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decided: September 20, 1971.


Appeal from the determination of the Department of Revenue in case of Petition of Unity-Frankfort Rack Service, Inc. Transferred September 1, 1970, from the Court of Common Pleas of Dauphin County to the Commonwealth Court of Pennsylvania.


Paul W. Lunkenheimer, with him Schumacker & Lunkenheimer, for appellant.

Edward T. Baker, Deputy Attorney General, with him J. Shane Creamer, Attorney General, for appellee.

President Judge Bowman and Judges Crumlish, Jr., Kramer, Wilkinson, Jr., Manderino, Mencer and Rogers. Opinion by Judge Manderino.

Author: Manderino

[3 Pa. Commw. 292 Page 294]

The question in this appeal is the proper valuation of the capital stock of Unity-Frankford Rack Service, Inc. (Unity), organized under the Business Corporation Law of Pennsylvania. Unity filed a capital stock tax report for the fiscal year ending June 29, 1968, which valued its capital stock at $125,000. The Commonwealth refused to accept Unity's valuation and revalued the worth of Unity's capital stock at $200,000, resulting in a claim for additional tax of $450. Unity appealed the Commonwealth's valuation through proper administrative channels and then to the Court of Common Pleas of Dauphin County. The appeal was transferred to this court pursuant to the Commonwealth Court Act (Act of January 6, 1970, P.L. , Act No. 185, 17 P.S. 211.1 et seq.)

The value of $125,000 placed by Unity upon its capital stock should be accepted unless the Commonwealth is able to show that the actual value of Unity's capital stock is other than the amount declared by Unity. Commonwealth v. Gimbel Bros., 18 Dauph. 385 (1915), Commonwealth v. Sykes Bros., Inc., 53 Dauph. 26 (1942).

Section One of the Capital Stock Tax Act (Act 1889, June 1, P.L. 420, ยง 21, as amended, 72 P.S. 1871) provides that a tax shall be paid ". . . on each dollar of the actual value of its whole capital stock. . . ." Section 20 of the Capital Stock Act (supra, 72 P.S. 1902) provides that the officers of the corporation shall file a report under oath stating the valuation and appraisal of the capital stock. The officers of the Company are to make their valuation under Section 20, for the ". . . actual value in cash as it existed at the close of the year for which report is made; . . . ."

Section 20 further provides that the officers, in declaring the actual value in cash are to take into consideration

[3 Pa. Commw. 292 Page 295]

    basically three factors: ". . . first, the average which said stock sold for during the year; and second, the price or value indicated or measured by net earnings or by the amount of profit made and either declared in dividends, expended in betterments, or carried into the surplus or sinking fund; and third, the actual value indicated or measured by consideration of the intrinsic value of its tangible property and assets, and of the value of its good will and franchises and privileges, as indicated by the material results of their exercise, taking also into consideration the amount of its indebtedness. . . ." (72 P.S. 1902).

Unity functions as an economic cooperative. It is a wholly owned subsidiary of the Frankford-Quaker Grocery Company (Frankford), another Pennsylvania business corporation which also functions as an economic cooperative. The entire capital stock of Frankford is owned by retail grocers who are members of that cooperative. Frankford purchases, warehouses and distributes grocery items to its retail grocer members. Stock in Frankford may only be owned and purchased by retail grocers. Unity was organized for the corporate purpose of purchasing, warehousing, and distributing health and beauty aids to its retail grocer members.

A retail grocer may apply for membership in either or both cooperatives by an application and contract. Shares of stock in Frankford with a par value of $100 per share are purchased by the grocer member in a quantity the value of which is intended to equal approximately three times the average weekly "price" of merchandise the grocer wishes the cooperative to purchase for his weekly merchandise withdrawals. The shares of stock are then assigned to the cooperative as security for any amount which may become due in the future. The grocer member then pays a weekly "price" for all items he withdraws from the cooperative. This

[3 Pa. Commw. 292 Page 296]

"price" is determined by estimating all of the cooperative's costs plus "reasonable reserves" for the cooperative. Unity's bylaws also provide that any amount over costs of the weekly "prices" paid to the cooperative by the grocer members, including the reserve, shall be refunded to the members in proportion to their withdrawals of merchandise.

During the fiscal year 1968, Unity, in accordance with its bylaws, refunded to its grocer members $63,325, the sum representing an excess of the amount, including the reserves, over the cooperative's costs. The amount held back in the reserve fund was $41,384. The average retention for reserves for five years was $23,311. All of Unity-Frankford's capital stock at the end of 1968 had a net book value of $151,611. The ...

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