422 Pa. 199 | Pa. | 1966
Opinion by
This appeal presents a question under the Philadelphia Mercantile License Tax.
The essential facts are not in dispute. Appellee, Shelburne, was organized in 1954 for the purpose of engaging in a form of manufacturing known as “full fashioned” knitting. So far as the record reveals, it is a de jure corporation, having issued shares of stock, elected directors, and appointed corporate officers. It has one or more bank accounts; it owns certain property including the knitting machinery employed in its operations; it rents space for its facilities; it employs and pays labor; and it pays for repairs to its machinery, for spare parts, and for certain supplies used in its operations. While its officers do not receive remuneration, appellee’s president, on occasion, received a salary.
The City of Philadelphia, pursuant to power granted by the Act of August 5, 1932, P. L. 45, §1, 53 P.S. §15971, subject to certain exceptions and qualifications not here relevant, imposes an annual mercantile license tax upon every person engaged in “business.” As defined in the ordinance, the term “business” includes: “The carrying on or exercising for gain or profit within the City any trade, business, profession, vocation or making sales to persons within the City, or any manufacturing, commercial or financial activity, service or business, including but not limited to manufacturers, brokers, wholesale dealers or wholesale vendors, retail dealers, or retail vendors. . . .” Philadelphia Code §19-1001(1).
Appellee, in urging that its activities are not such as to subject it to the tax in question, contends that although incorporated as an independent entity, it is, as a matter of economic reality, a department or division of its affiliate, Clover — a mere bookkeeping device rather than a viable and independent corporation. Its position is predicated on the fact that Shelburne re
Embodied in appellee’s argument are two distinct but related contentions. It first argues that it is not an independent business entity and, thus, not within the class of enterprises sought to be subjected to the Mercantile License Tax. It further urges that even if it be deemed a business enterprise separate and apart from Clover, it is not engaged in business “for gain or profit” within the meaning of the ordinance and, therefore, not subject to the tax. We are unable to agree with either contention.
Ordinarily, separate corporations retain their distinct identities notwithstanding the fact that they may have common stockholders, directors, and officers. See Independence Township School District Appeal, 412 Pa. 302, 312, 194 A. 2d 437, 442 (1963) ; Harrisburg v. Harrisburg Railways Co., 319 Pa. 140, 141, 179 Atl. 442 (1935). Accordingly, while the corporate entity is no more sacrosanct in the field of taxation than in other fields of the law, the tendency in such matters is not to disregard corporate individuality. 1 Fletcher, Cyclopedia Corporations §40 (1968). Thus, corporate affiliation has generally not been permitted to reduce the incidence of taxation. 14 Fletcher, Cyclopedia Corporations §7034 (1965) ; see, In re Bush Terminal Co., 93 F. 2d 661 (2d Cir. 1938); Loans & Service, Inc. v. United States, 193 F. Supp. 683 (N.D. Ohio 1961) ; Northwestern Pac. R. Co. v. State Board of Equalization, 21 Cal. 2d 524, 133 P. 2d 400 (1943); Superior Coal Co. v. Department of Revenue, 4 Ill. 2d 459, 123 N.E. 2d 713 (1954) ; Superior Coal Co. v. Department of Finance, 377 Ill. 282, 36 N.E. 2d 354 (1941). As the Supreme Court of the United States stated in Moline Properties,
In considering the validity of appellee’s contention that it is a mere bookkeeping device rather than a truly independent business entity and, therefore, not subject to the present tax, we recognize an element of merit in the argument advanced. However, the matter is one of vantage point, for surely a corporation which does engage, by all traditional standards, in an independent and profitable activity could make the same claim with respect to its relationship to an affiliate wholly owned by the same principals. Even more persuasive would be a like claim by a subsidiary with respect to the parent corporation. Yet, even though “a wholly owned subsidiary is generally incorporated or acquired by the parent corporation for the purpose of advantageously carrying on some phase of the parent corporation’s activities or business, the courts have been reluctant to disregard the separate legal entities . . . merely to grant relief from sales, or similar taxes at the expense of the state or its subdivisions.” Commonwealth v. Penn Fruit Co., Inc., 78 Dauph. 300, 304 (1962); see Commonwealth v. Prudential Industries, Inc., 80 Dauph. 381 (1963); Commonwealth v. Sylvan Seal Milk, Inc., 25 Pa. D. & C. 2d 790 (1961).
It has been urged that, in light of the interrelated nature of Shelburne and its affiliate, Clover, the imposition of the present tax would create an injustice.
We are unable to perceive how the imposition of the present tax creates a greater injustice than the imposition of the same tax upon an enterprise which, although organized to return a profit, does not in fact do so. Likewise, the insulation of Clover and the principals of both corporations from the claims of creditors of Shelburne, if challenged, would be vigorously defended. We are unpersuaded that the imposition of the present tax creates a burden incommensurate with the benefits accorded the principals of appellee by reason of their decision to adopt the corporate form of organization.
We do not deal here with a matter which may be reconciled by reference to principles of fairness. What tax consequences should flow in the instant case is a matter of legislative intent. While “courts neither follow the law’s fictions blindly nor reject them out of hand,”
In considering the tax consequences of appellee’s activities, we also take note of the contention which has been advanced that Shelburne is not a taxable entity because it is not engaged in business for “gain or profit”. However, in our view, the mere fact that Shelburne’s operations are not profitable when viewed from the perspective of its balance sheet, the relationship of its expenditures to its receipts, is not sufficient to place it beyond the reach of the instant tax. The terms “gain or profit” are not limited to the accomplishment of an excess of receipts over expenditures. A contrary conclusion would require the adoption of a narrower construction of the phrase “gain or profit” than has generally been accorded those terms by courts of other jurisdictions and one more circumscribed than we believe was intended by their inclusion in the present ordinance.
In Associated Pipe Line Co. v. United States, 258 Fed. 800, 803-4 (9th Cir. 1919), the court was confronted with the question of whether the taxpayer was a corporation “organized for profit” so as to be subject to excise tax under the Federal Corporation Tax Law of 1909. There, two corporations engaged in the petroleum business organized a pipe line company to operate and extend a line for the transmission of oil. The pipe line company dealt exclusively with the parent corporations and received in payment for the services which it rendered amounts just sufficient to meet its expenses. In contesting the imposition of the tax, the pipe line company argued that it was not a corporation organized for profit, contending that it had never earned a profit and that its income had never exceeded the cost of maintenance and operation. In sustaining the imposition of the tax, the court stated: “It is hard to conceive that the formation of the cor
Similar considerations led the court in Commonwealth v. 2101 Cooperative, Inc. (No. 1), 27 Pa. D. & C. 2d 405, 418 (1961), aff’d on the opinion of the court below, 408 Pa. 24, 183 A. 2d 325 (1962), to conclude that a “cooperative” apartment house was taxable as a profit making enterprise. In reaching this conclusion, the court quoted from the opinion in State ex rel. Troy v. Lumbermen’s Clinic, 186 Wash. 384, 394, 58 P. 2d 812, 816 (1936), wherein the Supreme Court of Washington observed: “Profit does not nesessarily mean a direct return by way of dividends, interest, capital account or salaries. A saving of expense which would otherwise necessarily be incurred is also a profit to the person benefited. If respondent renders to its incorporators or members, or to businesses in which they are interested and in whose profits they share, a service at a cost lower than that which would otherwise be paid for such service, then respondent’s operations result in a profit to its members. . . .” Cf. Bonnar-Vawter, Inc. v. Johnson, 157 Me. 380, 173 A. 2d 141 (1961); Harry Alan Gregg, Jr. Family Foundation, Inc. v. Commissioner of Corporations and Taxation, 330 Mass. 538, 543, 116 N.E. 2d 146, 150 (1953).
In the instant case, Shelburne was not prohibited from making a profit, or from selling its services to members of the clothing industry other than Clover. The failure to realize a profit from its transactions, or to deal with others than Clover, was not by prohibition but by choice. Cf. Bonnar-Vawter, Inc. v. Johnson, 157 Me. 385, 173 A. 2d 141, 144 (1961). Thus, the effect
Finally, appellee contends that the resolution of the instant dispute is controlled by the decisions in Tax Review Board v. Brine Corp., 414 Pa. 488, 200 A. 2d 883 (1964); Ed. McKean Oldsmobile Co. v. Pittsburgh, 407 Pa. 106, 180 A. 2d 46 (1962); Jefferson Grocery Co. of Pittsburgh v. Pittsburgh School District, 394 Pa. 110, 145 A. 2d 720 (1958); Philadelphia School District v. Frankford Grocery, 376 Pa. 542, 103 A. 2d 738 (1954); and H. J. Heinz Co. v. School District of Pittsburgh, 170 Pa. Superior Ct. 441, 87 A. 2d 85 (1952).
Tax Review Board v. Brine Corp., supra, is not here relevant, that decision having involved a consideration of the concept of “passive income”. Likewise, Jefferson Grocery Co. of Pittsburgh v. Pittsburgh School District, supra, presented a problem of statutory construction involving the phrase “wholesale dealer or wholesale vendor” under an ordinance other than that which controls the instant case. We do not view the considerations relevant to the disposition of that case here controlling.
Equally inapposite are the decisions in Ed. McKean Oldsmobile Co. v. Pittsburgh, supra, and H. J. Heinz Co. v. School District of Pittsburgh, supra. In both of these decisions, the activity sought to be taxed was found to be a service in the nature of a non-profit accommodation rather than a part of the taxpayer’s nor
Accordingly tbe order of tbe Superior Court is reversed.
Philadelphia Code §19-1003.
T.R.B. Memorandum Opinion No. 61 H, August 3, 1961.
33 Pa. D. & C. 2d 287 (C.P. Phila. 1964).
206 Pa. Superior Ct. 349, 213 A. 2d 92 (1965),
Knickerbocker, The Logical Difficulties of Let’s-Pretend Tax Law, 9 Vill. L. Bev. 3, 14 (1963).