Court Opinion

ID: 9635640
Source: CourtListenerOpinion
Date Created: 2023-08-22 13:57:30.837058+00
Date Added: 2024-06-11T11:17:05.837620
License: Public Domain

CONCURRING OPINION BY
Judge LEADBETTER.
I agree with the majority’s interpretation of Section 601(a),1 as well as the result in this ease. However, I write separately to address a serious constitutional question which the majority addresses only in passing. As the majority notes, the Capital Stock Tax is currently computed by a fixed formula provided by 1983 amendment(s)2 to the Tax Reform Code. Prior to enactment of that amendment, the tax was based upon a value estimated by the officers of the company to be the “actual value in cash” of the corporation’s capital stock, taking into consideration sale price, earnings or profits, assets (both tangible and intangible) and indebtedness. Section 601 of the Tax Reform Code. See IsadoRE H. Krekstein & David H. Rosenbluth, CORPORATE Taxation and Procedure in Pennsylvania 110 (1952). This method of arriving at stock value for tax purposes was, however, problematic. As has been noted:
For a period well over 100 years, the base of taxation of the Capital Stock Tax was the actual worth of a taxpayer’s capital stock. While regulatory efforts were made to rationalize the process of determining actual worth, they met with limited success. As a result, liability was difficult to predict, settlements were frequently appealed, and the final liability was often a negotiated figure.
26 Summary of PA Jurisprudence 2d., § 2:57 (West 1998). Thus, the statutory change from an estimated value to a fixed formula did not reflect a legislative intent to alter the character of the tax or, more precisely, the subject of the tax. Rather, the purpose of the amendment was to simplify the process of arriving at a value and limit the extent of disputes and litigation spawned by the utilization of a standard based upon subjective judgments. In other words, while the Capital Stock Tax remains a tax on the actual cash value of the corporation’s capital stock, the fixed formula was adopted to provide a simple and objective method of computing that value.
Implementation of such fixed formulae is both common and generally beneficial. The Due Process Clause, however, requires that any formula so utilized be fair, ie., produce results which are reasonably related to the actual value which is the subject of the tax. Container Corp. v. Franchise Tax Bd. 463 U.S. 159, 169-70, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983); Mobil Oil Corp. v. Comm’r of Vermont, 445 U.S. 425, 453-54, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-75, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978); Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 133-34, 51 S.Ct. 385, 75 L.Ed. 879 (1931); Unisys Corp. v. Commonwealth, 726 A.2d 1096, 1101-03 (Pa.Cmwlth.1999). While these cases generally arise in the context of apportioning income for commerce clause purposes, the principles of due process they enunciate apply with equal force to any statute which mandates use of a fixed formula to compute a tax where the actual value subject to the tax is difficult or impossible to ascertain.
Determining whether any such formula satisfies the requirements of due process necessarily implicates a two-part inquiry. First is whether the formula is on its face reasonably designed to fairly approximate the value it purports to measure. If not, *891the statute cannot pass constitutional muster. No claim is made here that the formula itself is intrinsically arbitrary, nor would any such claim have merit. Where, as here, the formula is not facially arbitrary, “it will be sustained until proof is offered of an unreasonable and arbitrary application in particular cases.” Hans Rees’ Sons, 288 U.S. at 138. In other words, the statute will be disturbed only when the taxpayer has established by “clear and cogent evidence” that the formula has yielded a taxable value “out of all appropriate proportion” to the actual value subject to the tax or “led to a grossly distorted result.” Moorman, 437 U.S. at 274 [quoting Hans Rees’ Sons, 283 U.S. at 135 and Norfolk & W. Ry. Co. v. State Tax Comm’n, 390 U.S. 317, 326, 88 S.Ct. 995, 19 L.Ed.2d 1201 (1968) ].
In this appeal, a substantial challenge has been raised to the constitutionality of the fixed formula as applied in this case. For the tax years in question, it is undisputed that the company was insolvent both before and after the restructuring of debts which caused it to recognize income on its financial statements, and it had no operating profits. Thus, Shawnee argues that, “Revenue’s determination of a $5,428,635 capital stock value and imposition of capital stock tax of $69,215 for the March 1995 Tax Year, a period in which it had no operating profits and zero net worth, is a result so arbitrary and so far out of line with the actual value of the company as to be illegal and confiscatory.” Appellant’s brief at 44.
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factors to be considered. As one text has noted:
It is probably rather obvious by now that book value does not reflect the current value of the assets and is, at best, only one of several criteria to be considered in determining the stock value. If book value and market value are substantially the same, then it may be merely by coincidence. Valuation of all or part of the enterprise’s stock is a subjective matter.
Anthony Phillips, et al., Basic Accounting for Lawyers 211 (4th ed.1988). See also In re Glosser Bros., Inc., 382 Pa.Super. 177, 555 A.2d 129 (Pa.Super.1989); Hamilton &
Booth, Business Basics FOR Law Students, Essential Terms and Concepts 193-222 (2d ed.1998). Moreover:
It is axiomatic under the decisions that the stock of a corporation may have an actual value notwithstanding that liabilities exceed assets.
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It therefore seems that although a corporation is insolvent in the sense that its liabilities exceed its assets, its stock, nevertheless, for the purpose of taxation, might have a substantial value if other factors establish that the shares, in fact, have a value.
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Each case should be judged on the facts and circumstances surrounding it.
Krekstein & Rosenbluth at 162-63.
Thus, it would appear that the only way Shawnee could establish a due process violation is by way of competent expert evidence regarding the actual value of the capital stock. The stipulations of fact upon which we must decide this appeal are devoid of any such evidence, and the burden of establishing the invalidity of the tax plainly rests with the taxpayer. See Lev-*892inthal v. Philadelphia, 518 Pa. 233, 239, 542 A.2d 1328, 1331 (1988). Thus,, although Shawnee has made a compelling argument that in this case the fixed formula may have led to a grossly distorted capital stock value, it clearly has failed to meet its burden of proof on the issue. Accordingly, I agree that we must affirm.

. Section 601(a) of the Tax Reform Code of 1971 (Tax Reform Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7601(a).

. Act of December 23, 1983, No. 89, P.L. 360.