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decided: October 12, 1971.


Appeal from judgment of Court of Common Pleas of Dauphin County, No. 356 Commonwealth Docket, 1967, in case of Commonwealth of Pennsylvania v. Western Maryland Railway Company.


Robert D. Myers, with him Shearer, Mette & Hoerner, for appellant.

George W. Keitel, Deputy Attorney General, with him Fred Speaker, Attorney General, for Commonwealth, appellee.

Bell, C. J., Jones, Eagen, O'Brien, Roberts, Pomeroy and Barbieri, JJ. Opinion by Mr. Justice Jones.

Author: Jones

[ 445 Pa. Page 136]

This is an appeal from the judgment of the Court of Common Pleas of Dauphin County sustaining the action of the Board of Finance and Review which denied appellant's petition for resettlement of its corporate net income tax, Act of May 16, 1935, P. L. 208, § 1 et seq., as amended, 72 P.S. § 3420a et seq., for the taxable year 1960. Pursuant to the Act of April 22, 1874, P. L. 109, § 1, 12 P.S. § 688, the matter was presented to the court below on stipulated facts and waiver of trial by jury.

Appellant, Western Maryland Railway Company, a domestic corporation domiciled in both Pennsylvania and Maryland,*fn1 operates a railroad system with tracks in Pennsylvania, Maryland and West Virginia. In addition, appellant's freight cars moved throughout the United States in accordance with the mandate of the Interstate Commerce Commission, for which appellant receives a per diem charge. Appellant contends that the Commonwealth's allocation of the tangible property fraction and the gross receipts fraction was improper. Turning to a different provision of the Corporate Net Income Tax Act, appellant also argues that the allocation of gain from the sale of destroyed freight cars was erroneous. Following a general discussion of the law in this area, we will examine each of these arguments in detail.

"Under section 2 of section 3420b of the Corporate Net Income Tax Act, the net income of a corporation

[ 445 Pa. Page 137]

    transacting part of its business in Pennsylvania and part of its business outside of Pennsylvania is apportioned to Pennsylvania by the use of three fractions, i.e., tangible property, wages and salaries, and gross receipts. Section 2(a) first provides for the specific allocation to Pennsylvania of gains or losses from the sale or exchange of tangible capital assets situated within the Commonwealth. Section 2(b) provides that if such assets are situated without the Commonwealth, that gains or losses therefrom shall not be allocated within Pennsylvania. The remainder of the net income, referred to in tax parlance as 'net income to be allocated,' is then divided into three equal parts. Section 2(c). To each part is applied one of the three fractions heretofore mentioned." Com. v. Koppers Co., Inc., 397 Pa. 523, 525-26, 156 A.2d 328, 330-31 (1959), appeal dismissed, 364 U.S. 286 (1960).

Since appellant's business is interstate and not wholly transacted within this Commonwealth, allocation is necessary for otherwise the Commerce Clause and the Due Process Clause are violated. Such allocation becomes most difficult when dealing with tangible movable property. Abandoning the ancient maxim mobilia sequuntur personam -- movables have no situs other than the owner's domicile -- the Supreme Court, in Pullman's Palace Car Co. v. Pennsylvania, 141 U.S. 18 (1891), declared that a nondomiciliary state could levy a capital stock tax upon the Pullman cars used continuously on runs into and through the nondomiciliary state. However, to avoid a multiple tax burden, only that portion of the cars "permanently located" -- a legal fiction -- in the nondomiciliary state could be taxed. In its opinion, the Supreme Court also ruled that an assessment based on track mileage over which the cars ran within the taxing state compared to total track mileage in all states over which the cars ran correctly proportioned the tax.

[ 445 Pa. Page 138]

The second key opinion by the Supreme Court is New York ex rel. New York Cent. & H. R. R. R. v. Miller, 202 U.S. 584 (1905). Distinguishing the Pullman opinion, an unapportioned tax by the domiciliary state upon a railroad's freight cars was upheld in Miller notwithstanding the fact that the cars were also run in other states since, "it [did] not appear that any specific cars or any average of cars was so continuously in any other State as to be taxable there."*fn2 202 U.S. at 597. Thus, the Pullman and Miller cases as well as their progeny establish the two-fold proposition that: (1) a domiciliary state may tax all movables at full value so long as the movables have not acquired an actual situs elsewhere, in which case allocation becomes necessary; and (2) a nondomiciliary state may tax those movables "permanently located" within its boundaries.

These principles were summarized and discussed at length in Central R. R. v. Pennsylvania, 370 U.S. 607, 611-13 (1962):

"Since Miller this Court has decided numerous cases touching on the intricate problems of accommodating, under the Due Process and Commerce Clauses, the taxing powers of domiciliary and other States with respect to the instrumentalities of interstate commerce. None of these decisions has weakened the pivotal holding in Miller -- that a railroad or other taxpayer owning rolling stock cannot avoid the imposition

[ 445 Pa. Page 139]

    of its domicile's property tax on the full value of its assets merely by proving that some determinable fraction of its property was absent from the State for part of the tax year. This Court has consistently held that the State of domicile retains jurisdiction to tax tangible personal property which has 'not ...

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