Q&A with the Pennsylvania Department of Revenue

Scenario: Will Pa. allow resident shareholders to take a credit for tax paid on the Sec 338(h) income in UT?

Sep 04, 2015
Scenario:

S Corporation A, an S corporation, merged into buyer Corporation B in a Sec 338(h) transaction. For federal and Utah (UT) purposes, gain from the sale of stock is treated as a sale of assets by A and a liquidation of the proceeds to the shareholders. The gain on the sale is $350,000. The liquidating distribution is also $350,000. 

Each shareholder has a federal stock basis before the sale of $0. Income from operations in the year of sale is $5,000. $350,000 (pro-rata share of Sec 338(h)) of the gain is apportioned to Utah (UT) [benefit derived state]. The character of UT income is ordinary business income, which is passed through to the shareholders to report on their individual UT income tax returns. Each A shareholder will file an individual UT personal income tax return and reports income from the year of sale as $355,000 ($350,000 gain from the sale of assets plus $5,000 income from operations). 

PA resident shareholders will file individual PA personal income tax returns. PA does not allow Sec 338(h) for S Corporations; therefore gain on sale is taxed at the shareholder and not the corporate level for PA purposes. PA resident shareholders report the $5,000 on PA-40, line 4 as income from the operation of a business and a gain of $345,000 on Schedule D as a sale of stock (Stock basis increases from $0 to $5,000 ($5,000 income from operations) before the sale. Sales proceeds of $350,000 less stock basis of $5,000.) 

The same income (gain) is taxed to UT and PA but reported in a different class of income in each state. Will PA allow resident shareholders to take a credit for tax paid on the Sec 338(h) income in UT?
 
A. 

Yes. See PA PIT Guide Chapter 16.  On page 46 it states: A resident shareholder may claim a resident credit for taxes paid to another state on Schedule D gain resulting from an IRC § 338(h)(10) transaction.


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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.