Opinion
No. 932 F.R. 2008
01-03-2012
Thomas Shaker, Petitioner v. Commonwealth of Pennsylvania, Respondent
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE DAN PELLEGRINI, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE JOHNNY J. BUTLER, Judge
This case was decided before Judge Butler's term ended on January 2, 2012.
OPINION NOT REPORTED
MEMORANDUM OPINION BY JUDGE BROBSON
BACKGROUND
The background is drawn from the parties' Joint Stipulation of Facts (Stipulation) and accompanying exhibits, which we adopt as our findings of fact in this de novo tax appeal.
Petitioner Thomas Shaker (Shaker) challenges a Board of Finance and Revenue (Board) Order, which confirmed a decision by the Department of Revenue (Revenue) assessing Pennsylvania personal income tax (PIT) on Shaker, a nonresident, for "income" from the foreclosure of a commercial property in the City of Pittsburgh (Property) in 2005. 600 Grant Street Associates Limited Partnership (Partnership), organized under Connecticut law, purchased the Property for $360 million. Of this $360 million purchase price, the Partnership financed $308 million with a Purchase Money Mortgage Note (PMM Note) secured only by the Property. The PMM Note was nonrecourse, meaning that the Partnership and the lender agreed that the lender's only recourse for nonpayment of the obligations under the PMM Note was to pursue foreclosure of the Property. As the name of the Partnership suggests, the Partnership's primary purpose was the ownership and management of the Property.
Section 302 of the Tax Reform Code of 1971 (Code), Act of March 4, 1971, P.L. 6, added by the Act of August 4, 1991, P.L. 97, as amended, 72 P.S. § 7302.
At all times relevant to this matter, Shaker was a resident of the State of New York.
Interestingly, the parties' Stipulation uses the word "approximately" when referring to the acquisition price of the Property and other relevant values. We will proceed, as the parties do in their briefs, as if the "approximate" is actual.
Interest on the PMM Note accrued on a monthly basis at a rate of 14.55%. If, however, the monthly accrued interest exceeded the net operating income of the Partnership, the Partnership was not required to pay the excess (i.e., the amount of monthly accrued interest less monthly net operating income). Instead, the accrued but unpaid excess would be deferred and, thereafter, compounded on an annual basis subject to the same interest rate as the principal amount of the PMM Note. The original maturity date of the PMM Note was November 1, 2001. In 1998, the lender and the Partnership amended the PMM Note to extend the maturity date to January 2, 2005.
Shaker purchased a limited partnership interest of approximately 0.037820% (one quarter unit) in the Partnership on or about December 21, 1984, for $37,250—$398 in cash and a promissory note of $36,852. Shaker paid the promissory note in full on or about March 14, 1988 and received a return of capital from the Partnership in September 1986 in the amount of $654. Shaker was a passive investor in the Partnership. He never participated in the management of the Partnership or the Property.
Over the years, the Partnership's net income from operations did not keep pace with projections. The Partnership actually incurred losses from operations for financial accounting, federal income tax, and PIT purposes every year of its existence. For PIT purposes, the Partnership allocated its annual losses from operations to each partner, including Shaker.
Because of the Partnership's dismal operations, the Partnership paid less monthly interest on the PMM Note than it had projected. Under the terms of the PMM Note, this led to a greater amount of accrued but unpaid interest over the years. According to the Offering Memorandum, the Partnership projected accrued but unpaid interest on the PMM Note at maturity (November 1, 2001, later extended to January 2, 2005) to be approximately $300 million. It also projected that upon sale of the Property at maturity, there would be enough proceeds to pay off the principal and accrued interest on the PMM Note, with additional funds available to distribute to the partners as a return on their investment. (Stip. ¶ 32.) At the date of foreclosure, the Partnership had an accrued but unpaid interest obligation of approximately $2.32 billion. (Id. ¶ 39.) The Partnership had used approximately $121,600,000 of this amount to offset its income from operations that would otherwise have been subject to PIT. Neither the Partnership nor Shaker derived any PIT benefit from the remainder. (Id. ¶ 38.)
The lender foreclosed on the Property on June 30, 2005. By that time, what began as a $308 million Partnership liability on the PMM Note had grown into a liability of more than $2.6 billion, of which only $308 million represented principal. Neither the Partnership nor its individual partners received any cash or other property as a result of the foreclosure. That same year, the Partnership terminated operations and liquidated. Shaker did not recover his capital investment (original investment less return of capital) in the Partnership at foreclosure or liquidation. Indeed, Shaker did not receive any cash or other property upon liquidation of the Partnership.
According to the parties' stipulation, the "approximate" number is $2,628,497,551.
Revenue assessed Shaker PIT for calendar year 2005 as a result of the foreclosure on the Property (Assessment). Shaker filed an appeal with Revenue's Board of Appeals (BOA) on July 24, 2008. On September 12, 2008, the BOA denied Shaker's appeal. Shaker appealed BOA's determination to the Board, which denied his request for relief from the BOA's determination on December 19, 2008. This appeal followed.
Our standard of review in this matter is covered by Rule 1571 of the Pennsylvania Rules of Appellate Procedure. See Pa. R.A.P. 1571. "Appeals taken from the Board of Finance and Revenue are de novo in nature, with no record being certified by the board." Tool Sales & Serv. Co. v. Bd. of Fin. & Revenue, 536 Pa. 10, 16, 637 A.2d 607, 610 (1993), cert denied sub nom. Tom Mistick & Sons, Inc. v. Pennsylvania, 513 U.S. 822 (1994). "Although the Court hears these cases under its appellate jurisdiction, the Court functions essentially as a trial court." Scott Elec. Co. v. Commonwealth, 692 A.2d 289, 291 (Pa. Cmwlth. 1997), exceptions dismissed, 704 A.2d 205 (Pa. Cmwlth. 1998).
Shaker raises several issues for our consideration, which we will restate for purposes of our analysis. First, he argues that because neither the Partnership nor the partners received any cash or other property upon foreclosure of the Property, no PIT is owed as a result of the foreclosure. Second, he argues that imposition of an income tax on a taxpayer, like Shaker, who actually derived no income from his investment is prohibited by our prior decision in Commonwealth v. Rigling, 409 A.2d 936 (Pa. Cmwlth. 1980), and the Court's decision in Commonwealth v. Columbia Steel & Shafting Co., 83 Pa. D. & C. 326 (Dauphin 1951), exceptions dismissed, 62 Dauph. 296, (Dauphin 1952). In his third issue, Shaker argues that application of the PIT to him in this instance is unconstitutional, because it treats him differently from the partners who reside in Pennsylvania. Fourth, Shaker claims that Revenue failed to apply the tax benefit rule—both generally and as set forth in the Pennsylvania Personal Income Tax Guide (PIT Guide), which Revenue publishes on its website—in calculating the amount of PIT Shaker owes. Finally, Shaker argues that he is not subject to the PIT because he lacks sufficient minimum contacts with Pennsylvania.
Out of approximately 735 limited partners in the Partnership, 25 were Pennsylvania residents. --------
ANALYSIS
This Court adequately addressed all of the issues in this appeal in our opinion in Marshall v. Commonwealth, No. 933 F.R. 2008, ___ A.3d ___ (Pa. Cmwlth. filed January 3, 2012). We incorporate that opinion by reference and reach the same conclusions in this case.
CONCLUSION
For the reasons set forth above and in this Court's opinion in Marshall, we affirm in part the Board's determination in this case. Revenue appropriately applied Pennsylvania law in assessing Shaker PIT for calendar year 2005 for his proportionate share of the Partnership's taxable gain as a result of the foreclosure of the Property. The amount assessed, however, is either in error or, based on the record before us, cannot be verified. This is due to the lack of evidence available to the Court to determine the adjusted basis of the Property at the time of foreclosure. We thus vacate the Board's decision only as to the amount of PIT due and remand for a recalculation consistent with this opinion.
/s/_________
P. KEVIN BROBSON, Judge
ORDER
AND NOW, this 3rd day of January, 2012, the order of the Board of Finance and Revenue in the above-captioned matter, dated December 19, 2008, is AFFIRMED IN PART. The amount of tax assessed is VACATED and the matter is remanded to the Board of Finance and Revenue for a recalculation of the amount of tax due in conformity with the Court's opinion.
Unless exceptions are filed within 30 days pursuant to Pa. R.A.P. 1571(i), this order shall become final.
/s/_________
P. KEVIN BROBSON, Judge BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE DAN PELLEGRINI, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE JOHNNY J. BUTLER, Judge OPINION NOT REPORTED DISSENTING OPINION BY JUDGE McCULLOUGH
I respectfully dissent for the reasons more fully set forth in my dissenting opinion in Marshall v. Commonwealth, ___ A.3d ___ (Pa. Cmwlth., No. 933 F.R. 2008, filed January 3, 2012). I incorporate that opinion by reference and reach the same conclusions in this case.
/s/_________
PATRICIA A. McCULLOUGH, Judge Judge Simpson joins in this dissenting opinion.