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decided: September 25, 1986.


Appeal from the Order of Commonwealth Court, at No. 764 C.D. 1984, dated August 20, 1985, affirming the Order of the Board of Finance and Revenue dated February 28, 1984. 91 Pa. Commonwealth Ct. 213, Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ. Larsen, J., files a dissenting opinion in which Flaherty, J., joins. Flaherty, J., files a dissenting opinion in which Larsen, J., joins. Hutchinson, J., dissents without an opinion.

Author: Papadakos

[ 511 Pa. Page 466]


This is an appeal from the decision of Commonwealth Court which affirmed a determination of the Board of

[ 511 Pa. Page 467]

Finance and Revenue that the Peters Orchard Company (Appellant) was not entitled to the "family farm corporation"*fn1 exemption from capital stock taxation. Commonwealth Court entered judgment in favor of the Commonwealth for $4,750.00 together with interest and costs. The sole issue in this appeal is whether a Pennsylvania corporation should be denied the benefit of the "family farm corporation" exemption from the Pennsylvania Capital Stock Tax, to which it is otherwise entitled, because it does not actually engage in farming, but leases its agricultural assets to another Pennsylvania corporation for operation. All of the stock of both corporations is owned by members of the same family. For the reasons set forth herein we conclude that the exemption should not be granted to this taxpayer and accordingly affirm.

The stipulated facts are as follows: Appellant is a Pennsylvania corporation which was formed in 1960. At all times since its incorporation, all of the issued and outstanding corporate stock of Appellant has been owned by members of the same family; namely, John B. Peters, his wife, Mary E.K. Peters, and their children.

Appellant's sole business activity since its incorporation has been the leasing of its assets, consisting of fruit farms located in Pennsylvania and farm machinery and equipment, to John B. Peters individually until his retirement in 1974, and thereafter to John B. Peters, Inc.*fn2 Both lessees used these assets in their family farming operation. The reason for the leasing arrangement between the two corporations is that the four sons of John B. Peters are actively engaged

[ 511 Pa. Page 468]

    in the farming operation while his two daughters are not. The leasing arrangement therefore permits all of the Peters children to share in the ownership of the fruit farms, machinery and equipment, while only those children who earn their livelihood from farming, i.e., the four sons who actively engage in the farming operation, share in the profits realized therefrom. Thus, the Appellant corporation owns the capital assets, and the farming operation is carried on by John B. Peters, Inc., through the leasing arrangement. However, all the outstanding stock of both corporations is owned by the members of the John B. Peters family, and those family members constitute all of the officers and directors of both corporations.

In filing its Capital Stock Tax Report for the fiscal year ending November 30, 1981, Appellant asserted that it was exempt from the capital stock tax because it qualified as a "family farm corporation." The Department of Revenue denied the claimed exemption, however, fixing the taxable value of Appellant's stock at $475,000.00, and setting its capital stock tax for that fiscal year at $4,750.00. Commonwealth Court affirmed the denial of the exemption to Appellant and this appeal ensued.

Determination of the question presented by this appeal is governed by Section 602.2 of the Tax Reform Code of 1971 (Code), Act of March 4, 1971, P.L. 6, 72 Pa.S. § 7602.2, added by the Act of October 17, 1980, P.L. 1077. Section 602.2 of the Code provides that:

(a) The provisions of [the Capital Stock-Franchise Tax, Section 602 of the Code, 72 P.S. § 7602] shall not apply to family farm corporations. Family farm corporations shall be exempt from the tax imposed by section 602. (b)(1) Family farm corporation means a Pennsylvania corporation at least seventy-five per cent of the assets of which are devoted to the business of agriculture, which business, for the purposes of this definition, shall not be deemed to include (i) recreational activities such as, but not limited to, hunting, fishing, camping, skiing, show competition or racing; (ii) the raising, breeding or training

[ 511 Pa. Page 469]

    of game animals or game birds, fish, cats, dogs or pets, or animals intended for use in sporting or recreational activities; (iii) fur farming; (iv) stockyard and slaughterhouse operations; or (v) manufacturing or processing operations of any kind: Provided, however, that at least seventy-five per cent ...

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