Two New York Tax Cases

Abstract

While he was on the New York Court of Appeals, Benjamin Cardozo wrote a number of opinions on state tax issues. People ex rel. Studebaker Corp. v. Gilchrist was an early transfer pricing case. Studebaker Corporation established a number of sales subsidiaries, so that income could be shifted away from states with corporate franchise taxes. As a result of its manipulation, a net loss of over $400,000 was reported to New York State in 1920, even though Studebaker earned a profit of over $11 million nationwide. The New York State Tax Commission and the Appellate Division reallocated the income, but the Court of Appeals reversed. Cardozo disagreed with the method of allocation used below. However, his opinion left the door open for reallocations in subsequent cases. Curiously, the facts would have lent themselves to transfer pricing analysis, which is used in modern international tax cases, rather than the formulary apportionment used by the courts below, which has become the standard method in state cases.

People ex rel. Clark v. Gilchrist was an interesting twist on the US Supreme Court opinion in Eisner v. Macomber. Like Macomber, Clark involved stock dividends. However, in Clark, the dividends were payable to the beneficiary of a trust. The Appellate Division and the Court of Appeals came out in opposite ways. However, between the two opinions, New York law had changed. Both courts correctly applied the law as it appeared when their decisions came down. The later, 1926 statute made sense, in light of New York’s abandonment of the old Pennsylvania Rule.

Keywords: tax, New York, Cardozo, transfer pricing, trusts