Court Opinion

ID: 9700356
Source: CourtListenerOpinion
Date Created: 2023-08-25 21:23:34.167624+00
Date Added: 2024-06-11T13:10:34.812969
License: Public Domain

Concurring Opinion by
Mr. Justice Pomeroy:
Mindful of the exigent need of the Commonwealth for additional tax revenues, it is with great reluctance that I feel compelled to join in the decision of the Court that Article III of the Tax Reform Code of 1971 is unconstitutional for want of uniformity. While I agree with much of what is said in the majority opinion, I do not agree with all of it. In view of the importance of the case, I deem it incumbent on me to delineate briefly my points of difference.
The approach used in the new personal income tax is, of course, to define taxable income by adopting the definition of taxable income contained in the Internal Revenue Code, with certain adjustments. The federal definition is complicated, but in simplest terms means gross income (as defined in the Code) less certain adjustments. From this “adjusted gross income” are subtracted allowable deductions (or a standard deduction if deductions are not itemized) and personal exemptions. The resultant figure is “taxable income”. To this the federal code applies a graduated rate of tax and then permits certain tax credits. The state statute applies a flat 3.5% rate. The result of this incorporation by reference of the federal definition is, as the majority opinion and the opinion of President Judge Bowman, dissenting in the court below, make clear, to employ as a tax base a figure which is something less than all income received by a taxpayer, and which may vary considerably even among taxpayers having the *64same gross income, depending on their particular situations.
Were we writing on a clean slate, I might agree that the built-in inequalities in the federal tax base serve to render the same tax base, when adopted by Pennsylvania, impermissibly non-uniform under our Constitution. But the slate is not clean. Unlike the majority, I think the decisions of this Court approving the Corporate Net Income Tax, Act of May 16, 1935, P. L. 208, as amended, 72 P.S. §3402a, et seq. (C.N.I.), compel an approval of the taxable income definition in Article III of the Tax Reform Code of 1971 insofar as the Internal Revenue Code provisions relating to corporate taxable income a/re substantially parallel to the provisions of the same Code relating to individual taxable income. The C.N.I., from its beginning in 1935, has defined “net income” (which is there the measure of the tax) as meaning “net income ... as returned to and ascertained by the Federal Government.” 72 P.S. 3420b. This figure is in general gross receipts, less cost of goods sold and/or of operations, plus other income items, less allowable deductions.1 The federal tax structure is thus basically the same whether the taxpayer be an individual or a corporation.
In Turco Paint & Varnish Co. v. Kalodner, 320 Pa. 421, 184 Atl. 37 (1936), one of the contentions of the taxpayer in a broad assault upon the constitutionality of the C.N.I. was that although the tax was at a flat 6% rate of net income (the present rate is 12%), it was in effect a graded tax because of the process by which net income was determined. This Court held explicitly to the contrary. The C.N.I. was again challenged in Commonwealth v. Warner Bros., 345 Pa. 270, 27 A. 2d *6562 (1942). The Court there held that the incorporation by reference of the net income definition applicable to corporations as used in the Internal Revenue Code did not involve a delegation of legislative power in violation of Article IX, Section 1 of the Constitution of 1874. The Pennsylvania Act, said the Court, “does not delegate the power to tax to the Federal tribunal, it only takes the net income fixed by it as the base for the excise privilege tax levied by the Commonwealth.” (345 Pa. at 272). The Court also, following Turco Paint & Varnish Co., supra, again rejected the charge that the C.N.I. violated the uniformity clause. See also Commonwealth v. Budd, 379 Pa. 159, 108 A. 2d 563 (1954).
The majority would distinguish these cases principally on the ground that corporations are “artificial legal entities” engaged in business for profit, whereas natural persons spend their resources for a number of reasons unrelated to profit-making, some of which give rise to income tax deductions not applicable to corporations.2 This seems to me unimportant as far as the power of the state to adopt a federally determined tax base is concerned.3
*66But although the Turco Paint & Varnish authority goes far to validate the present tax, as far as the legality of the federal base is concerned, it does not, in my view, go the whole way. The reason is that, in addition to certain deductions allowed to individuals which have no similarity to those allowed to corporations (notably deductions for medical expenses and alimony payments), there is no parallel in the federal income tax on corporations with the exemptions which are an integral part of the federal income tax on individuals. The federal income tax on individuals, as is well known, allows a personal exemption of |6254 for each taxpayer and for each of his dependents as defined, allows an additional exemption if the taxpayer is 65 years of age or older, and an additional exemption if the taxpayer is blind. I agree with Judge Bowman that these exemptions, “while meritorious in terms of ability to pay, bear no rational relationship to a tax on net income.” Moreover, as the majority opinion makes clear, exemptions very like those now in the federal income tax structure were held violative of the uniformity clause in Kelly v. Kalodner, 320 Pa. 180, 181 Atl. 598 (1935) and in Saulsbury v. Bethlehem Steel Co., supra. In Saulsbury, disapproving a tax ordinance imposing an occupational privilege tax which excluded from its operation those whose gross earnings would not amount to 8600 per year, the Court said: “. . . the tax . . . lacks uniformity and is in violation of the constitutional provision. While different subjects may be reasonably classified for tax purposes ... there must be no lack of uniformity within the class, either on the given subject of the tax or the persons affected as payers. . . . Part of the class may *67not be excused, regardless of the motive behind the action.”
The constitutional infirmity in these exemptions is not cured merely because they are part of a federal definition incorporated by reference in the new tax law; the holding in Turco, as mentioned above, does not give them sanction, there being no near counterpart in the Internal Revenue Code provisions applicable to corporation income. Neither are the exemptions saved by the new Section 2(b) (ii) of Article VIII of the Pennsylvania Constitution, which provides for the establishing of classes of taxpayers who are in need of tax exemption or special tax provision because of age, disability, infirmity or poverty. This is so both because the Legislature did not undertake to establish such classes with respect to the federal exemptions and because those exemptions apply regardless of the amount of the taxpayer’s income.5
Because the basic impermissible aspect of the personal income tax, as I view it, is not the result of express language used in the Code but comes about by the adoption of the federal tax base, there is, regrettably, no way to take advantage of the severability clause (§1202) of the Tax Reform Code of 1971; there is no single word, phrase, clause, sentence, section or provision which can be pointed to as the offensive language, let alone stricken. Hence, I must agree with the Court that the entire Article III must be declared in*68valid. See Pa. R. R. Co. v. Schwartz, 391 Pa. 619, 139 A. 2d 525 (1958); cf. Butcher v. Philadelphia, 333 Pa. 497,6 A. 2d 298 (1938).

 The interrelationship of the C.N.I. and the Internal Revenue Code provisions relating to corporation income are described, inter alia, in Commonwealth v. General Refractories Co., 417 Pa. 153, 207 A. 2d 833 (1965).

 The significant deductions in this category appear to be those relating to medical expenses and alimony payments. Corporations as well as individuals may, within certain limitations, deduct charitable contributions.

 The distinction is also made by the majority that the corporation tax has been held to be an excise tax for the privilege of doing business (Commonwealth v. Warner Bros., supra; but see Commonwealth v. Eastern Motor Express, Inc., 398 Pa. 279, 298, 157 A. 2d 79 (1959)) whereas the personal income tax is purportedly on the privilege of receiving, earning or acquiring income. I agree with Justice Hagen in his dissenting opinion that whatever be the proper label to be applied to the two taxes, the result should be the same, for the constitutional mandate is that “all taxes shall be uniform . . .” (my italics). This Court has stated without equivocation that “all” means what it says. Saulsbury v. Bethlehem Steel Co., 413 Pa. 316, 196 A. 2d 664 (1964) ; Kelly v. Kalodner, 320 Pa. 180, 181 Atl. *66598 (1935), and, Indeed, the parties to this litigation do not contend otherwise.

 This figure will become $650 in 1971, and $750 by 1973. Section 151 of the Internal Revenue Code, as amended.

 The General Assembly did undertake to utilize the new classification authority granted to it by the 1968 constitutional amendment in §319 of Article III, establishing so-called vanishing tax credits wtih respect to persons whose incomes are $10,000 and under. I agree with Justice Eagen and Judges M'enceb and Kbamek below in their respective dissenting opinions that §319 as drafted fails to establish the classes sought to be provided for. (I also agree with Justice Eagen that the local tax credit as contained in §317 of Article III is patently lacking in uniformity.)