[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 13 In January, 1931, the Scripps-Howard organization became interested in acquiring the New York World and the New YorkTelegram and this was accomplished by acquiring through various corporations the names, good will and intangible assets of the morning and evening World and all the assets, tangible and intangible, of the New York Telegram. As the result of various changes of corporate names and intercorporate transactions the properties were vested in two companies: World-Telegram Building and Equipment Corporation (which will be referred to as the Equipment Company) and New York World-Telegram Corporation (which will be referred to as the Publishing Company).
The Equipment Company had acquired possession of the premises at the northeasterly corner of West and Barclay Streets under lease from Rhinelander Real Estate Company and was obligated to pay the rentals reserved in the lease. It had acquired all of the equipment used in the business of publishing the New YorkWorld-Telegram from the Publishing Company, for which it had given its 6% notes to the Publishing Company to cover the cost of the equipment. The Equipment Company had also borrowed from the Publishing Company sums required for rent under the Rhinelander lease and additional sums to meet the building costs of a new ten-story building, which were also evidenced by its 6% notes.
The purpose of thus vesting all of the physical property in the Equipment Company, which was not engaged in the conduct of the newspapers, was to make available as security for an issue of preferred stock assets costing some three and a half million dollars plus the obligations of the Publishing Company as lessee of the building and equipment. Accordingly, the Equipment Company entered into a lease of the real estate and all of the equipment to the Publishing Company, which owned all of its stock. This lease was executed as of October 1, 1931.
There was no sales tax in the city of New York when these transactions occurred. Pursuant to the enabling act (L. 1934, ch. 873), both branches of the municipal assembly of the City *Page 16 of New York enacted the first New York City sales tax, which became law on December 5, 1934, when it was approved by the mayor. Eight years later, and more than eleven years after the lease was executed, the comptroller, on June 30, 1943, assessed a sales tax of 2% against the Publishing Company upon payments made under the lease during the period from December 10, 1934, to June 30, 1940, which he allocated to the personal property. The original assessment with penalty interest amounted to $43,788.15, which was increased to $49,570.27 by an additional assessment for penalty interest on May 1, 1945.
Before considering the lease it is important to bear in mind that the validity of this assessment does not turn upon whether the lease may be regarded as a sale for both parties contend that the tangible personal property was sold. The taxpayer contends that the personal property which was delivered in 1931, was sold before the sales tax was enacted, and that it was not the purpose of the law, which became effective in December, 1934, to tax prior sales of property delivered before the act took effect, even though payments therefor may have been made thereafter.
The law itself and the comptroller's regulations disclose the legislative purpose to exclude such sales. The law (§ 2) imposed a tax of 2% upon the amount of the receipts from every taxable sale in the city of New York for the period beginning December 10, 1934, to and including December 31, 1935, and it was provided (Local Laws, 1934, No. 24 of City of New York [published as No. 25], p. 167): "The tax imposed by this local law shall be paid upon all sales made and services rendered on and after December tenth, nineteen hundred and thirty-four, although made or rendered under a contract dated prior to December tenth, nineteen hundred and thirty-four. * * * The comptroller may provide by regulation that the tax upon receipts from sales on the installment plan may be paid on the amount of each installment and upon the date when such installment is due."
The word "sale" or "selling" was defined in subdivision (e) of section 1, as follows (Local Laws, 1934, p. 165): "(e) The word `sale' or `selling' means any transfer of title or possession or both, exchange or barter, license to use or *Page 17 consume, conditional or otherwise, in any manner or by any means whatsoever for a consideration, or any agreement therefor, and may include the rendering of any service specified in section two of this local law".
Subdivision (a) of section 11 of Local Law No. 20, as amended (published as No. 21), authorized and empowered the comptroller to make, adopt and amend rules and regulations appropriate to the carrying out of this local law and the purposes thereof, and on February 11, 1935, the comptroller promulgated the official regulations provided for in subdivision (a) of section 11 (N Y City Sales Tax Rules and Regulations — 1935). Among other problems, the comptroller's regulations dealt with the taxability of receipts from sales made before December 10, 1934, and in this connection provided:
"Article 29. — The tax is imposed upon the receipts of every sale of tangible personal property (except such property as is specifically exempted therefrom) at retail in the city of New York on and after December 10, 1934. * * *
"Where tangible personal property was sold and delivered to the purchaser thereof prior to December 10, 1934, no tax is imposed upon the amount of the receipts therefrom even though all or any part of the purchase price was paid after December 10, 1934.
"Where a contract for the sale of tangible personal property was made prior to December 10, 1934, and such property was sold to the purchaser on and after December 10, 1934, the purchaser is required to pay the tax to his vendor on the total selling price thereof. If at the time the contract was made, the purchaser made a down payment, he is required to pay the tax on the unpaid balance due on and after December 10, 1934.
"Where tangible personal property was sold on the installment plan and delivered to the purchaser before December 10, 1934, the tax does not apply to the receipts therefrom even though payment therefor is made on and after December 10, 1934."
The incidence of the tax is sale after December 10, 1934. The statute and the regulations leave no doubt that sales made before its effective date are not to be taxed. By express statutory definition conditional sales are sales within the meaning of the statute. Therefore, a conditional sale of tangible personal *Page 18 property is not taxable if the goods were delivered to the conditional vendee before the tax became effective. All of the tangible personal property was delivered to the appellant under the agreement on or about October 1, 1931. If that delivery was upon a contract of conditional sale or upon an unconditional obligation to pay for it in installments, the comptroller's assessments are without validity.
The agreement is cast in the form, style and language of a lease, but we must look to the rights it confers and the obligations it imposes to determine whether it has the essential attributes of a contract of conditional sale or of an installment sale (Central Union Gas Co. v. Browning, 210 N.Y. 10). If the conditional vendee has possession of the chattel, is obligated to pay for it and, having paid, becomes or has an option to become the owner of it, the vendor retaining the right to retake the goods if the conditional vendee defaults in his obligation to pay for them, there is a conditional sale (Central Union Gas Co. v.Browning, supra; Gardner v. Town of Cameron, 155 App. Div. 750, affd. 215 N.Y. 682; Ohl Co. v. Standard Steel Sections,Inc., 179 App. Div. 637; Equitable General Providing Co. v.Eisentrager, 34 Misc. 179).
Section 61 of the Personal Property Law, which is taken from section 1 of the Uniform Conditional Sales Act, is a statement declaratory of the law generally prevalent throughout the United States. See 2 Uniform Laws Annotated, section 1, Commissioner's Note, citing many cases in which leases have been construed to be conditional sales contracts where the buyer upon payment of rentals became or had the option to become the owner of the goods. Additional authorities are collected in Uniform Laws Annotated (Vol. 2A, § 13, p. 21). Section 61 of the Personal Property Law reads as follows:
"§ 61. Definitions. In this article `conditional sale' means (1) any contract for the sale of goods under which possession is delivered to the buyer and the property in the goods is to vest in the buyer at a subsequent time upon the payment of part or all of the price, or upon the performance of any other condition or the happening of any contingency; or (2) any contract for the bailment or leasing of goods by which the bailee or lessee contracts to pay as compensation a sum substantially equivalent to the value of the goods, and by which it is agreed that the *Page 19 bailee or lessee is bound to become, or has the option of becoming the owner of such goods upon full compliance with the terms of the contract."
All of the essential attributes of a conditional sale will be found in the provisions of the agreement and lease under the terms of which the Publishing Company regained possession of the equipment which it had transferred to the Equipment Company in exchange for its notes; the use of the land which the Equipment Company had acquired under the Rhinelander lease upon which the Publishing Company paid the rent, and and also the use of the building on this land the cost of which it had advanced to the Equipment Company. The Publishing Company owning all of the stock of the Equipment Company, its apparent purpose was to take advantage of a separate corporate structure to insulate valuable assets against the risks of the publishing business, but both the building and the equipment had been acquired for use in that business, and so the lease was made giving the Publishing Company possession and control of these properties but requiring the Publishing Company to make payments, called installments of rent, which would cover all costs and expense which it would have been required to pay if there had been no Equipment Company. It was even required to pay as "rental" the interest on the Equipment Company's notes which the Equipment Company was obligated to pay to it — no doubt to give these notes security which might make them attractive investments. Under these circumstances it is not surprising to find that the lease carefully provided that the Publishing Company upon performance of its obligations under the lease should become, or have the option to become, the owner of all of the leased property. It is quite obvious from the relation of the parties, the character of the transaction, the properties involved and the frame and structure of the documents used that the instrument was much more than a lease upon the termination of which the real and personal property would revert to the lessor, and that it had all the attributes of a conditional sale under which the lessee upon performance of its obligations would become the owner of all the leased property.
The agreement is called an agreement and lease. In terms it is a lease to the lessee and a hiring from the lessor of real *Page 20 estate in New York City, together with the buildings and improvements thereon, and of:
"(c) Personal Property: The following-described goods and chattels, to wit:
"Presses, type, typesetting and stereotyping machinery, desks, filing cabinets, and all other machinery, equipment, furniture and fixtures belonging to the Lessor and located or contained in the building situated on the above-described tract of land and in premises occupied by the Lessee at 305 East 45th Street, 460 West 34th Street and elsewhere in the City of New York or State of New York, together with all other machinery and equipment hereafter acquired by the Lessor; it being the intent and purpose of this instrument to sublease to the Lessee all rights of the Lessor herein and in and to said real estate, and all buildings, improvements and appurtenances upon the said premises covered by said Rhinelander lease, and to lease all tangible personal property of the Lessor wherever located."
The term of the lease is for twenty years, with three further terms of twenty-one years each at the lessee's option. The lease required the lessee to pay rent beginning October 1, 1931:
(a) the equivalent of the rentals payable by the Equipment Company under the Rhinelander lease;
(b) one-half per cent per month on the par value of all shares of preferred stock of the Equipment Company issued and outstanding, being the amount required to pay dividends upon this stock;
(c) an additional amount, payable quarterly through a sinking fund or otherwise, sufficient to redeem the Equipment Company's preferred stock in accordance with its certificate of incorporation;
(d) all taxes upon the assets, earnings and business of the Equipment Company;
(e) all other obligations assumed and undertaken by the Equipment Company under the Rhinelander lease; other expenses of the Equipment Company, "including a reasonable charge for or on account of depreciation on said building, machinery, equipment and all Leased Property above specified."
It should be noted that all these obligations are definite except "a reasonable charge for or on account of depreciation on said building, machinery, equipment and all Leased Property above *Page 21 specified." However, the parties, in the performance of their agreement, adopted straight line rates of depreciation which they regarded as reasonable — 2% annually on the cost of the building and 10% annually on the cost of the personal property. Thus the tenant became obligated to pay for the entire cost of the personal property within ten years and well within the first term of the lease.
It was further provided that the agreement and lease should "continue in full force and effect during the term of any renewal or renewals of said Rhinelander lease (whether or not made at the request of the Lessee herein) so long as (a) any Preferred stock of the Lessor shall remain outstanding and/or (b) any of the notes of the Lessor outstanding on October 1, 1931, shall remain unpaid; unless and until the Lessee herein shall sooner exercise its option as provided in Paragraph (11) hereof and shall have paid the price therein specified."
Thus, except by mutual consent, the agreement and lease contemplated by the parties was to continue until all of the lessor's preferred stock had been redeemed and all of its notes, representing the cost of the building, had been paid, unless the tenant (the lessee) exercised its option under paragraph (11) of the lease to purchase all the right, title and interest of the lessor in the Rhinelander lease and the described premises with the buildings thereon, together with all machinery, equipment and other property covered by the lease and owned by the lessor at any time after October 1, 1937. The price to be paid in the exercise of this option was the cost of the machinery and equipment, less depreciation paid, and the cost of the buildings and improvements thereon, less depreciation paidthereon, and in this connection the lessor agreed that all moneys paid to it under this option should be used to redeem its outstanding preferred stock and to pay its said notes before said moneys were used for any other purpose, and further agreed to apply the proceeds from all sales of its preferred stock, first, to pay outstanding notes of the lessor representing the costs of building, machinery and equipment, and thereafter as its board of directors might deem best.
The option clause in paragraph (11) of the agreement and lease reads as follows: "(11) The Lessor agrees that, all the *Page 22 covenants and conditions of this lease being fully performed by the Lessee, the Lessee shall have an option to purchase all the right, title and interest of the Lessor in said Rhinelander Lease and the above-described premises with all the buildings thereon and appurtenances thereunto belonging, together with all machinery and equipment and other property covered by this lease and owned by the Lessor, at any time after October 1, 1937, on giving the Lessor ninety (90) days' written notice of the election of the Lessee to exercise said option. The price to be paid shall be the sum of (a) the cost of said machinery and equipment less amounts paid by Lessee to Lessor on account of depreciation of said machinery and equipment up to the date of expiration of said ninety (90) days' notice, plus (b) the cost of said buildings, appurtenances and improvements less amounts paid by Lessee to Lessor on account of depreciation of said buildings, appurtenances and improvements up to the date of expiration of said ninety (90) days' notice. The Lessor hereby agrees that all monies paid to Lessor under this Paragraph shall be used by Lessor to redeem its outstanding Preferred stock and to pay its said notes before any of said monies are used for any other purpose. Lessor also agrees to apply the proceeds from all sales of its Preferred stock first to pay outstanding notes of the Lessor representing cost plus carrying charges for erection and purchase of the building, machinery, and equipment referred to above, and thereafter for such other corporate purposes as its Board of Directors may deem best. Upon the Lessee paying the said sums in cash to the Lessor on or before the date of expiration of said ninety (90) days' written notice, the Lessee shall be entitled to receive from the Lessor such instrument or instruments, duly executed and delivered, as will convey all right, title and interest of the Lessor (herein) in and to said Rhinelander lease and said land, buildings, appurtenances, improvements, machinery and equipment, to the Lessee, free and clear of all incumbrances whatsoever. In event the Lessee does not so pay for said land, building, appurtenances, improvements, machinery and equipment in cash on or before five (5) days after the date specified in said notice then the Lessee's right to purchase said land, buildings, appurtenances, improvements, machinery and equipment as herein stated shall be forfeited." *Page 23
The phrase "at any time after October 1, 1937," refers to the date on which under its charter the Equipment Company was given the right to call its preferred stock for redemption. The option price was to be the cost of the machinery, equipment, buildings, appurtenances and improvements, less the depreciation paid thereon under the provisions of the lease. All these costs, including depreciation at the reasonable rates fixed by the parties, were required to be paid as part of the rent. If such payments were not made when due, the Equipment Company was to be entitled to terminate the lease and retake the leased property, but if the Publishing Company did not default in its payments it was to have the option of becoming the owner of all the leased property, and this was bound to happen before the termination of the lease. Before that could happen, the entire option price (namely, the cost of leased property less depreciation paid) would have necessarily been paid, and the lessee, within the definition of a conditional sale, would have had the option to become the owner without further payments. This event was anticipated by voluntary action upon the part of the Publishing Company in 1941, when it contributed to the Equipment Company $1,100,000 which then retired its outstanding preferred stock, transferred all of its property to the Publishing Company and was dissolved. The fact that the two corporations thus liquidated the situation in anticipation of the liquidation which was required by the agreement and lease does not in the slightest degree change or impair the character of the transaction, which was not merely a lease but a conditional sale, nontaxable because it occurred prior to the enactment of the taxing statute.
The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, and the determination of the comptroller annulled.