THE GENERAL ASSEMBLY OF PENNSYLVANIA

SENATE BILL

INTRODUCED BY BROWNE, RAFFERTY AND MENSCH, OCTOBER 4, 2011

REFERRED TO FINANCE, OCTOBER 4, 2011  

AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," further providing for definitions, for interests

in unincorporated entities, for additional withholding

requirements and for interest in unincorporated entities.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Section 301(k) of the act of March 4, 1971

(P.L.6, No.2), known as the Tax Reform Code of 1971, amended

December 23, 2003 (P.L.250, No.46), is amended to read:

Section 301.  Definitions.--* * *

(k)  "Income from sources within this Commonwealth" for a

nonresident individual, estate or trust means the same as

compensation, net profits, gains, dividends, interest or income

enumerated and classified under section 303 of this article to

the extent that it is earned, received or acquired from sources

within this Commonwealth:

(1)  By reason of ownership or disposition of any interest in

real or tangible personal property in this Commonwealth; or

(2)  In connection with a trade, profession, occupation

carried on in this Commonwealth or for the rendition of personal

services performed in this Commonwealth; or

(3)  As a distributive share of the income of an

unincorporated business, Pennsylvania S corporation, profession,

enterprise, undertaking or other activity as the result of work

done, services rendered or other business activities conducted

in this Commonwealth, except as allocated to another state

pursuant to regulations promulgated by the department under this

article; or

(4)  From intangible personal property employed in a trade,

profession, occupation or business carried on in this

Commonwealth; or

(5)  As gambling and lottery winnings by reason of a wager

placed in this Commonwealth, the conduct of a game of chance or

other gambling activity located in this Commonwealth or the

redemption of a lottery prize from a lottery conducted in this

Commonwealth, other than prizes of the Pennsylvania State

Lottery.

Provided, however, That "income from sources within this

Commonwealth" for a nonresident individual, estate or trust

shall not include any items of income enumerated above received

or acquired from an investment company registered with the

Federal Securities and Exchange Commission under the Investment

Company Act of 1940 and shall not include any items of income

received from an investment fund as defined in Article IV except

to the extent that the items represent income other than

investment fund income as defined in Article IV.

* * *

Section 2.  Section 401(1) and (3) of the act are amended by

adding subclauses and the section is amended by adding clauses

to read:

Section 401.  Definitions.--The following words, terms, and

phrases, when used in this article, shall have the meaning

ascribed to them in this section, except where the context

clearly indicates a different meaning:

(1)  "Corporation."  Any of the following:

(i)  A corporation.

(ii)  A joint-stock association.

(iii)  A business trust, limited liability company or other

entity which for Federal income tax purposes is classified as a

corporation.

The term does not include:

* * *

5.  An investment fund.

* * *

(3)  "Taxable income."  * * *

5.  The taxable income of a corporation directly or

indirectly owning an interest in an unincorporated investment

fund shall be allocated and apportioned to this State pursuant

to this subclause as follows:

(a)  That portion of the corporation's income attributable to

an investment fund that constitutes other than investment fund

income shall be allocated by the corporation to this State to

the extent that the unincorporated entity generating the income

attributes the income to this State under subclause 1 or

apportions the income to this State under subclause 2, as

required under section 402.2(d).

(b)  That portion of the corporation's income that

constitutes investment fund income shall be allocated and

apportioned by the corporation as provided under subclause 1 or

2 and by section 402.2(c).

(c)  The balance of the corporation's income shall be

allocated and apportioned by the corporation as provided by

subclauses 1 and 2 and section 402.2(a) and (b).

* * *

(8)  "Investment fund business."  The acquisition,

maintenance, management and disposition of intangible

investments by an investment fund. Intangible investments

include interests in unincorporated entities.

(9)  "Investment fund."  An entity:

(a)  the sole business of which is an investment business and

in which all of the owners, other than a general partner of a

partnership, a managing member of a limited liability company

and any similar owner;

(i)  are passive investors;

(ii)  neither have nor exercise management rights; and

(iii)  do not participate in management decisions to acquire,

hold or dispose of assets of the entity;

(b)  which is an investment company as defined in section

3(a)(1) of the Investment Company Act of 1940 (15 U.S.C. §

80a-3(a)(1)) or as exempt from the Investment Company Act of

1940 under section 3(c)(1) (15 U.S.C. § 80a-3(c)(1)) or section

3(c)(7) (15 U.S.C. § 80a-3(c)(7)); or

(c)  which is a common trust fund as described in section

3(c)(3) of the Investment Company Act of 1940 (54 Stat. 789, 15

U.S.C. § 80a-3(C)(3)).

(10)  "Investment fund income."  Income from an investment

fund business except to the extent that the income is

attributable to income from business conducted by an

unincorporated entity that is not an investment fund in which

the investment fund holds a direct or indirect interest.

Section 3.  Section 402.2 of the act, amended December 30,

2002 (P.L.2080, No.232) and December 23, 2003 (P.L.250, No.46)

is amended to read:

Section 402.2.  Interests in Unincorporated Entities.--(a)

Except as set forth in [subsection (b)] subsections (b) and (c),

for purposes of this article, a corporation's interest in an

entity which is not a corporation shall be considered a direct

ownership interest in the assets of the entity rather than an

intangible interest.

(b)  Subsection (a) does not apply to a corporation's

interest in an entity described in section 401(1)1 or section

401(1)2 other than:

(1)  A business trust which is a real estate investment trust

as defined in section 856 of the Internal Revenue Code of 1986

(Public Law 99-514, 26 U.S.C. § 856) more than fifty per cent of

the voting power or value of the beneficial interests or shares

of which are owned or controlled, directly or indirectly, by a

single corporation that is not:

(i)  a real estate investment trust as defined in section 856

of the Internal Revenue Code of 1986;

(ii)  a qualified real estate investment trust subsidiary

under section 856(i) of the Internal Revenue Code of 1986;

(iii)  a regulated financial institution; or

(iv)  formed as a holding company, subsidiary or affiliate of

a regulated financial institution prior to December 1, 2003.

(2)  A business trust which is a qualified real estate trust

subsidiary under section 856(i) of the Internal Revenue Code of

1986 owned, directly or indirectly, by a real estate investment

trust as defined in section 856 of the Internal Revenue Code of

1986 more than fifty per cent of the voting power or value of

the beneficial interests or shares of which are owned or

controlled, directly or indirectly, by a single corporation that

is not:

(i)  a real estate investment trust as defined in section 856

of the Internal Revenue Code of 1986;

(ii)  a qualified real estate investment trust subsidiary

under section 856(i) of the Internal Revenue Code of 1986;

(iii)  a regulated financial institution; or

(iv)  formed as a holding company, subsidiary or affiliate of

a regulated financial institution prior to December 1, 2003.

(c)  Subsection (a) shall not apply to assets of an

unincorporated investment fund in which a corporation owns a

direct or indirect interest nor to assets of any unincorporated

fund in which the investment fund owns a direct or indirect

interest, except to the extent that the assets are used in other

than an investment fund business. A corporation's interest in

the assets shall not be considered a direct ownership interest

but shall be considered an interest in an intangible.

(d)  An unincorporated entity owned directly or indirectly by

an investment fund shall attribute its income to this State

under section 401(3)1 or shall apportion its income to this

State under section 401(3)2 and shall report the attribution or

apportionment to the department, to the investment fund and upon

request to any entity directly or indirectly owing an interest

in the investment fund.

Section 4.  Section 403.2 of the act is amended by adding a

subsection to read:

Section 403.2.  Additional Withholding Requirements.--* * *

(d.1)  This section shall not apply to a partnership that is

owned directly or indirectly by an investment fund if the

partnership reports the information as required under section

402.2(d).

* * *

Section 5.  Section 602.6 of the act, amended December 30,

2002 (P.L.2080, No.232), is amended to read:

Section 602.6.  Interest in Unincorporated Entities.--(a)

Except as set forth in [subsection (b)] subsections (b) and (c),

for purposes of this article, a corporation's interest in an

entity which is not a corporation shall be considered a direct

ownership interest in the assets of the entity rather than an

intangible interest.

(b)  Subsection (a) does not apply to a corporation's

interest in an entity described in section 601(a)(B)(1) or (2)

of the definition of "corporation."

(c)  Subsection (a) shall not apply to a corporation's

interest in an entity that is an investment fund as defined in

section 401(9) nor to an entity owned directly or indirectly by

the investment fund except with respect to assets of the entity

which are used in other than an investment business as defined

in section 401(8).

Section 6.  This act shall take effect in 60 days.