People ex rel. Studebaker Corp. of America v. Gilchrist

• Citation: 155 N.E. 68,244 N.Y. 114
• Parties: PEOPLE ex rel. STUDEBAKER CORPORATION OF AMERICA v. GILCHRIST et al., State Tax Commission.
• Decision Date: 31 December 1926
• Court: New York Court of Appeals

244 N.Y. 114

155 N.E. 68

PEOPLE ex rel. STUDEBAKER CORPORATION OF AMERICA

v.GILCHRIST et al., State Tax Commission.

Court of Appeals of New York.

Dec. 31, 1926.

Certiorari by the People, on the relation of the Studebaker Corporation of America, against John F. Gilchrist and others, constituting the State Tax Commission of the state of New York. From an order of the Appellate Division (217 App. Div. 130, 216 N. Y. S. 208), modifying and, as so modified, confirming, a determination of the State Tax Commission on an application for the revision of franchise taxes, under article 9-A of the Tax Law, relator appeals.

Order or Appellate Division reversed, determination of State Tax Commission annulled, and proceeding remitted for revision of taxes in accordance with opinion.

Crane and Pound, JJ., dissenting.

Appeal from Supreme Court, Appellate Division, Third department.

E. J. Dimock, of New York City, for appellant.

Albert Ottinger, Atty. Gen. (Wendell P. Brown, of Leonardsville, and Claude T. Dawes, of Albany, of counsel), for respondents.

CARDOZO, J.

‘The Studebaker Corporation of America’ is a New Jersey corporation. It sells automobiles and automobile accessories in New York and elsewhere. Its entire capital stock is owned by ‘the Studebaker Corporation,’ which manufactures the automobiles and the accessories in Indiana and Michigan, and sells them to subsidiaries. Of these subsidiaries the Studebaker Corporation of America is only one. Other subsidiaries (e. g., Studebaker Sales Corporation of Ohio, Studebaker Bros. of Utah, Studebaker Bros. of California) do business in other districts.

By agreement made August 25, 1920, the parent corporation (the manufacturer) agreed to sell its motor vehicles and parts and accessories to this subsidiary (the Studebaker Corporation of America), the distributor, at the retail list price (to be fixed by the manufacturer), less 25 per cent. discount on cars and 33 1/3 per cent. discount on parts. The discount was too small to enable the subsidiary to do business at a profit. Its loss during the year 1920 was $449,133.14. There was a loss during the same year to all the other subsidiaries, except the Studebaker Sales Corporation of Ohio. On the other hand, the parent corporation made in the same year a net profit of $11,434,954.41 from the operations of its business everywhere, which included, of course, the process of manufacture as well as the act sale. The loss sustained by the subsidiary now before us, the Studebaker Corporation of America, was taken over by the parent at the close of the year. Apparently this had been done in previous years also. At all events, the subsidiary was indebted to the parent on December 31, 1920, for upwards of $9,000,000.

The year 1921 makes a continued showing of loss. The subsidiary before us, operating under the same agreement, sustained a loss of $2,168,178.63, which again was taken over by the parent. Losses were sustained by the other subsidiaries except the Studebaker Sales Company of Ohio. The net profits of the parent were $13,684,952.73. These profits, like those of the preceding year, were the result of the transaction of its business everywhere.

Article 9-A of the Tax Law (Consol. Laws, c. 60), section 209, is to the effect that every domestic corporation shall pay for the privilege of exercising its franchise in this state, and every foreign corporation for the privilege of doing business, an annual franchise tax to be computed by the tax commission upon the basis of its entire net income for the year next preceding. The exceptions established by section 210 are unimportant for the case before us. The appellant, the Studebaker Corporation of America, made a report in 1922 for its income for the year ending December 31, 1920, and in 1923 for the year ending December 31, 1921. These reports showed that there had been no net income for either of these years, but on the contrary losses of $449,133.14 and $2,168,178.63, respectively. On the basis of these reports, the only tax payable would be the minimum tax prescribed by the final paragraph of Tax Law, § 214, $12.14 for 1921, and $15.91 for 1922. The tax commission imposed a tax upon the basis of the consolidated income of subsidiary and parent, gaining the requisite information from reports under the federal law. As thus computed, the tax was $9,671.27 in one year and $15,580.71 in the other. Upon applications for revision under Tax Law, § 218, slight errors of computation were corrected, and the taxes as thus reduced confirmed. There was a correction of other errors of computation at the Appellate Division with confirmation as modified, one member of the court dissenting. The taxes, as corrected, stand at $9,398.66 and $11,936.24, respectively.

The case involves the construction of subdivision 9 of section 211 of the Tax Law, as it read on July 1, 1922 (Tax Law, as amended by L. 1922, c. 507). We are not concerned at this time with later amendments which became effective in 1925 (L. 1925, c. 322). Subdivision 9 of section 211, as it stood before the amendment of 1925, contained the following provisions:

‘Any corporation owning or controlling, either directly or indirectly, substantially all of the capital stock of another corporation, or of other corporations, liable to report under this article, may be required to make a consolidated report showing the combined net income, such assets of the corporations as are required for the purposes of this article, and such other information as the tax commission may require, but excluding intercorporate stockholdings and intercorporate accounts.

‘The tax commission may permit or require the filing of a combined report where substantially all the capital stock of two or more corporations liable to taxation under this article is owned by the same interests. The tax commission may impose the tax provided by this article as though the combined entire net income and segregated assets were those of one corporation, or may, in such other manner as it shall determine, equitably adjust the tax.

‘Where any corporation liable to taxation under this article conducts the business whether under agreement or otherwise in such manner as either directly or indirectly to benefit the members or stockholders of the corporation, or any of them, or any person or persons, directly or indirectly interested in such business by selling its products or the goods or commodities in which it deals at less than a fair price which might be obtained therefor, or where such a corporation, a substantial portion of whose capital stock is owned either directly or indirectly by another corporation, acquires and disposes of the products of the corporation so owning the substantial portion of its capital stock in such a manner as to create a loss or improper net income, the tax commission may require such facts as it deems necessary for the proper computation provided by this article, and may for the purpose of the act determine the amount which shall be deemed to be the entire net income of the business of such corporation for the calendar or fiscal year, and in determining such entire net income the tax commission shall have regard to the fair profits which, but for any agreement, arrangement or understanding, might be or could have been obtained from dealing in such products, goods or commodities.’

The first paragraph of the subdivision quoted has no application to the situation now before us. It deals with a case where the parent corporation as well as the subsidiary is subject to the taxing power of this state, and is required by appropriate direction to make report on the basis of the consolidated income. No such direction has been made. The parent corporation in the Studebaker system is organized under foreign laws and manufactures its products in states far distant from our own. We do not now inquire whether the state of New York might disregard the subsidiary as a mere cover or pretense and lay a tax upon the parent as upon a corporation doing business here through the instrumentality of an agent. Procter & Gamble Co. v. Newton (D. C.) 280 F. 1013;Chicago, M. & St. P. Ry Co. v. Minneapolis Civic Ass'n, 247 U. S. 490, 38 S. Ct. 553, 62 L. Ed. 1229; So. Pac. Co. v. Lowe, 247 U. S. 330, 337, 38 S. Ct. 540, 62 L. Ed. 1142;United States v. Reading Co., 253 U. S. 26, 61, 63, 40 S. Ct. 425, 64 L. Ed. 760;Cannon Mfg. Co. v. Cudahy Co., 267 U. S. 333, 337, 45 S. Ct. 250, 69 L. Ed. 634; Gramophone & Typewriter, Limited, v. Stanley, [1908] 2 K. B. 89. Cf. Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 Cal. Law Rev. 12, 18, 20. If this or something not unlike might have been done, the commission has not sought to do it. The parent has not been taxed, nor has any requirement been addressed to it to make return as to its business. The only tax imposed has been a tax on the subsidiary, to be measured by the value of its franchise, not the franchise of another. The subsidiary in these transactions, if it had any genuine autonomy (Procter & Gamble Co. v. Newton, supra), was either a buyer or an agent. If, in truth and in good faith, it was a buyer of the parent's products, its operations were its own. By the very terms of the hypothesis, they are not to be identified with the operations of the seller. On the other hand, if the sale is to be disregarded as nothing but a cover for an agency, the value of the privilege of doing business in a corporate form as agent for another is not to be confused with the value to the principal of acting through the agent. The position of the subsidiary may be no better than if its certificate of incorporation had stated that the purpose of its business was to act as factor or intermediary for the products of the parent. The position may be no better, but it can also be no worse. The statute makes provision for a return on the basis of consolidated income by the corporation that is owner where the owner does...