(a) General.

1. (1) When a taxpayer has an interest in a partnership, joint venture, association or other unincorporated enterprise (hereinafter referred to in this section as partnership), the amount of its distributive share of partnership income shall be determined in accordance with the IRC. The taxpayer’s interest in the partnership shall, for purposes of Commonwealth corporate taxation, be considered a direct interest in the assets of the partnership rather than an intangible interest. Accordingly, the taxpayer’s share of the partnership’s payroll, property and sales—as hereafter determined—shall be included in the apportionment factors of the taxpayer unless otherwise excluded by this section.
2. (2) A taxpayer’s partnership interest for the purpose of computing the portion of the partnership’s property, payroll and sales to be included in the taxpayer’s property, payroll and sales factors shall be determined under the partnership agreement and in accordance with the IRC

(b) Nexus.

1. (1) If the separate activities of the taxpayer or the activities of the partnership are sufficient to meet the conditions of section 401(1) of the TRC (72 P. S. § 7401(1)) relating to doing business, carrying on activities, having capital or property employed or used or owning property within this Commonwealth, then the taxpayer will be subject to corporate taxation by the Commonwealth.
2. (2) If the separate activities of the taxpayer or the activities of the partnership are sufficient to constitute transacting business outside this Commonwealth and render the taxpayer taxable to another state under section 401(3)2.(a)(2) and (3) of the TRC (72 P. S. § 7401(3)2.(a)(2) and (3)), then the taxpayer will be allowed to apportion and allocate its income.

(c) Business income.

1. (1) Income arising from transactions and activity in the regular course of the taxpayer’s trade or business constitutes business income. The determination of whether a corporate partner’s distributive share of partnership income is business income depends upon whether the income arose in the regular course of the taxpayer’s trade or business, determined in accordance with § 153.24 (reserved). The taxpayer’s trade or business shall include activities performed in partnership.

   Example 1: Corporation A’s distributive share of Partnership P’s income is 20%. Corporation A manufactures toys which are sold in seven other states by Partnership P. Corporation A’s business income for the year, disregarding its distributive share of Partnership P’s income, was $1,000,000. Partnership P’s business income for the same year was $800,000. The business income of Corporation A is $1,160,000 ($1,000,000 plus 20% of $800,000).

2. (2) The classification of income by the labels customarily given such as interest, rents, royalties and capital gains, is of no aid in determining whether distributive partnership income is business or nonbusiness income. The income is determined to be either business or nonbusiness income depending upon the relationship to the trade or business of the corporate partner, not of the partnership, as determined by paragraph (1).

(d) Apportionment of business income. A corporate partner entitled to apportionment under subsection (b)(2) shall determine the business income attributable to this Commonwealth by use of a three-factor formula consisting of property, payroll and sales of the taxpayer including its share of the partnership’s property, payroll and sales for a partnership year ending within or with the taxpayer’s tax year as follows:

1. (1) Property factor.

   1. (i) General rule. The numerator and denominator of the property factor shall be determined as set forth in section 401(3)2.a(10)—(12) of the TRC (72 P. S. § 7401(3)2.(a)(10)—(12)) and this chapter; however, the special rules in subparagraph (ii) will apply.

   2. (ii) Special rules. A portion of the partnership’s real and personal property, both owned and used and rented and used during the tax year to the extent of the taxpayer’s interest in the partnership shall be included in the numerator and denominator of the taxpayer’s property factor. However, the value of the property which is rented or leased by the taxpayer to the partnership or vice versa shall, with respect to the taxpayer, be adjusted in the numerator and denominator of the taxpayer’s property fraction in order to avoid duplication in the following manner:

      1. (A) If the property is owned by the taxpayer and rented to the partnership, no portion of the rental value of the rented or leased property will be in the taxpayer’s property factor.

      2. (B) If the property is owned by the partnership and rented to the corporate partner, the property factor of the taxpayer will include the sum of:

         1. (I) The value of the property multiplied by the percentage of taxpayer’s interest in the partnership.

         2. (II) The rental value of the property multiplied by the percentage of the interests in the partnership not held by the taxpayer.

            Example 1: Corporation A’s interest in Partnership P is 20%. Corporation A’s distributive share of Partnership P’s income is included in business income of Corporation A to be apportioned by formula. Corporation A owns a building (original cost of $100,000) which is rented to Partnership P for $12,000 per year. Corporation A must include the original cost of $100,000 for the building in its Property Factor. Therefore, no portion of the rental value of the rented property will be reflected in the Property Factor of Corporation A. Example 2: Same facts as in Example 1 except Partnership P owns the building and rents it to Corporation A. Corporation A will include $20,000 (20% of $100,000) in its Property Factor because of its interest in Partnership P, and in addition, Corporation A will include $76,800 (($12,000 8) 80%) of rental value in its Property Factor in order to give weight in the property factor to the rented building used in Corporation A’s operation. Thus, the value of the building to be used in the Property Factor of Corporation A is $96,800 ($20,000, plus $76,800).

2. (2) Payroll factor.

   1. (i) General rule. The numerator and denominator of the payroll factor shall be determined as set forth in § 153.25 (relating to payroll factor); however, the special rules in subparagraph (ii) will also apply.

   2. (ii) Special rules. The partnership’s payroll shall be included in the denominator of the taxpayer’s payroll factor to the extent of the taxpayer’s interest in the partnership. The amount of a payroll applicable to this Commonwealth shall also be included in the numerator of the taxpayer’s payroll factor.

      Example 1: Corporation A’s interest in Partnership P is 20%, and its distributive share of Partnership P’s income is included in business income of Corporation A to be apportioned by formula. Corporation A’s own payroll is $1,000,000 and the payroll of Partnership P is $800,000. Corporation A’s total payroll for purposes of the Payroll Factor is $1,160,000 (1,000,000, plus 20% of $800,000).

3. (3) Sales factor.

   1. (i) General rule. The numerator and denominator of the sales factor shall be determined as set forth in § 153.26 (relating to sales factor); however, the special rules set forth in subparagraph (i) will also apply.

   2. (ii) Special rules.

      1. (A) The partnership’s sales which give rise to business income shall be included in the denominator of the taxpayer’s sales factor to the extent of the taxpayer’s interest in the partnership. The amount of the sales attributable to this Commonwealth shall also be included in the numerator of the taxpayer’s sales factor. Intercompany sales between the partnership and the taxpayer shall be eliminated from the denominator and numerator of the taxpayer’s sales factor as follows: sales by the taxpayer to the partnership to the extent of the interest in the partnership; sales by the partnership to the taxpayer not to exceed the taxpayer’s interest in partnership sales.
      2. (B) Notwithstanding an intercompany eliminations described in clause (A), sales made by the taxpayer or the partnership to nonpartners shall be included in the taxpayer’s sales factor in an amount equal to the taxpayer’s interest in the partnership.

      3. (C) Application of clauses (A) and (B) is illustrated by the following examples:

         Example 1: Corporation A’s interest in Partnership P is 20%, and its distributive share of Partnership P’s income is included in business income of Corporation A to be apportioned by formula. Corporation A’s sales were $20,000,000 for the year, $5,000,000 of which were made to Partnership P. Partnership P made sales of $10,000,000 during the same year, none of which were to Corporation A or the other partners. The denominator of Corporation A’s Sales Factor is $21,000,000 determined as follows:

         Sales by Corporation A		$20,000,000
         Add: Corporation A’s interest (20%) in Partnership P’s sales	2,000,000
         Less: Corporation A’s interest (20%) in Corporation A’s sales to Partnership P	1,000,000	1,000,000
         Denominator of Sales Factor		$21,000,000

         Example 2: The following facts are applicable to Examples 2(a) through (c) below. Corporation A’s interest in Partnership P is 20%, and Corporation B’s interest is 80%. The distributive share of partnership income is included in business income of Corporation A and Corporation B, respectively.

      4. (a) The sales made by Corporation A, Corporation B, and Partnership P are as follows:

         Corporation A$20,000,000 Corporation B60,000,000 Partnership P: To Corporation A$2,000,000 To Corporation B 8,000,000$10,000,000 The denominator of Corporation A’s Sales Factor is $20,000,000 determined as follows:

         Sales by Corporation A$20,000,000 Add: Corporation A’s interest (20%) in Partnership P’s sales $ 2,000,000 Less: Partnership P’s Sales to Corporation A 2,000,000 -0- $20,000,000 The denominator of Corporation B’s Sales Factor is $60,000,000 determined as follows:

         Sales by Corporation B$60,000,000 Add: Corporation B’s interest (80%) in Partnership P’s sales $ 8,000,000 Less: Partnership P’s sales to Corporation B 8,000,000 -0- $60,000,000 (b) The sales made by Corporation A, Corporation B, and Partnership P are as follows:

         Corporation A$20,000,000 Corporation B$60,000,000 Partnership P: To Corporation A$ 1,000,000 To Corporation B 9,000,000$10,000,000 The denominator of Corporation A’s Sales Factor is $21,000,000 determined as follows:

         Sales by Corporation A$20,000,000 Add: Corporation A’s interest (20%) in Partnership P’s sales $ 2,000,000 Less: Partnership P’s Sales to Corporation A 1,000,000 1,000,000 Denominator of Corporation A’s Sales Factor $21,000,000 The denominator of Corporation B’s Sales Factor is $60,000,000 determined as follows:

         Sales by Corporation B$60,000,000 Add: Corporation B’s interest (80%) in Partnership P’s sales $ 8,000,000 Less: Intercompany sales between Partnership P and Corporation B 8,000,000* -0- Denominator of Corporation B’s Sales Factor $60,000,000 *Not to exceed taxpayer’s interest in Partnership P’s sales. (c) The sales made by Corporation A, Corporation B, and Partnership P are as follows:

         Corporation A$20,000,000 Corporation B80,000,000 Partnership P: To Corporation A$ 3,000,000 To Corporation B6,000,000$10,000,000 To Corporation X1,000,000 The denominator of Corporation A’s Sales Factor is $20,200,000 determined as follows:

         Sales by Corporation A$20,000,000 Add: Corporation A’s interest in Partnership P’s sales to nonpartner X Corporation (20% x $1,000,000) 200,000 Corporation A’s interest in Partnership P’s sales to Partners (20% x $9,000,000) $ 1,800,000 Less: Intercompany sales from Partnership P to Corporation A $ 1,800,000* -0- Denominator of Corporation A’s Sales Factor $20,200,000 *Not to exceed taxpayer’s interest in Partnership P’s sales. The denominator of Corporation B’s Sales Factor is $82,000,000 determined as follows:

         Sales by Corporation B$80,000,000 Add: Corporation B’s interest in Partnership P’s sales to nonpartner X Corporation (80% x $1,000,000) 800,000 Corporation B’s interest in Partnership P’s sales to Partners (80% x $9,000,000)$ 7,200,000 Less: Intercompany Sales from Partnership P to Corporation B $ 6,000,000 1,200,000 Denominator of Corporation B’s Sales Factor $82,000,000 (e) Nonbusiness income. (1) The determination of whether a taxpayer’s distributive share of partnership income is business or nonbusiness income shall be made in accordance with this subsection if the conditions of subsection (b) are met. (i) The first step is to determine which portion of the taxpayer’s income and its distributive share of the partnership items constitute ‘‘business income’’ and ‘‘nonbusiness income’’ under section 401(3)2.(a)(1)—(17) of the TRC (72 P. S. § 7401(3)2.(a)(1)—(17)) and this chapter. The various items of nonbusiness income are then directly allocated to specific states under section 401(3)2.(a)(4)—(8) of the TRC (72 P. S. § 7401(3)2.(a)(4)—(8)) and this chapter. The taxpayer’s distributive share of the nonbusiness income shall be reported in the same manner as other nonbusiness income derived from other activities of the taxpayer. See § 153.24 (relating to business income and nonbusiness income). (f) Accounting period. (1) The corporate taxpayer and the partnership are required to maintain their accounting periods as prescribed under section 706 of the IRC (26 U.S.C.A. § 706). (2) Where the partnership keeps its books on a fiscal or calendar year which is different from the tax year of the taxpayer, the taxpayer shall report its share of the partnership income and apportionment factors in its tax year in which or with which the partnership year ended. (g) Accounting method. (1) In determining the corporate partner’s distributive share, the same method of accounting shall be used that the partnership uses in keeping its books. This is true even though the partnership method of accounting is not the same as that which the corporate partner used in preparing its corporate return. Thus, a cash basis partner would have to include items which are accrued but unpaid by an accrual basis partnership. (h) Filing requirements. (1) A corporation filing under this section shall file a copy of the partnerships’ Federal Form 1065 and a detailed description of partnership activity. The description shall include a detailed explanation of all business and nonbusiness income. (i) Effective date. This section will take effect for the tax years beginning January 1, 1982.
         Authority The provisions of this § 153.29 issued under section 408(a) of the Tax Reform Code of 1971 (72 P. S. § 7408(a)).
         Source The provisions of this § 153.29 adopted March 11, 1983, effective March 12, 1983, 13 Pa.B. 991.