New York v. Jersawit

Background

A New York corporation called the Ajax Dress Company was adjudicated bankrupt after a petition was filed on December 22, 1920. The State of New York filed a claim for the annual franchise tax covering November 1, 1920 through October 31, 1921, and sought additional sums described in the tax law as “penal interest.” The lower courts apportioned the tax to the short period the company actually exercised its franchise and denied the statutory penalty charge, allowing only six percent interest on the apportioned amount to the date of payment.

Reasoning

The Court considered whether the tax was tied to actual business activity during the taxed period or to the corporate right to exist in the State. The tax was computed from the prior year’s net income and was required to be paid in advance. The Court concluded the tax was a charge on the corporate right or franchise, not on actual business carried on during the later period, and therefore the full annual tax was due when the bankruptcy petition was filed. The Court also held the separate ten percent addition for late payment was a penalty and could not be allowed in bankruptcy; the one percent monthly addition was treated as part of that statutory penalty and fell with it, leaving only ordinary interest.

Real world impact

States may assert full annual franchise tax claims against corporations that become bankrupt after the tax becomes due, rather than receiving a prorated portion. Statutory penalty charges for late payment are barred in bankruptcy, and states are limited to receiving simple interest on unpaid taxes in these circumstances.