, 46 Sup. Ct. Rep. 619.) Even to accomplish this result, in order to sustain the tax as to shares of the New York corporation only, we are urged to regard substance and disregard form and construe the act as if the stockholders owned the property of the corporation. But as was said by Lord Reading, Ch. J., in Continental Tyre & Rubber Co., Limited, v. Daimler Co., Limited (1 K. B. [1915] 893, 903): “Justice should not be hindered by mere technicality, but substance must not be treated as form or swept aside as technicality because that course might appear convenient in a particular case.”

The corporate entity created by statute may be swept aside as a “convenient fiction” in order to reach illegal acts where there is no formal corporate action. (People v. N. R. S. R. Co., 121 N. Y. 582, 622.) But this is no case of “ assumed innocence ” on the part of an erring corporation. The corporate entity is not a mere form or technicality to be disregarded in construing a taxing statute.

Riggs v. C. M. Ins. Co. (125 N. Y. 7) is clearly distinguished. Why has a shareholder an insurable interest in the corporate property? Because the equitable interest of a stockholder may be prejudiced by the destruction of the corporate property. The stockholder’s equitable interest is stated to be the right to dividends and the right to share in the final distribution of the corporate property. Clearly this insurable interest is in no sense an interest in the property of the corporation. It does not follow that because the stockholder has an insurable interest in the corporate property he has title thereto.

It is urged that we may rely on canons of statutory construction to give the statute a meaning. Such canons are not unlike proverbs. It is possible to find one to fit any situation without paramount regard for consistency. Their force lies in their application. So here we may, as against the canon that a meaning must be imputed to a statute if possible, quote: “ 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.” • (People ex rel. Mut. Trust Co. v. Miller, 177 N. Y. 51, 57.)

At best it cannot be said that the statute before us imposes a tax on the transfer of decedent’s shares in the New York corporation with that clearness of expression which would brand the attempt to escape therefrom as as resting on “ subtile device or ingenious sophism.” Judge Cooley properly condemns such evasions in his classic work on taxation (Cooley on Taxation, 272) but technical words are to be understood in their technical sense.

The order of the Appellate Division and decree of the surrogate should be reversed and proceeding remitted to the surrogate to proceed in accordance herewith, with costs to appellant in all courts.

His cock, Ch. J., McLaughlin, Crane and Lehman, JJ., concur; Cardozo,. J., concurs in result; Andrews, J., absent.

Ordered accordingly.


text:
    In the Matter of the Transfer Tax upon the Estate of Stephen K. Reed, Deceased. State Tax Commission, Appellant; Archibald Douglas et al., Respondents.
    Tax — transfer tax — valuation of corporate stock owned by deceased president of corporation —■ erroneous exclusion of proceeds of insurance policy on life of decedent in favor of corporation on ground that collection came after death — quaere whether loss to corporation resulting from death of its officer might not be offset against insurance.
    1. Upon an appeal from a pro forma order, fixing a transfer tax, upon the ground that the appraiser in valuing stock owned by decedent included as an asset of the corporation the proceeds of life insurance policies carried by it upon the life of the decedent, who was its president, payable to the corporation upon his death, where the only question before the court was whether the proceeds of the insurance policies must be excluded from the valuation of the stock for the reason that collection came after death, it was error to exclude such proceeds. The policies of insurance were the property of the corporation; they were obligations to pay money at a future date; their value became fixed at the moment of the death of the insured and their proceeds became corporate assets by virtue of the insurance contracts. The proceeds of the policies are in no sense an increment of the corporate assets after death. They are the fruit of the policies and an element of the value of the corporate stock which should be included in valuing testator’s estate for the purpose of taxing’ the transfer of the property by his will.

      (Argued June 9, 1926;
    decided July 9, 1926.)
    2. The question whether loss to the corporation resulting from the death of its officer should be offset against the insurance, is not here, the only contention below being that the increment occurred after death of the insured.

      Matter of Heed, 216 App. Div. 714, reversed.
    Appeal, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered February 26, 1926, unanimously affirming an order of the New York County Surrogate’s Court assessing a transfer tax upon the estate of Stephen K. Reed, deceased.
    A. Welles Stump and Charles A. Curtin for appellant.
    The face value of the insurance policies was properly included by the appraiser in the assets of the corporation. (Matter of Knoedler, 140 N. Y. 377; Matter of Einstein, 114 Misc. Rep. 452.)

      Archibald Douglas and William C. Shanley, Jr., for .respondents.
    The value of a resident decedent’s estate taxable in transfer tax proceedings in New York State is the gross valúe of the estate existing at the moment of death less obligations of his estate and the reasonable expenses of its administration. (Matter of Swift, 237 N. Y. 84; Matter of Penfold, 216 N. Y. 163; Chrystie on Inheritance Tax, 37; Matter of Vassar, 127 N. Y. 1; Matter of Seaman, 147 N. Y. 69; Matter of Davis, 149 N. Y. 539; Matter of Smith, 150 App. Div. 805.) Inheritance taxation in the State of New York is essentially a tax on transfers and that tax is based on a transfer of the property owned by the decedent during his lifetime and possessed by him ,at death. (Knowlton v. Moore, 178 U. S. 42.) The word “ transfer ” as used in the law relating to taxable transfers means “ conveyance of the property owned by the person at the time of bis death, to the person succeeding.” (Matter of White, 208 N. Y. 64.) If the testator was not possessed of the increased value of shares at the time life became extinct, possession was impossible thereafter. It follows that there could be no transfer of an increment of value due to his death. (Sutherland Stat. Const. 994; U. S. v. Merriman, 263 U. S. 179; Gould v. Gould, 245 U. S. 151; Matter of Vassar, 127 N. Y. 1; Matter of Wadsworth, 100 Misc. Rep. 439; People v. Miller, 177 N. Y. 51.)
   Pound, J.

The decedent herein died on the 26th day of April, 1923. Transfer tax proceeding was had, the report of the transfer tax appraiser filed and the pro forma order fixing tax was entered in the office of the surrogate of New York county. The executors appealed from this order upon the ground that the transfer tax appraiser in valuing the common stock of Pettit & Reed, Inc., of which deceased was a stockholder and the president, included as an asset of the corporation the sum of $150,000, proceeds of life insurance policies carried by the corporation upon the life of the decedent, payable to the corporation upon his death. The surrogate allowed the appeal and determined that the sum of $150,000 should not be included as an asset but only the cash surrender value of the policies or the sum of $28,920.22 should be so included, thus reducing the value of the assets of the corporation by the sum of $121,079.78 and making the value of each share of stock in the corporation $206.73 instead of $267.20 as fixed by the transfer tax appraiser.

As the decedent owned 1,203 shares of stock of said Pettit & Reed, Inc., the value of his holdings in the corporation was reduced to $248,696.19 from the sum of $321,441.60 as fixed by the transfer tax appraiser’s report. The only question before the court was whether the proceeds of the insurance policies must be excluded from the valuation of the stock for the reason that collection came after death. The courts below have excluded such proceeds.

Considering this question alone, the result was erroneous. When a decedent leaves policies of life insurance payable to himself or his estate, the proceeds of such policies are taxable under the Transfer Tax Law as property of which the deceased was seized and possessed at the time of his death. (Matter of Knoedler, 140 N. Y. 377.) Here the policies of insurance were the property of the corporation; they were obligations to pay money at a future date; their value became fixed at the moment of the death of the insured and their proceeds became corporate assets by virtue of the insurance contracts. It is sought to distinguish the transfer of decedent’s shares of stock in the corporation from the transfer of a decedent’s property when augmented by the proceeds of fife insurance policies and to limit the value of the shares to the value which they had at decedent’s death, excluding the proceeds of the policies. But the policies were owned by the corporation when decedent died. Death merely fixed the date of maturity. The proceeds of the policies were assets of the estate at the time of death. The argument to the contrary would defeat the taxation of the proceeds of life insurance policies payable to the estate of an insured. It might be stated as follows: Before death the insured owned only the surrender value of the policies; death fixed an obligation to the estate, not to the insured; therefore, the proceeds of the policies were not a part of decedent’s property transferred by will or by the intestate laws of the State. But this court punctured this obvious paralogy when it said: if these policies were not assets, then the appellants derived no title to their proceeds under the will, and they cannot make title through any other source.” (Matter of Knoedler, supra, at p. 380.) So here, if the policies are not assets of the corporation, the corporation has no claim on the proceeds. The obligation to pay arises at the death of the insured. The payment is made according to the terms of the contract. The contract existed before death. Therefore, the proceeds of the policies are in no sense an increment of the corporate assets after death. They are the fruit of the policies and an element of the value of the corporate stock which should be included in valuing testator’s estate for the purpose of taxing the transfer of the property by his will.

Another question might present itself. It has been said that while a corporation has an insurable interest in the life of one of its officers, such life insurance for the purpose of determining the enhancement in value of the stock, is like fire and marine insurance, a contract of indemnity (U. S. v. Supplee-Biddle Co., 265 U. S. 189, 195), and not like ordinary life insurance, a contract to pay a definite sum of money upon the death of the insured in consideration of the premiums paid during life without reference to the value of the life insured.(Reed v. Provident Sav. Life Ass. Soc., 190 N. Y. 111; Empire Dev. Co. v. Title G. & T. Co., 225 N. Y. 53, 58.) The corporation thus seeks to indemnify itself against losses to its earning power in the event of the death of its officer. A general insurance by the corporation cf all its officers without reference to their peculiar value to the corporation would, it is urged, be wagering and speculative and unenforcible, but insurance of a valuable life -is like the insurance of the life of a debtor by his creditor to indemnify the creditor against loss. It would follow that loss to the corporation resulting from the death of its officer should be offset against the insurance. The question is not here. The insurance has been paid. The assets of the corporation have been augumented thereby. As between the insured and the insurance company the amount stated in the policy would be payable absolutely unless it were so excessive as to suggest a speculative wager. (Ferguson v. Mass. M. L. Ins. Co., 32 Hun, 306; affd., 102 N. Y. 647.) The contention was made below that such increment occurred after the death of the insured. That contention failing, the point that might have been made — that the insurance should be included in the assets, subject to a deduction due to impairment of the corporation’s financial condition by the death of its president — will not be considered.

The orders appealed from should be reversed and the pro forma order of the Surrogate’s Court afiirmed, with costs in all courts.

Hiscock, Ch. J., Cardozo, McLaughlin, Crane, Andrews and Lehman, JJ., concur.

Ordered accordingly.


text:
    The People of the State of New York ex rel. Board of Education of Union Free School District No. 2 of the Town of Brookhaven, Suffolk County, Respondent, v. Frank P. Graves, as Commissioner of Education, et al., Appellants.
    (Argued May 5, 1926;
    decided July 9, 1926.)
    Education Law — schools — jurisdiction — Commissioner of Education has power to direct school district to furnish transportation for children and on failure to comply has power to order that public moneys be withheld from district.
    The Commissioner of Education has the power to direct a board of education of a union free school district to provide, by the levy of a tax, funds for the transportation of children of school age living so remote from the school building in such district that they cannot otherwise attend school; and, where the district has failed to comply with such an order, the Commissioner has power to order the treasurer of the county in which the district is located to withhold the public moneys apportioned to the district. (Const, of N. Y. art. 9, § 1; Education Law, §§ 20, 890, 891; Cons. Laws, ch. 16.) An order of certiorari, therefore, to review such orders was properly vacated.

      Matter of Board of Education v. Graves, 215 App. Div. 744, reversed.
    Appeal from an order of the Appellate Division of the Supreme Court in the third judicial department, entered December 7, 1925, which annulled, on certiorari, an order of the Commissioner of Education and an order of the Acting Commissioner of Education.

      Frank B. Gilbert for appellants.
    To enable the Commissioner of Education to perform bis duty of management and supervision of the public school system he is given the power to determine educational controversies and to direct local school agencies in the exercise and performance of their powers and duties. This power includes the review of the acts of district meetings. (Bullock v. Cooley, 225 N. Y. 566; People ex rel. Board of Education v. Finley, 211 N. Y. 51.) The Commissioner of Education had jurisdiction of the subject matter and he was authorized and required by statute to examine and decide the same. (Barringer v. Powell, 183 App. Div. 666; People ex rel. Yale v. Eckler, 19 Hun, 609.) The authority conferred by statute upon a school district meeting to provide transportation for pupils to and from school does not preclude the Commissioner of Education from determining upon appeal to him that such transportation should be provided. (People ex rel. Cayuga Nation v. Land Comrs., 207 N. Y. 42; Phelps v. Hawley, 52 N. Y. 23; Hagadorn v. Raux, 72 N. Y. 583; Hutson v. Mayor of New York, 9 N. Y. 163.) The statute authorizes the Commissioner of Education to direct the relator board of education to levy a tax to pay the cost of transportation of the petitioner’s children. (Barringer v. Powell, 183 App. Div. 666.) The power conferred by statute upon the Commissioner to direct the levy of a tax when necessary to give effect to his decisions is essential for the administration of the school system and is not an unconstitutional delegation of legislative power. (Field v. Clark, 143 U. S. 649; Cincinnati, etc., Railroad v. Commissioners, 1 Ohio, 88; Locke’s Appeal, 72 Penn. St. 491; People v. Kaye, 212 N. Y. 407; Polinsky v. People, 73 N. Y. 65; People ex rel. Licberman v. Vandecarr, 175 N. Y. 440; Bellows v. Raynor, 207 N. Y. 389; People v. Wilcox, 194 N. Y. 383; Saratoga Springs v. Saratoga Gas, etc., Power Co., 199 N. Y. 123.) The order of the Acting' Commissioner of Education withholding the public school moneys of the district was incidental to the appeal and was issued in aid of the enforcement of the Commissioner’s decision in such appeal, and it may not be reviewed by certiorari. (Hutchinson v. Skinner, 21 Misc. Rep. 729.)

      Lester Hand Jayne for respondent.
    The Commissioner’s action and orders herein override the intendment of the Education Law and exceed the limits of the powers given to him by the statute. (Matter of Hirschfield v. Cook, 227 N. Y. 297; Williams v. District No. 1, 204 App. Div. 161; Starin v. Town of Genoa, 23 N. Y. 439; Bank of Chenango v. Brown, 26 N. Y. 467; Clark v. City of Rochester, 28 N. Y. 605; Village of Gloversville v. Howell, 70 N. Y. 287; People v. Fire Ass’n of Philadelphia, 92 N. Y. 311; Stanton v. Board of Supervisors, 191 N. Y. 428; Village of Saratoga Springs v. Saratoga Gas, etc., Co., 191 N. Y. 123; People ex rel. Unger v. Kennedy, 207 N, Y. 533.) Even if the Commissioner had been given this power, there was no appeal before him from any act or acts, either positive or passive in character, which gave him jurisdiction to make the order complained of. (People ex rel. Light v. Skinner, 159 N. Y. 162; Bullock v. Cooley, 183 App. Div. 529; Barringer v. Powell, 183 App. Div. 666; Hirshfield v. Cook, 227 N. Y. 297.)
   McLaughlin, J.

The question presented by this appeal is whether the Commissioner of Education has the power to direct a board of education of a union free school district to provide, by the levy of a tax, funds for the transportation of children of school age living so remote from the school building in such district that they cannot otherwise attend school; and, the district having failed to comply with such order, whether the Commissioner has power to order the treasurer of the county in which the district is located to withhold the public moneys apportioned to the district until the order is rescinded.

District No. 2 in the town of Brookhaven, Suffolk county, is a union free school district created under the provisions of the Education Law. (Chapter 140 of the Laws of 1910, as amended; Cons. Laws, ch. 16.) The district consists of former districts Nos. 2, 3 and 4 of the town, in which are located the villages of Setauket, East Setauket and South Setauket. South Setauket is situate between two and three miles from the school building in the district. In this village are several families with a considerable number of children of school age. These inhabitants, some fifteen in number, on the 14th of August, 1923, requested, in writing, the board of education to provide transportation for their children to and from the school building. The board at a regular meeting, after considering the request, refused to take any action thereon.

Thereafter, on September 28, 1923, one Sadie D. Hawkins, residing in South Setauket and having a child of school age, appealed by written petition to the Commissioner of Education in behalf of her child and the other children residing in that locality, from the action of the board in refusing to provide transportation for such children. The board of education made a return on the appeal in which the material facts set out in the petition were not denied. It was alleged by Sadie D. Hawkins that on several occasions prior to the time of the application of August 14, 1923, other similar applications had been made to the board, as well as to a district meeting, and that the board and the district meeting had neglected and refused to take action.

After the petition and return thereto had been filed with the Commissioner, he caused an examination to be made of the facts stated in such petition and in the answer thereto. After such examination, and on March 21,1924, he directed the board of education to provide for the transportation of the children residing in the locality specified in the petition and to pay for the same out of any moneys available for that purpose; in the event there were no such moneys, he directed the board to raise the same by a tax upon the taxable property of the distridt.

The board, instead of obeying the order, called a meeting of the qualified voters of the district to consider the proposition of providing funds for the purpose stated, and such proposition was voted down by a majority of those present.

Thereafter, the board took no further action and on May 26, 1924, the Acting Commissioner of Education ordered and directed the county treasurer of Suffolk county to withhold * * * the public moneys apportioned to District No. 2 Brookhaven from the apportionment to common schools until this order is rescinded.”

The board then applied to and obtained from the Supreme Court an order of certiorari to review the orders of the Commissioner and the Acting Commissioner. The order of certiorari, after a hearing at Special Term, was vacated. From such order an appeal was taken by the board to the Appellate Division where the same was reversed on the law, one of the justices dissenting, and leave to appeal to this court denied. The determination of the Commissioner and the Acting Commissioner should be confirmed.

The order of reversal, as appears from the opinions of two of the justices, was upon the ground that the Commissioner did not have power, under the Education Law, to direct the board to provide the necessary funds for the transportation of the children in question or the power to direct the county treasurer to withhold the public moneys from the district. This view, it seems to me, is erroneous when the provision of the Constitution relating to the common schools of the State and the provisions of the Education Law are considered. The Constitution provides that the Legislature shall provide for the maintenance and support of a system of free common schools, wherein all the children of this State may be educated,.” (Art. 9, sec. 1.) The Education Law was enacted to the end that this constitutional provision might be fully and fairly carried out. Such law cannot be complied with unless means are furnished for transporting the children mentioned in the petition to and from the school building. Under such circumstances, the Education Law provides that the Commissioner has the power to compel a board of education to act, the district meeting having previously refused to do so.

Section 20 of the Education Law provides that the Commissioner, by section 94 of the act, is the chief executive officer of the State system of education and as such is charged with the management and supervision of the public schools and all of the educational work of the State.

The Education Law permits the formation of small school districts into a union free school district, and once the formation of such district has taken place the board of education therein is given broad powers to the end that “all of the children ” of the district may “ be educated.” If a board of education is derelict in its duty in this respect, or refuses or neglects to carry out the object for which the district has been formed, the Commissioner, under the Education Law, is clothed with power to compel action. (Sec. 890, formerly 880.) This section provides, among other things, that any person conceiving himself aggrieved by the action of any school district meeting or by “ any other official act or decision of any officer, school authorities, or meetings concerning any other matter under this chapter, or any other act pertaining to common schools ” may appeal to the Commissioner of Education, who is authorized and required to examine and decide the question involved. The action of the Commissioner in passing upon such appeal is “final and conclusive, and not subject to question or review in .any place or court whatever.” (Bullock v. Cooley, 225 N. Y. 566, p. 577; Barringer v. Powell, 230 N. Y. 37; People ex rel. Hylan v. Finegan, 227 N. Y. 219; People ex rel. Jennings v. Finley, 175 App. Div. 204.)

But it is suggested that the Commissioner did not have jurisdiction to make the order directing the transportation of the children referred to because such question was not, before the order was made, submitted to a district meeting. (Education Law, sec. 206, subd. 18.) This suggestion is not sustained by the uncontradicted facts. The petition before the Commissioner alleged that once the question came up before a district meeting and was turned down.” The board of education, in answering the petition, did not deny this allegation. The Commissioner held, as appears from his decision, that the matter of transportation was not only before the board but that it had been before a district meeting and no affirmative action had been taken thereon. To say, therefore, that the order of the Commissioner was predicated upon an appeal only from the action of the board is contrary to the facts and to the finding of the Commissioner. He substituted his judgment for the judgment of the district, as he had a right to do, and ordered the board to act accordingly.

Section 891 of the Education Law (formerly 881) gives the Commissioner power to regulate all appeals and to make all orders, by directing the levying of taxes or otherwise, which may be proper or necessary to give effect to his decisions. That he has this power cannot be seriously questioned. Such power is essential for the proper administration of the school system and is expressly conferred upon the Commissioner by subdivision 4 of said section 891. Unless it be held that the Commissioner has this power, a school district, by refusing to vote a tax for the maintenance of a public school could thereby deprive the children of school age in the district of any education whatever and nullify the constitutional provision hereinbefore quoted.

I have no doubt that the construction which I have put upon the statute is the correct one. The statute itself seems to indicate a legislative intent to this effect and any doubt as to what was intended has been removed by the Legislature since this proceeding was instituted, by the passage of chapter 634 of the Laws of 1925. This act, in terms which cannot be misunderstood, specifically confers upon the Commissioner the power to direct the transportation of children of school age in a union free school district. While such act is not applicable to the present appeal, nevertheless it can be considered in connection with what the Legislature intended by the Education Law in force before that act was passed.

After a very careful consideration of the Education Law, having in view the purposes sought to be accomplished by it, I am clearly of the opinion that the Commissioner had jurisdiction of the subject-matter and the power to make the orders in question.

The order of the Appellate Division should be reversed and the determination of the Commissioner and Acting Commissioner confirmed, with costs in this court and in the Appellate Division.

Hiscock, Ch. J., Cardozo, Pound, Crane and Lehman, JJ., concur; Andrews, J., absent.

Ordered accordingly.