The opinion of the court was delivered by: P. Kevin Brobson, Judge
BEFORE: HONORABLE DAN PELLEGRINI, President Judge HONORABLE BONNIE BRIGANCE LEADBETTER, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE ANNE E. COVEY, Judge
Petitioner Robert J. Marshall, Jr. (Marshall), pursuant to Pa. R.A.P. 1571(i), filed exceptions to this Court's January 3, 2012, decision in Marshall v. Commonwealth, 41 A.3d 667 (Pa. Cmwlth. 2012) (en banc) (Marshall I). The dispute here focuses on the application of the Pennsylvania personal income tax (PIT)*fn1 to a nonresident, who invested as a limited partner in a Connecticut limited partnership, which owned a building in the City of Pittsburgh, which went into foreclosure.
Marshall initially petitioned this Court for review of a Board of Finance and Revenue (Board) Order, which confirmed a decision by the Department of Revenue (Revenue) imposing PIT on Marshall, a resident of Texas, for "income" from the foreclosure of a commercial property in the City of Pittsburgh (Property) in 2005. 600 Grant Street Associates Limited Partnership (Partnership), organized under Connecticut law, purchased the Property for approximately $360 million, $308 million of which the Partnership financed with a non-recourse Purchase Money Mortgage Note (PMM Note) secured only by the Property. Interest on the PMM Note accrued on a monthly basis at a rate of 14.55%, and, if monthly accrued interest exceeded the net operating income of the Partnership, accrued but unpaid interest would be deferred and compounded on an annual basis.
Marshall purchased a limited partnership interest (one unit) in the Partnership on or about January 24, 1985, for $148,889, although the Partnership returned a portion of Marshall's capital contribution in the amount of $6,184 in 1989. Marshall was a passive investor in the Partnership. He never participated in the management of the Partnership or the Property. The Partnership incurred losses from operations for financial accounting, federal income tax, and PIT purposes every year of its existence. For PIT purposes, the Partnership allocated its annual losses from operations to each partner, including Marshall. During this same time, Marshall had no other Pennsylvania source of income or loss, and he did not file a PIT return for tax years 1985 through 2004.
The lender foreclosed on the Property on June 30, 2005. At the date of foreclosure, the liability on the PMM Note had grown into a liability of more than $2.6 billion, of which only $308 million represented principal and approximately $2.32 billion represented accrued but unpaid interest.*fn2
That same year, the Partnership terminated operations and liquidated. Marshall did not recover his capital investment in the Partnership at foreclosure or liquidation, and he did not receive any cash or other property upon liquidation of the Partnership.
In 2008, Revenue assessed Marshall $165,055.24 in PIT for calendar year 2005 (inclusive of penalties and interest) as a result of the foreclosure on the Property (Assessment). Marshall filed a petition for reassessment with Revenue's Board of Appeals (BOA), and BOA ultimately struck the penalties from the Assessment but otherwise held that the amount of PIT due, with interest, was proper. Marshall appealed BOA's determination to the Board, which denied Marshall's request for relief from BOA's determination. Marshall then petitioned this Court for review.*fn3
In Marshall I, a majority of the Court rejected Marshall's argument that he is not subject to PIT because he is not a resident of the Commonwealth and does not have sufficient minimum contacts with the Commonwealth, such that the Commonwealth may tax him without violating the Commerce and Due Process Clauses of the United States Constitution.*fn4 The majority concluded that imposition of the PIT on Marshall, as a limited partner of the Partnership, as a result of the disposition of the Property at foreclosure does not violate Marshall's due process rights. In reaching that conclusion, the majority considered significant that Marshall invested in a specific and limited purpose Connecticut limited partnership, whose "primary purpose was ownership and management" of a substantial commercial property in the City of Pittsburgh, and that he purposefully availed himself of the opportunity to invest in Pennsylvania real estate through a partnership.*fn5 (Stip. ¶ 11 & Ex. "G" at 3.)
In Marshall I, the majority further concluded that the foreclosure on the Property triggered PIT obligation under the governing statute and regulation.*fn6 The majority rejected Marshall's argument that the discharge of indebtedness that resulted from the disclosure did not result in a taxable gain because he did not receive actual cash or other property as a result of the foreclosure. The majority was persuaded that Revenue reasonably interpreted Section 103.13 of the Regulations as applying to real property foreclosures, even when the mortgagor does not receive any cash or other property (i.e., proceeds) upon foreclosure. In so doing, the majority noted that Revenue's interpretation of its regulation is consistent with federal court cases interpreting Section 1001 of the Internal Revenue Code (IRC), 26 U.S.C. § 1001.*fn7 Section 1001 of the IRC addresses the computation of gain or loss and the amount realized from the sale or other disposition of property, and, similar to Section 103.13 of the Regulations, it references receipt of cash ("money") or "property (other than money)" in its calculation of a gain or loss from the sale or disposition of property. See, e.g., Cox v. C.I.R., 68 F.3d 128, 133 (5th Cir. 1995) ("It is a well-established rule that a foreclosure sale constitutes a 'disposition of property' within the meaning of I.R.C. § 1001.").
The majority agreed with Revenue that Marshall's reliance on our prior decision in Commonwealth v. Rigling, 409 A.2d 936 (Pa. Cmwlth. 1980), and the court of common pleas' decision in Commonwealth v. Columbia Steel & Shafting Co., 83 Pa. D. & C. 326 (Dauphin 1951), exceptions dismissed, 62 Dauph. 296 (C.P. Dauphin Pa. 1952), is misplaced, as those cases do not support
Marshall's contention that imposition of an income tax on a taxpayer, like himself, who actually derived no income from his investment in a partnership, is prohibited. In Marshall I, the majority emphasized that the issue in this case is whether the Partnership experienced a taxable gain for PIT purposes upon foreclosure of the Property, not whether Marshall, individually, received a positive return on his investment in the Partnership. If the Partnership experienced a taxable gain, under Section 306 of the Code, added by the Act of August 31, 1971, P.L. 362, as amended, 72 P.S. § 7306, Marshall is responsible to pay his share (based on his percentage ownership interest in the Partnership) of the Partnership's tax liability on that gain. Whether Marshall suffered a loss of the amount he invested in the Partnership, though unfortunate, is simply not relevant to the PIT question before us in this case. Rigling and Columbia Steel do not compel a different conclusion.
Having concluded that Revenue is not precluded from imposing a PIT on Marshall, the majority then considered in Marshall I the related question of whether Revenue appropriately calculated the PIT due in this case. In order to address this question, the majority determined whether Revenue used the appropriate amount realized and adjusted basis to arrive at the gain, if any, to be taxed. The majority noted a deficiency in the record ...