Garofolo, Curtiss, Lambert & MacLean, Inc. v. Commonwealth

FRIEDMAN, Judge,

dissenting.

The majority awards judgment to the Commonwealth on a motion for judgment on the pleadings,¹ finding no violation of either the uniformity or due process provisions of the Pennsylvania Constitution. I disagree and, thus, respectfully dissent.

Section 401(3)4. of the Tax Reform Code of 1971 (Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7401(3)4., which allowed corporate taxpayers to deduct prior net losses from taxable income of the three succeeding years, was phased in over three years from 1981 to 1983. However, on August 4, 1991, the Pennsylvania General Assembly amended Code section 401(3)4.(a) suspending operation of the net loss carryover deduction for years beginning in 1991, thereby eliminating unused deductions for losses incurred in 1988,1989 and 1990. Section 16 of the Act of August 4, 1991, P.L. 97, No. 22, 72 P.S. §§ 7401(3)4.(a) (Act 22).² As a result of the discontinuance of the net loss carryover deduction, Garofolo could not use its 1989 net loss to reduce its 1991 taxable income.

Following enactment of Act 22, Garofolo initiated this action by filing a Petition for Review in the nature of a complaint in equity (Petition) alleging that Act 22 adversely impacts it and other similarly situated corporations and seeking a declaration that Act 22 is unconstitutional in that it violates the uniformity and due process³ requirements of the Pennsylvania Constitution. The Commonwealth filed preliminary objections which we dismissed, Garofolo, Curtiss, Lambert & Maclean, Inc. v. Commonwealth of Pennsylvania, Department of Revenue, (No. 255 M.D.1992, filed April 8, 1993), and, subsequently, filed an Answer to Garofolo’s Petition. Garofolo then filed a Motion for Summary Judgment,⁴ which I would grant on the grounds that the 1991 amendment, as it affects deduction of 1988 and 1989 net losses, violates constitutional uniformity requirements.⁵ My reasoning follows.

Garofolo contends that Act 22 violates the uniformity clause of Article VIII, § 1 of the Pennsylvania Constitution by: 1) arbitrarily discriminating among corporations that incurred Pennsylvania net operating losses in 1989, treating those corporations that were able to use their 1989 losses against their 1990 tax liability differently from those that would have used the 1989 losses against their 1991 or 1992 tax liability; and 2) arbitrarily discriminating between corporations that would otherwise be able to use net losses from 1988, 1989 and 1990 and all other corporate taxpayers, placing an additional tax burden on the former subset of corporate taxpayers rather than distributing the increase over the entire class of corporate taxpayers. (Petition, ¶¶ 27-29.) I agree with Garofolo’s first proposition that the subset of corporate taxpayers with net losses from 1989 are not treated uniformly under Act 22 and that this non-uniform treatment is unconstitutional.

The uniformity clause of the Pennsylvania Constitution directs that “[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Pa. Const, art. VIII, § 1. The Pennsylvania Supreme Court has provided guidelines for uniformity analysis:

“[The Uniformity Clause] means that the classification by the legislative body must be reasonable and the tax must be applied with uniformity upon similar kinds of business or property and with substantial equality of the tax burden to all members of the same class.... While taxation is not a matter of exact science and perfect uniformity and absolute equality in taxation can rarely ever be attained, the imposition of taxes which are to a substantial degree unequal in their operation or effect upon similar kinds of business or property, or upon persons in the same classification, is prohibited. Moreover while reasonable and practical classifications are justifiable, where a formula or method of computing a tax will, in its operation or effect, produce arbitrary or unjust or unreasonably discriminatory results, the constitutional provision relating to uniformity is violated____ ‘A tax to be uniform must operate alike on the classes of things or property subject to it----

Amidon v. Kane, 444 Pa. 38, 48-49, 279 A.2d 53, 59 (1971), quoting Allentown School District Mercantile Tax Case, 370 Pa. 161, 167-68, 87 A.2d 480, 483 (1952) (citations omitted).

When considering the constitutionality of Act 22, I am mindful of the well-established rule that the legislature possesses wide discretion for purposes of taxation, Aldine Apartments v. Commonwealth, 493 Pa. 480, 426 A.2d 1118 (1981), and that “the taxing power of the Commonwealth is vested absolutely in the legislature, with no other limitation upon its exercise than the constitutions, State and [F]ederal, and the laws of the United States.” Clouser v. Reading City, 270 Pa. 92, 94-95, 113 A. 188, 189 (1921). Thus, the selection of the subjects for taxation, their classifications and the method of collection are legislative matters. The only constitutional limitation on this power is that the classification be reasonable and not arbitrary. Equitable Life Assurance Society of the United States v. Murphy, 153 Pa.Commonwealth Ct. 338, 621 A.2d 1078 (1993).

Garofolo relies on Commonwealth v. Budd Co., 379 Pa. 159, 108 A.2d 563 (1954), appeal dismissed, 349 U.S. 935 (1955) to support its position that Act 22 violates the uniformity requirement of the Pennsylvania Constitution, comparing Garofolo’s situation to that of the taxpayers there. In Budd, the taxpayers were Pennsylvania corporations which had sustained net operating losses in 1946. Under the Pennsylvania tax law in effect at the time they suffered their losses, corporate taxpayers could carry-back their net operating losses to either of the two years immediately preceding the year of the incurred losses. In May 1947, the Pennsylvania legislature amended the tax act and disallowed 1946 losses as a deduction for any prior fiscal or calendar year. However, under the amendment, corporations that had their taxes resettled prior to the date of the legislative enactment, May 14, 1947,⁶ could apply their 1946 losses to prior tax years, whereas corporations, such as Budd, whose taxes had not been resettled prior to that date, were denied the use of the loss carry-back provision.

Budd and other affected corporate taxpayers challenged the 1947 amendment as violative of the uniformity clause of the Pennsylvania Constitution in that it arbitrarily and unreasonably discriminated against the taxpayers in its terms and operation.⁷ Our Supreme Court found merit in the taxpayers’ constitutional challenges. The Court reasoned that corporations of the same class, all of which had suffered a net operating loss in 1946, were benefited by or deprived of the use of the loss carry-back provision depending solely upon “whether a resettlement of carry-back losses for 1946 and prior years was made by the fiscal or administrative officers of the Commonwealth prior or subsequent to May 14, 1947.” Budd, 379 Pa. at 170, 108 A.2d at 568. The Court determined that the 1947 enactment violated the uniformity provisions of the Pennsylvania Constitution because it did not apply the tax burden with substantial equality to all members of the same class; instead, it produced “arbitrary, unjust and unreasonably discriminatory results.” Id.

I find Budd’s uniformity analysis helpful in resolving the issue presented here. Garofolo and similarly situated corporations face discrimination comparable to that faced by the taxpayers in Budd because in both cases corporate taxpayers experiencing losses in certain years (1946 in Budd and 1988 and 1989 here) were treated unequally.⁸ The tax laws in effect at the time Garofolo incurred its net operating losses created the expectation that Garofolo would be able to use its losses as a carryover to offset taxable income in any of three following years.⁹ Similarly, when Budd suffered a loss in 1946, it expected to be able to amend its tax return for two years immediately preceding the loss year. Just as Budd found that it was deprived of the tax benefit because its carry-back losses had not been resettled prior to May 14, 1947, Garofolo found that it was deprived of a tax benefit because it had not been able to use the loss carryover prior to the 1991 taxable year. Budd found that other corporations with 1946 losses received the tax benefit because they had used the loss carry-back prior to May 14, 1947. Garofolo found that other corporations with 1989 losses received a tax benefit because they had used the loss carryover prior to 1991.

Act 22 discriminates between corporate taxpayers with 1989 loss carryovers solely on the basis of whether the loss carryover had been used prior to the 1991 taxable year; two companies which had suffered losses in 1989 would be treated differently if one had used all of its loss before 1991, and the other, like Garofolo, had used only some of that loss. I believe that such discrimination between taxpayers of the same class (i.e., corporate taxpayers who incurred losses in 1989) results in a substantial inequality of tax burden in contravention of the uniformity provision of the Pennsylvania Constitution. Budd; Aldine Apartments.

Although the legislature has the power to suspend or repeal tax benefits such as the loss carryover deduction, the formula or method of computing a tax must not, in its operation or effect, produce arbitrary or unjust or unreasonably discriminatory results. Amidon. If it does, the uniformity provision of the constitution is violated. Id. Because some corporate taxpayers were able to deduct 1988 and 1989 net losses,¹⁰ pursuant to the provisions of the Code, and others could not, I would conclude that Act 22, amending the Code to suspend the loss carryover deduction for 1991 and subsequent years, as it affects deduction of 1988 and 1989 net losses, results in unreasonably discriminatory treatment of corporate taxpayers within the same class in violation of the uniformity clause of the Pennsylvania Constitution.

Accordingly, I dissent. I would grant Garofolo’s Motion for Summary Judgment on the limited basis that Act 22, as it affects deduction of 1988 and 1989 net losses, violates constitutional uniformity requirements.

1 . Actually, the Petitioners filed a Motion for Summary Judgment to which the Commonwealth filed an Answer, but not a cross-motion for summaiy judgment. The majority treats Garofolo’s motion as a motion for judgment on the pleadings and not only denies judgment to Garofolo but enters judgment in favor of the Commonwealth. A court may grant judgment to the non-moving party on a motion for judgment on the pleadings, but this device is not available on a motion for summaiy judgment unless the responding party files a cross-motion or unless the court, as the majority does here, considers the motion mislabeled and treats it as a motion for judgment on the pleadings. 6 Standard Pennsylvania Practice §§ 31.37 and 32.97.

2 . Prior to the enactment of Act 22, section 401(3)4.(a) of the Code stated:

(a) For taxable years beginning in 1982 and thereafter, a net loss deduction shall be allowed from taxable income as arrived at under subclause 1 or, if applicable, subclause 2.

In addition, at section 401(3)4.(c), the Code specified which net losses could be carried over:

(c) The net loss deduction shall be the lesser of the amount of the net loss or losses which may be carried over to the taxable year or taxable income as determined under subclause 1 or, if applicable, subclause 2. A net loss for a taxable year may only be carried over pursuant to the following table.

Taxable Year Carryover

1981 1 taxable year

1982 2 taxable years

1983 and thereafter 3 taxable years

The earliest net loss shall be carried over to the earliest taxable year to which it may be carried under this schedule.

Following its amendment by Act 22, the relevant portion of Code section 401(3)4. provides:

4.(a) For taxable years beginning in 1982 through taxable years beginning in 1990, a net loss deduction shall be allowed from taxable income as arrived at under subclause 1 or, if applicable, subclause 2. For taxable years beginning in 1991 and thereafter, the net loss deduction allowed for years prior to 1991 shall be suspended, and no carryover of net losses from taxable years 1988, 1989 and 1990 shall be utilized in calculating net income.

3 . With regard to its due process argument, Garofolo asserts that retroactive discontinuance of the Pennsylvania corporate net operating loss provision violates due process under Article I, § 1 of the Pennsylvania Constitution by: 1) depriving taxpayers of their vested interest in Pennsylvania net operating losses already accrued; 2) constituting retroactive taxation in contravention of Pennsylvania law; and 3) representing inequitable repudiation of a quasi-contract. (Petition, ¶ 24 and ¶ 25.) Garofolo’s uniformity arguments are addressed in greater detail later in this opinion.

4 . A motion for summary judgment is appropriate where the case is clear and free from doubt; the record, viewed in the light most favorable to the non-moving party, must show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Pa.R.C.P. No. 1035(a) and (b). Summary judgment serves to eliminate the waste of time and resources of both litigants and the courts where a trial would be a useless formality. Liles v. Balmer, 389 Pa.Superior Ct. 451, 567 A.2d 691 (1989). A motion for summary judgment is an appropriate procedural device in a declaratory judgment proceeding. Pennsylvania State Lodge of Fraternal Order of Police v. Bailey, 128 Pa.Commonwealth Ct. 72, 562 A.2d 985 (1989), aff'd, 525 Pa. 265, 579 A.2d 1295 (1990).

The Commonwealth’s Answer to Garofolo’s Motion for Summary Judgment challenges certain factual averments in the Petition. However, these facts are not material to the uniformity issue upon which I would base this decision. I note, however, that if it were necessary to reach Garofolo's due process or quasi-contract arguments and the disputed factual averments were deemed to be genuine issues of fact material to those arguments, summary judgment would not be appropriate. The challenged factual averments indicate that the enactment of section 401(3)4. of the Code and the Commonwealth’s actions in publicizing the enactment created expectations among corporate taxpayers which were frustrated by section 16 of Act 22. For instance, in ¶ 7 of its Petition, Garofolo alleges that Pennsylvania designed the net operating loss carryforward provision to encourage investment and job creation in the state and to provide relief to businesses that experience cyclical downturns; in ¶ 9, Garofolo alleges that it was aware of the net operating loss carryover provision when, in 1988, it made and continued to make substantial investments and commitments in Pennsylvania during 1988, 1989, 1990; in ¶ 13 of the Petition, Garofolo alleges that having tailored the carryover provision to induce taxpayers' investments in Pennsylvania, the General Assembly defeated taxpayers’ reasonable reliance on the tax benefit of 1988, 1989 and 1990 losses by eliminating the policy without providing for a similar phase out; in ¶ 16 of its Petition, Garofolo alleges that during the years when it operated at a loss, it anticipated that it would have the benefit of the net operating loss carryover provision, so that once it became profitable, it could use its earlier losses to reduce its current taxable income over a three-year period. In addition, Garofolo points out that if Act 22 remains in force through 1993, any losses experienced by corporations in 1989 and 199.0 will be extinguished as tax benefits. (Petition, ¶¶ 18 and 19.) The briefs also indicate that the parties do not agree on whether Garofolo and similarly situated companies relied on the net loss carryover.

5 . Because I would decide this case on the uniformity issue and because Garofolo had no losses in 1990, I would not address the due process and quasi-contract arguments as they relate to loss of the carryover of 1990 net losses.

6 . That date was apparently unrelated to any tax consideration such as the taxable year or the due date for returns or amendments.

7 . The Budd petitioners also contended that the amendment was violative of due process protections under both the United States and Pennsylvania constitutions against impermissible retroactive taxation. I would not reach this issue.

8 . The majority questions the applicability and vitality of Budd, stating that Budd was a plurality decision. I am not swayed by this statement; we are certainly free to rely on the rationale of a plurality decision, although not compelled to do so. Moreover, in making this statement, the majority cites Fisher Controls Co., Inc. v. Commonwealth, 476 Pa. 119, 381 A.2d 1253 (1977), footnote 6 of which states that Fisher does not raise the retroactivity issue discussed in Budd and notes, only parenthetically, that Budd was a plurality decision.

The majority finds Budd’s retroactivity analysis clearly distinguishable from the present case; however, because I find Budd’s uniformity analysis more applicable here, I would not reach the question of retroactivity. I would note, however, that, as in Budd, the retroactive repeal of file net operating loss carryforward provision substantially and adversely affects particular Pennsylvania businesses which relied on the accrued tax benefits. For example, Pennsylvania S corporations must elect their tax status by March 15 of the year in question to receive S corporation treatment under Pennsylvania tax law. Therefore, many S corporations chose to pay their 1991 taxes at the regular corporate rate of 12.25 percent to take advantage of accrued net operating losses, only to find that this tax benefit was denied them with the enactment of Act 22 after the March 15 date. Had they known that they would not have been entitled to the tax benefit, these corporations would have opted to pay taxes for 1991 at the personal income tax rate of only 2.6 percent.

The majority also relies on Commonwealth v. Rohm and Haas Co., 28 Pa.Commonwealth Ct. 430, 368 A.2d 909 (1977), aff'd, 478 Pa. 164, 386 A.2d 491, appeal dismissed, 439 U.S. 805 (1978), where the taxpayer made an election to treat foreign taxes as a credit on its federal income tax return rather than as a deduction. This election caused the calculation of its net income for state purposes to be higher than it would have been had the taxpayer elected to deduct foreign taxes. The Court rejected the taxpayer’s claim that the Commonwealth’s refusal to allow it to deduct foreign taxes on its state return resulted in a lack of uniformity. In my opinion there is so little similarily between that case and the one presently before us that the majority’s reliance is misplaced.

9 . Garofolo belongs to a class of corporate taxpayers who, having suffered net losses, had a legal expectation of utilizing the tax benefit created by section 401(3)4. of the Code, i.e. the right to deduct those losses from any profits earned in the three years following the loss. Net operating losses have been recognized as a business asset. See, e.g., In re Prudential Lines, Inc., 928 F.2d 565 (2d Cir.), cert, denied, PSS S.S. Co., Inc. v. Official Committee of Unsecured Creditors, 112 S.Ct. 82 (1991).

10 . Because 1990 net losses could not be carried over and deducted prior to 1991, the year in which section 16 of Act 22 took effect, this non-uniformity problem does not exist with regard to suspension of the deduction for 1990 net losses.