Appeal from judgment of Court of Common Pleas of Dauphin County, No. 44 Commonwealth Docket, 1966, in case of Commonwealth v. Kirby Estates, Inc.
Edward T. Baker, Deputy Attorney General, with him William C. Sennett, Attorney General, for Commonwealth, appellant.
John McI. Smith, with him Nauman, Smith, Shissler & Hall, for appellee.
Bell, C. J., Musmanno, Jones, Cohen, Eagen, O'Brien and Roberts, JJ. Opinion by Mr. Justice Cohen. Dissenting Opinion by Mr. Justice Roberts. Mr. Justice Musmanno joins in this dissent.
This is an appeal by the Commonwealth involving the franchise tax imposed upon Kirby Estates, Inc. for the year 1962.
Kirby Estates, Inc. (taxpayer) is a Delaware corporation organized in 1943 as an investment and holding company. Until 1961 taxpayer engaged solely in the business of investing in stocks and securities, its activities in this respect being carried on wholly outside Pennsylvania. These activities continued in a similar fashion during 1962.
However, during December, 1961, taxpayer, by action of its board of directors acquired a tract of real estate in Erie, Pennsylvania, for the sum of $77,565.57. It paid for this real estate by giving cash in the amount of $32,565.57 and securing a mortgage from an Erie bank for $45,000. All of the cash was drawn from its earnings; none came from the sale of any stocks or securities. At the same time taxpayer registered to do business in Pennsylvania.
Taxpayer's Pennsylvania real estate was rented to unrelated tenants. It was managed for taxpayer by an Erie firm which received a monthly management fee. In 1962 taxpayer received rental income from the property of $10,692.60 and incurred expenses in connection therewith of $10,045.78, leaving a net income of $646.82.
In computing its 1962 franchise tax, taxpayer valued its capital stock at $30,450.36 by taking the December 31, 1962, depreciated book value of its Pennsylvania
real estate and subtracting therefrom the December 31, 1962, mortgage balance. To this figure it applied a taxable proportion of 100% (all of the factors attributable to its real estate activity were in Pennsylvania) and applied the five mill tax rate to obtain a tax of $152.25.
The Commonwealth, however, refused to let taxpayer eliminate its securities activity in this fashion. It settled the tax by including both the real estate and securities in determining the value of taxpayer's capital stock. This produced a value of $1,400,000. Application of the allocation fractions (100% for tangible property, no compensation fraction at all, and slightly less than 13% of all ...