Court Opinion

ID: 9927248
Source: CourtListenerOpinion
Date Created: 2024-01-26 16:09:58.634508+00
Date Added: 2024-06-11T09:24:10.157868
License: Public Domain

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Christopher L. Hackett,                  :
                  Petitioner             :
                                         :
      v.                                 : No. 538 F.R. 2018
                                         :
Commonwealth of Pennsylvania,            :
                Respondent               : Submitted: December 4, 2023

BEFORE:      HONORABLE RENÉE COHN JUBELIRER, President Judge
             HONORABLE CHRISTINE FIZZANO CANNON, Judge
             HONORABLE ELLEN CEISLER, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION
BY JUDGE CEISLER                                              FILED: January 26, 2024

      Christopher L. Hackett petitions for review of the June 13, 2018 Order of the
Board of Finance and Revenue (BFR) affirming the decision of the Pennsylvania
Department of Revenue’s (Department) Board of Appeals, which denied his Petition
for Reassessment of personal income tax for tax year 2014. We affirm the BFR’s
Order.

                                      Background

      In 2012, Mr. Hackett created Rides2Work (R2W), a limited liability company
operated as a sole proprietorship, to connect vehicle drivers and riders interested in
carpooling to and from their jobs in northeastern Pennsylvania for a fee. Stip. of
Facts ¶¶ 3-5, 9.1 When he created R2W, Mr. Hackett sought to monetize the concept
of connecting “blue- and gray-collar” workers who could not afford a car, were
without a license, or simply wanted a lower-cost alternative to transportation with

      1
         The parties filed a Stipulation of Facts and accompanying exhibits with this Court
pursuant to Pa.R.A.P. 1571(f) on May 15, 2023.
drivers who were traveling to the same or nearby worksites and who were looking
to earn extra money by carpooling. Id. ¶ 10. Mr. Hackett envisioned that the cost
to riders would be $5.00 for a one-way ride, $7.00 for a round-trip ride, and $15 for
a last-minute ride per day. Id. ¶ 25. Although Mr. Hackett attempted to implement
this pricing system for R2W, it never materialized because the website’s users
wanted the ability to set their own rates. Id. ¶ 26.
      Mr. Hackett intended that R2W would receive 10% of the cost of the rides,
using PayPal to process the payments. Id. ¶¶ 19-21, 28. Mr. Hackett and his
employees engaged in website development, marketing, and advertising for the first
two years with the goal of generating increased traffic to the R2W website. Id. ¶¶
16, 23-24, 36, 50.
      In September 2012, the first version of the R2W website became publicly
accessible on the internet at www.Rides2Work.com. Id. ¶ 14. By October 31, 2012,
29 drivers and 50 passengers had registered on the R2W website. Id. ¶ 15.
      As of April 2013, Mr. Hackett had not monetized the R2W website because
he believed the projected revenue, based on the number of users at that time, was
insufficient to continue R2W in the long term. Id. ¶ 33. Mr. Hackett intended to
charge fees once he attained a sufficient number of users to sustain R2W in the long
term. Id. ¶¶ 34-36.
      In December 2014, Mr. Hackett determined that a reasonable target would be
an increase of 200 drivers and 400 riders in that month. Id. ¶ 54. However, as of
February 9, 2015, a total of 100 drivers and 200 riders were registered on the R2W
website. Id. ¶ 55. In March 2015, Mr. Hackett shut down R2W. Id. ¶ 56.
      Mr. Hackett chose not to monetize R2W because the website did not attract
sufficient visits to generate revenue through advertising, and he was unable to recruit

                                           2
sufficient drivers and riders to achieve a scale necessary to continue the business.
Id. ¶ 57. R2W charged no fees to its users for ride matching, payment processing,
or any other service and never placed advertising on the website. Id. ¶¶ 34, 58. R2W
also did not generate any gross receipts. Id. ¶ 59.
       For tax year 2014, Mr. Hackett reported zero income from R2W and claimed
as a deduction $109,600 in business expenses for R2W on his personal income tax
return.2 Id. ¶ 62. The Department disallowed the expense deduction because it
determined that R2W was not a “commercial enterprise” under Section 301(c) of the
Tax Reform Code of 1971 (Tax Reform Code), Act of March 4, 1971, P.L. 6, as
amended, 72 P.S. § 7301(c) (defining a “business” as an activity “engaged in as
commercial enterprise and conducted for profit or ordinarily conducted for profit”).
Id. As a result, the Department assessed additional personal income tax against Mr.
Hackett in the amount of $35,361.64 for tax year 2014, plus interest and penalties.
Id. ¶ 68.
       Mr. Hackett filed a Petition for Reassessment with the Board of Appeals. The
Board of Appeals denied the Petition for Reassessment, concluding as follows:

              [R2W] reported its first loss of $114,060[] in 2013,[] its second
       loss of $109,600[] in 2014, and[] its third loss of [$]11,090[] in 2015.
       The Department disallowed $109,600[] losses in 2014 because the
       business reported no income. [R2W] failed to meet the “commercial
       enterprise test” because the business did not have a plan, [Mr. Hackett]
       devoted 4 hours per week to the business and less than 1% of [his]
       livelihood depended on this activity, as a result, [he] was unable to
       deduct [the] business expenses claimed.

              Upon review of the facts and circumstances presented in this
       appeal, the Board [of Appeals] finds [Mr. Hackett] has not established
       his claim that he had a business and not a hobby.

       2
         On his 2014 Pennsylvania income tax return, Mr. Hackett reported a total of $12,100,867
in business income. BFR Decision, 6/13/18, at 1.

                                               3
Bd. of Appeals Decision, 7/21/17, at 4 (emphasis added).
       Mr. Hackett then appealed to the BFR, which determined:

       Per the Department’s regulations, three criteria must be met before
       gains or losses can be considered net profits or loss from the operation
       of a business. First, the gross profits from the activity must come from
       either: the marketing of a product or service to customers on a
       commercial basis or from securities employed as working capital in the
       business operations; accounts and notes receivable from sales of
       products or services sold in the ordinary course of the business
       operations; or assets which serve an operational function in the ordinary
       course of business operations. 61 Pa. Code § 103.12(b)(1)(i)-(iii).
       Second, the marketed activity must “be conducted with the manifest
       objective of achieving profitable operations.” 61 Pa. Code §
       103.12(b)(2). Third, the marketed activity must “be conducted with
       regularity and continuity and may not be limited or exclusive.” 61 Pa.
       Code § 103.12(b)(3).

BFR Decision, 6/13/18, at 3. Applying these criteria, the BFR concluded that “[Mr.
Hackett] . . . failed to show that [R2W] meets the commercial enterprise test. During
its existence, [R2W] never reported gross receipts and never provided services to the
public.” Id. (emphasis added). Because Mr. Hackett failed to satisfy the commercial
enterprise test, the BFR affirmed the denial of his Petition for Reassessment. Mr.
Hackett now petitions this Court for review.3

       3
         “This Court reviews de novo the determinations of the [BFR]. Stipulations of fact are
binding upon both the parties and the Court. However, this Court may draw its own legal
conclusions.” Kelleher v. Com., 704 A.2d 729, 731 (Pa. Cmwlth. 1997) (internal citations
omitted); see Pa.R.A.P. 1571(h).

                                              4
                                           Analysis
       On appeal, Mr. Hackett’s principal argument is that he was entitled to deduct
expenses incurred in the operation of R2W for tax year 2014 because R2W was a
“business” under Section 303(a)(2) of the Tax Reform Code, 72 P.S. § 7303(a)(2).4
       The Department imposes personal income tax on certain classes of income
received by a resident individual during a tax year, including “net profits.”
Specifically, Section 303(a)(2) of the Tax Reform Code provides:

       (2) Net profits. The net income from the operation of a business,
       profession, or other activity, after provision for all costs and expenses
       incurred in the conduct thereof, determined either on a cash or accrual
       basis in accordance with accepted accounting principles and practices
       but without deduction of taxes based on income.

72 P.S. § 7303(a)(2) (emphasis added); see also 61 Pa. Code § 103.12(a) (“Net
profits shall be the net income from the operation of a business, profession or other
activity after provision for all costs and expenses incurred in the conduct thereof.”).
Section 301(c) of the Tax Reform Code, in turn, defines a “business” as

       an enterprise, activity, profession, vocation, trade, joint venture,
       commerce or any other undertaking of any nature when engaged in as
       commercial enterprise and conducted for profit or ordinarily
       conducted for profit, whether by an individual, partnership, association
       or other unincorporated entity.

       4
         Mr. Hackett also devotes a significant portion of his appellate brief to challenging the
Board of Appeals’ finding that R2W was merely a hobby and not a business. See Hackett Br. at
33-37. However, our review is limited to the decision of the BFR, which did not make such a
finding. In any event, the Commonwealth agrees with Mr. Hackett that R2W was not a hobby,
instead arguing that “R2W was a start-up project that never became a ‘commercial enterprise.’”
Cmwlth. Br. at 22 n.8.

                                               5
72 P.S. § 7301(c) (emphasis added). While “commercial enterprise” is not defined
in the Tax Reform Code, our Court has interpreted the above statutory language and
concluded as follows:

       Reading the provisions of Section 301(c) together with the provisions
       of Section 303(a)(2), we conclude and hold that the legislature intended
       that the “business, profession, or other activity” of Section 303(a)(2),
       must be “engaged in as commercial enterprise” in order for the income
       derived therefrom to be taxable under Section 303(a)(2). Since the
       term “commercial enterprise” is not defined in the [Tax Reform] Code,
       we must, pursuant to [Section 1903 of the Statutory Construction Act
       of 1972, ]1 Pa. C.S. § 1903, construe that term according to its common
       and approved usage. Without engaging in a lengthy discussion as to
       the common and approved usage of the term “commercial enterprise,”
       its sine qua non is[] . . . the rendering of goods or services to others in
       a market[]place.

Morgan v. Com., 400 A.2d 1384, 1386 (Pa. Cmwlth. 1979) (emphasis added);
accord Wettach v. Com., 620 A.2d 730, 733 (Pa. Cmwlth. 1993) (stating that Morgan
“held that the sine qua non of a commercial enterprise is the rendering of goods and
services to others in the marketplace”), aff’d, 677 A.2d 831 (Pa. 1995).
       First, Mr. Hackett asserts that R2W was a “business” for personal income tax
purposes because the evidence shows that R2W rendered services to others in a
marketplace. While we agree that R2W provided a service to others by connecting
vehicle drivers and riders through its ridesharing website, we disagree that R2W
provided its services to others “in a marketplace,” as required by Morgan.5
       Neither the Tax Reform Code nor our case law has defined the term
“marketplace.” Generally, “[w]ords and phrases shall be construed . . . according to

       5
           The BFR erroneously concluded that R2W “did not provide services to the public.” BFR
Decision, 6/13/18, at 3. While we disagree with this finding based on the stipulated evidence, as
explained above, we nonetheless agree with the BFR’s ultimate conclusion that “[Mr. Hackett] . .
. failed to show that [R2W] meets the commercial enterprise test.” Id.

                                               6
their common and approved usage.” 1 Pa. C.S. § 1903(a). This Court has further
stated that “where a court needs to define an undefined term, it may consult
dictionary definitions for guidance.” THW Grp., LLC v. Zoning Bd. of Adjustment,
86 A.3d 330, 336 (Pa. Cmwlth. 2014); see also Com. v. Gamby, 283 A.3d 298, 307
(Pa. 2022) (“To discern the legislative meaning of words and phrases, [the Supreme]
Court has on numerous occasions engaged in an examination of dictionary
definitions.”) (collecting cases).
        The dictionary definition of “marketplace” is a “place . . . where . . . public
sales    are   held.”       Merriam-Webster     Online     Dictionary,   available   at
https://www.merriam-webster.com/marketplace (last visited Jan. 25, 2024)
(emphasis added). “Sales” are defined as “operations and activities involved in
promoting and selling goods or services.” Merriam-Webster Online Dictionary,
available at https://www.merriam-webster.com/sales (last visited Jan. 25, 2024)
(emphasis added). An alternate definition of “sales” is “gross receipts.” Id.; see also
Merriam-Webster         Online   Dictionary,   available   at   https://www.merriam-
webster.com/sale (last visited Jan. 25, 2024) (defining “sale” as “the transfer of
ownership of something from one person to another for a price”) (emphasis added).
        Applying these definitions, as well as the common and ordinary usage of the
terms “marketplace” and “sales,” to the facts of this case, we conclude that Mr.
Hackett failed to establish that R2W was a commercial enterprise because R2W did
not “render[] . . . goods or services to others in a market[]place.” Morgan, 400 A.2d
at 1386. The stipulated evidence establishes that R2W did not charge or collect any
fees for ride matching, payment processing, or any other service. Stip. of Facts ¶¶
34, 58. It is also undisputed that R2W had no gross receipts. Id. ¶ 59. Consequently,
while R2W provided services to others, it did not “sell” any of its services. See id.

                                           7
¶ 37 (describing R2W as a “free ride-matching service”). Mr. Hackett made the
decision to forgo charging fees to R2W’s users because he believed doing so would
result in a loss of existing users and would discourage new users from registering
for its services. Id. ¶ 34. Because R2W had no “sales,” we conclude that R2W did
not provide services to others “in a marketplace.”
      We also conclude that R2W failed to satisfy the first criterion set forth in the
Department’s regulation at 61 Pa. Code § 103.12 (net profits regulation), which
further defines “net profits.” The net profits regulation provides:

      (b) To constitute net profits, all of the following must apply:

             (1) The gross profits shall be derived from one of the following:

                   (i) The marketing of a product or service to customers on
                   a commercial basis or from securities employed as
                   working capital in the business operations.

                   (ii) Accounts and notes receivable from sales of products
                   or services sold in the ordinary course of the business
                   operations.

                   (iii) Assets which serve an operational function in the
                   ordinary course of business operations.

             (2) The marketing activity shall be conducted with the manifest
             objective of achieving profitable operations.

             (3) The marketing activity shall be conducted with regularity and
             continuity and may not be limited or exclusive.

61 Pa. Code § 103.12(b) (emphasis added).
      Mr. Hackett posits that subsection (b)(1) of this regulation means that “if
‘gross profits’ . . . are produced, then those ‘gross profits’ must be produced from
the listed categories of activities to be considered part of the ‘net profits’

                                          8
calculation.” Hackett Br. at 27-28 (emphasis in original). We disagree. Contrary
to Mr. Hackett’s suggestion, the net profits regulation does not contain the word “if.”
See City of Phila. v. City of Phila. Tax Rev. Bd., 132 A.3d 946, 952 (Pa. 2015)
(rejecting a proposed statutory construction that “would insert words where they do
not appear”). Rather, the plain language of the net profits regulation assumes the
existence of gross profits, unambiguously stating that “all of the following must
apply.” 61 Pa. Code § 103.12(b) (emphasis added). In other words, “[t]o constitute
net profits,” there must first be “gross profits,” and those “gross profits shall derive”
from one of the three enumerated activities. 61 Pa. Code § 103.12(b)(1).
       Moreover, in his appellate brief, Mr. Hackett acknowledges that “the term
‘gross profits’ . . . is generally defined as ‘[t]otal sales revenue less the cost of the
goods sold, no adjustment being made for additional expenses and taxes.’” Hackett
Br. at 28 n.2 (quoting Black’s Law Dictionary (11th ed. 2019)) (emphasis added).
As explained above, however, the stipulated evidence shows that R2W had no “sales
revenue,” because it never charged any fees for its services and had no gross receipts.
Therefore, we conclude that because R2W had no gross profits, it failed to satisfy
the first requirement of the net profits regulation.6
                                          Conclusion
       We conclude that Mr. Hackett did not engage in a commercial enterprise, as
that term has been defined and interpreted by our Court. The stipulated evidence
establishes that R2W did not render its services to others in a marketplace because
it never charged any fees for its services and did not produce any gross receipts. It
is evident, based on the stipulated facts, that R2W was still in the exploratory phase

       6
          Because we conclude that R2W failed to satisfy the first criterion of the net profits
regulation, we need not address the remaining criteria, as all three are required to constitute “net
profits.” See 61 Pa. Code § 103.12(b).

                                                 9
when Mr. Hackett decided to shut it down due to his inability to recruit a sufficient
number of drivers and riders to achieve a scale necessary to continue R2W in the
long term. For these reasons, we conclude that Mr. Hackett was not entitled to
deduct expenses incurred in the operation of R2W for tax year 2014 because R2W
was not a “business” under Section 303(a)(2) of the Tax Reform Code. Accordingly,
we affirm the BFR’s Order.

                                       __________________________________
                                       ELLEN CEISLER, Judge

                                         10
           IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Christopher L. Hackett,              :
                  Petitioner         :
                                     :
      v.                             : No. 538 F.R. 2018
                                     :
Commonwealth of Pennsylvania,        :
                Respondent           :

                                  ORDER

      AND NOW, this 26th day of January, 2024, the June 13, 2018 Order of the
Board of Finance and Review is hereby AFFIRMED. This Order will become final
unless exceptions are filed within 30 days after entry of this Order, pursuant to
Pa.R.A.P. 1571(i).

                                     __________________________________
                                     ELLEN CEISLER, Judge