Quaid v. Tax Review Bd. of City of Philadelphia

• Decision Date: 18 March 1959
• Citation: 188 Pa.Super. 623,149 A.2d 557
• Parties: James A. QUAID, Appellant, v. TAX REVIEW BOARD OF CITY OF PHILADELPHIA.
• Court: Pennsylvania Superior Court

Page 557

149 A.2d 557

188 Pa.Super. 623

James A. QUAID, Appellant, v. TAX REVIEW BOARD OF CITY OF PHILADELPHIA.

Superior Court of Pennsylvania.

March 18, 1959.

Application for Allocatur Denied April 25, 1959.

George F. Shinehouse, Jr., James W. Brown, Jr., Zink, Shinehouse & Holmes, Philadelphia, for appellant.

Shirley S. Bitterman, Leonard B. Rosenthal, Asst. City Sols., David Berger, City Sol., Philadelphia, for appellee.

Before RHODES, P. J., and GUNTHER, WRIGHT, WOODSIDE, ERVIN and WATKINS, JJ.

WOODSIDE, Judge.

This is an appeal from an order of the court below sustaining the action of the Philadelphia Tax Review Board in denying the petition of the taxpayer to strike off a net profit tax assessment.

James A. Quaid was an equal partner with Rodman H. Martin in Martin-Quaid Co., which was engaged in the business of fabricating metals and metal products in the City of Philadelphia. The partnership filed tax returns with the City of Philadelphia and paid tax on the net profit earned by the partnership in the operation of its business during all of the time of its existence.

On March 24, 1952, the partnership was terminated by Quaid selling his interest in it to Martin for $200,000. Calculated according to federal income tax standards, the cost to Quaid of his interest in the partnership was $77,294.16 and his expenses of sale were $4,300, with the result that the sale yielded a gain to petitioner of $118,405.84.

Quaid, a resident of Montgomery County, did not file a net income tax return in Philadelphia for the year 1952, but Martin-Quaid Co. did file a return and paid the tax on the gain earned by the operation of its business during that part of the year Quaid was associated with it.

After the sale by Quaid of his interest in the partnership, the city assessed a tax against him on the $118,405.85 gain which it contends was a net profit earned by him from the operation of a business in Philadelphia.

Upon petition of Quaid, the Tax Review Board conducted a hearing which took the form of a recorded conversation between members of the board, the city solicitor and counsel for Quaid. The board was given a copy of the agreement of the sale of the partnership interest, and the facts set forth above were admitted by both parties.

The agreement of sale provided that Quaid did 'bargain, sell, transfer, set over and assign unto [Martin and his wife] all of the right, title and interest of Quaid in the partnership known as Martin-Quaid Co., including the interest of Quaid in all real estate, fixtures, equipment, machinery, work in progress, inventory, accounts receivable, contracts, policies of insurance, choses in action, and the good will used in and belonging to said partnership. Martin shall have the right to the use of the name 'Martin-Quaid Co.' until December 31, 1952, whereupon such right to the use of said name shall cease, and thereafter neither party shall have the right to use the name of 'Martin-Quaid Co.' or any other deceptively similar name.'

Upon being interrogated by members of the board and the city solicitor, counsel for Quaid said, 'A substantial amount of the profit represented the good will of the business. So there could be some minor appreciation in certain of the assets, for example, real estate held over a period of time, but the big factor in the sale of this business was the good will which inured to the business.'

Relying upon this statement, the board and the court below concluded that the sum of $118,405.85 was composed primarily of good will which was earned, and was subject to the Philadelphia net profit tax. Quaid, thereupon, appealed to this Court.

The question is whether the sum which Quaid received by the sale of his partnership interest, in excess of the cost of that interest to him, was taxable under the City Income Tax Ordinance as net profit earned from the operation of a business in Philadelphia.

As stated in the opinion of the Tax Review Board, the City Income Tax Ordinance of December 13, 1939, as amended, 'does not impose a general income tax, but subjects to tax two classes of income, commonly described as 'wages' and 'net profits.' These two arms of the tax are frequently referred to as the 'wage tax' and the 'net profits tax' although they are basically different aspects of the same tax.'

The ordinance as it existed in 1952 imposed an 'annual tax' 'on the net profits earned * * * of businesses, professions or other activities conducted in Philadelphia by non-residents.' ¹

'Net profits' is defined in the ordinance as 'The net gain from the operation of a business, profession or enterprise after provisions for all costs and expenses incurred in the conduct thereof.'

The word 'earned' as used in this ordinance, according to the Supreme Court in Breitinger v. City of Philadelphia, 1950, 363 Pa. 512, 519, 70 A.2d 640, 645, 'is obviously used in a limited sense and not in the generally comprehensive sense in which the word is sometimes used' and means, "to gain, get, obtain, or acquire as the reward of labor or performance of some service."

The tax is imposed upon 'active conduct of a money-making occupation and not to the kind of acts done by one not engaged in business but merely conserving his property,' (Breitinger v. City of Philadelphia, supra, 363 Pa. at page 521, 70 A.2d at page 645) and thus profits from real estate, mortgages and securities are not 'earned' within the meaning of the ordinance, (Breitinger v. City of Philadelphia, supra, 363 Pa. at pages 513-524, 70 A.2d at pages 641-647; Murray v. City of Philadelphia, 1950, 363 Pa. 524, 70 A.2d 647) unless the taxpayer is engaged in the real estate, mortgage or security business. Pennsylvania Co. for Insurances on Lives and Granting Annuities v. City of Philadelphia, 1943, 346 Pa. 406, 31 A.2d 137. See also Ross v. Philadelphia, 1942, 149 Pa.Super. 33, 25 A.2d 834, 835 in which it was held that voluntary offerings made to a clergyman at marriages, funeral services, masses, etc. received by him without demand as gratuities were not 'earned income' or 'net profits earned', and were not taxable under the ordinance.

'The ordinance contemplates a tax only upon 'earned income'. This implies that some labor, management or supervision must be involved in the production of that income. Income derived merely from ownership of property would not satisfy the definition.' Pennsylvania Co. for Insurances on Lives and Granting Annuities v. City of Philadelphia, supra, 1943, 346 Pa. 406, 415, 31 A.2d 137, 141.

In order for the 'gain' of the sale of a non-resident's interest in a partnership to be taxable the gain must be considered as earned by the taxpayer from the operation of a business in Philadelphia.

In construing a statute or an ordinance words and phrases are to be construed according to their common and approved usage, unless the statute or ordinance defines them otherwise. Statutory Construction Act of May 28, 1937, P.L. 1019, § 33, 46 P.S. § 533.

The money received here by the appellant was not from the operation of a business but from the sale of a business. A single isolated transaction such as the sale of a business by its owner is not the operation of a business. Breitinger v. City of Philadelphia, supra, 1950, 363 Pa. 512, 516, 70 A.2d 640; Murray v. City of Philadelphia, supra, 1950, 363 Pa. 524, 532, 533, 70 A.2d 647.

Gain from the sale of a partnership interest in a business is not, according to common and approved usage of the words or as defined in the ordinance, earned from the operation of a business. The sale by the appellant of his interest in the partnership was the disposition of a capital asset. The fact that part of the value of that capital asset was good will accumulated over a number of years partly as a result of the services of the appellant does not make it, or any part of it, 'net profit' as defined in the ordinance.

The contract of sale between the partners makes no attempt to put a valuation on the various items of property transferred, and there is no evidence that the partners themselves arrived at the sale price by any separate valuation of the property transferred.

The Tax Revision Board accepted as a stipulation the answer of Quaid's counsel to a question by the City Solicitor that 'A substantial amount of the profit represented the good will of the business.' The board, concluding that the 'gain' was 'good will,' held that the gain was earned by Quaid's services to the partnership.

"Good will' has been defined by Judge Cooley as the favor which the management of a business has won from the public, and the probability that old customers will continue their patronage. * * * 'A retiring partner conveys, in addition to his interest in the tangible effects, simply the advantage that an established business possesses over a new enterprise." White v. Trowbridge, 1906, 216 Pa. 11, 19, 20, 64 A. 862, 865.

The good will, if earned at all, was 'earned' over a number of years during which time the tax rate was different. It was not earned in the year the 'annual tax' was assessed. But the good will which the partnership had acquired may or may not have been the result of the partners' services. It could have been the result of an improved market with which the partners' labors had no connection, or of any number of other events not brought about by any activity of the partners.

But, assuming that Quaid's profit was composed entirely of good will, which the record does not establish, and that the good will was solely the result of the partners' efforts, of which there was no evidence, it was the good will of the partnership and not of the partners. Quaid possessed no good will independent of the partnership.

'Good will,' says our Supreme Court, 'could hardly exist independently of the property occupied by the firm.' Underdown v. Underdown, 1924, 279 Pa. 482, 489, 124 A. 159, 163; Musselman and Clarkson's Appeal, 1869, 62 Pa. 81.

A surviving partner has...