R. Pearlstein & C. Pearlstein v. Com. of PA, 743 F.R. 2017

Robert and Cynthia Pearlstein are partners in real estate development/management partnerships and use the Federal Income Tax (FIT) method of accounting.
During tax years 2013 and 2014 they engaged in like‑kind exchanges of real property under IRC §1031.
The Pennsylvania Department of Revenue assessed Personal Income Tax (PIT) on net gains from those exchanges, plus interest and penalties.
The Board of Finance and Revenue sustained the assessment in part and denied it in part, concluding Pennsylvania’s Tax Reform Code (TRC) does not permit the §1031‑style deferral and that the FIT method did not clearly reflect income.
The Commonwealth Court affirmed the Board’s order, assessing PIT and interest (but not penalties), relying on its companion opinion in James and Karen Pearlstein.
Judge Crompton dissented, arguing the Department abused its discretion and was inconsistent with its regulatory interpretation by taxing gains before realization.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Pennsylvania PIT on net gains from like‑kind real property exchanges is taxable in the year of exchange or may be deferred under the FIT method consistent with IRC §1031	Pearlstein: Using FIT and IRC §1031 deferral, gains are not taxable until realized (upon sale)	Commonwealth: TRC lacks a §1031 deferral; FIT method does not clearly reflect income for PA purposes, so tax is due in the year of the exchange	Court: Affirmed Board — gains are taxable in the year of the exchanges; FIT method does not clearly reflect income for PA PIT; assessment and interest upheld, penalties denied

None (this opinion primarily relied on the TRC, IRC §1031, and a companion Commonwealth Court decision that lacks an official reporter citation).