decided: February 3, 1978.
COMMONWEALTH OF PENNSYLVANIA
AFTER SIX, INC., APPELLANT
Appeal from the Order of the Board of Finance and Revenue in case of In Re: After Six, Inc., Docket No. R-398.
William P. Thorn, with him Wolf, Block, Schorr and Solis-Cohen, for appellant.
Vincent J. Dopko, Deputy Attorney General, for appellee.
President Judge Bowman and Judges Crumlish, Jr., Wilkinson, Jr., Rogers, Blatt and DiSalle. Opinion by Judge Rogers.
[ 33 Pa. Commw. Page 474]
Both After Six, Inc., a domestic corporation, and the Commonwealth of Pennsylvania have appealed a resettlement by the Board of Finance and Revenue of After Six's capital stock tax for its fiscal year ending June 30, 1972.
The number and complexity of the statutes governing the imposition of the capital stock tax suggest a preliminary discussion of these provisions. By Section 602(a) of the Tax Reform Code of 1971 (Tax Reform Code),*fn1 72 P.S. § 7602(a), a tax at the rate of 10 mills is imposed upon the taxable value of all capital stock of a domestic corporation.*fn2 The computations required to reach taxable value begin with a determination of actual value, reached by a consideration of the indicia of actual value described in Section 601 of the Tax Reform Code, 72 P.S. § 7601, as follows:
[F]irst, the average which said stock sold for during the year; and second, the price or value
[ 33 Pa. Commw. Page 475]
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.
See also, Spang Stores, Inc. v. Commonwealth, 468 Pa. 63, 360 A.2d 180 (1976) (dealing with an essentially identical capital stock valuation provision under Section 20 of the Act of June 1, 1889, P.L. 420, as amended, 72 P.S. §§ 1901, 1902. The Act of June 1, 1889 has been repealed; replaced by the Tax Reform Code of 1971).
Taxable value is determined by applying one of two apportionment formulas against actual value so ascertained. The Act of June 22, 1931, P.L. 685, 72 P.S. § 1896,*fn3 provides for what is commonly referred to as a single factor apportionment formula employing only an asset fraction expressed as follows:
[ 33 Pa. Commw. Page 476]
(a) taxable assets (total assets less exempt assets)*fn4 /total assets = apportionment factor
(b) apportionment factor X actual value = taxable value X 10 mills = tax due.
However, Section 602(a) of the Tax Reform Code gives domestic corporations an election to compute their capital stock tax in accordance with Section 602(b) of the Tax Reform Code.*fn5 Section 602(b) imposes a franchise tax on foreign corporations measured by the taxable value of their capital stock.*fn6 Incorporated by reference into Section 602(b) for use in computing
[ 33 Pa. Commw. Page 477]
taxable value of the capital stock of foreign corporations are the three factors -- property, payroll and sales -- used in computing the apportionment factor used in turn in the computation of corporate net income tax due under Article IV of the Tax Reform Code. The apportionment factor so computed is required by Section 602(b) to be applied to the actual value of the foreign corporation's capital stock in order to arrive at its taxable value. These factors, which appear at Subsection (a)9-18 of Section 401(3)2 of the Tax Reform Code, 72 P.S. § 7401(3)2.(a)(9)-(18), are graphically as follows:
(a) Average value of tangible property in Pa./Average value of tangible property everywhere = %(1)
(b) Wages, salaries, etc. assignable to Pa./Total wages, salaries, etc. everywhere = %(2)
(c) Sales assignable to Pa./Total Sales everywhere = %(3)
(d) %(1) %(2) %(3)/3 = Apportionment factor
(e) Apportionment factor X Actual value = Taxable value
(f) Taxable value X 10 mills = Tax due.
After Six and the Commonwealth have stipulated the facts which are binding upon this Court as well as the parties. Greenville Steel Car Co. v. Commonwealth, 20 Pa. Commonwealth Ct. 385, 343 A.2d 79 (1975), aff'd 469 Pa. 444, 366 A.2d 569 (1976). After Six manufactures men's formal clothing. It owns all of the issued and outstanding capital stock of eleven subsidiaries. Six of these subsidiaries are Pennsylvania corporations which during After Six's fiscal year paid Pennsylvania Capital Stock Tax on an actual
[ 33 Pa. Commw. Page 478]
value of their stock of $4,220,000. The remaining five are foreign subsidiaries with assets located entirely outside the Commonwealth and whose capital stock has an agreed actual value of $4,700,000.
In computing its capital stock tax for its fiscal year ending June 3, 1972, After Six elected to use the optional method authorized by Section 602(a) and described in Section 602(b). It reported the actual value of its capital stock as $12,300,834. From this figure it deducted $8,700,000 as the claimed actual value of the capital stock of its subsidiaries,*fn7 leaving a balance of $3,600,000. Using the three factor apportionment method, it calculated its apportionment factor to be .784401. It then multiplied the asserted actual value of its capital stock ($3,600,000) by the apportionment factor to arrive at a taxable value of $2,823,844.00 which, multiplied by 10 mills, produced a capital stock tax liability of $28,238.44.
The Departments of Revenue and Auditor General rejected After Six's report and settled the tax at $78,525.80. This amount of tax was arrived at by reappraising the actual value of After Six's capital stock value at $10,000,000; by disallowing any exemption for the capital stock of the eleven subsidiaries; and by multiplying the $10,000,000 actual value by an apportionment factor slightly greater than the taxpayer's (.785258), to arrive at a taxable value of $7,852,580, which multiplied by 10 mills produced capital stock tax $78,525.80. On After Six's petition for resettlement, the Departments of Revenue and Auditor General audited After Six's records and made a substantial change in the apportionment factor (.873420) to resettle the tax at $87,342.00.
[ 33 Pa. Commw. Page 479]
On After Six's appeal from the Departments of Revenue and Auditor General's determination, the Board of Finance and Revenue resettled After Six's capital stock tax at $75,605.02. The Board arrived at this figure by using the Department's figure for actual value of $10,000,000 and applying thereto the single factor formula of the Act of June 2, 1931, to arrive at taxable value and the $75,605.02 tax. Both After Six and the Commonwealth challenge this computation.*fn8 After Six says that its tax should be computed by deducting the stipulated value of the subsidiaries' stock of $8,920,000 from the actual value of its capital stock as established by the Commonwealth of $10,000,000 and by multiplying the resultant $1,080,000 by the Department's apportionment factor of .873420 to produce a taxable value of $943,293.60 which, at the ten mill rate, yields a capital stock tax of $9,432.94.*fn9 The Commonwealth argues that After Six is not entitled to any exemption for stock in its subsidiaries under the three factor apportionment formula of Article IV of the Tax Reform Code; it also contends that the Board of Finance and Revenue erred in recomputing
[ 33 Pa. Commw. Page 480]
After Six's capital stock tax by the use of the single factor apportionment formula after the taxpayer had elected the alternate three factor formula. We agree with both of the Commonwealth's assertions.
The Act of April 20, 1927, P.L. 311, as amended, 72 P.S. § 1894, provides:
Whenever any corporation . . . incorporated or formed under the laws of this Commonwealth, and liable to the payment of tax upon its capital stock, or specifically exempted therefrom under the laws of this Commonwealth, shall own, either directly or through subsidiary or sub-subsidiary corporations, a majority of the total issued and outstanding shares of voting stock of any corporation, . . . then, in such cases, so much of the value of all shares of stock, so owned in such other corporation . . . as represents the property or assets located or having a legal situs without this Commonwealth, shall not be liable to taxation, under the laws of this Commonwealth providing for the taxation of capital stock of corporations . . . but shall be excluded in determining the value of the capital stock of such owning company for purposes of taxation. (Emphasis added.)
There is also a judicially established exemption, based on the presumption against double taxation, for stock a domestic corporation owns in other corporations which are subject to the Pennsylvania capital stock tax regardless of where the assets of such other corporations are located. Commonwealth v. Fall Brook Coal Co., 156 Pa. 488, 26 A. 1071 (1893). In Commonwealth v. Fall Brook Coal Co., supra, the Fall Brook Coal Co. owned 70% of the capital stock of the Fall Brook Railway Co. The Railway Co. was subject to and paid the Pennsylvania capital stock tax then imposed by the Acts of 1889 and 1891. The Commonwealth treated the 70% of the Railway Co. stock held by the Coal
[ 33 Pa. Commw. Page 481]
Co. as taxable assets of the Coal Co. in computing its capital stock tax. The Supreme Court held that the Railway Co.'s stock, once subjected to a capital stock tax of its own, could not be taxed again in the hands of the Coal Co. because, for among other reasons,*fn10 the presumption against double taxation was left unrebutted by the Acts of 1889 and 1891. The Court there wrote that:
It is clear . . . that to tax the capital stock in the hands of the corporation, and then tax the owners of the parts or shares into which it is divided, upon their respective holdings in the same capital, is double taxation pure and simple.
[ 33 Pa. Commw. Page 482]
[T]he legislature has power to impose double taxation, provided it is done in such manner as to secure the uniformity which the constitution requires. It cannot be done arbitrarily in a given case, but it may be done if the whole class to which the subject belongs is subjected to the burden in substantially the same manner. But an intent to impose double taxation will not be presumed : Fidelity Company v. Loughlin, 139 Pa. 612. The presumption is against the existence of such an intention, and this presumption will prevail until it is overcome by express Page 482} words showing an intent to impose double taxation. (Emphasis added.)
Commonwealth v. Fall Brook Coal Co., supra, 156 Pa. at 495, 26 A. at 1071-72.
The Commonwealth does not contest that After Six's stock in its foreign subsidiaries qualifies for the Act of 1927 exemption and that its domestic subsidiary stock falls within the ambit of the judicial exemption of Fall Brook Coal Co., supra. The Commonwealth, however, says that these exemptions are available only through the single factor apportionment formula found in the Act of 1931 and were lost to After Six upon making its three factor formula election.
After Six argues that the Act of 1927 exemption, by its terms, extends to any domestic corporation and that nothing in Section 602(a) of the Tax Reform Code suggests that the exemption is not to be had where the three factor formula is elected. It contends that the Fall Brook Coal Co., supra, exemption is available where the three factor formula election is made because the Tax Reform Code contains no language establishing a legislative intent to permit a second taxation of the capital stock of its domestic subsidiaries. Thus After Six claims it may deduct the value of its subsidiaries' stock from the actual value of its own capital stock before applying the three factor formula.
After Six's arguments are without merit. It is clear that under the single factor formula of the Act of 1931, any exemptions for nontaxable assets are to be realized by subtracting their value from total assets in the numerator of the fraction and not by deducting the value of the exemption from actual value of the capital stock.*fn11 See Commonwealth v. Gulf Oil Corp., 359 Pa. 583, 60 A.2d 46 (1948).
[ 33 Pa. Commw. Page 483]
The election provision of Section 602(a) provides that:
[A]ny domestic corporation . . . subject to the [capital stock tax] may elect to compute and pay its tax under and in accordance with the provisions of subsection (b) of this section 602 [relating to the imposition and calculation of the franchise tax on foreign corporations]. . . . (Emphasis added.)
As previously stated, Section 602(b) incorporates the three factor formula of Article IV of the Tax Reform Code. The Supreme Court of Pennsylvania has stated that:
As applied to a domestic corporation electing to be treated as a foreign corporation the use of the three factor apportionment formula is a legislative grant by which the taxpayer can reduce its tax liability. Use of the formula is in the nature of an exemption or deduction and, as such, must be strictly construed.
Commonwealth v. Greenville Steel Car Co., 469 Pa. 444, 451, 366 A.2d 569, 573 (1976).
It is thus apparent that if After Six is to be permitted an exemption for its subsidiaries' stock, it must be authorized by the three factor formula. Since After Six obviously cannot claim an exemption for its subsidiaries' stock by way of the sales and salary factors of said formula, we look solely to the property factor found in Article IV, Section 401(3)2.(a)(10), 72 P.S. § 7401(3)2.(a)(10), which provides that:
[ 33 Pa. Commw. Page 484]
(10) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this State during the tax period and the denominator of which is the average value of all of the taxpayer's real and tangible personal property owned or rented and used during the tax period. (Emphasis added.)
The numerator and denominator of the property factor fraction of the three factor formula, as above underscored, include only tangible personal property and are not concerned with intangibles, including capital stock of subsidiaries. After Six having elected to compute its tax under the Article IV formula is not therefore entitled to any exception. To the extent that double taxation may result from refusing an exemption for stock held by After Six in its domestic subsidiaries, Fall Brook Coal Co., supra, offers no relief because the language of Article IV, Section 401(3)2.(a)(10) by unavoidable implication negates any presumption against double taxation.
Finally, we agree with the Commonwealth that the Board erred in computing After Six's capital stock tax by a single factor apportionment formula. Section 602(a) of the Tax Reform Code provides the privilege of choosing between the single or three factor formula to the taxpayer, not to the Board. After Six having elected to use the three factor formula must, for the taxable year of the election, bear the consequences of its decision whether they be favorable or adverse.
The sole remaining issue is whether After Six should pay the amount of $78,525.80 computed as tax by the Department of Revenue or the $87,342.00 resettlement figure of the Departments of Revenue and Auditor General. Stipulation of fact No. 9 entered into by the parties states that if relevant, the .873420
[ 33 Pa. Commw. Page 485]
apportionment factor should be the one applied. This apportionment factor multiplied by the actual value of After Six's capital stock in the amout of $10,000,000 produces a taxable value of $8,734,200 and a tax of $87,342.00.
We therefore enter the following
And Now, this 3rd day of February, 1978, the petition for review of After Six, Inc. from the decision of the Board of Finance and Revenue in making resettlement of After Six, Inc.'s capital stock tax for the fiscal year ending June 30, 1972 is dismissed. The Commonwealth's challenge of the same decision is upheld. Unless exceptions hereto are filed within Thirty (30) Days of the filing of this Order, as provided by law, judgment is hereby directed to be entered in favor of the Commonwealth in the amount of $87,342.00 with interest at the statutory rate of six percent (6%) per annum from the date said capital stock tax was originally due.
Petition of taxpayer dismissed. Challenge of Commonwealth is upheld.