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FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION PHILADELPHIA v. COMMONWEALTH PENNSYLVANIA (07/09/87)

decided: July 9, 1987.

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PHILADELPHIA, APPELLANT,
v.
COMMONWEALTH OF PENNSYLVANIA, APPELLEE



Appeal from Order of Commonwealth Court entered September 13, 1985, at Nos. 1638 C.D. 1974 and 1854 C.D. 1982 affirming Orders of Board of Finance and Review entered November 20, 1974, at No. R-745 and July 2, 1982, at No. R-1370. Nix, C.j., and Larsen, Flaherty, Hutchinson and Papadakos, JJ. McDermott and Zappala, JJ., did not participate in the consideration or decision of this case.

Author: Nix

[ 515 Pa. Page 370]

OPINION

In this appeal we must determine whether interest on tax-exempt Commonwealth obligations held for investment by a mutual thrift institution must be included in that institution's net income for purposes of the Mutual Thrift Institution Tax Act ("MTITA"),*fn1 and is thereby subject to taxation.

I.

The stipulations agreed to by the parties to this appeal reflect the following pertinent facts. Appellant First Federal Savings and Loan Association of Philadelphia ("First Federal") is a mutual thrift institution within the meaning of section 2 of the MTITA, 72 P.S. § 1986.2, and is subject to taxation under that statute.*fn2 Pursuant to the MTITA First Federal filed a tax report for the year ending December 31, 1972, with the Department of Revenue ("Department") and made payments on account totaling Three Hundred Thousand Five Hundred Forty-three dollars ($300,543.00) for that year. The Department made a settlement of First Federal's tax for the year in the amount of Three

[ 515 Pa. Page 371]

Hundred Six Thousand Three Hundred Sixty-one Dollars and Sixty-one Cents ($306,361.61), which was approved by the Department of the Auditor General ("Auditor General") on November 16, 1973. First Federal subsequently filed a petition for resettlement for its 1972 tax requesting tax-exempt treatment for Fifty Thousand Five Hundred Ninety-seven Dollars ($50,597.00) of interest income received on various obligations issued by the Commonwealth, its agencies or political subdivisions ("Commonwealth obligations"), which the Department had added to First Federal's reported net income. That petition was refused after a hearing on June 20, 1974. First Federal then filed a petition for review with the Board of Finance and Revenue ("Board") which was refused after a hearing on November 20, 1974. A timely notice of appeal from that refusal was filed in the Commonwealth Court on December 19, 1974.

First Federal's experience with the Department concerning the tax year ending September 30, 1973, was similar. First Federal reported and paid a tax of Two Hundred Ninety-four Thousand Three Hundred Forty-five Dollars and Thirty-eight Cents ($294,345.38) but the Department, again adding the interest earned on Commonwealth obligations to First Federal's net income, settled the tax in the amount of Three Hundred Three Thousand Thirty-five Dollars and One Cent ($303,035.01).*fn3 The settlement was approved by the Auditor General on March 18, 1975. First Federal unsuccessfully sought a resettlement requesting tax-exempt treatment for Seventy-five Thousand Five Hundred Sixty-two Dollars of interest earned on Commonwealth obligations during the 1973 tax year. The Board upheld the Department, and First Federal filed a second appeal in the Commonwealth Court on July 29, 1982.

The Commonwealth Court en banc heard oral argument on First Federal's appeals from the 1972 and 1973 tax settlements on April 10, 1985. On September 13, 1985, that

[ 515 Pa. Page 372]

    court, being evenly divided,*fn4 entered an order upholding the decisions of the Board subject to the filing of exceptions. First Federal's exceptions were dismissed on October 29, 1985, and judgment was entered on the September 13, 1985, order, 91 Pa. Commw. 634, 498 A.2d 455. This appeal followed.*fn5

II.

The starting point of our inquiry is the Act of August 31, 1971, P.L. 395, No. 94, 72 P.S. §§ 4752-1, 4742-2 (Supp. 1987) ("Act 94"), which exempts the income generated by Commonwealth obligations from state and local taxation, with ...


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