PRINTER'S NO. 1428
No. 1223 Session of 1983
INTRODUCED BY POTT, TRELLO, WILSON, DORR, D. R. WRIGHT, BOYES,
J. L. WRIGHT, PRATT, JACKSON, SIRIANNI, HALUSKA, GODSHALL,
FARGO, McVERRY, KUKOVICH, BOWSER, MACKOWSKI, MAIALE, ARTY,
NOYE, SWEET, VROON, SEVENTY, MORRIS, WACHOB, BOOK, LETTERMAN,
MILLER, D. W. SNYDER, GRUPPO, MOEHLMANN, FREIND, HERSHEY,
LASHINGER, BURD, BELARDI, SERAFINI, GEIST, F. E. TAYLOR,
MADIGAN, ITKIN, WOGAN, OLASZ, WOZNIAK, JOHNSON, ALDERETTE,
CAWLEY, MERRY, MOWERY, ZWIKL, O'BRIEN, COLAFELLA,
E. Z. TAYLOR AND PETERSON, JUNE 15, 1983
REFERRED TO COMMITTEE ON FINANCE, JUNE 15, 1983
AN ACT
1 Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An
2 act relating to tax reform and State taxation by codifying
3 and enumerating certain subjects of taxation and imposing
4 taxes thereon; providing procedures for the payment,
5 collection, administration and enforcement thereof; providing
6 for tax credits in certain cases; conferring powers and
7 imposing duties upon the Department of Revenue, certain
8 employers, fiduciaries, individuals, persons, corporations
9 and other entities; prescribing crimes, offenses and
10 penalties," providing for the tax treatment of Pennsylvania S
11 corporations and their shareholders.
12 The General Assembly of the Commonwealth of Pennsylvania
13 hereby enacts as follows:
14 Section 1. Section 301(c), (k), (l) and (w) of the act of
15 March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of
16 1971, added August 31, 1971 (P.L.362, No.93) and clause (k)
17 amended November 23, 1976 (P.L.1158, No.256), are amended and
18 clauses are added to read:
19 Section 301. Definitions.--The following words, terms and
1 phrases when used in this article shall have the meaning
2 ascribed to them in this section except where the context
3 clearly indicates a different meaning. Any reference in this
4 article to the Internal Revenue Code shall include the Internal
5 Revenue Code of 1954, as amended to the date on which this
6 article is effective:
7 * * *
8 (c) "Business" means an enterprise, activity, profession,
9 vocation, trade, joint venture, commerce or any other
10 undertaking of any nature when engaged in as commercial
11 enterprise and conducted for profit or ordinarily conducted for
12 profit, whether by an individual, partnership, Pennsylvania S
13 corporation, association or other unincorporated entity.
14 * * *
15 (k) "Income from sources within this Commonwealth" for a
16 nonresident individual, estate or trust means the same as
17 compensation, net profits, gains, dividends, interest or income
18 enumerated and classified under section 303 of this article to
19 the extent that it is earned, received or acquired from sources
20 within this Commonwealth:
21 (1) By reason or ownership or disposition of any interest in
22 real or tangible personal property in this Commonwealth; or
23 (2) In connection with a trade, profession, occupation
24 carried on in this Commonwealth or for the rendition of personal
25 services performed in this Commonwealth; or
26 (3) As a distributive share of the income of an
27 unincorporated business, Pennsylvania S corporation, profession,
28 enterprise, undertaking or other activity as the result of work
29 done, services rendered or other business activities conducted
30 in this Commonwealth, except as allocated to another state
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1 pursuant to regulations promulgated by the department under this
2 article; or
3 (4) From intangible personal property employed in a trade,
4 profession, occupation or business carried on in this
5 Commonwealth.
6 Provided, however, That "income from sources within this
7 Commonwealth" for a nonresident individual, estate or trust
8 shall not include any items of income enumerated above received
9 or acquired from an investment company registered with the
10 Federal Securities and Exchange Commission under the Investment
11 Company Act of 1940.
12 (l) "Individual" means a natural person and shall include
13 the members of a partnership or association and the shareholders
14 of a Pennsylvania S corporation.
15 * * *
16 (n.1) "Pennsylvania S corporation" means any small
17 corporation as defined in section 301(s.2) which has a valid
18 election under section 307 in effect.
19 * * *
20 (s.2) "Small corporation" means any corporation which has a
21 valid election in effect under subchapter S of Chapter 1 of the
22 Internal Revenue Code of 1954, as amended as of January 1, 1983,
23 and which does not have passive investment income in excess of
24 twenty-five percent of its gross receipts. For purposes of this
25 clause, passive investment income means gross receipts derived
26 from royalties, rents, dividends, interest, annuities and sales
27 or exchanges of stock or securities (gross receipts from such
28 sales or exchanges being taken into account only to the extent
29 of gains therefrom).
30 * * *
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1 (w) "Taxpayer" means any individual, estate or trust subject
2 to the tax imposed by this article, any partnership having a
3 partner who is a taxpayer under this act, any Pennsylvania S
4 corporation having a shareholder who is a taxpayer under this
5 act and any employer required to withhold tax on compensation
6 paid.
7 Section 2. Article III of the act is amended by adding a
8 part to read:
9 ARTICLE III
10 PERSONAL INCOME TAX
11 * * *
12 PART IV-A
13 PENNSYLVANIA S CORPORATIONS
14 Section 307. Election by Small Corporation.--Except as
15 provided in section 307.6, any small corporation may elect not
16 to be subject to the tax imposed under Article IV. Such election
17 shall be valid only if all the shareholders of the corporation
18 on the day on which the election is made consent to the
19 election.
20 Section 307.1. Manner of Making Election.--(a) An election
21 made pursuant to section 307 shall be made in such manner as
22 prescribed by the department.
23 (b) An election under section 307 may be made for any
24 taxable year at any time during the preceding taxable year or at
25 any time before the fifteenth day of the third month of the
26 current taxable year.
27 Section 307.2. Effective Years of Election.--An election
28 made pursuant to section 307 shall be effective for the taxable
29 year for which the election is made and for each succeeding
30 taxable year unless revoked or terminated.
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1 Section 307.3. Revocation of Election.--(a) An election
2 under section 307 may be revoked if shareholders holding more
3 than one-half of the shares of stock of the corporation on the
4 day on which the revocation is made consent to the revocation.
5 (b) Except as provided in subsection (c), a revocation under
6 subsection (a) shall be effective on the first day of the
7 taxable year if made on or before the fifteenth day of the third
8 month thereof; if the revocation is made after such date, it
9 shall be effective for the following taxable year.
10 (c) If the revocation specifies a date for revocation which
11 is on or after the day on which the revocation is made, the
12 revocation shall be effective on and after the date so
13 specified.
14 Section 307.4. Termination by Corporation Ceasing to be a
15 Small Corporation.--(a) If a corporation ceases to be a small
16 corporation, as defined in section 301(s.2), the election under
17 section 307 shall terminate.
18 (b) Such termination shall be effective on the date on which
19 the corporation ceases to be a small corporation, as defined in
20 section 301(s.2).
21 Section 307.5. Revocation or Termination Year.--(a) The
22 portion of the revocation or termination year of a Pennsylvania
23 S corporation ending before the first day for which the
24 revocation or termination is effective shall be treated as a
25 short taxable year for which the corporation is a Pennsylvania S
26 corporation.
27 (b) The portion of such year beginning on the first day for
28 which the revocation or termination is effective shall be
29 treated as a short taxable year for which the corporation is
30 subject to the tax imposed by Article IV.
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1 (c) The allocation of income and expense items to be taken
2 into consideration in each short year shall be made in
3 accordance with such regulations as may be issued by the
4 department.
5 Section 307.6. Election after Revocation or Termination.--If
6 a corporation has made an election under section 307 and if such
7 election has been revoked or terminated, such corporation, and
8 any successor corporation, shall not be eligible to make an
9 election under section 307 for any taxable year prior to its
10 fifth taxable year which begins after the first taxable year for
11 which such revocation or termination is effective.
12 Section 307.7. Taxable Year of a Pennsylvania S
13 Corporation.--The taxable year of a Pennsylvania S corporation
14 shall be the same taxable year which the corporation uses for
15 Federal income tax purposes.
16 Section 307.8. Income of a Pennsylvania S Corporation.--(a)
17 A Pennsylvania S corporation as such shall not be subject to the
18 tax imposed by this article, but the shareholders of the
19 Pennsylvania S corporation shall be subject to the tax imposed
20 under this article as provided in this article.
21 (b) No deduction shall be allowed for taxes based on income
22 or taxes paid by the Pennsylvania S corporation pursuant to
23 subchapter S of Chapter 1 or section 58(d) of the Internal
24 Revenue Code of 1954, as amended as of January 1, 1983.
25 (c) If a Pennsylvania S corporation makes a distribution of
26 property, other than an obligation of such corporation, with
27 respect to its stock and the fair market value of such property
28 exceeds its adjusted basis in the hands of the corporation, then
29 gain shall be recognized on the distribution as if the property
30 had been sold to the distributee at its fair market value.
19830H1223B1428 - 6 -
1 (d) Any election which may affect the computation of items
2 derived from a Pennsylvania S corporation shall be made by the
3 corporation.
4 (e) Any deduction, except a net operating loss deduction,
5 which was disallowed when a corporation was subject to the tax
6 imposed under Article IV shall be allowed in years in which the
7 corporation is a Pennsylvania S corporation to the same extent
8 and in the same manner that the deduction would have been
9 allowed if the corporation had remained subject to the tax
10 imposed under Article IV.
11 Section 307.9. Income of Pennsylvania S Corporations Taxed
12 to Shareholders.--(a) Each shareholder of a Pennsylvania S
13 corporation shall take into income such shareholder's pro rata
14 share of the income or loss in each applicable class of income
15 received by the corporation for its taxable year ending within
16 or with the shareholder's taxable year.
17 (b) Each shareholder's pro rata share of any item for any
18 taxable year shall be the sum of the amounts determined with
19 respect to the shareholder by assigning an equal portion of all
20 items to each day of the taxable year and then by dividing that
21 portion pro rata among the shares outstanding on such day.
22 (c) The character of any item included in the shareholder's
23 pro rata share shall be determined as if such item was realized
24 directly by the shareholder from the source from which it was
25 realized by the corporation or incurred in the same manner as
26 incurred by the corporation.
27 (d) With respect to any deduction allowed pursuant to
28 section 307.8(e), any nonresident shareholder shall be allowed
29 such deduction only to the extent that the previously disallowed
30 deduction would have been considered a deduction related to
19830H1223B1428 - 7 -
1 income from sources within this Commonwealth, within the meaning
2 of section 301(k), during the taxable year when the deduction
3 was disallowed.
4 Section 307.10. Limitation on Pass-thru of Losses to
5 Shareholders.--(a) The aggregate amount of losses taken into
6 account by a shareholder of a Pennsylvania S corporation under
7 section 307.9 shall not exceed the sum of the adjusted basis of
8 the shareholder's stock in the Pennsylvania S corporation,
9 determined after applying section 307.11(a) for the taxable year
10 and the shareholder's adjusted basis of any indebtedness of the
11 Pennsylvania S corporation to the shareholder, determined before
12 applying section 307.11(d) for the taxable year.
13 (b) There shall be no carryover of losses by the
14 shareholders of the Pennsylvania S corporation.
15 Section 307.11. Adjustments to the Basis of the Stock of
16 Shareholders.--(a) The basis of the stock of any shareholder in
17 a Pennsylvania S corporation shall be increased by his share of
18 the corporation's income, including nontaxable income, as
19 determined under section 307.9.
20 (b) The basis of any shareholder's stock in a Pennsylvania S
21 corporation shall be decreased, but not below zero, by any
22 distribution by the corporation to the shareholder which was not
23 included in the income of the shareholder pursuant to section
24 307.12 and by his share of the corporation's losses as
25 determined under section 307.9 to the extent that the loss
26 reduced the shareholder's income subject to the tax imposed
27 under this article or a tax measured by net income, imposed on
28 the shareholder by any other state.
29 (c) If for any taxable year any shareholder's basis in the
30 stock of a Pennsylvania S corporation is reduced to zero, any
19830H1223B1428 - 8 -
1 excess losses will reduce the shareholder's basis, but not below
2 zero, in any indebtedness of the Pennsylvania S corporation to
3 the shareholder.
4 (d) If a shareholder's basis in any indebtedness is reduced
5 under subsection (c) of this section, then such reduction shall
6 be restored before the shareholder's basis in the Pennsylvania S
7 corporation's stock is increased.
8 Section 307.12. Distributions.--(a) A distribution of
9 property by a Pennsylvania S corporation which has no
10 accumulated earnings and profits to a shareholder of the
11 corporation shall not be included in the shareholder's income to
12 the extent that it does not exceed the shareholder's adjusted
13 basis in the stock. Any amount of the distribution in excess of
14 the adjusted basis in the stock shall be treated as a gain from
15 the sale, exchange or other disposition of property.
16 (b) A distribution of property by a Pennsylvania S
17 corporation which has accumulated earnings and profits shall be
18 treated in the same manner as a distribution by a Pennsylvania S
19 corporation without earnings and profits to the extent of the
20 corporation's accumulated adjustment account. That portion of
21 the distribution in excess of the accumulated adjustment account
22 will be treated as a dividend to the extent of the accumulated
23 earnings and profits of the corporation. Any portion of the
24 distribution in excess of the accumulated earnings and profits
25 of the corporation shall be treated in the same manner as a
26 distribution from a Pennsylvania S corporation without
27 accumulated earnings and profits.
28 (c) Accumulated Adjustment Account means an account of the
29 Pennsylvania S corporation which is cumulatively adjusted for
30 the most recent continuous period during which the corporation
19830H1223B1428 - 9 -
1 has been a Pennsylvania S corporation by increasing the account
2 for corporate income and decreasing the account for corporate
3 losses and all distributions of property by the corporation to
4 the shareholders which were not included in the income of the
5 shareholders: Provided, That no adjustment shall be made for any
6 income or loss not in any of the classes of income enumerated in
7 section 303 or for any non-deductible expense.
8 In the case of a non-pro rata distribution of property, the
9 adjustment shall be limited to an amount which bears the same
10 ratio to the balance in such account as the number of shares
11 sold, exchanged or otherwise disposed of bears to the number of
12 shares in the corporation outstanding immediately before such
13 sale, exchange or disposition.
14 Section 3. Section 314 of the act, added August 31, 1971
15 (P.L.362, No.93), is amended to read:
16 Section 314. Income Taxes Imposed by Other States.--(a) A
17 resident taxpayer before allowance of any credit under section
18 312 shall be allowed a credit against the tax otherwise due
19 under this article for the amount of any income tax, wage tax or
20 tax on or measured by gross or net earned or unearned income
21 imposed on him or on a Pennsylvania S corporation in which he is
22 a shareholder, to the extent of his pro rata share thereof
23 determined in accordance with section 307.9, by another state
24 with respect to income which is also subject to tax under this
25 article.
26 (b) The credit provided under this section shall not exceed
27 the proportion of the tax otherwise due under this article that
28 the amount of the taxpayer's income subject to tax by the other
29 jurisdiction bears to his entire taxable income.
30 Section 4. The act is amended by adding a section to read:
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1 Section 330.1. Return of Pennsylvania S Corporation.--(a)
2 Every Pennsylvania S corporation shall make a return for each
3 taxable year, stating specifically all items of gross income and
4 deductions, the names and addresses of all persons owning stock
5 in the corporation at any time during the taxable year, the
6 number of shares of stock owned by each shareholder at all times
7 during the taxable year, the amount of money and other property
8 distributed by the corporation during the taxable year to each
9 shareholder, the date of each distribution, each shareholder's
10 pro rata share of each item of the corporation for the taxable
11 year and such other information as the department may require.
12 (b) The return shall be filed on or before the date when the
13 corporation's Federal income tax return is due.
14 (c) Every Pennsylvania S corporation shall also submit to
15 the department a true copy of the income tax return filed with
16 the Federal Government at the time the return required under
17 subsection (a) is filed.
18 Section 5. Clause (1) and subclause 1 of clause (3) of
19 section 401 of the act, amended December 21, 1981 (P.L.482,
20 No.141), are amended to read:
21 Section 401. Definitions.--The following words, terms, and
22 phrases, when used in this article, shall have the meaning
23 ascribed to them in this section, except where the context
24 clearly indicates a different meaning:
25 (1) "Corporation." A corporation having capital stock,
26 joint-stock association, or limited partnership either organized
27 under the laws of this Commonwealth, the United States, or any
28 other state, territory, or foreign country, or dependency, and
29 (i) doing business in this Commonwealth; or (ii) carrying on
30 activities in this Commonwealth; (iii) having capital or
19830H1223B1428 - 11 -
1 property employed or used in this Commonwealth; or (iv) owning
2 property in this Commonwealth, by or in the name of itself, or
3 any person, partnership, association, limited partnership,
4 joint-stock association or corporation. The word "corporation"
5 shall not include building and loan associations, banks, bank
6 and trust companies, national banks, savings institutions, trust
7 companies, insurance and surety companies and Pennsylvania S
8 corporations.
9 * * *
10 (3) "Taxable income." 1. (a) In case the entire business
11 of the corporation is transacted within this Commonwealth, for
12 any taxable year which begins on or after January 1, 1971,
13 taxable income for the calendar year or fiscal year as returned
14 to and ascertained by the Federal Government, or in the case of
15 a corporation participating in the filing of consolidated
16 returns to the Federal Government, the taxable income which
17 would have been returned to and ascertained by the Federal
18 Government if separate returns had been made to the Federal
19 Government for the current and prior taxable years, subject,
20 however, to any correction thereof, for fraud, evasion, or error
21 as finally ascertained by the Federal Government.
22 (b) Additional deductions shall be allowed from taxable
23 income on account of any dividends received from any other
24 corporation but only to the extent that such dividends are
25 included in taxable income as returned to and ascertained by the
26 Federal Government.
27 (c) Further additional deductions shall be allowed from
28 taxable income in an amount equal to the amount of any reduction
29 in an employer's deduction for wages and salaries as a result of
30 the employer taking a credit for "new jobs" or "targeted jobs"
19830H1223B1428 - 12 -
1 pursuant to section 44B or section 51 of the Internal Revenue
2 Code.
3 (d) Taxable income will include the sum of the following tax
4 preference items as defined in section 57 of the Internal
5 Revenue Code, as amended, (i) excess investment interest; (ii)
6 accelerated depreciation on real property; (iii) accelerated
7 depreciation on personal property subject to a net lease; (iv)
8 amortization of certified pollution control facilities; (v)
9 amortization of railroad rolling stock; (vi) stock options;
10 (vii) reserves for losses on bad debts of financial
11 institutions; (viii) capital gains; and (ix) accelerated cost
12 recovery deduction under section 57(a)(12)(B) of the Internal
13 Revenue Code, but only to the extent that such preference items
14 are not included in "taxable income" as returned to and
15 ascertained by the Federal Government.
16 (e) Taxable income for tax years ending in 1981, 1982 and
17 1983 will also include the amount of the deduction related to
18 depreciation claimed and allowable under section 168,
19 accelerated cost recovery system, Internal Revenue Code of 1954,
20 as amended by the Economic Recovery Tax Act of 1981, other than
21 items of tax preference under section 57 which have been
22 included in taxable income.
23 (f) For the tax years beginning and ending in 1981 and 1982
24 a deduction shall be allowed from taxable income to the extent
25 of the deduction for depreciation which would have been
26 allowable on such recovery property under section 167 of the
27 Internal Revenue Code of 1954, as amended, prior to amendment by
28 the Economic Recovery Tax Act of 1981.
29 (g) For the tax year beginning and ending in 1983 a
30 deduction shall be allowed from taxable income to the extent of
19830H1223B1428 - 13 -
1 the deduction for depreciation which would have been allowable
2 on such recovery property under section 167 of the Internal
3 Revenue Code of 1954, as amended, prior to amendment by the
4 Economic Recovery Tax Act of 1981, plus an additional deduction
5 to the extent of one-half of the deduction related to
6 depreciation claimed and allowable on such recovery property
7 under section 168 of the Internal Revenue Code of 1954, as
8 amended, in excess of the deduction for depreciation which would
9 have been allowable on such recovery property under section 167
10 of the Internal Revenue Code of 1954, as amended, prior to
11 amendment by the Economic Recovery Tax Act of 1981, if any.
12 (h) For tax years beginning in 1984, and for subsequent
13 years, there shall be allowed as a deduction related to
14 depreciation the amount allowable under section 168 of the
15 Internal Revenue Code, as amended, with respect to recovery
16 property.
17 (i) For all recovery property the amounts disallowed as a
18 consequence of the aforesaid adjustments shall be recovered by
19 an additional deduction from taxable income returned to and
20 ascertained by the Federal Government in tax years commencing in
21 1984 of one-fourth of the sum per year or ten thousand dollars
22 ($10,000) per year, whichever is greater, until the total amount
23 has been recovered.
24 (j) In the case of fiscal year taxpayers, the deduction from
25 taxable income related to depreciation shall be prorated so as
26 to reflect the relative portions of each of the calendar years
27 1981, 1982 and 1983 included in the taxpayer's fiscal year, in a
28 manner pursuant to regulations to be promulgated by the
29 secretary.
30 (k) A taxpayer reporting on a 52-53 week basis which closes
19830H1223B1428 - 14 -
1 its fiscal year on any of the last seven days in December or the
2 first seven days of January is deemed a calendar year taxpayer
3 with a year ending date of December 31.
4 (l) For the purpose of computing the depreciation deduction
5 which would have been allowable under section 167 of the
6 Internal Revenue Code of 1954, as amended, prior to amendment by
7 the Economic Recovery Tax Act of 1981: (i) tax preference items
8 as set forth above shall not be included; (ii) property shall be
9 depreciated for a period and with a method consistent with that
10 employed for similar property in prior years; and (iii) for
11 taxable years 1982 and 1983, no deduction shall be allowed for
12 additional first year depreciation on section 179 property.
13 (m) No deduction shall be allowed for net operating losses
14 sustained by the corporation during any other fiscal or calendar
15 year: Provided, That for the calendar year 1981 and fiscal years
16 beginning in 1981 and thereafter, a net operating loss, as
17 provided by section 172 of the Internal Revenue Code, shall be
18 allowed as a deduction and a carryover pursuant to the following
19 schedule:
20 Net Operating Loss for Year Carryover
21 1981 1 year
22 1982 2 years
23 1983 and thereafter 3 years
24 The net operating loss shall be carried to the earliest of the
25 taxable years to which, under this schedule, such loss may first
26 be carried. In the case of regulated investment companies as
27 defined by the Internal Revenue Code of 1954, as amended,
28 "taxable income" shall be investment company taxable income as
19830H1223B1428 - 15 -
1 defined in the aforesaid Internal Revenue Code of 1954, as
2 amended. In arriving at "taxable income" for Federal tax
3 purposes for any taxable year beginning on or after January 1,
4 1981, no deduction shall be allowed for taxes imposed on or
5 measured by net income.
6 (n) No loss shall be a carryover from a taxable year when
7 the corporation elects to be treated as a Pennsylvania S
8 corporation pursuant to section 307 of Article III of this act
9 to a taxable year when the corporation is subject to the tax
10 imposed under this article.
11 (o) Paragraph (n) shall not prevent a taxable year when a
12 corporation is a Pennsylvania S corporation from being
13 considered a taxable year for determining the number of years to
14 which a net operating loss may be a carryover.
15 (p) For purposes of the net operating loss deduction, the
16 short taxable year of a corporation, after the revocation or
17 termination of an election to be treated as a Pennsylvania S
18 corporation pursuant to sections 307.3 and 307.4 of Article III
19 of this act, shall be treated as a taxable year.
20 * * *
21 Section 6. The provisions of this act are declared to be
22 nonseverable. If any provision of this act or any application
23 thereof is held invalid or unconstitutional, the remaining
24 provisions of this act shall be void.
25 Section 7. This act shall be applicable for tax years
26 beginning after December 31, 1983.
27 Section 8. This act shall take effect immediately.
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