Corporate Net Income Tax - Nonbusiness Income, Fair Apportionment and Unrelated Asset Arguments Rejected


In a recent 4-3 decision, Pennsylvania’s Commonwealth Court rejected the Glatfelter Pulpwood Company’s request to exclude from its Corporate Net Income Tax base the extraordinary gain on its sale of Delaware timberland pursuant to a plan by which the company sought to dispose of most of its timberland holdings (362 F.R. 2007, May 4, 2001). The timberland was part of holdings the company had used to generate 25% of the pulpwood it sold to its parent, a paper manufacturing company. The subsidiary company historically had made pulpwood acquisitions on the open market to provide the other 75% of its parent’s pulpwood requirements. The court refused to grant relief on three basic grounds.

Nonbusiness Income

First, the court rejected the company’s argument for “nonbusiness income” treatment. Similar to many other states, in Pennsylvania “nonbusiness income” is income other than “business income,” which is defined as:

Income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if either the acquisition, the management or the disposition of the property constitutes an integral part of the taxpayer’s regular trade or business operations. The term includes all income which is apportionable under the Constitution of the United States.

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