Pennsylvania Code › Title 61 - REVENUE › Part I - Department of Revenue › Subpart B - General Fund Revenues › Article VI - Corporation Taxes › Chapter 155 - CAPITAL STOCK TAX AND FOREIGN FRANCHISE TAX › VALUATION OF CAPITAL STOCK › Section 155.26 - Average net income-fixed formula

Current through Register Vol. 54, No. 28, July 13, 2024
(a) Average net income is the sum of the
						taxpayer's net income or loss for each of the current and immediately preceding
						4 years, divided by five.
(b) Net
						income or loss is the amount set forth as income per books on the income tax
						return filed by the taxpayer with the Federal government, or if no return is
						made, as would have been set forth had the return been made. The net income or
						loss shall be computed on an unconsolidated basis exclusive of the net income
						or loss of an investee corporation and exclusive of the net income or loss of
						an investee corporation accounted for under the equity method of accounting.
						The amount set forth as income per books on the income tax return filed with
						the Federal government or as would have been set forth had the return been
						made, shall be adjusted to include dividends received from investee
						corporations, including dividends from investments accounted for under the
						consolidated or equity methods of accounting.
(c) In computing average net income, losses
						shall be entered as computed, but the average net income may not be less than
						zero.
(d) Net income or loss shall
						be subject to correction by the Department for fraud, evasion or
						error.
(e) In the case of a
						taxpayer which has not been in existence for a period of 5 calendar years,
						average net income is the average net income for the number of years that the
						taxpayer has been in existence. A taxpayer in existence for a part of a year
						shall be considered to have been in existence for that year based on the number
						of days in the year that the taxpayer was in existence.
Example 1.
The taxpayer, incorporated
						  August 1, 1982, reports on a calendar year basis. Its net income for the period
						  August 1 through December 31, 1982 (153 days) was $20,000. Its net income for
						  1983 was $50,000 and for 1984, $70,000. Average net income for 1984 would be
						  $57,870 ($140,000 ÷ 2153/365).
Example 2.
The taxpayer filed on a
						  calendar year basis until December 1980. In 1981 it changed its filing period
						  to a fiscal year ending June 30. In order to do so, it filed a short period
						  report for January 1 through June 30, 1981. Thereafter, taxpayer continued to
						  file on a fiscal year basis. In computing average net income for the period
						  ending June 30, 1985, taxpayer would include its January 1 through June 30,
						  1981 net income or loss as well as its July 1, 1981 through June 30, 1985 net
						  income or loss and divide the result by 4 181/365.
Example 3.
The taxpayer, incorporated
						  May 1, 1971, filed a calendar year report for 1980. Between January 1, 1981 and
						  December 31, 1984, the taxpayer, as a result of various mergers and filing
						  period changes, had 6 book years. The taxpayer's average net income for 1984
						  would include the net income or loss for each of the 6 book years between
						  January 1, 1980 and December 31, 1984, divided by five.
(f) Average net income does not include net
						income or loss of the corporation for a period of time prior to incorporation,
						such as net income or loss of a partnership prior to incorporation. Net income
						or loss of a predecessor corporation may not be attributed to a successor
						corporation. In the case of a mere change in identity, form or place of
						organization of one corporation, net income or loss prior to the change shall
						be utilized in determining average net income. Net income or loss may not be
						adjusted in the event of a change in corporate structure, but to the extent
						that a change occurs as a result of a tax evasion motive, net income or loss
						may be adjusted to negate the effects of the change in corporate structure. The
						following examples demonstrate the application of this subsection with respect
						to mergers, consolidations and reincorporations. Where there is evidence of a
						tax evasion motive, average net income will be determined based on the
						substance of the transaction.
Example 1.
Effective December 31,
						  1984, Corporation A merges into Corporation B. The net income or loss for the
						  two corporations are:
Year
Corporation
								  A
Corporation B
1981
$60,000
$150,000
1982
$10,000
$100,000
1983
($100,000)
$ 80,000
1984
($100,000)
$ 60,000
Total 1985
-
$100,000
The average net income for 1985 for Corporation B, the
						  corporation which survived the merger, would be $98,000 ($490,000 ÷ 5),
						  determined without regard to the net income or loss of Corporation A prior to
						  the merger.
Example 2.
Effective December 31,
						  1984, Corporation A and Corporation B consolidate to form a new corporation,
						  Corporation C. Both Corporations A and B had been in existence for more than 5
						  years prior to the consolidation. Corporation C's average net income would be
						  determined for 1985 based only on the corporation's net income or loss for
						  1985, and no recognition would be given to the net income or loss of either
						  Corporation A or Corporation B prior to the consolidation.
Example 3.
Effective December 31,
						  1984, Corporation A, formerly incorporated in State Y, reincorporates in State
						  X. The average net income for 1985 would be computed taking into account net
						  income or loss for 1985, as well as net income or loss for the 4 years prior to
						  January 1, 1985.
(g) No
						adjustment to net income or loss may be made for Federal income tax which would
						have been paid by a corporation electing S Corporation treatment under Section
						1361 of the IRC (26 U.S.C.A.
						§
													1361) or for Commonwealth Corporate
						Net Income Tax which would have been paid by a corporation electing
						Pennsylvania S corporation treatment under article 3 of the TRC (72 P. S.
						§§
													7301-7361), or for Commonwealth
						personal income tax paid by the shareholders of the corporation.
(h) No adjustment to net income or loss may
						be permitted on account of nonrecurring or extraordinary items.
(i) A taxpayer which totally ceases
						operations, has abandoned the business for which it was incorporated and is
						divested of assets shall be deemed to have ceased to exist for the purpose of
						computing average net income and upon recommencing business activities, shall
						be considered to have come into existence upon the date activities recommence.
						This subsection does not apply to situations where the cessation of activities
						occurred due to a tax evasion motive.
(j) Corporations planning significant
						reductions in business operation, as well as corporations in the process of
						liquidating, should be aware of the effects tail earnings may have on
						subsequent years' tax liability and plan accordingly.
The provisions of this §
														155.26 issued under section 408 of
							 the Tax Reform Code of 1971 (72 P. S. §
															7408).
This section cited in 61 Pa. Code §
														155.21 (relating to
							 general).