Com. v. Rigling

• Decision Date: 04 January 1980
• Citation: 409 A.2d 936,48 Pa.Cmwlth. 303
• Parties: COMMONWEALTH of Pennsylvania v. Vance F. RIGLING and Mabel S. Rigling, his wife, Appellants.
• Court: Pennsylvania Commonwealth Court

Page 936

409 A.2d 936

48 Pa.Cmwlth. 303

COMMONWEALTH of Pennsylvania v. Vance F. RIGLING and Mabel S. Rigling, his wife, Appellants.

Commonwealth Court of Pennsylvania.

Argued Sept. 12, 1979.

Decided Jan. 4, 1980.

Lloyd R. Persun, Shearer, Mette & Woodside, Harrisburg, for appellants.

Vincent J. Dopko, Deputy Atty. Gen., Ins. Dept., Harrisburg, for appellee.

Before BOWMAN, President Judge, and CRUMLISH, Jr., MENCER, ROGERS, BLATT, DiSALLE and CRAIG, JJ.

BOWMAN, President Judge.

Vance F. Rigling and Mabel S. Rigling, his wife (taxpayers) have filed a petition for review of an order by the Board of Finance and Revenue (Board) sustaining an assessment by the Department of Revenue (Department) in the amount of $998.00, with interest, on account of their Pennsylvania Personal Income Tax for 1972, levied pursuant to Article III of the Tax Reform Code of 1971 (Code). ¹ We adopt as our findings of fact in this de novo tax appeal the facts as stipulated by the parties.

These facts disclose that taxpayers, in preparing Schedule D of their 1972 Personal Income Tax return, attempted to minimize taxable income by using the May 31, 1971 close of business day fair market value to calculate gain resulting from the sale of two separate holdings of stock, but acquisition cost to calculate gain on all other Schedule D sales, whichever would yield lesser gain. By letter dated October 24, 1973, the Department informed taxpayers that May 31, 1971 fair market value could not be used to calculate gains on Schedule D, and that it would use acquisition cost to recalculate taxpayers' gain as to the two affected stocks. Taxpayers challenged the Department's action before the Board in a proceedings only collaterally involved in this appeal.

During the pendency of that challenge before the Board, the legislature amended Section 303(a)(3) of the Code, 72 P.S. § 7303(a)(3), ² to provide, retroactively, that the basis of property acquired prior to June 1, 1971, would be determined using June 1, 1971, as the acquisition date, and that the basis of property acquired after June 1, 1971, would be determined using the actual acquisition date. By order of August 27, 1974, the Board granted taxpayers' petition for refund as to the two stocks on which taxpayers had calculated gain using the May 31, 1971 close of business day fair market value.

Subsequent to this ruling by the Board, the Department, pursuant to the provisions of the 1974 amendment, recalculated taxpayers' gains on all other 1972 Schedule D stocks acquired prior to June 1, 1971, substituting June 1, 1971 value for actual acquisition cost, and assessed taxpayers additional tax on the additional gains thus indicated. Both the Department's Board of Reassessment and the Board sustained the Department's subsequent assessment. Hence this appeal.

In their brief and in oral argument before this Court taxpayers relied on several different theories to advance what are, in essence, two basic arguments: first, that the Board's initial grant of refund as to the tax assessed on the two 1972 Schedule D stocks, on which taxpayers calculated gain using the May 31, 1971 fair market value, precluded subsequent reassessment of tax by the Department on all other 1972 Schedule D stocks; and second, that the Department's subsequent assessment constitutes a misapplication of the 1974 basis amendment to the extent that it imposes a tax on nonexistent income.

We are not persuaded by taxpayers' first argument that the Board's refund as to two of the 1972 Schedule D stocks precluded subsequent assessment by the Department as to other stocks. In support of their position taxpayers assert that the Department's payment of refund in compliance with the Board's first ruling rendered moot the issues involved in the subsequent assessment, that the Department's exclusive remedy, if aggrieved by the Board's first ruling, was to appeal pursuant to Sections 503 and 1104 of The Fiscal Code ³ and that the subsequent assessment was barred by principles of res judicata. In so arguing, taxpayers erroneously assume that the Department's subsequent assessment was an attempt to relitigate issues previously adjudicated by the Board.

The undisputed facts here show that the Department, in making its subsequent assessment, simply recomputed the gain on all of taxpayers' Schedule D property, exclusive of the two stocks affected by the Board's ruling, using the same basis provision used by the Board when it found for the taxpayers as to gain on the two stocks initially in dispute. Such a recomputation was neither mooted by the Department's payment of a refund as to the first two stocks, ⁴ nor inconsistent with the appeal provisions of Sections 503 and 1104 of The Fiscal Code, which provisions we have held to be exclusive remedies only where subsequent Department action is an attempt to unilaterally reverse a prior Board decision. Westinghouse Broadcasting Co. v. Board of Finance and Revenue, 14 Pa.Cmwlth. 59, 321 A.2d 413 (1974), nor barred by principles of res judicata, See Department of Environmental Resources v. Pennsylvania Power Co., 34 Pa.Cmwlth. 546, 384 A.2d 273 (1978). Under the facts presented here, we conclude that the Board's initial ruling as to two stocks on taxpayers' Schedule D was a limited one involving a narrow issue; it did not preclude the Department's subsequent review of gains on other stocks on Schedule D.

We now turn to taxpayers' second argument, an attack upon the substance of the Department's subsequent assessment with regard to other Schedule D gains. Taxpayers contend that the Department, in substituting June 1, 1971 value for actual acquisition cost on all property acquired prior to June 1, 1971, even in instances in which actual acquisition cost exceeded June 1, 1971 value, taxed income which taxpayers never in fact realized, and to that extent misapplied the 1974 basis amendment. We agree.

As originally enacted, Section 303(a)(3) of the Code, which provides for the computation of net gains or income from disposition of property for purposes of personal income taxation, was, aside from the mandate that "accepted accounting principles" be used, silent as to the method to be used in calculating the basis of property. This section was amended in 1974, See note 2 Supra, to provide retroactively a basis measured by June 1, 1971 fair market value for property acquired prior to June 1, 1971, and a basis measured by acquisition cost for property acquired subsequent to June 1, 1971.

In making its subsequent assessment, the Department applied this amended basis provision to the computation of gains reported on Schedule D of taxpayers' 1972 return without regard to the fact that taxpayers' acquisition costs for many of the holdings of stock listed on that schedule were greater than the fair market value of those stocks as of June 1, 1971. ⁵ As a result, the Department subtracted from sale price the artificially low June 1, 1971 basis and imputed to taxpayers a recognized gain that was greater than the gain they actually realized.

A simple example of the Department's application of the basis provision in this case is as follows: assume that taxpayers purchased property in 1960 for $10, that the property had a fair market value on June 1, 1971, of $5, and that taxpayers sold it on December 31, 1971, for $15. Though taxpayers actually realize a gain of $5, the Department, literally applying the language of the 1974 basis amendment, would measure taxpayers' gain from the $5 June 1, 1971 value and find a "gain" of $10. We do not believe that the legislature intended such a result.

When interpreting the provisions of a statute to ascertain the intent of the General Assembly, we look first to the face of the statute itself. Article III of the Code, 72 P.S. § 7301 Et seq., imposes a tax on certain classes of resident individuals' "income." Section 301(j) of the Code, 72 P.S. § 7301(j), defines income as "compensation, net profits, gains, dividends, interest or income enumerated and classified under Section 303 of this article." Section 303(a)(3) of the Code, 72 P.S. § 7303(a)(3), which addresses the class of income here at issue, net gains or income from disposition of property, embodies the contested provisions for determining the basis of property acquired prior to June 1, 1971, but provides no further elucidation as to the meaning of income.

Where, as here, no clear definition of a key word is provided by the statute, Section 1903(a) of the Statutory Construction Act of 1972 (Statutory Construction Act), 1 Pa.C.S. § 1903(a) directs that the word shall be construed according to its "common and approved usage." While we attempt no exhaustive exposition of the meaning of income for purposes of Pennsylvania income taxation, we do not hesitate to assert that, contrary to the Department's application of the basis provision, the "common and approved" definition of income does not include a benefit which taxpayers have not and will not ever realize. See Black's Law Dictionary 906 (4th ed. rev. 1968); Webster's Third New International Dictionary 1143 (1966). Sections 1921(c)(6) and 1922(1) of the Statutory Construction Act, 1 Pa.C.S. §§ 1921(c)(6), 1922(1), which permit us to consider the consequences of a particular interpretation and to presume that the General Assembly did not intend a result that is absurd, impossible of execution, or unreasonable, supply additional support for this construction.

Since the unrealized and unrealizable "benefit" taxed by the Department is not income within the meaning of Article III of the Code, and since the taxation of such as "income" would be, in our view, both absurd and unreasonable, we hold that the General Assembly did not intend through its amendment to Section 303(a)(3) to substitute June 1, 1971 value for actual acquisition cost of property acquired prior to that date in those instances in which actual acquisition cost exceeds June 1, 1971 value. To...