App. Div. 131] Third Department, May, 1921. the future should the general interest of the community or the public exigencies so require. (People ex rel. Iroquois Door Co. v. Knapp, 186 App. Div. 172, 175; affd., 227 N. Y. 592; People ex rel. Gallatin National Bank v. Commissioners, 67 id. 516; People ex rel. Cunningham v. Roper, 35 id. 629, 635.) The possibility of the enactment of an income tax many years in the future did not exist in the minds of the legislators at the time they enacted the recording tax provisions. Those provisions and the exemption created thereby had no reference to an entirely distinct system of taxation at some time in the future such as is created by the income tax provisions. We are not unmindful that it has been held that a tax on income is in reality a tax on the property producing the income. (Pollock v. Farmers' Loan & Trust Company, 157 U. S. 581; 158 id. 601; Hancock v. Singer Manufacturing Company, 62 N. J. L. 289, 342; Opinion of the Justices, 220 Mass. 613, 623.) That might be important in reference to some questions, as for instance if we were considering the legality of a tax on income, there being a constitutional prohibition against such tax on the principal. Our problem here, however, is one of statutory construction and to ascertain the legislative intent, and in a problem of that nature we are not hampered by constitutional restrictions. In our view of sections 251 and 253 of the Tax Law it is as if the Legislature had said, there shall be no other tax on the principal of mortgages except the recording tax, but we reserve the right to impose in the future should circumstances require a tax on the income of such mortgages. If we have properly construed such legislation, the validity of the tax in question necessarily follows. There is still another view to take of this question. The income tax is not directly at least imposed on any particular income. The recording tax is imposed on the mortgage (§ 253); the income tax is a tax on the individual. It is "imposed upon every resident of the State" (§ 351). His income is used only in fixing the measure of such tax. It is the "net income" on which the tax is computed (§ 351). The "net net income " means the "gross income" of the taxpayer less legal deductions (§ 357) and in determining the "gross income" mortgage interest as well as all other income is Third Department, May, 1921. [Vol. 197 included with numerous exceptions specified in section 359. From such "gross income " "thus determined are to be subtracted numerous deductions (§ 360) and also certain exemptions (§ 362) before the tax is computed. Hence the income from any particular source is but one element to be considered in connection with other elements in determining the measure of the taxation which is imposed on the individual. In no proper sense may it be said that the tax is imposed on the interest of any particular mortgage. That is merely a factor in the determination of the amount of such taxation. We think, therefore, for the reasons stated that the contention of the relator cannot be sustained. The determination should be confirmed, with fifty dollars costs and disbursements. All concur, except JOHN M. KELLOGG, P. J., dissenting, with an opinion. JOHN M. KELLOGG, P. J. (dissenting): * * * * The State is bound by its contracts which are based upon an actual and not a speculative consideration. (People ex rel. N. Y. C. & H. R. R. R. Co. v. Mealey, 224 N. Y. 187, 197; First Construction Co. v. State of New York, 221 id. 295.) Here, in order to induce the taking of real estate mortgages, the Legislature imposed a recording tax by sections 251, 253 and 254 of the Tax Law, and agreed with the relator, who complied with the act, to exempt "all mortgages * and the debts and the obligations which they secure, together with the paper writings evidencing the same from other taxation by the State," and the subdivisions of the State, except from taxes imposed under certain sections of the statute which we are not interested in. In effect section 253 requires a payment in advance of a sum which is agreed to be in lieu of all future taxes on account of the mortgage, the debt and the obligation secured, together with the writings evidencing the same. Section 254, relating to mortgages made before the act, whether recorded or unrecorded, is a request to the owner to come within the act and obtain the benefits of the exemption. There the consideration of the contract more clearly appears. The mortgage secured the payment of the interest as well as the principal; in fact the interest was clearly the moving App. Div. 131] reason for making the loan and taking the mortgage. The relator would have kept its money if it was to be returned without interest; it loaned it to secure the interest. The interest is not, therefore, a mere incident to the mortgage, but is an essential part of it, and is a part of the debt secured. Where the law gives interest as damages for the breach of a contract, it may be considered an incident to the debt; but where the original contract requires the payment of interest, the agreement to pay the interest is as much a part of the debt and obligation as is the agreement to pay the principal. (Southern Central R. R. Co. v. Town of Moravia, 61 Barb. 180, 189; Fake v. Eddy, 15 Wend. 76; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 583.) The State income tax is imposed upon net incomes. Interest, to be taxable as income, need not be actually paid. Unpaid interest, which has accrued and is payable, is subject to the tax. (Tax Law, § 350, subd. 6.) The taxpayer must include in his return all interest which is accrued and payable. Subdivision 1 of section 359 speaks of income "received," but subdivision 6 of section 350 provides that the word "received" means "received or accrued." Accrued" means "due." (Allen v. Armstrong, 58 App. Div. 427; 1 C. J. 733.) In Pollock v. Farmers' Loan & Trust Co. (supra) it was held, under the old Federal Income Tax Law of 1894 (28 U. S. Stat. at Large, 509, chap. 349; Id. 553, § 27 et seq.), that income from municipal bonds could not be taxed by the Federal authorities, as they had no right to tax the bonds themselves. The past due interest upon a mortgage, which by its terms draws interest, forms a part of the net income for taxation. It has not been paid, and the only right to it is that it is payable by the terms of the mortgage, the obligation upon which the tax has been paid; it is a part of the debt secured by the mortgage, and is exempt. Needless to say that mortgage loans were made under the act, and old mortgage loans were continued, in reliance upon the exemption provision. The State is bound to keep its obligation with the mortgagees and cannot be permitted to change its position. If there is a fair doubt as to the proper construction of section 359 of the Tax Law, the court will be solicitous to adopt the construction which makes for validity rather than Third Department, May, 1921. [Vol. 197 for invalidity. In construing the statute it will be assumed that the State meant to meet its fair obligations and deal honorably with its citizens and is not seeking to avoid its just obligations. The following cases sustain these views: People ex rel. Cooper Union v. Wells (180 N. Y. 537); People ex rel. Cooper Union v. Gass (190 id. 323); People ex rel. Roosevelt Hospital v. Raymond (194 id. 189). In each case it was claimed that an exemption from taxation in the charter of a corporation was not destroyed by a subsequent general tax law. In the Wells case it was held that the charter of the relator exempting it from taxation prevented the Legislature from destroying the exemption. The case was without opinion in the Appellate Division (98 App. Div. 623) and the Court of Appeals, but is explained in People ex rel. Roosevelt Hospital v. Raymond (194 N. Y. 198, 199). In the Gass case it was held that the charter exemption could be repealed by virtue of section 1 of article 8 of the Constitution, which permits all general laws and special laws with reference to corporations to be altered from time to time or repealed. The Roosevelt Hospital case explains the other cases, and considers that a general statute embracing the subject of taxation ordinarily repeals an exemption contained in a special charter, but that where the exemption is a matter of contract, a proposition by the State which has been acted upon by the party claiming the exemption, the presumption is that it is not repealed and that the exemption survives the general statute. It could not be presumed that the Legislature intended to violate the good faith and the agreement of the State, but it is presumed to have intended to keep faith and to observe its contracts by continuing the exemption. The constitutional provision has no application here and the agreed exemption continues. In my judgment a fair construction of the Tax Law exempts the interest upon mortgages which have paid a recording tax. If this construction is wrong, then the part of the statute attempting to destroy the exemption is unconstitutional. I favor reversal. Determination confirmed, with fifty dollars costs and disbursements. App. Div. 139] Fourth Department, May, 1921. In the Matter of the Judicial Settlement of the Accounts of JAMES W. EGAN, as Executor, etc., of HANNAH EGAN MURPHY, Deceased, Respondent. JOHN MURPHY, Appellant. Fourth Department, May 4, 1921. Partition — interlocutory judgment directing payment of proceeds into Surrogate's Court - surrogate does not have power to direct payment of money to executor in proceedings to sell same property — Code of Civil Procedure, §§ 1538 and 2707, applied appeal – order directing payment of money to executor affects substantial right of person entitled to share therein. Where an interlocutory judgment in a partition action instituted within eighteen months after the death of the owner of the land directs that the property be sold free from liens and on consent of the parties that the money be paid into the Surrogate's Court by paying the same to the county treasurer, the Surrogate's Court has no power in proceedings instituted by the executor to sell said real property for the payment of debts, to direct that said funds be paid over to the executor on his giving a bond. Section 1538 of the Code of Civil Procedure governs the disposition of proceeds in partition actions, and the surrogate had no power to proceed under section 2707 of the Code of Civil Procedure. The order directing the payment of said money to the executor affected a substantial right of the appellant, the husband of the decedent, who was entitled to a share of the partition money, in that it deprived him of his right to secure his share in the manner prescribed by section 1538 of the Code of Civil Procedure. APPEAL by John Murphy, husband of Hannah Egan Murphy, deceased, and one of the persons named as devisee in her last will and testament, from that part of an order of the Surrogate's Court of Onondaga county, entered in the office of said surrogate on the 16th day of October, 1920, directing the county treasurer of said county to pay over to the executor herein the sum of $5,476.05, proceeds of the sale of real property of the deceased deposited with said county treasurer, pursuant to a final judgment of the Supreme Court in a partition action. John P. Hennessey, for the appellant. George W. O'Brien, for the respondent. |