Court Opinion

ID: 9700388
Source: CourtListenerOpinion
Date Created: 2023-08-25 21:25:34.195013+00
Date Added: 2024-06-11T18:21:08.454177
License: Public Domain

DISSENTING OPINION by
Judge McGINLEY.
I respectfully dissent to the majority’s conclusion that Canteen’s “gain from the fictional liquidation of assets deemed to occur under a federal tax election pursuant to 26 U.S.C. § 338(h)(10) is taxable by the Commonwealth” as non-business income.
The majority agrees with Canteen’s argument that “the gain from the fictional liquidation of assets should be treated the same as that from an actual liquidation, which is considered non-business income pursuant to our Supreme Court’s holding in Laurel Pipe Line Comp. v. Board of Finance and Revenue, 537 Pa. 205, 642 A.2d 472 (1994).” Majority Opinion at 596 (emphasis added). However, Laurel Pipe Line Company is distinguishable in that it involved an actual liquidation as opposed to the “deemed liquidation” in the present controversy.
When Laurel Pipe Line Company (Laurel) sold its unprofitable Aliquippa-Cleve-land pipeline, it “liquidated a portion of its assets.” Id. at 211, 642 A.2d at 475. After the sale, Laurel continued to operate a second pipeline. Aso, Laurel distributed the proceeds to stockholders rather than reinvest them in the business. Our Pennsylvania Supreme Court determined that the gain from the sale of the pipeline was nonbusiness income.
Here, Canteen was a subsidiary of Vending, the owner of Canteen’s stock. Vending was a subsidiary of Holdings, which sold the stock to Compass. Holdings and Compass treated the sale of stock as a sale of assets for federal tax purposes. Canteen was “deemed” to have sold its assets in complete liquidation. Athough Canteen reported its gain as nonbusiness income, the Department of Revenue treated Canteen’s gain as business income and increased Canteen’s tax liability. Contrary to the majority’s view, the actual liquidation in Laurel Pipe Line Company presents a different set of circumstances than the fictional liquidation in the present controversy.
The majority correctly notes that the transactional test and the functional test are used to determine whether the gain from the sale of property is “business income,” as specified in Section 401(3)2.(a)(l)(A) of the Tax Code, 72 P.S. § 7401(3)2.(a)(l)(A). In addition, the majority explains that the functional test focuses on the gain arising “from the sale of an asset which the taxpayer acquired, managed and disposed of as an integral part of its regular business.” Majority Opinion at 598 (citations omitted).
Nevertheless, the majority misconstrues the functional test when it states that “[a]s in Laurel Pipe Line, Canteen liquidated *601assets and distributed the proceeds to the stockholder.” Majority Opinion at 599. I disagree with the majority’s conclusion that under the functional test, Canteen’s gain did not constitute business income.
As the Honorable James R. Kelley1 accurately determined:
Under the functional test, Canteen’s gain from the transaction constitutes business income. The acquisition and management of Canteen’s assets as well as the “disposition” of those assets for Section 338 purposes constitute integral parts of Canteen’s business. Those assets were and are used to generate business income. The nature of this transaction did not result in the cessation of Canteen’s business. Furthermore, it appears that Canteen’s gain from the transaction was used in the continuation of its business operations, which never ceased.
Canteen Corporation v. Commonwealth of Pennsylvania, 792 A.2d 14, 22 (Pa. Cmwlth.2002).2
This Court also addressed Canteen’s argument that but for the election, the stock transaction would not have involved Canteen nor resulted in income for Canteen. In his opinion, Judge Kelley concluded that Canteen’s “argument completely ignores the fact that Canteen incurred, a gain as a result of the sale of its parent corporation’s stock in the transaction.” Id. at 22 (emphasis added). Canteen’s enhanced financial position after the sale of the stock should not be overlooked.3
Accordingly, I would dismiss the exceptions and enter judgment in favor of the Commonwealth.
Judge PELLEGRINI joins in this dissent.

. Judge Kelley authored this Courts opinion that affirmed the Board of Finance and Revenue.

. Although this Court hears appeals from Board orders in our appellate jurisdiction, this Court essentially functions as a trial court. Norris v. Commonwealth of Pennsylvania, 155 Pa.Cmwlth. 423, 625 A.2d 179 (1993). "The stipulation of facts is binding and conclusive upon this Court, but we may draw our own legal conclusions from those facts.” Id. at 182 citing Suburban/Bustleton Pharmacy v. Department of Aging, 134 Pa.Cmwlth. 71, 579 A.2d 426 (1990).

. Finally, the majority observes that its determination that Canteen’s fictitious gain amounts to non-business income "is not changed by the Department’s regulation at 61 Pa.Code § 153.81(d)(1), which directs that taxable income generated as a result of a Section 338 election is treated as business income.” Majority Opinion at 599 (footnote omitted). In particular, the majority reasons that "the application of the regulation conflicts with our Supreme Court’s interpretation of the underlying statute in Laurel Pipe Line.” Majority Opinion at 599.
As stated, I disagree with the majority’s reliance upon Laurel Pipe Line Company. I believe this Court properly found the Department of Revenue regulation to be consistent with statutory law as the stock transaction was not an actual liquidation. Canteen Corporation, 792 A.2d at 21.