Q&A with the Pennsylvania Department of Revenue

How does the DOR determine whether hedge funds, private equity funds, and/or similar types of investment vehicles are engaging in a “business” for PIT purposes?

Jun 30, 2011
Q:

In light of recent BF&R decisions in which the Department of Revenue’s representative did not dissent, which criteria will the DOR now use to determine whether hedge funds, private equity funds and/or similar types of investment vehicles are engaging in a “business” for PIT purposes?

A:

The Department does not anticipate making any policy changes related to the criteria for business activity. The criteria are located in 61 Pa. Code § 103.12. The Department’s position is that business entities such as hedge funds that do not market a product or service to the general public but are merely a group of people who invest for their own benefit are not conducting a business.

See the following excerpts from the PIT Guide and Revenue website Q&A, below:

B. What is Not a Business or Profession

The following activities do not constitute the operation of a business, profession or farm and are, therefore, reportable in other classes of Pennsylvania income-

A sale, discontinuation, or abandonment of a business or segment thereof;

An isolated or nonrecurring transaction which is not a normal or routine business activity;

The ownership or disposition of assets which are held for long-term investment purposes;

Trading in or hedging securities for personal purposes; and

A non-operating interest in coal, oil, gas, or minerals in place unless they serve an operational function in the operation of the owner's business.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.