Corporations- Allocation of Subsidiary’s Tax Benefit from Consolidated Return
Defendant parent corporation received from its subsidiary 3,556,992 dollars in tax benefits which had accrued to the subsidiary from filing a consolidated income tax return. By agreement between parent and subsidiary, the profit-making corporation was to pay the losing corporation the savings created by the consolidated return. The working relationship of the two assured the subsidiary profits and the parent losses. Consequently, nearly all tax benefit inevitably flowed to the parent. Plaintiffs, the subsidiary’s minority stockholders, sought a refunding of benefits allocated to defendant, claiming that the agreement was unfair and alleging that the defendant, as the subsidiary’s majority shareholder, had violated its fiduciary obligation to minority shareholders. The Supreme Court, finding no violation, dismissed the complaint. On appeal to the Appellate Division, held, reversed. The subsidiary’s majority shareholder owes its minority shareholders a fiduciary duty not to part with all or nearly all the tax benefit resulting from a consolidated return; since the agreement between the parent (majority shareholder) and the subsidiary violates this obligation, the allocation agreement is unenforceable. Case v. New York Cent. R.R., 19 App. Div. 2d 383, 243 N.Y.S.2d 620 (1963).