Variations for Bank Shares Tax Valuations Tolerable 

Tax Alert

January 9, 2014

A plurality of the full Pennsylvania Supreme Court held that the disparity in valuations that results from the application of the statutory averaging formula for valuations and a combination provision are not unconstitutional. Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011 (Pa. Dec. 27, 2012) (3 to 2), reversing 27 A.3rd 288 (Pa Commw. 2011) . The decision may be incorrectly decided.

The problem is caused by a drafting mistake. Prior to 2014, the capital stock value of a bank for Bank Shares Tax purposes was determined by averaging the values for regulatory reporting purposes for six years. The majority speaks as though six years of value were being taxed. That is inaccurate. The Bank Shares Tax is imposed on a yearly basis. What is taxed is the value for a particular tax year. The value is calculated by the six-year average. It is not unusual to calculate a value based on historical averages. The same thing was done for many years for Capital Stock Tax purposes. Past earnings are often taken into account for valuing real estate for a current tax year.

The statute provides that in the case of a combination of institutions, the value post-combination should be set by using the historical averages of both institutions. In theory, that is the correct tax policy result. If Bank A is worth $1,000 and is merged with Bank B, which is worth $5,000, the tax base should be $6,000. However, the definitions in the statute probably inadvertently refer to combinations of two or more institutions. An institution is defined as an entity subject to the Bank Shares Tax. Therefore, a nontaxable foreign entity is not an institution and technically cannot be a party to a statutory combination. As a result, an in-state bank merging with an out-of-state bank is not required to include in the history of net worth the value of the six preceding years. That is an incorrect tax policy result. If the Bank B referred to above is worth $5,000, that number should be included in the post-merger value, whether or not it was previously taxed. The current value should be calculated by a methodology consistently applied to both merger partners.

The majority excuses the disparity by stating that the new assets “enrich the state’s coffers.” The rationale is unconvincing. The fundamental question is what is the value of the post-merger combination for the particular tax year. The answer should be that the value includes the out-of-state history, because that is an essential element of the post-merger combination. It is unconvincing to state that the post-merger value adds to the coffers of the state when the addition is accomplished only to the extent of one-sixth.

The court also included a confusing distinction between combinations for corporate law purposes and tax purposes. The combination provision applies in the case of a merger or consolidation. It does not apply in the case of an asset purchase, because there is no addition to value. Assets are purchased for consideration. Except for an increase to goodwill, the balance sheet will not change on an acquisition; cash, on hand or borrowed, will be exchanged for assets.

A dissent by Justice Saylor for two justices would construe the word “institution” in the combination provision to apply also to out-of-state banks, thereby eliminating the disparity in value.



Joseph C. Bright


(215) 665-2053

Dan A. Schulder


(717) 703-5905

Cheryl A. Upham


(215) 665-4193

Related Practices

To discuss any questions you may have regarding the opinion discussed in this Alert, or how it may apply to your particular circumstances, please contact: Joseph C. Bright at or 215.665.205, Dan A. Schulder at or 717.703.5905 or Cheryl A. Upham at or 215.665.4193.