LUNDING v. NEW YORK TAX APPEALS TRIBUNAL
New York Tax Law section 631(b)(6) denies only nonresident taxpayers a state income tax deduction for alimony paid. In 1990, Christopher Lunding and his wife, residents of Connecticut, were required to pay higher taxes on their New York income when the State denied their attempted deduction of a pro rata portion of the alimony Lunding paid a previous spouse. Lunding commenced suit, asserting that section 631(b)(6) discriminates against New York nonresidents in violation of the Privileges and Immunities, Equal Protection, and Commerce Clauses of the Federal Constitution. Ultimately, the New York Court of Appeals held that section 631(b)(6) was adequately justified because New York residents who are subject to taxation on all of their income regardless of source should be entitled to the benefit of full deduction of expenses, while personal expenses of a nonresident taxpayer are more appropriately allocated to the State of residence.
Does New York Tax Law section 631(b)(6), which effectively denies only nonresident taxpayers a state income tax deduction for alimony paid, violate the Privileges and Immunities Clause of the Constitution?
Legal provision: Article 4, Section 2, Paragraph 1: Privileges and Immunities Clause
Yes. In a 6-3 opinion delivered by Justice Sandra Day O'Connor, the Court held that, in the absence of a substantial reason for the difference in treatment of nonresidents, section 631(b)(6) violates the Privileges and Immunities Clause by denying only nonresidents an income tax deduction for alimony payments. "The alimony obligation may be of a 'personal' nature, but it cannot be viewed as geographically fixed in the manner that other expenses, such as business losses, mortgage interest payments, or real estate taxes, might be," wrote Justice O'Connor. Justice Ruth Bader Ginsburg wrote a dissenting opinion, in which Chief Justice William H. Rehnquist and Justice Anthony M. Kennedy joined.
Argument of Christopher H. Lunding
Chief Justice Rehnquist: We'll hear argument next in Number 96-1462, Christopher H. Lunding v. the New York Tax Appeals Tribunal.
Mr. Lunding: Mr. Chief Justice, and may it please the Court:
In calendar year 1990 I was a lawyer practicing law in the City of New York and residing some 38 miles from my office in the State of Connecticut, some 9,000 feet, plus or minus, over the State border.
It is something I did not think of when I moved to the State of Connecticut that I would be here today on my on behalf, challenging a statute of the State of New York as discriminating against me as a nonresident in taxation.
Unknown Speaker: What, 9,000 feet would be roughly, what, 2--
Mr. Lunding: A little less than 2 miles over the State line, Your Honor, into Connecticut.
Unknown Speaker: --Well, but... okay.
Mr. Lunding: Right.
Close to the border.
Not that I think that in--
Unknown Speaker: That doesn't make a difference, though.
Mr. Lunding: --No, it does not, Your Honor.
I do not urge that the distance from the State line is legally relevant in this case.
What is legally relevant, though, is the question of the constitutionality of New York State tax law 631(b)(6), which entirely denies--
Unknown Speaker: Well, you don't argue, do you, or maybe you do, that in apportioning this income for people who work full or part-time in New York, that New York has to allow personal deductions of various kinds to out-of-State residents, do you?
I mean, deductions that don't relate to the production of income in New York?
Mr. Lunding: --Well--
Unknown Speaker: Let's talk about that kind of deduction.
It doesn't relate to the production of your income in New York.
Now, does New York have to worry about personal deductions of that kind?
Mr. Lunding: --Well, the money is fungible, Justice O'Connor, and a substantial portion of my income and a much more substantial person... portion of other taxpayers' nonresident-in-New York income is earned in the State of New York.
I think there could be made a persuasive argument that, because of that, it is a requirement of the Privileges and Immunities Clause that nonresidents be allowed to take deductions in proportion that their New York income bears to their total income for personal expense items.
It is not necessary to reach that point in this case, and that's particularly because the nature of alimony is very different from the nature of other personal expense items in several respects.
In the first respect, in the State of Connecticut, as well as in other States, the amount of alimony is based, must be based upon the payor's total income from all sources.
Inevitably... one case so holding is Wanatowitz v. Wanatowitz, which is found in 533 A. 2d.
Because of that, inevitably in the setting of the amount of the alimony my New York income was taken into account.
So that's point number 1.
There's a direct connection there between the alimony and my New York income which is not present if it were a charitable deduction, or a real estate tax, or any number of--
Unknown Speaker: Couldn't you say, too, that you couldn't afford a very nice house in Connecticut which perhaps you have if you didn't make a good deal of money in New York, and therefore that New York ought to allow your property tax in Connecticut to be deducted?
Mr. Lunding: --That may be true, but it wouldn't... but the property tax would not be determined based upon my New York income in part.
That's the difference I'm articulating here.
Alimony specifically is determined on the basis of total income.
Property taxes are determined on the basis of the value of the real estate in question, and therefore not so clearly connected to--
Unknown Speaker: Yes, but that would be true even... supposing your divorce took place while you were getting all your income in Connecticut, and then you later started to practice in New York and had the same alimony, would that make it a different case?
Mr. Lunding: --Well, we--
Unknown Speaker: You're relying on the fact that your alimony is partially determined by your New York income, but we'd have the same case before us if that were not the fact.
Mr. Lunding: --Right.
I believe I must say that that is correct, and it's because this statute has as its unitary basis for discrimination nonresidents and no other factor.
It is, of course, true that only that factor is really before this Court, and to some degree all other elements are extraneous.
Unknown Speaker: Well, I'm not sure that that's the way the State of New York would see it.
Won't... wouldn't they say we're not discriminating based solely on residence, we're discriminating based on (a) nonresidents, and (b) the fact that this particular deduction was not related to the earning of income in New York?
Mr. Lunding: Well, that--
Unknown Speaker: And--
Mr. Lunding: --Right.
Unknown Speaker: --that seems to me very, very... a very different case.
Mr. Lunding: Well, they are discriminating--
Unknown Speaker: Now, am I characterizing their position correctly, to begin with?
Mr. Lunding: --Well, let me--
Unknown Speaker: Perhaps not.
Mr. Lunding: --Let me go back and state the analysis here under the Privileges and Immunities Clause.
The first element is, is this statute discriminatory against nonresidents.
There's a two-prong test.
I will answer your question, but in a long way, if I may.
The first test is to be satisfied is, is this statute discriminatory?
Well, this statute is discriminatory.
It has one sole, unique, intentional purpose, which is to discriminate against nonresidents by denying this particular adjustment to income.
That element is satisfied in this case.
The State of New York is unclear actually on that point, but objectively we certainly assert that it's satisfied.
Unknown Speaker: Mr. Lunding, let me ask you about that.
Mr. Lunding: Yes.
Unknown Speaker: Because I had always thought of alimony as an income-splitting between the payor and the ex-spouse.
Mr. Lunding: Correct.
Unknown Speaker: Now, I could see, if you were presenting us with a situation where what... New York lets you deduct the tax to your ex-spouse so that New York gets the tax on that amount of money that you earned in New York, but you would like to take the deduction while on the income side, if there is any income, it is to the exspouse, who is a Connecticut residence, so it seems to me you say, let me take the sweet and New York will be stuck with the bitter.
Mr. Lunding: Well, I would not agree with that conclusion, Your Honor, but I would point out this about the nature of alimony.
The statute calls alimony a deduction, and we... we're talking about personal deductions here.
Alimony is not really a deduction at all.
For Federal purposes and for New York purposes it is an adjustment to income, meaning it is... and it is taken out of the income of the payor, transferred to... functionally the responsibility to pay tax transferred to the income of the payee, or the recipient for tax purposes.
On your Federal return that's the way it works, and if you're a resident in New York that's the way it works, and that's irrespective of where the recipient lives.
Unknown Speaker: Yes.
Mr. Lunding: Right.
Unknown Speaker: And in the Federal union that's fine, because the IRS is going to get it either way.
Mr. Lunding: Right.
Unknown Speaker: The husband or the wife, it could be, deducts it, and the one who receives it pays income on it.
Mr. Lunding: Right.
Unknown Speaker: But when you're in one State and you're dealing with nonresidents, in the generality of cases if you have a marital situation it's in the State of their residence.
Mr. Lunding: Yes.
Unknown Speaker: So one State is going to get the income to tax, the other State is not going to get that tax, so there seems an imbalance there, and my only question is, why is it a violation of Privileges and Immunities to say that when New York doesn't get the chance to tax the one who's getting the money, getting the alimony, it shouldn't have to give a deduction to the one who's paying it?
Mr. Lunding: Well, my point there was, if I had been a resident of New York there would have been an adjustment in which I would have been absolved entirely for the tax on the alimony amount, and it would have been transferred to my spouse.
Now, the New York statute doesn't require for that operation for a resident that the spouse live in New York.
The spouse could live anywhere in the world, and if the spouse did not live in New York there would be no tax captured by New York on any part of that transferred income, so this is really, I believe, a factor which is not a motivating factor for New York, and if you look at it in terms of the incidence of the tax as to residence, it apparently is completely irrelevant in the economic analysis.
In the case of nonresidents, in any event the residence of the recipient is also irrelevant.
The statute doesn't say, which it could, if the recipient lives in New York, and therefore we tax that money in New York, we let you off the hook, Connecticut taxpayer.
It hits everybody.
This is... these are another example of extraneous elements that are not really involved here, where the only basis for discrimination is nonresidence and everything else is--
Unknown Speaker: Now, I don't think we completed our--
Mr. Lunding: --Yes.
Unknown Speaker: --brief colloquy on what you think the standard is.
Mr. Lunding: Well--
Unknown Speaker: Does New York have to treat residents precisely the same as nonresidents in every category of taxation?
Mr. Lunding: --Well, Austin v. New Hampshire teaches us that New York has to treat nonresidents under a rule of substantial equality of treatment, and--
Unknown Speaker: Can that substantial equality of treatment be based on a theory that the income... pardon me, that the deduction or the adjustment must be related to the income that's earned in New York, and income-producing activities in New York?
Mr. Lunding: --As regards personal expenses, the answer is no, because money being fungible, as a practical matter, looking at the actual, practical impact of the tax, which is the method of analysis, not labels, not anything else, but the actual practical impact, there is a discrimination here.
There is a higher tax paid by nonresidents than by residents.
It is not insubstantial in this instance or in any other, and it is much worse in the case of people with proportionately greater New York-source income in proportion to the whole, and therefore New York may not, the petitioners urge, distinguish between the two in the manner that this statute does.
Unknown Speaker: Now, you don't earn all your income in New York, is that correct?
Mr. Lunding: About half of it in my case, year-in, year-out.
Unknown Speaker: But a person who earns all income in New York but lives in Connecticut, strictly the bedroom community situation--
Mr. Lunding: There are many such people, yes.
Unknown Speaker: --As to that person, there would be a very substantial difference, I suppose.
Mr. Lunding: Well, the State has--
Unknown Speaker: If alimony is not deductible.
Mr. Lunding: --Or... well, it would be... yes, that is correct, and the amount of course, would vary according to how much alimony, and in proportion to the total income, but in that scenario the amount which would be paid by the nonresident in New York tax would be greater than the amount that would be paid by a resident of New York.
I mean, in whole dollars, not in proportion to anything.
And this is another problem with the way this statute does operate.
Unknown Speaker: May I ask you a question just for my own clarification?
Mr. Lunding: Yes.
Unknown Speaker: Is it correct that the rate that New York imposes on the nonresident is based in part on the nonresident's non-New York income?
Mr. Lunding: That's correct.
The case that allowed that is named Brady v. State, and they take into account worldwide income in setting the rate, which is progressive.
Unknown Speaker: Do you... did you... you didn't challenge that feature of the tax in this case, did you?
Mr. Lunding: No, I did not, and I... therefore I don't have the standing to... I have a view on it, but I don't think it's appropriate necessarily to state it at this time.
Unknown Speaker: What is--
Mr. Lunding: --Yes.
Unknown Speaker: --What is the top rate?
Mr. Lunding: I don't really... 9 percent, I believe, currently.
I don't... I'm not sure what it is today, but it's 8 or 9 percent is the... and I'm thinking about 1990.
I frankly don't remember.
But that's ball park, and it is progressive, and they do tax... they do take into account in setting the rate worldwide income, and that could be another basis upon which it could be said as a matter of the Privileges and Immunities Clause that they also must allow some proportion of worldwide deductions, whatever they may be, or adjustments, because strictly speaking alimony is not a deduction, not subject, for example, to the Federal limit on deductions, but an income transfer, as Justice Ginsburg pointed out.
Unknown Speaker: But an income transfer that can be very beneficial.
Mr. Lunding: Well, the actual effect in any particular case will, of course, vary according to the personal circumstances, where the receiving ex-spouse lives and many other factors, but the effect of this statute in all cases compared to the situation if the statute were not there will be to discriminate against nonresident taxpayers who pay alimony, because this reduction in their income, taxable income, will obviously discriminate.
Unknown Speaker: Well, when you say discriminate, you mean treat differently, I take it.
Mr. Lunding: Treat differently than residents who pay alimony, yes, that's what I mean, and the amount in this case is [dollars] 3,724 for the year 1990 in my particular case, or a 15-percent increase in the tax in my case.
Unknown Speaker: But you deduct if Connecticut has an income tax?
Mr. Lunding: It did not have a tax on earned income in 1990 at all.
Unknown Speaker: Which is the year in question.
Mr. Lunding: Issue.
The year in issue.
Unknown Speaker: But ordinarily, if a State has an income tax, the resident State, you could then deduct the New York tax from the Connecticut tax.
I'm just trying to see how much in practice is left when you take into account, well, you have to pay New York more, but then you got a bigger deduction in your home State.
Mr. Lunding: Well, looking at the matter currently, the tax rate in Connecticut is 4-1/2 percent.
The tax rate in New York is... I don't remember, 8 or 9 percent.
The deduction in Connecticut is at the rate in Connecticut, and therefore there still is something left over to be discriminatory on that regime, 4-1/2 percent, whatever it is, the difference between the marginal rates in the two States, but--
Unknown Speaker: And in figuring the level of discrimination, do we take account at all of the tax that's being paid on these funds by the Connecticut resident who's receiving them?
Mr. Lunding: --No, and that is because in Austin v. New Hampshire this Court held that the constitutionality of one State statute that discriminates against nonresidents may not be... depend upon the present configuration of the statutes of another State, which is what we're talking about here as to the State of Connecticut.
What its tax laws may or may not be at any particular time cannot be the basis for holding constitutional this discriminatory statute in the State of New York.
Unknown Speaker: Are there some deductions or credits that really are closely tied to the taxpayer's domestic life as opposed to his or her business life?
Mr. Lunding: Well, there are commentators... Professor Hellerstein in a 1974 article in the Michigan Law Review seems to suggest a possible test in the abstract that there would be some particular deductions which are particularly tied to the particular circumstances of the State of residence, without identifying what they are.
Unknown Speaker: Isn't it true, Mr. Lunding, that the standards by which tax law classifications are judged are about the most generous known to the law?
Mr. Lunding: No, I don't think that... well, the petitioners would not agree with that statement.
Unknown Speaker: Well, several of our cases say that.
Perhaps not in the Privileges and Immunities Clause kind, but just in the sense of classification generally for tax laws.
Mr. Lunding: --Well, the standard there... I'm thinking of Allied Stores v. Bowers, which is one of the places where the test you're describing I believe is set forth.
Assuming first that the particular act by the State does not violate the Federal Constitution, which is what it says in that case, there is a wide latitude, but if it... but if--
Unknown Speaker: Well--
Mr. Lunding: --that assumes the conclusion which is--
Unknown Speaker: --There's a total latitude if it doesn't violate the Federal Constitution.
Mr. Lunding: --Well, that... and in any event, that is not the... yes, that's correct, but the issue in the privileges & immunities context, in light of Austin v. New Hampshire, the first thing is that there is a standard of review substantially more rigorous under the Privileges and Immunities Clause for State taxing decisions affecting individuals than affecting business organizations, trades, or professions.
That is part of what the case says, and therefore I would not agree that there is a... in this context a greater degree of latitude than in others.
In fact, in the taxing area petitioners would argue that this is a case where a substantially heightened scrutiny is required, a rule of substantial equality is required, and it is our position that it has not been met in this instance.
Unknown Speaker: Mr. Lunding--
Mr. Lunding: Yes.
Unknown Speaker: --I hate to think we're going to have to go through State deductions one by one in order... in case after case in order to decide which must be allowed to out-of-Staters and which need not be.
What is your criterion for whether it must or need not be?
Mr. Lunding: Well, the only criterion that needs to be addressed... well, I guess I under... I'll answer the question in two parts.
The only criterion that needs to be addressed in this case is evidently whether alimony as an adjustment, and I've stated the unique aspects of that, so--
Unknown Speaker: If that's all we do, then we're going to have another case on the next item, and another case on the next item.
I want a principle.
Mr. Lunding: --Well, the simple principle view... the simple principle view is that when you're talking about taxes which fall by their terms upon personal service income... and this is a personal income tax in New York.
That's the label that goes on it.
That's what it taxes, my personal individual income in New York.
When the State wishes to tax a nonresident's personal income, the bright line rule would be that if there are personal deductions, no matter what they are, or adjustments, such as alimony, no matter what they are, then they must be allowed in the proportion that the New York State income bears to total income, period.
Unknown Speaker: What are nonpersonal deductions?
Mr. Lunding: Business expenses, or running a donut shop in Connecticut, or something along those lines might be treated differently, and I'm thinking of Shaffer v. Carter, which appeared to do that.
Whether there's a principle basis to treat any deduction differently we could debate, but we're talking about personal deductions here and I was trying to answer your specific--
Unknown Speaker: All right.
Mr. Lunding: --question on that subject.
Unknown Speaker: What about life insurance--
What about home... excuse me.
What about... what about--
Mr. Lunding: Life insurance or home mortgage interest?
Unknown Speaker: --No.
What about a deduction for investing in a solar panel for your home, which is in Connecticut?
Mr. Lunding: Well, responding to Justice Scalia, the bright line rule which will avoid what... the problem he foresees is to just say, if you tax personal income, you must give all personal deductions that the State gives to its own residents in the proportion that the income in that State bears to total income.
Unknown Speaker: So this--
Mr. Lunding: Therefore the answer would be, for solar panels or for anything else, if New York gives that personal deduction from personal income of its residents, it must do so in proportion for nonresidents which it taxes.
Unknown Speaker: --Of course, when I asked you that question at the start, you said, oh, no, no, no, we're just talking about alimony here--
Mr. Lunding: Right.
Unknown Speaker: --and there's a big difference, and that's all we're talking about, and we're not going to talk about personal deductions.
Mr. Lunding: Well--
Unknown Speaker: Now we've got a whole different approach.
Mr. Lunding: --Well, no.
He asked me a hypothetical question about where the line would be in--
Unknown Speaker: Right.
Mr. Lunding: --if we were dealing with other subjects.
It is... to be clear, it is our position that the question before the Court today is one and unitary, and that is the adjustment-for-alimony issue, and we do believe it's different, and I pointed out why I believe it's different, for many reasons, from the standard run of personal deductions--
Unknown Speaker: Mr. Lunding, are you--
Mr. Lunding: --and not getting into solar panels or other matters.
Unknown Speaker: --Are you attacking the New York statute as it applies to your particular facts, or are you saying it is invalid as to everybody who doesn't get an alimony deduction?
Mr. Lunding: The latter is the answer.
Unknown Speaker: Across the board.
Mr. Lunding: It is... yes.
Unknown Speaker: So you're in effect here on behalf of the person who has 100-percent New York income, 100 percent of his income comes from New York, but if his alimony is... if he's a nonresident he gets taxed at a higher rate than the New York resident does.
Mr. Lunding: It is certainly true that the petitioners view themselves... well, we are attacking the statute on its face, not as apply to the petitioners in particular, and proceeding, if you will, by principles of stare decisis at least, whatever happens here, for the benefit of all other nonresidents similarly situated who pay alimony.
Unknown Speaker: And then we get into this fascinating question of what is the standard for judging a facial attack, because under your view... you might say it's clearly unconstitutional in the hypothetical you have in your brief about the... all the income comes from a New York... you know, a New York resident and a nonresident both earn all their income in New York.
Mr. Lunding: Right.
Unknown Speaker: On the other hand, at the other end of the spectrum you say it's perfectly all right... you might say it's perfectly all right on a fact picture such as yours, because--
Mr. Lunding: Well--
Unknown Speaker: --your income is... you know, is different.
Mr. Lunding: --It would... the petitioners evidently would not agree with that conclusion, Your Honor, but I think I may bring in here some question of the particular laws of New York and why I'm standing here alone rather than in a representative capacity or some other.
New York has a rule, which was stated in a case called Martin v. Lavine, L-a-v-i-n-e, in 1976 and elsewhere, including in the intermediate appellate court in Brady v. State, that when a tax statute is challenged in New York, generally speaking, you cannot have a representative action.
You have to proceed individually, and therefore in the State court system, which is where this started, you are prohibited from proceeding in a representative capacity.
Unknown Speaker: I didn't know you could sue for a refund or... in the Federal system either in a class action capacity.
Mr. Lunding: Well--
Unknown Speaker: Isn't that generally the rule with respect to challenges?
Mr. Lunding: --I can only say in Brady v. State, which involved the question of considering worldwide income and setting the progressive rate in New York, it was brought as a class action, and it was stopped as a class action because of this rule, and the rule is based on the theory as to the Government that an individual who would win a case on the constitutionality of a statute gives the benefit to all others by way of stare decisis, and therefore there is no need for--
Unknown Speaker: Oh, this Court has said that in a number of cases.
Mr. Lunding: --Yes, of course, but--
Unknown Speaker: Let me just be clear, because you do have to, if you're invoking privileges and immunities, give us some kind of principle.
Mr. Lunding: --Yes.
Unknown Speaker: That you... you are candidly saying yes, anything that's personal, including your medical expenses, including what could be ambiguous in some cases like life insurance, whether it's to protect the business or to protect the individual, but all of those you have to be treated just like a resident.
Mr. Lunding: I'm saying if a bright line rule is desired, which is what Justice Scalia asked, that that would be a rational bright line rule which would avoid the necessity for future definition of what is or is not appropriately required.
Unknown Speaker: May I raise one--
Mr. Lunding: But that's... but it's not this case, and we do not argue for the adoption of such a general rule in this case.
This case is limited to alimony, and the only purpose of the petitioners here is to have a decision on the question of whether the adjustment for alimony, which in many ways is different from other sorts of items which are deductions, must be given as a matter of constitutional right under the Privileges and Immunities Clause.
Unknown Speaker: --Well, if Justice--
Mr. Lunding: It need not get into all this other--
Unknown Speaker: --Assuming we--
--If Justice Souter would permit me for just one reason, to--
Mr. Lunding: --Yes.
Unknown Speaker: --Justice Scalia and Justice Ginsburg and I have all asked you, what is your... we have to write this opinion.
Mr. Lunding: Yes.
Unknown Speaker: This violates the Privileges and Immunities Clause because it's not equal?
That... That's not the standard.
We need a standard that's more specific than that.
Mr. Lunding: It favors... well, it... well, I think the standard under Austin v. New Hampshire is that there is a rule of substantial equality of treatment of nonresidents mandated by the Privileges and Immunities Clause in the area of judging the constitutionality of State taxes which impact nonresidents, and the petitioners' view of the matter is that in this instance there is a lack of equality.
There are no reasons for it which are cognizable, and accordingly it's a rather simple matter that this particular exaction and the statute which gives rise to it is unconstitutional.
Unknown Speaker: Mr. Lunding, I, too would like to have, if not a bright line rule, at least a bright line principle, and I have this reservation about the one that you suggested.
You suggest a line to be drawn essentially between personal expenses and... or deductions and business deductions, deductions for the production of income in the other State.
My reservation comes for this reason.
You also suggested, and I thought with some cogency, that because New York takes into consideration worldwide income when the rate is set, therefore, New York ought to take into consideration worldwide deductions.
Mr. Lunding: Yes.
Unknown Speaker: The income, the worldwide income that New York takes into consideration includes business income, I assume.
Mr. Lunding: Yes, it does.
Unknown Speaker: And therefore, if we were to adopt what I suggested might be a cogent rationale, I think we've got to go the whole hog, and I think we've got to say, whatever is related to the production of any income, or whatever would be appropriate as a deduction from any income, must be allowed in New York pro tanto.
Mr. Lunding: Certainly petitioners would not object to such a rule for... but--
Unknown Speaker: Yes.
Mr. Lunding: --I mean, I can understand the struggle here.
Unknown Speaker: But wait a minute--
Mr. Lunding: I don't mean to indicate... I don't mean to indicate, though, Justice Souter, that there should necessarily be a different rule for business than for personal deductions.
I mention that only because of Shaffer v. Carter and there are no business deductions involved in this case.
Unknown Speaker: --Surely that would be an unfair rule, because New York takes into account out-of-State income--
Mr. Lunding: Yes.
Unknown Speaker: --For purposes of what rate you pay.
Mr. Lunding: That's right.
Unknown Speaker: But it does not tax you on that out-of-State income.
Mr. Lunding: No.
Unknown Speaker: So it would certainly be unfair to let you get dollar-for-dollar deductions on that--
Mr. Lunding: We're only asking for it in proportion.
We're not asking for it dollar-for-dollar.
We're asking for it in the proportion that the New York State income bears to the total income and because of that it doesn't raise the question of fairness which I think you're--
Unknown Speaker: --Well, and you're only asking for it to the extent that New York allows the same deduction for its own residents.
Mr. Lunding: --Yes.
It can certainly make the decision not to allow it to its own residents and it need not give it to nonresidents, and that's true whether it's a deduction or an adjustment or they use some other label because, as this Court's decisions tell us, labels are not determinative.
It's the practical effect.
Unknown Speaker: Well, I thought our test was something along the following lines, that a statute that discriminates against nonresidents must be justified by a substantial reason for the discrimination against the nonresidents, beyond the mere fact that they're citizens of another State.
What do you think the reason is that's offered by New York here, and is it substantial?
Mr. Lunding: Well, there are two reasons.
One is that there exists untaxed income, meaning they can't reach it because of the Due Process Clause under Shaffer v. Carter, and for that reason they're free to discriminate as they please, which is their actual position as regards personal deductions, adjustments, or whatever.
That part of the position is foreclosed by Travis v. Yale & Towne, which says because the statute does not condition its discrimination on the existence of untaxed income, whether that exists or not is irrelevant to the constitutionality of the statute on its face, so that reason number 1, Travis takes out.
The only other reason that... well, my colleague will speak for himself, but the only other reason that I foresee here is the lack of connection argument which we've been talking about for most of this oral argument, and we allege that there is a sufficient connection and obvious connection, and that therefore this statute is unconstitutional on its face--
If I may, I'd like to reserve the remainder... well, I have no time remaining.
Unknown Speaker: Thank you... thank you, Mr. Lunding.
Mr. Lunding: Thank you.
Unknown Speaker: Mr. Bing, we'll hear from you.
Argument of Andrew D. Bing
Mr. Bing: Mr. Chief Justice, and may it please the Court:
The issue in this case is really whether New York is required by the Privileges and Immunities Clause to afford nonresidents an alimony deduction because it affords the same alimony deduction to residents.
In New York's view, New York is not so required because the basis upon which New York taxes residents and nonresidents is completely different.
New York's taxation of residents is based on the fact that they reside within New York, residence giving New York plenary jurisdiction over their income from every source worldwide.
With respect to nonresidents, the basis of New York's taxation is that nonresidents--
Unknown Speaker: Would you address at the outset the one little flaw in that presentation, namely the rate is in part determined by non-New York income and therefore, whether directly or indirectly, you are to a certain extent taxing this gentleman at a higher rate than you would someone who had just the same amount of New York income, who lived in New York, that he has.
Mr. Bing: --Justice Stevens, it is correct that we tax... that the rate is set based upon the nonresident's worldwide income, but as Justice Scalia pointed out a moment ago we are not taxing the--
Unknown Speaker: But you really are in a way, if the bottom line, you get more money than you would if that weren't the fact.
Whether you say it's taxing, it does affect the total tax he pays.
Mr. Bing: --It affects the rate, Justice Stevens.
Unknown Speaker: Well, it affects the rate, the... more money on the check he has to write to you.
Mr. Bing: --The--
Unknown Speaker: Does it not?
Mr. Bing: --It does.
Unknown Speaker: Yes.
What's the percentage of... you say... I believe Mr. Lunding said the high end of New York's tax rate was 9 percent.
What is the low rate?
What is the low end?
Mr. Bing: During the... during 1990, the lowest marginal rate for married filing jointly and surviving spouse was 4 percent, and the highest rate at which I believe... the top marginal rate was 7.875 percent, which was the rate at which the additional deficiency was calculated in this case.
Unknown Speaker: Now, let's consider the situation, which must occur with some frequency, of people who earn all their earned income in New York and live outside the city, outside the State.
Mr. Bing: Those--
Unknown Speaker: And the end result is going to be the payment of a substantially higher tax than would be the case for a similarly situated New York resident who nevertheless lived in New York.
Mr. Bing: --It is true that in the case of the nonresident who derived all, or substantially all his or her income in New York, that the tax that the nonresident pays would be higher than the resident who derives all of his income in New York.
Unknown Speaker: What is the substantial reason that New York offers for the validity of such an arrangement?
Mr. Bing: This is the inevitable result of the fact that New York, with respect to nonresidents, is only looking at, and believes it is entitled to only look at their net income from the economic activity that they conduct within New York State, and that deductions, however large they may be in relationship to the total income, which have no relat... which are not incurred to produce or to generate that in-State income, are simply not something that New York is required to take into account.
Unknown Speaker: Why?
You don't do that for New Yorkers.
You allow New Yorkers to do that stuff.
It is not incurred in the generation of the New York income.
You give them all sorts of personal deductions.
Mr. Bing: But again--
Unknown Speaker: What justification is there for not allowing the same treatment to the out-of-Staters?
Mr. Bing: --In the context of the New York resident, again we are looking not only at the New York resident's New York income but the New York resident's worldwide income, and so the New York resident as a general matter is someone who will generally be subject to a burden of taxation which is greater than that of an individual in petitioner's situation.
Again, under the Privileges and Immunities Clause--
Unknown Speaker: You're saying if you're looking at all his income for purposes of taxes, you're entitled to give him all deductions of any sort, but these people, since they're out-of-Staters and you're not looking at all of their income, except as to the rate, and therefore you don't have to give them all of the deductions.
I guess there's a certain parallelism there.
Mr. Bing: --That is correct, Justice Scalia.
Residence also affords the State an opportunity to take into account certain personal activities of its residents that it is not in our view required to take into account for purposes of nonresidents, and under the Privileges and Immunities Clause absolute equality of treatment has never been the hallmark.
Unknown Speaker: But absolute equality of treatment, I found it awfully easy to construct bizarre examples.
That is, I just imagined a person at $100,000 income, all out of New York, and $50,000 alimony, and all you have to do is, you multiply by 4 percent, and that person is paying, what, 4 percent times 50,000 I guess is $2,000, and then apply your formula, and your formula will be [dollar]s 100,000, the total income, over Federal, minus the alimony, which will be 50, so you get a multiple of 2, and so you have the New York person paying 2,000, the Connecticut person paying 4,000.
And if, by the way, the person had a bad year, and his income went down to where it was close to the judicial decree for alimony, suppose he had 100,000, his alimony was 90, you're going to get results that are going to be phenomenal.
I mean, what will happen is the New York person on [dollars] 1,000 will pay... let's say, if it's 10 percent, they pay 1,000.
You'd have to multiply by a multiple of 10, and you would discover that the Connecticut resident has a $10,000 tax in New York, or if it's 8 percent, $8,000, and his real income is 10,000.
Am I wrong in those?
I mean, I just... all I did was apply the formula, you know.
I took the formula.
It says, he has [dollars] 100,000, he has 90,000 alimony.
For New York purposes, he has [dollars] 10,000 income.
He pays, let's say, 8 percent, or 10 percent.
That's [dollars] 1,000.
Then it says you're supposed to take the New York total, which is [dollars] 100,000, right, and then you have in the... that's the denominator, his Federal, but not counting alimony, so that's 10.
So 100 is 10 x 10, so you multiply 10 times the New York tax, and you discover you've got [dollars] 10,000 in tax.
I mean, I could create, you know, worse ones, or I suppose there are a lot of better ones, but it seemed to me that it was pretty easy to create odd examples, and... which seem very unfair.
Now, am I wrong about the ease of doing that, or is there some justification for that, or is it just bizarre that a person would have, say, half his income in alimony and yet all of his income out of New York, or that he could have a bad year, or what?
Mr. Bing: Your mathematics are entirely correct, and your application of the formula are correct.
The justification for it that New York has offered is, I guess, twofold.
The first one, again, is this is exactly the result that is contemplated by this Court's decision in Shaffer and by this Court's decisions in the portion of Travis upon which we rely, and has been accepted--
Unknown Speaker: What was that portion, because that's been a little fuzzy to me.
I know what they held about the exemptions, that you have to give the out-of-Stater the same personal exemption, but what is the part that you were relying on?
Mr. Bing: --The taxpayer in Travis also specifically challenged a provision of the New York... then New York tax laws, section 360, subdivision 11, which permitted nonresidents the deductions available to residents only if and to the extent connected with New York income, and the taxpayer specifically challenged that provision in its brief in this Court arguing that it would, for example, disallow the Connecticut resident who worked in New York the deduction for his real property taxes while at the same time allowing the New York resident a deduction for the real property taxes on the New York residence.
Unknown Speaker: Was it hypothetical, or was there something in the case, that this taxpayer said, I want a deduction for my real property tax or my life insurance premium and they're not giving it to me?
Mr. Bing: I believe that because of the posture of that case and because of who the taxpayer was that issue was hypothetical.
The taxpayer in this case was a Connecticut corporation that employed a number of Connecticut residents in New York as well as residents of other States and was challenging the entire personal income tax treatment of nonresidents, including personal exemptions, including the fact that it was required to withhold only with respect to nonresidents in this deduction provision.
So there were a number of provisions that were being challenged by the employer rather than by any particular taxpayer who was pointing to him or herself and saying, this tax adversely affects me this way, but that example was included within their brief, and I believe that that example was what this Court responded to when it said that the State is permitted to limit the deduction in the case of nonresidents to those expenses that are connected with the New York income, as settled by the Shaffer case.
I think they were referring to that particular contention of the taxpayer in the Travis case, and subsequent to Travis, this Court has repeatedly in summary dismissals in effect permitted States to recognize that the difference in tax treatment which is mandated by the Constitution, the fact that we can only reach the nonresident's State-source income, permits, justifies a State treating personal deductions differently in the case of nonresidents.
Unknown Speaker: You say personal deductions, so I gather that you are making the distinction between expenses for the production of income and personal expenses, and you are not relying to any extent on the peculiarity of alimony, that it is a two-way thing, one gets a deduction, the other gets income.
Mr. Bing: We treat alimony... in our view alimony is properly treated as a personal expense deduction because it is not incurred to produce income within New York State, that New York State--
Unknown Speaker: Just like the sole, or whatever, so... but you're not... I would just like to be clear on getting a factor out of my head if it shouldn't be there, that is that the spouse who receives the alimony would be paying the State in which he resides income on it.
Mr. Bing: --The residence of the recipient is not a factor in our analysis.
Unknown Speaker: Well, if the former wife receiving the alimony lived in New York, would that spouse be taxed on the alimony income by New York?
Mr. Bing: Yes, New York would tax the recipient.
Unknown Speaker: Yes.
Mr. Bing: Regardless of the location of the payor.
Unknown Speaker: Right.
But you don't, on the other hand, allow the deduction as a result, as the Federal Government would.
Mr. Bing: We--
Unknown Speaker: I thought that under our cases, under the Privileges and Immunities Clause there had to be a reasonable relationship between whatever the evil is presented by the nonresident and the rule adopted by the State, and I just haven't heard what that reasonable relationship is here to justify New York's rule.
I'd really like to hear that.
Mr. Bing: --The... again, the relationship is, I guess, twofold.
First, we don't tax the nonresident with respect to anything that occurs outside New York, and in our view we are not required, as a result of that, to take into account with respect to the nonresident anything that is unrelated to the economic activity that that nonresident is doing within the State of New York.
Again, we're put in the posture of not being able to afford equality of treatment.
From the very beginning, this is not a case where New York has gone out of its way to single out nonresidents.
They're different by virtue of the Due Process Clause and by virtue of our reach.
Unknown Speaker: But he's not asking for the entirety of the deduction.
He's only asking for a percentage of the deduction that is equivalent to the percentage of his total income which consists of New York income.
I mean, your answer would be a good one if he was coming in and saying, give me a full deduction, and you say, well, we can't tax you on your out-of-State and therefore we don't have to give you a deduction.
But he's saying, don't give me the whole deduction.
Just give me the same percentage that I... you know, that New York income constitutes of my total income.
Mr. Bing: We don't dispute that that is a reasonable approach.
In fact, it's one that New York did follow between 1961 and 1987.
We do believe, however, that New York is not required to afford a proportionate deduction, and we believe that our rule is, in fact, a better rule because it recognizes that the alimony simply has nothing to do with where petitioner earns his income.
There's no particular reason--
Unknown Speaker: How is it a better rule in the circumstances described by Justice Breyer?
Why is New York's present rule better?
It looks to me like there are some circumstances where it's an absolutely lousy rule.
Mr. Bing: --There are cases where the hypothetical posited by Justice Breyer will happen.
Unknown Speaker: In fact, isn't it true that... one of the things that troubles me, and I... it's a very troublesome case... is if the nonresident turns out in one year to be extraordinarily generous, giving large amounts of money to charity, to hospitals, one thing and another, they're all deductible on his Federal return.
The net effect of that is to increase his New York tax, because it makes the denominator so much bigger in your fraction.
Mr. Bing: That's true, but--
Unknown Speaker: So that in a way his activities out of State... this is a second way in which activities out of State impact on the tax he pays in New York in kind of a perverse way, because if he's a very generous person, he'll end up with a higher New York tax.
Mr. Bing: --He ends up with a higher New York tax than a comparably situated New York resident having the same--
Unknown Speaker: Or that he would have had to pay if he didn't do all these things.
If he didn't have all those deductions the denominator would be smaller, and therefore his New York would be smaller.
Mr. Bing: --With respect to charitable contribution deductions I'm not sure that they... because they don't affect either... they're below-the-line deductions, in other words.
They're deductions from adjusted gross income for Federal purposes--
Unknown Speaker: Could I--
Mr. Bing: --to get the taxable income.
They're not... I believe that the fraction is neutral with respect to them, because they are not a reduction of either New York-source income or Federal adjusted gross income.
Unknown Speaker: --I failed to understand that from the briefs.
Mr. Bing: Federal adjusted gross is the denominator in that, so with respect to those, I don't believe that there would be a difference akin to the difference with respect to alimony, but--
Unknown Speaker: My examples were meant to be quite ordinary, most of them.
I mean, the one that they have 100 percent in New York, then you get the odd rate.
But whether it's those examples or the... you know, the unusual ones you can construct with the generous person, you had two justifications, because you've said twofold several times, and I've heard one, and I want to be sure I get the other.
Mr. Bing: --The second one is simply, again, the concept that New York can do for its residents things that it is not obligated to do for nonresidents, and that... again, the Privileges and Immunities Clause and other provisions of the Constitution have been allowed... have been construed to permit certain beneficial residence treatments based on policy adopted by particular States with respect to the right to vote, the right to hold elective office, the right to free public education or welfare or medical benefits.
Unknown Speaker: Well, maybe you could allow... I could see your allowing a deduction for contributions to New York charities that are not allowed for deductions to out-of-State charities, or maybe allowing a deduction for payment of county or municipal taxes in New York only, and not out of State.
I can see some policy justification for that.
But you're not giving me any policy justification, just sort of a yah, yah, yah argument.
We do it because we can do it, that's why.
I mean, that doesn't seem to me a policy justification.
Mr. Bing: It's not intended to be a simply-because-we-can argument, Justice Scalia.
With respect to the treatment of alimony, the policy, if you will, is to really conform the treatment of alimony, of income-splitting post marriage with the treatment of income-splitting if people are married.
Unknown Speaker: So now you are going back when you say it does count that most often the spouse will be in the other State, so that you are not allowing the deduction, but on the other hand, you're not getting your hands on the income to tax.
Mr. Bing: It's because with respect to married people we don't allow income-splitting unless they're both residents.
If one of the parties is a nonresident, income-splitting is not permitted in the case of people who are still married, and this provision is... conforms that same rule with respect to income-splitting with respect to people who are no longer married.
Unknown Speaker: But even--
--Why did New York change in 1987?
You said they had the other rule where they allowed the same deductions, personal deductions, and then they changed.
What prompted the change?
Mr. Bing: Well, the treatment of marital income generally was addressed in '87, and at that time New York abolished the filing-separately-on-the-same-return status that married people had previously enjoyed and went to more or less full income-splitting for the first time, which is premised on the assumption that spouses share total marital income equally.
Again, that was the assumption underlying treatment of people who are still married to each other, and because alimony, as you pointed out, is a tax-shifting device rather than a true deduction, the treatment of alimony with respect to nonresidents was designed to bring it into congruence with the treatment of income-splitting for people who are still together, still married to each other.
Unknown Speaker: But there's the countervailing consideration, isn't there, in the fact pointed out by your brother that alimony is characteristically assessed on the basis of total income, and therefore there is a very strong relationship between the amount of alimony ordered and income earned in New York.
Mr. Bing: There is a relationship, but in our view the controlling standard is the one set forth by this court in the Gilmore case, which looks to the origin of the claim in characterizing an expense as personal or business under section 162 of the Internal Revenue Code with respect to marital dissolution.
In Gilmore, simply because the expenses were incurred to preserve and to protect the taxpayer's income-producing assets, it was not enough to give them a sufficient nexus to make them related under section 162 to be deductible for income tax purposes.
We argue the same standard ought to apply in a case like this, that the alimony in this case, related though it may have been to petitioner's... the amount of petitioner's worldwide income, including the New York-source income, was not incurred to produce that income, or incurred in carrying on the trade or business that generated that income, and that that should be the test with respect to alimony or any other personal expense.
Unknown Speaker: Do you know how many States do it the way New York is currently doing it?
Mr. Bing: I believe that in addition to New York there are six other States that specifically disallow alimony deductions.
However, there are a number of other States that have relied upon the general tenor of the Shaffer and Travis cases, as well as summary dismissals such as Goodwin, to treat a number of different items differently for nonresidents, including, in addition to the alimony expenses we're talking about today, real estate taxes and mortgage interest in out-of-State residence, medical expenses, insurance premiums, moving expenses, income averaging, rollover of gain on sale of principal residence, grocery and medical tax rebates, food sales tax credit, and homestead tax rebates, all of which have been upheld under Privileges and Immunities Clause challenges.
Unknown Speaker: Well, under your principle I suppose if a taxpayer living in Connecticut had a second home on Long Island in New York, you could deny him the home interest deduction.
Mr. Bing: The deduction would not be allowed in computing New York-source income, that is correct, because it does not relate to the production of the New York-source income.
I guess I'd like to address the policy reason.
What is it about these personal deductions and about the nonresident status that seems to be... that justifies what we're doing, and again, we're not simply saying we're doing it because Shaffer and Travis and Goodwin and the others say we can.
We're doing it because we think it's perfectly reasonable, and it's entirely justified for New York to say with respect to nonresidents, all we have jurisdiction over regarding you is what you do here, your economic activity here, and that it's reasonable and permissible for us to say to those people, we will allow you deductions with respect to the production of the income, the net income from your economic activity.
We'll look at what you do here, and we'll let you deduct that.
We'll tax you on your net income, but we're not going to let you take into account either losses or deductions arising from expenses in out-of-State businesses over which we have no jurisdiction, and we're also not going to take into account personal expenses that you may incur in your personal life in some other jurisdiction, even though with respect to people who reside in New York we will allow them.
New York has believed and continues to believe that that is a substantial justification and a legitimate reason for what New York has done in this case.
Unknown Speaker: Why aren't those personal expenses... I mean, if 20 percent of your income is from New York, why isn't 20 percent of those personal expenses fairly attributable to New York income?
I mean, you're sort of adopting the premise that all of your personal expenses come from non-New York State income.
That seems to me an unreasonable premise.
Mr. Bing: Again, we're not saying that the contention is... is being argued for in terms of this would be a reasonable approach is not true.
We're not saying it's an unreasonable approach, but we are saying that we don't think the Privileges and Immunities Clause--
Unknown Speaker: Requires--
Mr. Bing: --requires that absolute equality, or at least that percentage equality of treatment.
And again, these expense actions have nothing to do with where Mr. Lunding earned his income, and there really is no principle basis, other than just saying, well, 20 percent of the income, 20 percent of the deductions, for looking at what happened in Connecticut.
There's no reason for us to say well, it could be 20, but it could be more than 20.
We could say that with respect to his medical expenses he's entitled to more than that because it was really primarily related to his getting back and forth to New York and dealing with the rush-hour traffic.
I mean, there's no principled reason, no constitutional principled requirement for New York to be forced under the Privileges and Immunities Clause to adopt a rateable approach, even though, as I said, that is one that New York has followed in the past.
Unknown Speaker: --Can I just give you one hypothetical that keeps running through my mind and just ask you to comment on it?
Supposing you've got a Connecticut resident and a New York resident, both of whom make exactly the same amount of money, both of whom derive all of their income from New York... they're commuters.
One of them is a commuter and one lives in the city, and one of them, the one who lives in Connecticut, donates a substantial amount of money to the law school in New York and wants a charitable deduction.
The one who lives in New York donates a substantial amount of money to Yale in Connecticut.
The one who gets the deduction is the one who makes a donation to the New York recipient.
Mr. Bing: Well, Justice Stevens, in computing--
Unknown Speaker: I mean, the one who does not get the deduction is the one... yes.
Mr. Bing: --In computing the New York-source income portion of the equation, that's correct, but in computing the tax as if a resident, which is the number by which the fraction is multiplied, you do treat the nonresident as if the nonresident were a resident, so that there is... again, this doesn't affect the computation of the fraction, because the charitable contribution--
Unknown Speaker: Right.
Mr. Bing: --deduction is below the line in both cases, so there is a--
Unknown Speaker: Would they be taxed the same in my hypothetical as... would the bottom line be the same?
Mr. Bing: --I believe that the... obviously the... when you computed the New York... the taxes if a resident, on the part of the New York resident, then obviously you'd stop, because that would be the answer.
The percentage of that that would be paid by the nonresident wouldn't be affected by the formula, by the fraction, which is the other thing, because New York-source income is a net number without any reduction for... itemized deduction such as the charitable contribution.
Unknown Speaker: I thought, to oversimplify it, that the New York resident would get the deduction and the Connecticut resident would not, in my hypothetical.
Mr. Bing: In looking at the New York fraction, Justice Stevens, there's no difference in the New York-source income number... there would be no deduction in computing New York-source income for the charitable contribution.
Unknown Speaker: That's not a constitutional point, so any constitutional holding that permitted you to do what you've done here would permit Justice Stevens' hypothetical.
All it would take would be a Federal statute that does the same thing that this statute did here.
A delegation imposes... you know, convinces the other Members of Congress to write a little thing which says that New York-source alimony is not... you know, the way they did it here, they'd do the same thing for charities.
They could do the same thing for anything, so it would be easy under the Constitution to replicate just that problem, wouldn't it?
Mr. Bing: Our--
Unknown Speaker: And that's what's worrying me.
Of course, if it's constitutionally permissible to do this, the States that are always anxious to get more money could think of, you know, dozens and dozens of ways to produce the kinds of results that we were talking about.
Mr. Bing: --It's true that I believe our argument would permit... it doesn't work in New York's particular methodology, but our argument is based on the legitimacy of permitting States to focus solely on the economic activity within the State and not to look at the personal--
Unknown Speaker: Maybe the distinction is that New York treats nonresidents as just purely mechanical money-making machines, whereas it treats its own people as whole persons and citizens who have all sorts of interests other than making money, because that's what you treat the nonresident--
--They're New Yorkers, after all.
Or they're non-New Yorkers.
Mr. Bing: --In fact, as to New York State, that is a permissible... in our view, that's all right.
That's a distinction that we seek to draw.
It's a distinction that New York and other States have always, at least since 1920, thought that they had the power to draw, and it's a reasonable distinction based on the fact that we argue that we should not be required to take into account the fact that yes, Mr. Lunding does have a personal life, but it's a personal life that is related to Connecticut, not related to any of the other places from which Mr. Lunding derives his income.
If there are no further questions, thank you, Your Honor.
Chief Justice Rehnquist: Thank you, Mr. Bing.
The case is submitted.
Unknown Speaker: The honorable Court is now adjourned until Monday next at ten o'clock.