Pennsylvania Supreme Court Holds that Gain from Sale was Apportionable Business Income

State and Local Tax

By Allen Wassel

On January 22, 2013, the Pennsylvania Supreme Court upheld the Commonwealth Court's ruling that the sale of timberland should be treated as apportionable business income in the case of Glatfelter Pulpwood Company v. the Commonwealth of Pennsylvania.


Glatfelter Pulpwood Company's ("Glatfelter" or "Company") business consisted almost exclusively of selling pulpwood to its parent company, which the parent then used in its manufacturing operations. The pulpwood that Glatfelter sold was either purchased from third parties, or produced from company-owned timberland. Historically, Glatfelter reported the income from these transactions as apportionable business income on its Pennsylvania corporate income tax return.

Due to a decreased demand for pulpwood, the Company made a business decision to sell-off a portion of its timberland holdings. Since the timberland was physically located in the state of Delaware, Glatfelter reported the resulting gain as nonbusiness income allocable to Delaware.

The Pennsylvania Department of Revenue ("Department") did not agree with this treatment and denied the classification as nonbusiness income, arguing that the income from the sale should be included in business income because it resulted from the sale of property used in the ordinary course of Glatfelter's business operations.

Subsequently, the Pennsylvania Board of Appeals, Board of Finance & Revenue and Commonwealth Court each ruled in favor of the Department and held that the gain was taxable to Pennsylvania as apportionable business income.


Glatfelter primarily argued that the gain from the sale of the timberland should not be subject to tax in Pennsylvania because the gain did not meet the definition of "business income." The Company also argued that Pennsylvania could not tax the gain from the sale of real property that was physically located in Delaware, and further, that Pennsylvania taxing a portion of the gain when 100% of the gain was already taxed by Delaware resulted in unfair taxation.


The Court looked at the business operations of the Company and the parent as a whole, instead of in silos. The Court determined that because Glatfelter and its parent operated a unitary business, which included a paper mill physically located in Pennsylvania, the gain was apportionable business income. The Court also cited a 2001 amendment to the statutory definition of "business income" in support of its ruling. The amendment changed the phrase from "…income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations" to "…if either the acquisition, the management or the disposition of the property …" The Court determined that rather than having to meet each of the three (3) tests included in the pre-2001 definition, the gain from the 2004 sale of the timberland should be classified as "business income" if it meets any of the three (3) tests included in amended definition. The Court referred to the taxpayer's description of its business activities, which included the original acquisition and subsequent management of the timberlands, in support of its decision that the gain be treated as "business income." 

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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