*1 ness state a cannot claim under Section 8
by challenging provision a YMCA’s new CORPORATION, CANTEEN expanded commercial health-club type Petitioner, City Pittsburgh facilities. Under Appeal Sewickley Valley YMCA providing YMCA’s health-club facilities Pennsylvania, COMMONWEALTH primarily to paying competi- customers in Respondent.
tion with similar small may give businesses rise to a valid claim under the Act. Be- Pennsylvania. Commonwealth Court of Selfspot’s cause complaint was dismissed preliminary objections, any decision Argued Sept. precise this Court on the nature and ex- March Decided tent of proposed the uses of the YMCA facility would be premature. Under its review,
standard of say Court cannot
with certainty recovery that no possible, is
and the trial court’s order must be re-
versed and the ease remanded for further
proceedings.5
LEADBETTER, SIMPSON and
LEAVITT, JJ., dissent.
ORDER NOW,
AND day February, this 25th
2003, the order of the Court of Common County
Pleas of Butler sustaining pre-
liminary objections County of The Butler
Family dismissing YMCA and the com-
plaint reversed, of Selfspot, Inc. is and this
case is remanded for further proceedings foregoing opinion.
consistent with the
Jurisdiction relinquished. is argues 5. The Butler Selfspot any proper YMCAalso could not be related to charitable allege failed to state a claim it did because not purpose stated in the The YMCA charter. challenged activity was unrelated to a Selfspot argument also asserts that makes an purpose charitable as stated in the YMCA’s facility that the construction of the new con- copy charter and did not attach a of that impermissible expansion scope stitutes complaint. lapse document This on the 8(h) of the YMCA’sactivities under Section Selfspot readily subject was to amend- argument the Act. This raised in Self- ment, and thе YMCAattached the document brief, post's parties may but the contest the preliminary objections. to its A fair inference subject It issue on remand. will be better Selfspot's pleading that the YMCA's development resolution after of the facts. operation of the fitness center as described *2 Batt, and Peter Philadelphia R.
Robert York, Faber, petitioner. L. New for Smith, re- Harrisburg, for G. Clinton spondent. COLINS, Judge, President
BEFORE: PELLEGRINI, McGINLEY, Judge, FRIEDMAN, Judge, Judge, LEADBETTER, SIMPSON, Judge, LEAVITT, Judge. Judge, and BY LEADBETTER.1 Judge OPINION corpo- whether а presented issue liq- the fictional taxpayer’s rate 5, 2002. reassigned author on November case was This uidation of assets throughout deemed to occur under a most of the contiguous 48 federal tax election pursuant to 26 including Pennsylvania. U.S.C. states During the the Common- period, relevant tax wholly- was a Pennsylvania wealth of as business income owned of I.M. Vending, Inc. or non-business income. In exceptions (Vending); *3 Vending wholly-owned was a сourt,2 by panel decision a subsidiary of this Holdings, Canteen Inc. (Canteen) Corporation challenges (Holdings); Holdings was a subsidiary of legal conclusion parent corpo- that its Flagstar Companies, Inc. (Flagstar). ration’s federal tax election under Flagstar’s Section June of part as a dives- 338(h)(10) of the Internal plan, Revenue Code titure Holdings Vending sold to Com- (IRC), 338(h)(10), § 26 U.S.C. pass which re- Holdings, (Compass), Inc. an unrelat- sults in a fictitious sale of Cantеen, corporation. assets ed as a subsidiary in a liquidation, deemed requires that Vending, conveyed actually was to Com- gain fictional be treated as pass business in- participate as an asset and did not pursuant come Department’s regu- a party to the sale or receive cash or other 163.81(d)(1).3 § lation at 61 Pa.Code proceeds Can- as a result of the sale. argues teen gain from the fictional sale, Aftеr completion Holdings liquidation of assets should be treated the and Compass apply elected to IRC Section same as that from an liquidation, actual 338(h)(10) for tax purposes. federal income which is considered non-business income 338(h)(10) election, Under the Section pursuant to our Supreme holding sale of if Vending stock was treated as in Laurel Pipe Comp. v. Board of Vending sold all of its assets Revenue, Finance and 537 Pa. 642 parent, and distributed to proceeds and, therefore, A.2d 472 agree We Holdings, the selling corporation. reverse. subsidiary of Vending, Canteen was like- Delaware, Canteen is incorporated wise deemed have sold all of its to headquartered North in liquidation Carolina and con- immediately and to have dis- ducts its food operations services business proceeds Vending.4 tributed the to As a Commonwealth, (seller) Corp. 2. Canteen parent corporation 792 A.2d [WJhere the sells (Pa.Cmwlth.2002). subsidiary (target) the stock of its to anoth- corporation (buyer), er the seller and the 3. The states: 338(h)(10) buyer may elect under Section (d) the IRC to treat the sale as if the liability. election tax Effect of seller, subsidiary, by while owned sold Coiporate Net Income Tax. Taxable in- liquidation. all complete of its assets in generated come aas result of a Section 338 338(h)(10). U.S.C. then subject Pennsylvania Corpo- election is to recognizes or loss on the deemed rate Net Income Tax and treated as busi- assets, sale of its which is included in the subject apportionment, ness income if seller's consolidated federal tax return. Id. taxpayer apportionment was entitled year ending immediately pri- for the taxable The effect of Section is to create acquisition or to the date. The inсome con- paid a fiction in which the amount for the sequences of a Section 338 election shall be having shares of stock is treated as been separate company reflected aon basis and paid subject corpora- for the assets of the not as of a combined or consolidated purposes. tion for federal tax The sold report. subsidiary reports or loss on the 153.81(d)(1). 61 Pa.Code upon dеemed sale of its assets based panel opinion, Judge Kelley In the accurate- difference between the sale ly (basis) operative described effect of a Section the tax cost of those assets. For 338(h)(10) election as follows: purposes, federal income tax the transac- liability, its tax 338(h)(10) election, peals for resettlement of the Section Thereafter, Can- Board denied. for which the reаlized a fictitious both Board of for review petitioned teen purposes. income tax and federal state Revenue, also denied Finance Tax Pennsylvania’s Pursuant court, a three- appeal to our relief. On Code,5 corporate net in imposes a trial court8 judge functioning as panel appor tax on come certain allocated properly determined that taxable under the federal tioned income gain as business characterized Canteen’s code, reported tax therefore, and, the Board affirmed tax Pennsylvania corporate return on its and Revenue. See Canteen of Finance period January tax for the relevant (Pa. Commonwealth, Corp. v. through June 1994.6 See *4 Cmwlth.2002). present filed the Canteen 7401(3). 401(3) Code, 72 of the Tax P.S. decision, the exceptions panel’s to gain reported the as non-business Canteen we en banc. decide income, in in a this case resulted income Pennsylvania’s corporate if liability lower tax than would ensue Can privilege the of reported gain the inc tax is an excise tax on teen as business therefore, settlement, and, under the Department earning On the income ome.7 and, the as income Clause of the United States gain treated business Commerce Constitution, may consequently, subject tax to Pennsylvania increased lia Canteen’s bility. only corporate of of income petitioned Ap- the Board taxation $1,974,875.00 gain to purchase tion is treated not as a the from the allocated of stock, but, rather, $1,672,227.00 target's target if Pennsylvania, as the a of business loss (based had sold its assets and the appor- distributed sale Pennsylvania on allocated to [proceeds] parent $39,186,087.00), corporation tо its in com- a tionment of total loss of plete liquidation, though even liqui- no yielding taxable of a total income target actually of corporation dation the $302,178.00. increased treating By occurs. the of stock the sale as $821,227.00 liability tax to based assets, of a sale the assets take on new tax the business on its characterization of as equal generally price paid by basis the buyer subsidiary’s the the stock for and purchase price presumably since the ex- corpo 7. We that the of note characterization ceeds cost the their historic basis in hands always rate as income "non-business” will subsidiary, post-transaction of de- advantage; will corporation’s be this to the preciation respect deductions with depend upon geographical of distribution subsidiary's assets are increased. The corporation’s both assets and its business deemed distribution portion operations. greater Where the parent is tax-free Pennsylva corporation’s are located in parent’s actual and sale of the subsid- nia, characterizing as income "non-business” iary’s ignored pur- federal tax for advantage to likely greater tax will poses. taxpayer. See than to Commonwealth Corp., A.2d at 792 Co. v. Common Welded Tube America 32, wealth, A.2d 988 101 Pa.Cmwlth. 515 4, 1971, 6, amended, 5. Act of March P.L. as (1986). §§ 72 P.S. 7101-10004. appeals from of the Board In decisions Pennsylvania tax 6. Canteen declared liabili- Revenue, and the Commonwealth $36,231.00 Finance ty based on taxable income of is de because we function $302,178.00. Court’s review novo its Canteen calculated court, though are $1,974,875.00 cases even such trial by allocating income the to- v. appellate jurisdiction. Norris $199,579,941.00 heard in our Pennsyl- tal 423, Commonwealth, 625 Pa.Cmwlth. Pennsylvania 155 vania based on the ratio of as- 179, A.2d 182 sets to total assets. subtracted 598 ie., test,” (2)
reasonably privilege gain, related to the exer- “the transactional or cised this Commonwealth. Erieview the arises from the sale of asset Commonwealth, Inc. v. Cartage, taxpayer acquired, managed which the (Pa.Cmwlth.1995). 276, 278 The method of of as an disposed integral part regu- of its business, ie., determining portion may what of income lar “the functional test.” Linе, constitutionally Pennsylva- 209-10, be attributed to 537 Pa. at depending nia upon differs whether A.2d at 474-75. See also Ross-Araco Commonwealth, Corp. classified as “business” “non- v. 544 Pa. (1996) business.” The tax on business income is [stating A.2d upon corporation’s Pennsylvania Supreme based ratio of the Line the payroll, property, receipts adopted within Court the transactional and func- Pennsylvania payroll,-property, to its total tional first tests described the Com- receipts; the tax on in- monwealth Court Co. Welded Tube Commonwealth, is limited to the come sale of America 101 Pa. tangible personal real or located property Cmwlth. A.2d 988 ]. 401(3)2(a) Pennsylvania. Supreme In Laurel our Code, 7401(3)2(a). Tax P.S. these applied tests to determine Pennsylvania Tax Code de- proper characterization of income from the *5 arising fined “business income” as “income the pipelines operated sale of one of two from the activity regu- transactions and in The by Department agreed Laurel. that lar of or taxpayer’s course the trade busi- in selling Laurel was not the business of tangible ness and includes income from and, therefore, pipelines pro- intangible acquisition, if property the not ceeds were business income under the management, disposition prop- the of test. In that concluding transаctional the erty integral constitute of the tax- parts generate also did not income sale business payer’s regular trade or opera- business test, functional under the the rea- 401(3)2(a)(l)(A) tions.” Section of the Tax soned as follows: 7401(3)2(a)(l)(A).9 Code, § 72 P.S. The statutory in- The definition of business Tax Code defined “non-business income” requires acquisition, come that “the as “all income in- other than business of the management, disposition 401(3)2(a)(l)(D) Section of the Tax come.” the property integral parts constitute 7401(3)2(a)(l)(D).10 Code, § 72 P.S. regular op- taxpayer’s trade or business 7401(3)2(a)(l)(A) § erations.” 72 P.S. Based on the definition of statutory added). (emphasis 401(3) income” in of the “business Section Code, gain corpora Tax the sale of view, if property is business either In our the was not dis- pipeline
tion’s
income
corporation
as an
regularly engages
posed
integral part
the
of Laurel’s
Rather,
the
of transaction
the
trade or
the
type
produced
regular
that
business.
legislature
portionable
In
the
the defini-
under
the
of the
amended
Constitution
7401(3)2(a)(l)(A).
amended,
§
72 P.S.
United States.”
tion of "business income." As
in-
acquisition,
come
"business income” if "the
amendment,
legislature
the 2001
the
management
disposition
property
the
amended the
also
definition
"non-business
integral part
taxpayer’s
constitutes an
of the
by adding,
not in-
income”
"The term does
regular trade or business.” The amendment
apportionable
which is
under
clude income
which,
sentence,
states,
also added
second
the
of the United States.”
Constitution
ap-
term
which is
"The
includes all income
7401(3)2(a)(l)(D).
P.S.
misapplied
Pipe
Laurel
company-
panel
was that the
effect of the sale
inconsistent with
a result that is
its assets. This
reach
liquidated
portion
definition
income” in our
of “business
that
pro-
еvidenced
fact
ig-
and that
corporate income tax statute
ceeds of the sale were not reinvested
business,
election while
nores the Section
but
operations
back into
such
election
still
fiction
entirely
employing
to the stock-
were distributed
If we
income.
creates to tax
fictional
corporation.
holders of the
under
ignore
arising
the fiction
Line,
at
Pa.
338(h)(10) election,
has no
act
distributing
at 475. The critiсal
and, if we embrace
from the transaction
liquidation
the asset
proceeds of
election,
have
is deemed to
distinguished
shareholders
the decision
complete liqui-
in a
sold all of its assets
Line from that Welded
in-
dation,
which results
Tube,
from the sale of
where
come.
the company’s
one of
two tube manufactur-
ing plants
in the
was reinvested
business
that Canteen’s
Our conclusion
and, therefore,
test,
under the functional
non-
gain must be treated as
was business
changed by
is not
business income
Department’s regulation
in Laurel
at 61 Pa.Code
153.81(d)(1),
there is
which directs
present
dispute
case
no room
a result of a Section
liquidation
generated
that Canteen’s asset
did
inc
generate
is treated as business
business income under
trans
election
generally
actional
ome.11 It remains
true
test.
conducts
food
and, therefore,
force
law.
service business
the fiсtion
such a
has the
Carnegie
stemming
Teledyne
al
of assets
*6
Columbia-Summerill
Review,
parent
Comp.
Bd.
corporation’s
Unemployment
Section 338 election is
of
17,
665,
type
a
A.2d
668
not
of transaction in which Canteen
160
634
Pa.Cmwlth.
(1993), Moreover,
regularly engages.
recognize
in Laurel
that such
Pipe
we
pro
be
in
liquidated
regulation
great
Canteen
assets and dis
a
can
of
value
interpretation
a
of
viding taxpayers
tributed the
the
clear
proceeds to
stockholder.
distribution,
can
liquidation
language upon
they
This
and
statutory
deemed
rely
to have occurred as a
of the
in
their business affairs.
planning
Section
338(h)(10) election,
case,
However,
the
recognized
present
applica
cannot
in the
be
our
regulation
the
one
in tion of the
conflicts with
Commonwealth on the
hand
un
ignored Supreme
interpretation
order to
a
of the
yield
but
in
Be
Pipe
the other hand in
to
the
statute
Laurel
Line.
derlying
order
avoid
with
holding
Pipe
regulation
in Laurel
cause a
must be consistent
Line.
given
of
argues
61
be
some measure
deference.
11. that subsection
Pa.Code
should
153.81(d)(1)
Co.,
apply only
is intended to
Pa.
Rump
See
v. Aetna Cas. and Sur.
338(g)
339, 348,
1093,
under Section
elections
Internal
710 A.2d
There-
Code,
Revenue
and not to elections under
fore,
(d)(1) in
inapplicability of subsection
the
153.81(a)
338(h)(10),
Section
because
refers
338(h)(10)
is
election
the context of Section
type
would
be
to a
of tax return which
interpreta-
due
conflict with the Court’s
to its
filed in the Section
context. How-
Code Laurel
Line rather
tion of the Tax
in
ever,
(d)(1)
language
the
of
both
subsection
is
Departmental
any
intent to
than
inference of
Moreover,
unambiguous.
inclusive and
only
regulation
certain elections
limit the
construction,
disputes
Department
Canteen’s
under
regulation
interpretation
and its
its own
of
liquidation”
present
under
it
in
promulgated,
the statute
is
to the “deemed
controversy.
to the
lawfully applied
is not
present case. See Rump v. Aetna Cas.
(Lau-
Line Company
When
Co.,
348,
339,
and Sur.
551 Pa.
710 A.2d rel)
unprofitable
its
Aliquippa-Cleve-
sold
1093, 1098
(holding
interpreta-
that
it “liquidated
pipeline,
portion
land
its
question
tion of
statute is a
law for the
Id. at
assets.”
at 475. After
court and when the court
that
determinеs
sale, Laurel
operate
continued to
interpretive regulation
clearly
erro-
Aso,
pipeline.
second
Laurel distributed
intent,
legislative
neous
violates
stockholders rather than
disregard
court
regulation).
will
See
reinvest them the business.
Penn-
Our
Welfare,
v. Dep’t
also Franks
Pub.
804 sylvania Supreme Court
determined
(Pa.Cmwlth.2002).
A.2d
from the sale of
pipeline
was
nonbusiness
Accordingly,
exceptions
to this
Here,
subsidiary
Canteen was a
February
court’s order of
are
sus-
Vending, the owner of
stock.
judgment
Canteen’s
tained
is entered
favor of
was a
Vending
Holdings,
taxpayer, Canteen Corporation.
which sold the stock to
Hold-
Compass.
Compass
treated
of stock
ings
ORDER
as a sale of assets for federal tax purposes.
NOW,
March, 2003,
AND
day
this 6th
Canteen was “deemed” to have sold its
EXCEPTIONS to the order
Febru-
liquidation. Athough
in complete
8, 2002 in
ary
the above
matter
captionеd
reported
as nonbusiness
Judgment
hereby
are SUSTAINED.
income,
of Revenue treat-
petitioner,
entered
favor of the
ed Canteen’s
as business income
Corporation.
liability.
increased Canteen’s tax
Con-
view,
trary
majority’s
the actual
Judge
DISSENTING OPINION by
liquidation
Company
McGINLEY.
presents a different set of circumstances
respectfully
present
I
than the fictional
majority’s
dissent to the
controversy.
“gain
conclusion
*7
liquidation
deemed tо
fictional
of assets
majority correctly
that
*8
application
con-
that "the
Pennsylva
Norris v.
court.
Commonwealth of
interpretation
Supreme
flicts with our
nia, 155 Pa.Cmwlth.