Corporate Tax

Foreign Corporation is Entitled to Prorate Its Franchise Tax Liability

In a case of first impression, the Pennsylvania Supreme Court recently affirmed per curiam an earlier ruling of the lower Commonwealth Court which held that the taxpayer (a foreign corporation which elected to compute its foreign franchise tax liability using the single-factor apportionment apportionment formula) is entitled to prorate its tax liability after it ceased to do business in the Commonwealth based on the number of days in its final short period Pennsylvania tax report.

In Wilmington Trust Corporation v. Commonwealth, the taxpayer withdrew from the Commonwealth of Pennsylvania on March 1, 1998. The sole legal issue in dispute was the taxpayer’s right to prorate its foreign franchise tax on a daily basis for the 59 day short period (from January 1st to March 1st) during which it conducted activities in Pennsylvania. The Department of Revenue disallowed time proration and resettled the tax at the amount due for a full taxable year. That resettlement was subsequently upheld by the Department of Revenue Board of Appeals and the Pennsylvania Board of Finance and Revenue. The taxpayer’s appeal of the Board of Finance and Revenue decision upholding the Department’s disallowance of time proration was granted in full by the Commonwealth Court.

The Commonwealth Court agreed with the taxpayer and held that the legislative intent of Section 602(g) of the Tax Reform Code of Pennsylvania is that the franchise tax liability of a foreign corporation such as the taxpayer should be based on the period of time during which it actually exercises its right to conduct business in Pennsylvania. A foreign corporation conducting business in Pennsylvania for less than a full year (e.g., one day, one week or one month) should pay a proportionally smaller tax than a foreign corporation present in Pennsylvania for the entire tax year, regardless of the formula that the foreign corporation chooses to determine the taxable value of its capital stock. The Court further held that a foreign corporation withdrawing from the Commonwealth and required to file a corporate tax report for a period of less than a year is entitled to prorate its tax under the plain meaning of Section 602(g).

The Pennsylvania Attorney General’s Office subsequently appealed the Commonwealth Court decision to the Pennsylvania Supreme Court. Without writing an opinion, the Pennsylvania Supreme Court affirmed the lower, Commonwealth Court Order in favor of the taxpayer. Therefore, the taxpayer is entitled to prorate its foreign franchise tax for the 59 days from January 1st to March 1st during which it conducted business in Pennsylvania in accordance with the formula set out in Section 602(g). Other foreign corporations which elect to leave the Commonwealth should be able to similarly prorate their foreign franchise tax obligations.

Steve Zivitz and Bill Hussey of our Tax, Pensions and Estates Planning Group represented Wilmington Trust Corporation before the Pennsylvania Supreme Court and the Commonwealth Court. Steve can be contacted at 215-864-6240 or zivitzs@whiteandwilliams.com. Bill can be contacted at 215-864-6257 or husseyw@whiteandwilliams.com.