Appeals from the Orders of the Board of Finance and Revenue in case of Appeal of Safe Harbor Water Power Corporation, Docket Nos. R-16709 and R-16710. Transferred September 1, 1970 from the Court of Common Pleas of Dauphin County to the Commonwealth Court of Pennsylvania.
Robert R. Batt, with him Brian T. Keim and Ballard, Spahr, Andrews & Ingersoll, for appellant.
George W. Keitel, Deputy Attorney General, for appellee.
President Judge Bowman and Judges Crumlish, Jr., Kramer, Wilkinson, Jr., Mencer, Rogers and Blatt. Opinion by President Judge Bowman.
These tax appeals challenge resettlements of appellant's corporate net income tax liability for the years 1956 and 1957 which were sustained by the Board of Finance and Revenue and provide the basis for the instant appeals.
They are before us upon a stipulation of facts which facts are as follows: appellant, Safe Harbor Water Power Corporation ("Safe Harbor"), a Pennsylvania corporation, was formed in 1930 as the result of a merger and consolidation of Safe Harbor Water Power Corporation (serving the Township of Manor, Lancaster County) and Chanceford Water Power Corporation (serving the Township of Chanceford, York County). The formation of appellant was caused by Consolidated Gas Electric Light and Power Company of Baltimore (now Baltimore Gas and Electric Company, hereinafter referred to as "the Baltimore company") and Pennsylvania Water and Power Company (predecessor to Pennsylvania Power and Light Company, both predecessor and successor hereinafter referred to as "the Pennsylvania company"). Appellant's voting stock was divided equally between the Baltimore and Pennsylvania companies, with the Baltimore company also receiving non-voting stock to reflect its greater investment in appellant.
The Baltimore and Pennsylvania companies originally constituted an electric power system known as the "Aldred System," and in 1927 they were more closely integrated via the execution of a long-term contract under which the Baltimore company became entitled to the entire hydro-electric output of the Pennsylvania company. Appellant was formed as an extension of the Aldred System. During the construction of its generating facilities on the Susquehanna River at Safe Harbor, Pennsylvania, appellant entered into an agreement dated June 1, 1931, effective until April 22, 1980, with the Baltimore and Pennsylvania companies whereby two-thirds of appellant's output was sold to the Baltimore company and one-third was sold to the Pennsylvania company. By the terms of the agreement, the rate of annual payment specified for 1938 and subsequent years was to yield to appellant a return of seven percent on its rate base; this was reduced to five percent in 1946 by the Federal Power Commission. Supplemental agreements dated August 1, 1932, and November 22, 1939, essentially reaffirmed the terms of the 1931 agreement.
Throughout 1931 and for many years thereafter, all three companies maintained their principal offices in Baltimore. Appellant had no executive or administrative office in Pennsylvania until August, 1955, prior to which time its employees in Pennsylvania consisted exclusively of construction, operating and maintenance personnel. Executive officers of appellant had offices in Baltimore and/or New York City until August, 1955. Prior to that date, all legal purchasing, budgeting, engineering, financial, accounting, billing, tax, insurance and other administrative functions of appellant were performed by its Baltimore personnel. The 1931 and supplemental agreements were executed on behalf of appellant by J. A. Walls, originally appellant's vice-president and later its president; negotiations for these
agreements were conducted at the New York and Baltimore offices.
On December 28, 1937, appellant registered with the Maryland State Tax Commission to transact interstate business in Maryland; this registration is still in effect.
In 1940, the Federal Power Commission terminated Aldred control of the Baltimore and Pennsylvania companies. Lacking unified control, the relationship between the two companies deteriorated to the point of continuous litigation between them, commencing in 1948. This litigation was finally resolved on June 1, 1955, at which time the following events occurred:
(1) Pennsylvania Water and Power Company merged into Pennsylvania Power and Light Company.
(2) The Baltimore and Pennsylvania companies entered into a new agreement with appellant superseding the 1931 agreement, but continuing the sale of two-thirds of appellant's electric energy to the Baltimore company and one-third to the Pennsylvania company, said terms to be in effect until April 22, 1980.
(3) Appellant engaged the services of Stone & Webster Service Corporation; among these services were the appointment of an individual to serve as president and board chairman of appellant and the appointment of others to serve as vice-president, assistant secretary and assistant treasurer. This management agreement has been renewed annually since.
Negotiations for this 1955 agreement had been proceeding for several years. Participating therein were three directors of appellant with offices in Baltimore. Two of these individuals were also employed by the Baltimore company; the third was also employed by the Pennsylvania company. Appellant had no interest in the outcome of these negotiations, the principal issue being the division of appellant's electric energy output between the Baltimore and Pennsylvania companies.
The management contract with Stone & Webster was intended to vest the management of appellant in persons independent of the two corporate shareholders. Stone & Webster selected one of its vice-presidents, F. W. Utz, to serve as president and board chairman of appellant. Mr. Utz executed the 1955 agreement on behalf of appellant.
During the year 1956, appellant paid or accrued to Stone & Webster $49,654.05 of which $22,916.67 constituted five-twelfths of the first yearly fee*fn1 of $55,000.00 pursuant to the 1955 agreement; $26,250.00 constituted seven-twelfths of the regular yearly fee of $45,000.00; the balance represented reimbursement of expenses incurred. During the year 1957, appellant paid or accrued to Stone & Webster $45,274.27, of which $45,000.00 represented the regular yearly fee and the balance represented reimbursement of expenses incurred.
After June 1, 1955, appellant had its name listed in the New York City telephone directory and on the building directory at 90 Broad Street, New York City, where its engineering and executive offices were located on the nineteenth floor. Stone & Webster occupied seven floors at the same location, including the nineteenth floor. These offices included those of the individuals appointed by Stone & Webster to serve as president and vice-president of appellant commencing June 1, 1955.
In August, 1955, appellant closed its Baltimore office. Most of the "general office routine" was transferred to appellant's office in Safe Harbor, Pennsylvania, where it has since been performed by a maximum of nine employees as directed by appellant's treasurer. The other four officers of ...