By:  David Shechtman, Esquire, Drinker Biddle & Reath LLP

A recent unreported decision of the Pennsylvania Board of Finance and Revenue ("BFR") is good news for taxpayers subject to the PA Personal Income Tax ("PIT") who are engaging, or have engaged, in like-kind exchanges.  Affected exchangers now can claim tax-free treatment for PIT purposes in more situations, and those who reported taxable income for PIT purposes in prior years (which are still open) may be eligible for refunds.

As a general matter, for PIT purposes, Pennsylvania does not tax business income (including income from a sale or exchange of property used in the business) based on federal income tax principles.  Rather, a taxpayer must compute his income using the method of accounting regularly used in keeping his books.  Acceptable methods include GAAP and other accounting methods which clearly reflect income.  A taxpayer may use "federal income tax" as a method of accounting if permissible for his particular trade or business.

Due to the lack of federal conformity, Pennsylvania PIT does not specifically provide for non-recognition of gain or loss on a like-kind exchange of properties meeting the requirements of Internal Revenue Code §1031.  In PA PIT Bulletin 2006-07 (Oct. 20, 2006), the Pennsylvania Department of Revenue explained that, despite the lack of a §1031 equivalent for PIT purposes, a taxpayer may defer gain on a like-kind exchange if permitted by the taxpayer's method of accounting.The Bulletin contains an example where a taxpayer consistently uses GAAP and follows APB Opinion 29.

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