PA Tax Law News – July 2015
July 7, 2015
In this issue: PA Budget Watch l Amended Return May Not Serve as Timely Refund Claim l County Waited Too Long to Assess l Pennsylvania’s NOL Cap Litigation Moving Forward l Morcom Joins McNees SALT Group l Federal Court Retains Jurisdiction in Case Involving Delaware’s Unclaimed Property Estimation Methodology
PA Budget Watch
by James L. Fritz
On Tuesday June 30th, Republican majorities in the Pennsylvania House and Senate passed a 2015-16 budget with no new taxes and sent it to Democrat Governor Tom Wolf who promptly vetoed the bill and called upon legislative leaders to join him in working out a compromise budget.
House and Senate Republican leaders said their proposed budget was balanced and said it provided significant new funding to basic education. The Republican majorities also passed public pension revisions to put new employees in a defined contribution plan rather than the existing defined benefit plan, and passed a liquor reform plan to expand the availability of wine and liquor, and eventually sell off state-owned wine and liquor stores.
The Governor said the Republican budget failed to address the Commonwealth’s structural budget deficit, provided no significant boost for education funding and did nothing to cut school district property taxes. The Governor issued a press release stating that the Republican budget proposal relied on $1.5 billion of “gimmicks and one-time fixes” and would lead to a $3 billion deficit. The release further stated that the “plan is filled with smoke and mirrors like budgets of the past four years that have resulted in serial credit downgrades” for the Commonwealth.
The good news for Pennsylvania’s business taxpayers is that, at this time, there are no new taxes or tax increases in the Commonwealth’s 2015-16 budget. The bad news is that, as of June 30, we have no 2015-16 budget! How soon the Governor and the leadership in the General Assembly will be able to develop a compromise budget is anyone’s guess. Taxpayers who have concerns about tax proposals advanced over the last several months (e.g. the proposed expansion of the sales and use tax discussed in our March 2015 newsletter) should continue to be vigilant and communicate their positions to their legislators and to the Governor’s Office. If you have any questions or require assistance in addressing your concerns, please contact a member of the McNees Salt Group.
by Megan F. Luck
Filing an amended tax return does not negate the need to file a timely petition for refund with the Pennsylvania Department of Revenue’s Board of Appeals. In a case decided in June, Quest Diagnostics Venture, LLC v. Commonwealth, Docket No. 782 F.R. 2012, the Commonwealth Court of Pennsylvania rejected the taxpayer’s argument that its amended Corporate Tax Report constituted a timely petition for refund. In addition, the Court found that under the facts of the case, equitable considerations did not provide a basis to extend the time period for filing a refund petition set out in the statute. We note, however, that under other factual scenarios the Board of Finance and Revenue or a court may exercise equitable tolling powers. Also, pending Pennsylvania legislation concerning amending tax reports, if adopted, could affect the time limitations for filing a refund petition.
Pennsylvania tax refund claims currently are required to be filed within three years of the actual payment of the tax,1 with the exception that when there has been an audit, a petition for refund may be filed within the later of six months from the date of an assessment or three years from the date the tax was paid.2
On April 15, 2008, Quest Diagnostics Venture, LLC (“Quest”) obtained a six month extension to file its 2007 Corporate Tax Report and paid Franchise Tax for the 2007 year.3 On October 15, 2010, Quest timely filed an amended Corporate Tax Report showing a tax refund due.4 On February 21, 2012, the Department notified Quest via letter that the Department did not accept Quest’s amended 2007 return. On the same day, Quest filed a petition for refund with the Department’s Board of Appeals.5 Both the Board of Appeals and the Board of Finance and Revenue denied Quest a refund on the basis that the petition was untimely filed. In Commonwealth Court, Quest argued that its October 15, 2010 amended report essentially should be treated as a timely filed refund petition on the basis that “the amended report contained substantial information required for a petition for refund.”6
Under current statutory law, a petition for refund must identify: “(i) the tax type and tax periods included within the petition; the amount of the tax that the taxpayer claims to have been overpaid; and (iii) the basis of the taxpayer’s claim for refund.”7 Pursuant to the Department of Revenue’s regulations, all petitions for refund must be filed with the Department’s Board of Appeals.8
In its opinion, the Commonwealth Court confirmed that the filing of an amended report does not extend the three year time limit for filing a Petition for Refund and determined that the amended report was not a Petition for Refund “in form and substance.”9 Thus, Quest has been unsuccessful in its appeal to date but does have a right of appeal to the Pennsylvania Supreme Court.
In support of its position, Quest also relied on other legal arguments, including the doctrine of equitable estoppel. They argued that the Department should be estopped from denying the timeliness of Quest’s refund request because “the Department’s representatives advised Petitioner that the Department was reviewing and considering the refund claim that had been submitted as an Amended Return” and “waited almost a year and a half to advise Petitioner that the Department’s position was that a refund claim need not be considered or granted and the statute of limitations would not be tolled.”10 The Commonwealth Court rejected this argument because the rules for filing refund claims are clear and the company should have been aware of them.
Although the equitable argument was unsuccessful in this case, such arguments may be successful in other limited circumstances, as where a taxpayer has been affirmatively misled by someone at the Revenue Department and, as a result, misses a filing deadline.
A house bill has been introduced in the Pennsylvania House of Representatives proposing a new section be added to the Tax Reform Code of 1971 that, if enacted in its current form, would provide that the Department must “review an amended report and advise the taxpayer in writing within one year of the filing date of the amended report whether the department accepts the amended report.”11 “A taxpayer who disagrees with the action of the department [could then] file an appeal with the board of appeals within ninety days of the mailing date of the written notice.”12 If this bill were to become law in its current form, a company in Quest’s position in the future would be provided an opportunity to appeal the denial of its amended return.
1 See 72 P.S. § 10003.1(a).
2 See 72 P.S. § 10003.1(b).
3 Quest Diagnostics Venture, LLC v. Commonwealth, Docket No. 782 F.R. 2012, 2015 Pa. Commw. LEXIS 240, at *2.
4 Petition for Review, Quest Diagnostics Venture, LLC v. Commonwealth of Pennsylvania, No. 782 F.R. 2012, 2012 Pa. Tax LEXIS 740, at *7.
5 Quest Diagnostics Venture, LLC v. Commonwealth, Docket No. 782 F.R. 2012, 2015 Pa. Commw. LEXIS 240, at *5.
6 Id. at *10
7 72 P.S. § 9703(2).
8 61 Pa. Code § 7.14(a).
9 Quest Diagnostics Venture, LLC v. Commonwealth, Docket No. 782 F.R. 2012, 2015 Pa. Commw. LEXIS 240, at *10.
10 Petition for Review, Quest Diagnostics Venture, LLC v. Commonwealth of Pennsylvania, No. 782 F.R. 2012, 2012 Pa. Tax LEXIS 740, at *13.
11 H. 1198, Reg. Sess., at 3 (Pa. 2015).
12 H. 1198, Reg. Sess., at 4 (Pa. 2015).
In Duke Energy Fayette II, LLC v. Fayette County Board of Assessment Appeals, No. 1406 C.D. 2014 (May 28, 2015), the Court found that the Fayette County Board of Assessment Appeals conducted an impermissible spot reassessment when it decided to wait eight years to reassess a gas-fired electric generation station (“Station”). The Station was completed in 2003, after a subdivision of property in 2001 and 2002. Beginning in 2003, the Station was in a Keystone Opportunity Zone (“KOZ”) and was exempt from property taxes from 2001 to 2011. Because of the Station’s status in a KOZ, the County reasoned there would be no return on an investment to appraise and reassess the Station in 2003. Subsequently, after the Station came out of KOZ status in 2011, the County issued a new assessment, which the owner appealed as an improper “spot assessment.” The initial assessment in 2003 was $1,800,000 for the land. The new assessment in 2011 was $27,000,000 for land and $8,181,260 for improvements, or $35,181,260.
In finding for the owner, the Court held that the 2011 assessment was improper. The Court reasoned that assessment of improvements must take place when the improvements are made and not at an arbitrary time in the future.
In a Corporate Net Income Tax (“CNI”) appeal filed by Nextel Communications of the Mid-Atlantic, Inc. (“Nextel”), the Commonwealth Court will consider whether Pennsylvania’s statutory cap on net operating loss (“NOL”) deductions violates the Uniformity Clause of the Pennsylvania Constitution. Nextel has asserted that the NOL cap violates the Uniformity Clause because the cap produces “progressive” effective tax rates and improperly subjects companies with larger amounts of income to a higher effective tax rate. Briefing has been completed, and oral argument in the Nextel case has tentatively been scheduled for the Commonwealth Court’s September session in Harrisburg.
Pennsylvania’s CNI statute permits taxpayers with net operating losses to carry over those “net losses” to reduce taxable income in future tax years. See 72 P.S. § 7401(3)4.(b), (c)(2)(A). However, the amount of the NOL deduction that may be taken in a particular year is currently subject to both a “flat dollar cap” and a “percentage-based cap.” For the 2014 tax year, for example, the NOL deduction was limited to the greater of $4 million or 25% of a taxpayer’s taxable income. See 72 P.S. § 7401(3)4.(c)(1)(A)(V). Corporate taxpayers with Pennsylvania income less than the dollar cap are able to reduce their taxable income (and tax) to zero due to the NOL deduction. However, corporate taxpayers with income over the NOL dollar cap are entitled to offset only a portion of their taxable income for a given year through the NOL deduction, regardless of the amount of unused losses incurred in prior years that are otherwise available to be carried forward for CNI purposes.
The pending court appeal involves Nextel’s 2007 Corporate Net Income Tax liability. The record reflects that 314 larger taxpayers had their NOL deductions limited for that year due to the statutory cap, and that 234 of those taxpayers could have reduced their Pennsylvania taxable income to zero, but for the NOL cap. In contrast, over 19,000 other corporate taxpayers, whose Pennsylvania taxable income was less than the NOL dollar cap of $3,000,000 and had net losses that exceeded their income, were able to offset their entire 2007 taxable income through the NOL deduction.
Corporations that have not already done so should consider filing protective CNI refund petitions for years for which the statute of limitations is still open if they have unused net loss deductions in excess of the NOL cap for prior years.
Paul R. Morcom has joined McNees Wallace & Nurick’s State and Local Tax Group. Paul previously served as counsel to Pennsylvania’s Board of Finance and Revenue, handled multistate compliance and planning for a Fortune 1000 company and represented numerous state tax clients in private practice with a Harrisburg PA firm. He has a total of more than twelve years of SALT experience, including with sales and use taxes as well as corporate net income and franchise taxes.
Paul received his BS in Business Administration, with honors, from King’s College in Wilkes Barre, PA and graduated with a JD from the Widener School of Law in Harrisburg. He is active in the community, serving as a Board Member for Drug Free Pennsylvania and as Secretary of his Lions Club.
Paul is an active member of the Institute for Professionals in Taxation and presently serves as Secretary of the Tax Law Section of the Pennsylvania Bar Association.
Federal Court Retains Jurisdiction in Case Involving Delaware’s Unclaimed Property Estimation Methodology
Delaware has developed a reputation for being very aggressive in its unclaimed property auditing procedures through the use of third-party contract auditors. Several appeals filed in federal court challenging Delaware’s estimation and sampling techniques were ultimately resolved by confidential settlement (e.g., Select Medical Corp. v. Cook, et al., Case No. 1:13-CV-00694 (D. Del)). A challenge filed by Temple-Inland, Inc. may, however, be moving forward to a decision on the merits. In an important procedural decision issued on March 11, 2015, the U.S. District Court for the District of Delaware denied Delaware’s motion to dismiss four categories of federal constitutional claims raised by Temple-Inland in challenging Delaware’s unclaimed property estimation procedures, thus allowing Temple-Inland to move forward with those claims. See Temple-Inland, Inc. v. Cook et al, Civ. No. 14-00654-SLR. If the Temple-Inland case proceeds to a decision on the merits, it may have important implications not only for companies being audited by Delaware, but also for companies facing unclaimed property audits by other states, including Pennsylvania, where estimation techniques are being used to determine unclaimed property liabilities.
Temple-Inland is a Delaware corporation with a principal place of business in Memphis, Tennessee. The Delaware State Escheator commenced an audit in late 2008 for an audit period going back to 1981. The company was unable to produce relevant records for periods prior to 2003. However, it did provide accounts payable records starting with the year 2003 and payroll records starting with the year 2004. The audit resulted in no unclaimed property liability from the payable disbursement account, and only $147.30 in unclaimed property from the payroll disbursement account. Nevertheless, as a result of the company’s failure to produce records for periods prior to 2003, the State Escheator used an estimation method to extrapolate the company’s unclaimed property liability for those years and computed an underpayment of approximately $2.1 million, which was later reduced to approximately $1.388 million after an administrative appeal. (This liability was presumably based, in part, on the fact that the company had escheated a cumulative total of over $1.3 million of unclaimed accounts payable and payroll checks to various states, including Delaware, during the audit period. Since the company had no records for periods prior to 2003, Delaware would likely assert all unclaimed property for those years was reportable to Delaware since the company was incorporated in Delaware.)
Temple-Inland subsequently filed a complaint with the U.S. District Court for the District of Delaware seeking various types of relief for violation of its rights under federal law and the United States Constitution. In addition to arguing that Delaware’s actions violated federal common law, Temple-Inland contended that Delaware’s audit procedures violated its rights to Substantive Due Process under the Fourteenth Amendment to the United States Constitution, the Ex Post Facto Clause of the United States Constitution, the Takings Clause of the Fifth Amendment to the United States Constitution and the Commerce and Full Faith and Credit Clauses of the United States Constitution. Delaware officials asserted that no legitimate federal question was raised in Temple-Inland’s complaint and that the federal court lacked jurisdiction over the case.
Temple-Inland overcame substantial procedural hurdles in the case when the federal court rejected Delaware’s Motion to Dismiss for Failure to State a Claim (and on the basis of lack of subject-matter jurisdiction) with respect to all four categories of constitutional claims raised by Temple-Inland. While the court dismissed Temple-Inland’s claim that Delaware’s estimation techniques were preempted by federal common law, the court’s decision allowing Temple-Inland to move forward with its various constitutional claims was a significant victory for the company.
We will continue to monitor the Temple-Inland case and provide updates regarding further developments in the matter. Please contact a member of the McNees SALT Group if you need advice concerning unclaimed property reporting or dealing with an unclaimed property audit.
Solving State & Local Tax Problems
Call upon the McNees State and Local Tax Group whenever you require assistance with Pennsylvania and other state and local tax problems. Members of our SALT Group routinely advise companies of all sizes, individuals, and nonprofit entities on state and local tax issues. We have handled more than 1,000 appeals involving Pennsylvania sales and use tax, corporate net income taxes, capital stock and franchise taxes, insurance taxes, fuels taxes, personal income and other state taxes. Members of our Group also have authored the leading treatise on Pennsylvania local real estate tax law and represented clients in local tax matters in 66 of the Commonwealth’s 67 counties. Our services include:
Dealing with State & Local Tax Auditors
Assessment and Refund Appeals to the PA Department of Revenue Board of Appeals
Appeals to the PA Board of Finance and Revenue
Appeals to PA County and Appellate Courts
Abandoned and Unclaimed Property (Escheat) Advice and Appeals
Real Estate Valuation and Exemption Appeals before County Boards of Assessment and in PA Courts
Obtaining Letter Rulings
Negotiating Compromises – both in the appeals context and in the collections process
Advice Concerning Legislative Approaches to Solving State & Local Tax Issues
Contact any of the members of our SALT Group for assistance.
© 2015 McNees Wallace & Nurick LLC
PA TAX LAW NEWS is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.