PRINTER'S NO. 567
No. 518 Session of 2005
INTRODUCED BY LEVDANSKY, VEON, GRUCELA, BELARDI, BEBKO-JONES,
BELFANTI, BLAUM, CALTAGIRONE, DeWEESE, FABRIZIO, FREEMAN,
GERGELY, HALUSKA, LaGROTTA, McCALL, MUNDY, ROONEY, SOLOBAY,
SURRA, THOMAS, WANSACZ, WILLIAMS, GOODMAN, JOSEPHS,
MANDERINO, McGEEHAN, PISTELLA, RUFFING, STURLA, TANGRETTI,
WALKO AND WASHINGTON, FEBRUARY 15, 2005
REFERRED TO COMMITTEE ON FINANCE, FEBRUARY 15, 2005
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," further providing, in corporate net income tax,
11 for the definition of "taxable income."
12 The General Assembly of the Commonwealth of Pennsylvania
13 hereby enacts as follows:
14 Section 1. Section 401(3)1(a) of the act of March 4, 1971
15 (P.L.6, No.2), known as the Tax Reform Code of 1971, amended May
16 12, 1999 (P.L.26, No.4), is amended and clause (3)1 is amended
17 by adding a paragraph to read:
18 Section 401. Definitions.--The following words, terms, and
19 phrases, when used in this article, shall have the meaning
20 ascribed to them in this section, except where the context
1 clearly indicates a different meaning:
2 * * *
3 (3) "Taxable income." 1. (a) In case the entire business
4 of the corporation is transacted within this Commonwealth, for
5 any taxable year which begins on or after January 1, 1971,
6 taxable income for the calendar year or fiscal year as returned
7 to and ascertained by the Federal Government, or in the case of
8 a corporation participating in the filing of consolidated
9 returns to the Federal Government, the taxable income which
10 would have been returned to and ascertained by the Federal
11 Government if separate returns had been made to the Federal
12 Government for the current and prior taxable years, subject,
13 however, to any correction thereof, for fraud, evasion, [or
14 error as finally ascertained by the Federal Government] error,
15 or addback as provided pursuant to paragraph (t)(1).
16 * * *
17 (t) (1) In accordance with paragraph (a), taxable income
18 shall include the amount of the deduction for interest expenses
19 and costs and intangible expenses and costs paid, accrued or
20 incurred to or in connection with one or more transactions with
21 related members of the corporation.
22 (2) The following transactions between related members of a
23 corporation shall not be subjected to the addback provided for
24 in this paragraph:
25 (A) An arm's-length transaction between a corporation and a
26 related member resident in a foreign nation that has in force a
27 comprehensive income tax treaty with the United States when the
28 transaction involves the licensing or sublicensing of intangible
29 property owned by the related member and used by the corporation
30 in its business operation.
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1 (B) A transaction that produces interest expenses and costs
2 paid, accrued or incurred in connection with an arm's-length
3 loan from an institution defined in section 701.5 or section
4 1501.
5 (C) A transaction that produces interest expenses and costs
6 paid, accrued or incurred in connection with payments of
7 transition bonds issued pursuant to 66 Pa.C.S. § 2812 (relating
8 to approval of transition bonds).
9 (D) A transaction that produces interest, expenses and costs
10 paid, accrued or incurred in connection with an arm's-length
11 loan made in connection with a centralized treasury function or
12 a centralized cash management function of related members.
13 (3) The following words, terms and phrases when used in this
14 paragraph, shall have the meaning ascribed to them in this
15 subparagraph, except where the context clearly indicates a
16 different meaning:
17 (A) "Intangible expenses and costs" includes all of the
18 following:
19 (I) Expenses and costs for, related to or in connection with
20 the acquisition, use, maintenance or management, ownership sale,
21 exchange or any other disposition of tangible property to the
22 extent such amounts are allowed as deductions or costs in
23 determining taxable income before the operating loss deduction
24 and special deductions for the taxable year under the Internal
25 Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.).
26 (II) Royalty, patent, technical and copyright fees.
27 (III) Licensing fees.
28 (IV) Other similar expenses and costs.
29 (B) "Intangible property" means patents, patent
30 applications, trade names, trademarks, service marks,
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1 copyrights, mask works, trade secrets and similar types of
2 intangible assets.
3 (C) "Interest expenses and costs" means amounts allowed as
4 deductions under section 163 of the Internal Revenue Code of
5 1986 (Public Law 99-514, 26 U.S.C. § 163) for the purposes of
6 determining taxable income under the Internal Revenue Code of
7 1986.
8 (D) "Related entity" means any of the following:
9 (I) A stockholder who is an individual or a member of the
10 stockholder's family enumerated in section 318 of the Internal
11 Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 318), if
12 the stockholder and the members of the stockholder's family own
13 directly, indirectly, beneficially or constructively, in the
14 aggregate, at least fifty per cent of the value of the
15 corporation's outstanding stock.
16 (II) A stockholder or a stockholder's partnership, limited
17 liability company, estate, trust or corporation, if the
18 stockholder and the stockholder's partnerships, limited
19 liability companies, estates, trusts and corporations own
20 directly, indirectly, beneficially or constructively, in the
21 aggregate, at least fifty per cent of the value of the
22 corporation's outstanding stock.
23 (III) A corporation or a party related to the corporation in
24 a manner that would require an attribution of stock from the
25 corporation to the party or from the party to the corporation
26 under the attribution rules contained in section 318 of the
27 Internal Revenue Code of 1986, if the corporation owns,
28 directly, indirectly, beneficially or constructively, at least
29 fifty per cent of the value of the corporation's outstanding
30 stock. The attribution rules contained in section 318 of the
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1 Internal Revenue Code of 1986 shall apply for the purposes of
2 determining whether the ownership requirements of this
3 definition have been met.
4 (E) "Related member" means a person or other entity that,
5 with respect to the corporation during all or any portion of the
6 taxable year is any of the following:
7 (I) A related entity as defined in this subparagraph.
8 (II) A component member as defined in section 1563(b) of the
9 Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
10 1563(b)).
11 (III) A person to or from whom there is the attribution of
12 stock ownership in accordance with section 1563(e) of the
13 Internal Revenue Code of 1986.
14 (IV) A person that, notwithstanding its form of
15 organization, bears the same relationship to the taxpayer as a
16 person described in subclauses (I), (II) and (III).
17 * * *
18 Section 2. The amendment or addition of section 401(3)1(a)
19 and (t) of the act shall apply to taxable years beginning after
20 December 31, 2004.
21 Section 3. This act shall take effect immediately.
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