The opinion of the court was delivered by: Dan Pellegrini, Judge
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE BERNARD L. McGINLEY, Judge HONORABLE DAN PELLEGRINI, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge
OPINION BY JUDGE PELLEGRINI
Glatfelter Pulpwood Company (Taxpayer) petitions for review from an order of the Board of Finance and Revenue (Board) denying its request for a tax refund because its timberland sales gains meets the definition of "business income" under Section 401(3)2.(a)(1)(A) of the Tax Reform Code of 1971.*fn1 For the reasons that follow, we affirm the Board's decision.
According to the parties' Stipulation of Facts, Taxpayer is a wholly- owned subsidiary of P.H. Glatfelter Corporation, the parent company (Parent), which is a corporation that is organized under the laws of Maryland and maintains its headquarters in York, Pennsylvania. The Parent is engaged in the business of manufacturing specialty papers and engineered products and has timberlands located in Delaware, Maryland, Pennsylvania and Virginia. Taxpayer's sole business activity is the procurement of pulpwood either from harvesting company-owned timberland or by purchasing timberland from third parties for the specialty paper manufacturing operations of the Parent. Taxpayer operates the Parent's paper mill in Spring Grove, Pennsylvania.
Prior to 2003, Taxpayer obtained approximately 25% of the pulpwood needed for its Parent's paper manufacturing operations from company-owned timberland and procured approximately 75% of the needed pulpwood from purchases on the open market. In 2003, following an industry trend, Taxpayer made a corporate decision to divest certain of its timberland holdings with the effect of reducing the percentage of pulpwood procured from company-owned timberland from approximately 25% to approximately 5%. This was known as the "Timberland Divestiture Plan." As a result, Taxpayer sold 5,000 acres of timberland in Delaware and 25,821 acres of timberland in Maryland. It sold most of its timberland in Maryland to The Conservation Fund, a non-profit Maryland corporation, and received in consideration a 10-year note in the amount of $37.9 million. It also entered into a supply agreement to purchase at market prices an annual amount of pulpwood averaging 34,425 tons per annum over the eight-year term of the agreement on the timberlands sold to The Conservation Fund. As of December 31, 2004, Taxpayer owned 14,364 acres of timberland in Delaware; 25,587 acres of timberland in Pennsylvania; 40,676 acres of timberland in Virginia; and 49 acres of timberland in Maryland.
During 2004, as part of the Timberland Divestiture Plan, Taxpayer sold 4,882 acres of timberland in Delaware for $56,586,000, realizing a net gain of $55,355,452 ("the 2004 Delaware Sale"). Taxpayer reported the 2004 Delaware Sale on its federal tax return as a sale or exchange of property used in a trade or business. The income generated by the sales of pulpwood from the business prior to the 2004 sale was reported to Pennsylvania as apportionable business income. Taxpayer distributed all of the net proceeds from the 2004 Delaware Sale to its Parent, which, in turn, used the proceeds to pay debt and pay dividends to its shareholders.
Taxpayer filed its 2004 corporate tax report omitting any inclusion of nonbusiness income and reporting a tax liability of $2,189,876. Taxpayer paid this liability and filed an amended corporate tax report claiming that the net gain from the 2004 company-owned timberland in Delaware was nonbusiness income to be allocated to Delaware. The amended corporate tax report reported a zero corporate net income tax liability. On settlement of Taxpayer's 2004 tax year, the Department of Revenue (Department) increased the apportionable business income from a ($3,044,914) net loss to $52,327,343 through denial of the nonbusiness income treatment of the net gain related to the 2004 timberland sale. As a result, the Department asserted additional corporate net income tax liability owed by Taxpayer in the amount of $2,205,211.
Taxpayer filed an appeal with the Board of Appeals seeking a refund of the 2004 corporate net income tax in the amount of $2,205,211 based on a claim of nonbusiness income treatment for the net gain from the 2004 Delaware Sale. The Board of Appeals refused Taxpayer's refund claim, and Taxpayer appealed to the Board again requesting nonbusiness income treatment for the net gain from the 2004 Delaware Sale. The Board denied Taxpayer's request because it found that the timberland sales gains met the definition of "business income" under Section 401(3)2.(a)(1)(A) of the Tax Reform Code of 1971 and met the transactional test for business income:
because buying and selling timberland occurred in the regular course of [Taxpayer's] business. Welded Tube Co.,[*fn2 ] supra. [Taxpayer] decided that it under utilized its timberlands and engaged in a series of timberland sales in 2003 and in 2004. The timberland sales gains meet the functional test for business income because the acquisition and management of timberlands constituted an integral part of [Taxpayer's] regular trade or business. 72 P.S. §7401(3)2.(a)(1)(A). All business income is apportioned under the Tax Reform Code. 72 P.S. §7401(3)2.(a)(9)(A).
The Department correctly settled and apportioned [Taxpayer's] business income.
(Board's May 22, 2007 decision at 7.) This appeal by Taxpayer followed.*fn3
For purposes of corporate net income tax, Pennsylvania classifies income into two groups: business income and nonbusiness ...