Court Opinion

ID: 6261043
Source: CourtListenerOpinion
Date Created: 2022-02-17 22:04:40.918088+00
Date Added: 2024-06-11T08:59:42.929955
License: Public Domain

Opinion by
Mr. Justice Nix,
This is an appeal by the Commonwealth from an adverse decision of the Commonwealth Court holding that New York property owned by appellee, Morewood Realty Corporation, should be excluded from the valuation of Morewood’s capital stock for purposes of the Pennsylvania franchise tax, Act of June 1, 1889, P. L. 420, §21, as amended, 72 P.g. §1871 (b), imposed upon Morewood for the year 1966. Morewood Realty Corp. v. Commonwealth, 6 Pa. Commonwealth Ct. 244, 294 A.2d 219 (1972).
The parties stipulated to the following facts. More-wood is a Delaware Corporation whose principal place of business is in New York. It is registered to do business in Pennsylvania. It owns two buildings in Pittsburgh and each is rented to unrelated tenants and managed by a local rental agent. The Corporation also owns a sand and gravel business in New York from which it receives royalties and rental income from the rental of machinery used thereon. In addition, the company owns and manages a portfolio of securities in New York. Director’s meetings are held at the New York office where the President makes routine decisions. All the Corporation’s properties except the two Pittsburgh buildings are located in New York. More-wood has never had any employees working in Pennsylvania. One director and vice president resides in Pennsylvania but he also serves on boards of other companies. This officer travels to New York once a month to vote at meetings and does not supervise the Pennsylvania properties. Morewood carries separate insurance *207policies on its Pittsburgh property. The net income from the Pittsburgh properties in 1966 amounted to $1,-657. The buildings were purchased in 1965 in a cash transaction and none of the out-of-state assets were used either to secure the Pennsylvania purchase money or to act as reserve for costs on any Pittsburgh property.
When Morewood first submitted its tax return for 1966 it included its New York assets and receipts. Using the formula in the Franchise Tax Act and a value of $24,155,130 for its capital stock its franchise tax equalled $4,563.63. The Department of Revenue increased the valuation of the capital stock to $35,000,000. Morewood petitioned for resettlement alleging that it had erroneously included the New York assets and receipts and that the revaluation by the Department was incorrect. The Department refused the petition and the Board of Finance and Review sustained the Department’s position. Morewood appealed to the Court of Common Pleas which transferred the matter to the Commonwealth Court. The Commonwealth. Court reversed the decision of the Board and found that the tax due for the year 1966 should be confined to the value of the land and buildings situated in Pennsylvania which that court determined to be the stipulated book value of those properties.
Appellant here alleges that the Commonwealth Court erred first in excluding the New York assets and receipts because Morewood had not met its burden of proof that inclusion would create an unconstitutional application of the tax; and second that the valuation based on the book value of the properties was incorrect.
In view of the constitutional proscription against taxation by one state of property in another, Wheeling Steel Corp. v. Fox, 298 U.S. 193, 209 (1936), our Court has held that the relevant tax statute “does not give power to the Commonwealth to levy a capital stock tax *208or a franchise tax upon securities held and owned by a foreign corporation doing business in Pennsylvania which have no fair relation to the value of the franchise enjoyed by the corporation in this state. Such assets must be excluded.” Commonwealth v. Carheart Corp., 450 Pa. 192, 196, 299 A.2d 628, 630 (1973), citing Commonwealth v. The Mundy Corp., 346 Pa. 482, 484, 30 A.2d 878, 879-80 (1943). Since Morewood has the burden of proving a constitutionally impermissible application of the tax, Commonwealth v. American Telephone & Telegraph Co., 382 Pa. 509, 516 n.2, 115 A.2d 373, 376 n.2 (1955), the central issue is whether Morewood has shown that its New York properties “have no fair relation to the value of the franchise enjoyed by the corporation” in Pennsylvania.
In Commonwealth v. ACF Industries, Inc., 441 Pa. 129, 271 A.2d 273 (1970) this Court extensively discussed the principles relating to a determination of both the franchise tax and corporate net income tax. There the Court said:
“Exclusion of value or income is claimed because the taxpayer either (1) is engaged in a separate business outside of Pennsylvania (the so-called ‘multiform’ concept) or (2) owns an asset or assets unrelated to the exercise of its franchise or the conduct of its activities in Pennsylvania (the so-called ‘unrelated asset’ concept).” 441 Pa. at 135, 271 A.2d at 276.
“In two franchise tax cases ... we dealt with taxpayers whose activities were not multiform . . . Neither case involved a situation ‘in which a corporation conducts diverse forms of business having no unity save unity of ownership, and no common relation save by separate contributions to the total revenue of the corporation.’ ” 441 Pa. at 138, 271 A.2d at 277-78.
*209Since we deal in these multiform or unrelated asset cases with an apportionment dependent on factual considerations, each case, naturally, is unique. Nevertheless, the principles are clear.
“First, if a multi state business enterprise is conducted in a way that one, some or all of the business operations outside Pennsylvania are independent of and do not contribute to the business operations within this State, the factors attributable to the outside activity may be excluded.
“Second, in applying the foregoing principle to a particular case, we must focus upon the relationship between the Pennsylvania activity and the outside one, not the common relationships between these and the central corporate structure. Only if the impact of the latter on the operating units or activities is so pervasive as to negate any claim that they function independently from each other do we deny exclusion in this context.” 441 Pa. at 142, 271 A.2d at 279-80.
In our judgment the facts here show that the only connection between the Pennsylvania properties and the out-of-state enterprises is common ownership. Thus we are satisfied that Morewood has amply met its burden in establishing that it is a multiform business whose New York assets are unrelated to and completely independent of its franchise in Pennsylvania. See Commonwealth v. Advance-Wilson Industries, Inc., 456 Pa. 200, 317 A.2d 642 (1974).
“The question now as it has always been, is what is the value of the corporate franchise being exercised in Pennsylvania, and has there been eliminated therefrom all elements of value bearing no relation to the exercise of the privilege of doing business here? Whether we speak of multiform business activity or unrelated assets, this question remains the same. Here, it is obvious that taxpayer’s presence in Pennsylvania was limited to its ownership of real estate and that its activity in *210connection therewith, was neither enhanced nor diminished by its securities activity outside Pennsylvania. The two were unconnected in the traditional sense even though they may be broadly joined and categorized by the descriptive verb ‘investing.’ For this reason we sustain taxpayer’s position.” Commonwealth v. Kirby Estates, Inc., 432 Pa. 103, 108, 246 A.2d 120, 122 (1968).
The Commonwealth in attempting to show that Morewood is a unitary business relies heavily on the fact that a vice president of Morewood resides in Pittsburgh and that he conducts his activity for Morewood in Pennsylvania. However the facts stipulated to by the Commonwealth indicate otherwise and the Commonwealth is bound thereby. See Commonwealth v. Carheart Corp., supra.
Finally the Commonwealth relies upon Commonwealth v. Emart Corp., 443 Pa. 397, 278 A.2d 916 (1971) to support its claim that their settlement of the franchise tax was proper. In Emhart we held that the sale of certain stock was related to the corporate enterprise and therefore was to be included in income allocable to Pennsylvania for purposes of computing the Pennsylvania Corporate Net Income Tax. That case is distinguishable in that (1) the business was admittedly unitary and (2) it was not an unrelated asset because the sale of the stock was used to reduce a corporate debt as specifically required by a prior loan agreement. Thus the sale benefited the Pennsylvania activity as well as the corporate activity outside of Pennsylvania.
In sum we conclude that the capital stock value for 1966 should include only the value of Morewood’s Pennsylvania property. Accord, Commonwealth v. Kirby Estates, Inc., supra.
In its second and final argument the Commonwealth argues that the Commonwealth Court erred in using the book value of the Pennsylvania property to compute *211the franchise tax. They contend that “other values such as local assessed value for tax purposes, replacement value, insurance on the property, income generated by the property, and appraised value should be considered.” In view of the fact that the purpose of the franchise tax is the privilege of doing business in the state and not a property tax, see Commonwealth v. Columbia Gas and Electric Corp., 336 Pa. 209, 8 A.2d 404 (1939), we might be inclined to agree with the Commonwealth’s position that book value alone may be an insufficient measure for determining capital stock. Where, as here, however, the Commonwealth made no attempt to offer specific evidence of these “other values”, the book value absent such other evidence is an appropriate measure of the value of the franchise. The Commonwealth, having stipulated to the book value, is bound thereby and we cannot conclude on the basis of this record that the Commonwealth Court erred in its valuation. Commonwealth v. Carheart, supra; Commonwealth v. Kirby Estates, Inc., supra.
Accordingly, the order of the court below is affirmed.