Argued Nov. 27, 2012.
Appeal from Primary Type: the order of Commonwealth
Court at No. 698 FR 2005 dated 08-04-2011 dismissing the exceptions and
entering judgment of the 02-12-2009 order that affirmed the decision of the
Board of Finance & Revenue dated 10-18-2005, exited 10-21-2005, at No.
0504946. Intermediate Court Judges: Bonnie Brigance Leadbetter, President
Judge, Bernard L. McGinley, Dan Pellegrini, Renee Cohn Jubelirer, Robert E.
Simpson, Mary Hannah Leavitt, Johnny J. Butler, Judges.
Sara A. Lima, Esq., Kyle Oliver Sollie, Esq., Reed Smith LLP, Philadelphia, for Wells Fargo Bank, N.A. (Successor to First Union National Bank), amicus curiae.
David M. Kuchinos, Esq., Ann B. Laupheimer, Esq., Blank Rome LLP, Philadelphia, for Lebanon Valley Farmers Bank.
John Joseph Butchar, Esq., Howard Greeley Hopkirk, Esq., Kathleen Granahan Kane, Esq., John G. Knorr III, Esq., Carol L. Weitzel, Esq., PA Office of Attorney
General, Harrisburg, for Commonwealth of Pennsylvania.
SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.
Appellant, Lebanon Valley Farmers Bank (LVFB), appeals from the August 4, 2011, order and opinion of the en banc Commonwealth Court dismissing its exceptions to the February 12, 2009, order and opinion of the Commonwealth Court, which affirmed the order of the Board of Finance and Revenue. This is an appeal as of right pursuant to 42 Pa.C.S. § 723(b). After careful review, we reverse.
The stipulated facts show Farmers Bank was a Pennsylvania chartered bank, and a subsidiary of Fulton Financial Corporation, which merged with Keystone Heritage Group, Inc. The merger made Fulton the parent company of Lebanon Valley National Bank, which merged with Farmers Bank as part of the transaction, thereby forming LVFB. Prior to the merger, both Farmers Bank and National Bank were " institutions" subject to the Shares Tax, 72 P.S. §§ 7701-7706.
The Shares Tax is set forth in Article VII of the Pennsylvania Tax Reform Code; it is imposed on the average taxable amount of a banking institution's shares of capital stock. " [C]alculation of the tax is based on the book value of the bank's net assets (adjusted to deduct value attributable to United States obligations)." Allfirst Bank v. Commonwealth, 593 Pa. 631, 933 A.2d 75, 81 (2007) (citing 72 P.S. § 7701.1). The Shares Tax has three provisions relevant to the present claim. First, the tax is imposed only upon " institutions," which is defined to include " [e]very bank operating as such and having capital stock which is incorporated under any law of this Commonwealth, under the law of the United States or under the law of any other jurisdiction and is located within this Commonwealth. " 72 P.S. § 7701.5 (emphasis added). Thus, an out-of-state bank is not an " institution" for purposes of the Shares Tax, and thus, is not subject to the tax.
Second, in order to mitigate the effect of year-to-year fluctuations in value, the Shares Tax mandates an averaging method for calculating the taxable amount of shares— the tax is not imposed on present value but on the six-year average value. Specifically, § 7701.1(a) (the " averaging provision" ) of the Shares Tax provides:
The taxable amount of shares shall be ascertained and fixed by adding together the value determined under subsection (b) for the current and preceding five years and dividing the resulting sum by six. If an institution has not been in existence for a period of six years, the taxable amount of shares shall be ascertained and fixed by adding together the values determined under subsection (b) for the number of years the institution has been in existence and dividing the resulting sum by such number of years.
Id., § 7701.1(a).
Third, to prevent corporate maneuvering from creating this loss of revenue when two institutions merge, § 7701.1(c)(2) of the Shares Tax (the " combination provision" ) provides, in pertinent part:
[T]he combination of two or more institutions into one shall be treated as if the constituent institutions had been a single
institution in existence prior to as well as after the combination and the book values and deductions for United States obligations from the Reports of Condition of the constituent institutions shall be combined.
Id., § 7701.1(c)(2).
For the 2002 tax year, LVFB filed a Bank Shares Tax return, which included National Bank's pre-merger value in its calculation of its six-year average share value, as required by the combination provision. However, in 2005, LVFB filed a petition with the Board of Appeals, seeking a refund of the portion of its 2002 tax payment attributable to National Bank's pre-merger share value. It claimed disparate treatment because the combination provision is inapplicable when mergers involve out-of-state banks or banks less than six years old. In fact, the Commonwealth Court has held, under the plain language of the statute, the combination provision applies only to combinations of " institutions" ( i.e., banks with Pennsylvania locations). First Union National Bank v. Commonwealth, 867 A.2d 711, 716 (Pa.Cmwlth.), exceptions dismissed, 885 A.2d 112, 114 (Pa.Cmwlth.2005), aff'd per curiam, 587 Pa. 507, 901 A.2d 981 (2006). Thus, the pre-combination value of an out-of-state bank is not included in a surviving institution's six-year average value calculation under the terms of the statute.
LVFB argued the " First Union rule" affords disparate treatment for mergers of Pennsylvania and non-Pennsylvania banks, in violation of the Uniformity Clause. The Board of Appeals rejected the claim, and LVFB appealed to the Board of Finance and Revenue. Relying on First Union, the Board also denied the appeal. The Commonwealth Court initially affirmed, finding because the combination provision was revenue neutral, it did not violate the constitutional requirement of uniformity. Lebanon Valley Farmers Bank v. Commonwealth (Farmers Bank I), 965 A.2d 1249, 1253 (Pa.Cmwlth.2009). The court relied on the Commonwealth's explanation of the averaging provision, in light of First Union, as ...