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Saturday Family LP v. Commonwealth

Commonwealth Court of Pennsylvania

August 14, 2017

Saturday Family LP, Petitioner
v.
Commonwealth of Pennsylvania, Respondent Techspec Inc., Petitioner
v.
Commonwealth of Pennsylvania, Respondent

          Submitted: June 7, 2017

          BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE P. KEVIN BROBSON, Judge, HONORABLE PATRICIA A. McCULLOUGH, Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE JOSEPH M. COSGROVE, Judge.

          OPINION

          P. KEVIN BROBSON, Judge.

         Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i), the Commonwealth of Pennsylvania (Commonwealth) filed exceptions to this Court's three-judge panel opinion and order in Saturday Family LP v. Commonwealth of Pennsylvania, 148 A.3d 931 (Pa. Cmwlth. 2016) (Saturday Family I), dated October 17, 2016, in which the Court reversed an order of the Board of Finance and Revenue (Board), dated September 25, 2013 (mailed on September 27, 2013). In so doing, we concluded that the Commonwealth was bound by the clear terms of its own regulation and could not impose realty transfer tax on a ground lease with a less than thirty-year initial term but with a renewal option at fair market value (FMV) rent. Upon careful review, we overrule the Commonwealth's exceptions.

         Generally speaking, [1] a lease for real property for a term of thirty years or more is subject to Pennsylvania's realty transfer tax. Section 1103-C.1 of the Tax Code[2] provides that "[i]n determining the term of a lease, it shall be presumed that a right or option to renew or extend a lease will be exercised if the rental charge to the lessee is fixed or if a method for calculating the rental charge is established." (Emphasis added.) Under its rulemaking authority, [3] the Department of Revenue (Department) promulgated a regulation to aid, inter alia, in its enforcement of Section 1103-C.1 of the Code. With respect to leases and lease extensions, the Department's regulation provides, in relevant part:

In determining the term of a lease under this paragraph, it shall be presumed that a right or option to renew or extend a lease will be exercised if the lessor and lessee cannot renegotiate the rental charges for the renewal or extension period unconditionally. A lessor and lessee cannot renegotiate a rental charge unconditionally if it is fixed at a set amount for the period or a method for establishing the rental charges is established. Renewals or extensions at the option of the lessee at fair rental value at the time of the renewal or extension are not included in determining the term of a lease.

61 Pa. Code § 91.193(b)(24)(v) (emphasis added).

         In Saturday Family I, the Court examined the terms of the ground lease between Petitioners Saturday Family LP, as landlord, and Techspec Inc., as tenant, (collectively Taxpayers) for the lease of property located at 718 Y Street, Derry Township, Westmoreland County, Pennsylvania (Ground Lease). Specifically, the Ground Lease provides for an initial term of 29 years and 11 months (and 3 days).[4] The Ground Lease provides the tenant with the option to renew the term for up to 6 periods of 5 years each for FMV rent as determined by the parties at the time of the extension based on rents for similar parcels in Westmoreland County and, if they are unable to agree, by appraisal. Applying both the governing statute and the Department's regulation, the Court held that because the Ground Lease expressly provided the lessee with the option to renew the Ground Lease at expiration for an additional 5-year term at FMV rent at the time of renewal, the term of the extension should not be included in the lease term. Accordingly, the Ground Lease, which was for a term of less than 30 years, is not subject to the realty transfer tax.

         The Commonwealth takes exception in a brief that largely tracks the arguments set forth in its original merits brief. In its first exception, the Commonwealth initially challenges not this Court's decision but an alleged failure by Taxpayers "to claim a valid exemption from [r]ealty [t]ransfer [t]axes." (Cmwlth. Br. on Exceptions at 14.) The Commonwealth relies on instances in the record and in Taxpayers' initial brief to the Court where Taxpayers refer to a nonexistent provision in the Tax Code, specifically "72 P.S. § 8102-C.3(24)." Although "72 P.S. § 8102-C.3" exists, [5] it does not contain a subsection (24).

         We acknowledge those citation errors but do not view them as fatal. Taxpayers have consistently argued that because the Ground Lease has a renewal option at FMV rent, the renewal period should not be included for realty transfer tax purposes. In their initial brief, for example, Taxpayers include the following in their Statement of the Case: "Renewal options at fair market value are not counted toward the 30-year lease term test for [t]ransfer [t]ax purposes. 72 P.S. § 8102-C.3(24)." (Taxpayers' Initial Br. at 3.) This statutory cite is an obvious error, apparent from a reading of Taxpayers' argument section, where Taxpayers cite specifically to the Department's regulation to support this proposition.[6] We note that the Commonwealth does not profess to be deceived or otherwise prejudiced by the citation errors. Rather, it merely seeks to take advantage of them. Like the Commonwealth, however, the Court was clearly able to discern the legal basis for Taxpayers' appeal notwithstanding some errant citations. Accordingly, this particular exception does not compel the Court to rule in the Commonwealth's favor.

         The balance of the Commonwealth's first exception is directed largely to this Court's construction of Section 1103-C.1 of the Tax Code and the Department's related regulation-61 Pa. Code § 91.193(b)(24)(v). As it did in its brief on the merits, the Commonwealth contends that portions of the Ground Lease detailing how the parties will arrive at FMV rent on renewal are equivalent to a "method for calculating the rental charge, " as described in Section 1103-C.1 of the Tax Code, or a "method for establishing the rental charge, " as described in the Department's regulation, for the extension period. Because the Ground Lease includes such a "method" for calculating the rent for the extension period, the Commonwealth contends that the extension period must be included in the lease period, which would bring the lease period to greater than 30 years. Accordingly, the lease is subject to realty transfer tax.

         Because the panel in Saturday Family I did not reach the same conclusion, the Commonwealth contends that the panel (a) failed to consider the language in Section 1103-C.1 of the Tax Code, focusing only on the final sentence in 61 Pa. Code § 91.193(b)(24)(v) (relating to lease extension); (b) should have relied on dictionary definitions of the term "method" and, had it done so, would have found that the procedures to arrive at FMV rent set forth in the Ground Lease constitute a "method" as that term is used in the statute and regulation; (c) erred in even concluding that the parties agreed to extend the lease at FMV rent because the parties are not free to negotiate; (d) inconsistently concluded that the Department's regulation was clear while at the same time applying the Statutory Construction Act of 1972;[7] and (e) adopted a construction that defeats the purpose of the statutory provisions imposing the transfer tax.

         The Commonwealth, here, presents largely the same issues and arguments that this Court addressed in our opinion in Saturday Family I. Having considered the Commonwealth's contentions and Taxpayers' responses, we confirm the panel's construction of both Section 1103-C.1 of the Tax Code and Section 91.193(b)(24)(v) of the Department's regulation for the reasons set forth in the panel's opinion. In response to particular points raised by the Commonwealth, we offer some additional analysis.

         First, the panel in Saturday Family I fully considered all relevant provisions of the Tax Code and the Department's regulation in applying the clear language set forth in the Department's regulation. Saturday Family I, 148 A.3d at 934-35. In reality, the language of the Department's regulation largely tracks Section 1103-C.1 of the Tax Code, with the exception of the added language in the regulation dealing with extensions at FMV rent. The Court's interpretation in Saturday Family I is not inconsistent with the language in the Tax Code, unless of course the Department is suggesting that its own regulation, particularly the FMV language, is inconsistent with the Tax Code. The Department, however, does not make such an argument. The ...


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