Opinion
Argued March 21, 1986
Decided June 3, 1986
Appeal from the Appellate Division of the Supreme Court in the Third Judicial Department.
Robert Abrams, Attorney-General (Francis V. Dow, Robert Hermann and Peter H. Schiff of counsel), for appellant.
George J. Noumair, Gerald D. Groden and Allen A. Hans for respondent.
MEMORANDUM.
The judgment of the Appellate Division should be reversed, with costs, and the determination of the New York State Tax Commission reinstated.
We agree, for the reasons stated in the dissenting memorandum of Justice Paul A. Yesawich, Jr., at the Appellate Division, that substantial evidence supports the determination of the State Tax Commission to require petitioner to file its franchise tax return on a combined basis with its parent corporation and other subsidiaries of the parent corporation. In order to accurately reflect tax liability, corporate taxpayers subject to the New York State franchise tax may be required, in the discretion of the State Tax Commission, to file combined reports with other corporations, irrespective of whether such corporations are doing business in this State, where the parent owns or controls substantially all the capital stock of petitioner (see, 20 N.Y.CRR 6-2.2 [a]), and the corporations are, in substance, part of a unitary business conducted by the entire group of corporations (see, Tax Law § 211; Matter of Wurlitzer Co. v State Tax Commn., 35 N.Y.2d 100; Matter of Coleco Indus. v State Tax Commn., 92 A.D.2d 1008, 1009, affd 59 N.Y.2d 994; 20 N.Y.CRR 6-2.5 [a]). Nevertheless, as we made clear in Matter of Wurlitzer Co. v State Tax Commn. (supra, at p 105), "it is not a condition precedent that the income or capital of the taxpayer be improperly or inaccurately reflected" before the Commission may exercise that discretion and require combined reports because of intercompany transactions. In point of fact, many of the same arguments advanced by the dissent here were made by the dissenters in Wurlitzer and rejected by the majority. Our construction of the statute in Wurlitzer constitutes binding precedent on all members of the court (Foss v City of Rochester, 66 N.Y.2d 872, 873; People v Hobson, 39 N.Y.2d 479, 489-490).
In any event, the State Tax Commission here expressly found that "a proper reflection of * * * New York franchise tax liability is impossible without combination." This conclusion is plainly rational (see, 20 N.Y.CRR 6-2.3 [c]). Petitioner and its related corporations have substantial intercompany transactions, which demonstrate that they have a symbiotic relationship to each other and that petitioner is a vital link in the over-all enterprise. Moreover, since its inception, petitioner has exclusively solicited sales for Campbell's Soup in 34 States.
Finally, it was incumbent upon petitioner to establish that the allocation formula utilized by the Commission does not properly reflect the business it transacts in New York (Matter of Eastman Kodak Co. v State Tax Commn., 33 A.D.2d 298, 303, affd 30 N.Y.2d 558). That burden has not been met here.
Chief Judge WACHTLER and Judges MEYER, SIMONS, ALEXANDER, TITONE and HANCOCK, JR., concur in memorandum; Judge KAYE dissents and votes to affirm in an opinion.
Judgment reversed, etc.
For more than 30 years, Campbell Sales Company (Sales), a New York taxpayer (see, Tax Law § 208; § 209 [1]), had paid State franchise tax based on its income. Its parent, Campbell Soup (Soup), had not done business here and was not subject to the tax. Now, with no change in Sales' business or its relations with its parent, Sales is compelled to file a combined report with Soup and its subsidiaries, because they are part of a unitary business, thereby for the first time subjecting the income of Soup and its subsidiaries to New York State franchise tax.
Pursuant to Tax Law § 211 (4) the State Tax Commission may require a New York taxpayer that owns or is owned by another corporation to report income on a combined basis, "provided * * * that no combined report * * * shall be required unless the tax commission deems such a report necessary, because of inter-company transactions * * * in order properly to reflect the tax liability under this article." Because the Tax Commission's position — now reinforced by the majority's incorrect assumption that a taxpayer may be forced to file a combined report simply because it is "part of a unitary business conducted by the entire group of corporations" (at p 620) — reads out of the statute the requirement that a combined report must be necessary "in order properly to reflect the tax liability under this article", I respectfully dissent.
The Tax Commission made no finding that, because of intercompany transactions, a combined report was necessary properly to reflect the tax liability of Sales. To the contrary, the Commission apparently believed that it was not required to make such a finding and that it could require affiliated corporations to file a combined report on the basis of two other factors: "(1) whether the corporations are in substance part of a unitary business conducted by the entire group, and (2) whether there are substantial intercorporate transactions among the corporations." (See, Conclusions of Law of Tax Commission.) Thus, the issue is not — as the majority states — whether there was substantial evidence, or could have been a rational conclusion, that combined reporting was necessary to correctly portray Sales' tax liability under article 9-A of the Tax Law. The agency did not reach its decision on this basis and our review is confined to the agency's basis for its determination (see, Matter of Montauk Improvement v Proccacino, 41 N.Y.2d 913; Securities Exch. Commn. v Chenery Corp., 332 U.S. 194, 196). The issue is whether a taxpayer can be compelled to file a combined report simply because it is part of a unitary business, or whether — as the statute says — the Commission first must find that, because of intercompany transactions, a combined report is necessary in order properly to reflect tax liability.
The majority suggests that the Commission made a specific factual finding that in this case a combined report was necessary properly to reflect tax liability. Quoting from the Commission's decision, the majority claims that the Commission "here expressly found that `a proper reflection of * * * New York franchise tax liability is impossible without combination.'" The full quotation, however, reveals that the Commission was taking the position that a factual finding was unnecessary because unitary businesses must always be combined for tax purposes: "Where the businesses of corporations are so unified and interassociated (having due regard for their separate corporate existences), a proper reflection of their New York franchise tax liability is impossible without combination." Our Tax Law requires more.
The Tax Commission's reasoning permits the Commission to order affiliated corporations to file a combined report whenever they engage in activities that "are related to the activities of the other corporations in the group" (20 N.Y.CRR 6-2.2 [b]). The second requirement, that there be "substantial intercorporate transactions", adds nothing of substance, for affiliated corporations engaging in a "unitary business" will, almost by definition, have "substantial intercorporate transactions" (see, 20 N.Y.CRR 6-2.3 [c]). The Appellate Division majority was therefore correct in concluding that the Commission's "reasoning would require a combined report in every instance in which a unitary relationship existed." ( 111 A.D.2d 995, 997.)
The "unitary business" concept essentially reflects a constitutional limitation on a State's right to tax income arising out of interstate activities — even on a proportional basis — unless there is a minimal connection or nexus between the interstate activities and the taxing State. Thus, a State may tax a purported "unitary business" if at least a portion of it is conducted within the State, and if the business is in fact "unitary" in the constitutional sense. Chief among the factors relevant to the latter question, are requirements that there be some uniting bond of ownership or control and that between in-State and out-of-State activities "there be some sharing or exchange of value not capable of precise identification or measurement — beyond the mere flow of funds arising out of a passive investment or a distinct business operation — which renders formula apportionment a reasonable method of taxation" (Container Corp. v Franchise Tax Bd., 463 U.S. 159, 166). Thus, the Commission's approach may well be constitutional. But New York by statute has chosen not to adopt a unitary business test (cf. Container Corp. v Franchise Tax Bd., 463 U.S. 159, 167-168, supra). Our Tax Law provides on its face that the Commission may not require a combined report unless necessary "in order properly to reflect the tax liability under this article", and this statutory threshold has not been met — indeed it was not even recognized — in the case at bar.
Matter of Wurlitzer Co. v State Tax Commn. ( 35 N.Y.2d 100) is markedly different. There, the court upheld the Commission's determination to require the taxpayer, Wurlitzer, to file a combined report including the net income of its subsidiary, Wurlitzer Acceptance (WAC). But WAC was a shell. After receiving $2.5 million in capital from Wurlitzer in the form of accounts receivable, WAC went into the business of buying accounts receivable from Wurlitzer and collecting them. WAC had no employees. It paid Wurlitzer a "fee" and Wurlitzer employees performed the collection tasks, purportedly on behalf of WAC.
Here, by contrast, Sales acted as a sales representative or food broker for Soup's products; Soup also retained brokers elsewhere to render the same service. While wholly owned by Soup, Sales operated autonomously, with its own employees — more than 1,000 in number — its own payroll, bank accounts, facilities, and a recognized business from which it derived income and paid expenses. It is uncontroverted that Soup paid Sales percentage commissions that were at least as high as — and likely higher than — commissions paid to other food brokers. Thus, Sales' own taxable income was at least as great as that of an independent food broker would have been.
As the Appellate Division noted in Wurlitzer: "The key
finding made by the commission, which is dispositive of the case, is that WAC had no separate corporate autonomy and was, in reality, merely the finance department of a unitary business, Wurlitzer" ( 42 A.D.2d 247, 250). Therefore, "the Commission concluded that the computation of the liability of Wurlitzer by including Wurlitzer and WAC in the combined report, properly reflects Wurlitzer's tax liability for franchise tax purposes" (35 N.Y.2d, at p 103), and we agreed that the "Commission could properly conclude that separate reports would not accurately reflect the taxable income or the taxable liability" (id., at p 105). The court in Wurlitzer, having pointedly set out the facts indicating that WAC had no autonomous existence and having reached its conclusion "[o]n this record" (id.), cannot be said to have held as a matter of binding precedent that the Tax Law no longer requires inaccuracy by virtue of the intercorporate transactions as a basis for imposing combined reporting (see, People v Bethea, 67 N.Y.2d 364, 368, n). "[I]t is well settled that `[t]he language of any opinion must be confined to the facts before the court'" (People v Anderson, 66 N.Y.2d 529, 535, quoting Dougherty v Equitable Life Assur. Socy., 266 N.Y. 71, 88).
Because the Commission failed to apply the correct standard, I would affirm the judgment.