Q&A with the Pennsylvania Department of Revenue

Scenario: A Pennsylvania individual taxpayer invested in a partnership that does not have business in Pennsylvania and receives a K-1 with a loss.

Jun 19, 2012
Q:

A Pennsylvania individual taxpayer invested in a partnership that does not have business in Pennsylvania. The taxpayer receives a K-1 with a loss. Pennsylvania sends out a notice denying the loss because no RK-1 is submitted. No RK-1 exists because the Partnership has no business in Pennsylvania. After multiple phone calls, this is resolved. Is this Department policy? How can this be avoided in the future?

A:

Title 72 Section 7335(c) of the Tax Reform Code of 1971 states, “Every partnership having a resident partner or having any income derived from sources within this Commonwealth shall make a return for the taxable year setting forth all items of income, loss and deduction, and such other pertinent information as the department may by regulations prescribe.”  

Furthermore, it is the Department of Revenue’s policy that a partnership must file the PA-20S/PA-65 Information Return if either or both of the following apply: 1. During its taxable year, the partnership earned, received, or acquired any gross taxable income allocable or apportionable to Pennsylvania. 2. On the last day of its taxable year, the partnership had at least one member that was a Pa resident individual, estate, trust, or other pass-through entity (partnership or Pa S Corporation).

If a partnership return is not filed with the Department of Revenue, there is no documentation to support the PA loss reported on the individual return.  We are not in the position to determine the Fed to State adjustments or the classification of the income.  Therefore, the loss will be denied.

72 P.S. Sections 214(a) and (b) of the Fiscal Code state, “Any individual, person, or entity required by law or regulation to furnish any return or other document to the Department of Revenue who furnishes a false or fraudulent return or who fails to file a return or other document in the manner and at the time required shall, in addition to any other penalty provided by law, be liable for a penalty of fifty dollars ($50.00) for each failure to file.”  “If any person liable to pay a penalty under this section neglects or refuses to pay the penalty after demand, the amount of the penalty together with any costs shall be a lien in favor of the Commonwealth upon both the real and personal property of that person.”

The entity is legally required to file a PA return and may have penalties assessed against it if a return is not filed.

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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.