Sys. & Computer Tech. Corp. v. Commonwealth

Systems & Computer Technology Corporation, Petitioner

v.Commonwealth of Pennsylvania, Respondent

No. 77 F.R. 2009

COMMONWEALTH COURT OF PENNSYLVANIA

Argued: December 12, 2011

FILED: April 18, 2012

BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge

HONORABLE BERNARD L. McGINLEY, Judge

HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge

OPINION BY

PRESIDENT JUDGE LEADBETTER¹

Systems & Computer Technology Corporation (SCT) petitions to review the order of the Board of Finance and Revenue that affirmed the Board of Appeals' resettlement of SCT's franchise tax liability for the taxable year 2005. In this appeal, the Court is asked to decide whether the "goodwill" recorded on SCT's 2005 balance sheet as an asset is includable in "the actual value" of its stock in its wholly owned subsidiary corporations. If so, SCT is eligible to compute its 2005 franchise tax liability utilizing the favorable "10% holding company apportionment" method under Section 602(e) of the Tax Reform Code of 1971 (Tax Reform Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7602(e). Because we conclude that SCT met the definition of a holding company and was,therefore, eligible to utilize such tax computation method, we reverse.

The parties submitted a Stipulation of Facts (Stipulation) with numerous exhibits attached thereto pursuant to Rule 1571(f) of the Pennsylvania Rules of Appellate Procedure, Pa. R.A.P. 1571(f), which reveal the following relevant facts. SCT is a publicly traded Delaware corporation with its principal place of business in Malvern, Pennsylvania. SCT's activities consist of providing corporate oversight to its twenty-two wholly-owned subsidiary corporations.² Those subsidiary corporations either provided information technology solutions to colleges and universities in the form of software applications and services or held interests in other entities. On February 12, 2004, SunGard Data Systems, Inc. (SunGard), an entity unrelated to SCT, acquired SCT and SCT's twenty-two subsidiary corporations.³ Before and after the acquisition, SCT and its subsidiary corporations conducted similar activities.

In accordance with the Statement of Financial Accounting Standards No. 141, Business Combinations (2001) (FAS 141), published by the Financial Accounting Standards Board of the Financial Accounting Foundation, American Appraisal Associates, an independent third-party appraisal company, prepared a report on the values of SCT's tangible and intangible assets as of the February 12, 2004 acquisition. Based on the fair market values estimated in that report, SCT first allocated the price paid by SunGard for the acquisition to assets acquired andliabilities assumed (net assets) and then allocated the remainder of the acquisition price exceeding the fair market values of the net assets to goodwill, as required by FAS 141 (Exhibit A).⁴ Stipulation, ¶ 8. This allocation, commonly referred to as a "purchase price allocation," is reflected on Schedule L ("Balance Sheets per Books") of SCT's federal income tax Form 1120 for the taxable year ending December 31, 2004 (Exhibit B). Id.

Similarly, on Schedule L (balance sheet) of pro-forma Form 1120 for the taxable year 2005 (Exhibit E), Line 13a ("Intangible assets"), SCT reported its intangible assets of $489,780,621, consisting of $847,727 for purchased software, $89,589,321 for acquired software, $108,454,887 for the customer base and $290,888,686 for goodwill. The purchased software, acquired software and customer base are "recognizable intangible property" under FAS 141. Stipulation, ¶ 9. The intangible assets reported on the 2005 balance sheet were consistent with their treatment on SCT's 2004 balance sheet and in accordance with the valuation study performed by the independent third-party following the 2004 acquisition. On Line 9 ("Other investments") of the 2005 balance sheet, SCT reported $237,954,339 as investments in its subsidiary corporations' stock, which was calculated by adding together its subsidiary corporations' capital stock and additional paid-in-capital accounts. Stipulation, ¶ 10.

Every "foreign entity"⁵ must pay an annual franchise tax, which is"computed by multiplying each dollar of the capital stock value⁶ ... by the appropriate rate of tax." Section 602(b)(1) of the Tax Reform Code. The rate of the franchise tax for the taxable year ending December 31, 2005 was 5.99 mills. Section 602(h) of the Tax Reform Code. A holding company, however, may elect to compute a franchise tax "by applying the rate of tax ... to ten per cent of the capital stock value." Section 602(e) of the Tax Reform Code. This favorable method of tax computation is known as a "10% holding company apportionment." Section 601(a) of the Tax Reform Code, 72 P.S. § 7601(a), defines a holding company as:

Any corporation (i) at least ninety per cent of the gross income of which for the taxable year is derived from dividends, interest, gains from the sale, exchange or other disposition of stock or securities and the rendition of management and administrative services to subsidiary corporations, and (ii) at least sixty per cent of the actual value of the total assets of which consists of stock securities⁷ or indebtedness of subsidiary corporations.

[Emphasis and footnote added.]

The first and second elements of the above definition are referred to as "the income test" and "the asset test," respectively. It is undisputed that SCT met the income test. Only the asset test is at issue here.

In a PA Corporate Tax Report for the taxable year 2005 (Exhibit D) filed with the Department of Revenue (Department), SCT reported $137,447⁸ as its franchise tax liability, utilizing the 10% holding company apportionment method. Stipulation, ¶ 20. With the approval of the Auditor General, the Department settled SCT's 2005 franchise tax liability to $1,071,381. Exhibit F. SCT timely filed a petition for resettlement with the Board of Appeals. The Board rejected SCT's computation of its franchise tax liability under the 10% holding company apportionment but granted partial relief, resettling SCT's franchise tax liability to $811,795. Exhibit H. SCT filed a petition to review the resettlement with the Board of Finance and Revenue that denied the petition and affirmed the resettlement. SCT's appeal to this Court followed.

To meet the asset test for a holding company, SCT was required to establish that "the actual value of SCT's stock securities of subsidiary corporations divided by [the actual value of] SCT's total assets equals at least sixty percent."Stipulation, ¶ 19 (emphasis added). The parties further stipulate:

If this Court determines that the goodwill SCT recorded as an asset on its balance sheet as a result of its acquisition by SDS [SunGard] is properly includable in the actual value of SCT's stock securities of subsidiary corporations, then SCT meets the sixty percent [of the asset] test, qualifies for holding company apportionment and the Tax as calculated on its original return is correct.

Stipulation, ¶ 20. If the goodwill recorded on SCT's 2005 balance sheet is not includable in the actual value of SCT's stock in its subsidiary corporations, but instead is a directly owned asset of SCT, then SCT fails to meet the asset test, and its 2005 franchise tax liability, as resettled by the Board of Appeals, is correct. Stipulation, ¶ 21.⁹

The Commonwealth urges this Court to adopt what it characterizes as a "balance sheet analysis." Commonwealth's Brief at 11. Under the Commonwealth's approach, SCT's investments in the subsidiary corporations, as reported on the 2005 balance sheet (Schedule L, Line 9 of Form 1120), would be the actual value of its stock in those corporations. Id. at 11 n.3. Because the goodwill value was not included on Line 9, but instead was included on Line 13a (intangible assets), the Commonwealth would attribute the value of goodwill to SCT directly, not to the subsidiaries. The Commonwealth claims that its approach "allows for a consistent method of evaluation by the Department and imposes no additional reporting requirements on a taxpayer." Id.

SCT counters that its investments reported on the balance sheet weremerely the historical cost of the subsidiary corporations and did not approximate the actual value of their stock in the subsidiaries. SCT's Reply Brief at 3. SCT argues that the price paid by SunGard for the 2004 acquisition in the arm's-length transaction was the actual value of SCT and its subsidiary corporations and that because SCT's subsidiary corporations, not SCT, operated the valuable business of providing information technology solutions to the colleges and universities, the goodwill recorded on its balance sheet as an asset must be included in the actual value of the subsidiary corporations' stock securities, and not as a separate asset held directly by SCT.

The term "actual value" is not defined by the Tax Reform Code, but is defined by the regulations as a "[c]ash value." 61 Pa. Code § 155.22. The courts have also defined an actual value as a market value or a fair market value for tax assessment purposes. F & M Schaeffer Brewing Co. v. Lehigh County Bd. of Appeals, 530 Pa. 451, 610 A.2d 1 (1992); Gilmour Props. v. Bd. of Assessment Appeals of Somerset County, 873 A.2d 64 (Pa. Cmwlth. 2005). A fair market value is "'the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell F & M Schaeffer Brewing, 530 Pa. at 457, 610 A.2d at 3 [quoting Buhl Found. v. Bd. of Prop. Assessment, Appeals & Review, 407 Pa. 567, 570, 180 A.2d 900, 902 (1962)].

Goodwill is "[a] business's reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase." Black's Law Dictionary 715 (8th ed. 2004). The components of goodwill include, inter alia, the following: "[t]he excess of the fair values over the book values of the acquired entity's net assets at the date of acquisition;" "[t]he ...