RB Alden Corp. v. Commonwealth
2016 Pa. Commw. LEXIS 278
Pa. Commw. Ct.2016Background
- RB Alden Corp. (Taxpayer), a Delaware corporation, was sole general partner and majority limited partner in Eastview Associates LP, which owned Alden Park Apartments in Philadelphia.
- Taxpayer sold a 45% limited partnership interest in FY 2006 for $5,000 cash plus assumption by buyer of $29.9 million of nonrecourse liabilities, realizing a $29.9 million capital gain for federal purposes.
- Taxpayer historically reported partnership operating losses (passed through) and had substantial net operating loss carryovers; Pennsylvania limited net loss carryover deductions to $2 million for FY 2006.
- Department of Revenue reclassified the sale gain as business (apportionable) income, assessed CNIT; Board of Finance and Revenue sustained the assessment; Taxpayer appealed.
- The court considered (1) business vs. nonbusiness classification (transactional vs. functional tests), (2) multiformity/unrelated assets exclusion, (3) sourcing of sales proceeds for apportionment, (4) application of the tax-benefit rule and constitutionality of the $2 million net loss carryover cap.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the partnership‑interest sale gain is business or nonbusiness income | Sale was a one‑time liquidation of a distinct activity; not part of Taxpayer’s regular trade or business (nonbusiness) | Taxpayer acquired, managed and disposed of the partnership interest as integral to its business of owning/operating the partnership — functional test met (business income) | Held business income under the functional test; sale was integral to Taxpayer’s operations and control of the Pennsylvania real estate |
| Whether the gain should be excluded from apportionment under multiformity / unrelated‑assets doctrines | The interest and sale are unrelated to Taxpayer’s Pennsylvania activities because acquisition was to secure lender control, so exclusion should apply | Taxpayer directed and operated the partnership and retained control and significant continuing interest; activities were integrated with Pennsylvania operations | Held no exclusion: interests were integrally related to Pennsylvania business, so gain is apportionable business income |
| Proper sourcing of sale proceeds for sales factor (Pennsylvania v. New York) | Sale of an intangible partnership interest is sourced to headquarters (New York) because acquisition/holding/ disposition occurred there | Income‑producing activity (operation/management of apartment complex and partnership) occurred in Pennsylvania; costs and activities producing income are in PA | Held Pennsylvania sourced: income‑producing activities and related costs performed in Pennsylvania, so sales receipts are PA receipts |
| Applicability of the tax‑benefit rule and challenge to $2M net‑loss cap (Uniformity Clause) | Tax‑benefit rule should allow recovery of prior unused passthrough operating losses (beyond $2M cap); cap violates Uniformity Clause and should be removed | Tax‑benefit rule not applicable to CNIT here; adopting it would thwart explicit Code limits; cap is constitutional as applied (Commonwealth contested scope) | Court declined to apply the tax‑benefit rule to override Code limits; but held the $2M cap violated the Uniformity Clause and ordered CNIT recalculated without the cap |
Key Cases Cited
- Glatfelter Pulpwood Company v. Commonwealth of Pennsylvania, 61 A.3d 993 (Pa. 2013) (functional test; liquidation does not create an exception to business‑income classification)
- Glatfelter Pulpwood Company v. Commonwealth of Pennsylvania, 19 A.3d 572 (Pa. Cmwlth. 2011) (application of business‑income tests)
- Nextel Communications of Mid‑Atlantic, Inc. v. Commonwealth of Pennsylvania, 129 A.3d 1 (Pa. Cmwlth. 2015) (net loss carryover cap held to violate Uniformity Clause in that as‑applied challenge)
- Ross–Araco Corp. v. Commonwealth of Pennsylvania, 674 A.2d 691 (Pa. Cmwlth. 1996) (transactional vs. functional tests explained)
- Laurel Pipe Line Co. v. Commonwealth of Pennsylvania, 642 A.2d 472 (Pa. 1994) (pre‑2001 formulation of business income tests)
- Welded Tube Co. of America v. Commonwealth, 515 A.2d 988 (Pa. Cmwlth. 1986) (origin of transactional/functional framework)
- Miller Bros. Co. v. Maryland, 347 U.S. 340 (U.S. 1954) (multiformity / minimum connection principle)
- Canteen Corp. v. Commonwealth of Pennsylvania, 818 A.3d 594 (Pa. Cmwlth. 2003) (constitutional limits on state corporate income taxation)