Pa. Courts May Revisit the Meaning of Federal Taxable Income

The ruling in the Mission Funding Beta Company v. Commonwealth case open the possibility that Pennsylvania courts will be asked to define what “federal taxable income” means for Pennsylvania corporate tax purposes.

In a taxpayer-friendly decision, a three-judge panel of the Pennsylvania Commonwealth Court concluded that Section 406 of the state’s Tax Reform Code of 1971 (the Code) is an exception to the general three-year statute of limitations to petition for a refund of Pennsylvania corporate net income tax.¹ With that ruling, the case – Mission Funding Beta Company v. Commonwealth – leaves open the possibility that Pennsylvania courts will be asked to define what “federal taxable income” means for Pennsylvania corporate tax purposes in the context of Section 406.  

The immediate issue in the case was whether the taxpayer, Mission Funding Beta Company (Mission Funding), was foreclosed from filing for a refund of corporate net income tax for the 2008 tax year after filing a Report of Change in PA Corporate Net Income Tax (Report) pursuant to Section 406 of the Code. Mission Funding timely filed its Report after the conclusion of an IRS audit for the 2008 tax year. In its report, Mission Funding claimed a significant reduction in the taxable income it reported in its 2008 tax year. The Pennsylvania Department of Revenue (DOR) rejected the Report on the grounds that “there was no change in federal taxable income.” In rejecting the claimed refund, however, the DOR failed to define the term “federal taxable income” or explain the reason for its determination.  

Mission Funding appealed to the Board of Appeals claiming entitlement to the credit. The Board of Appeals and subsequently the Board of Finance and Revenue (BF&R) both denied relief on the grounds that the appeal was filed beyond the general three-year statute of limitations for filing a refund claim under Section 3003.1(a) of the Code.² On appeal, the Commonwealth Court clarified that the general three-year refund limitations period was inapplicable to this case because Mission Funding requested a credit for an overpayment of state taxes after an IRS audit pursuant to Section 406, but ultimately vacated BF&R’s order and remanded the case to BF&R to consider the appropriate definition of “taxable income” noted in Section 406(a).  

Section 406 requires that a Report be filed with the DOR “[i]f the amount of the taxable income, as returned by any corporation to the federal government” is finally changed by the IRS, a federal agency, or federal court. Corporations whose entire business is conducted in Pennsylvania are required to report “taxable income . . . as returned to and ascertained by the federal government,”³ while corporations with business conducted inside and outside the commonwealth are provided with a differently worded statutory framework and must apportion their income to Pennsylvania. The calculation of Pennsylvania corporate net income tax on the return starts with line 28 of Federal Form 1120, which is federal income before net operating losses or special deductions – which makes practical sense because Pennsylvania does not necessarily adhere to federal net operating losses or special deductions. But there is nothing in Section 406 that ties the statute to line 28 of the federal income tax return.  

If the General Assembly intended to tie a Report of Change in PA Corporate Net Income Tax to changes in federal taxable income as defined under Section 401, it could have done so. It chose not to. In interpreting Section 406, Pennsylvania courts must consider what a “statute says as well as what it does not say.”⁴ It remains to be seen at this time what issues the Court will weigh if it takes up this issue.  

¹ Mission Funding Beta Company v. Commonwealth, No. 411 F.R. 2019 (Pa. Cmwlth. 2025). 

² 72 P.S. Section 10003.1(a).  

³ 72 P.S. Section 7401(a). 

⁴ Pearlstein v. Cmmw., 323 A.3d 716, 735 (Pa. 2024), reconsideration and reargument denied (Nov. 14, 2024).  

Dan A. Schulder is an equity partner at Cozen O’Connor in its Harrisburg office. Schulder focuses his practice on state and local tax matters. He can be reached at dschulder@cozen.com. 

Heidi R. Schwartz is an associate in the Philadelphia office of Cozen O’Connor. Schwartz, too, focuses on state and local tax matters. She can be reached at hschwartz@cozen.com.

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