The opinion of the court was delivered by: MCLEAN
Plaintiff sues for a refund of federal income tax paid by it for the year 1962 in the amount of $10,606.55 on the ground that this sum was erroneously reported and paid by plaintiff and illegally collected by defendant. The case was submitted for decision upon stipulated facts. It presents a question of law which is apparently of first impression.
The $10,606.55 paid by plaintiff was the tax on the sum of $20,397.21 which plaintiff included in its taxable income as reported in its 1962 tax return. It is conceded that plaintiff filed a timely claim for refund of the tax. No refund has been forthcoming.
The $20,397.21 constituted interest received by plaintiff in 1962 on loans made by plaintiff to students pursuant to Sections 650-658 of the New York Education Law, McKinney's Consol. Laws, c. 16. The question is whether this interest constitutes "interest on the obligations of a State . . . or any political subdivision" of a state within the meaning of Section 103(a) of the Internal Revenue Code of 1954 (26 U.S.C. § 103(a)) which excludes such interest from a taxpayer's gross income. The answer to this question depends upon a determination of the legal effect, for federal income tax purposes, of the activities of the New York Higher Education Assistance Corporation (the "Corporation") created by Section 650 of the Education Law in 1957.
The purpose of the Corporation is "to improve the higher and vocational educational opportunities of persons who are residents of this state, and who are attending or plan to attend colleges or vocational institutions in this state or elsewhere, by lending funds to such persons, or guaranteeing the loan of funds to such persons, to assist them in meeting their expenses of higher or vocational education, . . ." (Section 651). To that end Section 653 empowers the Corporation to lend money to such students and also "to guarantee the loan of money" to them, up to certain specified maximums and under certain conditions not material here.
Section 653-a-1 provides that "[no] loan made or guaranteed by the corporation shall bear interest at a rate in excess of six per cent per annum . . . ." It further provides that the Corporation shall not guarantee any loan which bears interest at a rate higher than the then prevailing rate of interest up to a maximum of six per cent per annum unless the Board of Directors of the Corporation determines otherwise.
Section 653-a-3 provides:
"In the case of loans guaranteed by the corporation, there shall be paid to the corporation from the state treasury annually a sum sufficient to pay the amount of all of the interest payable pursuant to subdivision one of this section, on behalf and for the account of the borrower, by the corporation during the period during which the borrower is regularly pursuing the college or vocational institution program for which such loan was made and nine months thereafter . . . ."
It further provides that:
"Upon the borrower's completion of such college or vocational institution program . . . such interest accruing nine months thereafter on such loan, up to a maximum of three per centum per annum thereof shall be paid by the borrower directly, and any such interest in excess of said three per centum per annum thereof shall be paid by the corporation, on behalf and for the account of the borrower . . . . There shall be paid to the corporation from the state treasury annually a sum sufficient to pay the amount of any such interest in excess of said three per centum per annum thereof . . . ."
Section 653-b deals with repayments of such loans. Subdivision 1 provides:
"The terms and conditions of any loan made or guaranteed by the corporation shall not require the borrower thereof to commence the repayment of his loan and any interest which he may be obliged to pay thereon, earlier than one year following his completion or other termination of the college or vocational institution program for which such loan was made . . . . Such a borrower shall not be required to repay in full any such loan or any interest thereon earlier than within four years following his completion or other termination of his college or vocational institution program . . . ."
Pursuant to this statute plaintiff and the Corporation on June 19, 1961 entered into a "guaranty loan agreement." After reciting that the Corporation desires that plaintiff shall make loans to students, the agreement goes on to prescribe the procedure for the making of such loans. In substance it provides that any application by a student to plaintiff for a loan shall be submitted by plaintiff to the Corporation for approval and if approved, plaintiff will thereupon loan to the student the amount approved by the Corporation and will take in evidence of the loan a promissory note signed by the student in a specified form. The form of note annexed to the agreement to be signed by the student provides that the student promises to pay to plaintiff the principal amount of the note at maturity "and to pay interest upon the unpaid principal amount of this note" from the date of the note to maturity at the rate of six per cent. It ...