The opinion of the court was delivered by: Bonnie Brigance Leadbetter, President Judge
Argued: December 12, 2011
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE BERNARD L. McGINLEY, Judge
HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge
PRESIDENT JUDGE LEADBETTER*fn1
Systems & Computer Technology Corporation (SCT) petitions to review the order of the Board of Finance and Revenue that affirmed the Board of Appeals' resettlement of SCT's franchise tax liability for the taxable year 2005. In this appeal, the Court is asked to decide whether the "goodwill" recorded on SCT's 2005 balance sheet as an asset is includable in "the actual value" of its stock in its wholly owned subsidiary corporations. If so, SCT is eligible to compute its 2005 franchise tax liability utilizing the favorable "10% holding company apportionment" method under Section 602(e) of the Tax Reform Code of 1971 (Tax Reform Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7602(e). Because we conclude that SCT met the definition of a holding company and was, therefore, eligible to utilize such tax computation method, we reverse.
The parties submitted a Stipulation of Facts (Stipulation) with numerous exhibits attached thereto pursuant to Rule 1571(f) of the Pennsylvania Rules of Appellate Procedure, Pa. R.A.P. 1571(f), which reveal the following relevant facts. SCT is a publicly traded Delaware corporation with its principal place of business in Malvern, Pennsylvania. SCT's activities consist of providing corporate oversight to its twenty-two wholly-owned subsidiary corporations.*fn2
Those subsidiary corporations either provided information technology solutions to colleges and universities in the form of software applications and services or held interests in other entities. On February 12, 2004, SunGard Data Systems, Inc. (SunGard), an entity unrelated to SCT, acquired SCT and SCT's twenty-two subsidiary corporations.*fn3 Before and after the acquisition, SCT and its subsidiary corporations conducted similar activities.
In accordance with the Statement of Financial Accounting Standards No.
141, Business Combinations (2001) (FAS 141), published by the
Financial Accounting Standards Board of the Financial Accounting
Foundation, American Appraisal Associates, an independent third-party
appraisal company, prepared a report on the values of SCT's tangible
and intangible assets as of the February 12, 2004 acquisition. Based
on the fair market values estimated in that report, SCT first
allocated the price paid by SunGard for the acquisition to assets
liabilities assumed (net assets) and then allocated the remainder of
the acquisition price exceeding the fair market values of the net
assets to goodwill, as required by FAS 141 (Exhibit A).*fn4
¶ 8. This allocation, commonly referred to as a "purchase price allocation," is reflected on Schedule L ("Balance Sheets per Books") of SCT's federal income tax Form 1120 for the taxable year ending December 31, 2004 (Exhibit B). Id.
Similarly, on Schedule L (balance sheet) of pro-forma Form 1120 for the taxable year 2005 (Exhibit E), Line 13a ("Intangible assets"), SCT reported its intangible assets of $489,780,621, consisting of $847,727 for purchased software, $89,589,321 for acquired software, $108,454,887 for the customer base and $290,888,686 for goodwill. The purchased software, acquired software and customer base are "recognizable intangible property" under FAS 141. Stipulation,
¶ 9. The intangible assets reported on the 2005 balance sheet were consistent with their treatment on SCT's 2004 balance sheet and in accordance with the valuation study performed by the independent third-party following the 2004 acquisition. On Line 9 ("Other investments") of the 2005 balance sheet, SCT reported $237,954,339 as investments in its subsidiary corporations' stock, which was calculated by adding together its subsidiary corporations' capital stock and additional paid-in-capital accounts. Stipulation, ¶ 10.
Every "foreign entity"*fn5 must pay an annual franchise tax, which is "computed by multiplying each dollar of the capital stock value[*fn6 ] . by the appropriate rate of tax." Section 602(b)(1) of the Tax Reform Code. The rate of the franchise tax for the taxable year ending December 31, 2005 was 5.99 mills. Section 602(h) of the Tax Reform Code. A holding company, however, may elect to compute a franchise tax "by applying the rate of tax . to ten per cent of the capital stock value." Section 602(e) of the Tax Reform Code. This favorable method of tax computation is known as a "10% holding company apportionment." Section 601(a) of the Tax Reform Code, 72 P.S. § 7601(a), defines a holding company as:
Any corporation (i) at least ninety per cent of the gross income of which for the taxable year is derived from dividends, interest, gains from the sale, exchange or other disposition of stock or securities and the rendition of management and administrative services to subsidiary corporations, and (ii) at least sixty per cent of the actual value of the total ...