IN THE COMMONWEALTH COURT OF PENNSYLVANIA

RB Alden Corp., :

Petitioner :

:

v. : No. 73 F.R. 2011

: Argued: May 12, 2016

Commonwealth of Pennsylvania, :

Respondent :

BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

HONORABLE DAN PELLEGRINI, Senior Judge

OPINION BY

SENIOR JUDGE PELLEGRINI FILED: June 15, 2016

This is a petition for review from an order of the Board of Finance and 

Revenue (Board) in which RB Alden Corporation (Taxpayer) claims that it owes 

no Pennsylvania corporate income tax on a $29.9 million capital gain profit 

resulting from the sale of part of a partnership interest. Taxpayer makes that claim 

on a number of alternative bases contending that:

 gain from a sale of the partnership interest is 

“nonbusiness income” under Section 401(3)2.(a)(1)(D) 

of the Tax Reform Code of 1971 (Code),

1

not “business 

income” under Section 401(3)2.(a)(1)(A) of the Code;

2

 

1 Act of March 4, 1971, P.L. 6, No. 2, as amended, 72 P.S. §7401(3)2.(a)(1)(D).

2

72 P.S. §7401(3)2.(a)(1)(A).
2

 the gain must be excluded from its apportionable 

tax base under the doctrines of multiformity or unrelated 

assets;

 the gross proceeds from the sale of the partnership 

interest should be sourced to New York, the state in 

which it is headquartered, for purposes of calculating the 

sales factor of its corporate net income tax apportionment 

fraction, rather than Pennsylvania, where the property 

from which the sale is derived is located;

 under the tax benefit rule, it is entitled to exclude 

from business income the gain from the sale because it 

had previously taken a deduction for which it received no 

benefit; and

 under Nextel Communications of Mid-Atlantic, Inc. 

v. Commonwealth of Pennsylvania, 129 A.3d 1 (Pa.

Cmwlth. 2015), limiting its net loss carryover deduction 

to $2 million violates the Uniformity Clause of the 

Pennsylvania Constitution, Pa. Const. art. VIII, §1.

We will address each of those issues.

I.

A.

According to the parties’ Stipulation of Facts, Taxpayer is a Delaware 

corporation. During the tax year beginning July 1, 2006, and ending June 30, 2007 

(Fiscal Year 2006), Taxpayer was wholly owned by Riverbank Properties, Inc. 

(Riverbank), and Riverbank was wholly owned by RB Asset, Inc. (RB Asset). 

Accordingly, during Fiscal Year 2006, Taxpayer was indirectly wholly owned by 

RB Asset.
3

At the beginning of Fiscal Year 2006, Taxpayer was the sole general 

partner and owned 87.36% of the limited partnership interest of Eastview 

Associates LP (Partnership). The Partnership was formed as a New Jersey general 

partnership in 1984, and in 1989, it converted into a New Jersey limited 

partnership.

The Partnership owned an apartment complex in Philadelphia known 

as Alden Park Apartments (Apartment Complex). Prior to 1995, the Partnership 

borrowed $40 million from National Westminster Bank USA (National 

Westminster). In connection with the loan, National Westminster obtained a 

mortgage securing the loan (the mortgage and loan hereinafter collectively referred 

to as the “Secured Loan”). In January 1995, National Westminster merged with 

and into National Westminster Bank NJ, which subsequently changed its name to 

NatWest Bank National Association (NatWest). In March 1995, NatWest sold the 

Secured Loan to Hampton Ponds, a subsidiary of River Bank America. In May 

1998, River Bank America completed a reorganization into RB Assets under which 

RB Assets assumed all River Bank America’s assets and liabilities, including River 

Bank America’s interest in the Secured Loan.

After the Partnership defaulted on the Secured Loan, Taxpayer 

acquired its general and limited partnership interest in the Partnership as a result of 

restructuring to give its lender control of the Partnership. As the sole general 

partner of the Partnership, Taxpayer’s only business activity was operating and 

controlling the Partnership’s operations, including those of the Apartment 

Complex.
4

Beginning in 1989 and continuing through Fiscal Year 2006, the 

Partnership incurred and reported a taxable loss from operations which was passed 

through pro-rata to Taxpayer. Taxpayer filed federal income tax returns for each 

tax year from 1989 through Fiscal Year 2006 and reported its share of the 

Partnership’s operational losses. Likewise, Taxpayer filed Pennsylvania corporate 

tax reports for each tax year from 1989 through Fiscal Year 2006 and reported 

100% of its share of the Partnership’s operational losses as business income.

Taxpayer did not file an income tax return in any state other than Pennsylvania and 

never apportioned any of its Pennsylvania taxable income or loss for any tax year. 

Taxpayer was unable to use its share of the Partnership’s losses to reduce 

Pennsylvania taxable income during the tax years prior to Fiscal Year 2006 as 

neither Taxpayer nor the Partnership generated any Pennsylvania taxable income 

during those years.

Taxpayer’s assets during Fiscal Year 2006 consisted of its general and 

limited partnership interests in the Partnership and certain intercompany 

receivables owed to it by the Partnership. That year, pursuant to an Assignment, 

Assumption and Substitution Agreement (Agreement) dated June 27, 2007, 

Taxpayer sold a 45% limited partnership interest in the Partnership to PCK Capital, 

Inc. (Buyer). In exchange for the transferred partnership interest, Buyer 

transferred $5,000 cash to Taxpayer and assumed $29.9 million of the 

Partnership’s nonrecourse liabilities attributable to the transferred partnership 

interest. Taxpayer retained a 42.36% limited partnership interest and a 1% general 

partnership interest in the Partnership and continued to operate and control the 

Partnership and the Apartment Complex as before.
5

In March 2008, Taxpayer filed its 2006 Pennsylvania corporate tax 

report and 2006 Proforma federal return.3The 2006 Proforma federal return 

reflected a federal taxable income of $24.5 million, which includes a $29.9 million 

gain on the sale of the transferred partnership interest and a $5.4 million loss on its 

share of the Partnership’s operational losses for Fiscal Year 2006. Taxpayer 

claimed the $29.9 million gain was nonbusiness income and reported an overall 

taxable loss for Pennsylvania corporate net income tax (CNIT) purposes on the 

2006 Pennsylvania corporate tax report.

4

The Department of Revenue 

(Department) issued a notice of assessment dated October 13, 2009, disallowing 

Taxpayer’s classification of the gain as nonbusiness income and imposing an 

assessed CNIT in the amount of $2,243,291 for Fiscal Year 2006, plus interest.5

B.

Taxpayer filed an appeal with the Board of Appeals challenging the 

Department’s classification of the gain as business income, asserting that the sale 

of the partnership interest was nonbusiness income and should not be sourced to 

Pennsylvania. Specifically, Taxpayer argued:

 

3

The 2006 Proforma federal return was prepared on a separate company basis.

4 Because it was unavailable, Taxpayer had the 2006 Proforma federal return prepared on 

a separate company basis. Taxpayer had filed a consolidated federal income tax return as a 

member of a consolidated group. Taxpayer informed the Commonwealth that its consolidated 

federal income tax return was destroyed and not available. In lieu of Taxpayer’s consolidated 

federal tax return copy, the affidavit of Marvin Antman, Taxpayer’s former accountant, was 

provided to the Commonwealth with his explanation of the consolidated federal tax return filing 

for Fiscal Year 2006.

5

The Department assessed interest in the amount of $286,439.00 as of October 23, 2009.
6

The Taxpayer, who is a Delaware Taxpayer, had nonbusiness income from the sale of a partnership interest 

that was not sourced to Penn [sic]. The capital gain from 

the sale of the partnership interest is not business income 

as the income was not income arising from transactions 

& activity in the regular trade or business nor is it income 

from tangible or intangible property since the 

management and disposition of the [P]roperty were not 

integral to the Taxpayer’s trade or business. The capital 

gain should not be allocated to Pennsylvania. The 

Taxpayer is not in the business of buying or selling their

[sic] partnership interest.

(Board of Appeals Petition at 2.) After a hearing, the Board of Appeals denied 

Taxpayer’s request for classifying the sale of the partnership as nonbusiness 

income, denied its request to source the sale outside of Pennsylvania and sustained 

the Department’s assessment in its entirety.

Taxpayer appealed to the Board, requesting again nonbusiness income 

treatment for the gain from the partnership interest sale and the ability to source the 

sale outside of Pennsylvania and seeking to strike the Department’s assessment.

The Board denied Taxpayer’s request, finding that Taxpayer’s interests in the 

Partnership subjected Taxpayer to CNIT because the Partnership does business in 

Pennsylvania and the partnership sales gain constituted business income:

Because such income was derived from a transaction in 

the regular course of [Taxpayer’s] business, investing in 

real estate partnerships and receiving income from them. 

Welded Tube Co.,

[6]

supra. The partnership sales gain 

 

6 Welded Tube Company of America v. Commonwealth, 515 A.2d 988 (Pa. Cmwlth.

1986).
7

constituted business income for [Taxpayer] under the 

functional test because the acquisition and disposition of 

the investment partnerships constituted an integral part of 

[Taxpayer’s] regular trade or business, investment. See 

72 P.S. §7401(3)2.(a)(1)(A). [Taxpayer] is not entitled to 

allocate the partnership income under the [Code] because 

this income is apportionable business income. See 72 

P.S. §7401(3)2.(a)(4) (allocating rents, royalties, gains or 

interest only “to the extent they constitute nonbusiness 

income”); but see 72 P.S. §7401(3)2.(a)(9)(A) 

(subjecting all business income to apportionment).

(Board’s December 15, 2010 decision at 10) (footnote added).

The Board further denied Taxpayer’s request for multiformity or 

unrelated assets income treatment, explaining that Taxpayer’s tax return, petitions 

and supporting materials do not show the unrelated nature of the income it seeks to 

remove from taxation. With regard to Taxpayer’s request for exclusion of the 

partnership sales gains from a sales fraction numerator, the Board reasoned that the 

request is denied because the gains were apportionable business income and 

“sales” included in the sales apportionment factor are all gross receipts not 

allocated under the Code other than dividends, government obligation interest and 

securities sales proceeds. The Board also found that the Partnership assets in 

which Taxpayer held a direct interest were located in Pennsylvania, and the sale of 

such assets makes Taxpayer’s sales gains Pennsylvania receipts correctly included 

in a sales numerator. Finally, the Board found there to be no evidence that the sale 

of the Partnership interest was “produced by a greater proportion of activity in 

New York based on costs of performance given the circumstances of this case,” 

thereby denying Taxpayer’s request to attribute the partnership sales proceeds to 
8

New York. (Board’s December 15, 2010 decision at 11.) This appeal by Taxpayer

followed.7

II.

A.

At the outset, we must determine whether the gain realized by 

Taxpayer from the sale of the Partnership interest is business or nonbusiness 

income.

“Pennsylvania’s corporate income tax is an excise tax on the privilege 

of earning income and, therefore, under the Commerce Clause of the United States 

Constitution, Pennsylvania may subject to taxation only that part of corporate 

income reasonably related to the privilege exercised in this Commonwealth.” 

Canteen Corporation v. Commonwealth of Pennsylvania, 818 A.2d 594, 597–98 

(Pa. Cmwlth. 2003) (en banc), aff’d, 854 A.2d 440 (Pa. 2004) (per curiam). The 

Code provides the general procedure for calculating Pennsylvania’s corporate 

income tax and separates income into two classifications: “business income” or 

“nonbusiness income.” “Business income” is defined as:

[I]ncome arising from transactions and activity in the 

regular course of the taxpayer’s trade or business and 

includes income from tangible and intangible property if 

either the acquisition, the management or the disposition 

 

7

In appeals from decisions of the Board of Finance and Revenue, our review is de novo

because we function as a trial court even though such cases are heard in our appellate 

jurisdiction. Glatfelter Pulpwood Company v. Commonwealth of Pennsylvania, 19 A.3d 572, 

576 n.3 (Pa. Cmwlth. 2011) (en banc), aff’d, 61 A.3d 993 (Pa. 2013).
9

of the property constitutes an integral part of the 

taxpayer’s regular trade or business operations. The term 

includes all income which is apportionable under the 

Constitution of the United States.

72 P.S. §7401(3)2.(a)(1)(A) (emphasis added). “Nonbusiness income” is defined 

as:

[A]ll income other than business income. The term does 

not include income which is apportionable under the 

Constitution of the United States.

72 P.S. §7401(3)2.(a)(1)(D).

There are two alternative independent tests derived from the definition 

of “business income” by which to evaluate whether income should be classified as 

business income or nonbusiness income.8Ross–Araco Corporation v. 

Commonwealth of Pennsylvania, Board of Finance and Revenue, 674 A.2d 691, 

694 (Pa. 1996). Under the transactional test, which is based on the first clause of 

the definition, a gain is “business income” if it is derived from a transaction in 

which the taxpayer regularly engages. Id. at 693. This test “measures the 

particular transaction against the frequency and regularity of similar transactions in 

 

8

The Pennsylvania Supreme Court adopted in Laurel Pipe Line v. Commonwealth of 

Pennsylvania, Board of Finance and Revenue, 642 A.2d 472, 474-75 (Pa. 1994), the 

transactional and functional tests that this Court set forth in Welded Tube Company of America v. 

Commonwealth of Pennsylvania, 515 A.2d 988, 993-94 (Pa. Cmwlth. 1986), to properly classify 

income as “business income” or “nonbusiness income.”
10

the past practices of the business.” Id. Also relevant in determining if a gain is 

“business income” is the taxpayer’s subsequent use of the income. Id.

The functional test is based on the second clause of the “business 

income” definition and sets forth that “a gain from the sale of an asset is business 

income if the corporation acquired, managed, or disposed of the asset as an integral 

part of its regular business.” Glatfelter Pulpwood Company v. Commonwealth of 

Pennsylvania, 61 A.3d 993, 1000 (Pa. 2013) (Glatfelter II). Moreover, a gain is 

“business income” if it “arises from the sale of an asset that produced business 

income while it was owned by the taxpayer.” Ross–Araco, 674 A.2d at 693.

However, for the purposes of this test, the “extraordinary nature or infrequency of 

the transaction is irrelevant.” Id.

Because the Commonwealth agrees that Taxpayer’s gain does not 

satisfy the transactional test because Taxpayer’s sale of the Partnership interest was 

a one-time event and not a transaction or activity in which Taxpayer regularly 

engages, the only issue is whether it satisfies the functional test. Taxpayer asserts 

that it does not meet the functional test because the sale of the Partnership interest 

was a liquidation of a separate and distinct aspect of its business.

Our Supreme Court in Glatfelter II addressed the issue of whether 

income gained from liquidation of a business constituted an exception to the 

income being deemed business income and determined that it did not. The 

taxpayer in that case argued, similarly to Taxpayer in this case, that the sale 

constituted a partial liquidation of a unique aspect of the taxpayer’s business and,
11

thus, was nonbusiness income. The taxpayer relied on Laurel Pipe and argued that 

the Supreme Court had “carv[ed] out an exception from business income for gains 

derived from the liquidation of a segment of a taxpayer’s business” and had 

“arrived at its holding in Laurel Pipe without finding it necessary to parse the 

statutory language of the definition of business income.” 61 A.3d at 1002. Noting 

that Laurel Pipe was decided in 1994, before the 2001 amendment to the statutory 

definition of “business income,” the Court explained:

Whether the disposition of the timberland was also an 

integral part of Appellant’s regular business operations, 

pursuant to this Court’s precedent in Laurel Pipe, is not a 

matter that we need reach because only the acquisition or

the management or the disposition of the property at 

issue need be an integral part of the taxpayer’s regular 

business operations under the plain text of the current 

statute. Accordingly, pursuant to the unambiguous 

statutory definition, Appellant’s gain from the sale of its 

Delaware timberland constitutes business income.

. . .

Contrary to Appellant’s assertion ... this Court did 

indeed parse, to the extent necessary, the statutory 

definition of business income in Laurel Pipe. As 

discussed above, the statutory definition applicable in 

Laurel Pipe was the pre–2001 version, requiring that “the 

acquisition, management, and disposition of the property 

constitute integral parts of the taxpayer’s regular trade or 

business.” ... We concluded that the property at issue in 

Laurel Pipe was not disposed of as an integral part of the 

taxpayer’s regular trade or business, and having resolved 

the matter on this basis, there was no need for us to 

address the acquisition or management of the property.

Thus, in Laurel Pipe, which was decided in 1994, our 

analysis and our holding were properly grounded in the 

statutory definition of business income that was in effect 
12

at that time, prior to the 2001 amendments. We did not, 

as Appellant suggests, “carv[e] out an exception” to the 

definition. ... Rather, we decided Laurel Pipe based 

upon the prior definition of business income in effect at 

the time, and we decide the case now before us based 

upon the revised definition currently in effect. In sum, 

Appellant’s net gain from the sale of the Delaware 

timberland constitutes business income, as that term is 

defined by the plain text of the current and only relevant 

definition.

Glatfelter II, 61 A.3d at 1004 (emphasis in original).

Based on the stipulated facts, Taxpayer acquired its interests in the 

Partnership for the purpose of gaining control over the Partnership. As the 

Partnership’s sole general partner, Taxpayer’s sole business activity was directing 

and controlling the Partnership’s operations, including the Apartment Complex 

operations through its officers and directors. Moreover, RB Assets, Taxpayer’s 

indirect parent, strategically acquired the lender’s rights to the Secured Loan in 

order for Taxpayer to operate and control on its behalf the Partnership and 

Apartment Complex. Taxpayer’s subsequent sale of a portion of its Partnership 

interest was, therefore, in line with “the management or the disposition of the 

property constitut[ing] an integral part of the taxpayer’s regular trade or business 

operations management,” and, thus, the income gained from the sale is business 

income. Glatfelter Pulpwood Company v. Commonwealth of Pennsylvania, 19 

A.3d 572, 578 (Pa. Cmwlth. 2011) (Glatfelter I) (citation omitted).
13

B.

Alternatively, Taxpayer argues that if the gain is indeed deemed 

business income, the gain must be excluded from Taxpayer’s apportionable tax 

base under the doctrines of multiformity or unrelated assets. “Apportionable” 

income is income that “is divided among states with some nexus to the business 

based on a formula.” Glatfelter I, 19 A.3d at 576. More specifically, in 

calculating the business income of a multistate corporation, Pennsylvania 

“employs a formula based on the ratio of three factors, to wit, the corporation’s 

payroll, property, and sales within Pennsylvania, to the corporation’s total payroll, 

property, and sales, respectively.” Glatfelter II, 61 A.3d at 999 (citations omitted). 

The constitutional theory of multiformity provides that a state may not tax value 

earned outside its borders unless there is “some definite link, some minimum 

connection, between a state and the person, property or transaction it seeks to tax.”

Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954).

Taxpayer contends that because it acquired its partnership interests 

not for the purpose of engaging in the Partnership’s real estate rental operations but 

instead to give its lender control of the Partnership on account of the Partnership’s

default in the loan, the gain from the sale of the partnership interest cannot be 

apportioned to Pennsylvania using the pass-through apportionment factors related 

to the real estate rental operations conducted by the Partnership.

In Commonwealth of Pennsylvania v. ACF Industries, Incorporated, 

271 A.2d 273, 276 (Pa. 1970), the Pennsylvania Supreme Court established that a 

taxpayer may exclude all of its gain when reporting its corporate net income to 
14

Pennsylvania when “the taxpayer either (1) is engaged in a separate business 

outside of Pennsylvania (the so-called ‘multiform’ concept) or (2) owns an asset or 

assets unrelated to the exercise of its franchise or the conduct of its activities in 

Pennsylvania (the so-called ‘unrelated asset’ concept).” Recognizing that the 

multiform or unrelated asset cases are “unique” and highly dependent upon factual 

considerations, the Court presented three principles to follow in deciding whether 

apportionment is allowed:

First, if a multistate business enterprise is conducted in a 

way that one, some or all of the business operations 

outside Pennsylvania are independent of and do not 

contribute to the business operations within this State, the 

factors attributable to the outside activity may be 

excluded.

Second, in applying the foregoing principle to a 

particular case, we must focus upon the relationship 

between the Pennsylvania activity and the outside one, 

not the common relationships between these and the 

central corporate structure. Only if the impact of the 

latter on the operating units or activities is so pervasive 

as to negate any claim that they function independently 

from each other do we deny exclusion in this context.

Third, without attempting to preclude exclusion in any 

given case, we reiterate our statement above that the 

manufacturing, wholesaling and retailing (or 

manufacturing and selling) activities of a single 

enterprise are not fit subjects for division and partial 

exclusion. On the other hand, a truly divisionalized 

business, conducting disparate activities with each 

division internally integrated with respect to 

manufacturing and selling, may well be in a position to 

make a valid claim for exclusion.
15

Id. at 279-80.9

Taxpayer acknowledged in the Stipulation that it acquired its interests 

in the Partnership for the purpose of gaining control over the Partnership and 

thereafter directed and controlled both the Partnership and the Apartment 

Complex, located in Pennsylvania, to operate them as an integrated whole. 

Taxpayer then made a strategic business decision to sell a portion of its interest in 

the Partnership, but retained a 42.36% limited partnership interest, continued to be 

the sole general partner and maintained its operations over the Partnership as 

before. For these reasons, we conclude that Taxpayer’s interest in the Partnership 

was integrally related to its business activities in Pennsylvania and, thus, the 

income from the sale of the Partnership interest is subject to tax in Pennsylvania as 

business income.

 

9

The Commonwealth argues that the multiformity or unrelated assets doctrines are 

antiquated and no longer apply as they were developed out of 1930-40s era Pennsylvania case 

law attempting to apply the Due Process and Commerce Clauses of the United States 

Constitution to the Pennsylvania foreign franchise tax. The Commonwealth maintains that ACF

Industries’ holding as it relates to the multiformity or unrelated assets doctrines is inapplicable in 

this case because ACF Industries was decided before the Code was enacted and, instead, it 

interpreted a 1965 amendment to a 1935 statute, which has long been repealed. The 

Commonwealth argues that although some of the ACF Industries’ era analysis may be similar, it 

does not control the interpretation of the current Pennsylvania definition of business and 

nonbusiness income adopted by our legislature. Although the Commonwealth is correct in that 

ACF Industries analyzed a statute that is not relevant to this case and that it was decided before 

the Code was even enacted, this Court, in Glatfelter I and the Supreme Court in Glatfelter II,

used ACF Industries in determining whether the multiformity or unrelated assets doctrines apply,

even after the definition of “business income” was amended in 2001.
16

C.

Taxpayer next contends that if the gain is apportionable business 

income, the gross proceeds from the sale of the partnership interest should be 

sourced to New York, the state in which Taxpayer is headquartered, for purposes 

of calculating the sales factor10 of Taxpayer’s corporate net income tax 

apportionment fraction. Taxpayer argues that the sale of its partnership interest is 

a sale of intangible personal property for federal income tax purposes and not a 

sale of its proportionate share of the Partnership’s underlying assets or a sale by the 

Partnership of its assets. It argues that because the calculation of its corporate net 

income tax base starts with its federal taxable income, and the gain realized on the 

sale of the Partnership interest is treated as gain from the sale of intangible 

property for federal income tax purposes, the gross proceeds must likewise be 

treated as realized from the sale of intangible property for corporate net income tax 

purposes and sourced to New York pursuant to Section 401(3)2.(a)(17) of the Code 

because all of the activities associated with the acquisition, holding and disposition 

of the Partnership interest occurred at the headquarters in New York. We disagree.

Section 401(3)2.(a)(17) of the Code provides that:

Sales, other than sales under paragraphs (16) and (16.1) 

[(relating to sales of tangible personal property and real 

property)], are in this State if:

 

10 Section 401(3)2.(a)(15) of the Code defines “sales factor” as “a fraction, the numerator 

of which is the total sales of the taxpayer in this State during the tax period, and the denominator 

of which is the total sales of the taxpayer everywhere during the tax period.” 72 P.S. 

§7401(3)2.(a)(15).
17

(A) The income-producing activity is performed in 

this State; or

(B) The income-producing activity is performed 

both in and outside this State and a greater proportion of 

the income-producing activity is performed in this State 

than in any other state, based on costs of performance.

72 P.S. §7401(3)2.(a)(17).

Taxpayer’s income-producing activity, the operation and management 

of the Apartment Complex and the Partnership, are performed in Pennsylvania.

The stipulated facts indicate that the Apartment Complex is located in Philadelphia 

and that Taxpayer’s duty is to operate the Apartment Complex. In selling a portion 

of its Partnership interest, Taxpayer gained income from transferring a portion of 

its interest in the Partnership and Apartment Complex, located in Pennsylvania. 

Moreover, any costs that arise in producing the income, that is, operating the 

Partnership and the Apartment Complex, are generated in Pennsylvania. Nothing 

in the stipulated facts suggests otherwise or establishes that Taxpayer is involved 

in income-producing activities and their related costs outside of Pennsylvania.

D.

Even if the money derived from a sale of the partnership interest is 

business income and all of that income is apportionable to Pennsylvania, Taxpayer 

contends that the tax benefit rule described in Wirth v. Commonwealth of 

Pennsylvania, 95 A.3d 822, 845-46 (Pa. 2014), involving the Pennsylvania 

personal income tax (PIT), should be applied to this case to allow it to exclude 

from business income the gain from the sale.
18

1.

The “tax benefit rule” is not constitutionally mandated, but instead is a 

product of federal common law that has its genesis in the United States Supreme 

Court cases of Dobson v. Commissioner, 320 U.S. 489 (1943) and Hillsboro 

National Bank v. Commissioner, 460 U.S. 370 (1983). It is now codified in

Section 111 of the Internal Revenue Code (IRC).

11 As we stated in Marshall v. 

Commonwealth, 41 A.3d 67, 93 (Pa. Cmwlth. 2012):

 

11 The Internal Revenue Code codifies the application of the tax benefit rule, providing in 

pertinent part:

(a) Deductions.--Gross income does not include income 

attributable to the recovery during the taxable year of any amount 

deducted in any prior taxable year to the extent such amount did 

not reduce the amount of tax imposed by this chapter.

(b) Credits.--

(1) In general.--If--

(A) a credit was allowable with respect to any 

amount for any prior taxable year, and

(B) during the taxable year there is a downward 

price adjustment or similar adjustment,

the tax imposed by this chapter for the taxable year shall be 

increased by the amount of the credit attributable to the 

adjustment.

(2) Exception where credit did not reduce tax.--Paragraph 

(1) shall not apply to the extent that the credit allowable for the 

recovered amount did not reduce the amount of tax imposed by 

this chapter.

26 U.S.C. §111.
19

[T]he tax benefit rule is not a generic doctrine prescribed 

by the courts to remedy every apparent or perceived 

inequity or unfairness in an income tax system, state or 

federal. To the contrary, it was created to address a 

specific and particular inequity in the tax system caused 

by the annual accounting system for taxation. As the 

United States Supreme Court [in Hillsboro, 460 U.S. at 

389] recognized:

The limited nature of the rule and its effect on the 

annual accounting principle bears repetition: only

if the occurrence of the event in the earlier year 

would have resulted in the disallowance of the 

deduction can the Commissioner require a 

compensating recognition of income when the 

event occurs in the later year.

(Emphasis in original.)

In explaining the exclusionary aspect of the tax benefit rule, our 

Supreme Court in Wirth stated that the tax benefit rule:

[A]pplies when a deduction of some sort for a loss is 

taken by a taxpayer in one year, only to have the amount 

previously deducted recovered in a following tax year.

Normally, the taxpayer would be responsible for 

including the recovered income on his personal income 

tax return for the year in which recovery occurred. The 

tax benefit rule states, however, that the recovery of the 

previously deducted loss is not includible to the extent 

that the earlier deduction did not reduce the amount of 

the tax owed in the year the initial deduction was taken. 

Put differently, the “rule permits exclusion of the 

recovered item from income [in a subsequent tax year] so 

long as its initial use as a deduction did not provide a tax 

saving.” Commentators upon the rule have stated that it 

is “both a rule of inclusion and exclusion: recovery of an 

item previously deducted must be included in income; 
20

that portion of the recovery not resulting in a prior tax 

benefit is excluded.”

Wirth, 95 A.3d at 845-46 (citations omitted).

2.

Wirth was the first case that addressed the tax benefit rule application 

to Pennsylvania taxes and it found that the tax benefit rule was not applicable to a 

tax imposed under the PIT. That case did not discuss whether we should adopt this 

federal common law rule into Pennsylvania tax law, but stated “the Department has 

seemingly incorporated the rule into Pennsylvania tax law through Table 16-2.” 

Wirth, 95 A.3d at 848 (emphasis added). Rather than address that claim, both this 

Court and our Supreme Court just conducted an analysis to see if it had any tax 

consequence. Similarly, this is the first time we have been asked to consider 

whether the tax benefit rule should be adopted for the purpose of how the CNIT is 

imposed.

The CNIT begins with “federal taxable income” as determined by the 

provisions of the IRC. 72 P.S. §7401(3)2.(a)(1)(A). The Department of Revenue’s

regulations (Regulations) further define federal taxable income, in pertinent part,

as “income before net operating loss deduction and special deductions ... or 

adjusted under 401(3)1 of the [Code] (72 P. S. §7401(3)1.).” 61 Pa. Code §153.11. 

We have held that, unless the statutory scheme indicates otherwise, the reference to 

“federal taxable income” as “incorporat[ing] ... those provisions of the IRC which 

go toward the computation of taxable income for federal purposes.” 
21

Commonwealth v. Rohm and Haas Company, 368 A.2d 909, 912 (Pa. Cmwlth.

1977).

In their Stipulation of Facts, the parties state that Taxpayer reported a 

$29.9 million capital gain on its 2006 Proforma federal return. The gain was 

calculated as the amount realized from the sale of the Partnership interest in the 

amount of $29.9 million minus Taxpayer’s basis in the Partnership interest, zero.12

See 26 U.S.C. §741; 26 C.F.R. §1.741-1(a). The amount realized includes 

Taxpayer’s share of the Partnership’s nonrecourse debt attributable to the sale of 

the Partnership interest and assumed by the Buyer. Taxpayer did not pay any 

federal income tax on the taxable gain from the sale for the 45% limited 

Partnership interest because it had federal net operating loss carryovers to offset 

the gain. Federal net loss carryovers can be used for 20 years after they are 

incurred and have no limit on the amount that can be deducted. While 

Pennsylvania also has a 20 year net loss carryover, only $2 million of that 

carryover can be deducted from Pennsylvania income in the 2006 tax year.

3.

Taxpayer claims that we should adopt the tax benefit rule to allow it 

to use those carryovers in excess of the $2 million cap because it would restore its 

basis in the Partnership interest in “an amount equal to the Partnership’s 

 

12 Taxpayer explains that the gain on the sale of its 45% limited partnership interest was 

based on dividing its 45% limited partnership interest by its 87.36% total limited partnership 

interest.
22

operational losses passed through to [Taxpayer] that could not be utilized by 

[Taxpayer] for [corporate net income] tax purposes.” (Petitioner’s Brief at 14-15.)

In analyzing whether Taxpayer should be allowed to have the benefit 

of the exclusionary aspect of the tax benefit rule, let us first start with Wirth and 

assume that the tax benefit rule has been adopted in Pennsylvania. In Marshall, 41 

A.3d at 94, a companion case to Wirth, quoting from John Hancock Financial 

Services v. United States, 378 F.3d 1302, 1305 (Fed. Cir. 2004), we held that at a 

minimum, taxpayers seeking to avail themselves of the exclusionary aspect of the 

tax benefit rule must establish three requirements: “First, there must be a loss that 

was deducted but did not result in a tax benefit. Second, there must be a later 

recovery on the loss. Third, there must be a nexus between the loss and the 

recovery.” (Emphasis in Marshall). Moreover, in Marshall, we stated that the tax 

benefit rule cannot be used in a way that abrogates provisions of the IRC and/or the 

Regulations, or where application of the rule would result in a deduction expressly 

prohibited by the IRC.

Under the first prong of that test, Taxpayer has the burden to establish 

that it has attempted to take the deduction from which it received a tax benefit in a 

prior year. As our Supreme Court stated in Wirth:

Dobson and its progeny, as well as Section 111 [of the 

IRC], all require that the attempted exclusion of realized 

gain be related to a deduction without tax consequence 

from a prior year. [Taxpayers] have not pointed to any 

jurisprudence, regulation, or Department policy that 

states otherwise. Through all of their protestations 

regarding the mandatory application of the exclusionary 

arm of the tax benefit rule, [taxpayers] never address this 
23

salient point, nor, more importantly, when they attempted 

to take the required prior deduction.

95 A.3d at 848. Nothing in the Stipulation states that Taxpayer attempted to take a 

tax deduction in a prior year without tax consequences; nor have any tax returns 

been filed for the prior years. For this reason alone, because Taxpayer has failed to 

meet its burden, the tax benefit rule cannot be used in this case.

As to the second and third prong of the test – requiring that there must 

be a later recovery on the loss as well as a nexus between the loss and the recovery 

– these prongs are intertwined. We agree with the Commonwealth that Taxpayer 

does not meet these two prongs because the deductions it seeks to recoup are 

operating expenses that cannot be deducted under the tax benefit rule because its

losses are in no way related to the capital gain from the sale of the Partnership

interest.13

 

13 See In re Appeal of H.V. Management Corporation, Decision of July 29, 1981, Cal. Bd. 

of Equalization (1981), available at: http://www.boe.ca.gov/legal/pdf/81-sbe-081.pdf (last visited 

May 25, 2016).

H.V. Management Corporation is substantially similar to this case. The taxpayer in that 

case was a corporation that was a general partner in a partnership that developed real estate in 

California. Like here, the taxpayer did not have other activities or investments other than its 

interest in the partnership. The taxpayer reported losses from its share of the partnership losses 

and reported the partnership losses on its federal and state income tax returns. After selling its 

partnership interest at a gain, the taxpayer attempted to reduce the gain by the amount of its 

aggregate prior years, asserting that the tax benefit rule excluded the gain. Holding that the tax 

benefit rule was not applicable, the California Equalization Board reasoned that the taxpayer’s 

operational losses were separate transactions from the taxpayer’s gain on the sale of the 

partnership interest.
24

4.

The Commonwealth also contends that the application of the tax 

benefit rule does not apply to this case because to do so would be in conflict with

the United States Department of Treasury Regulations (Treasury Regulations)

Section 1.111-1(a) that disallows depreciation as an expense under the tax benefit 

rule. The regulation provides, in pertinent part:

The rule of exclusion so prescribed by statute applies 

equally with respect to all other losses, expenditures and 

accruals made the basis of deductions from gross income 

for prior taxable years ... but not including deductions 

with respect to depreciation, depletion, amortization, or 

amortizable bond premiums.

26 CFR §1.111-1(a) (emphasis added).

In response, Taxpayer first argues that the Commonwealth’s

assumption that the losses it seeks to exclude were for depreciation is erroneous 

because the losses were created by the deduction of a number of expenses incurred 

in the operation of a rental property, including advertising, insurance, interest, 

wages and salaries and real estate taxes. Depreciation accounted for only a portion 

of the deductions that created the losses at issue. Unfortunately, Taxpayer does not 

give us a breakdown of those expenses and neither the Stipulation nor the tax

returns set forth how the losses were incurred. We do note, though, that the gain 

on the federal tax return was characterized as a capital gain.

More substantively, while acknowledging that it does permit 

depreciation from being excluded from income under the tax benefit rule, 
25

Taxpayer contends that Section 1.111-1(a) of the Treasury Regulations goes 

beyond the language of Section 111 of the IRC as a result of a 1984 amendment to

IRC Section 111(a) that removed any reference to debts, prior taxes and 

delinquency as the only type of items that were subject to the tax benefit rule. IRC 

Section 111(a) was broadened to address any recovery:

Gross income does not include amounts attributable to

the recovery during the taxable year of any amount

deducted in any prior taxable year to the extent such

amount did not reduce the amount of tax imposed by this

chapter.

26 U.S.C. §111(a). As a result, Taxpayer claims that given the amendment, there 

are now no limitations on the type of deductions that can be excluded from income.

However, as far as we can discern, this regulation has not been 

challenged and, after the amendment in American Mutual Life Company v. United 

States, 46 Fed. Cl. 445 (2000), it was used by analogy not to allow a life insurance 

company to exclude from income certain decreases in life insurance reserves 

otherwise required to be included as income under the IRC.

Given that the IRC grants authority to the United States Department 

of Treasury to “prescribe all needful rules and regulations for the enforcement of 

this title,” 26 U.S.C. §7805(a), and under Chevron U.S.A., Inc. v. Natural 

Resources Defense Council, Inc., 467 U.S. 837 (1984), courts are required to 

afford an agency discretion to interpret a provision of the agency’s organic or 

enabling statute unless it is inconsistent with the provisions of that statute, we 
26

decline to find the Regulation invalid. If we had found that the tax benefit rule was 

applicable, we would have ordered a hearing to take evidence on what portion of 

the deduction was attributable to depreciation; but that is not necessary for the 

reason set forth, as well as the fact that it is in conflict with the Code provisions 

regarding the CNIT.

In this case, only tax year 2006 is at issue and Section 

401(3)4.(c)(1)(A)(I) of the Code, 72 P.S. §7401(3)4.(c)(1)(A) (I), provides that for 

taxable years beginning before January 1, 2007, the net loss carryover deduction is 

limited to $2 million. Taxpayer’s contention that the tax benefit rule should apply 

because it would otherwise forego the deductions above the $2 million limitation 

in effect would remove all caps on the net loss carryover, a direct contravention of 

the above-cited provisions of the Code. In the context of the CNIT, we decline to 

adopt the tax benefit rule.

E.

Relying on Nextel Communications of Mid-Atlantic, Inc. v. 

Commonwealth of Pennsylvania, 129 A.3d 1 (Pa. Cmwlth. 2015), Taxpayer argues 

that if the gain is apportionable business income, it is entitled to claim a net loss 

carryover deduction in an amount equal to 100% of its income apportioned to 

Pennsylvania.

14 It contends that limiting its net loss carryover deduction to the $2 

 

14 The net loss carryover provision of the Code, 72 P.S. §7401(3)4.(c)(1)(A)(II), enables a 

taxpayer to reduce its positive taxable income in a particular year by deducting prior year net 

losses (i.e., where the taxpayer had negative taxable income), thus reducing the amount of 

corporate net income tax due and payable in that tax year. Net losses from prior tax years may 

be carried over to subsequent tax years and applied to reduce taxable income according to a 

schedule set forth in Section 401(3)4.(c)(2) of the Code, 72 P.S. §7401(3)4.(c)(2). The Code 

(Footnote continued on next page...)
27

million as allowed by the Department violates the Uniformity Clause of the 

Pennsylvania Constitution, Pa. Const. art. VIII, §1, because it favors smaller 

taxpayers in positive net loss carryover positions over similarly-situated larger 

taxpayers, and imposes disparate tax burdens on taxpayers based solely on the 

amount of income earned.

15

The Commonwealth acknowledges that this Court held in Nextel that 

the Pennsylvania net loss carryover deduction violates the Uniformity Clause. 

However it asserts that the decision was limited in application to the 

Commonwealth, the taxpayer in Nextel and the 2007 tax year.16 The 

 

(continued...)

limits the number of years a taxpayer may carry over its net losses as well as the amount of the 

net loss carryover deduction a taxpayer may take in any given tax year. For Fiscal Year 2006, 

for example, the amount of the net loss carryover deduction was $2 million. 72 P.S. 

§7401(3)4.(c)(1)(A)(I).

15 In challenging the constitutionality of tax legislation, a taxpayer bears a heavy burden. 

Leonard v. Thornburgh, 489 A.2d 1349, 1351 (Pa. 1985). The taxpayer must establish: (1) that 

the provision results in some form of classification, and (2) that the classification is 

“unreasonable and not rationally related to any legitimate state purpose.” Clifton v. Allegheny 

County, 969 A.2d 1197, 1211 (Pa. 2009). However, “tax legislation is presumed to be 

constitutionally valid and will not be declared unconstitutional unless it ‘clearly, palpably and 

plainly violates the constitution.’” Nextel, 129 A.3d at 8 (quoting Free Speech, LLC v. City of 

Philadelphia, 884 A.2d 966, 971 (Pa. Cmwlth. 2005)). That is, “[a]ny doubts regarding the 

constitutionality of tax legislation should be resolved in favor of upholding its constitutionality.” 

Id.

16 In making this argument, the Commonwealth noted that we clarified in Nextel:

[O]ur analysis and remedy is appropriately confined to the 

Commonwealth, Nextel, and the 2007 Tax Year. To the extent our 

decision in this as-applied challenge calls into question the validity 

of the [net loss carryover] deduction provision in any other or even 

(Footnote continued on next page...)
28

Commonwealth further contends that unlike the taxpayer in Nextel, the Taxpayer 

here did not establish that the net operating loss deduction was unconstitutional as 

applied to it.

Indeed, we held in Nextel that based on Section 401(3)4.(c)(1)(A)(II)

of the Code, the net loss carryover deduction provision that allows a net loss 

deduction that is the greater of the flat percentage of net losses or of a flat capped 

amount violates the Uniformity Clause. We also, as the Commonwealth states, 

limited the aforementioned holding to the parties in Nextel and the 2007 tax year. 

However, that does not preclude us from performing the same analysis as we did in 

Nextel in determining whether the net loss carryover deduction, insofar as it applies 

to Taxpayer, also violates the Uniformity Clause.

The Uniformity Clause states: “All taxes shall be uniform, upon the 

same class of subjects, within the territorial limits of the authority levying the 

tax....” Pa. Const. art. VIII, §1. Additionally:

[a]lthough the Uniformity Clause does not require 

absolute equality and perfect uniformity in taxation, the 

legislature cannot treat similarly-situated taxpayers 

differently. Where the validity of a tax classification is 

challenged, “the test is whether the classification is based 

upon some legitimate distinction between the classes that 

 

(continued...)

every other context, the General Assembly should be guided 

accordingly.

(Respondent’s Brief at 58) (quoting Nextel, 129 A.3d at 13) (emphasis in brief).
29

provides a non-arbitrary and ‘reasonable and just’ basis 

for the difference in treatment.” In other words, “[w]hen 

there exists no legitimate distinction between the classes, 

and, thus, the tax scheme imposes substantially unequal 

tax burdens upon persons otherwise similarly situated, 

the tax is unconstitutional.”

Nextel, 129 A.3d at 8 (citations omitted).

For Fiscal Year 2006, Section 401(3)4.(c)(1)(A)(I) of the Code 

limited the amount of the net loss carryover deduction to the lesser of $2 million or 

the actual amount of the net loss carryovers available for carryover to the tax year. 

Based on the parties’ stipulated facts, in its 2006 Pennsylvania report, Taxpayer 

reported $43,706,696 of accumulated net loss carryovers. The losses were 

generated by the unused operational losses passed through to it from the 

Partnership in the tax years prior to Fiscal Year 2006. Of the $43,706,696

accumulated net loss carryovers, pursuant to Section 401(3)4.(c)(2), $38,969,295 

were available for carryover to Fiscal Year 2006. However, per Section 

401(3)4.(c)(1)(A)(I) of the Code, Taxpayer was limited to a $2 million deduction.

The stipulated facts show that the net loss carryover provision creates 

classes of taxpayers based on their taxable income. For Fiscal Year 2006, the net 

loss carryover provision can and likely did allow some taxpayers to reduce their 

taxable income to $0 and not have to pay any CNIT. However, that provision can 

also prevent other taxpayers, as in this case, from reducing their taxable income to 

$0 and cause these taxpayers to pay CNIT. For Fiscal Year 2006, where both 

classes of taxpayers entered the 2006 tax year in a positive net operating loss 

carryover position, the only distinguishing factor between the two classes of 
30

taxpayers is the amount of taxable income that year. Those with $2 million or less 

in taxable income for Fiscal Year 2006 could offset up to 100% of the taxable 

income as the statute allows a $2 million deduction. However, taxpayers with 

more than $2 million in income for Fiscal Year 2006 could only offset $2 million 

and pay CNIT on the remaining income.

In holding the cap on the net loss carryover unconstitutional, we 

reasoned:

To the extent the General Assembly exercises its power 

to tax property, it cannot set a valuation threshold that, in 

effect, exempts some property owners from the tax 

entirely.... Here, the General Assembly has elected to 

tax property—i.e., corporate net income. It has also 

allowed taxpayers to deduct from their taxable income 

carryover net losses from prior years. By capping that 

deduction at the greater of $3 million or 12.5% of taxable 

income, however, the General Assembly has favored 

taxpayers whose property (i.e., taxable income) is valued 

at $3 million or less. To the extent these taxpayers are in 

a positive net loss carryover position, they pay no 

corporate net income tax—i.e., they have no tax burden. 

A similarly-situated taxpayer with more than $3 million 

in taxable income, however, cannot avoid paying tax 

under the [net loss carryover] deduction provision. The 

distinction is based solely on asset value, which is, under 

Cope’s Estate, “unjust, arbitrary, and illegal.” Moreover, 

the fact that the [net loss carryover] deduction provision 

enabled 98.8% of taxpayers in a positive net loss 

carryover position to avoid paying any tax in 2007, 

leaving 1.2% of similarly-situated taxpayers to pay some 

tax, “illustrates the injustice and inequality that must 

result from such special legislation.”
31

Nextel, 129 A.3d at 10-11 (citations and footnote omitted). A similar reasoning 

applies to this case, with the exception being that the cap is $2 million instead of 

three.

Based on the foregoing, Taxpayer requests that we remedy Section 

401(3)4.(c)(1)(A)(I)’s uniformity violation in the same way as we did in Nextel by 

eliminating the cap on the net loss carryover. Accordingly, because the net loss 

carryover provision contained in Section 401(3)4.(c)(1)(A)(I) of the Code is

unconstitutional, we reverse the Board’s decision on that basis and calculate the tax 

without a cap on the net loss carryover.

______________________________

DAN PELLEGRINI, Senior Judge
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

RB Alden Corp., :

Petitioner :

:

v. : No. 73 F.R. 2011

:

Commonwealth of Pennsylvania, :

Respondent :

O R D E R

AND NOW, this 15th day of June, 2016, it is hereby Ordered that the 

order of the Board of Finance and Revenue dated December 17, 2010, at No. 

1000719 is reversed, and the Department of Revenue is directed to calculate RB 

Alden Corp.’s corporate net income tax without capping the amount that it can take 

on its net loss carryover.

______________________________

DAN PELLEGRINI, Senior Judge