Court Opinion

ID: 3580607
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:31:40.967963+00
Date Added: 2024-06-11T07:41:27.631797
License: Public Domain

The Studebaker Corporation is the name of a company organized under the laws of the State of New Jersey engaged in the manufacture of motor vehicles in the States of Indiana and Michigan. It has in various States subsidiary corporations for the sale and disposition of its product. One of these corporations does business in the State of New York. It is the relator in this case, and is named "The Studebaker Corporation of America." Organized under the laws of the State of New Jersey, it disposes of the product of the parent company in New York State.
That it should be taxed for the privilege of doing business in this State upon the basis of its net income is conceded. This litigation has arisen over the determination of its net income.
The parent company, the Studebaker Corporation, owns all the stock of the Studebaker Corporation of America, the relator, which, as I have said, was its subsidiary, or selling agent, in the State of New York. By an arrangement between the two corporations, motor vehicles, parts and accessories were sold by the parent company to its subsidiary at a 25 per cent discount on cars, and a 33 1/3 per cent discount on parts. The result of this arrangement *Page 128 
was that during the year 1920 the relator sustained a loss of $449,133.14, and for the year 1921 a loss of $2,168,176.63. These figures were purely artificial, mere matters of bookkeeping. As a matter of fact, they did not represent an actual loss; the figures were the result of the arbitrary discount apparently allowed by the parent company. The discount might have been anything; the result would have been the same to the parent company which owned all the stock, and merely used its subsidiary as a means of disposing of its cars. Whatever may have been the distinct corporate entity, in reality and in fact one was the creature of the other. I do not mean to say that they were one and the same corporation for the purpose of taxation, but they were one and the same corporation regarding control, and for the purpose of this discount. During these years the parent company made a profit in 1920 of $11,434,954.41, and in 1921 of $13,684,952.73. Apparently there is no question about the loss of the subsidiary being a mere bookkeeping item; not an actual loss, but a result reached under the system of doing business devised by the parent corporation which was making all the profits. This is recognized in the main opinion which very frankly states that the relator could have been taxed upon the fair profits which would have been earned under a fair and reasonable agreement.
As the parent company created a situation and by its system established a fictitious loss on the business in New York, who is to determine what a fair profit would have been on the sales here? Who would know better than the persons conducting the business and ultimately making the profit? It must be presumed that the Studebaker Corporation, the parent company, and even its subsidiary knew what this court is undertaking to state, namely, that it was taxable upon the basis of the net income which would be derived from the sales in New York State under a fair and reasonable arrangement *Page 129 
with the manufacturer. Knowing this law, the relator furnished no such information.
We have, therefore, at the outset of this case these facts beyond dispute, treating of course, the relator as an independent corporation having an entity and a vitality of its own. It is carrying on business in New York State; its loss is fictitious. It may have made profits, or should have made profits, on its business in the State. Under a fair arrangement with the manufacturer, it could have made profits, or might have made them. The manufacturer owns all its stock and made the profits, if any. All but one of its subsidiaries in other States made losses, while the parent company made the profits according to the above figures.
What were the taxing authorities here in the State of New York going to do? They were in duty bound under article 9-A of the Tax Law to assess and tax the relator upon the basis of its net income, or the net income which it should have had. How were they to ascertain this? By any fair and reasonable method, and such means as they had at their disposal in the first instance. They had the returns made by the companies to the Federal government. Later, the relator furnished the figures regarding its business, that of the parent company and of its various subsidiaries. To determine what should have been this fair return or net profit on the business in this State, the Tax Commissioners allocated the net profits of the parent company in proportion to all its assets and that of all its companies to the assets of the relator in New York State. The figures were arrived at by taking such a proportion of the combined net income of the parent corporation and its subsidiaries as the total determinative assets of those corporations bore to the determinative assets of those corporations allocated to the State of New York. Now this might not have been accurate; it was apparently the only method, or at least a lawful method of proceeding in the absence of other *Page 130 
information. The relator failed to furnish any other information or to show what would have been a fair profit under a reasonable agreement with the holding company. The relator was afforded an opportunity to furnish this information. The tax as fixed by the Commission was presumptively correct. The relator had the opportunity and the burden of showing it to be incorrect. (People ex rel. Barcalo Mfg. Co. v. Knapp, 227 N.Y. 64;People ex rel. Kohlman  Co. v. Law, 239 N.Y. 346; Matter ofLorimier, Greenbaum Co., Inc., v. Gilchrist, 212 App. Div. 733. )
I know of nothing in the law which prevents the Tax Commission from adopting this method of allocation in order to determine the net profits when other information is not forthcoming and it is conceded that the books do not correctly show the actual facts. It was for the relator to show whether or not there was an actual instead of a fictitious loss, in view of all the circumstances of this case. It is no answer in my judgment to say that the Tax Commission could not have compelled the parent company, a foreign corporation, to make a return or give information. The fact is that the information was furnished according to the figures which the Commission used. The Commission adopted the figures furnished by or through the parent company and the relator.
This case in my judgment comes within subdivision 9 of section211 of the Tax Law, and subdivision 7 of section 214. The latter provision reads:
"In case any report is made as provided by subdivision nine of section two hundred and eleven of the tax law, the tax commission may assess the tax against either of the corporations whose assets or net income are involved in the report and upon the basis of the combined entire net income and the combined segregated assets of the corporation and upon such other information as it may possess, or may adjust the tax in such other manner as it shall determine to be equitable." *Page 131 
A method specifically provided for corporations coming within these subdivisions is not improperly or illegally used to ascertain net profits under such conditions as here exist, although the condition may not be specifically stated in the statute. The Commission had a duty to discharge and that was to ascertain what would have been the net profit under a fair agreement with the holding or parent company. In the absence of other means of ascertainment or of other information furnished by the relator, it was justified in adopting the figures which were given and arriving at the net profits according to the methods used in other and similar cases. If the parent company had been doing business directly in New York State, there is no question about the correctness of the methods adopted by the Tax Commission. What can be the objection by the relator to such methods when it is a mere subsidiary carrying on business in New York State for the parent company, and fails to show a true state of facts? The only answer to be made is that such method is not specifically prescribed in the statute for such specific relationship. What is prescribed, however, is that the Tax Commission must find what the net profit was or would be, if any, under normal conditions on such business done in New York State. To arrive at such a conclusion the Tax Commission could adopt and use any information it had, and this is specifically stated. It did use the figures given by the relator and the process of allocation which was the correct method for ascertaining profit when a foreign corporation was doing business directly. In the absence of other information furnished by the relator, this in my judgment was legal and proper.
For these reasons I vote for affirmance of the action of the Tax Commission.
HISCOCK, Ch. J., McLAUGHLIN, ANDREWS and LEHMAN, JJ., concur; CRANE, J., dissents in opinion in which POUND, J., concurs.
Ordered accordingly. *Page 132