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decided: November 10, 1983.


Appeal from the Order of the Board of Finance and Revenue in case of The Philadelphia Saving Fund Society v. Commonwealth of Pennsylvania, dated August 7, 1973.


Joseph C. Bright, Jr., with him Michael J. DeLaurentis, Drinker, Biddle & Reath, for appellant.

Vincent J. Dopko, Deputy Attorney General, for appellee.

President Judge Crumlish, Jr. and Judges Williams, Jr., Craig, MacPhail and Doyle. Opinion by Judge MacPhail. Dissenting Opinion by Judge Doyle. Judge Williams, Jr. joins in this dissent.

Author: Macphail

[ 78 Pa. Commw. Page 284]

This appeal*fn1 raises in this Court for a third time the issue of whether interest received by a financial institution subject to the provisions of The Mutual Thrift Institutions Tax Act (MTITA), Act of June 22, 1964, P.L. 16, as amended, 72 P.S. §§ 1986.1-1986.6

[ 78 Pa. Commw. Page 285]

    may be considered in determining the tax due pursuant to that Act, where the interest arises from obligations which are generally tax exempt under the provisions of the Act of August 31, 1971 (Act 94), P.L. 395, 72 P.S. §§ 4752-1 and 4752-2.

Petitioner, Philadelphia Saving Fund Society (PSFS), appeals here from an order of the Board of Finance and Revenue (Board) which denied the petition for review filed by PSFS from the refusal of the Departments of Revenue and Auditor General to resettle its MTITA tax for the year 1971. The basis upon which resettlement was sought was that interest from obligations of the Pennsylvania Turnpike Commission, the City of Philadelphia, the School District of Philadelphia, the Food Distribution Center and the Levittown Educational Foundation should be excluded from the computation of its MTITA tax. We affirm the Board.

This Court adopts the stipulation of facts and first amendment to stipulation of facts filed by counsel for the litigants as the pertinent facts for a determination of the issue now before us.

PSFS contends that the provisions of Act 94 are clear that such interest must be excluded. The Commonwealth relies upon our prior decisions in Commonwealth v. Commonwealth Federal Savings and Loan Association of Norristown, 29 Pa. Commonwealth Ct. 222, 370 A.2d 409 (1977) and First Federal Savings and Loan Association of Hazleton v. Commonwealth, 25 Pa. Commonwealth Ct. 359, 360 A.2d 773 (1976) as controlling.

PSFS admits, as it must, that both of our prior cases held that notwithstanding the provisions of Act 94, franchise or excise taxes may be measured by property, including obligations of the United States and the Commonwealth, or the income therefrom, which would not, of itself, be amenable to a direct property

[ 78 Pa. Commw. Page 286]

    tax. PSFS urges, however, that those decisions were in error and should be reconsidered by us. We decline to do so because we believe that the reasoning and case citations in support thereof are and should remain the law of this Commonwealth.

As we have noted, PSFS contends that the plain language of Act 94*fn2 will admit of no conclusion other than that the clear intent of the legislature was to exempt certain governmental and authority obligations from all taxation except inheritance and estate taxes. This contention is answered in Norristown by distinguishing a property tax on income from a franchise tax on the privilege of doing business in Pennsylvania. It is not the interest per se that is being taxed, it is the privilege of doing business that is being taxed and the measure of that tax is in this instance the net income or earnings of the institution from all sources. This conclusion is supported by a long line of federal and state cases including the United States Supreme Court opinion in Flint v. Stone Tracy Co., 220 U.S. 107 (1911), where it was held that obligations otherwise

[ 78 Pa. Commw. Page 287]

    free from taxation were properly includable to determine a corporate tax measured by income of the corporation from all sources. See also Werner Machine Co., Inc. v. Director of Division of Taxation, Department of Treasury, State of New Jersey, 350 U.S. 492 (1956); Commonwealth v. National Biscuit Co., 390 Pa. 642, 136 A.2d 821 (1957), appeal dismissed, 357 U.S. 571 (1958); Commonwealth v. Ford Motor Co., 350 Pa. 236, 38 A.2d 329 (1944), appeal dismissed, 324 U.S. 827 (1945); Philadelphia Contributorship for Insurance v. Commonwealth, 98 Pa. 48 (1881).*fn3

PSFS next contends that since Act 94 specifically excludes inheritance and estate taxes from the exemption provisions, no other privilege taxes can be excluded. There is case law authority for the proposition that inheritance and estate taxes are succession taxes on the privilege of receiving at death the property possessed by a decedent. Tack's Estate, 325 Pa. 545, 191 A. 155 (1937). There is nothing in the language of Act 94, however, to indicate that the otherwise tax exempt obligations would be subject to inheritance and estate taxes because those taxes were privilege taxes. In fact, the legislature may have provided the exception for inheritance and estate taxes solely because of the decision reached in Tack's Estate

[ 78 Pa. Commw. Page 288]

    and its progeny. In any event, we cannot accept as valid the argument that the statutory exceptions per se preclude the imposition of any other privilege or excise tax. PSFS argues also that the MTITA is an income tax. While the distinctions between property taxes, income taxes, franchise taxes, excise taxes and privilege taxes have not been honed to a very sharp edge by the courts, there are certain guidelines. It is true that the characterization of the nature of the tax is not controlling but it is also true that such characterization is entitled to much weight. Stone Tracy Co. Here the legislature has clearly categorized this tax as an excise tax. One standard for distinguishing a property tax from a franchise or excise tax is the method adopted for imposing the tax and for fixing the amount thereof. Commonwealth v. Columbia Gas and Electric Corp., 336 Pa. 209, 8 A.2d 404 (1939). In the case sub judice, the legislature uses the net income of the institution as the measure of the tax. Institutions subject to the MTITA receive their privilege to transact business from the sovereign, i.e., the Commonwealth. A fair measure of the value of that privilege is the net earnings the institution derives from it. We are satisfied that the MTITA is a true excise tax and not an income tax.*fn4 Hazleton.

PSFS states that the result of the MTITA tax is the same as if it were an income tax and that this frustrates the purpose of Act 94. Even if we would accept the premise of this argument, we cannot agree that it would lead to the conclusion that PSFS urges upon us. The legislature determines the subjects of taxation

[ 78 Pa. Commw. Page 289]

    and while one piece of tax legislation may seemingly frustrate the purpose of another, that is clearly within the prerogative of the legislature. In Werner Machine Co., a New Jersey corporate franchise tax was upheld where the income from Federal bonds was included in a determination of the amount of tax due. The Court said, "This Court has consistently upheld franchise taxes measured by a yardstick which includes tax-exempt income or property, even though a part of the economic impact of the tax may be said to bear indirectly upon such income or property." Id., 350 U.S. at 494.

One of the least worthy of PSFS's arguments is that if we do not reverse our prior rulings, tax exempt obligations may become subject to other taxes. This is pure speculation. An identical argument was dismissed in Norristown as "not yet ripe."

Based upon the foregoing, our conclusion of law is that interest from obligations exempt from taxation under Act 94 may be included in the measurement of the tax due from an institution subject to the provisions of MTITA.*fn5


The decision of the Board of Finance and Revenue refusing the petition of Philadelphia Saving Fund Society for resettlement is hereby affirmed. Unless exceptions are filed within 30 days hereof, the Chief Clerk is hereby directed to enter judgment in favor of the Commonwealth and against the Appellant in the amount of $1,298,049.81 and mark the same satisfied, said amount having previously been paid by Philadelphia Saving Fund Society.



[ 78 Pa. Commw. Page 290]

Dissenting Opinion by Judge Doyle:

I respectfully dissent. I believe our decisions in Commonwealth v. Commonwealth Federal Savings and Loan Association of Norristown, 29 Pa. Commonwealth Ct. 222, 370 A.2d 409 (1977) and First Federal Savings and Loan Association of Hazleton v. Commonwealth, 25 Pa. Commonwealth Ct. 359, 360 A.2d 773 (1976), which held that taxation under the Mutual Thrift Institutions Tax Act*fn1 (MTIT Act) constitutes a franchise or excise tax on the privilege of doing business in the Commonwealth, are in error.

The nature of a tax is to be determined by its substance and not by its label. Gaugler v. Allentown, 410 Pa. 315, 189 A.2d 264 (1963); Coney Island, II, Inc. v. Pottsville Area School District, 72 Pa. Commonwealth Ct. 461, 457 A.2d 580 (1983). Coney Island is illustrative. In that case, we held that local "business privilege taxes" were invalid to the extent that they exceeded the limitations of Section 8 of the Local Tax Enabling Act.*fn2 Section 8 provides in pertinent part:

No taxes levied under the provisions of this act shall be levied by any political subdivision on the following subjects exceeding the rates specified in this section:

(2) On each dollar of the whole volume of business transacted by wholesale dealers in goods, wares and merchandise, one mill, by retail dealers in goods, wares and merchandise and by proprietors of restaurants or other places where food, drink and refreshments are served, one and one-half mills. . . .

We rejected the argument that gross volume of business was merely the measure of the tax and noted that

[ 78 Pa. Commw. Page 291]

    the legislation which labeled the taxes "business privilege taxes" provided "that the taxes imposed shall be ' ON each and every dollar of the whole or gross volume of business transacted.'" Id. at 468, 457 A.2d 583 (emphasis by the Court). We looked beyond the face of the so called privilege taxes to their true nature and found them to be taxes on the subjects limited by Section 8. Similarly, the MTIT Act provides, in pertinent part:

(b) From and after the passage of this act, every mutual thrift institution shall annually, upon the fifteenth day of April of each year . . . make a report to the Department of Revenue, setting forth the entire amount of net earnings or income received or accrued by said mutual thrift institution from all sources during the preceding year, . . . and upon such net earnings or income the said mutual thrift institution shall pay into the State Treasury, through the Department of Revenue, for the use of the Commonwealth, within the time prescribed by this act for making such annual report, a State Excise Tax at the rate of six per cent (6%) for the years 1964, 1965, and 1966, and at the rate of seven and one-half per cent (7 1/2%) for the year 1967 and the year 1968, and at the rate of eleven and one-half per cent (11 1/2%) for the year 1969 and thereafter, upon such annual net earnings or income. . . . (Emphasis added.)

72 P.S. § 1986.3(b).

It is clear from a reading of the MTIT Act that it imposes a tax ON the net earnings of mutual thrift institutions, not simply on the privilege of doing business measured by net earnings as the majority contends. As a tax on net earnings or income, the MTIT Act tax is limited by the exemption embodied in Act

[ 78 Pa. Commw. Page 29294]

.*fn3 I do not believe interest income from the obligations of government or its agencies may be subject to taxation under the MTIT Act.

I would reverse the order of the Board of Finance and Revenue.

Judge Williams, Jr. joins in this dissent.

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