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Legislative Update

Week Ending May 26, 2006

• Week in Review
• Political News & Notes
• Revenue Issues New Rules on Nonqualified Deferred Compensation
• New Plan for Property Tax Relief Introduced
• Criminal/Licensure Law Overlap Discussions Begin in House
• Comments on S-Corp Election Form Sought
• NY Revises Convenience of the Employer Test
• Tax Practitioners Beware!

Week in Review

House Speaker John Perzel this week appointed a special task force to review and provide recommendations pertaining to pensions and medical benefits for state and public employees in Pennsylvania. Reps. Craig Dally, Stanley Saylor and Mike Turzai will head up the task force and report back to the Speaker by September 1.

On Monday, May 22, the House Local Government Subcommittee held an informational public hearing on legislation that would transition all local police pension plans into a statewide pension plan administered by the State Employees Retirement System (SERS). There are currently 970 defined benefit plans for municipal police, including Philadelphia. Additional hearings on the bill are planned.

Because of the Memorial Day holiday weekend, the PICPA Legislative Update will not be published next week. We will return the week ending June 9. 

Political News & Notes

Another One Bites the Dust... Reverberation from last week's Primary Election is still being felt. Republican State Chairwoman Eileen Melvin announced this week that she will not seek re-election. Melvin is bowing out following criticism for the State Committee's support of incumbent legislators who lost to challengers in the May 16 Primary Election. Cambria County businessman and current Republican State Committee member Rob Gleason is her likely successor.  

Revenue Issues New Rules on Nonqualified Deferred Compensation

The Department of Revenue this week issued new rules governing the processing procedures regarding nonqualified deferred compensation. Act 40 of 2005 changed the definition of constructive receipt for Pennsylvania Personal Income Tax purposes.

Specifically, the act's new definition of constructive receipt adopts many of the provisions established by the Internal Revenue Code with respect to what and when to include certain deferrals of compensation as income for Pennsylvania Personal Income Tax purposes. The act also provides that distributions from nonqualified deferred compensation plans attributable to elective deferrals (and earnings thereon) are taxable at the time of the distributions, irrespective of retirement.

For additional information regarding the taxation of Deferred Compensation in Pennsylvania, please see PA PIT Bulletins 2005-03 and 2005-04 available on the Department's Web site

New Plan for Property Tax Relief Introduced

The House and Senate may not have been in Session this week, but the debate over property tax reform continued. On Tuesday, a Special Session House Finance Committee Sub-Committee on Property Tax Reduction, chaired by Rep. Gordon Denlinger, CPA, met to discuss the merit of a new plan, informally referred to as the Turzai-Reichley-Nickol Property Tax Proposal after its three co-sponsors.

Reps. Mike Turzai, Douglas Reichley and Steve Nickol introduced the proposal as one designed to be compromise legislation, elements of which had been gleaned from the Conference Committee report, caucus meetings and the very public debates over how best to provide property tax relief. According to the sponsors, it would be impossible provide relief in lost revenue from property taxes without a shift in taxes. The Turzai-Reichley-Nickol plan has two chief purposes: to provide fair tax relief to the greatest number of Pennsylvanians, and to create an equitable funding distribution system for school districts.

The proposal calls for a raise in the state sales tax from 6 percent to 7 percent, without expanding upon its current base. The revenue reaped from this increase - an estimated $1.4 billion - would go to a fund dedicated to property tax reductions. The monies would then be distributed to school districts on a "per-pupil" basis, ensuring the equal treatment of each district. Local school boards would then also have the option of increasing the PIT up to 1 percent, the revenue from which would be placed in the same separate fund. School districts would be able to use no more than 3 percent of the total received from this fund to cover administrative costs.

Criminal/Licensure Law Overlap Discussions Begin in House

The House Professional Licensure Committee held an informational meeting on Wednesday in order to begin their discussion of a package of bills related to the overlap between criminal law and licensure law. In this introductory tutorial, members of the committee heard an explanation of the consumer complaint and disciplinary processes.

Presenting before the committee were Basil Merenda, Commissioner of the Bureau of Professional and Occupational Affairs (BPOA), and current Director of the Bureau of Enforcement and Investigation (BEI) and former district attorney C.A.L. Shields, Esq.

The BPOA oversees 27 boards, including the State Board of Accountancy, and serves a number of functions - the most important of which is its role as disciplinarian. To ensure the integrity of licensed professionals, the BPOA works in conjunction with the BEI that, each year, conducts approximately 3,800 investigations and 16,000 inspections in answer to consumer complaints.

However, the BEI is aware that oftentimes police investigators are unaware of licensure laws and what actions might also constitute a breach of them. So that criminal investigators and the BEI can more easily work in collaboration, license information on individuals or facilities is available online to officers investigating or researching the events surrounding a complaint. The BEI has also reached out to officers and district attorneys with educational programs in order to distinguish itself as an available resource.

Further hearings to discuss actual legislation - House Bills 2104, 2105, 2106 and 2108 - will be held beginning June 1.

Comments on S-Corp Election Form Sought

Taxpayers and practitioners have identified a need to improve the Form 2553, Election by Small Business Corporation. The IRS expects to simplify the S-corporation election process through legislative and/or processing changes that would minimize the impact of Form 2553 on the processing of Form 1120-S returns.

The Taxpayer Burden Reduction office invites tax professionals to provide feedback on improving the election process, reducing internal costs associated with processing elections and promoting efficient and accurate assessment of tax against entities. E-mail comments to sbse.scorps.elections@irs.gov.

NY Revises Convenience of the Employer Test

The New York State Department of Taxation and Finance recently revised its position concerning the application of the Convenience Of The Employer Test. A new memorandum addresses situations where a nonresident or part-year resident employee whose assigned or primary work location is in New York State performs services for an employer at that location and at a home office located outside of New York State.

For tax years beginning on or after Jan. 1, 2006, it is the Tax Department's position that in the case of a taxpayer whose assigned or primary office is in New York State, any normal work day spent at the home office will be treated as a day worked outside the state if the taxpayer's home office is a bona fide employer office. 

New York State Tax Law imposes a personal income tax on a nonresident individual's taxable income that is derived from New York sources. The tax is equal to the tax computed as if the individual were a New York State resident for the entire year, reduced by certain credits, multiplied by the income percentage. 

Tax Practitioners Beware!

The U.S. Justice Department and the IRS will continue to crack down on tax practitioners who break the law by preparing false tax returns or who otherwise help their clients to perpetuate fraud against the government, according to Eileen O'Connor, assistant attorney general.

Speaking at a national bar association meeting recently, O'Connor warned that the government will not tolerate criminal misconduct by tax professionals. She pointed to a long list of practitioners convicted for filing false tax returns for their clients, as well as schemes to convince taxpayers that they do not owe federal income tax.

Also detailing the government's success in litigating cases involving abusive tax shelters over the past several years, O'Connor stressed that practitioners should reconsider strategies that play the system to minimize penalties