Court Opinion

ID: 5878619
Source: CourtListenerOpinion
Date Created: 2022-01-13 02:09:32.949136+00
Date Added: 2024-06-11T08:44:56.214714
License: Public Domain

Yesawich, Jr., J.
Tax Law article 9-A proposes taxing foreign corporations doing business in New York on the basis of the business they generate in the State (Tax Law § 209 [1]; Matter of Wurlitzer Co. v State Tax Commn., 35 NY2d 100,105). To properly reflect that tax liability, Tax Law § 211 (4) authorizes respondent to require a foreign corporation to file a return combined with its parent if (1) the parent owns or controls substantially all of the capital stock of the taxpayer subsidiary, and (2) there are either substantial intercorporate transactions or some agreement which distorts income (see also, 20 NYCRR 6-2.5 [a]; Matter of Wurlitzer Co. v State Tax Commn., supra; Matter of Coleco Indus. v State Tax Commn., 92 AD2d 1008, 1009, affd 59 NY2d 994).
Since petitioner is a wholly owned subsidiary of Campbell Soup, this appeal necessarily focuses on whether respondent acted rationally (see, Matter of Howard v Wyman, 28 NY2d 434, 438; Matter of Del-Met Corp. v State Tax Commn., 102 AD2d 312, 313) when it concluded that petitioner and Campbell Soup engaged in intercompany transactions of substance, making proper reflection of their New York franchise tax liability impossible without a combined report. Significantly, respondent in *1000appurtenant regulations, the validity of which is not challenged, has declared that in determining if there are material intercorporate transactions among corporations, activities such as the performance of services by the taxpayer for the other corporation and the selling of goods acquired from the other corporation are to be considered (20 NYCRR 6-2.3 [c] [1], [2]). That regulation provides further that “[t]he substantial intercorporate transaction requirement may be met where as little as 50 percent of a corporation’s receipts or expenses are from one or more” of such activities (20 NYCRR 6-2.3 [c]). To the exclusion of all else and since its inception, petitioner’s complete and undivided attention has apparently been directed at soliciting sales for Campbell Soup in 34 States for over 60 years; that a substantial intercorporate relationship existed here is thus obvious.
The interassociation of these corporations is also manifested by the following undisputed facts: while petitioner sells Campbell Soup’s products, Campbell Soup handles the advertising and marketing; after consummation of sales, petitioner continues to field and attempt to resolve customer complaints; employees of Campbell Soup will, on occasion, accompany those of petitioner to gather information for promotional materials and to ascertain the success of particular products; and the joint service of petitioner’s president as vice-president of Campbell Soup.
Petitioner’s contention that it is an independent enterprise is further undermined by (1) the private agreement with Campbell Soup which ensures that petitioner’s income will equal its costs plus 4% and (2) petitioner’s 1941 tax liability agreement with the State. The former agreement guarantees petitioner a profit regardless of cost fluctuations and actually results in increasing its income as its costs increase. This arrangement suggests that petitioner has a rather intimate involvement in the over-all machinery of Cambell Soup’s conglomerate. As for the tax liability agreement, it is so constructed that petitioner’s gross income is arrived at only by allocating a portion of Campbell Soup’s income to petitioner, and it even provides for readjustment of petitioner’s income in the event that Campbell Soup’s advertising expense falls below a certain amount. In short, by that agreement, the amount of income reported by petitioner is a product of Campbell Soup’s income. Moreover, by reason of the tax liability agreement with the State, petitioner has since 1941 voluntarily paid New York franchise taxes conspicuously greater in amount than those due under the statutory formula (e.g., in 1977, $199,772 of tax paid under the agreement instead *1001of $9,463 under the statutory formula), thereby implicitly acknowledging that its franchise tax liability is distorted if the New York income of the unitary business of which petitioner is a part is not considered. It is also worth noting that, absent such an agreement, unitary business income concededly derived by petitioner and Campbell Soup from New York would escape taxation. In our judgment, the foregoing evidence more than amply justifies respondent’s decision to require a combined report.
With respect to the propriety of respondent’s audit formula, the 1941 agreement, which neither party has a copy of, seemingly presupposes that 4% of Campbell Soup’s sales revenue originated in New York. It is unchallenged that during the years 1974 through 1977, the sales of Campbell Soup within New York accounted for an average of 7.7% of its total sales; furthermore, during that time, the proportion of petitioner’s total operating expenses to those incurred in New York, the multiplier for computing its New York source income under the 1941 tax liability agreement, averaged 9.46%. Consistent with these increases, for 1977, the year in question, the New York income of the unitary business is made up of the imputed New York income of Campbell Soup, 5.57% of its total sales revenue, and the actual income of petitioner, 2.51% of Campbell Soup’s revenues. Inasmuch as petitioner has not maintained its burden of showing that the disputed allocation does not properly reflect the business transacted in New York, we would confirm respondent’s determination.