Can the Department of Revenue Collect Realty Transfer Taxes More than Once on the Same Sale?

by Attorney Paula J. Leicht Esq.

Paying Double Reality Taxes

A: Yes.

The Department of Revenue takes the position that an assignment of an executed agreement of sale for real property may result in double realty transfer tax because it considers the assignment a separate transaction involving the conveyance of real estate.

When a buyer buys a commercial property, but does not have a business entity formed, the buyer signs the agreement as an individual with the intention of assigning the agreement to a new business entity after the buyer is satisfied that all conditions are met.

Beware: the Department of Revenue will say that there are two transactions: the agreement of sale with the individual buyer and the assignment to the new business entity.

Ways to avoid double taxation of realty transfer tax are 1) create the business entity from the beginning in order to sign the agreement of sale; 2) revoke the original agreement of sale and enter into a new agreement after the new business entity is created; or 3) enter into a novation agreement.

Gaining Access to Landlocked Property After O’Reilly Case

By: Paula J. Leicht, Esq.

Gaining Access To Landlocked Property

For property owners whose property does not adjoin a public road and does not have access thereto either through an express access easement or easement across adjoining property by implication involving a common owner in the chain of title, the Private Road Act (the “Act”) of June 13, 1836 P.L. 551 as amended, 36 P.S. §§ 1781-2891, offered the landlocked property owner a remedy.

Since the Act was adopted in 1836, the owner of landlocked property could petition the court of common pleas in the county where the property is located for a Board of Viewers to lay out a road on adjoining properties for access to a public road for the landlocked property. The damages for same as determined by the Board of Viewers would be paid by the landlocked property owner.

Several recent appellate court cases on the subject, however, have called into question the constitutionality of this remedy and its availability to redress the problem. The argument goes that a petitioner must establish that the public be the primary and paramount beneficiary of the opening of the road to the landlocked property, otherwise the taking of another’s property for an access easement would in effect be an unconstitutional taking of another’s property in the absence of a public purpose.

The original case which brought us to this end is In the matter of: Opening a Private Road for benefit of O’Reilly, 954 A.2d 57 (Cmnwth., 2008) (the “First O’Reilly Appeal”). In this First O’Reilly Appeal to Commonwealth Court, the Commonwealth Court upheld the Court of Common Pleas of Allegheny County in determining that the Act is constitutional for many reasons, including the long history of the Act’s use to provide an access remedy for truly landlocked parcels. The Commonwealth Court held that the opening of a road to an otherwise landlocked property serves a public purpose because “otherwise inaccessible swaths of land in Pennsylvania would remain fallow and unproductive, . . . making the land virtually worthless and not contributing to commerce or the tax base of this Commonwealth.”

The parties whose land would be taken for the private access road appealed the First O’Reilly Appeal to the Pennsylvania Supreme Court, 5 A.3d 246 (2010) (the “Second O’Reilly Appeal”). The Pennsylvania Supreme Court sent the case back to the Commonwealth Court to “determine whether the public may be fairly regarded as the primary and paramount beneficiary of a taking under the Act.” Following a further remand by the Commonwealth Court, 22 A.3d 291 (Cmnwth., 2011) to the Court of Common Pleas of Allegheny County to develop additional evidence, the Court of Common Pleas concluded that the petitioner did not establish that the public would be the primary and paramount beneficiary of the O’Reilly application. The petitioner appealed this decision to the Commonwealth Court in the Third O’Reilly Appeal, 100 A.3d 689 (2014), which upheld the lower court’s last conclusion, i.e., that the public benefit was not established in this case.

In conclusion, the above series of appellate cases, although not outright determining that the Act is unconstitutional, certainly will make any future petitioner’s case for access to landlocked property over land of another a very difficult one to win. This result may affect members of the farming community because very often historically agricultural lands were conveyed together with a wood lot on the nearby forested hills, parcels which were not necessarily contiguous to the agricultural lands and parcels for which access easements to a public road were not granted.

Advantages of Converting a Limited Partnership to an LLC

by Paula J. Leicht

Advantages of Converting a Limited Partnership to an LLC

Two recent changes in Pennsylvania law made it advantageous to convert a limited partnership which owns real estate (and/or other income-producing assets) to a limited liability company.

A preferred form of ownership for real estate and other income-producing investments prior to January 1, 2016 was the limited partnership which owns the real estate with a limited liability company (“LLC”) as the general partner. This vehicle accomplished two purposes: one, it avoided the Pennsylvania capital stock tax which an LLC was subject to; and two, it preserved liability protection for the general partnership interest. This approach involved the creation of two entities, a limited partnership and a limited liability company as the general partner, and the requirement to file two separate tax returns.

Two recent changes in Pennsylvania law now make it possible to convert the limited partnership to an LLC without incurring realty transfer tax liability on the transfer and the second change effective January 1, 2016 repealed the capital stock tax on LLC’s. The LLC to serve as general partner may now be dissolved as the unlimited liability protection is obtained through the converted limited partnership.

These two changes now make it possible for real estate investors to convert their limited partnerships into LLCs without having to worry about long-term tax obligations and also to continue to enjoy limited liability protections. With only one entity remaining, the limited partnership that converted to an LLC, only one tax return needs to be filed.

If you have an interest in more information on this subject, please contact our office.

Economic Development Incentives in PA

by Paula J. Leicht and Brian J. Hinkle

Economic Development Incentives in PA

Over the past eight years Pennsylvania has had a remarkably business-friendly environment despite budget shortfalls and an overall weak economy. During that time, and while the Governor’s Office and General Assembly were both Republican and Democrat-controlled, existing economic development incentives and programs continued to receive funding and new incentives and programs were created, all of which were aimed at making Pennsylvania an attractive place to do business.

Additionally, with the election of Democrat Governor Tom Wolf, a businessman and former Secretary of the Pennsylvania Department of Revenue, and the pro-business Republican leadership in the General Assembly, the trend toward expanding economic development incentives seems likely to continue.

As such, any business looking to relocate to/expand in Pennsylvania should take full advantage of the numerous economic development incentives offered in Pennsylvania, a number of which are discussed below.

Commonwealth of Pennsylvania Incentives:

Tax breaks and other economic development incentives are essentially the only tools used to attract and retain businesses over which the Commonwealth of Pennsylvania has control.

As it relates to tax breaks, Pennsylvania has been trending toward offering industry and business-specific tax incentives, such as tax credits and Sales and Use Tax exemptions, over the past few years. For example, a 25-year $1.65 billion tax credit was signed into law in 2012 that incentivized the construction of an ethane processing facility in western Pennsylvania. Also, a Sales and Use Tax exemption for sale of airplane parts and services worth an estimated $12.5 million was signed into law in 2013. A similar exemption for helicopters was also enacted in 2009. These types of incentives, which can be challenging to obtain, provide meaningful incentives to any business or industry that receives them.

As for other economic development incentives, the Pennsylvania Department of Community & Economic Development (DCED) invests public resources to create jobs in Pennsylvania. To do so, DCED administers various grants, loans and loan guarantees designed to stimulate economic development in Pennsylvania. These types of incentives are typically less challenging to obtain than the industry or business specific incentives discussed above. The following is a summary of selected programs administered by DCED:

Keystone Opportunity Zones (KOZs) – KOZs were designed to offer state and local tax incentives to attract businesses to designated areas within Pennsylvania. KOZs are designated by local governments and approved by DCED. Incentives offered through the KOZ program include, but are not limited to, abatements and exemptions to: corporate net income tax; earned income tax; property tax; and business gross receipts tax. KOZ projects also receive Sales and Use Tax exemptions for certain purchases of services and products.

Job Creation Tax Credit (JCTC) Program – The JCTC Program was established for the purpose of securing job-creating economic development opportunities through the expansion of existing businesses and the attraction of new businesses to Pennsylvania. Specifically, the JCTC Program provides employers with a $1,000 tax credit per employee for those employers who meet certain requirements.

In addition to the various programs administered by DCED, numerous opportunities to obtain financing for economic development projects exist in Pennsylvania. For example, the Pennsylvania Economic Development Financing Authority (PEDFA) provides access to low-interest financing for businesses through the issuance of tax-exempt and taxable bonds. Additionally, the Pennsylvania Industrial Development Authority (PIDA) provides access to financing for businesses engaging in projects involving the acquisition, renovation, expansion or new construction of land and buildings.

Local Government Incentives:

While many incentives are offered by the Commonwealth of Pennsylvania, local governments may also offer incentives to attract and retain businesses.

For example, Payment In Lieu of Taxes (PILOT) Agreements are entered into between for-profit or non-profit entities and local governments and involve voluntary payments made by the entity to the local government as a substitute for county and township property and school district taxes. With regard to for-profit entities, PILOT Agreements are used almost exclusively as an economic development incentive to attract certain businesses.

Another example is Tax Increment Financing (TIF), whereby an industrial or commercial development authority may issue tax increment bonds to finance certain project costs for residential, commercial or industrial development projects within a tax increment district, which is created by resolution or ordinance by the governing body of the local government, usually a municipality or county.

At Mette, Evans & Woodside, our experienced attorneys can help you navigate the numerous programs available, work together with our strategic partners on any government relations efforts which may be required to obtain incentives, and address other issues, such as obtaining land development, subdivision and zoning approvals, which may arise during the course of your relocation/expansion.

Employer Service Provider Security Breach

by Paula Leicht

Employer Service Provider Security Breach

What should you do in the event of notification by your employer that a service provider to your company has notified its clients that the service provider’s client files were accessed by unauthorized persons?

There have been a number of recent media articles on this subject and some recommendations on steps an employee should take to avoid being a victim of identity theft. This article will summarize the type of employee information obtained and outline steps to take to minimize the risk that the personal information obtained could be used by unauthorized persons.

First, the type of information obtained could include your name, social security number, direct deposit bank account information, if applicable, date of birth, hire date, wage information, home and cell phone numbers and home address. The type of information obtained depends upon the type of information provided by the employer for the particular service.

Your personal information could be obtained, even if you are no longer working for the employer, if the accounts were not deleted by the service provider for prior employees. If this is the case, you should receive notice of the security breach from your former employer.

The following are recommended steps to take for you to avoid unauthorized use of your personal information:

1. Obtain free credit reports from the three national credit reporting agencies at www.annualcreditreport.com or call toll free (877) 322-8228. Each agency will provide one free report annually. If you obtain one credit report from each of the three agencies at four month intervals, you can review your credit status for an entire year at no cost to you.

2. Immediately notify the banks involving the accounts which were compromised. The prudent approach to take would be to close those accounts.

3. Place a fraud alert on your credit reports by contacting one of the three reporting agencies: Equifax (800) 525-6285; Experian (888) 397-3742; and TransUnion (800) 680-7289. The agency you contact will alert the remaining two agencies. This fraud alert expires after ninety (90) days so you will need to renew the alert on day ninety-one (91) for the foreseeable future.

4. Routinely review bank account statements, credit card statements and telephone charges for any unauthorized activity.

5. File an Identity Theft Affidavit with the Internal Revenue Service (IRS Form 14039). This form alerts the IRS to mark your account to identify questionable activity such as someone other than yourself filing a tax return in your name and claiming your refund.

The Federal Trade Commission Consumer Information website at www.consumer.ftc.gov notes that identity thieves, upon obtaining your personal information, can withdraw funds from your bank accounts, charge purchases to your credit card, open new utility accounts or use health insurance information for medical charges.

Identity thieves also know that immediately upon being notified that your personal information has been obtained by unauthorized persons you will diligently be watching and monitoring your accounts for unauthorized activity. It could be a few months, a year or several years before the identity thieves actually attempt to do something with your personal information.

As the foregoing summary indicates, these are serious matters and should be addressed by all affected employees immediately as well as in the near and distant future.

Oil and Gas Act – Municipal Zoning Limitations

by Paula Leicht

Oil And Gas Act - Municipal Zoning Limitations

On February 14, 2012, the Unconventional Gas Well Impact Fee Act (Act 13 of 2012) which amends Title 58 (Oil and Gas) of the Pennsylvania Consolidated Statutes was signed into law by Governor Corbett. This Act among other matters required municipalities to amend their land use ordinances to allow unconventional gas wells, such as those associated with extraction of natural gas from the Marcellus Shale formation, as a permitted use in every zoning district and their related facilities in nearly every zoning district (58 Pa. C.S. §3304). The definition of oil and gas operations also was expanded to include construction, installation, use, maintenance and repair of oil and gas pipelines, natural gas processing plants or facilities performing equivalent functions and all equipment directly associated with the foregoing activities.

Under the Act, there are certain permissible limitations on the location of oil and gas operations within residential zoning districts. For example, a local zoning restriction may prohibit wells or well sites within a residential district if the well site cannot be placed so that the wellhead is at least 500 feet from any existing building. The well site may not be located so that the outer edge of the well pad is closer than 300 feet from an existing building in a residential district and oil and gas operations may not take place within 300 feet of an existing building. Impoundment areas for oil and gas operations also are permitted in all zoning districts provided that the edge of an impoundment cannot be located closer than 300 feet from an existing building.

The Act further provides that natural gas compressor stations must be authorized as a permitted use in agricultural and industrial zones and as a conditional use provided the compressor building is located at least 750 feet from the nearest existing building or 200 feet from the nearest lot line, whichever is greater and the noise level cannot exceed a noise standard of 600 dbA at the nearest property line or the applicable standard imposed by Federal law, whichever is less.

Other than the principal exceptions outlined above, among other lesser limitations, municipalities are preempted from regulating oil and gas operations as defined in Act 13 of 2012 (58 Pa. C.S. §3302).

In response to the above limitations on the ability of local government to regulate the location of oil and gas operations within their jurisdictions, a number of municipalities filed a Petition for Review with the Pennsylvania Commonwealth Court on March 29, 2012 challenging the constitutionality of state preemption of local regulation and, in particular, zoning regulations under Act 13.

The Commonwealth Court in an order dated July 26, 2012 held that Section 3304 of the Act which, in effect, requires a municipality to violate its comprehensive plan for growth and development violates substantive due process because it does not protect the interests of neighboring property owners from harm, it alters the character of the neighborhood and it makes zoning classifications a nullity as it requires a municipality to allow in all zones, drilling operations, impoundments, gas compressor stations and related facilities.

The Commonwealth was permanently enjoined from enforcing this Section 3304 and most of the remainder of Chapter 33 of the Act. The Commonwealth among others filed a Notice of Appeal of the Commonwealth Court’s decision with the Pennsylvania Supreme Court on July 27, 2012. Stay tuned for further developments in this very significant case.