Com. v. Westinghouse Elec. Corp.

• Decision Date: 31 May 1978
• Citation: 478 Pa. 164,386 A.2d 491
• Parties: COMMONWEALTH of Pennsylvania v. WESTINGHOUSE ELECTRIC CORPORATION, Appellant.
• Court: Pennsylvania Supreme Court

Page 491

386 A.2d 491

478 Pa. 164

COMMONWEALTH of Pennsylvania v. WESTINGHOUSE ELECTRIC CORPORATION, Appellant.

Supreme Court of Pennsylvania.

Argued March 7, 1978.

Decided April 28, 1978.

Reargument Denied May 31, 1978.

Howell C. Mette, Shearer, Mette & Woodside, Harrisburg, for appellant.

Vincent Dopko, Harrisburg, Deputy Atty. Gen., Philip C. Herr, Philadelphia, Scott Schearer, Harrisburg, for appellee.

Before EAGEN, C. J., and O'BRIEN, ROBERTS, POMEROY, NIX, MANDERINO and LARSEN, JJ.

OPINION

LARSEN, Justice.

When appellant, a Pennsylvania corporation, filed its consolidated Federal corporate income tax return for calendar year 1969, it elected to claim the taxes which it paid to foreign governments as a credit against its Federal tax liability rather than as a deduction from its gross income. ¹ Since the Pennsylvania Corporate Net Income Tax Act of May 16, 1935, P.L. 208, § 1 et seq. as amended, 72 P.S. 3420a et seq. (herein referred to as "the 'act' ") ² provided that a corporation's taxable income (for the purposes of calculating state tax liability) consisted of those funds which the Federal government designated as taxable on the corporation's Federal tax return, appellant, because it did not claim a deduction for foreign taxes on its 1969 Federal return, did not deduct said foreign taxes from its 1969 state return.

On December 17, 1970, appellant and the State Auditor General reached a settlement on appellant's state tax liability for calendar year 1969.

On March 10, 1972, the director of the State Bureau of Corporation Taxes issued a document entitled Taxing Memorandum No. 83 which provided that a corporation, when filing its state tax return, could claim foreign taxes as a deduction from its gross income even though said corporation did not deduct the foreign taxes from its Federal return. Accordingly, on May 5, 1972, appellant filed a petition with the State Board of Finance and Revenue requesting a partial refund of the taxes that appellant paid to the Commonwealth for calendar year 1969. Appellant claimed that it was entitled to this refund since, in determining its state tax liability for calendar year 1969, appellant did not deduct foreign taxes from its gross income as it was permitted to do under Taxing Memorandum No. 83.

The Board of Finance and Revenue denied appellant's petition for a partial refund of its 1969 state taxes. Appellant appealed the Board's decision to the Commonwealth Court, which affirmed the Board's denial of appellant's refund petition. Subsequently, appellant filed this appeal of the Commonwealth Court's decision in this Court.

On April 2, 1973, the director of the Bureau of Corporation Taxes rescinded Taxing Memorandum No. 83.

Appellant's first contention is that since Section 3420c of the Act provided that a corporation was required to pay a state excise tax only "upon each dollar of net income . . . received by . . . and accruing to" said corporation, appellant was entitled to deduct the foreign taxes because it never "received" the taxes which it paid to foreign governments. Appellant's argument is misplaced since it ignores the Act's definition of "net income"; the Act defines "net income" as the corporation's "taxable income . . . as ascertained by the Federal Government . . . " for Federal tax purposes. 72 P.S. § 3420(b)(2)(c). ³ Thus, in determining whether appellant's foreign taxes should be considered as part of "net income" (and hence subject to the state corporate net income tax), our sole inquiry is whether the amount of said foreign taxes was included as "taxable income" on appellant's Federal return. By not claiming a Federal tax deduction for the foreign taxes, appellant treated the amount of those taxes as included within the figure which comprised "taxable income" on its Federal return; accordingly, the amount of foreign taxes paid by the taxpayer must be treated as included within the amount to be shown as "net income" on appellant's state tax return.

Appellant's second contention is that the Commonwealth's refusal to partially refund the taxes which appellant paid for calendar year 1969 violated appellant's rights under the equal protection clause of the United States Constitution and the uniformity clause of the Pennsylvania Constitution. The basis for appellant's argument is that appellant, by not being permitted to deduct foreign taxes from its state tax return, was taxed at a higher rate than those corporations which were allowed to deduct foreign taxes from their state tax returns.

In the past, this Court has held that in matters of taxation, allegations of violations of the equal protection clause and the uniformity clause are analyzed in the same manner. Fisher Controls Co. v. Commonwealth of Pennsylvania, 476 Pa. 138, 381 A.2d 1253, 1256 (1977). Further, this Court has held that a state tax is not violative of the uniformity clause if the tax "applies to all corporations with which the Commonwealth has power constitutionally to deal . . . . Where the (state tax) base is the same and the rate unvarying, there is no lack of uniformity." Commonwealth v. Warner Brothers Theatres, Inc., 345 Pa. 270, 274, 27 A.2d 62, 64 (1942). In the case at bar, it is obvious that the Act did not violate the uniformity clause because the Act's tax base, the corporation's "taxable income . . . (as) ascertained by the Federal Government" for Federal tax purposes, applied the "same . . . unvarying" rate to all corporations.

Further, the sole reason that appellant paid more taxes than those corporations which were permitted to deduct foreign taxes from their state tax returns was that unlike those other corporations, appellant chose to claim the foreign taxes as a credit against Federal tax liability rather than as Federal tax deduction from its gross income and, thus, appellant was not entitled to deduct the foreign taxes from its gross income on its state return. Appellant's election of claiming the foreign taxes as a credit rather than as a deduction on its Federal tax return was voluntary.

Appellant's third contention is that the equal protection and uniformity clauses were violated by the Commonwealth because appellant, unlike corporations who settled their state tax liabilities while Taxing Memorandum No. 83 was in effect, was not permitted to deduct said foreign taxes from its state return. "A taxpayer complaining that administration of a tax violates its rights to be taxed uniformly with others in its class must demonstrate 'deliberate, purposeful discrimination in the application of the tax . . . before constitutional safeguards are violated. . . . ' (An) appellant has the burden of proof of showing the discriminatory pattern which might entitle him to relief: 'the validity of actions of taxing authorities is presumed; when...