Appeal from judgment of Court of Common Pleas of Dauphin County, No. 12 Commonwealth Docket, 1958, in case of Commonwealth of Pennsylvania v. General Refractories Company.
Edward T. Baker, Deputy Attorney General, with him Walter E. Alessandroni, Attorney General, for Commonwealth, appellant.
William H. Wood, with him N. David Rahal, John F. Headly, and Hull, Leiby and Metzger, and Montgomery, McCracken, Walker & Rhoads, for appellee.
Bell, C. J., Musmanno, Jones, Cohen, Eagen, O'Brien and Roberts, JJ. Opinion by Mr. Justice Cohen. Mr. Justice Roberts dissents.
This is an appeal by the Commonwealth of Pennsylvania (Commonwealth) from a final judgment of the Court of Common Pleas of Dauphin County sustaining certain contentions of General Refractories Company (General), a Pennsylvania corporation, with regard to the determination of its Pennsylvania corporate net income tax for the calendar year 1954.
General, in 1950, purchased all of the stock of American-Austrian Magnesite Corporation, a Delaware corporation, from the then owners. The principal asset of the acquired company was the entire outstanding stock of Oesterreichisch-Amerikanische Magnesit, A. G. (Oemag), an Austrian corporation engaged in mining
and manufacturing activities in Europe.*fn1 Since the Austrian Government, at that time, had imposed currency controls restricting the removal of currency from Austria, General completed the aforementioned purchase only after entering into several agreements with Oemag whereby it could obtain a return on its investment in a manner approved by the Austrian Government. The return took the form of 15,000 tons of magnesite to be delivered annually by Oemag to General; and although the initial agreement between the parties indicated that such tonnage was to be paid as "royalty and compensation" for General's grant to Oemag of the use of certain patents and know-how, the "Supplemental Agreement" required and approved by the Austrian Government indicates rather clearly that the purpose of the magnesite payments was to provide a satisfactory return on its investment to General. The "Supplemental Agreement" stated that the magnesite was to be accepted "in lieu of dividends" and that Oemag shall pay no "additional dividends" in any year in which it pays magnesite to General. It also states that General may terminate the arrangement if it ceased to be the sole stockholder of Oemag or if the Austrian Government thereafter permitted Oemag to pay dividends in currency. Both of these latter conditions confirm the connection between the magnesite payments and General's stock ownership in contrast to any sale or licensing of patents and know-how.
In 1954 General received from Oemag (1) the 15,000 metric tons of magnesite with a value (after loss in shipment and certain expenses of General) of $927,562.13 and (2) 1,886 shares of stock in an American corporation with a value (over the cash paid to Oemag by General) of $115,789.83. The total of $1,043,351.96
was reported by General in its federal income tax return as dividends and was used by it in computing a credit against its federal income tax as dividends received from a foreign corporation. In computing its Pennsylvania corporate net income tax, General deducted the entire amount as dividends received from another corporation. The Commonwealth denied General's right to make this deduction, thus giving rise to the present controversy.
At all times, from the initial enactment of the Pennsylvania Corporate Net Income Tax Act of May 16, 1935, P. L. 208 (Act), to the present day, the measure of the tax has been, with few adjustments, the income upon which tax is paid to the Federal Government. See Commonwealth v. Lukens Steel Company, 402 Pa. 304, 167 A.2d 142 (1961). Pennsylvania has always referred to this measure as "net income", and it has always defined net income as the "net income" (prior to the Internal Revenue Code of 1954 -- ...