J. & K. Pearlstein v. Com. of PA

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
James and Karen Pearlstein, :
:
Petitioners : CASES CONSOLIDATED
:
v. : No. 741 F.R. 2017:
Commonwealth of Pennsylvania, :
:
Respondent :
Reed and Gail Slogoff, :
:
Petitioners :
:
v. : No. 742 F.R. 2017:
Commonwealth of Pennsylvania, :
:
Respondent :
Robert Pearlstein and :
Cynthia Pearlstein, :
:
Petitioners :
:
v. : No. 743 F.R. 2017: Submitted: December 14, 2022
Commonwealth of Pennsylvania, :
:
Respondent :
BEFORE: HONORABLE RENÉE COHN JUBELIRER, 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 LORI A. DUMAS, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION
BY JUDGE WOJCIK FILED: February 10, 2023
James and Karen Pearlstein, Reed and Gail Slogoff, and Robert and
Cynthia Pearlstein (together, Taxpayers), have filed exceptions1 to this Court’s
opinion and order filed on December 2, 2021, in Pearlstein v. Commonwealth, 267
A.3d 593 (Pa. Cmwlth. 2021) (Pearlstein I).2 In that order, we affirmed the Board
of Finance and Revenue’s (Board) decision that assessed personal income tax (PIT)
against Taxpayers for net gains owed on like-kind exchanges of real property in tax
years 2013 and 2014, the years in which the properties were exchanged. “In tax
appeals from the Board, this Court functions as a trial court, and exceptions filed
pursuant to Pa. R.A.P. 1571(i) have the effect of an order granting reconsideration.”
Consolidated Rail Corporation v. Commonwealth, 679 A.2d 303, 304 (Pa. Cmwlth.
1996), aff’d, 691 A.2d 456 (Pa. 1997) (citation omitted).
1
Rule 1571(i) of the Pennsylvania Rules of Appellate Procedure states in relevant part:
Any party may file exceptions to an initial determination by the
court under this rule within 30 days after the entry of the order to
which exception is taken. Such timely exceptions shall have the
effect . . . of an order expressly granting reconsideration of the
determination previously entered by the court.
Pa. R.A.P. 1571(i).
2
In Pearlstein I, this Court affirmed the Board of Finance and Revenue’s (Board) decision
that assessed personal income tax (PIT) against James and Karen Pearlstein for net gains owed on
like-kind exchanges of real property in tax years 2013 and 2014, the years in which the properties
were exchanged. In unpublished opinions filed on the same date, we also affirmed assessment of
PIT against Reed and Gail Slogoff, and Robert and Cynthia Pearlstein, using the same analysis.
Taxpayers’ exceptions to all three cases were consolidated for disposition.
2
Taxpayers present the following four issues on exceptions: (1)
whether the Court erred in applying Section 303(a.1) of the Tax Reform Code of
1971 (TRC),3 72 P.S. §7303(a.1), to disallow a rule within the Federal Income Tax
(FIT) method of accounting, when Taxpayers were authorized to use the FIT method
of accounting; (2) whether the Court erred by failing to construe Section 303(a.1) of
the TRC strictly in favor of Taxpayers; (3) whether the Court erred by penalizing
Taxpayers for following the Department of Revenue’s (Department) guidance on
like-kind exchanges; and (4) whether the Court misinterpreted the TRC’s two-step
scheme when it found that Taxpayers’ FIT method of accounting did not clearly
reflect income.4 Upon review, we discern no errors in our decision in Pearlstein I,
and we overrule Taxpayers’ exceptions.
Taxpayers present the same arguments in their exceptions as in their
petition for review on the first, third, and fourth issues presented. See Pearlstein I,
267 A.3d at 597-603. To the extent that Taxpayers present the same arguments in
their exceptions as in their initial petition for review of the Board’s assessment of
PIT against Taxpayers for net gains owed on like-kind exchanges of real property in
the tax years in which the properties were exchanged, all of which are thoroughly
addressed in Pearlstein I, we do not find any basis upon which to disturb our
disposition of these issues. As a result, these exceptions are overruled. Consolidated
Rail Corporation, 679 A.2d at 304; Kalodner v. Commonwealth, 636 A.2d 1230,
1231 (Pa. Cmwlth. 1994), aff’d, 675 A.2d 710 (Pa. 1995).
3
Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§7101-10004. Section 303(a.1) of
the TRC was added by the Act of August 31, 1971, P.L. 362.
4
The Pennsylvania Institute of Certified Public Accountants (PICPA) filed an amicus
curiae brief in support of Taxpayers. PICPA’s position is that the Court’s decision in Pearlstein I
would undermine the ability of certified public accountants across Pennsylvania to provide
certainty to clients when the FIT method of accounting has been called into question.
3
As to the second issue, Taxpayers argue that the Court erred by failing
to strictly construe Section 303(a.1) of the TRC in Taxpayers’ favor, when this
Section imposes a tax.5 Taxpayers cite Greenwood Gaming and Entertainment, Inc.
v. Department of Revenue, 90 A.3d 699 (Pa. 2014), and Greenwood Gaming and
Entertainment, Inc. v. Commonwealth, 263 A.3d 611 (Pa. 2021), to support strict
construction in Taxpayers’ favor. The Department responds that because Section
303(a.1) is not ambiguous, Taxpayers are not entitled to strict construction in their
favor. The Department further responds that even if it was ambiguous, Section
303(a.1) does not impose a tax, but as applied to Taxpayers, exempts them from tax,
and thus should be construed against Taxpayers.
We overrule Taxpayers’ exceptions on the second issue. Taxpayers
correctly note that Section 1928(b)(3) and (5) of the Statutory Construction Act of
1972, 1 Pa. C.S. §1928(b)(3) and (5), requires that statutes imposing taxes and
statutes exempting persons or property from taxes should be “strictly construed.”
Provisions imposing taxes must be strictly construed in favor of taxpayers.
Greenwood Gaming and Entertainment, Inc., 90 A.3d at 707. Provisions exempting
persons or property from taxation must be strictly construed against taxpayers. Id.
In either instance, however, these principles apply only when the statutory language
is ambiguous. Id. Here, we found no ambiguity in Section 303(a.1) of the TRC.
Instead, we interpreted its plain language to permit the Department to assess PIT on
5
Section 303(a.1) of the TRC, 72 P.S. § 7303(a.1), provides as follows:
Income shall be computed under the method of accounting on the
basis of which taxpayer regularly computes income in keeping the
taxpayer’s books. If the [D]epartment determines that no method
has been regularly used or the method does not clearly reflect
income, the computation of income shall be made under a method
which, in the opinion of the [D]epartment, clearly reflects income.
4
net gains from Taxpayers’ like-kind exchanges when the exchanges were made,
because the FIT method of accounting does not clearly reflect income as defined
under the TRC. Pearlstein I, 267 A.3d at 604.
Accordingly, and for the foregoing reasons, we overrule Taxpayers’
exceptions and affirm the Board’s order.
MICHAEL H. WOJCIK, Judge
5
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
James and Karen Pearlstein, :
:
Petitioners : CASES CONSOLIDATED
:
v. : No. 741 F.R. 2017:
Commonwealth of Pennsylvania, :
:
Respondent :
Reed and Gail Slogoff, :
:
Petitioners :
:
v. : No. 742 F.R. 2017:
Commonwealth of Pennsylvania, :
:
Respondent :
Robert Pearlstein and :
Cynthia Pearlstein, :
:
Petitioners :
:
v. : No. 743 F.R. 2017:
Commonwealth of Pennsylvania, :
:
Respondent :
ORDER
AND NOW, this 10th day of February, 2023, the exceptions filed by
James and Karen Pearlstein, Reed and Gail Slogoff, and Robert and Cynthia
Pearlstein to this Court’s Opinion and Order in Pearlstein v. Commonwealth, 267
A.3d 593 (Pa. Cmwlth. 2021), are OVERRULED. The order of the Board of Finance
and Revenue dated August 23, 2017, is AFFIRMED. Judgment entered in favor of
the Department of Revenue.
__________________________________
MICHAEL H. WOJCIK, Judge
2
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
James and Karen Pearlstein, : CASES CONSOLIDATED
Petitioners :
:
v. : No. 741 F.R. 2017: Submitted: December 14, 2022
Commonwealth of Pennsylvania, :
Respondent :
Reed and Gail Slogoff, :
Petitioners :
:
v. : No. 742 F.R. 2017:
Commonwealth of Pennsylvania, :
Respondent :
Robert Pearlstein and Cynthia Pearlstein, :
Petitioners :
:
v. : No. 743 F.R. 2017:
Commonwealth of Pennsylvania, :
Respondent :
BEFORE: HONORABLE RENÉE COHN JUBELIRER, 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 LORI A. DUMAS, Judge
OPINION NOT REPORTED
DISSENTING OPINION
BY JUDGE McCULLOUGH FILED: February 10, 2023
Respectfully, I disagree with the Majority’s decision to overrule the
exceptions filed by James and Karen Pearlstein, Reed and Gail Slogoff, and Robert
and Cynthia Pearlstein (together, Taxpayers). I would sustain the exceptions for the
following reasons set forth in former Judge Crompton’s dissenting opinion in James
and Karen Pearlstein v. Commonwealth, 267 A.3d 593, 609 (Pa. Cmwlth. 2021):
Taxpayers adopted and consistently used a method of
accounting for book purposes that is based on accepted
accounting principles and practices, namely, [Federal
Income Tax] [(FIT)]. They reported their [Personal Income
Tax] [(PIT)] income in conformity with the FIT method, and
thus complied with PIT regulations that required that they
report income in a manner consistent with their selected and
generally accepted accounting method.
The FIT method is utilized widely and was utilized
consistently by Taxpayers here. In the [Personal Income
Tax Bulletin No. 2006-7, “Pennsylvania Tax Treatment of
IRC § 1031 Like-Kind Exchanges”] [(Bulletin)], the
[Department of Revenue] [(Department)] expressly
acknowledged acceptance of like-kind exchanges utilizing a
consistently used and generally accepted accounting
method. Therefore, Taxpayers are entitled to the benefit of
the Department’s opinion at the time. Stated differently, the
Revised Bulletin should not have been applied retroactively
to Taxpayers in these circumstances, where they
consistently used the FIT and complied with then-applicable
law and stated policy.
Section 101.2 of the PIT regulations [61 Pa. Code §101.2]
should have been construed and applied to the 2013-14 tax
years in accordance with the Department’s then-current
interpretation. The Department’s after-the-fact application
of the Revised Bulletin to Taxpayers’ PIT returns has the
effect of altering the legal landscape after Taxpayers
complied with applicable and then available guidance then
filing their PIT returns. In allowing the Department to
disregard the Bulletin, and instead apply the Revised
Bulletin to the tax years in question, the Majority errs.[ ]
PAM - 2
Id. (footnote omitted).
Accordingly, I respectfully dissent and, unlike the Majority, would
sustain Taxpayers’ exceptions.
________________________________
PATRICIA A. McCULLOUGH, Judge
PAM - 3