Commonwealth v. Columbia Gas & Elec. Corp.
| Decision Date | 25 September 1939 |
| Docket Number | 53 |
| Parties | Commonwealth, Appellant, v. Columbia Gas and Electric Corporation |
| Court | Pennsylvania Supreme Court |
[Copyrighted Material Omitted]
Argued June 19, 1939
Appeal, No. 53, May T., 1939, from judgment of C.P. Dauphin Co., Com. Docket 1937, No. 29, in case of Commonwealth v Columbia Gas and Electric Corporation. Judgment reversed.
Appeal to common pleas by foreign corporation from settlement of franchise tax. Before HARGEST, P.J., without a jury.
The opinion of the Supreme Court states the facts.
Judgment entered for corporation. Commonwealth appealed.
Errors assigned, among others, related to the action of the court below in overruling various exceptions of the Commonwealth to its findings and conclusions.
Judgment reversed. The record is remitted to the court below with instructions that it be returned to the Department of Revenue to resettle the tax against appellee in accordance with this opinion.
Claude T. Reno, Attorney General, and Frank A. Sinon, Deputy Attorney General, for appellant.
Geo. Ross Hull, with him Wm. A. Seifert, J. Smith Christy, Roy J. Keefer, Chas. W. Hull, Snyder, Hull, Leiby & Metzger, Reed, Smith, Shaw & McClay and Weil, Christy & Weil, for appellee.
Leighton P. Stradley, Jr. and David H. Rosenbluth, amici curiae.
Before KEPHART, C.J., SCHAFFER, MAXEY, DREW, LINN, STERN and BARNES, JJ.
On October 2, 1933, the Columbia Gas and Electric Company, a Delaware corporation, with its principal office in New York, applied for and obtained a certificate of authority to transact in Pennsylvania the business of "production of oil, gas and electricity and holding of real estate." From that date until October 31, 1935, it owned and operated in this State plants for the manufacture of gasoline and natural gas. In the conduct of that business for the year 1935 it employed tangible property of a book value of $331,813.39, paid wages of $14,926.27 and received from sales $31,451.47, all within or assignable to the State.
The company's corporate powers and businesses were broader than those which it qualified to pursue in Pennsylvania. The great bulk of its activities consisted in acting as a holding company. It owned 50% to 100% of the stock of some 50 subsidiaries, a substantial investment in stocks, bonds, mortgages and notes of other companies, and had a large amount of accounts receivable and cash. In 1935 the total value of these intangible assets amounted to approximately $446,000,000. The court below found that the legal situs of this intangible property was outside of this State.
Upon the withdrawal of the company from this State at the end of October, 1935, it filed a franchise tax report for 10 months, setting forth the following information:
Appraised value of entire capital stock
$188,862,501.00
Tangible property in Pennsylvania
331,813.00
Total tangible property
475,328.00
Wages paid in Pennsylvania
14,926.00
Total wages paid
453,612.00
Gross receipts assignable to Pennsylvania
31,451.00
Total gross receipts
The Commonwealth, pursuant to the amendatory Act of May 16, 1935, P.L. 184, settled the tax as follows:
Value of capital stock as appraised by
Department of Revenue
$188,862,501.00
$331,813.39 / $475,328.86 X 1/3 of $188,862,501=
43,946,491.00
$14,926.27 / $453,612.37 X 1/3 of $188,862,501=
2,071,528.00
$31,451.47 / $18,257,245.78 X 1/3 of $188,862,501=
108,450.00
Taxable value of Capital Stock
46,126,469.00
Tax of Five Mills
192,193.63
Penalty
Amount due Commonwealth
An appeal was taken to the court below from this settlement of tax by the Revenue Department.
The taxing officials, from the argument presented in this Court evidently based the settlement upon the assumption that the company was doing a holding company business in this State because of the following facts: The company had under lease several floors of the Union Trust Company Building in Pittsburgh at a rental of $80,000 per year, which, in turn, was billed proportionately to the operating subsidiaries in Pennsylvania. The company had on deposit in the Union Trust Company from $1,300,000 to $1,400,000. From this account loans were made to its subsidiaries and repaid by them into it; into the account were received dividends of upwards of $658,000, and approximately $522,000, representing the proceeds of gas sold by appellee to another company.
However, the court below found that the executive business of the company was transacted, and all meetings of the stockholders and directors were held, out of the State; the stock certificates of subsidiaries, bonds, mortgages and other evidence of indebtedness were kept, and interest and dividends were received, outside of this State, except those sent for deposit to Pittsburgh, which were immediately entered upon the books of the New York City office. It concluded from this, as well as other evidence, that the company did not conduct a holding company business in this State. It then found that the amendment imposed a franchise tax on foreign corporations; that such tax measured by the capital stock was subject to constitutional restrictions imposed by the due process, equal protection and interstate commerce clauses of the Federal Constitution; that the allocation of taxable value to this State must bear a fair relation to the amount of local business done here by the foreign corporation; that, in this instance, the apportionment formula resulted in allocating a too large taxable value to Pennsylvania, principally because of the large amount of intangible properties which were located in another State and used solely in the performance of the holding company functions. The court concluded that the formula and allocation fractions prescribed by the statute to ascertain the taxable value of the franchise, operated not only unreasonably in the case of the Columbia Gas and Electric Company but were ". . . inherent in the method of allocation, and arbitrarily and unreasonably affect every corporation which has a substantial part of its intangible property outside of the State, because under the system prescribed by the Act intangible property is brought proportionately into the State for a base upon which to apply the tax." It therefore declared the Act unconstitutional generally. From this decision the Commonwealth has appealed.
Prior to 1935 both domestic and foreign corporations were subject to the capital stock tax imposed by the Act of June 1, 1889, P.L. 420, as amended April 25, 1929, P.L. 657. Domestic corporations paid a tax of 5 mills on the whole amount of their capital stock less certain exemptions. Foreign corporations paid a tax at the same rate on that proportion of the value of their entire capital stock which the tangible assets within the State bore to all assets of the company.
The amendatory Act of May 16, 1935, P.L. 184, is entitled: "An Act to Further Amend . . . by substituting a franchise tax on foreign corporations in lieu of the capital stock tax on such corporations." Section 21B of the Act provides: "Every foreign corporation . . . shall be subject to and pay . . . a franchise tax at the rate of 5 mills upon a taxable value to be determined in the following manner: The actual value of its whole capital stock of all kinds, including common, special and preferred shall be ascertained in the manner prescribed in the 20th Section of this Act and shall then be divided into three equal parts." To each one-third of the value of this entire capital stock there are applied certain fractions, representative of the fundamental elements of corporate structure, that there may be determined the taxable value allocable to this State to which the tax rate is to be applied. In the first fraction the numerator is the value of tangible property within the State and the denominator is the value of the entire tangible property wherever situated. In the second fraction the numerator is the gross expenditure for wages, salaries, commissions, et cetera paid in this State and the denominator the wages, et cetera, of all employees everywhere. In the third fraction the numerator is the gross receipts from business assignable to the State and the denominator is the total gross receipts from all business. As above noted, each fraction is applied against one-third of the value of the capital stock. Their sum total represents the taxable value.
Prior to the Act of 1935 the tax imposed on capital stock of foreign corporations, as well as domestic, had been repeatedly held to be a property tax. [1] Guided by what was stated in Commonwealth v. Standard Oil Company, 101 Pa. 119, and Commonwealth v. Curtis Publishing Company, 237 Pa. 333, it became the practice to tax only so much of the capital stock of a foreign corporation as the ratio of tangible assets in the State bore to all assets of the foreign corporation wherever situated. Under this arrangement foreign corporations, transacting a large part of their business here, escaped their fair share of the tax burden. The assets of foreign corporations, so far as they were comprised of intangibles, were wholly free of tax notwithstanding that they may have played an important part in the conduct of the company's local business. The old tax did not even reach all the tangible property of the enterprise located in this State. It made no attempt to value foreign corporations either as going concerns within this State, or as parts of going concerns which the foreign corporations had created through operations in this and other states. The discrimination under the old tax law was not only unfair, but operated unjustly in favor of foreign corporations and against domestic corporations, even though the...
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