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decided: November 12, 1970.


Appeal from judgment of Court of Common Pleas of Dauphin County, No. 280, Commonwealth Docket, 1965, in case of Commonwealth v. ACF Industries, Incorporated.


N. David Rahal, with him Roy J. Keefer, and Metzger, Hafer, Keefer, Thomas & Wood, for appellant.

Edward T. Baker, Deputy Attorney General, with him William C. Sennett, Attorney General, for Commonwealth, appellee.

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

Author: Cohen

[ 441 Pa. Page 131]

This is an appeal by ACF Industries, Incorporated (ACF), from a settlement of its corporate net income tax for the fiscal year ended April 30, 1962. The sole question is whether it must include the gain on the sale of certain securities in the income reported by it to the Commonwealth of Pennsylvania (Commonwealth) for that year.

ACF is a New Jersey corporation with its head-quarters in New York City. It is registered to do business in Pennsylvania. During the year in question, its activities in Pennsylvania included the manufacture of railroad and tank cars, the repair of freight and tank cars (its own and others), the manufacture of pressed steel and pressure vessels and the sale of some products made outside the state. It also carried on these activities, as well as certain aerospace and nuclear engineering operations, outside of Pennsylvania. It concedes that its business enterprise is a unitary one for corporate net income tax purposes.

In April, 1960, ACF purchased 214,500 shares of stock of Republic Aviation Corporation from the estate of Paul Moore. The purchase came about as a result of information acquired by a director of ACF who also served as a director of Bankers Trust Company of New York with Paul Moore. Bankers Trust did business with Republic, and Moore served on Republic's board and frequently mentioned the company. When Moore died, his colleague on Bankers Trust board made the availability of the stock known to ACF. Since ACF had business dealings with Republic, it was interested in exploring an acquisition of Republic's assets or a

[ 441 Pa. Page 132]

    merger with Republic and felt there was little risk in acquiring the stock. It consummated the purchase at a price of $24 a share.

Following the purchase, a joint committee was established to explore the acquisition or merger possibilities. In May, 1961, this committee rendered a negative report. ACF then decided to dispose of its Republic stock; and on August 29, 1961 (sixteen months after purchase), it sold all of the shares through a secondary offering at a net price of $47.875 a share. This sale produced a net capital gain of $5,058.299. ACF excluded all of this gain in reporting its corporate net income to Pennsylvania for the year of sale on the theory that this income was from an asset unrelated to its Pennsylvania activities. The Commonwealth disagreed and, after the lower court sustained the Commonwealth's position, the present appeal followed.

Apart from the above, certain other facts appear:

First, in order to finance the purchase of the Republic stock, ACF had to use borrowed funds. In 1958 it had entered into a loan agreement with The Prudential Insurance Company whereby the latter agreed to lend ACF $25,000,000 (half on April 30, 1959, and half on April 30, 1960) for general business purposes. The second half of this loan was taken down by ACF 12 days prior to its purchase of the stock, and in order to use part of these funds for the purchase it obtained Prudential's consent to a modification of certain restrictions in the loan agreement which otherwise would have prevented ACF from so using the funds.

The loan agreement with Prudential called for final repayment by ACF on May 1, 1979, with an annual retirement of $1,000,000 beginning May 1, 1962. ACF made the annual payments from cash generated by its general business activities and, in fact, prepaid the entire remaining balance on the loan on April 30, 1965 (fourteen years early).

[ 441 Pa. Page 133]

Second, ACF handled the Republic stock on its financial statement as a separate item "Investment in common stock of Republic Aviation Corporation" and referred to it as a transaction not related to its normal business operations. It carried on all of its activities relating to the stock at its New York City office. The testimony indicates that the stock was not used as collateral for loans, was not associated with other assets or the reserves of the corporation and produced more than sufficient dividends to pay the interest on that part of the Prudential loan used to acquire it. ACF's tax manager testified that net gains on the sale of stock in no way influenced ACF's business activities or financial planning. Both the dividends and sale proceeds were commingled with ACF's other funds.

Third, before and during ACF's ownership of the Republic stock, it engaged in several joint business activities with Republic. In 1958 Republic was awarded a prime government contract to build and supply F-105 fighter planes to the Federal Government. In a separate award ACF obtained a prime government contract to build and furnish flight simulators to train pilots to fly the F-105 planes. In connection with these separate contracts Republic furnished ACF with data regarding the F-105.

In April, 1960 (prior to the stock purchase), ACF and Republic submitted a joint bid to NASA involving flight testing of nuclear rocket propulsion systems. This bid was rejected on July 29, 1960. From time to time ACF submitted joint bids on federal contracts with other companies. According to the testimony, ACF never acquired stock in any of the other joint bidders, did not consider it necessary to do so in order to ...

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