Recently, in O’Donnell v. Allegheny County North Tax Collection Committee, et al., No. 8 WAP 2021 (Dec. 27, 2021), the Pennsylvania Supreme Court held that whistleblower payments constituted compensation subject to local earned income taxes.

In 2014, the taxpayer had filed an action alleging that his employer violated the federal False Claims Act (“FCA”).  After a “whistleblower,” such as the taxpayer, files an action under the FCA (known as a “qui tam action”), the government choses whether to pursue the claim, let the whistleblower pursue the claim, or seek dismissal of the claim.  Despite this control by the government, the FCA provides the whistleblower with “an interest in the lawsuit,” specifically, an entitlement to part of any settlement the government obtains in the action.    Thus, the whistleblower’s monetary incentive drives the initiation of the lawsuit.  Here, the taxpayer received an award equal to 16% of the settlement, amounting to $34,560,000, later the same year.

Later, in 2017, the tax collector for the School District and the Borough in which the taxpayer resided discovered that the taxpayer had not filed a local earned income tax return for 2014, and assessed him approximately $437,000 in tax, interest, penalties, and costs based on the award.

The School District and the Borough derive their authority to impose an earned income tax on their residents, such as the taxpayer, from the Local Tax Enabling Act (“LTEA”).  The LTEA defines “earned income” as “[t]he compensation as required to be reported to or as determined by the [Pennsylvania Department of Revenue] under section 303 of the . . . Tax Reform Code of 1971, and rules and regulations promulgated under that section.”

Section 303 defines “compensation” for state Personal Income Tax purposes, in relevant part, as:  “All salaries, wages, commissions, bonuses and incentive payments whether based on profits or otherwise, fees, tips, and similar remuneration received for services rendered whether directed or though and agent and whether in cash or in property . . . ”  72 P.S. § 7303(a)(1)(i).

In addition, the Department’s regulations provide, in relevant part:

Compensation includes items of remuneration received, directly or through an agent, in cash or in property, based on payroll periods or piecework, for services rendered as an employee or casual employee, agent or officer of an individual, partnership, business or nonprofit corporation, or government agency. These items include salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips, dismissal, termination or severance payments, early retirement incentive payments and other additional compensation contingent upon retirement, including payments in excess of the scheduled or customary salaries provided for those who are not terminating service, rewards, vacation and holiday pay, paid leaves of absence, payments for unused vacation or sick leave, tax assumed by the employer, or casual employer signing bonuses, amounts received under employee benefit plans and deferred compensation arrangements, and other remuneration received for services rendered.

61 Pa. Code 101.6(a) (emphasis added).

The question for the Supreme Court was whether the qui tam award was taxable in Pennsylvania as “compensation” under Section 303.  Qui tam awards are not explicitly listed in the statutory definition of “compensation.”  Therefore, the Court was required to determine whether the award fell within any of the other enumerated categories of compensation in the statute, which necessitated an analysis of qui tam actions and their purpose.  The Court noted that the FCA aims to prevent fraud upon the government by incentivizing private citizens to act “‘for the person and for the United States Government’ against the entity perpetrating the fraud.”  Thus, the Court concluded that qui tam awards fit within the listed category of “incentive payments.”  In a footnote to its decision, the Court also concluded that the award met the definition of compensation for “similar remuneration for services rendered,” as remuneration for the taxpayer’s services in providing useful information to the federal government about his employer’s fraud and for initiating the qui tam action.

Relying on the Department’s regulation — which states that compensation must be for “for services rendered as an employee or casual employee, agent or officer” — the Commonwealth Court had previously held that the taxpayer was required to be (but was not) an employee or agent of the federal government for the qui tam award to be taxable.  But the Supreme Court disagreed, holding that there is nothing in the plain language of the statutory definition of “compensation” suggesting that an employment nexus is a prerequisite for a payment to constitute compensation.  In fact, according to the Supreme Court, there are several categories of compensation mentioned in the statute that are routinely provided outside of an employment relationship, such as commissions, fees, and tips.  Moreover, contrary to the Commonwealth Court’s view, the Supreme Court concluded that the regulation does not limit the definition of compensation to require an employment relationship, but rather provides a non-exhaustive, illustrative list of common items that the Department believes qualify as compensation.  In any event, the Supreme Court noted that a regulation cannot conflict with a statute and the statute here clearly did not require the existence of an employment relationship.

The Supreme Court further held — contrary to a dissenting opinion — that, although a whistleblower possesses a private interest in a qui tam action, the qui tam award nevertheless satisfies the statutory requirement that a compensation is for “services rendered,” because a whistleblower renders a service to the government as its representative in bringing the action.

This result is unsurprising, because, as the Supreme Court ultimately noted, the federal government and almost all other states tax qui tam awards.  That said, Pennsylvania’s personal income tax is unique in that it taxes eight enumerated classes of income, rather than simply taxing all federal taxable income.  Consequently, there is some additional room for interpretation when determining what is subject to tax in Pennsylvania.

If you have questions about this Decision or any state tax matter, please feel free to contact Adam Koelsch (717-237-5305) or any member of the McNees State and Local Tax team.

Wayne County is currently going through a countywide reassessment whereby the county is going to reassess ever property within its border.  The last time Wayne County performed a countywide reassessment was in 2004.  Wayne County started the countywide reassessment process back in January 2021 and has since held public meetings, mailed out data mailers to property owners and analyzed the data. Now one year later, the County is gearing up to mail out tentative new assessed values to all property owners in March. Property owners and lessees who pay the real estate taxes will have the opportunity to request an informal review of the tentative values in April and May.  After the informal appeal process, Wayne County will mail 2023 Assessment Notices to all property owners containing the final assessed values before July 1, 2022.  Property owners and lessees who pay the real estate taxes will then have 40-days from the mailing date of the 2023 Assessment Notice to file formal appeals with the Wayne County Board of Assessment Appeals (“Board”) if they don’t agree with the new assessed value.  All formal appeals shall be heard and acted upon by the Board not later than October 31, 2022.  The new assessed values will be effective January 1, 2023 for county and municipal real estate taxes and July 1, 2023 for school district real estate taxes.

Commercial property owners or lessees of commercial property in Wayne County should contact our office to speak with our experienced assessment law attorneys, Paul Morcom (717-237-5364), Adam Koelsch (717-237-5305), or Ryan Gonder (717-237-5340) if they have any questions pertaining to the countywide assessment appeal process or how to determine if the new assessed value is correct.  Our assessment law attorneys have successfully appealed countywide reassessments in Adams County, Allegheny County, Bedford County, Blair County, Cumberland County, Delaware County, Lancaster County, Lehigh County,  Luzerne County, Monroe County, Philadelphia County and Washington County.

The deadline for filing a real estate tax assessment appeal for the 2022 tax year is fast approaching in Allegheny County.  The deadline is March 31, 2022.  Property owners of hotels, restaurants, bars or any property type that has been affected by COVID 19 should be taking a close look at their assessed values for 2022 and possibly filing assessment appeals for the 2022 tax year.   Allegheny County is the only county out of the 67 counties in Pennsylvania whereby you appeal the assessed value when the assessed value is already effective.

If you have any questions about appealing your real property in Allegheny County, please contact Paul Morcom (717-237-5364).

On February 1, 2022, the Pennsylvania Supreme Court granted a Petition for Allowance of Appeal in GM Berkshire Hills LLC and GM Oberlin Berkshire Hills LLC v. Berks County Board of Assessment and Wilson School District, 16 MAP 2022.  The issues are limited to the following:

a.  Do a school district’s selective real estate tax assessment appeals violate the Uniformity Clause of the Pennsylvania Constitution when the school district chooses only recently-sold properties for appeal, leaving most properties in the district at outdated base-year values?

b.  Do a school district’s selective real estate tax assessment appeals violate the Uniformity Clause of the Pennsylvania Constitution when the school district chooses only certain recently-sold properties that would generate a minimum amount of additional tax revenue for appeal, leaving most properties in the district at outdated base-year values?

It will be interesting to see what the Court does with these issues, especially in light of Chief Justice Saylor’s recent retirement and the addition of Justice Brobson.  Chief Justice Saylor wrote the landmark Valley Forge Towers opinion in 2017 that gave property owners a leg to stand on when fighting the selection process of properties in school district initiated appeals.  Justice Brobson is a Republican that is coming right from being the President Judge at Commonwealth Court, a court that has consistently sided with school district’s selection processes before and after Valley Forge Towers. Stay tuned to see how this one plays out.

On September 13, 2021, the Commonwealth Court held in Alcatel-Lucent USA Inc. v. Com., No. 803 F.R. 2017 (“Alcatel”), that the Pennsylvania Department of Revenue’s policy of applying the Pennsylvania Supreme Court’s landmark decision in Nextel Communications of the Mid-Atlantic, Inc. v. Com., 171 A.3d 682 (Pa. Oct. 18, 2017), only prospectively did not violate the state and federal constitutions.

Before 2017, the Commonwealth’s Corporate Net Income Tax statute had limited a taxpayer’s net operating loss deduction to the greater of a flat cap amount of the taxpayer’s taxable income or a percentage of the taxpayer’s apportioned income, both of which varied by year.  For tax year 2007, the limit was the greater of 12.5% of taxable income or $3 million.  In Nextel, the taxpayer argued that the statute discriminated against corporations with more than $3 million in taxable income (“large corporations”), because taxpayers with $3 million or less in taxable income (“small corporations”) paid no tax while large corporations could reduce their taxes by only 12.5%.  The Supreme Court held that the flat cap violated the Uniformity Clause of the Pennsylvania Constitution but it preserved the percentage cap.  Subsequently, the Department issued Corporation Tax Bulletin 2018-02, stating that it would not apply the Nextel decision to taxable years beginning prior to January 1, 2017.

In Alcatel, the taxpayer — who, in 2014, had applied the percentage cap and paid tax on its remaining income — sought a refund, arguing that the Department’s policy was unconstitutional because it continued to apply the percentage cap to large corporations before 2017 but not to the small corporations who had originally applied the now-unconstitutional flat cap.  The taxpayer argued that it was therefore entitled to an unlimited deduction for 2014, just as the small corporations had effectively obtained.

According to the taxpayer, the Department’s policy violated the Uniformity Clause of the Pennsylvania Constitution because it systematically applied the percentage cap to large corporations but not to small ones.  Thus, the question was whether the Department had been under a duty to retroactively apply Nextel to recalculate the deductions of small corporations under the percentage cap.  The Commonwealth Court held that, under the three-pronged test of Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), Nextel did not apply retroactively.  Under that test, a court may apply a decision retroactively if:  (1) the decision does not establish a new principle of law; (2) retroactive application will further the operation of the decision; and (3) the “relevant equities” are in favor of retroactive application.  The Court agreed that, under the first prong, Nextel did not establish a new principal of law, because it had relied on long-standing legal precedent.  But the Court concluded that, under the second prong, applying Nextel to retroactively remove the percentage cap on large corporations would not further that decision, which had explicitly upheld the percentage cap.  The Court further concluded that, under the third prong, the prospect of “[r]etroactively assessing thousands of taxpayers that justifiably relied upon the legality of the flat-dollar deduction prior to the Nextel decision would produce a substantially inequitable result.”  The Court distinguished its decision in General Motors Corp. v. Com., 222 A.3d 454 (Pa. Cmwlth. 2019), which had retroactively applied Nextel under the Chevron test, on the basis that the deduction for the tax year in that case (tax year 2001) was limited to the unconstitutional flat cap and not the percentage cap upheld in Nextel.  Accordingly, the Court held the Department was not required to apply Nextel retroactively and therefore its policy did not violate the Uniformity Clause.

In addition, the Court held that the Department’s policy did not violate the federal Due Process Clause, which protects against the deprivation of property without due process of law, because the taxpayer had merely paid the correct tax due under the (constitutional) percentage cap and was therefore not deprived of property.  The Court further held that the taxpayer did not suffer any discrimination prohibited under the federal Equal Protection Clause because the Supreme Court in Nextel had eliminated the relevant discrimination by removing the flat cap.  Finally, the Court held that the taxpayer had received its “remedy by due course of law” as required by the Remedies Clause of the Pennsylvania Constitution because it had exercised its right to pursue its refund claim at the administrative boards and in the courts (despite the fact that the claim was ultimately unsuccessful).

If your company has received an assessment for Pennsylvania Corporate Net Income Tax or is pursuing a refund, please contact one of our state and local tax attorneys – Adam Koelsch (717-237-5305), Sharon Paxton (717-237-5393) or Paul Morcom (717-237-5364).

The annual assessment appeal deadline of August 1, 2021 for assessed values effective for tax year January 1, 2022 is quickly approaching for the following Pennsylvania Counties:

Adams, Bucks, Butler, Cambria, Chester, Dauphin, Erie, Fayette, Franklin, Indiana,  Lackawanna, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York.

However, because August 1, 2021 falls on a Sunday, you will have until August 2, 2021 to timely file annual assessment appeals in the above-mentioned counties.

The annual assessment appeal deadline of September 1, 2021 for assessed values effective for tax year January 1, 2022 is on the horizon for the following Pennsylvania Counties:

Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntington, Jefferson, Juniata, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Washington, Wayne and Westmoreland.

There are a few oddball counties that have to be different and thus the annual assessment appeal deadline for Berks County is August 15, 2021 and Wyoming County is August 31, 2021.  Philadelphia County is not a specific date, but instead the annual appeal deadline is the first Monday in October, which is the 4th this year. Allegheny County is the only county that has a deadline, March 31, that is actually during the year that you are appealing. Thus, the appeal deadline for assessed values effective for tax year January 1, 2022 in Allegheny County is March 31, 2022.

Each county has its own separate set of local rules pertaining to assessment appeals that need to be navigated in order to successfully file an annual assessment appeal.  If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact Paul Morcom at 717-237-5364 to determine if an appeal is warranted for tax year 2022.

The Pennsylvania Department of Revenue has extended its Voluntary Compliance Program (“Program”) for any business that has inventory or stores property in Pennsylvania but is not registered to collect and pay Pennsylvania taxes. The Program, which runs through June 8, 2021, offers a limited lookback period and penalty relief when the business becomes compliant.

Taxpayers that choose to participate in the Program will not be liable for taxes owed prior to January 1, 2019. Taxpayers who participate in the Program also will be given penalty relief for any non-compliance for past due tax returns that were not filed and taxes that were not paid.   If your company has inventory or stores property in Pennsylvania but is not registered to pay or collect Pennsylvania taxes, please contact one of our SALT attorneys (Paul R. Morcom, 717-237-5364; Sharon Paxton, 717-237-5393; or Adam Koelsch, 717-237-5305) to determine if the Program is right for your company.

The Pennsylvania Department of Revenue adjusted the Common Level Ratio (“CLR”) for Delaware County to reflect Delaware County’s countywide reassessment base change effective January 1, 2021.  Accordingly, for documents accepted between 7/1/2020 to 12/31/2020 the applicable Delaware County CLR is 2.00.  For documents accepted between 1/1/2021 to 6/30/2021 the applicable Delaware County CLR is 1.00.  See Pa. Bull. Doc. No. 21-339, Vol. 51, No. 10, 03/06/2021.

Please contact one of our state and local tax attorneys – Adam Koelsch (717-237-5305), Sharon Paxton (717-237-5393) or Paul Morcom (717-237-5364) – if you have any questions pertaining to realty transfer tax in Pennsylvania.

On March 3, 2021, the Commonwealth Court in Mandler and Nuclear Imaging Systems, Inc. v. Commw., No. 483 F.R. 2014, overruled taxpayers’ exceptions to the Court’s decision affirming the denial of the taxpayers’ petition for refund of employer withholding taxes paid to the Pennsylvania Department of Revenue (the “Department”) in satisfaction of $180,000 in liens.  As part of a prior bankruptcy proceeding, a third-party purchaser had received approval to buy equipment from the taxpayers and had agreed to escrow the funds as payments to state taxing authorities.  The bankruptcy trustee, however, used the funds to pay other liabilities of the taxpayers.  Thus, the Department, which had filed proofs of claim for the taxes in the bankruptcy proceeding, was not paid and it thereafter filed liens against the taxpayers for the taxes owed.

As an initial matter, the Court held that the taxpayers had waived arguments asserting civil rights violations by the Department because they had failed to mention them in their original petition for review or Statement of Questions Involved and did not develop those arguments in their brief, and because they had not raised the arguments in their exceptions apart from “mere declarations without accompanying developed arguments, record citations, or legal authorities” in the supporting briefs.

The Court reaffirmed its holding in its prior opinion that the taxpayers had failed to satisfy their burden of proving their entitlement to refunds.  As Pennsylvania employers, the taxpayers were required under the Tax Code to withhold income taxes from their employees’ compensation and hold those funds in trust on behalf of the Commonwealth.  Trust fund taxes of that kind are not dischargeable in bankruptcy and therefore the bankruptcy proceeding did not relieve the taxpayers of their liabilities.  The taxpayers argued that the Department was barred from collecting the taxes because funds had been escrowed for the express purpose of paying the taxes and the Department failed to claim those funds during the bankruptcy proceedings.  But, although the third-party purchaser had agreed to escrow the funds to pay taxes, nothing in the bankruptcy proceeding specified that the funds were set aside for that purpose.  Moreover, the evidence showed the taxpayers knew that the escrowed funds did not satisfy their tax debt because only $66,215.19 was put into the account, and because documents filed during the bankruptcy proceeding showed that the taxpayers owed $300,000 in taxes to various states, including $180,000 to the Commonwealth.  Furthermore, there was no evidence the Department knew the funds existed, especially given that the Commonwealth was not a party to the bankruptcy settlement.

The Court also reaffirmed its holding in its prior opinion that the doctrine of laches did not bar the Department from collecting the taxes through the liens.  Laches, as applicable to a Commonwealth agency, has three requirements:  (1) the agency intentionally or negligently misrepresented a material fact; (2) the agency knew or had reason to know the other party would justifiably rely on the misrepresentation; and (3) the misrepresentation induced the other part to act to its detriment.  In their exceptions, the taxpayers relied on the decision of In re Estate of Leitham, 726 A.2d 1116 (Pa. Cmwlth. 1999) for the proposition that laches can preclude the Commonwealth from collecting past taxes due.  In response, the Court pointed to its decision nine years later in Borough of Braddock v. Sullivan Plumbing Inc., 654 A.2d 672 (Pa. Cmwlth 2008).  The Braddock court held that laches precluded a borough from collecting interest and penalties because those amounts resulted from the borough’s delay in attempting to collect the tax principal.  But the Braddock court also held that the borough could collect the tax principal because the borough’s delay did not change the fact that the taxpayer owed the tax.  Thus, in the current case, the Court held that the taxpayers had failed to establish laches from the Department’s failure to claim the funds during the bankruptcy because:  (1) the Department had not intentionally or negligently misrepresented any material fact that induced the taxpayers to act to their detriment; (2) the escrowed funds had not been set aside specifically for taxes and therefore the Department could not have necessarily claimed them; (3) the taxpayer’s conclusory statement that “there was prejudice” was insufficient to show it; and (4) the taxpayers, quite simply, owed the taxes.

Finally, the taxpayers claimed, for the first time in their exceptions, that the doctrine of collateral estoppel barred the Department from collecting the taxes.  Collateral estoppel requires, among other things, that “the issue decided in the prior adjudication was identical with the one presented in the later action,” and that “there was a final judgment on the merits.”  The taxpayers had not offered a specific argument on the issue in their exceptions.  But, in any event, the Court concluded that the Department was not estopped because the issues in the current case differed from the issues in the bankruptcy proceedings, and because there was no final judgment on the merits since the tax liens were not satisfied in the bankruptcy proceedings.

If you are considering bankruptcy and know that you have outstanding Pennsylvania tax issues, please contact one of our state and local tax attorneys – Adam Koelsch (717-237-5305), Sharon Paxton (717-237-5393) or Paul Morcom (717-237-5364) to ensure that all of your outstanding Pennsylvania tax issues are addressed properly.

The deadline for filing a real estate tax assessment appeal for the 2021 tax year is fast approaching in Allegheny County.  The deadline is March 31, 2021.  Property owners of hotels, restaurants, bars or any property type that has been affected by the government restrictions due to COVID 19 should be taking a close look at their assessed values for 2021 and possibly filing assessment appeals for the 2021 tax year.   Allegheny County is the only county out of the 67 counties in Pennsylvania whereby you appeal the assessed value when the assessed value is already effective.

If you have any questions about appealing your real property in Allegheny County, please contact Paul Morcom (717-237-5364).