PHILADELPHIA SUBURBAN CORPORATION, Appellee, v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE AND REVENUE, Appellant.
Supreme Court of Pennsylvania.
Decided Dec. 10, 1993.
Reargument Denied Feb. 25, 1994.
635 A.2d 116
Argued Dec. 9, 1992.
Accordingly, for all the foregoing reasons, we reverse the Order of the Superior Court and remand this matter to the trial court for a new trial.
MONTEMURO, J., did not participate in the consideration or decision of this case.
Before NIX, C.J., and LARSEN, FLAHERTY, PAPADAKOS, CAPPY and MONTEMURO, JJ.
OPINION
NIX, Chief Justice.
This is a tax case. At issue is the validity of a regulation promulgated by the Department of Revenue at
This case arose out of a dispute over how much taxes were owed in 1985 by the taxpayer, Philadelphia Suburban Corporation. It computed its capital stock tax liability without calculating its capital stock value as required by
Average net income—fixed formula.
(a) Average net income is the sum of the taxpayer‘s net income or loss for each of the current and immediately рreceding 4 years, divided by five.
(b) Net income or loss is the amount set forth as income per books on the income tax return filed by the taxpayer
with the Federal government, or if no return is made, as would have been set forth had the return been made. The net income or loss shall be computed on an unconsolidated basis exclusive of the net income or loss of an investee corporation and exclusive of the net income or loss of an investee corporation accounted for under the equity method of accounting. The amount set forth as income per books on the income tax return filed with the Federal government or as would have been set forth had the return been made, shall be adjusted to include dividends received from investee corporations, including dividends from investments accounted for under the consolidated or equity methods of accounting.
The Department of Revenue recalculated the taxpayer‘s 1985 capital stock taxes according to the formula provided in the regulation. Accordingly, it added $8 million to the taxpayer‘s income per books. That triggered аn increase in its tax liability from $14,331.00 to $29,987.00. The taxpayer‘s appeals were rejected by both the Board of Appeals and the Board of Finance and Revenue. Thereafter, the Commonwealth Court reversed.
As we proceed to analyze this cаse, we are mindful that the regulation is a product of an exercise of an agency‘s interpretive rule-making authority. As such, it will survive or fail based on the following considerations.
“An interpretative rule ... depends for its validity ... upon the willingness of a reviewing court to say that it in fact tracks the meaning of the statute it interprets. While courts traditionally accord the interpretation of the agency
charged with administration of the act some deference; the meaning of a statute is essentially a question of law for thе court, and, when convinced that the interpretative regulation adopted by an administrative agency is unwise or violative of legislative intent, courts disregard the regulation. See, e.g., United States v. Cartwright, 411 U.S. 546, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973); Skidmore v. Swift & Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944).”
Girard School Dist. v. Pittenger, 481 Pa. 91, 95, 392 A.2d 261, 263 (1978) (quoting Uniontown Area School Dist. v. Pennsylvania Human Relations Comm‘n., 455 Pa. 52, 77-78, 313 A.2d 156, 169 (1973) (footnote omitted)). Thus, our primary order of business is to determine precisely what the statute says and how it operates in the state‘s corporate taxation scheme. In a case such as this, where the subject matter is within the agency‘s area of expertise and beyond general judicial competence, we give great weight to the agency‘s interpretation. Uniontown Area School Dist., 455 Pa. at 78 n. 26, 313 A.2d at 169 n. 26; SmithKline Beckman Corp. v. Commonwealth, 85 Pa.Commw. 437, 458, 482 A.2d 1344, 1353 (1984), aff‘d, 508 Pa. 359, 498 A.2d 374 (1985).
Pennsylvania taxes corporations based on what is referred to as сapital stock value. A corporation computes its capital stock value by applying a formula provided in Section 601 of the Tax Reform Code of 1971. Act of March 4, 1971, P.L. 6, codified as amended at
The sum of the net income or loss for each of the current and immediately preceding four years, divided by five.... In computing average net income, losses shall be entered as computed, but in no case shall average net income be less than zero. The net income or loss of the entity for any taxable year shall be the amount set forth as income per books on the income tax return filed by the entity with the Federal government for such tаxable year, or if no such return is made, as would have been set forth had such a return been made, subject, however, in either case to any
correction thereof, for fraud, evasion or error. In the case of any entity which has an investment in another сorporation, the net income or loss shall be computed on an unconsolidated basis exclusive of the net income or loss of such other corporation.
The taxpayer contends that the statute precisely and unambiguously identifies income per books as the sole determinant of the net income or loss used to arrive at average net income. Therefore, the argument goes, since the Department‘s regulation requires an adjustment to the income per books figure, it operates in derogation of the statute and should be held invalid. This was the Commonwealth Court‘s rationale for its decision. However, this argument fails to take into account crucial language elsewhere in the provision.
The last sentence in Section 601 clearly indicates that a different procedure must be followed to arrive at net income when an entity has an investment in another corporation. The taxpayer in this case qualifies as just such an entity because it holds stock in Suburban Water Company. Therefоre, it would be improper to rely exclusively on what appears in the first part of the provision to determine how the Legislature wants net income calculated in a case such as this one. The Commonwealth Court committed this very error.
Section 601 rеquires any company with investments in another corporation to compute net income “on an unconsolidated basis exclusive of the net income or loss of such other corporation.” According to the Board of Finance and Revenuе, an “unconsolidated basis” of computing income means that a company is treated as if it is not part of a consolidated commercial enterprise; it is viewed as being a distinct, separate and independent entity. Moreover, Section 601 viеws companies in this way regardless of how much stock one owns in another. This is a sound interpretation of the statute, and we give it great weight.
As a general rule, when a company receives dividends, it records the payment as income, making it automatically re-
Section 601 expresses the legislative policy judgment to always treat corporations as distinct, separate and unrelatеd entities for the purposes of computing capital stock taxes, irrespective of the amount of stock one owns in another. As already indicated, when corporations are not part of a consolidated commercial enterprise, dividends are recorded by their recipient as income, making them part of a company‘s tax computation under Section 601. The regulation at
The taxpayer attempts to persuade this Court to invalidate the regulation by arguing thаt it results in double-taxation. Specifically, the taxpayer contends that the $8 million in dividends it received has already been reflected in and taxed as part of the investee corporation‘s net income per books. Therefore, the argument сontinues, by adding $8 million to the recipient corporation‘s net income per books, the same money is taxed before and after it is transferred. While this argument may have some surface appeal, it fails to survive scrutiny.
What the taxpayer decries as double-taxation is nothing more than the manner in which dividends are taxed generally: The corporation pays taxes before dividends are distributed, and the shareholder recognizes the dividend payment as income subject to taxation. The only difference in this case is that the shareholder happens to be a corporation that owns all of the stock in the dividend-paying corporation. The regulation ensures that neither a taxpayer‘s corporate status nor the number of shares it owns will affect how dividends it receives are taxed. Therefore, the taxpayer‘s insinuation that the regulation unfairly results in double-taxation simply has no merit. Indeed, the regulation ensures that all corporate taxpayers are treated uniformly with respect to dividend рayments.
In summary, the Commonwealth Court erred when it invalidated the regulation at
Accordingly, we vаcate the Order of the Commonwealth Court and enter judgment in favor of the Commonwealth.
ZAPPALA, J., did not participate in the consideration or decision of this case.
PAPADAKOS, J., files a dissenting opinion.
PAPADAKOS, Justice, dissenting.
Since I believe this to be a case of double taxation as argued by the Appellee-taxpayer, I dissent and would affirm the order of the Commonwealth Court.