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CITY PITTSBURGH v. DRAVO CORPORATION (08/15/89)

decided: August 15, 1989.

CITY OF PITTSBURGH, A MUNICIPAL GOVERNMENT; STEPHEN A. SCHILLO, TREASURER; AND HENRY WILSON, ASSISTANT DIRECTOR OF TAXES, APPELLANTS,
v.
DRAVO CORPORATION, A PENNSYLVANIA CORPORATION, APPELLEE (TWO CASES). DRAVO ENGINEERS, INC., A PENNSYLVANIA CORPORATION, APPELLANT, V. CITY OF PITTSBURGH, A MUNICIPAL CORPORATION; STEPHEN A. SCHILLO, TREASURER; CITY OF PITTSBURGH; AND HENRY WILSON, ASSISTANT DIRECTOR OF TAXES, APPELLEES



Appeal from Common Pleas Court, Allegheny County; Honorable Robert A. Doyle, SEN. JUDGE.

COUNSEL

Ronald H. Pferdehirt, Asst. City Sol., with him, D.R. Pellegrini, City Sol., for appellants/appellees, City of Pittsburgh, Treasurer, and Asst. Director of Taxes.

Louis C. Long, with him, Scott W. Irmscher, Meyer, Darragh, Buckler, Bebenek, Eck & Hall, Pittsburgh, for appellees/appellants, Dravo Corp. and Dravo Engineers, Inc.

Craig and Doyle, JJ., and Kalish, Senior Judge.

Author: Craig

[ 128 Pa. Commw. Page 382]

The City of Pittsburgh, the City of Pittsburgh Treasurer and the City of Pittsburgh Assistant Director of Taxes appeal an order of the Court of Common Pleas of Allegheny County directing the city to refund to Dravo Corporation (Dravo) $153,716 in business privilege taxes paid for the 1982 tax year, plus interest, and vacating a deficiency assessment against Dravo for business privilege taxes owed in the amount of $29,775.16, for the tax years 1981 through 1984, plus interest and penalty. Additionally, Dravo Engineers, Inc. (DEI), a wholly-owned subsidiary of Dravo, appeals the same order dismissing DEI's claim for a refund of $256,116 of paid business privilege taxes.

History

Dravo is a Pennsylvania corporation conducting an engineering, construction and manufacturing business from its home office in Pittsburgh. In 1982, Dravo, computing its 1982 tax liability based on its 1981 gross receipts, paid a business privilege tax in the amount of $425,872. Because Dravo had been conducting business in Pittsburgh for the entire 1981 calendar year, Dravo calculated its 1982 tax liability in accordance with section 243.03(a) of the Pittsburgh Code, which provides that "[e]very person, subject to the payment of the tax hereby imposed who has commenced his business at least one full year prior to the beginning of any tax year shall compute his tax upon the actual receipts received by him during the preceding calendar year."

On July 1, 1982, Dravo's reorganization of its corporation went into effect. As part of the reorganization, Dravo created DEI for the purposes of performing all engineering activities in a more efficient manner than previously performed by Dravo and to create more business by securing contracts which Dravo had been unable to obtain because of various labor laws and agreements.

[ 128 Pa. Commw. Page 383]

On October 14, 1982, DEI filed its initial business privilege tax return, and paid $132,446 for the six months it conducted business in 1982. Because DEI commenced business activity in 1982, DEI computed its tax liability in accordance with section 243.03(c) of the Pittsburgh Code, which provides that "[e]very person subject to the payment of the tax hereby imposed who commences or has commenced his business subsequent to the beginning of any tax year shall compute his tax for such year upon the gross receipts generated by the business during the first month of such business multiplied by the number of months or fraction thereof remaining in the tax year." Thus, DEI calculated its 1982 tax liability by annualizing the gross receipts from the month of July, 1982.

In April of 1983, DEI filed its 1983 business privilege tax return, and paid taxes in the amount of $264,892. Because DEI did not have a full year of business activity in 1982, DEI computed its tax liability in accordance with section 243.03(b) of the Pittsburgh Code, which provides that "[e]very person subject to the payment of the tax hereby imposed, who commences or has commenced his business less than one full year prior to the beginning of any tax year, shall compute his tax for such tax year upon the gross receipts generated by the business during the first month he engages in such business activity multiplied by twelve." Thus, DEI calculated its 1983 tax liability by, again, annualizing the gross receipts from the first month of operation -- July, 1982. Additionally, in 1983, Dravo paid business privilege taxes based on its 1982 gross receipts.

Claims

On April 6, 1984, Dravo filed a request for a business privilege tax refund in the amount of $153,716 for taxes paid in 1982, contending that, because Dravo discontinued its engineering business as of July 1, 1982, Dravo is entitled to a pro rata refund pursuant to section 703(b) of the Business Privilege Tax Regulations of the City of Pittsburgh.

[ 128 Pa. Commw. Page 384]

The Treasurer, following a hearing on July 3, 1984, denied Dravo's refund claim. Dravo then filed a statutory appeal with the Court of Common Pleas of Allegheny County on August 24, 1984, asserting that the discontinuance of the engineering business, the ambiguity of the code and regulations relating to refunds, and the city's receipt of a duplicate tax payment entitle Dravo to the requested refund.

On October 1, 1984, DEI filed a request for business privilege tax refunds in the amounts of $132,446 paid in 1982 and $123,670 paid in 1983, contending that the taxes had been erroneously calculated on the assumption that DEI commenced a new business, that the tax base for DEI should be that of Dravo's and that, because Dravo had already paid its business privilege tax in the same years, the city received a windfall payment by levying the tax upon DEI.

The Assistant Director of Taxes for the City of Pittsburgh notified DEI by letter, dated October 2, 1983, that the refund claims had been denied. DEI then requested a Treasurer's hearing to discuss the merits.

Additionally, on August 13, 1985, following a routine audit of Dravo's financial records, the Treasurer issued to Dravo a notice of assessment for business privilege taxes owed in the amount of $29,775.16, plus interest and penalty, covering the tax years 1981 through 1984. The Treasurer based the deficiency assessment upon the discovery that Dravo had excluded from its reported gross annual receipts those receipts generated by the payment of intercompany management fees. Specifically, Dravo's business records indicated that management fees had been invoiced by Dravo to its various subsidiaries, and that appropriate adjustments had been made to the subsidiary accounts to reflect actual payment of the management fees by the subsidiaries to Dravo.

On November 14, 1985, the Treasurer held a hearing to review DEI's refund claim and the deficiency assessment against Dravo. On July 21, 1986, the Treasurer, issuing

[ 128 Pa. Commw. Page 385]

    separate adjudications, denied the refund claim of DEI and affirmed the deficiency assessment against Dravo. DEI and Dravo then filed separate statutory appeals with the Common Pleas Court of Allegheny County. On October 29, 1986, Judge Doyle ...


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