R. Pearlstein & C. Pearlstein v. Com. of PA ( 2021 )

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Robert Pearlstein and Cynthia :
Pearlstein, :
:
Petitioners :
:
v. : No. 743 F.R. 2017
: Argued: June 9, 2021
Commonwealth of Pennsylvania, :
:
Respondent :
BEFORE: HONORABLE P. KEVIN BROBSON, President Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE ANNE E. COVEY, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE CHRISTINE FIZZANO CANNON, Judge
HONORABLE ELLEN CEISLER, Judge
HONORABLE J. ANDREW CROMPTON, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION
BY JUDGE WOJCIK FILED: December 2, 2021
Robert Pearlstein and Cynthia Pearlstein (Taxpayers) petition for
review of the order of the Board of Finance and Revenue (Board), which sustained
in part and denied in part the Department of Revenue’s (Department) assessment of
Personal Income Tax (PIT) against Taxpayers, plus interest and penalties, for the
years 2013 and 2014. The issue is the Board’s assessment of PIT for Taxpayers’ net
gains or income from disposition of property, specifically PIT owed on like-kind
exchanges of real property during the 2013 and 2014 tax years. Taxpayers, who are
partners in a number of real estate development and management partnerships, and
who use the Federal Income Tax (FIT) method of accounting, argue that net gains
on like-kind exchanges should be taxed when the property is sold, because such
deferrals are permitted under Section 1031 of the Internal Revenue Code of 1986, as
amended, 26 U.S.C. §1031 (IRC §1031). The Board determined that net gains on
like-kind exchanges should be taxed in the years the exchanges occurred, because
unlike IRC §1031, the Tax Reform Code of 1971 (TRC)1 does not permit tax deferral
on net gains from like-kind exchanges of real property. For that reason, the Board
found that the FIT method of accounting does not clearly reflect income.
Accordingly, the Board concluded that Taxpayers should be assessed PIT and
interest, but not penalties. We affirm the Board’s order based on the reasoning
expressed in our opinion in James and Karen Pearlstein v. Commonwealth of
Pennsylvania, ___ A.3d ___ (Pa. Cmwlth., No. 741 F.R. 2017, filed December 2,
2021).
MICHAEL H. WOJCIK, Judge
1
Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§7101-10004.
2
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Robert Pearlstein and Cynthia :
Pearlstein, :
:
Petitioners :
:
v. : No. 743 F.R. 2017
:
Commonwealth of Pennsylvania, :
:
Respondent :
ORDER
AND NOW, this 2nd day of December, 2021, the order of the Board of
Finance and Revenue dated August 23, 2017, is AFFIRMED. Unless exceptions are
filed within 30 days pursuant to Pa. R.A.P. 1571(i), this order shall become final.
__________________________________
MICHAEL H. WOJCIK, Judge
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Robert Pearlstein and Cynthia Pearlstein, :
Petitioners :
:
v. : No. 743 F.R. 2017
: Argued: June 9, 2021
Commonwealth of Pennsylvania, :
Respondent :
BEFORE: HONORABLE P. KEVIN BROBSON, President Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE ANNE E. COVEY, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE CHRISTINE FIZZANO CANNON, Judge
HONORABLE ELLEN CEISLER, Judge
HONORABLE J. ANDREW CROMPTON, Judge
OPINION NOT REPORTED
DISSENTING OPINION
BY JUDGE CROMPTON FILED: December 2, 2021
Robert Pearlstein and Cynthia Pearlstein (Taxpayers) petition for
review of the order of the Board of Finance and Revenue (Board), which sustained
in part and denied in part the Department of Revenue’s (Department) assessment of
Personal Income Tax (PIT) against Taxpayers, plus interest, for the years 2013 and
2014. The issue is the Board’s assessment of PIT for Taxpayers’ net gains or income
from the disposition of property, i.e., PIT owed on like-kind exchanges of real
property during the 2013 and 2014 tax years. Specifically, the dispute involves when
that PIT is owed. Taxpayers, who are partners in a number of real estate
development and management partnerships, and who use the Federal Income Tax
method, contend that the Department abused its discretion and was inconsistent with
its own regulatory interpretation when it imposed tax liability on the like-kind
exchanges before income from the exchanges was realized. For the reasons set forth
in my dissenting opinion in James and Karen Pearlstein v. Commonwealth of
Pennsylvania, ___ A.3d ___ (Pa. Cmwlth., No. 741 F.R. 2017, filed December 2,
2021), I respectfully dissent.
______________________________
J. ANDREW CROMPTON, Judge
JAC - 2