Marshall v. Commonwealth
50 A.3d 287
Pa. Commw. Ct.2012Background
- Marshall, a Texas resident, invested as a limited partner in a Connecticut limited partnership that owned a Pittsburgh building and later foreclosed.
- The partnership financed the property with a non-recourse PMM Note; interest accrued massively, largely unpaid, and was capitalized.
- Marshall owned one unit in the partnership; he contributed about $148,889 and received a partial return in 1989, but never recovered his investment.
- Revenue assessed Marshall for 2005 PIT based on the foreclosure disposition; the Board and this Court (Marshall I) upheld the tax, with remand for recalculation due to basis issues.
- The majority in Marshall I held that PIT could apply to Marshall as a nonresident, that the amount realized included the discharged nonrecourse debt, and that the tax benefit rule and cross-class offsets did not alter the result.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a nonresident partner is subject to PIT for a foreclosure disposition | Marshall contends nonresidents cannot be taxed on Pennsylvania-source gains from a partnership. | Revenue/Board argues nonresidents may be taxed on Pennsylvania-sourced partnership gains from foreclosures. | Yes; nonresident may be taxed on disposition gains. |
| Whether the amount realized includes unpaid interest and the nonrecourse debt discharged | Tufts-like limitation and other arguments require limiting amount realized. | Revenue properly includes the full nonrecourse liabilities discharged as amount realized. | Yes; full discharged nonrecourse debt is part of amount realized. |
| Whether the tax benefit rule applies to offset prior-year interest deductions | Marshall argues the tax benefit rule should reduce amount realized using prior NOL deductions. | Regulations and Pennsylvania law prohibit cross-class offset; no NOL carryover effect. | No; tax benefit rule does not apply to create cross-class offsets. |
| Whether the evaluation and uniform application of PIT to nonresidents aligns with constitutional limits | Nonresidents are treated differently from residents, violating uniformity. | PIT is limited by constitutional ability to tax nonresidents; no uniformity violation found. | No constitutional uniformity violation; nonresidents taxed on Commonwealth-source income. |
| Whether remand for recalculation of the PIT is appropriate | Remand misstates the basis and results; calculation should be finalized. | Remand is proper to determine adjusted basis and finalize amount due. | Remand affirmed for recalculation consistent with Marshall I. |
Key Cases Cited
- Cox v. C.I.R., 68 F.3d 128 (5th Cir. 1995) (foreclosure as disposition for §1001 purposes)
- Allan v. Commissioner of Internal Revenue, 856 F.2d 1169 (8th Cir. 1988) (tufts-like treatment of discharge in amount realized)
- Tufts v. CIR, 461 U.S. 300 (U.S. 1983) (amount realized includes indebtedness discharged under Tufts)
- Hillsboro National Bank v. C.I.R., 460 U.S. 370 (U.S. 1983) (tax benefit rule framework and recovery of deductions)
- Complete Auto Transit v. Brady, 430 U.S. 274 (U.S. 1977) (narrow view of tax principles; sourcing and allocation context)
- Purple Orchid, Inc. v. Pa. State Police, 572 Pa. 171 (2002) (issues of waiver and appellate briefing specificity in Pennsylvania)
- Miller v. Commonwealth of Pennsylvania, 18 A.3d 395 (Pa. Cmwlth. 2011) (court role and de novo review in tax appeals from Board)
- Marshall v. Commonwealth (Marshall I), 41 A.3d 67 (Pa. Cmwlth. 2012) (nonresident PIT on foreclosure; remand for basis reconsideration)
- Rigling, 409 A.2d 936 (Pa. Cmwlth. 1980) (substance over form approach in tax cases; limited scope of offsets)
- Commonwealth v. Columbia Steel & Shafting Co., 83 Pa. D. & C. 326 (Dauphin 1951) (early Pennsylvania tax case; not binding on modern interpretation)
- Complete Auto Transit v. Brady, 430 U.S. 274 (U.S. 1977) (see above)