Appeal from the Order of the Board of Finance and Revenue in case of In Re: Appeal of S. Frieder & Sons Company, Docket No. R-185.
William P. Thorn, with him Wolf, Block, Schorr and Solis-Cohen, for appellant.
Joseph F. Lynch, Deputy Attorney General, with him Donald J. Murphy, Deputy Attorney General, for appellee.
President Judge Bowman and Judges Crumlish, Jr., Wilkinson, Jr., Mencer, Rogers and Blatt. Judge Kramer did not participate. Opinion by Judge Mencer.
[ 27 Pa. Commw. Page 537]
This is an appeal from a denial by the Board of Finance and Revenue of a petition for review of the
[ 27 Pa. Commw. Page 538]
settlement of the 1971 franchise tax of S. Frieder & Sons Company (Frieder). Pennsylvania imposes a franchise tax on foreign corporations doing business in Pennsylvania or having capital or property employed in this Commonwealth.*fn1 This tax is assessed upon the value to the taxpayer of the franchise to do business in this state. Commonwealth v. Columbia Gas & Electric Corp., 336 Pa. 209, 8 A.2d 404 (1939).
The value of the franchise is computed by multiplying the value of the corporation's capital stock by the arithmetic mean of three fractions: the tangible property fraction, the compensation fraction, and the gross receipts fraction. The sole issue in this appeal is whether the Commonwealth's valuation of Frieder's capital stock at $1.1 million was reasonable and not excessive.
Frieder is a cigar manufacturer and engaged primarily in manufacturing private label cigars for large retailers or wholesalers. It enjoys about two-thirds of 1 percent of the total cigar market of the United States. Cigar consumption in the United States has declined each year since 1965, with the exception of the year 1970. The decline from 1965 to 1971 was approximately 1.1 billion units.
A jury trial was waived by the parties to this litigation, in accordance with the provisions of Section 1 of the Act of April 22, 1874, P.L. 109, as amended, 12 P.S. § 688. The parties have entered into a partial stipulation of facts. We adopt the stipulation as our findings of fact and incorporate the same herein by reference. In the course of this opinion we will discuss those facts which, in our judgment, are essential to the disposition of this case.
[ 27 Pa. Commw. Page 539]
Frieder timely filed its franchise tax report for the year ended December 31, 1971, in which it valued its capital stock for franchise tax purposes at $557,461. Its allocation fraction was .638952, and its 10-mill franchise tax was computed at $3,562. The Department of Revenue and Auditor General settled Frieder's franchise tax for the year in question by increasing the value of its capital stock to $1.1 million, with a resulting increase in the franchise tax which was determined to be $7,028.47. Frieder was unsuccessful in attempting to have the tax resettled and thereafter filed a petition for review with the Board of Finance and Revenue, which was denied.
Section 601 of the Act, 72 P.S. § 7601, provides in pertinent part that the capital stock shall be valued and appraised "at its actual value in cash as it existed at the close of the year for which report is made; taking into consideration, 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 franchise and privileges, as indicated by the material results of their exercise, taking also into consideration the amount of its indebtedness."
Frieder is a privately held corporation and none of its stock was sold during the year 1971. Frieder's current assets on December 31, 1971 consisted of cash in the amount of $97,481, accounts receivable of $414,273, inventories of $846,201, and other current assets and investments of $226,138. In addition, Frieder's buildings and other fixed depreciable assets were valued at $992,983, subject to accumulated depreciation
[ 27 Pa. Commw. Page 540]
of $649,699, and other assets totaled $393,550. These items resulted in total current assets of $2,320,927. Frieder's liabilities included accounts payable of $192,085; mortgages, notes, and bonds payable in less than one year of $80,000; mortgages, notes, and bonds payable in one year or more, $240,000; and other current liabilities of ...