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RB Alden Corp. v. Commonwealth

Commonwealth Court of Pennsylvania

September 12, 2017

RB Alden Corp., Petitioner
v.
Commonwealth of Pennsylvania, Respondent

          Argued: February 8, 2017

          BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE MICHAEL H. WOJCIK, Judge HONORABLE JULIA K. HEARTHWAY, Judge [1] HONORABLE JOSEPH M. COSGROVE, Judge

          OPINION

          PATRICIA A. McCULLOUGH, JUDGE

         Presently before this Court are the exceptions filed on behalf of the Commonwealth of Pennsylvania (Commonwealth) and RB Alden Corp. (Taxpayer) to this Court's order filed June 15, 2016, which reversed the order of the Board of Finance and Revenue (Board) denying Taxpayer's request for relief and directing the Department of Revenue (Department) to calculate Taxpayer's corporate net income tax (CNIT) without capping the amount that Taxpayer can take on its net loss carryover deduction.

         Taxpayer alleged that it owed no Pennsylvania corporate net income tax on a $29.9 million capital gain profit resulting from the sale of part of a partnership interest for the following reasons:

• 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), [2] not "business income" under Section 401(3)2. (a)(1)(A) of the Code;[3]
• 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, (Pa. Cmwlth. 2015) (hereafter Nextel), [4] limiting its net loss carryover deduction to $2 million violates the Uniformity Clause of the Pennsylvania Constitution, Pa. Const. art. VIII, §1.

         The Board rejected each of Taxpayer's arguments. In our June 15, 2016, decision, [5] this Court agreed with the Board that the income gained by Taxpayer from the sale of a portion of the partnership was properly treated as business income subject to tax in Pennsylvania and declined to adopt the tax benefit rule in the context of the corporate net income tax. However, we concluded that the $2 million limit on the amount of the net loss carryover deduction set forth in section 401(3)4. (c)(1)(A)(I) of the Code, 72 P.S. §7401(3)4. (c)(1)(A)(I), violated the Uniformity Clause of the Pennsylvania Constitution, Pa. Const art. VIII, §1, as it applied to Taxpayer. Hence, we reversed the Board's decision and directed the Department to calculate Taxpayer's corporate net income tax without capping the amount that Taxpayer could take on its net loss carryover. Both the Commonwealth and Taxpayer have now filed exceptions to our decision.

         Commonwealth's Exceptions

         The Commonwealth takes exception to this Court's conclusion that the $2 million limit on the amount of the net loss carryover deduction set forth in section 401(3)4. (c)(1)(A)(I) of the Code violated the Uniformity Clause of the Pennsylvania Constitution as it applied to Taxpayer. In this regard, the Commonwealth takes specific exception to this Court's findings: that such a limitation created unequal tax burdens on similarly situated taxpayers; that effective tax rates, rather than statutory tax rates, must be uniform; that Nextel, or the formula used therein to calculate a corporation's effective tax rate, has any application to this case; and that the creation of any separate classes of corporations with unequal tax burdens resulting from application of the net loss carryover deduction limitation was unreasonable, arbitrary, or not rationally related to a legitimate state purpose.

         The Commonwealth also takes exception to this Court's finding that limiting a tax deduction for sensible budgetary planning is not a legitimate state purpose sufficient to withstand a uniformity challenge, as well as this Court's purported failure to analyze the limitation as an equal protection challenge, under which the broad legislative goal of assuring stability in state finances is a relevant consideration. In any event, the Commonwealth takes further exception to this Court's conclusion that Taxpayer overcame its heavy burden in challenging the constitutionality of the limitation. Finally, the Commonwealth takes exception to this Court's remedy ...


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