Pennsylvania taxpayers should be aware of the recent decision by the Pennsylvania Supreme Court in Mission Funding Alpha v. Commonwealth, in which the court held that a refund claim is timely only if it is filed within three years from the due date of the tax return, potentially without extensions.

The taxpayer in Mission Funding made estimated payments of Pennsylvania corporate taxes (corporate net income tax (CNIT) and capital stock franchise tax (CSFT)) totalling $430,000 for its tax year ending December 31, 2007, and had an overpayment of $32,297 carried forward from the prior tax year. The due date for the taxpayer's 2007 annual report—without extensions—was April 15, 2008, and all tax owed by the taxpayer was due on April 15, 2008 (even if the taxpayer had a valid extension on file).

The taxpayer failed to seek an extension to file its annual corporate tax report for 2007. It filed its corporate tax report on September 19, 2008, reporting CSFT liability of $66,344 and CNIT liability of $314,175. The Pennsylvania Department of Revenue accepted the taxpayer's annual report as filed, applied the taxpayer's estimated tax payments and overpayment carryforward against the reported 2007 liability, and imposed a $913 late-filing penalty.

On September 16, 2011, just short of three years after the taxpayer filed its return, the taxpayer filed a petition claiming a CSFT refund of $66,344. The Board of Appeals and Board of Finance and Revenue denied the refund claim as untimely, holding that the due date for filing a refund claim was April 15, 2011—three years after the date that the taxpayer's payment and the annual report were due.

Pennsylvania law requires a taxpayer to file a petition for a refund of tax "within three years of actual payment of the tax, interest or penalty" (emphasis added). The issue, therefore, was whether the "actual payment of the tax" occurred when the taxpayer filed its late return or at some prior date.

The Commonwealth Court sided with the taxpayer, finding that the "actual payment of tax" occurred on September 19, 2008, when the taxpayer filed its 2007 annual report and the taxpayer's 2007 CSFT liability was established, allowing the credits on the taxpayer's account to be applied.

The Pennsylvania Supreme Court, however, reversed the Commonwealth Court's decision, holding that the "actual payment of tax" occurred on April 15, 2008, when the taxpayer's payments of CSFT and CNIT were due. It agreed with the Commonwealth Court that the actual payment occurs when the credits on the account can be applied against a taxpayer's liability. However, the Court determined that actual payment could happen without the filing of a return by the taxpayer, and that the payment of tax and the filing of a return are two separate acts—even though in many cases, they occur at the same time.

In holding that the actual payment of tax occurred when the CSFT and CNIT were due, the Court relied on the fact that, under Pennsylvania law, the taxpayer's estimated tax payments and credits were treated as payments of 2007 CSFT and CNIT on the due date of the annual report (April 15, 2008). The court stated: "[w]e further hold the filing of the annual report—when it takes place after the due date as happened here—is not the triggering event for determining whether a refund petition is timely filed."

The majority cautioned that its opinion is "based on the facts before us here," leaving unanswered the question of whether the result would have been different if the taxpayer had timely sought an extension of its annual report. On one hand, it could be argued that such a timely extension request gives notice to the Commonwealth that the taxpayer's liability will not be ascertained until the return is filed, thereby allowing prior deposits and credits to be applied against the return-reported liability. On the other hand, if the due date of the payment is determinative without regard to when a return is timely filed, an extension arguably is irrelevant.

The refund procedures at issue apply to virtually all Pennsylvania taxes (including personal income tax). Consequently, to be cautious, Pennsylvania taxpayers should file refund claims within three years of the due date of a return without extensions. This contrasts with the federal rule, which allows for refunds to be requested until the later of (i) three years from when the return was filed, or (ii) two years from when the tax was paid. Many Pennsylvania taxpayers, therefore, could have up to six months fewer than they think to file refund claims (and up to six months fewer than they have to file a claim for a refund of federal tax for the same period).

Ballard Spahr's Tax Group can assist with any questions about Pennsylvania refund claims or any other Pennsylvania tax issues. For more information, please contact Wendi L. Kotzen or Saba Ashraf, co-leaders of the Tax Group.

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