Academic journal article Albany Law Review

The Parameters of the Substantial Justification Test as Established by the Supreme Court in Lunding V. New York Tax Appeals Tribunal

Academic journal article Albany Law Review

The Parameters of the Substantial Justification Test as Established by the Supreme Court in Lunding V. New York Tax Appeals Tribunal

Article excerpt


The Privileges and Immunities Clause of the United States Constitution prohibits a state from enacting laws designed to discriminate in favor of citizens of that state over citizens of other states.(1) The United States Supreme Court has often decided the constitutionality of state taxing statutes based on the Privileges and Immunities Clause.(2)

In the recent case of Lunding v. New York Tax Appeals Tribunal,(3) the Supreme Court, in a six to three decision, ruled that a New York State statute which effectively denied a nonresident taxpayer a deduction from his New York State income tax for alimony payments made to a former spouse, violated the Privileges and Immunities Clause.(4) Such tax treatment discriminated against the nonresident taxpayer because New York tax statutes permitted a state resident to deduct such alimony payments against his income before computing his New York State income tax.(5)

According to the majority opinion of the Court, a state, under its taxing system, must provide substantial equality of treatment for nonresident and resident taxpayers.(6) Nonetheless, the Court recognized the Privileges and Immunities Clause does not require exact equality of treatment between nonresident and resident taxpayers.(7) If a state fails to provide identical tax treatment for nonresidents, the state must provide a substantial reason or justification for the disparate treatment afforded the nonresident, and must also furnish an explanation of the manner in which such discriminatory treatment of the nonresident relates to the state's reason or justification.(8)

The Court's test for satisfying the requirements of the Privileges and Immunities Clause requires any discriminatory treatment of nonresidents be reasonable in effect and predicated on a substantial justification other than nonresidence.(9) Although the Court formulated this test, it failed to clearly articulate the parameters under which the rule could be applied. The Court blurred the boundaries of its standard by distinguishing alimony payments, which it characterized as a personal deduction, from other personal deductions, such as mortgage interest payments and real property taxes.(10) The Court suggested that states may permissibly discriminate against nonresident taxpayers by disallowing mortgage interest deductions and real estate tax deductions only for homes located outside of the taxing state.(11) The Court asserted that alimony payments are largely determined by an individual's income, wherever earned, whereas mortgage interest and real estate taxes can be attributed to geographic location of the property.(12) However, it failed to articulate why the physical situs, outside of New York, of the source of the personal expense deduction necessarily made the discriminatory treatment reasonable in effect and also established a substantial justification for such discrimination.

In dissent, Justice Ginsburg questioned the majority's view which seemed to base the deductibility of certain personal expenses solely on the geographic situs of the source of the expense.(13) She challenged the rationale for denying a nonresident a deduction for a personal expense based solely on the location of the source which produced the expense.(14) She argued that income, wherever earned, has a greater correlation to an individual's spending habits and abilities than the geographic location of items purchased with respect to where the personal expenditure is made.(15) Notwithstanding this observation, Justice Ginsburg ultimately determined the alimony payments of Lunding were personal expenses which neither took place, nor provided any benefit to New York.(16)

The Supreme Court failed to explain why the situs of the personal expense could dictate its deductibility. Apparently, a substantial justification for discrimination against a nonresident could exist if the personal expense of the nonresident was situated outside the taxing state. …

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