LEGAL NEWSLINE

HARRISBURG, Pa. (Legal Newsline) -- The Pennsylvania Supreme Court has ruled that a pulpwood company's sale of its Delaware land constitutes taxable business income in the state.

Glatfelter Pulpwood Company, a wholly-owned subsidiary of P.H. Glatfelter Corp., challenged a Commonwealth Court's decision to side with the state Board of Finance and Revenue.

The board had determined that Glatfelter's gains from the sale of a tract of Delaware timberland could be characterized as "business income," and is subject to taxation in Pennsylvania.

Glatfelter, which owns and operates a paper mill in Spring Grove, produces a variety of specialty paper products.

Its sole business activity is to procure pulpwood for its parent company's operations, at the lowest possible costs and from two sources: by growing and harvesting trees from its own timberland, or by purchasing pulpwood from third parties on the open market.

As of Jan. 1, 2003, Glatfelter's timberland holdings were as follows: 25,821 acres in Maryland; 19,249 acres in Delaware; 28,595 acres in Pennsylvania; and 40,682 acres in Virginia.

That same year, Glatfelter made a corporate decision to sell certain timberland holdings, thereby decreasing the percentage of pulpwood procured for its parent company from its timberlands.

In 2004, as part of its timberland divestiture plan, Glatfelter sold 4,882 of its 19,249 Delaware acres for $56,586,000, realizing a net gain of $55,355,452.

Glatfelter distributed all of the net proceeds from this sale to its parent company, which used the distributed proceeds to pay down debt and to pay dividends to its shareholders.

As required by Delaware tax law, Glatfelter allocated 100 percent of the net gain from the timberland sale to Delaware and paid Delaware corporate income tax on the gain in 2004.

It then reported the timberland sale on its federal tax return as a sale or exchange of property used in a trade or business.

Also, in its initial 2004 Pennsylvania corporate tax report, Glatfelter reported a corporate net income tax liability of $2,189,876, which it paid.

It then filed an amended 2004 Pennsylvania corporate tax report asserting that its reported net gain on the 2004 Delaware timberland sale should have been considered non-business income allocated to Delaware.

Therefore, the company claimed, it actually suffered a net loss of $3,044,914 for the tax year, and its Pennsylvania corporate net income tax liability was zero.

The Pennsylvania Department of Revenue declined to characterize Glatfelter's net gain from the Delaware timberland sale as non-business income, and concluded the company's 2004 business income was $52,327,343.

Instead, the department attributed 42 percent of Glatfelter's income to Pennsylvania and assessed the company's corporate net income tax liability at $2,205,211.

Glatfelter filed an appeal with the department's Board of Appeals, seeking a refund of its 2004 corporate net income tax in the amount of $2,205,211.

The board denied relief. Glatfelter then filed an appeal with the Board of Finance and Revenue, again requesting that the gain from the timberland sale be considered non-business income.

The board denied the appeal.

In June 2007, Glatfelter filed a petition for review in the Commonwealth Court. The court affirmed the board's decision.

Glatfelter then filed a direct appeal with the state Supreme Court.

The state's high court affirmed the lower court's decision in its Jan. 22 ruling.

Justice Seamus McCaffery, who wrote the majority opinion, explained that the stipulations establish that Glatfelter's timberlands were "integral operational assets" of its unitary business.

"The timberlands could in no sense be characterized as passive investments," he wrote.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.