417 Pa. 153 | Pa. | 1965
Opinion by
This is an appeal by the Commonwealth of Pennsylvania (Commonwealth) from a final judgment of the Court of Common Pleas of Dauphin County sustaining certain contentions of General Refractories Company (General), a Pennsylvania corporation, with regard to the determination of its Pennsylvania corporate net income tax for the calendar year 1954.
General, in 1950, purchased all of the stock of American-Austrian Magnesite Corporation, a Delaware corporation, from the then owners. The principal asset of the acquired company was the entire outstanding stock of Oesterreichisch-Amerikanische Magnesit, A. G. (Oemag), an Austrian corporation engaged in mining
In 1954 General received from Oemag (1) the 15,-000 metric tons of magnesite with a value (after loss in shipment and certain expenses of General) of $927,-562.13 and (2) 1,886 shares of stock in an American corporation with a value (over the cash paid to Oemag by General) of $115,789.83. The total of $1,043,351.96
At all times, from the initial enactment of the Pennsylvania Corporate Net Income Tax Act of May 16,1935, P. L. 208 (Act), to the present day, the measure of the tax has been, with few adjustments, the income upon which tax is paid to the Federal Government. See Commonwealth v. Lukens Steel Company, 402 Pa. 304, 167 A. 2d 142 (1961). Pennsylvania has always referred to this measure as “net income”, and it has always defined net income as the “net income” (prior to the Internal Revenue Code of 1954 — hereafter referred to as Code) or “taxable income” (after passage of the Code) returned to and ascertained by the Federal Government.
As they stood on May 16, 1935, the federal internal revenue laws allowed all dividends received by a corporation from a taxable domestic (U.S.) corporation to be deducted from gross income in determining net income. Revenue Act of 1934, ch. 277, §23 (p), 48 Stat. 690. At the same time they allowed a credit against tax for taxes paid to any foreign country, Revenue Act of 1934, ch. 277, §131 (a)(1), 48 Stat. 718, and extended the benefits of this credit provision to any domestic corporation which owned a majority of the stock of a foreign corporation from Avhich it received dividends when the foreign subsidiary itself paid tax to a foreign country on the accumulated profits from which the dividends were paid. Revenue Act of 1934, ch. 277, §131 (f), 48 Stat. 720. The Pennsyl
In the Revenue Act of 1936, ch. 690, 49 Stat. 1648-1756, the Federal Government made certain changes in the structure of the provisions imposing income tax on corporations. One of these changes eliminated entirely the deduction for dividends received from a United States corporation and substituted for it a credit against net income (not against the tax itself as stated both by the lower court and by General on its brief before us). Another change reduced the extent of the benefit to 85% of the dividends received, Revenue Act of 1936, ch. 690, §26(b), 49 Stat. 1664. These changes were made as part of a federal policy of discouraging the use of multiple corporate entities and of encouraging simplification of corporate structures. Bittker, Federal Income Taxation of Corporations and Shareholders 47. No pertinent change was made, however, in the foreign tax credit provisions as previously contained in the Revenue Act of 1934, and these provisions were retained in the Revenue Act of 1936.
Whatever the reasons for the federal changes, they had the effect of dislocating the Pennsylvania corpo
The Pennsylvania deduction for dividends received has remained in substantially the same form to the present day. See Corporate Net Income Tax Act, §2(1) (b), 72 P.S. §3420b. While the federal tax provisions, as now contained in §§243 to 245 of the Code, once again provide for a deduction from federal gross income in arriving at federal taxable income rather than a credit against the latter, the only effect of this 1954 Code change was to require Pennsylvania to limit its deduction for dividends received to the extent such dividends are still included in federally ascertained taxable income. Thus, today (and in 1954), 85% of dividends received are eliminated from Pennsylvania net income because they are deducted from federal gross income in determining federal taxable income; while the remaining 15% of dividends received are subsequently deducted in computing Pennsylvania net income.
Tbe effect of this history on the status of the magnesite received initially by General from Oemag is not entirely clear. As pointed out above, dividends received from a foreign corporation not engaged in business in the United States are not deductible to any extent for federal tax purposes. Rather, they provide the basis for a credit against tax. Code §§901, 902. On the other hand, the language of the Corporate Net Income Tax Act, supra, does permit a 100% deduction for such dividends; and the parties here have stipulated that cash dividends so received have been recognized, at least during 1954 and subsequently, as deductible dividends received from “any other corporation”. We believe that the Act, as amended in 1936, provided for similar treatment between then and 1954 and, also, that it applied to property (other than cash) received and includible in gross income as a dividend.
These conclusions do not conclusively establish General’s right to a deduction, however, since it was uncertain whether the magnesite received by it constituted a dividend. In fact, the value of the magnesite received by General in 1953, while reported by it as a dividend on its Federal income tax return, was ultimately determined by the Federal Government to be taxable as a royalty. In enacting the Code in 1954, however, Congress added Code §902(d) to the federal tax laws. Under this special provision the magnesite payments from Oemag to General are treated as a distribution and, hence, as a dividend if out of earnings and profits. On the other hand, the shares of stock received by General from Oemag in 1954 were includi
With this factual background before us, we can summarize the parties’ positions. The Commonwealth, argues (1) that Pennsylvania “net income” (i.e., federal “taxable income”) is a figure ascertained prior to the Pennsylvania deduction for dividends received and, thus, that the status and characterization of the deduction for such dividends is governed by the Corporate Net Income Tax Act and not by the Code; (2) that under the Pennsylvania statute the distribution to General by Oemag was not a dividend; and (3) in any case only dividends received from other corporations doing business in Pennsylvania are deductible.
General, on the other hand, contends that the dividends received deduction is one resorted to in determining Pennsylvania net income so that the federal definitions of its elements control; (2) the distribution in question was a dividend as that term is used both for tax and corporate purposes; and (3) nothing in the Corporate Net Income Tax Act restricts the deduction to devidends received from corporations doing business in Pennsylvania.
In approaching a solution to these issues,
Section 2(1) (b) of the Corporate Net Income Tax Act, however, also provides for certain adjustments to federal taxable income in determining Pennsylvania net income. One of these permits a deduction for dividends received from any other corporation to the extent such dividends are still included in federal taxable income. Only after these adjustments are made does the Act provide for the various allocations and apportionments applicable when a corporation transacts part of its business outside of Pennsylvania.
While the precise language of the Act is not a model of clarity in regard to the question before us, we are convinced that the adjustment to taxable income for dividends received can be explained only in terms of the Federal Code. The dividends received deduction stated in the Act is primarily an extension of the already permitted 85% deduction allowed by the Code; and it would be illogical to hold that while the latter 85% is determined by reference to the federal concept of dividends, the former 15% is computed only by reference to some differing state standard. That the state
Viewed in this light the initial question before us is not really, as suggested by the parties, whether the deduction in question is one made prior or subsequent to the determination of Pennsylvania net income. Rather, it is whether or not the Corporate Net Income Tax Act requires that the deduction be taken by reference to federal standards or state concepts (if, in fact, there is a difference between them). Since we have concluded that the Act inextricably ties the deduction to the Federal Code, the deduction is clearly subject to the federal definition. This conclusion follows from the language of the Corporate Net Income Tax Act and from the history of the deduction and is confirmed by the past administrative practices of the Commonwealth as stipulated by the parties.
Resolution of this issue also disposes of the remaining questions. If a particular receipt is includible in federal gross income as a dividend, then its characterization as such must follow through to the full state deduction for dividends received, whether this be for the remaining 15% of dividends received from United States corporations or the entire 100% received from certain foreign corporations.
We find no intent in the Act to limit the deduction to dividends received from corporations doing business in Pennsylvania. Such a conclusion would contradict everything we have said above and would again create a dual standard for treating dividends. None of the factors that bear on this point — the statutory language,
The judgment of the court below is affirmed.
After the purchase was completed, General liquidated the Aonerican-Austrian Magnesite Company and became the direct owner of Oemag’s stock.
Actually, in The Revenue Act of 1935, eh. 829, 49 Stat. 1014-1028 (enacted Aug. 30, 1935) §23(p) of The Revenue Act of 1934 was amended to limit the deduction to 90% of the dividends received. By this time the 1935 Session of the Pennsylvania General Assembly had been adjourned.
To the extent that dividends are received from a foreign corporation not engaged in business in the United States, of course, the present language permits, as it did in 1936 and thereafter, a deduc
The following discussion in this opinion deals specifically with the Act as it must be applied during 1954, the year involved here. However, it is equally relevant to the present application of the Act.
This conclusion is equally true with regard to the varying amounts deductible under Code §245 as dividends received from certain other foreign corporations.
The definitional clause of the Corporate Net Income Tax Act, §2, 72 P.S. §3420(b), provides: “The following words . . . when used in this act, shall have the meaning ascribed to them in this section, except where the context clearly indicates a different meaning.
“ ‘Corporation’. A corporation having capital stock, joint-stock association, or limited partnership either organized under the laws of this Commonwealth, the United States, or any other state, territory, or foreign country, or dependency, and doing business in this Oommomoealth, or having capital property employed or used in this Commonwealth by or in the name of itself, or any person, partnership, association, limited partnership, joint-stock association or corporation. . . .” (Emphasis supplied).
It is clearly apparent that this definition was not intended to apply to the word “corporation” in the context of the clause providing a deduction for “dividends received from any other corporation. . . .” (72 P.S. §3420b(a)). The definition was intended to apply to the word “corporation” in the context of the clauses referring to the entities subject to the tax.