The Southern District of New York denied a plaintiff-relator’s motion to remand a dispute over the defendant’s transfer pricing arrangement brought under the New York’s False Claims Act to New York state court. The plaintiff initiated the suit on behalf of the State of New York in state court alleging that the company did knowingly fail to comply with federal transfer pricing rules with regard to transactions with foreign affiliates, and seeking to recover unpaid New York state and city corporate franchise taxes.  The defendant, a Swiss limited liability company with a U.S. subsidiary headquartered in New York previously removed the action to federal court.

The relator alleges that the defendant kept two sets of books—one for business purposes and one for tax purposes—and the set of books the defendant’s accounting firm used in preparing the defendant’s New York tax returns was incomplete and did not properly reflect the defendant’s income. As part of its allegation, the plaintiff asserted that the defendant’s U.S. entity improperly used deductions that belonged to its foreign affiliates, thus depriving New York of taxable income. A defendant is liable to New York State under the New York False Claims Act if he/she “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government.” Unlike the federal False Claims Act, New York’s False Claims Act allows for relators to initiate qui tam actions regarding alleged New York tax law violations. The New York State Attorney General declined to prosecute or intervene in the plaintiff’s qui tam action.

In denying the plaintiff’s motion to remand to state court, the court concluded that the matter should remain in federal court because the controversy in issue centers on the scope of a corporation’s duty under the federal transfer pricing laws in dispute. The court found that each of the four factors used to determine whether a federal court can exercise jurisdiction over a state-law claim had been met: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. In an additional order, the court invited Treasury, the Department of Justice, the New York State Department of Tax and Finance, and the New York attorney general to submit amicus briefs addressing the questions raised in the matter.

N.Y. ex rel. Am. Advisory Servs., LLC v. Egon Zehnder Int’l Inc., No. 21-CV-6884 (LJL) (S.D.N.Y., Mar. 22, 2022).