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decided: December 11, 1969.


Matter of Brodsky v. Murphy, 30 A.D.2d 904, affirmed.

Judges Burke, Bergan and Jasen concur with Judge Breitel; Judge Scileppi dissents and votes to reverse in a separate opinion in which Chief Judge Fuld concurs; Judge Gibson taking no part.

Author: Breitel

 The issue on this appeal is whether a taxpayer entitled to a refund of taxes improperly paid and collected by the State under compulsion is also entitled to interest on the refund from the time of payment of the taxes, the particular statute authorizing refunds being silent concerning interest. The issue is raised in a proceeding under CPLR article 78 in the nature of mandamus, following the refusal of the State Tax Commission to direct the payment of interest on the refund of the mortgage taxes required in an earlier proceeding. The tax had been erroneously imposed on a supplemental mortgage, which, having created no new or further indebtedness or obligation, was entitled under the Tax Law to an exemption from a recording tax. (20 N.Y.2d 828, affg. 26 A.D.2d 225.)

Special Term held that there was no right to interest absent a provision therefor in the mortgage tax refund statute (Tax Law, § 263). The Appellate Division affirmed, but solely on the procedural ground that the taxpayers must first obtain an amendment of the remittitur handed down by this court in the prior proceeding (30 A.D.2d 904). Since the majority in this court concludes that the taxpayers are not entitled to interest on the refund, it is unnecessary to resolve the procedural choice, namely, whether to amend the remittitur in the prior proceeding or to determine the substantive issue in the present proceeding. In either event, the order of the Appellate Division should be affirmed, and on the merits amendment of the remittitur would be denied.

Whether, before interest may be added to a tax refund, there must be express statutory direction or authorization has been unclear in this State and without uniformity elsewhere in the nation (see, generally, Ann.: Tax Refund or Credit -- Interest, 88 A.L.R. 2d 823, esp. at pp. 825-827, discussing the cases in this State).

The leading case in this State is Matter of O'Berry (179 N. Y. 285). Involved was a taxing statute struck down as wholly void and unconstitutional. Noting this circumstance the court repeatedly emphasized the unthinkability of taking a taxpayer's property unconstitutionally and not reimbursing him by the payment of interest for the period during which he was deprived. Thus, it was said: "It was a void tax and not merely voidable for some irregularity or error, and had no support except an unconstitutional statute. It confers no rights, imposes no duties, confers no powers, and in legal contemplation is as inoperative for any purpose as if it had never been passed" (179 N. Y., at p. 287). In discussing the rule it was propounding, however, the court a number of times referred generally to any taxes collected illegally without distinction whether the illegality stemmed from an absolutely void and unconstitutional statute or simply from an erroneous application of a valid statute.

The O'Berry case (supra) has been applied to taxes erroneously collected under an otherwise valid statute (People ex rel. Metropolitan Trust Co. v. Travis, 191 App. Div. 129; People ex rel. Knickerbocker Trust Co. v. Kelsey, 114 App. Div. 319). On the other hand, the view was expressed with cogency, albeit by way of alternative ratio decidendi, that the O'Berry rule is confined to refunds under wholly void taxing statutes (Matter of Empire Trust Co. v. Tremaine, 160 Misc. 239, 242 [Bergan, J.]). And, in cases involving governmental refunds, other than taxes, the courts have refused to allow interest absent authorization or direction in the statute (Matter of Brophy v. Prudential Ins. Co., 246 App. Div. 871, affd. 271 N. Y. 644; Matter of Johnson v. O. C. Buck Expositions, 22 A.D.2d 993). In the Brophy case, the O'Berry case was called to the attention of the court, but, nevertheless, interest was denied. In this state of the decisional law there is no unequivocal direction under the doctrine of stare decisis, and no unambiguous indication of the legislative intention which would be paramount and controlling.

Looking to the statutory arrangements there is also lacking a uniform pattern. There are statutes which expressly provide that there shall be no interest on refunds (Tax Law, § 434, subd. 1 [taxes on alcoholic beverages]; id., 214, subd. 2 [corporation franchise taxes]; id., § 248-f [transfers of property by nonresidents]; id., §§ 249-f, 249-aa [estate taxes]; Pari-Mutuel Revenue Law [L. 1940, ch. 254, as amd.], § 9, subd. 1 [parimutuel taxes]; cf. Tax Law, § 476 [cigarette sales taxes]).

On the other hand, there are other statutes which direct the payment of interest on tax refunds (Tax Law, § 1139, subd. [d] [sales and use taxes]; Real Property Tax Law, § 726, subd. 1, par. [a]; subd. 2 [real property taxes]; General City Law, § 25-a [Model Local Law, § 66, subd. (a)] [local income taxes]). There are also specially conditioned interest statutes with respect to estate taxes, personal income taxes, and certain corporate taxes (Tax Law, §§ 249-h, 249-z, 688, 1088).

There are a very few other tax statutes like the one involved in this proceeding which are absolutely silent on whether interest should or may be paid on tax refunds (Tax Law, § 263 [mortgage taxes involved in this case]; id., § 280 [stock transfer taxes]; id., § 289-c [gasoline taxes]). Consequently, their fewness of number suggests that they do not present a problem of widespread significance.

In the meantime, however, a pragmatic disposition consistent with the precedents insofar as they speak decisively to the problem is indicated. The reasoning of the O'Berry case (supra) would appear to be invulnerable as applied to a statute wholly void. Such a statute, as the O'Berry court noted, is as if it had never been. Moreover, it involves a higher degree of intrusion upon the rights of the taxpayer. Lastly, insofar as any refund provision may be included in such a statute, it falls with the statute of which it is a part (cf. Richfield Oil Corp. v. City of Syracuse, 287 N. Y. 234, 239, and Dun & Bradstreet, Inc. v. City of New York, 276 N. Y. 198, 206-207 [availability of a declaratory judgment action to review a tax statute providing an exclusive remedy but attacked as unconstitutional]). On the other hand, with respect to tax refunds under valid statutes there may be many countervailing circumstances for the erroneous collection and payment, not always the responsibility of the tax collector but often caused by the slipshod or otherwise culpable conduct of the taxpayer. With respect to such tax refunds, interest is not authorized unless the tax statute or other statute applicable to refunds explicitly makes provision for the payment of interest, and perhaps with such limitations, conditions, and qualifications as may be appropriate to correct whatever injustice has resulted from the imposition and collection of the tax under a valid statute.

In reaching these conclusions the provisions of CPLR governing accrual of interest on claims, decisions, and judgments have been noted (CPLR 5001, subd. [a], 5002). The statutes, it would seem, make one thing clear, namely, that the Legislature did not leave the question of interest to be covered by the general practice statutes. There are just too many tax statutes that cover the issue expressly, one way or the other. Moreover, tax refunds are largely handled administratively and not under the provisions of CPLR. Inequality would result solely on the basis of whether the taxpayer receives his refund administratively or by special judicial proceeding. This would make little sense. Nevertheless, once there is a proper judgment directing a refund it would seem that the CPLR provision (5003) governing interest on judgments, which has an ancient lineage, should govern.

Accordingly, the order of the Appellate Division should be affirmed without costs.


Order affirmed.

Scileppi, J. (dissenting). While I disagree with the majority's conclusion that the substantive question is now properly before us, I will limit my discussion to the merits of that issue.

Although the question before us has not been often litigated in our State, this court's decision in Matter of O'Berry (179 N. Y. 285) evidences that our State has adopted the view that a tax refunding statute silent as to interest carries with it a right to such interest.

In the O'Berry case, the court stated (p. 287) that "the only question before us is whether the Comptroller, having received the money without right and used it for the purposes of the state under a promise to refund it, was properly charged by the court with interest". The Comptroller argued that the statute, pursuant to which he was required to act, being silent as to interest, he was without power to pay interest and the court was without power to impose interest. In rejecting this contention the court stated: "The state, having received the money without rights, and having retained and used it, is bound to make the party good just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest." (Matter of O'Berry, supra, at p. 288.)

"What the state agreed to do, it is said, was to refund, and it complies with its promise by restoring the bare sums received without interest. I can only add that this contention is not only contrary to principle and to all authority on the question, but is unworthy of a great state." (supra, at p. 293).

Our holding in O'Berry was subsequently followed in two Appellate Division cases directly on point (People ex rel. Metropolitan Trust Co. v. Travis, 191 App. Div. 129; People ex rel. Knickerbocker Trust Co. v. Kelsey, 114 App. Div. 319).

The Tax Commission, however, (relying upon the dictum in Matter of Empire Trust Co. v. Tremaine, 160 Misc. 239, [Bergan, J.]) attempts to distinguish O'Berry from the case at bar by drawing a distinction between refunds granted pursuant to void and voidable taxing statutes. The argument is advanced that in O'Berry the taxing statute was held unconstitutional and thus void; ergo, the conclusion that the State improperly held the money ab initio. Where, however, the argument continues, the tax is paid, such as in the instant case, pursuant to a valid taxing statute, the tax is properly computed and collected and is merely voidable because of a construction placed upon the statute. Thus, the conclusion is urged that the State properly holds the tax collected until such time as the statute is construed in favor of the taxpayer. The distinction is tenuous for in neither case does the official have the right to collect the tax. When a court determines that a tax has been improperly imposed in the case of the so-called voidable taxing statute, it does not say to the sovereign that the imposition of the tax was lawful up until this moment and, therefore, you can keep all the benefits you derived from the use of the funds up until the date of our decision; rather, the court says you never had the right to impose the tax in the first instance. Thus, the State should be obligated to refund not only the money received but also any benefits derived from the use of the funds during the period of retention. The imposition of interest is merely a reasonable method of assessing those benefits.

Accordingly, the order of the Appellate Division should be reversed.


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