Appeals from the Order of the Pennsylvania Board of Finance and Revenue in the cases of In Re: Rockwell International Corporation, Docket Nos. R-6272 and R-6273.
Gregory W. Walkauskas, for petitioner.
Thomas D. Nabors, Jr., Deputy Attorney General, with him, LeRoy S. Zimmerman, Attorney General, for respondent.
President Judge Crumlish, Jr., and Judges Rogers, Craig, MacPhail, Barry, Colins and Palladino. Opinion by Judge Colins.
[ 99 Pa. Commw. Page 131]
Rockwell International Corporation (Rockwell), a Delaware corporation licensed to do business in the state of Pennsylvania, with its principal office in Pittsburgh, Pennsylvania, appeals an adverse determination of the Board of Finance and Revenue (Board) sustaining resettlements of the property fractions of the apportionment factors of Rockwell's franchise tax returns for the fiscal year ending September 30, 1979. The resettlements had been entered by the Department of Revenue and approved by the Department of the Auditor General.
The methodology for calculating what portion of a corporation's transactions has a taxable nexus or situs in Pennsylvania is the same for both the Corporate Net Income Tax*fn1 and the Capital Stock/Franchise Tax.*fn2 Section
[ 99 Pa. Commw. Page 132401]
of the Tax Reform Code of 1971 states that all business income shall be apportioned to Pennsylvania by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.*fn3 See Paris Manufacturing Company, Inc. v. Commonwealth, 505 Pa. 15, 476 A.2d 890 (1984). The apportionment is done in the same manner for capital stock and franchise taxes.*fn4
Here, the parties have stipulated as to the facts and they dispute only the value of property to be included in the property fraction of the apportionment formula. The property fraction is calculated by means of a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented in Pennsylvania, and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period subject to statutory exceptions for interests held as security only.*fn5
Rockwell makes use of a facility in Winchester, Kentucky, the value of which Rockwell included in its property factor as if the facility were owned by Rockwell. Rockwell claims ownership of the facility subject to a financing arrangement interest held by the City of Winchester, to whom Rockwell makes annual payments. The Department of Revenue disputes the characterization of this arrangement. It contends that Rockwell does not own the property but rents it. The tax consequences of rental as opposed to ownership of property are set forth in Section 401 of the Tax Reform Code of 1971, which requires property owned by the taxpayer to be
[ 99 Pa. Commw. Page 133]
valued at original cost, whereas property rented is to be valued at eight times the net annual rental rate.*fn6 Pursuant to its theory that the property was rented and not owned, the Department of Revenue resettled Rockwell's property factor such that ...