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decided: October 29, 1974.


Appeal from order and judgment of Commonwealth Court, No. 698 Transfer Docket 1970, in case of Commonwealth of Pennsylvania v. Morewood Realty Corp.


Edward T. Baker, Deputy Attorney General, for Commonwealth, appellant.

William Y. Rodewald, with him Buchanan, Ingersoll, Rodewald, Kyle & Buerger, for appellee.

Jones, C. J., Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Opinion by Mr. Justice Nix. Dissenting Opinion by Mr. Justice Roberts.

Author: Nix

[ 458 Pa. Page 206]

This is an appeal by the Commonwealth from an adverse decision of the Commonwealth Court holding that New York property owned by appellee, Morewood Realty Corporation, should be excluded from the valuation of Morewood's capital stock for purposes of the Pennsylvania franchise tax, Act of June 1, 1889, P. L. 420, § 21, as amended, 72 P.S. § 1871(b), imposed upon Morewood for the year 1966. Morewood Realty Corp. v. Commonwealth, 6 Pa. Commonwealth Ct. 244, 294 A.2d 219 (1972).

The parties stipulated to the following facts. Morewood is a Delaware Corporation whose principal place of business is in New York. It is registered to do business in Pennsylvania. It owns two buildings in Pittsburgh and each is rented to unrelated tenants and managed by a local rental agent. The Corporation also owns a sand and gravel business in New York from which it receives royalties and rental income from the rental of machinery used thereon. In addition, the company owns and manages a portfolio of securities in New York. Director's meetings are held at the New York office where the President makes routine decisions. All the Corporation's properties except the two Pittsburgh buildings are located in New York. Morewood has never had any employees working in Pennsylvania. One director and vice president resides in Pennsylvania but he also serves on boards of other companies. This officer travels to New York once a month to vote at meetings and does not supervise the Pennsylvania properties. Morewood carries separate insurance

[ 458 Pa. Page 207]

    policies on its Pittsburgh property. The net income from the Pittsburgh properties in 1966 amounted to $1,657. The buildings were purchased in 1965 in a cash transaction and none of the out-of-state assets were used either to secure the Pennsylvania purchase money or to act as reserve for costs on any Pittsburgh property.

When Morewood first submitted its tax return for 1966 it included its New York assets and receipts. Using the formula in the Franchise Tax Act and a value of $24,155,130 for its capital stock its franchise tax equaled $4,563.63. The Department of Revenue increased the valuation of the capital stock to $35,000,000. Morewood petitioned for resettlement alleging that it had erroneously included the New York assets and receipts and that the revaluation by the Department was incorrect. The Department refused the petition and the Board of Finance and Review sustained the Department's position. Morewood appealed to the Court of Common Pleas which transferred the matter to the Commonwealth Court. The Commonwealth Court reversed the decision of the Board and found that the tax due for the year 1966 should be confined to the value of the land and buildings situated in Pennsylvania which that court determined to be the stipulated book value of those properties.

Appellant here alleges that the Commonwealth Court erred first in excluding the New York assets and receipts because Morewood had not met its burden of proof that inclusion would create an unconstitutional application of the tax; and second that the valuation based on the book value of the properties was incorrect.

In view of the constitutional proscription against taxation by one state of property in another, Wheeling Steel Corp. v. Fox, 298 U.S. 193, 209 (1936), our Court has held that the relevant tax statute "does not give power to the Commonwealth to levy a capital stock tax

[ 458 Pa. Page 208]

    or a franchise tax upon securities held and owned by a foreign corporation doing business in Pennsylvania which have no fair relation to the value of the franchise enjoyed by the corporation in this state. Such assets must be excluded." Commonwealth v. Carheart Corp., 450 Pa. 192, 196, 299 A.2d 628, 630 (1973), citing Commonwealth v. The Mundy Corp., 346 Pa. 482, 484, 30 A.2d 878, 879-80 (1943). Since Morewood has the burden of proving a constitutionally impermissible application of the tax, Commonwealth v. American Telephone & Telegraph Co., 382 Pa. 509, 516 n.2, 115 A.2d 373, 376 n.2 (1955), the central issue is whether Morewood has shown that its New York properties "have no fair relation to the value of the franchise enjoyed by the corporation" in Pennsylvania.

In Commonwealth v. ACF Industries, Inc., 441 Pa. 129, 271 A.2d 273 (1970) this Court extensively discussed the principles relating to a determination of both the franchise tax and corporate net income tax. There the Court said:

"Exclusion of value or income is claimed because the taxpayer either (1) is engaged in a separate business outside of Pennsylvania (the so-called 'multiform' concept) or (2) owns an asset or assets unrelated to the exercise of its franchise or the conduct of its activities in Pennsylvania (the so-called 'unrelated asset' concept)." 441 Pa. at 135, 271 A.2d at 276.

"In two franchise tax cases . . . we dealt with taxpayers whose activities were not multiform . . . Neither case involved a situation 'in which a corporation conducts diverse forms of business having no unity save unity of ownership, and no common relation save by separate contributions to the total revenue of the corporation.'" 441 Pa. at 138, 271 A.2d at 277-78.

[ 458 Pa. Page 209]

Since we deal in these multiform or unrelated asset cases with an apportionment dependent on factual considerations, each case, naturally, is unique. Nevertheless, the principles are clear.

"First, if a multistate business enterprise is conducted in a way that one, some or all of the business operations outside Pennsylvania are independent of and do not contribute to the business operations within this State, the ...

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