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Volume 4 - Opinions of Counsel SBEA No. 9

Opinions of Counsel index

Aged exemption (income requirement) (loss carryback/carryover) (net income from self-employment) - Real Property Tax Law, § 467:

When computing net income from self-employment for purposes of Real Property Tax Law, section 467, losses sustained in a previous year may not be used to offset actual income in a subsequent year. Only losses actually sustained in a particular year should be used to offset income in that year.

Our opinion has been requested concerning the income requirement of section 467 of the Real Property Tax Law, the so-called aged exemption. An applicant for this exemption has apparently claimed that he meets the income requirement of the statute because net operating losses, which he sustained in the operation of his business in 1972, and which he carried over to his 1973 federal income tax return (pursuant to section 172 of the Internal Revenue Code), exceed his actual income for the tax year 1973. The question is whether losses sustained in a previous year may properly be used to offset actual income in a subsequent year for the purpose of determining income eligibility for the aged exemption in such subsequent year.

Subdivision 3(a) of section 467 provides that no exemption shall be granted if the income of the applicant exceeds the limit set by the granting municipality (a figure not lower than $3,000 nor higher than $6,000). This subdivision further provides that “[s]uch income shall include social security and retirement benefits, interest, dividends, net rental income, salary or earnings, and net income from self-employment, but shall not include gifts or inheritances.”

Relying on this statutory language we have consistently stated that whether moneys received are taxable or nontaxable for federal or state income tax purposes is immaterial to the issue of inclusion or exclusion for purposes of the aged exemption. The legislative intent would appear to be to exclude persons from the benefits of this statute who have more than a set amount of cash accruing to them from all sources with which to meet expenses, excluding gifts and inheritances. In this connection, attention is directed to a 1973 decision of the Court of Appeals where the matter was treated in part (Engle v. Talarico, 33 N.Y.2d 237, 306 N.E.2d 796, 351 N.Y.S.2d. 677). There the Court stated, at page 679, that:

[T]he Legislature expressed no intention of incorporating the federal or state tax rules into the exemption statute. Absent direction to the contrary, the term “income”, as used in the particular statute, must be judicially construed.

In its decision the Court supported a qualified “cash flow” concept, and, among other things, held that federal income tax rules notwithstanding, a depreciation deduction could not be allowed with respect to income-producing property for purposes of section 467. Thus, it should be apparent that the ordinary income tax rules do not apply when computing income for purposes of section 467.

For federal income tax purposes, taxable income is ordinarily determined on the basis of an annual accounting period. That is to say, the income items, deductions, etc., must be totaled at the end of the taxable year. If at this time the deductions exceed the gross income, the excess may not, as a matter of right, in every case, be applied against income of another year. However, section 172 of the Internal Revenue Code permits the application of such excess against the income of other years if the loss was incurred in trade or business, or from a casualty loss or loss on the sale of depreciable property or real estate used in trade or business.

Pursuant to that section, losses from the operation of a business can be carried back three years preceding the loss year. If not entirely used to offset income in those years, a loss can be carried forward for as many as five years succeeding the loss year. However, a net operating loss for a taxable year must first be carried back before it may be carried forward (Internal Revenue Code, § 172 (b) (2); i.e., a taxpayer with net operating losses in 1972 would first have to apply such excess to his tax return in 1969, then 1970, and 1971 before being permitted to carry over any excess to 1973 and beyond).

One explanation for the development of this concept in the income tax laws is found in the following language from Mertens, Law of Federal Income Taxation (vol. 5, chap. 29, p. 3):

In all its variations it has represented a response of Congress to the hardships caused by the taxable year as the measuring unit of time for determining tax liability, and in its inception in 1919 and its revival in 1939 was intended to favor taxpayers whose income was apt to fluctuate from year to year as well as those taxpayers whose business was in a period of development.

Such purpose does not coincide with the purpose of the aged exemption as stated in the Governor’s memorandum which accompanied approval of the original bill (L.1966, c.616), viz., to permit “. . .local governments to exempt from real property taxation – to the extent of fifty percent of assessed value – residential real property owned and occupied by persons aged sixty-five or over whose income is less than $3,000 per year.”

It would appear that the import of Engle v. Talarico, supra, is that income for purposes of section 467 is to be determined by actual cash income for the year in question less losses actually sustained in that year, and thus an income tax concept such as the net operating loss carryback/carryover would be alien to the income concept of section 467.

This is evidenced by the fact that under the Internal Revenue Code, such losses must first be carried back to the three years preceding the actual loss; if such a procedure were applicable to income reporting for purposes of section 467, the question would arise as to whether an individual might be entitled to the exemption retroactively (i.e., if the taxpayer had net operating losses sufficient to offset his income for each of the three previous years, would he then be entitled to some sort of rebate of taxes if he was otherwise qualified for this exemption at the time?). There is no statutory authority for the granting of this exemption retroactively and therefore it should be apparent that the net operating loss carryback/carryover concept has no place in income reporting for purposes of section 467.

We have previously stated that where an individual sells property under an installment method, whether or not he opts for the installment method of reporting income for Federal income tax purposes (Internal Revenue Code, § 453), his income for purposes of section 467 includes the gain he realizes each year from such sales. That is to say, such individual could not report all the gain he would be entitled to over the length of the installment contract in the first year since he would be receiving actual cash gain in each succeeding year of the contract. Conversely, actual losses sustained in one year should not be carried over to subsequent years for purposes of section 467 since no losses are actually being sustained then.

Therefore, it is our opinion that the Federal income tax concept of a net operating loss carryback/carryover is not applicable for determining income eligibility under section 467. Only losses actually sustained in a particular year should be used to offset income in that year.

September 6, 1974

NOTE:   Construes law prior to L.1992, c.145, which allowed the income of only one spouse to be considered under certain circumstances. Note also that the maximum income limitation has been repeatedly increased since this Opinion was issued.