Appeal from order of Court of Common Pleas of Dauphin County, Commonwealth Docket, 1967, No. 185, in case of Commonwealth of Pennsylvania v. Emhart Corporation.
Sheldon M. Bonovitz, with him Duane, Morris & Heckscher, for appellant.
Edward T. Baker, Deputy Attorney General, with him Fred Speaker, Attorney General, for Commonwealth, appellee.
Jones, Cohen, Eagen, O'Brien, Roberts and Pomeroy, JJ. Opinion by Mr. Justice Roberts. Mr. Chief Justice Bell took no part in the consideration or decision of this case. Mr. Justice Cohen took no part in the decision of this case.
Two issues are presented in this appeal: (1) whether appellant Emhart Corporation, in computing its Pennsylvania Corporate Net Income Tax for 1964, properly excluded its capital gain realized on the sale of Monsanto Chemical Company stock from income to be allocated to Pennsylvania on the ground that the capital gain was unrelated to appellant's Pennsylvania business and bore no relation to the exercise of the privilege of doing business in Pennsylvania; and (2) whether, in computing its Pennsylvania Corporate Net Income Tax for 1964, appellant properly deducted its subpart F income (as defined by Section 952 of the Internal Revenue Code) and the taxes deemed to have been paid thereon as dividends received from any other corporation as provided for in Section 2(1)(b) of the Corporate Net Income Tax Act, Act of May 16, 1935, P. L. 208, as amended, 72 P.S. § 3420 b1 (b). We agree with
the Court of Common Pleas of Dauphin County (Commonwealth Docket)*fn1 that the exclusion of the capital gain was erroneous. However, we disagree with the view that the deduction of the dividend by appellant was improper and accordingly reverse that portion of the trial court's order.
I. Exclusion of Capital Gain
The pertinent facts have been stipulated by the parties. Emhart Manufacturing Company was originally a business corporation organized under the laws of Delaware in 1922 for the purpose of manufacturing glassmaking and packaging machinery and equipment. Its plant and principal office were located in Connecticut, and from the time of its incorporation until June 30, 1964, the date of its merger with appellant, it owned no offices or plants in Pennsylvania.
American Hardware Corporation (appellant, under a former name) was originally in the business of manufacturing builders' hardware, with its principal plant and home office in Hartford, Connecticut. In time, American Hardware expanded its business to include the manufacture of sporting firearms and refrigeration equipment; in the process, it acquired a plant in Lancaster, Pennsylvania, on March 1, 1962.
Then, on June 30, 1964, Emhart Manufacturing Company and American Hardware Corporation merged, with American Hardware being the surviving corporation. No gain or loss was recognized for federal tax purposes. The survivor's name was changed to Emhart Corporation -- appellant in the present case.
Certain corporate acquisitions prior to the merger must be set forth. In 1935, Emhart Manufacturing Company incorporated Plax Corporation in Delaware to develop inventions of the Fernplas Corporation, another Delaware corporation. Emhart Manufacturing eventually acquired Fernplas for cash and liquidated it into itself, thereby gaining title to any patents owned by Fernplas. Plax continued to develop machinery and to manufacture plastic products. Its home office and plant were located in Connecticut.
In 1953, Emhart Manufacturing sold one-half of the stock of Plax to Owens-Illinois Glass Company. In 1957, Owens-Illinois in turn transferred its one-half interest in Plax to Monsanto Chemical Company in exchange for Monsanto stock. In 1962, Monsanto acquired the remaining one-half of Plax stock from Emhart Manufacturing in exchange for Monsanto stock. As a result of these transactions, Emhart Manufacturing acquired a total of 308,219 shares of Monsanto common stock.
In February, 1964, Emhart Manufacturing borrowed $30,000,000 from the Bankers Trust Company in New York. At the time of the loan, merger negotiations between Emhart Manufacturing and appellant were already underway. The bank, Emhart Manufacturing, and appellant had an unwritten understanding that if any of Emhart Manufacturing's ...