The opinion of the court was delivered by: Judge McGINLEY
BEFORE: HONORABLE BERNARD L. McGINLEY, Judge, HONORABLE DAN PELLEGRINI, Judge, HONORABLE JAMES R. KELLEY, Senior Judge.
Richard Hvizdak (Taxpayer) petitions for an appeal from an order of the Board of Finance and Revenue (Board) which denied his petition for review of refund and sustained the order of the Board of Appeals (BOA).
Taxpayer, as a Florida resident, was required to file a nonresident Pennsylvania Personal Income Tax (PIT) return. Taxpayer filed his 2002 PIT return under an approved extension. The Pennsylvania Department of Revenue (Department) disallowed a business loss of $21,796,899 from Brown Fox Partners Fund LLC (Brown Fox) because a Pennsylvania partnership return was not filed by Brown Fox. Because the business loss was disallowed, Taxpayer was assessed tax, penalties and interest totaling $789,267.29. Taxpayer paid the assessment in full and petitioned for a refund with the BOA.
The BOA sustained the assessment in full because Taxpayer failed to submit a Pennsylvania partnership return. The BOA struck the 5% penalty assessed by the Department and assessed a 25% penalty. The BOA sustained a penalty for underpayment of estimated tax and added appropriate interest to the taX deficiency. Taxpayer petitioned for review with the Board.
The Board denied Taxpayer's petition because Brown Fox did not satisfy the economic substance test set forth in the Pennsylvania Personal Income Tax regulations, 61 Pa.Code §103.13(a), and sustained the penalty assessment:
The Board finds that the loss from Petitioner's [Taxpayer] investment in Brown Fox Partners Fund LLC demonstrates a lack of economic substance. Petitioner [Taxpayer] has not shown that the investments were entered into for gain, profit or income as required at 61 Pa Code 103.13(a). Therefore, the loss from Brown Fox Partners Fund LLC shall not be allowed.
Petitioner [Taxpayer] has not shown that the underpayment of tax was not the result of negligence or intent to defraud. Moreover, the loss claimed by Petitioner [Taxpayer] is the result of excluding gains that should have been reported. Therefore, the assessment of a 25% underpayment penalty is appropriate since the omission is in excess of 25% of taxable income.
As neither of the safe harbor provisions provided at §7352 were met, a penalty for underpayment of estimated tax is appropriate. Petitioner's [Taxpayer] request for abatement of the estimated tax penalty must be denied.
Interest is charged to compensate the Commonwealth for the loss of the use of funds while the tax shown to have been properly due is in the possession of the taxpayer. Therefore, Petitioner's [Taxpayer] request for abatement of interest must be denied.
Board Opinion, November 15, 2006, at 4-5.
Taxpayer petitioned for review with this Court. The Commonwealth and Taxpayer stipulated to the following relevant facts:
13. The Taxpayer invested in Brown Fox Partners Fund LLC (the 'Fund') in 2001.
14. This profit was reported as business income on Taxpayer's 2001 Pennsylvania personal income tax return.
15. If called to testify, Taxpayer would testify that he made his investment in the fund with the intention of making a profit.
17. According to the Fund's Private Placement memorandum, the Fund's goal was to make a profit for ...