Pennsylvania Code › Title 61 - REVENUE › Part I - Department of Revenue › Subpart B - General Fund Revenues › Article V - Personal Income Tax › Chapter 103 - IMPOSITION AND DETERMINATION OF TAX › Subchapter B - DETERMINATION OF TAX › Section 103.13 - Net gains or income from disposition of property

Current through Register Vol. 54, No. 28, July 13, 2024
(a)
Gain or loss.
A gain on
						the disposition of property is recognized in the taxable year in which the
						amount realized from the conversion of the property into cash or other property
						exceeds the adjusted basis of the property. A loss is recognized only with
						respect to transactions entered into for gain, profit or income and only in the
						taxable year in which the transaction, in respect to which loss is claimed, is
						closed and completed by an identifiable event which fixes the amount of the
						loss so there is no possibility of eventual recoupment.
(b)
Stock dispositions.
Corporate reorganizations, acquisitions and recapitalizations shall be a sale,
						exchange or disposition resulting in a taxable gain or loss to the shareholders
						whether or not the gain or loss is recognized for purposes of the Federal
						income tax, except as provided in the TRC. The transfer of property or anything
						else of value to a corporation in exchange for an interest therein is a sale,
						exchange or disposition resulting in a taxable gain or loss. A resident
						shareholder shall report as taxable gain in the taxable year in which it was
						received or credited the excess of the fair market value of any "return of
						capital" distribution over the adjusted basis of his stock. A "return of
						capital" distribution is a distribution which is not made or credited by a
						business corporation or association out of its earnings and profits. The basis
						of stock or shares held by a resident shareholder shall be decreased, but not
						below zero, by a distribution which is not taxable dividend income.
Example.
B Corporation distributed
						  from its capital account $100,000 to its sole stockholder, S, a resident of
						  Pennsylvania. The adjusted basis of S's stock was $75,000. As the distribution
						  is not made out of earnings and profits, the $100,000 does not represent
						  taxable dividend income to S. S must, however, decrease the adjusted basis of
						  the stock from $75,000 to zero and report the remaining $25,000 of the $100,000
						  "return of capital" distribution as a taxable gain.
(c)
Basis.
If property is
						acquired by a taxpayer by inheritance, the basis shall be the fair market value
						at the date of death. If property is acquired by a taxpayer by gift, the basis
						shall be the same as it would be if the property had remained in the hands of
						the donor. Otherwise, the basis shall be the cost.
(d)
Sales made before June 1,
						1971.
Payments received pursuant to an installment sale made before
						June 1, 1971, are not subject to tax except as to separately stated interest
						payments.
(e)
Gain or loss
						on property acquired on or after June 1, 1971.
The amount subject to
						tax shall be the net gains or net income less net losses derived from the sale,
						exchange or other disposition of property-real or personal, tangible or
						intangible-to the extent that the value of that which is received or receivable
						is greater than or, in the case of a loss, less than the basis of the taxpayer.
						The basis shall be increased by capital expenditures made after the property
						was acquired and decreased by depreciation or amortization, allowed or
						allowable, after the property was acquired.
(f)
Gain or loss on property acquired
						prior to June 1, 1971.
If the property was acquired prior to June 1,
						1971, the amount subject to tax shall be the net gains or net income less net
						losses derived from the sale, exchange or other disposition of property-real or
						personal, tangible or intangible-to the extent that the value of that which is
						received or receivable is greater than or, in the case of a loss, less than the
						basis of the taxpayer determined as follows:
(1) The basis as of June 1, 1971, for
						determining gain shall be the cost or other basis as adjusted or its fair
						market value as of June 1, 1971, whichever is greater.
(2) The basis as of June 1, 1971, for
						determining loss shall be the cost or other basis as adjusted without reference
						to the fair market value as of June 1, 1971.
(3) The application of paragraphs (1) and (2)
						may be illustrated by the following example:
(i) On June 1, 1966, a taxpayer purchased for
						$50,000 property having a useful life of 50 years. Assuming that there were no
						capital improvements to the property before June 1, 1971, the depreciation
						allowed or allowable on the property before June 1, 1971, was $5,000 (5 years
						at $1,000), so that the original cost adjusted, as of June 1, 1971, for
						depreciation allowed or allowable prior to that date is $45,000. On that date
						the property had an appraised fair market value of $90,000 with a remaining
						life of 45 years. The property was sold on June 1, 1980, for
						$120,000.
(ii) For the purpose of
						determining gain from the sale, exchange or other disposition of the property
						on June 1, 1980, the basis of the property is the fair market value of $90,000
						as of June 1, 1971, adjusted for depreciation allowed or allowable after May
						31, 1971, computed on $90,000. Thus, the basis of $90,000 is reduced by the
						depreciation adjustment from June 1, 1971, to May 31, 1980, in the aggregate of
						$18,000 (9 years at $2,000-$90,000 ÷ 45), leaving an adjusted basis for
						determining gain of $72,000 ($90,000 less $18,000). Taxpayer would be subject
						to tax on a gain of $48,000 ($120,000 less $72,000).
(iii) Assume the same facts as in
						subparagraph (i) except that the taxpayer purchased the property for $90,000 on
						June 1, 1966, and the property had a fair market value of $30,000 on June 1,
						1971. The depreciation allowed or allowable on the property before June 1,
						1971, was $9,000 (5 years at $1,800) so that the original cost adjusted, as of
						June 1, 1971, for depreciation allowed or allowable prior to that date is
						$81,000. For the purpose of determining gain the basis of the property is its
						cost of $90,000 reduced by the depreciation adjustment allowed or allowable in
						the aggregate of $25,200 (14 years at $1,800-$90,000 ÷ 50), leaving an
						adjusted basis for determining gain of $64,800 ($90,000 less $25,200). Taxpayer
						would be subject to tax on a gain of $55,200 ($120,000 less $64,800).
(iv) Assume the same facts as in subparagraph
						(i) except that the property was sold on June 1, 1980, for $20,000. For the
						purpose of determining loss from the sale, exchange or other disposition of the
						property on June 1, 1980, the basis of the property is its cost, adjusted for
						depreciation allowed or allowable. In this example, the amount of depreciation
						allowed or allowable is $15,000 (15 years at $1,000). Therefore the adjusted
						basis for determining loss on June 1, 1980, is $35,000 ($50,000-$15,000). The
						taxpayer would report a loss of $15,000.
(4) If the selling price is greater than cost
						but less than the June 1, 1971, value, there is neither taxable gain nor loss.
						The application of this paragraph may be illustrated by the following example:
Example
: Assume that acquisition cost
						  is $10,000, June 1, 1971, value is $30,000 and the selling price is $20,000. If
						  the rules in paragraph (1) for determining the basis for gain were applied, the
						  result would be a loss-($30,000 less $20,000). If the rule in paragraph (2) for
						  determining the basis for loss were applied, the result would be a
						  gain-($20,000 less $10,000). However, the rule in this paragraph provides that
						  there is neither taxable gain nor loss.
(5) Determination of fair market value as of
						June 1, 1971, shall be as follows:
(i) If the
						property on which a taxpayer is reporting was not listed on an established
						market or exchange, the fair market value as of June 1, 1971, shall be the
						opening price on Tuesday, June 1, 1971. If the property was not traded on that
						day, the price of the last sale during the preceding week shall be the fair
						market value as of June 1, 1971, for computing gain or loss. If the property
						was not traded during the previous week or in the absence of an opening price
						for Tuesday, June 1, 1971, the average of the high and low price or the average
						of the bid and asked quotations on Tuesday, June 1, 1971, whichever is
						appropriate, shall be used to ascertain the fair market value as of June 1,
						1971. When a return is filed involving property acquired prior to June 1, 1971,
						an explanation of the method utilized in computing the June 1, 1971, fair
						market value shall be attached to Schedule D.
(ii) If the property on which a taxpayer is
						reporting was not actively traded in an established market or exchange, the
						fair market value as of June 1, 1971, may be established through a bona fide,
						independent, written appraisal as of the date by a competent appraiser of
						recognized standing and ability. The value as established by the appraiser
						shall specifically exclude the value of improvements made subsequent to June 1,
						1971. A copy of the appraisal shall be attached to Form PA-40 when filed. When
						an appraisal is utilized, an explanation of improvements made subsequent to
						June 1, 1971, including the date and cost of the improvements, shall be
						attached to Schedule D.
(iii) The
						following table illustrates the application of the rules for computing gain or
						loss as enumerated in this subsection. It may be used as a guide when
						securities or other nondepreciable assets are involved, assuming that no
						adjustments are necessary for capital additions or capital reductions.
Cost
June
									 1,1971 Value
Selling
									 Price
Gain
Loss
500
750
1,000
250
-
500
250
1,000
500
-
500
1,500
1,000
none
none
500
100
50
-
450
500
25
50
-
450
500
1,000
50
-
450
(6) If the fair market value of the property
						was not ascertained as of June 1, 1971, by the methods enumerated in paragraph
						(5), the gain or loss shall be computed by subtracting from the sales price
						selling expenses and the historic or cost basis of the property and multiplying
						that figure by a fraction-the numerator of which is the number of full calendar
						months the property was held subsequent to June 1, 1971, and the denominator of
						which is the number of full calendar months in the taxpayer's entire holding
						period for the property. When the proration is used, an explanation shall
						accompany Schedule D, setting forth for each asset the date and costs of
						acquisition and the date and costs of any capital improvements, both prior to
						and subsequent to June 1, 1971. Proration fractions utilized shall be included
						in the explanation. Paragraphs (1)-(5) do not apply when this paragraph is
						used.
(i) The application of this paragraph
						may be illustrated by the following examples:
(A) Taxpayer purchased his home on June 1,
						1960, at a cost of $20,000. He sold the home on June 1, 1980, for $100,000. He
						incurred selling expense of $5,000. The taxable gain is computed by subtracting
						from the sale price of $100,000 selling expenses of $5,000, leaving a net sale
						price of $95,000. Next the $20,000 cost basis is subtracted from the net sale
						price of $95,000. This $75,000 gain is multiplied by the fraction of 108/240
						resulting in a taxable gain of $33,750.
(B) A tract of land is acquired on June 1,
						1960, at a cost of $10,000. As of June 1, 1965, a building at a cost of $50,000
						is constructed on the land. The building has a useful life of 50 years and is
						depreciated using the straight line method. On June 1, 1980, the asset is sold
						for $100,000. Assuming the value of the land was $25,000 and the value of the
						building was $75,000 at the time of sale, the following would be the method for
						determining the net gain for Pennsylvania tax purposes, utilizing the proration
						method. Since the land was held for a period of 20 years, 9 of which were
						subsequent to June 1, 1971, the applicable fraction would be 108/240 times the
						net gain of $15,000. Since the structure was held for 15 years, of which 9 were
						subsequent to June 1, 1971, the applicable fraction would be 108/180 times the
						net gain of $40,000 ($50,000 cost less $15,000 depreciation equals $35,000
						adjusted basis; $75,000 sale price less $35,000 adjusted basis equals $40,000
						gain). Thus, the total taxable gain for this transaction would be $30,750
						($6,750 + $24,000).
(ii)
						For the Department to determine the proper proration fraction applicable, data
						similar to that outlined in subparagraph (i) shall be provided.