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decided: June 24, 1966.


Appeal from order of Superior Court, Oct. T., 1965, No. 306, affirming order of Court of Common Pleas No. 6 of Philadelphia County, June T., 1961, No. 2849, in case of Shelburne Sportswear, Inc. v. City of Philadelphia.


Levy Anderson, First Deputy City Solicitor, with him Edward G. Bauer, Jr., City Solicitor, for City of Philadelphia, appellant.

Richard B. Malis, with him Malis, Malis & Malis, for appellee.

Bell, C. J., Musmanno, Jones, Cohen, Eagen, O'Brien and Roberts, JJ. Opinion by Mr. Justice Roberts. Mr. Justice Jones concurs in the result.

Author: Roberts

[ 422 Pa. Page 201]

This appeal presents a question under the Philadelphia Mercantile License Tax.*fn1 An assessment thereunder was made by the City of Philadelphia against appellee, Shelburne Sportswear, Inc., a Pennsylvania corporation, for the years 1959 and 1960. Shelburne appealed to the Tax Review Board of the City of Philadelphia, which sustained the imposition of the tax.*fn2 A further appeal to the Court of Common Pleas of Philadelphia County resulted in the decision of the Tax Review Board being reversed and the assessment being set aside.*fn3 The decision of the Court of Common Pleas was affirmed by the Superior Court,*fn4 and we allowed the petition of the City of Philadelphia for allocatur. For the reasons hereinafter stated, we are of the view that the Court of Common Pleas erred in reversing the Tax Review Board and that its decision may not stand.

The essential facts are not in dispute. Appellee, Shelburne, was organized in 1954 for the purpose of engaging in a form of manufacturing known as "full fashioned" knitting. So far as the record reveals, it is a de jure corporation, having issued shares of stock, elected directors, and appointed corporate officers. It has one or more bank accounts; it owns certain property including the knitting machinery employed in its operations; it rents space for its facilities; it employs and pays labor; and it pays for repairs to its machinery, for spare parts, and for certain supplies used in its operations. While its officers do not receive remuneration, appellee's president, on occasion, received a salary.

[ 422 Pa. Page 202]

The "full fashioned" knitwear manufactured by appellee is devoted exclusively to supplying Clover Knitting Mills, Inc., an affiliate having the same stockholders owning shares in the same proportion and the same directors and officers. Shelburne's operations are comprised of knitting yarns supplied by its affiliate, Clover, into unfinished garments such as "sweater bodies" and transferring its work product to Clover. In exchange for the service rendered by appellee, Clover provides sufficient funds for Shelburne to meet its expenses. Thus, appellee's receipts from Clover are not based upon a unit or other fixed price for the services which it performs but are calculated merely to meet Shelburne's costs of operation. As a result of this arrangement, appellee operates in a state of economic stasis, showing neither profit nor loss.

The City of Philadelphia, pursuant to power granted by the Act of August 5, 1932, P. L. 45, § 1, 53 P.S. § 15971, subject to certain exceptions and qualifications not here relevant, imposes an annual mercantile license tax upon every person engaged in "business." As defined in the ordinance, the term "business" includes: "The carrying on or exercising for gain or profit within the City any trade, business, profession, vocation or making sales to persons within the City, or any manufacturing, commercial or financial activity, service or business, including but not limited to manufacturers, brokers, wholesale dealers or wholesale vendors, retail dealers, or retail vendors. . . ." Philadelphia Code § 19-1001(1).

Appellee, in urging that its activities are not such as to subject it to the tax in question, contends that although incorporated as an independent entity, it is, as a matter of economic reality, a department or division of its affiliate, Clover -- a mere bookkeeping device rather than a viable and independent corporation. Its position is predicated on the fact that Shelburne returns

[ 422 Pa. Page 203]

    no profit and was not intended to return a profit but was organized to permit Clover to engage in a new enterprise, full fashioned knitting, without subjecting itself to the ...

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