Although Pennsylvania Capital Stock and Franchise Taxes are being phased out, a recent case demonstrates that the taxes still generate significant issues. In Systems & Computer Technology Corp. v. Cmwlth., 77 F.R. 2009 (April 18, 2012), the taxpayer had reported Franchise Tax utilizing statutory 10% “holding company apportionment.” The Department of Revenue increased the tax by several hundred thousand dollars, on the basis that the value of the company’s subsidiaries, as reflected by the “investment in subsidiary” on its balance sheet was less than 60% of the value of its total assets - violating the “asset test” in the statute.

On appeal the taxpayer pointed out that the company and its subsidiaries had been acquired for a price well in excess of the value of recognizable assets. The difference was reflected as “goodwill” on the company’s balance sheet, but really reflected value attributable to its operating subsidiaries. The company, itself, merely acted as a holding company.