Opinion
May 22, 1961.
June 26, 1961.
Taxation — Corporations — Corporate net income tax — Basis of computation — Gross receipts allocation fraction.
1. Taxpayer's contention that it should be taxed as a multiform taxpayer was Held to be without merit in view of its stipulation which the court below correctly evaluated in holding the business of the taxpayer was unitary and should be taxed as such. [294-6]
2. The inclusion of a separate out-of-state business in the gross receipts allocation fraction in determining the taxpayer's corporate net income tax was Held to be proper. [295]
3. In determining whether Pennsylvania gross receipts allocation formula is proper the sole issue is whether Pennsylvania justly allocates to itself a proper proportion of the corporation's activities, regardless of the methods used by the other states. [296]
Mr. Justice BELL dissented.
Argued May 22, 1961. Before JONES, C. J., BELL, JONES, COHEN, BOK and EAGEN, JJ.
Appeal, No. 31, May T., 1961, from judgment of Court of Common Pleas of Dauphin County, No. 520 Commonwealth Docket, 1959, in case of Commonwealth of Pennsylvania v. South Philadelphia Terminal, Inc. Judgment affirmed.
Appeal by taxpayer from net income tax settlement by Commonwealth.
Order entered dismissing appeal, taxpayer's exceptions dismissed and judgment entered, opinion by SHELLEY, J. Taxpayer appealed.
Frank A. Sinon, with him Rhoads, Sinon Reader, for appellant.
Edward Friedman, Deputy Attorney General, with him Anne X. Alpern, Attorney General, for Commonwealth, appellee.
In this case the South Philadelphia Terminal, Inc., appellant, questions its liability for the payment of Pennsylvania Corporate Net Income Tax as assessed. The appellant's contention that it should be taxed as a multiform taxpayer was dissipated by its stipulation which the court below correctly evaluated, holding that the business of the taxpayer was unitary and should be taxed as such. A further contention of appellant that income from a separate out-of-state business was allocated to Pennsylvania, thereby creating net income in Pennsylvania when there was actually none also was correctly answered by Judge SHELLEY from whose opinion we quote the following: "The purpose of an allocating fraction is to assign to a state that portion of the corporation's activity which is exercised within the state as a result of a privilege granted in the certificate of authority. Each state has the right to establish a formula to be used for the purpose of assessing corporate net income tax, so long as the formula is uniform and reasonable. Various formulae including the one used in Pennsylvania have been sustained by the Supreme Court of the United States, Butler Bros. v. McColgan, . . . .
"Since the various states of the union have not adopted a uniform method of allocating income, the possibility of overlapping of the apportionment formulae always exists. This possibility was recognized and held to be of no moment in the ordinary case. In Commonwealth v. Koppers Company, Inc., 397 Pa. 523, 530 (1959), the Court held: 'The gross receipts fraction, as well as the tangible property and wages and salaries fractions, is part of a method used to apportion the income of a corporation doing business in more than one state so that each state may base its tax on only a portion of the income, a portion considered allocable to that state. Use of the three fraction formula has been held reasonable and valid: Butler Bros. v. McColgan, 315 U.S. 501, 86 L.Ed. 991 (1942), and Turco Paint Varnish Co. v. Kalodner, 320 Pa. 421, 184 A. 37 (1936), even though that formula may not precisely measure the corporation's income actually attributable to the taxing state. Guaranty Trust Co. v. Virginia, 305 U.S. 19, 83 L.Ed. 16 (1938). Just as in cost accounting it becomes almost impossible to make a completely accurate cost analysis, so here in the allocation of income to the various taxing states there is usually some overlapping by the several states, which results in the imposition of a tax on more than 100% of the corporation's income. This is not constitutionally fatal and would only be declared so when there has been an unreasonable distortion of income.' "
The conclusion that the fairness of an allocation formula cannot be determined by consideration of or the effect of a different formula used by another state is most proper. The sole issue is whether Pennsylvania's formula justly allocates to itself a proper portion of the corporation's activities, regardless of the methods used by the other states.
Judgment affirmed.
Mr. Justice BELL dissents.