We provide here a written summary of answers provided by the Department of Revenue to the committee at periodic question and answer sessions. 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 a specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.

Q&A with the Pennsylvania Department of Revenue

Scenario: Under IRC § 860E a holder of a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) is required, at a minimum, to pay tax on its excess inclusion income (EII).

Nov 15, 2019
Q:

Scenario: Under IRC § 860E a holder of a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) is required, at a minimum, to pay tax on its excess inclusion income (EII). A REMIC residual interest holder is instructed to report taxable income on federal Form 1120, line 30, for each year in an amount no less than EII and a net operating loss will be generated. This treatment is required whether the taxpayer
reports a loss on federal Form 1120, line 28.

a. For CNIT purposes, the Department of Revenue has taken the position on audit that the starting point for computing Pennsylvania taxable income is EII. How does that position reconcile with the Department of Revenue's policies regarding the treatment of net repatriated income (Information Notice 2018-1) and GILTI/FDII (Corporation Tax Bulletin 2019-02) which are premised upon the position that the starting point for computing Pennsylvania taxable income is federal taxable income before net operating losses and special deductions (Form 1120, line 28), as provided in the regulations?

b. Assuming that the Department’s position is correct, does the holder of a residual interest in a REMIC who incurs a loss on federal Form 1120, line 28 never get a net operating loss, as the Pennsylvania net loss deduction provisions do not incorporate IRC § 860E?

A:

Pennsylvania law provides specific rules for net loss deductions from Pennsylvania
“taxable income,” 72 P.S. § 7401(3)4. However, the Pennsylvania net loss provisions do not permit a taxpayer to carryforward to future years a net loss that was never actually included in the taxpayer's taxable income reported to Pennsylvania for the tax year in which such loss is alleged to have occurred.
 

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Disclaimer

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.