Wirth v. Commonwealth
626 Pa. 124
| Pa. | 2014Background
- Nonresident investors in a Connecticut limited partnership owned the Pittsburgh U.S. Steel Building; partnership foreclosed in 2005.
- Nonrecourse mortgage debt totaled $2.628 billion; foreclosure extinguished principal and accrued interest, creating purported gain.
- Partnership reported the foreclosure gain and allocated shares to limited partners; Pennsylvania PIT assessed at 3.07% on each partner’s share.
- Four nonresident appellants challenged the PIT assessments in Commonwealth Court; the court affirmed in part and remanded for basis calculations.
- Commonwealth Court applied Tufts-based reasoning, treating the discharge of nonrecourse debt as a disposition of property and taxing the related gain.
- Debate ensued over whether gains could be offset by prior partnership losses and whether nonresidents could deduct losses sourced outside Pennsylvania.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can PIT apply to foreclosures on nonrecourse debt? | Marshall argues no basis for tax; no cash realized. | Department relies on Tufts; discharge equals gain from disposition of real property. | Yes; PIT applies under Tufts-inspired reasoning. |
| Is the TUFTS rule properly applied under Pennsylvania law? | Tufts misapplied; no cash or disposition contrary to 103.13. | Tufts aligns with Section 7303(a)(3) and 61 Pa.Code § 103.13. | Tufts rule controls; accruals included in amount realized. |
| May investment losses of nonresidents offset foreclosure gains for PIT purposes? | Losses should offset gains under cross-class deduction rules. | Cross-class deduction barred by Regulation 121.13(a); losses sourced outside PA not deductible. | No; losses cannot offset PA-sourced foreclosure gains. |
| Does nonresident status violate equal protection, due process, or commerce principles? | Disparate treatment and source rules effectively tax nonresidents more. | Income is PA-sourced when real property is in PA; domicile rules govern intangible interests. | No constitutional violation; PA may tax PA-sourced income and restrict cross-jurisdictional deductions. |
Key Cases Cited
- Commissioner v. Tufts, 461 U.S. 300 (U.S. 1983) (nonrecourse debt discharge included in amount realized)
- Crane v. Commissioner of Internal Revenue, 331 U.S. 1 (U.S. 1947) (mortgage discharge treated as economic benefit)
- Allan v. Commissioner, 856 F.2d 1173 (8th Cir. 1988) (foreclosure/amount realized includes accrued interest)
- Shaffer v. Carter, 252 U.S. 37 (U.S. 1920) (intangible property situs and nonresident taxation limits)
- Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 (U.S. 1998) (privileges and immunities and nonresident deductions)
- Quill Corp. v. North Dakota, 504 U.S. 298 (U.S. 1992) (minimum nexus vs. substantial nexus distinction)
- Rigling v. Commonwealth, 409 A.2d 936 (Pa. Cmwlth. 1980) (retroactivity and basis adjustments in PA tax context)