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CERTIORARI TO THE COURT OF APPEALS OF NEW YORK No. 96-1462. Argued November 5, 1997-Decided January 21, 1998

New York Tax Law § 631(b)(6) effectively denies only nonresident taxpayers a state income tax deduction for alimony paid. Petitioners-a Connecticut couple required to pay higher taxes on their New York income when that State denied their attempted deduction of a pro rata portion of the alimony petitioner husband paid a previous spouse-exhausted their administrative remedies and commenced this action, asserting, among other things, that § 631(b)(6) discriminates against New York nonresidents in violation of the Privileges and Immunities Clause, U. S. Const., Art. IV, §2. The Appellate Division of the New York Supreme Court agreed and held § 631(b)(6) to be unconstitutional, but the New York Court of Appeals reversed, holding that § 631(b)(6) was adequately justified because New York residents who are subject to taxation on all of their income regardless of source should be entitled to the benefit of full deduction of expenses, while personal expenses of a nonresident taxpayer are more appropriately allocated to the State of residence. The court also noted that § 631(b)(6)'s practical effect did not deny nonresidents all benefit of the alimony deduction, because they could claim the full amount of such payments in computing their hypothetical tax liability "as if" a resident, one of the steps involved in computing nonresident tax under New York law.

Held: In the absence of a substantial reason for the difference in treatment of New York nonresidents, § 631(b)(6) violates the Privileges and Immunities Clause by denying only nonresidents an income tax deduction for alimony payments. Pp. 296-315.

(a) While States have considerable discretion in formulating their income tax laws, that power must be exercised within the limits of the Federal Constitution. When confronted with a challenge under the Privileges and Immunities Clause to a law distinguishing between residents and nonresidents, a State may defend its position by demonstrating that "(i) there is a substantial reason for the difference in treatment; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State's objective." Supreme Court of N. H. v. Piper, 470 U. S. 274, 284. Thus, New York must defend §631(b)(6) with a substantial justification for its different treatment of nonresidents, including an explanation of how the discrimination relates


to the State's justification. E. g., Shaffer v. Carter, 252 U. S. 37, 55. Pp.296-299.

(b) This Court's precedent respecting Privileges and Immunities Clause challenges to nonresident income tax provisions informs the review of the State's justification for § 631(b)(6). Travis v. Yale & Towne Mfg. Co., 252 U. S. 60, 80-82, and Austin v. New Hampshire, 420 U. S. 656, 665, make clear that the Clause prohibits a State from denying nonresidents a general tax exemption provided to residents, and Shaffer, supra, at 57, and Travis, supra, at 75-76, establish that States may limit nonresidents' deductions of business expenses and nonbusiness deductions based on the relationship between those expenses and in-state property or income. While the latter decisions provide States considerable leeway in aligning nonresidents' tax burden to their in-state activities, neither those decisions nor Austin can be fairly read to hold that the Clause permits States to categorically deny personal deductions to a nonresident taxpayer without a substantial justification for the difference in treatment. pp. 299-302.

(c) Respondents' attempt to justify § 631 (b) (6)'s limitation on nonresidents' deduction of alimony payments by asserting that the State only has jurisdiction over their in-state activities is rejected. The State's contention that, under Shaffer and Travis, it should not be required to consider expenses "wholly linked to personal activities outside New York" does not suffice. pp. 302-314.

(i) The New York Court of Appeals' decision upholding § 631(b)(6) does not contain any reasonable explanation or substantial justification for the discriminatory provision. The case on which that decision was based, Goodwin v. State Tax Commission, 286 App. Div. 694, 146 N. Y. S. 2d 172, aff'd, 1 N. Y. 2d 680, appeal dism'd, 352 U. S. 805, is of questionable relevance here, since it involved a state tax provision that is not analogous to § 631(b)(6), was rendered before New York adopted its present system of nonresident taxation, and was called into doubt in a subsequent decision. Unlike the New York Court of Appeals, this Court takes little comfort in the fact that inclusion of the alimony deduction in a nonresident's federal adjusted gross income reduces the nonresident's "as if" tax liability, because New York effectively takes the alimony deduction back in the "apportionment percentage" used to determine the actual tax owed. In summarizing its holding in the present case, the New York Court of Appeals explained that, because there could be no serious argument that petitioners' alimony deductions were legitimate business expenses, the approximate equality of tax treatment required by the Constitution was satisfied. This Court's precedent, however, should not be read to suggest that tax schemes allowing nonresidents to deduct only their business expenses are per se constitu-

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