Court Opinion

ID: 6261044
Source: CourtListenerOpinion
Date Created: 2022-02-17 22:04:40.924667+00
Date Added: 2024-06-11T08:59:42.938606
License: Public Domain

Dissenting Opinion by
Me. Justice Roberts:
The majority today affords appellee a “constitutional” immunity from taxation to which it is not entitled. In applying the doctrines developed in our earlier cases without undertaking fresh constitutional analysis, the majority, in my view, errs seriously.
The source of today’s error was the subject of a caution by Mr. Justice Frankfurter : “Constitutional provisions are often so glossed over with commentary that imperceptibly we tend to construe the commentary rather than the text. We cannot, however, be too often reminded that the limits on the otherwise autonomous powers of the states are those in the constitution and *212not verbal weapons imported into it. ‘Taxable event’, ‘jurisdiction to tax’, ‘business situs’, ‘extraterritoriality’, are all compendious ways of implying the impotence of state power because state power has nothing on which to operate. These tags are not instruments of adjudication but statements of result. . . .” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S. Ct. 246, 250 (1940).
The statute1 provides, in pertinent part: “(b) Every foreign corporation . . . shall be subject to ... a franchise tax at the rate of five mills upon a taxable value to be determined in the following manner. The actual value of its whole capital stock of all kinds . . . shall be ascertained . . . and shall then be divided into three equal parts.” These “three equal parts” refer to three fractions involving the taxpayer’s tangible property, wages, and gross receipts. Commonwealth v. Rieck Investment Corp., 419 Pa. 52, 56, 213 A.2d 277, 280 (1965). “All three fractions are designed as measures of corporate activity in the taxing state.” Commonwealth v. Koppers Co., 397 Pa. 523, 531, 156 A.2d 328, 333 (1959). Accord, Commonwealth v. Carheart Corp., 450 Pa. 192, 194, 299 A.2d 628, 630 (1973); Commonwealth v. Columbia Gas & Electric Corp., 336 Pa. 209, 8 A.2d 404 (1939).
On its face, the statute contains no special provisions for “multiform business” or “unrelated assets.” These doctrines were judicially created to insure that the franchise tax statute, which is “structurally constitutional,” would not be applied in unconstitutional ways. Commonwealth v. Columbia Gas & Electric Corp., 336 Pa. 209, 222-25, 8 A.2d 404, 412 (1939). The application of these exceptions must, therefore, be strictly confined to those cases where the constitution requires them.
*213Which, constitutional provisions limit the Commonwealth’s power of taxation here? Because appellee’s business does not involve the interstate sale of goods or services, no burden on interstate commerce will result from imposition of the tax. Thus, the tax is valid unless it operates to deprive appellee of its property without due process of law. The standard for determining whether a tax so operates was articulated by Mr. Justice Frankfurter in Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S. Ct. 246, 249-50 (1940): “A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if ... the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.
“. . . The simple but controlling question is whether the state has given anything for which it can ask return.”
In the language of our cases, the issue is whether the value of the capital stock, as apportioned by the statutory formula, has “no fair relation to the value of the franchise enjoyed by the corporation” in Pennsylvania. Commonwealth v. Carheart Corp., 450 Pa. 192, 196, 299 A.2d 628, 630 (1973).
The Legislature was thoroughly cognizant of the need to limit the tax to that proportion of the value of the corporation’s capital attributable to the Pennsylvania franchise. For this purpose, it devised an apportionment formula taking account of three factors: gross receipts, payroll, and tangible property. As the Court said in Commonwealth v. Columbia Gas & Electric Corp., 336 Pa. 209, 220-21, 8 A.2d 404, 411 (1939): “If the legislature had chosen to use a single one of these fractions and applied the same to the entire capital stock, certainly it could hardly be contended that it would be without its powers .... The use of all three *214and the application of each to one-third of the entire capital stock value is simply an attempt to make the ultimate measure to which the tax is to be applied more representative of the actual worth of the franchise to do business and to allow the interplay of the factors to average out the hardship which might arise by reliance upon any single one.” See Maxwell v. Kent-Coffey Mfg. Co., 204 N.C. 365, 168 S.E. 397, aff’d mem., 291 U.S. 642, 54 S. Ct. 437 (1933) (upholding income tax statute apportioning 99 per cent of corporation’s income to state by means of single factor property formula although corporation sold less than 1 per cent of its products in the state); see generally Note, Developments in the Law — Federal Limitations on State Taxation of Interstate Business, 75 Harv. L. Rev. 953, 1034-35 (1962); Hellerstein, Some Reflections on the State Taxation of a Non-Resident’s Personal Income, 72 Mich. L. Rev. 1309, 1319-22 (1974).
The principal burden of excluding extra-state values must fall on the formula devised by the Legislature for that purpose. While it is only an approximate measure of the value of the frachise conferred, the valuation of such a franchise is necessarily imprecise. The statutory method of apportionment may not be displaced by judicially created exclusions unless the statutory formula will produce a result which bears “no fair relation to the value of the franchise enjoyed by the corporation.” Commonwealth v. Carheart Corp., 450 Pa. 192, 196, 299 A.2d 628, 630 (1973) (emphasis supplied).
In this case, appellee has three groups of assets: two office buildings in Pittsburgh, operated by a hired management firm as rental properties; real property in New York, which is leased to another for the operation of a sand and gravel business; and a large portfolio of cash and marketable investments, constituting roughly 90% of the total assets.
*215The Commonwealth’s computation apportions to Pennsylvania less than 4% of the value of appellee’s capital stock.2
For the purposes of the apportionment formula, the New York property is treated as a non-Pennsylvania asset and the income produced by that property as non-Pennsylvania income. This treatment drastically reduces the apportionment fractions. In this way, the statutory computation effectively excludes the value attributable to that property without reference to any judicially-created exclusions.
The cause of the apparent difficulty is the investment portfolio, whose “situs” the majority places in *216New York. The effect of apportioning 4% of appellee’s capital stock to Pennsylvania is to allocate to the Pennsylvania franchise one or two percent of the intangible assets of the corporation.8 In this connection, however, it is necessary to remember: “The rule that property is subject to taxation at its situs, within the territorial jurisdiction of the taxing state, readily understood and applied with respect to tangibles, is in itself meaningless when applied to intangibles which, since they are without physical characteristics, can have no location in space. The resort to a fiction by the attribution of a tax situs to an intangible is only a means of symbolizing, without fully revealing, those considerations which are persuasive grounds for deciding that a particular place is appropriate for the imposition of the tax.” First Bank Stock Corp. v. Minnesota, 301 U.S. 234, 240-41, 57 S. Ct. 677, 680 (1937).
This Court has also recognized the problems created by the attempt to assign intangibles to a particular location. In Commonwealth v. Columbia Gas & Electric Corp., 336 Pa. 209, 8 A.2d 404 (1939), the appellee challenged the omission of intangible assets from the apportionment formula, and this Court responded: “[T]he intangible worth of a going corporation as well as intangible assets themselves may be said to have some degree of correlation as to situs with tangibles. It was *217undoubtedly within the power of the legislature to permit this correlation to be worked out through the use of a fraction which considered tangible assets only, leaving a more exact correspondence to be brought about through the interaction and effect of the other fractions composed of gross receipts and payrolls.” Id. at 220, 8 A.2d at 411.
To return to the precise question before us, is it fair to include some portion of the intangible assets of the corporation in valuing its Pennsylvania franchise? Essentially the same question was presented in Ford Motor Co. v. Beauchamp, 308 U.S. 331, 60 S. Ct. 273 (1939). That case involved a Texas franchise tax measured by the capital of the corporation and apportioned solely by gross receipts.4 Ford sought to limit the measure of the tax to the $3,000,000 value of its assets within Texas. However, the United States Supreme Court upheld the state’s assessment of tax on the $23,000,000 dictated by the apportionment of the corporation’s entire capital, holding: “Financial power inherent in the possession of assets may be applied, with flexibility, at whatever point within or without the state the managers of the business may determine. For this reason it is held that an entrance fee may be properly measured by capital wherever located. The weight, in determining the value of the intrastate privilege, given the property beyond the state boundaries is but a recognition of the very real effect its existence has upon the value of the privilege granted within the taxing state.” Id. at 336, 60 S. Ct. at 276 (footnote omitted).
*218Surely the enhancement of the intrastate franchise resulting from financial power is at least as great where, as here, the taxpayer is engaged in the business of investing. Further, the statutory apportionment has again given full consideration to the factors suggesting a New York “situs,” for both the receipts from the intangible assets and the employees who manage them5 have been included in the computation as non-Pennsylvania elements.6
The Legislature was well aware of the difficulties of assigning a location to intangible assets and chose to utilize an apportionment method based on more readily ascertainable factors. It cannot be said that the valuation produced by that method bears “no fair relation” to the value of appellee’s Pennsylvania franchise. The result reached by the majority is an unwarranted departure from the requirements of the act. I dissent.
I would vacate the order of the Commonwealth Court and remand the case for determination of the actual value of appellee’s entire capital stock. Once this contested issue is determined, the agreed apportionment fractions resulting from application of the statutory formula may then be applied and the tax computed.

 Act of June 1, 1889, P.D. 420, § 21, as amended, 72 P.S. § 1871 (b) (1949).

 Appellee initially filed a return on the basis of the statutory computation, without reference to the doctrines of “multiform business” or “unrelated assets.” Its computation was:
(a) Average value of tangible property in Pennsylvania $ 397,323
Average value of all tangible -— .071085
property $5,589,375
(b) Wages, salaries, etc., assignable to Pennsylvania $ 40
- __ o
Total wages, salaries, etc. $ 121,725
(c) Gross receipts assignable to Penn-
sylvania $ 69,877
- = .042274
Gross receipts from all business $1,652,956
.113359
4.3
.037786
$24,155,130 (total value of
capital stock) x .037786 = $912,726 at .005 = $4,563.63
The Commonwealth reassessed the value of the capital stock at $35,000,000 but accepted the apportionment fractions. Appellee then sought resettlement on the grounds that only its Pittsburgh real estate was properly includible in computing the value of its Pennsylvania franchise to do business.

 The uncertainty results from a dispute between the taxpayer and the Commonwealth as to the value of appellee’s entire capital stock. See note 2 supra.
If the taxpayer’s valuation were accepted, the statutory computation would produce an apportioned value of roughly $900,000. The Commonwealth’s valuation would produce an apportioned value of about $1,300,000. In either case, approximately $400,000 would be attributable to the Pennsylvania real estate. This would leave $500,000 or $900,000, respectively, attributable to other assets. These amounts constitute about 1.3% and 2.3%, respectively, of the corporation’s almost $41,000,000 in intangible assets.

 The Texas apportionment method upheld in Ford Motor Co. was far less precise than the three-factor formula provided in the Pennsylvania statute. Were the apportionment here based solely on gross receipts, the value assigned to the franchise would be even larger than that produced by the statutory formula; see note 2 supra.

 While ail of appellee’s payroll has been allocated to New York, it should be noted that one of appellee’s vice-presidents resides in Pennsylvania. Although his principal employment is with another company, it is stipulated: “His value to the taxpayer is with respect to its portfolio of marketable securities (particularly the common stock portion thereof) and the New York . . . operations . . . .”
As the Commonwealth suggests in its brief: “This type of duty [investment management] obviously requires a day-to-day review and, therefore, this individual’s functions for [appellee] must have been conducted in part in Pennsylvania.” This fact simply underscores the propriety of including a small portion of the investment portfolio in valuing the Pennsylvania franchise.

 All of appellee’s payroll and aU of the investment income (constituting over 77% of appellee’s gross receipts) were assigned to non-Pennsylvania sources. See the computation in note 2 supra.