RB Alden Corp. v. Commonwealth

• Citation: 142 A.3d 169
• Decision Date: 15 June 2016
• Docket Number: No. 73 F.R. 2011,73 F.R. 2011
• Parties: RB ALDEN CORP., Petitioner v. COMMONWEALTH of Pennsylvania, Respondent.
• Court: Commonwealth Court of Pennsylvania

142 A.3d 169

RB ALDEN CORP., Petitioner

v.COMMONWEALTH of Pennsylvania, Respondent.

No. 73 F.R. 2011

Commonwealth Court of Pennsylvania.

Argued May 12, 2016.

Decided June 15, 2016.

Joseph C. Bright, Philadelphia, for petitioner.

Richard M. Botwright, Assistant Counsel, Harrisburg, for respondent.

BEFORE: RENÉE COHN JUBELIRER, Judge, and PATRICIA A. McCULLOUGH, Judge, and DAN PELLEGRINI, Senior Judge.

OPINION BY Senior Judge DAN PELLEGRINI

.

This is a petition for review from an order of the Board of Finance and Revenue (Board) in which RB Alden Corporation (Taxpayer) claims that it owes no Pennsylvania corporate income tax on a $29.9 million capital gain profit resulting from the sale of part of a partnership interest. Taxpayer makes that claim on a number of alternative bases contending that:

• gain from a sale of the partnership interest is “nonbusiness income” under Section 401(3)2.(a)(1)(D) of the Tax Reform Code of 1971 (Code),¹ not “business income” under Section 401(3)2.(a)(1)(A) of the Code;²

• the gain must be excluded from its apportionable tax base under the doctrines of multiformity or unrelated assets;

• the gross proceeds from the sale of the partnership interest should be sourced to New York, the state in which it is headquartered, for purposes of calculating the sales factor of its corporate net income tax apportionment fraction, rather than Pennsylvania, where the property from which the sale is derived is located;

• under the tax benefit rule, it is entitled to exclude from business income the gain from the sale because it had previously taken a deduction for which it received no benefit; and

• under Nextel Communications of Mid–Atlantic, Inc. v. Commonwealth of Pennsylvania, 129 A.3d 1 (Pa.Cmwlth.2015)

, limiting its net loss carryover deduction to $2 million violates the Uniformity Clause of the Pennsylvania Constitution, Pa. Const. art. VIII, § 1.

We will address each of those issues.

I.

A.

According to the parties' Stipulation of Facts, Taxpayer is a Delaware corporation. During the tax year beginning July 1, 2006, and ending June 30, 2007 (Fiscal Year 2006), Taxpayer was wholly owned by Riverbank Properties, Inc. (Riverbank), and Riverbank was wholly owned by RB Asset, Inc. (RB Asset). Accordingly, during Fiscal Year 2006, Taxpayer was indirectly wholly owned by RB Asset.

At the beginning of Fiscal Year 2006, Taxpayer was the sole general partner and owned 87.36% of the limited partnership interest of Eastview Associates LP (Partnership). The Partnership was formed as a New Jersey general partnership in 1984, and in 1989, it converted into a New Jersey limited partnership.

The Partnership owned an apartment complex in Philadelphia known as Alden Park Apartments (Apartment Complex). Prior to 1995, the Partnership borrowed $40 million from National Westminster Bank USA (National Westminster). In connection with the loan, National Westminster obtained a mortgage securing the loan (the mortgage and loan hereinafter collectively referred to as the “Secured Loan”). In January 1995, National Westminster merged with and into National Westminster Bank NJ, which subsequently changed its name to NatWest Bank National Association (NatWest). In March 1995, NatWest sold the Secured Loan to Hampton Ponds, a subsidiary of River Bank America. In May 1998, River Bank America completed a reorganization into RB Assets under which RB Assets assumed all River Bank America's assets and liabilities, including River Bank America's interest in the Secured Loan.

After the Partnership defaulted on the Secured Loan, Taxpayer acquired its general and limited partnership interest in the Partnership as a result of restructuring to give its lender control of the Partnership. As the sole general partner of the Partnership, Taxpayer's only business activity was operating and controlling the Partnership's operations, including those of the Apartment Complex.

Beginning in 1989 and continuing through Fiscal Year 2006, the Partnership incurred and reported a taxable loss from operations which was passed through pro-rata to Taxpayer. Taxpayer filed federal income tax returns for each tax year from 1989 through Fiscal Year 2006 and reported its share of the Partnership's operational losses. Likewise, Taxpayer filed Pennsylvania corporate tax reports for each tax year from 1989 through Fiscal Year 2006 and reported 100% of its share of the Partnership's operational losses as business income. Taxpayer did not file an income tax return in any state other than Pennsylvania and never apportioned any of its Pennsylvania taxable income or loss for any tax year. Taxpayer was unable to use its share of the Partnership's losses to reduce Pennsylvania taxable income during the tax years prior to Fiscal Year 2006 as neither Taxpayer nor the Partnership generated any Pennsylvania taxable income during those years.

Taxpayer's assets during Fiscal Year 2006 consisted of its general and limited partnership interests in the Partnership and certain intercompany receivables owed to it by the Partnership. That year, pursuant to an Assignment, Assumption and Substitution Agreement (Agreement) dated June 27, 2007, Taxpayer sold a 45% limited partnership interest in the Partnership to PCK Capital, Inc. (Buyer). In exchange for the transferred partnership interest, Buyer transferred $5,000 cash to Taxpayer and assumed $29.9 million of the Partnership's nonrecourse liabilities attributable to the transferred partnership interest. Taxpayer retained a 42.36% limited partnership interest and a 1% general partnership interest in the Partnership and continued to operate and control the Partnership and the Apartment Complex as before.

In March 2008, Taxpayer filed its 2006 Pennsylvania corporate tax report and 2006 Proforma federal return.³ The 2006 Proforma federal return reflected a federal taxable income of $24.5 million, which includes a $29.9 million gain on the sale of the transferred partnership interest and a $5.4 million loss on its share of the Partnership's operational losses for Fiscal Year 2006. Taxpayer claimed the $29.9 million gain was nonbusiness income and reported an overall taxable loss for Pennsylvania corporate net income tax (CNIT) purposes on the 2006 Pennsylvania corporate tax report.⁴ The Department of Revenue (Department) issued a notice of assessment dated October 13, 2009, disallowing Taxpayer's classification of the gain as nonbusiness income and imposing an assessed CNIT in the amount of $2,243,291 for Fiscal Year 2006, plus interest.⁵

B.

Taxpayer filed an appeal with the Board of Appeals challenging the Department's classification of the gain as business income, asserting that the sale of the partnership interest was nonbusiness income and should not be sourced to Pennsylvania. Specifically, Taxpayer argued:

The Taxpayer, who is a Delaware Taxpayer, had non-business income from the sale of a partnership interest that was not sourced to Penn [sic]. The capital gain from the sale of the partnership interest is not business income as the income was not income arising from transactions & activity in the regular trade or business nor is it income from tangible or intangible property since the management and disposition of the [P]roperty were not integral to the Taxpayer's trade or business. The capital gain should not be allocated to Pennsylvania. The Taxpayer is not in the business of buying or selling their [sic] partnership interest.

(Board of Appeals Petition at 2.) After a hearing, the Board of Appeals denied Taxpayer's request for classifying the sale of the partnership as nonbusiness income, denied its request to source the sale outside of Pennsylvania and sustained the Department's assessment in its entirety.

Taxpayer appealed to the Board, requesting again nonbusiness income treatment for the gain from the partnership interest sale and the ability to source the sale outside of Pennsylvania and seeking to strike the Department's assessment. The Board denied Taxpayer's request, finding that Taxpayer's interests in the Partnership subjected Taxpayer to CNIT because the Partnership does business in Pennsylvania and the partnership sales gain constituted business income:

Because such income was derived from a transaction in the regular course of [Taxpayer's] business, investing in real estate partnerships and receiving income from them. Welded Tube Co.,^[6] supra. The partnership sales gain constituted business income for [Taxpayer] under the functional test because the acquisition and disposition of the investment partnerships constituted an integral part of [Taxpayer's] regular trade or business, investment. See 72 P.S. § 7401(3)

2.(a)(1)(A). [Taxpayer] is not entitled to allocate the partnership income under the [Code] because this income is apportionable business income. See 72 P.S. § 7401(3) 2.(a)(4) (allocating rents, royalties, gains or interest only “to the extent they constitute nonbusiness income”); but see 72 P.S. § 7401(3) 2.(a)(9)(A) (subjecting all business income to apportionment).

(Board's December 15, 2010 decision at 10) (footnote added).

The Board further denied Taxpayer's request for multiformity or unrelated assets income treatment, explaining that Taxpayer's tax return, petitions and supporting materials do not show the unrelated nature of the income it seeks to remove from taxation. With regard to Taxpayer's request for exclusion of the partnership sales gains from a sales fraction numerator, the Board reasoned that the request is denied because the gains were apportionable business income and “sales” included in the sales apportionment factor are all gross receipts not allocated under the Code other than dividends, government obligation interest and securities sales proceeds. The Board also found that the Partnership assets in which Taxpayer held a direct interest were located in Pennsylvania, and the sale of such assets makes Taxpayer's sales gains Pennsylvania receipts correctly included in a sales numerator. Finally, the...