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Volume 6 - Opinions of Counsel SBEA No. 34

Opinions of Counsel index

Taxes (collection) (railroads - reduced payments) - New York State Constitution, Article VIII, § 1; Real Property Tax Law, § 1097:

A municipal corporation may accept notes of the reorganized Penn Central Transportation Company as payment in compromise of unpaid taxes.

Our opinion has been requested as to whether a taxing jurisdiction entitled to accept payment at reduced rates in cancellation or compromise of unpaid taxes levied against real property or railroad corporations in bankruptcy, receivership, or the like, pursuant to chapter 817 of the Laws of 1959 {*}, may accept notes from the Penn Central Transportation Company. There is a constitutional issue involved in this question: the possibility that acceptance of the notes would violate Article VIII, section 1, of the New York State Constitution, which prohibits municipal corporations from becoming owners of stocks or bonds of any private corporation. This language was intended to end the abuses which grew out of the exercise by municipalities of the power to issue bonds and to use their credit and funds for the construction of railroads. This intent is substantiated by early case law.

In Sun Printing and Publishing Association v. The Mayor of New York, 152 N.Y. 257,46 N.E. 499, the Court of Appeals considered what is now section 1 of Article VIII and stated the following (at 268-269):

This provision should be construed with reference to the evils it was intended to correct. It first found place in the Constitution in 1874. Prior to this, there had been upon the statute books that which was commonly known as the Town Bonding Act. Under it numerous railroads had been built upon the bonds procured from towns through which they were constructed in return for stock issued by the corporations. The inhabitants of the towns were induced to give their consent through supposed benefits that would result to their property and upon representations that the earnings of the road would provide dividends upon the stock, with which they could pay their bonds. In some instances the bonds were procured and sold and the roads never built. In many other cases the roads in a few years were sold out under foreclosure of mortgages and the stock cut off. So great was the evil and so heavy was the burden upon the towns that relief was sought through a constitutional provision. It was this evil that the provision in question was intended to correct, and with this situation in view it should be construed. (emphasis added)

Clearly no such evil is present under the circumstances of the Penn Central case. The municipal corporations which have levied taxes on Penn Central property have been specifically precluded from collecting such taxes or enforcing the liens thereof by Order No. 70 (entered October 26, 1970) of the federal court in bankruptcy. They would not be investing municipal funds, in the traditional sense of the word “investing,” by the acceptance of the notes in question; rather, they would be seeking to ensure that the full amount of taxes previously levied be paid, albeit over an extended period of time.

Two opinions of the State Comptroller, 2 Op.State Compt. 282 and 341, suggest that acceptance of notes or stock of a private corporation by a municipal corporation is not per se unconstitutional. In the first opinion, it was declared that “[w]here a bank acting as a depository of the funds of a school district was reorganized after the bank holiday of 1933 and as a result of such reorganization the school district received stock in such bank, the school district [could] not continue to hold such stock for investment purposes.” This opinion implies that while a municipal corporation may not acquire stocks or bonds of a private corporation for investment purposes, it may be constitutional to accept stocks or bonds in anticipation that the underlying debt-in this case, the now unenforceable tax liens - will be paid in full.

May 31, 1977

{*This law was repealed but substantially reenacted as section 1097 of the Real Property Tax Law by chapter 709 of the Laws of 1977, effective August 5, 1977.