Gosewisch v. Com., Dept. of Revenue

• Decision Date: 26 February 1979
• Citation: 397 A.2d 1288,40 Pa.Cmwlth. 565
• Parties: William GOSEWISCH and Theresa M. Gosewisch, Appellants, v. COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Appellee.
• Court: Pennsylvania Commonwealth Court

Page 1288

397 A.2d 1288

40 Pa.Cmwlth. 565

William GOSEWISCH and Theresa M. Gosewisch, Appellants, v. COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Appellee.

Commonwealth Court of Pennsylvania.

Argued Dec. 6, 1978.

Decided Feb. 26, 1979.

[40 Pa.Cmwlth. 566] R. Scott Shearer, Deputy Atty. Gen., Harrisburg, for appellee.

P. J. DiQuinzio, Paul S. Kimbol, Dechert, Price & Rhoads, Philadelphia, for appellants.

Before BOWMAN, President Judge, and WILKINSON, MENCER, ROGERS, BLATT, DiSALLE and MacPHAIL, JJ.

OPINION

ROGERS, Judge.

William Gosewisch and Theresa M. Gosewisch, his wife, have filed a petition for review of the action of the Board of Finance and Revenue sustaining an additional assessment of $153.41, with interest, but without penalty, on account of their Pennsylvania Personal Income Tax for 1973, and refusing their application for a refund in the amount of $1355.30.

The parties have filed a stipulation of facts from which we have culled the following as our findings:

"1. William and Theresa M. Gosewisch (hereinafter referred to as 'Appellants') are husband and wife and reside at 6004 Musket Road, Fort Washington, Pennsylvania 19034.

"2. Appellants are on the cash basis of accounting for Pennsylvania Personal Income Tax purposes.

"3. Appellants duly and timely filed a Pennsylvania Personal Income Tax Return for the taxable year 1973. Appellants reported taxable income for 1973 of $56,191.99, a tax due of $1,292.42, taxes withheld $2,320.96, and claimed a refund of $1,028.54. . . . .

"4. In 1973, Appellant William Gosewisch (hereinafter 'Taxpayer') received.$65,596.36 as a lump sum distribution from the H. B. Frazer Company, Inc. Profit Sharing Trust. . . . Of that amount, $51,389.76 had accrued to Taxpayer's profit sharing plan account prior to June 1, 1971 and $14,206.60 had accrued to his profit sharing plan account after June 1, 1971. On their 1973 Personal Income Tax return Appellants reported as taxable compensation only the amount accrued after June 1, 1971, along with the amount of $24,000.08 received as salary as evidenced by the W-2 issued Taxpayer, producing a reported taxable compensation of $38,207.09.

"5. The Personal Income Tax Bureau determined that Appellants' total taxable income for 1973 was $107,580.00. The Bureau determined that the $51,388.00 accrued to Taxpayer's profit-sharing plan account prior to June 1, 1971 and distributed to Taxpayer in 1973 by the H. B. Frazer Company, Inc. Profit Sharing Trust was taxable as compensation. As a result of this adjustment, the Bureau determined that Appellants' 1973 personal income tax was $2,474.37, applied the credit of $2,320.96 for tax withheld, and determined that a deficiency of $153.41 was still owed by Appellants.

". . . an

"7. On April 15, 1975, the Appellants filed a timely Petition for Reassessment in which they claimed that their correct 1973 Pennsylvania Personal Income Tax liability is $965.66 and that they were entitled to a refund of $1,355.30. By decision mailed October 15, 1975 the Personal Income Tax Board of Reassessment sustained the assessment in its entirety.

"8. On November 12, 1975, Appellants filed a Petition for Review with the Board of Finance and Revenue. By Order dated January 28, 1976, the Board of Finance and Revenue sustained the assessment, but abated the penalties.

"9. Prior to 1973, Taxpayer was employed by H. B. Frazer and Company, Inc. and was a participant in the H. B. Frazer Company, Inc. Profit Sharing Plan (hereinafter 'Plan'). . . .

"10. The Plan created a Fund designed to provide certain benefits for eligible employees (hereinafter 'Members') of H. B. Frazer Company, Inc. Contributions under the Plan and earnings on those contributions are allocated annually as of each December 31, to the Member's account. Any Member of the Plan who had a vested interest in the Fund as provided by the Plan had a legally enforceable right to the money or other property in his account upon the occurrence of certain specified events, one or more of which was certain to occur. None of these specified events occurred relative to the Taxpayer until 1972. No benefit payable under the Plan was subject, in any manner, to anticipation, assignment or pledge.

"11. All of the contributions to said Plan consisted of contributions by the employer (H. B. Frazer Company, Inc.). The members of the Plan, including the instant Taxpayer, made no contributions into the Plan.

". . .l o

"15. On April 16, 1970, Section 6.2 of the Plan was amended to read as follows:

"6.2 'TERMINATION OF EMPLOYMENT'. Upon the termination of employment of a member for reasons other than death or disability, he shall be entitled to receive the full amount standing to his credit in the Fund. Payment of such amount shall be made in ten equal annual installments commencing with the month following the termination of his employment; provided, however, that the Committee may at any time elect to have paid in one lump sum the amount then standing to his credit in the Fund."

"16. As of December 31, 1970, the balance in Taxpayer's Plan account was $51,398.76. Thereafter, $14,206 was credited to his Plan account as of December 31, 1971. This latter sum consisted of Taxpayer's share of the contribution made to the plan by H. B. Frazer Company, Inc. for 1971 and his share of the Plan's income and appreciation for the year 1971.

"17. In 1972, Taxpayer terminated his employment with H. B. Frazer Company, Inc.

"18. In 1973, Taxpayer received.$65,596.36 from the Girard Trust Bank, the trustee of the Profit Sharing Trust established pursuant to the Plan. Upon receipt of this sum, Taxpayer ceased to be a Member of the Plan and relinquished all of his right, title and interest in the Plan."

As the findings suggest, Mr. and Mrs. Gosewisch reported the gross amount of the total distribution to Mr. Grosewisch from the Profit Sharing Trust in the amount of.$65,596.36 on their 1973 Pennsylvania Personal Income Tax Return but deducted from that amount the sum of $51,389.76, the amount credited to his account as of December 31, 1970, the date his account became totally nonforfeitable and a date prior to June 1, 1971, the effective date of the Pennsylvania Personal Income Tax. ¹ They reported and paid tax on the difference between the total distribution of.$65,596.36 and the amount of $51,389.76, or $14,207.01; this last figure being the sum of the 1971 appreciation in the value of Mr. Gosewisch's interest credited to his account as of December 31, 1971 and of the 1971 employer contributions to his account also credited December 31, 1971.

The Commonwealth's position, upheld by the Board of Finance and Revenue, is that the total distribution in the amount of.$65,596.36 was compensation received by Mr. Gosewisch in 1973 and all taxable in that year. It is the position of Mr. and Mrs. Gosewisch that Mr. Gosewisch's interest in the Profit Sharing Trust was, from the moment it became 100% Non-forfeitable, intangible personal property, which in 1973, when his employment terminated, he exchanged with the trustees for cash; and that only the difference between the amount he received,.$65,596.36, and the "fair market value of his property interest in his account on June 1, 1971", $51,389.76, that is, $14,207.01, ² was taxable as a capital gain. ³

In our opinion, the 1973 distribution to Mr. Gosewisch from the Profit Sharing Trust was compensation within the meaning of Section 303(a)(1) of the Code, 72 P.S. § 7303(a)(1), which provides:

"Compensation. All salaries, wages, commissions, bonuses and incentive payments whether based on profits or otherwise, fees, tips and similar remuneration received for services rendered whether directly or through an agent and whether in cash or in property except income derived from the United States Government for active duty outside the Commonwealth of Pennsylvania as a member of its armed forces."

and that no part of it represented a net gain or income from disposition of property within the meaning of Section 303(a)(3) of the Code, 72 P.S. § 7303(a) (3), which provides:

"Net gains or income from disposition of property. Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property, including real or personal, whether tangible or intangible as determined in accordance with accepted accounting principles and practices. For the purpose of this act, for the determination of the basis of any property, real or personal, if acquired prior to June 1, 1971, the date of acquisition shall be adjusted to June 1, 1971 as if the property had been acquired on that date. If the property was acquired after June 1, 1971, the actual date of acquisition shall be used in determination of the basis."

The term compensation is defined in Section 301 of the Code, 72 P.S. § 7301(d), as follows:

" 'Compensation' means and shall include salaries, wages, commissions, bonuses and incentive payments whether based on profits or otherwise, fees, tips and similar remuneration received for services rendered, whether directly or through an agent, and whether in cash or in property.

The term 'compensation' shall not mean or include: (i) periodic payments for sickness and disability other than regular wages received during a period of sickness or disability; or (ii) disability, retirement or other payments arising under workmen's compensation acts, occupational disease acts and similar legislation by any government; or (iii) payments commonly recognized as old age or retirement benefits paid to persons retired from service after reaching a specific age or after a stated period of employment; or (iv)...