Cancellation of Indebtedness Is Income in Pennsylvania, Part IV.

The final part of the majority opinion in Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014) deals with the question whether non-resident taxpayers were the subject of constitutionally improper disparate treatment.
The majority opinion rejected that contention. While acknowledging that the question was “close,” the majority concluded that there was no violation of the Privileges and Immunities Clause or of the Equal Protection or Commerce Clauses. Wirth, majority slip op. at 55. The result rested on two distinct rationales. First, the court noted that the non-resident taxpayers could offset the foreclosure gain against other Pennsylvania sourced income.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part III.

This post continues my coverage of Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014), in which a majority of the Supreme Court of Pennsylvania held that foreclosure of property securing a non-recourse loan gives rise to a taxable gain.
After concluding that an assessment of gain based upon Tufts was proper, the Court next turned to how to calculate the amount of the gain. The taxpayers argued that the amount of the gain should be limited to the principal amount of the mortgage plus the limited interest that had previously been deducted to offset the partnership’s limited income.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part II.

This post continues my coverage of Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014), in which a majority of the Supreme Court of Pennsylvania held that foreclosure of property securing a non-recourse loan gives rise to a taxable gain.
Income from the disposition of property is taxable under Pennsylvania’s Personal Income Tax. 72 P.S. § 7303(a)(3). The Department of Revenue has issued a regulation that provides for the recognition of gain “in the taxable year in which the amount realized from the conversion of the property into cash or other property exceeds the adjusted basis of the property.” 61 Pa.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part I.

Recently, the Supreme Court of Pennsylvania addressed the treatment of cancellation of indebtedness as income, reviewing the Commonwealth Court’s decision in Marshall v. Commonwealth, 41 A.3d 67 (Pa. Commw. 2012), which I covered in April 2012. The Supreme Court came down on the side of the Commonwealth. Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014).
The case involved non-resident taxpayers who invested in a Connecticut limited partnership that acquired an office building in Pittsburgh. Wirth, majority slip op. at 2. After the building went into foreclosure, the partnership was liquidated. The partnership had lost money throughout its existence, and ultimately, the 380 million dollar mortgage loan used to purchase the property had mushroomed to 2.6 billion dollars.… Read More

An Afterword on Cancellation of Indebtedness as Income in Pennsylvania.

In February, I did a series of posts on Marshall v. Commonwealth of Pennsylvania, 41 A.3d 67 (Pa. Commw. 2012), which addressed the question whether a discharge of non-recourse indebtedness was treated as income under the Pennsylvania personal income tax. Despite the relatively obscure topic (or perhaps because of it), this series has been one of the most popular set of posts that I have done.

Mr. Marshall lost on every issue that he raised, but I thought that the case had some pretty compelling equities for the taxpayer and that there were some weaknesses in the Commonwealth’s case. On August 16th, the Commonwealth Court issued its opinion on Mr.Read More

Cancellation of Indebtedness as Income under Pennsylvania Law, Part I.

In January, the Commonwealth Court issued its opinion in Marshall v. Commonwealth, No. 933 F.R. 2008 (Jan. 3 2012). The majority opinion is lengthy and addresses a variety of issues relevant to the application of Pennsylvania’s personal income tax with painful results for a non-resident taxpayer who was a passive investor in a limited partnership that had owned real estate in the Commonwealth. In this post, I will review the basic facts of the case and summarize the issues that Mr. Marshall sought to raise. Future posts will cover the majority opinion and dissent and offer my general thoughts.

Robert Marshall, a non-resident, purchased a limited partnership interest in 600 Grant Street Associates Limited Partnership, paying $5,889 in cash and signing a promissory note for $143,000 in 1985.Read More