Shoe Icon Seeks Supreme Court Ruling on N.Y. Taxes

The founders of the Sam Edelman shoe business, who sold their company in 2010, asked the U.S. Supreme Court to hear their claims that New York unconstitutionally taxed income from the sale, in a case that may ultimately free some people from being taxed twice on a wide variety of income.

Samuel and Louise Edelman are one of two couples who lived in Connecticut but met New York’s definition for New York residency. Connecticut taxed their income from selling shares of business interests, and New York taxed it too.

According to their petitions, “virtually any taxpayer who owns stock or accrues interest on a bank account earns intangible income and is at risk of double taxation” if New York treats them as residents even though their principal home is in another state.

The disputes also offer the Supreme Court a chance to clarify the reach of its 2015 decision in Comptroller of Treasury of Maryland v. Wynne, where it struck down a Maryland tax regime as unconstitutional discrimination against interstate commerce. Each petition argues that New York courts have “thumbed their noses” at that decision.

Both couples are represented by appellate attorney Kannon K. Shanmugam, chair of the Supreme Court and Appellate Practice Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The cases involve similar facts: Both couples live in Connecticut but meet New York’s definition of a New York resident. Under New York law, this means all of their income, no matter its source, is subject to New York taxation.

The state offers credit for tax paid elsewhere on income from businesses or professions and from real property, but not for tax paid on income from intangibles like annuities, dividends and gains from sale of interests in a business.

The Couples

During the years at issue, the couples met New York law’s definition of legal residents: They owned “a permanent place of abode” in the state and spent some time in New York on more than 183 days in the year.

Richard Chamberlain and Martha Crum were married and lived in Connecticut during the years in question, from 2009 to 2011. They both commuted to New York for work and also kept a townhouse in New York City.

Similarly, Samuel and Louise Edelman lived in Connecticut from 2010 to 2013, the years at issue in their case. According to their petition, they commuted daily from Connecticut to New York and had a New York City apartment.

In 2010 the couple sold their shares in Edelman Shoe to Brown Shoe Co. but continued to work in the New York office and commute from Connecticut.

Both couples were taxed twice on income from intangible assets, according to their petitions to the high court. Chamberlain and Crum were billed for over $2.7 million by New York for income from the sale of interests in Chamberlain’s company, among other intangible income. The Edelmans were billed for over $6 million in back taxes that included taxes on intangible income from the sale of their interests in their shoe company, Edelman Shoe.

In both cases, the couples had already paid taxes on this income to Connecticut.

Earlier Supreme Court Decision

The tax regime in Wynne involved separate tax schemes for Maryland residents and non-residents. Maryland residents paid two taxes to the state, a general state tax and a tax determined by the county a Maryland resident lived in. Non-residents paid the state tax on all income they received from sources within the state and also a “special nonresident tax” that matched the lowest county tax rate in Maryland, meant to substitute for the county tax Maryland residents paid.

Brian Wynne challenged this taxing system as a violation of the U.S. Constitution’s so-called “dormant commerce clause.” The clause prohibits states from discriminating against economic exchanges that involve commerce across multiple states.

Justice Alito, writing for the majority, argued the court should apply something called the “internal consistency test” to understand whether the tax was unconstitutional. He said the test “helps courts identify tax schemes that discriminate against interstate commerce.”

The test looks at whether a state’s taxing procedure, if it were to become the taxing procedure for every state, “would place interstate commerce at a disadvantage” compared with commerce that takes place completely within a state.

Alito concluded that, when applying the test, the “total tax burden on interstate commerce” ended up being higher than on commerce within only one state.

Supreme Court Petitions

In one paragraph for each case, the Court of Appeals of New York, the state’s highest court, held these new cases didn’t directly involve any “substantial constitutional question.” In fuller opinions, lower courts in New York argued the cases were different from Wynne because Wynne involved taxpayers who weren’t legally defined as residents of two states and whose income wasn’t intangible.

The cases are:

Chamberlain v. N.Y. State Dep’t of Taxation and Fin., U.S., No. 18-1569, petition for cert. filed 6/24/19.

Edelman v. N.Y. State Dep’t of Taxation and Fin., U.S., No. 18-1570, Petition for cert. filed 6/24/19.