IN THE COMMONWEALTH COURT OF PENNSYLVANIA

John K. Houssels, Jr., :

Petitioner :

:

v. : No. 867 F.R. 2015

: Argued: June 6, 2018

Commonwealth of Pennsylvania, :

Respondent :

:

Commonwealth of Pennsylvania, :

Petitioner :

:

v. : No. 49 F.R. 2016

: Argued: June 6, 2018

John K. Houssels, Jr., :

Respondent :

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge

HONORABLE RENÉE COHN JUBELIRER, Judge

HONORABLE P. KEVIN BROBSON, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

HONORABLE ANNE E. COVEY, Judge

HONORABLE MICHAEL H. WOJCIK, Judge

HONORABLE ELLEN CEISLER, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION

BY JUDGE BROBSON FILED: November 2, 2018

This personal income tax (PIT) matter returns to us following remand 

to the Board of Finance and Revenue (Board) for recalculation of the amount of 

Pennsylvania PIT owed by Petitioner John K. Houssels, Jr. (Taxpayer or Houssels). 

See Houssels v. Commonwealth (Pa. Cmwlth., No. 757 F.R. 2008, filed Jan. 3, 2012) 
2

(en banc) (Houssels I), exceptions overruled, (Pa. Cmwlth. No. 757 F.R. 2008, filed 

Aug. 16, 2012) (en banc) (Houssels II), aff’d sub nom. Wirth v. Commonwealth, 

95 A.3d 822 (Pa. 2014) (Wirth), cert. denied sub nom. Houssels v. Pennsylvania, 

135 S. Ct. 1405 (2015). On remand, the Board reassessed Taxpayer’s tax liability 

at $103,397, “plus appropriate penalties and interest, less any payments and credits 

on his account.”1 Both Taxpayer and the Pennsylvania Department of Revenue 

(Department or Revenue) challenge aspects of the Board’s reassessment on remand. 

We affirm.

I. BACKGROUND

A. Houssels I, Houssels II, and Wirth

Taxpayer, a resident of the State of Nevada, invested as a limited 

partner in 600 Grant Street Associates Limited Partnership (Partnership), a 

Connecticut limited partnership, which owned a building in the City of Pittsburgh 

(Property) that went into foreclosure in 2005. In 2008, the Department assessed 

Taxpayer for his pass-through share of the Partnership’s income2realized from the 

 

1 The Board issued two orders on remand, an original order dated September 16, 2015, and 

a corrected order dated November 12, 2015. Neither party explains the occasion or necessity for 

the corrected order. For purposes of our disposition, then, we will treat both as a single order.

2 With respect to taxability of partners, Section 306 of the Tax Reform Code of 1971 

(Code), Act of March 4, 1971, P.L. 6, as amended, added by the Act of August 31, 1971, P.L. 362, 

72 P.S. § 7306, provides, in relevant part:

[A] partnership as an entity shall not be subject to the tax imposed by this article, 

but the income or gain of a member of the partnership in respect to said partnership 

shall be subject to the tax and tax shall be imposed on his share, whether or not 

distributed, of the income or gain received by the partnership for its taxable year 

ending within or with the member’s taxable year.
3

foreclosure of the Property. Section 303 of the Code3sets forth eight separate classes 

of income subject to the PIT. The class of taxable income at issue here is “[n]et 

gains or income from disposition of property.” Section 303(a)(3) of the Code.4

In Houssels I, we summarized the details of financial arrangement 

giving rise to the foreclosure and the assessed PIT liability therefrom:

[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.

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 

 

3 Act of March 4, 1971, P.L. 6, as amended, added by the Act of August 4, 1971, P.L. 97, 

72 P.S. § 7303.

4 Section 303(a)(3) of the Code, setting forth the class of income at issue here is quite 

lengthy. The general class description provides:

Net gains or income from disposition of property. Net gains or net income, 

less net losses, derived from the sale, exchange or other disposition of property, 

including real property, tangible personal property, intangible personal property or 

obligations issued on or after the effective date of this amendatory act by the 

Commonwealth; any public authority, commission, board or other agency created 

by the Commonwealth; any political subdivision of the Commonwealth or any 

public authority created by any such political subdivision; or by the Federal 

Government as determined in accordance with accepted accounting principles and 

practices.

In addition to providing this general description of the class, the General Assembly also expressly 

exempted several specific transactions from the class. See id. § 7303(a)(3)(iii)-(vii). None of these 

exceptions, however, apply to the particular type of property disposition in this case.
4

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.

Houssels purchased a limited partnership interest of 

approximately 0.151281% (one unit) in the Partnership on 

or about October 19, 1984, for $148,889—$1,589 in cash 

and a promissory note of $147,300. Houssels paid the 

promissory note in full on or about March 11, 1992. 

Houssels 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 Houssels.

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. At the date of 

foreclosure, the Partnership had an accrued but unpaid 

interest obligation of approximately $2.32 billion. 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 
5

Partnership nor Houssels derived any PIT benefit from the 

remainder.

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. 

Houssels did not recover his capital investment (original 

investment less return of capital) in the Partnership at 

foreclosure or liquidation. Indeed, Houssels did not 

receive any cash or other property upon liquidation of the 

Partnership.

Revenue assessed PIT for calendar year 2005 as a 

result of the foreclosure on the Property (Assessment). 

Houssels filed an appeal with Revenue’s Board of Appeals 

(BOA) on June 29, 2007. On December 28, 2007, . . . 

BOA denied Houssels’ appeal. Houssels appealed BOA’s 

determination to the Board, which denied his request for 

relief from . . . BOA’s determination on 

September 19, 2008.

Houssels I, slip op. at 1-2 (footnotes omitted) (record citations omitted).

Taxpayer appealed the Board’s determination to this Court. In his 

appeal, Taxpayer raised issues identical to those raised by the petitioner and 

addressed by this Court in Marshall v. Commonwealth, 41 A.3d 67 (Pa. Cmwlth.) 

(en banc) (Marshall I), exceptions overruled, 50 A.3d 287 (Pa. Cmwlth. 2012) (en 

banc) (Marshall II), aff’d sub nom. Wirth v. Commonwealth, 95 A.3d 822 (Pa. 2014) 

(Wirth), cert. denied, 135 S. Ct. 140 (2015). Incorporating by reference our decision 

in Marshall I, this Court, in Houssels I, affirmed the Board’s assessment of PIT, but 

remanded the matter to the Board for determination of the adjusted basis of the 

Property at foreclosure and recalculation of the PIT due from Taxpayer. 

Incorporating by reference our decision in Marshall II, this Court overruled 
6

Taxpayer’s exceptions in Houssels II. In Wirth, the Pennsylvania Supreme Court 

affirmed our decision on every issue.

B. Proceedings Following Remand

After the Supreme Court issued its decision in Wirth, Taxpayer filed, 

or refiled, Pennsylvania PIT returns for tax years 1985 through 2005, reporting 

thereon his pass-through share of the operating losses of the Partnership during those 

years. (Joint Supplemental Stipulation of Facts ¶ 3(b) (dated Oct. 25, 2017).) The 

Court has reviewed copies of the returns, filed under seal. As reflected in the parties’ 

stipulations, the Partnership took deductions on its federal tax forms, including a 

deduction for the accrued but unpaid interest on the PMM Note, which contributed 

to the Partnership’s annual operating loss and, consequently, zero tax liability from 

inception through foreclosure. (Joint Stipulation ¶¶ 40, 53, 54.)

Taxpayer reported on the filed/refiled Pennsylvania returns his 

pass-through share of the Partnership’s “[n]et income (loss) from rental real estate 

activities,” as reported to him by the Partnership on IRS Schedule K-1 (Form 1065) 

for each of these years. Taxpayer disclosed these annual losses on his Pennsylvania 

Individual Income Tax Returns as Section 303(a)(4) class income—“Net gains or 

income derived from or in the form of rents, royalties, patents and copyrights.” 

72 P.S. § 7303(a)(4). 

Before the Board on remand, with respect to calculating the adjusted 

basis of the Property upon foreclosure, the parties’ dispute focused on depreciation. 

Specifically, Taxpayer and the Department offered competing views on how to apply 

Section 303(a.2) of the Code, 72 P.S. § 7303(a.2). This section allows for a 

depreciation deduction against income: “In computing income, a depreciation 

deduction shall be allowed for the exhaustion, wear and tear and obsolescence of 
7

property being employed in the operation of a business or held for the production of 

income.” Section 303(a.2) of the Code. It also provides how to calculate the 

adjusted basis of depreciated property:

The basis of property shall be reduced, but not below zero, 

for depreciation by the greater of:

(1) The amount deducted on a return and not 

disallowed, but only to the extent the deduction results in 

a reduction of income; and

(2) The amount allowable using the straight-line 

method of depreciation computed on the basis of the 

property’s adjusted basis at the time placed in service, 

reasonably estimated useful life and net salvage value at 

the end of its reasonably estimated useful economic life, 

regardless of whether the deduction results in a reduction 

of income.

Section 303(a.2) of the Code. Both parties refer to this provision as the “minimum 

straight-line depreciation provision,” because regardless of the extent to which a 

taxpayer benefits from the allowable depreciation deduction, the basis of the 

depreciated property must be reduced, at a minimum, by the amount of depreciation 

allowable using the straight-line method of depreciation.

The parties’ dispute centered around the effective date of the minimum 

straight-line depreciation provision. Section 303(a.2) was added to the Code by 

section 9 of Act 89 of 2002.5 Section 34 of Act 89 of 2002 provides that 

Section 303(a.2) of the Code “shall apply to taxable years beginning after 

December 31, 2000.” Taxpayer argued that this language meant that the minimum 

straight-line depreciation provision should only be applied for tax years 2001 and 

thereafter and, therefore, did not mandate a minimum downward basis adjustment 

for straight-line depreciation in years preceding the 2001 tax year. The Department 

 

5 Act of June 29, 2002, P.L. 559.
8

offered a competing interpretation. In its view, Section 303(a.2) relates to the 

calculation of income. In this case, the income in question is the gain on disposition 

of the Property, which occurred in 2005. Accordingly, because the income event 

occurred after the effective date of Section 303(a.2), the minimum straight-line 

depreciation provision applied to calculate the adjusted basis of the Property from 

inception through foreclosure and, consequently, any gain upon disposition.

The Board refused to address Taxpayer’s tax benefit rule argument, 

holding that this Court and the Pennsylvania Supreme Court ruled finally on the tax 

benefit rule’s application in this case and that the tax benefit rule was not within the 

scope of the remand order. With respect to the depreciation issue, the Board sided 

with Taxpayer’s interpretation. Taxpayer now appeals the Board’s refusal to 

consider his tax benefit rule argument, and the Department appeals the Board’s 

interpretation and application of Section 303(a.2) of the Code. 

II. DISCUSSION

This Court adequately addressed all of the issues in this appeal in our 

opinion in Marshall v. Commonwealth of Pennsylvania, ___ A.3d ___ (Pa. Cmwlth., 

Nos. 863 F.R. 2015 and 50 F.R. 2016, filed __________). We incorporate that 

opinion by reference and reach the same conclusions in this case.

III. CONCLUSION

For the reasons set forth above, we affirm the Board’s assessment of 

Taxpayer’s PIT liability in all respects.

P. KEVIN BROBSON, Judge

Judge Fizzano Cannon did not participate in the decision of this case.
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

John K. Houssels, Jr., :

Petitioner :

:

v. : No. 867 F.R. 2015

:

Commonwealth of Pennsylvania, :

Respondent :

:

Commonwealth of Pennsylvania, :

Petitioner :

:

v. : No. 49 F.R. 2016

:

John K. Houssels, Jr., :

Respondent :

O R D E R

AND NOW, this 2

nd day of November, 2018, the order of the Board of 

Finance and Revenue is AFFIRMED.

Unless exceptions are filed within 30 days pursuant to 

Pa. R.A.P. 1571(i), this order shall become final.

P. KEVIN BROBSON, Judge
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

John K. Houssels, Jr., :

Petitioner :

: No. 867 F.R. 2015

v. :

:

Commonwealth of Pennsylvania, :

Respondent :

Commonwealth of Pennsylvania, :

Petitioner :

: No. 49 F.R. 2016

v. :

: Argued: June 6, 2018

John K. Houssels, Jr., :

Respondent :

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge

HONORABLE RENÉE COHN JUBELIRER, Judge

HONORABLE P. KEVIN BROBSON, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

HONORABLE ANNE E. COVEY, Judge

HONORABLE MICHAEL H. WOJCIK, Judge

HONORABLE ELLEN CEISLER, Judge

OPINION NOT REPORTED

CONCURRING OPINION 

BY JUDGE McCULLOUGH FILED: November 2, 2018

I join in the Majority’s affirmance of the Board of Finance and 

Revenue’s application of section 303(a.2) of the Tax Reform Code of 19711

 

1 Act of March 4, 1971, P.L. 6, as amended, added by the Act of June 29, 2002, P.L. 559, 

72 P.S. §7303(a.2).
PAM - 2

concerning minimum straight-line depreciation. However, I concur with the 

Majority’s affirmance of the Board’s refusal to apply the tax benefit rule to reduce 

the personal income tax (PIT) liability of John K. Houssels, Jr., for the reasons set 

forth in my Concurring Opinion in Marshall v. Commonwealth of Pennsylvania, ___ 

A.3d ___ (Pa. Cmwlth., Nos. 863 F.R. 2015 and 50 F.R. 2016, filed November 2, 

2018).

________________________________

PATRICIA A. McCULLOUGH, Judge