Appeals, Nos. 8 and 9, May T., 1954, from judgments of Court of Common Pleas of Dauphin County, 1949 and 1950, Commonwealth Docket Nos. 7 and 31, in cases of Commonwealth of Pennsylvania v. The Budd Company, and Same v. Westinghouse Electric Corporation. Judgments affirmed; reargument refused November 9, 1954. Appeal by taxpayer from decision of Board of Finance and Revenue refusing petition for review of resettlement of corporate net income taxes. Before SMITH, P.J., without a jury. Adjudication entered finding for taxpayer; exceptions to adjudication dismissed and judgment entered for taxpayer. Commonwealth appealed.
George W. Keitel, with him Howell C. Mette, Deputy Attorneys General and Frank F. Truscott, Attorney General, for appellant.
Leslie M. Swope, with him Henry S. Drinker, James J. Dougherty and John R. Scholl, for The Budd Company, appellee.
Charles E. Kenworthy, with him Roy J. Keefer, Joseph G. Robinson, Hull, Leiby & Metzger and Reed, Smith, Shaw & McClay, for Westinghouse Electric Corporation, appellee.
Before Stern, C.j., Stearne, Jones, Bell, Chidsey, Musmanno and Arnold, JJ.
OPINION BY MR. JUSTICE BELL
These cases involve the same basic question and were argued together and will be treated as one in this opinion.
The question involved may be narrowed to whether § 2 of the Corporate Net Income Tax Act of May 14,
, P.L. 232, in its application to taxpayers' 1944 corporate net income is constitutional.
Each of the taxpayers is a Pennsylvania corporation; each is engaged in both intra-state and interstate business; and each was subject to Pennsylvania's Corporate Net Income Tax for the years 1944, 1945 and 1946. Each taxpayer duly filed with the Department of Revenue its corporate net income tax report for the year 1944 and each paid the tax shown therein to be due. In 1946 each of the taxpayers suffered a net operating loss which was allowed by the Commissioner of Internal Revenue and was applicable under the (Federal) Revenue Act of 1942 to the taxpayer's 1944 income.
The Corporate Net Income Tax Act was first enacted by the Act of May 16, 1935, P.L. 208 for a limited period of two years. It was thereafter reenacted up to and including 1945 (with amendments not here relevant), by every subsequent regular session of the legislature. It was denominated a state excise tax. Section 2 of the Act of May 7, 1943, P.L. 217 (and of the Act of April 11, 1945, P.L. 190) provided: "Section 2. Definitions. - The following words, terms, and phrases, when used in this act, shall have the meaning ascribed to them in this section, except where the context clearly indicates a different meaning. ...
"'Net Income.' 1. ... net income for the calendar year or fiscal year as returned to and ascertained by the Federal Government,*fn* ..."
Section 3 of the said Acts provided as follows: "Every corporation shall be subject to, and shall pay for the privilege of doing business in this Commonwealth, or having capital or property employed or used in this Commonwealth, ... a State excise tax ... at the
rate of four per centum per annum upon each dollar of net income of such corporation received by, and accruing to, such corporation during the calendar year ... one thousand nine hundred forty-four."
The Commonwealth ignores the definition of "net income" and limits it to the net income actually received by the corporation during the calendar year. We do not agree with this construction.
The Commonwealth adopted as the base of its tax for determining the tax liability of corporations for the years 1943, 1944 (and by the Act of 1945 supra, the years 1945 and 1946), the amount of net income "as returned to and ascertained by the Federal Government." Because of the losses which would likely be incurred in converting from wartime to peacetime business, the Revenue Act of 1942 provided that net operating losses could be carried back for the two years immediately prceding the loss year. That meant that each of these taxpayers could, under the Revenue Act of 1942, carry back its net operating loss in 1946 and apply it in reduction of its 1944 income. For the years 1941 to 1945 inclusive, the Department of Revenue and the Department of the Auditor General, in making corporate net income tax settlements and resettlements, allowed deductions for net operating loss carry-backs to the extent that corporations were permitted to do so under the Federal law.
The Commonwealth by Act of May 14, 1947, supra, amended the 1943 (and 1945) Acts by providing, inter alia: "Section 2. ... And provided further, That on reports filed for the calendar year one thousand nine hundred forty-six,... or any calendar or fiscal year thereafter, no deduction shall be allowed for net operating losses sustained by the corporation during any other fiscal or calendar year, nor shall any net operating loss sustained by the corporation during the calendar
year one thousand nine hundred forty-six,... or in any calendar or fiscal year thereafter be allowed as a deduction for any prior calendar or fiscal year...."
"Section 13. This Act shall become effective immediately upon its final enactment ...."
The Commonwealth contends that this amendment as applied to 1944 corporate net income is valid and constitutional, and that it made no change in the tax base of the prior Acts so far as carry-back losses are concerned.
The first question that arises is, what is the meaning of "net income" as used in the Acts prior to 1947 and more particularly do they permit carry-back losses sustained in 1946 to be deducted in ascertaining 1944 net income?
Pennsylvania chose and adopted as the base for determining the tax liability of corporations for the years 1943 to 1946 inclusive, the amount of net income as returned to and ascertained by the Federal Government, with full knowledge that The Revenue Act of 1942 allowed carry-back losses for the two years immediately preceding the loss year. But Pennsylvania went much further than this. During the month of June, 1946, in order to attract business to the Commonwealth and to retain within the Commonwealth as much corporate business as possible, Governor Martin and other high officials of the State advertised in the leading newspapers on the Atlantic seaboard as follows: "There are provisions for carry back and carry forward of corporate losses for purposes of State corporate income tax calculations which result in an effective average method of determining taxable income."
Governor Duff, in his Budget Message in January, 1947, recommended a change in the corporate net income tax in order to obtain increased revenue. He
said, inter alia: "... One of the principal reasons [for the lower than anticipated receipts from the corporate net income tax] is that this State allows the carry-back, carry-forward of losses as provided in the Federal Corporate Income Tax. Under this provision losses incurred in the current year may be carried back two years to be established as credits against taxes paid in these years or may be carried forward two years similarly. ...
"The carry-back, carry-forward provision was made a part of the Federal Tax Act in order to help to spread the burden of the high Federal taxes. Pennsylvania in using the Federal base did not exclude the operation of this provision as has been done in some other states. Of all the states having a corporate net income tax, this State alone permits the operation of this provision."
Moreover, each of the taxpayers, in reliance on the law, i.e., the Act of 1943 and the Act of 1945, and on the Commonwealth's advertisements and its practice prior to May 14, 1947, of allowing deductions for operating loss carry-backs to the extent permitted under the Federal law, made vital decisions and commitments, and in connection with mergers and a sale of debenture bonds and preferred stock, issued to its stockholders (in connection with possible purchases of stock), and to the buying public and to the (Federal) Securities and Exchange Commission, statements of taxpayer's right to carry-back operating losses for the two years in question.
Taxpayers contend that if this Act of 1947 is interpreted retroactively, as the Commonwealth contends it should be, the refusal to allow the carry-back to 1944 of a net operating loss sustained by the corporation in the year 1946, is ...