61 Pa. Code § 155.26
(e) In the case of a taxpayer which has not been in existence for a period of 5 calendar years, average net income is the average net income for the number of years that the taxpayer has been in existence. A taxpayer in existence for a part of a year shall be considered to have been in existence for that year based on the number of days in the year that the taxpayer was in existence.
Example 1. The taxpayer, incorporated August 1, 1982, reports on a calendar year basis. Its net income for the period August 1 through December 31, 1982 (153 days) was $20,000. Its net income for 1983 was $50,000 and for 1984, $70,000. Average net income for 1984 would be $57,870 ($140,000 ÷ 2 153/365).
Example 2. The taxpayer filed on a calendar year basis until December 1980. In 1981 it changed its filing period to a fiscal year ending June 30. In order to do so, it filed a short period report for January 1 through June 30, 1981. Thereafter, taxpayer continued to file on a fiscal year basis. In computing average net income for the period ending June 30, 1985, taxpayer would include its January 1 through June 30, 1981 net income or loss as well as its July 1, 1981 through June 30, 1985 net income or loss and divide the result by 4 181/365.
Example 3. The taxpayer, incorporated May 1, 1971, filed a calendar year report for 1980. Between January 1, 1981 and December 31, 1984, the taxpayer, as a result of various mergers and filing period changes, had 6 book years. The taxpayer’s average net income for 1984 would include the net income or loss for each of the 6 book years between January 1, 1980 and December 31, 1984, divided by five.
(f) Average net income does not include net income or loss of the corporation for a period of time prior to incorporation, such as net income or loss of a partnership prior to incorporation. Net income or loss of a predecessor corporation may not be attributed to a successor corporation. In the case of a mere change in identity, form or place of organization of one corporation, net income or loss prior to the change shall be utilized in determining average net income. Net income or loss may not be adjusted in the event of a change in corporate structure, but to the extent that a change occurs as a result of a tax evasion motive, net income or loss may be adjusted to negate the effects of the change in corporate structure. The following examples demonstrate the application of this subsection with respect to mergers, consolidations and reincorporations. Where there is evidence of a tax evasion motive, average net income will be determined based on the substance of the transaction.
Example 1. Effective December 31, 1984, Corporation A merges into Corporation B. The net income or loss for the two corporations are:
Year…Corporation A…Corporation B 1981…$60,000…$150,000 1982…$10,000…$100,000 1983…($100,000)…$ 80,000 1984…($100,000)…$ 60,000 Total 1985…— …$100,000
The average net income for 1985 for Corporation B, the corporation which survived the merger, would be $98,000 ($490,000 ÷ 5), determined without regard to the net income or loss of Corporation A prior to the merger.
Example 2. Effective December 31, 1984, Corporation A and Corporation B consolidate to form a new corporation, Corporation C. Both Corporations A and B had been in existence for more than 5 years prior to the consolidation. Corporation C’s average net income would be determined for 1985 based only on the corporation’s net income or loss for 1985, and no recognition would be given to the net income or loss of either Corporation A or Corporation B prior to the consolidation.
Example 3. Effective December 31, 1984, Corporation A, formerly incorporated in State Y, reincorporates in State X. The average net income for 1985 would be computed taking into account net income or loss for 1985, as well as net income or loss for the 4 years prior to January 1, 1985.
The provisions of this § 155.26 issued under section 408 of the Tax Reform Code of 1971 (72 P. S. § 7408).
The provisions of this § 155.26 adopted January 16, 1987, effective January 17, 1987, 17 Pa.B. 273.
Application
This section does not apply retroactively and the Department of Revenue followed the Department’s previously established interpretation of section 408 of the Tax Reform Code of 1972 (72 P. S. § 7408). Doyle Equipment Co. v. Commonwealth, 542 A.2d 644 (Pa. Cmwlth. 1988).
Calculating Tax Liability
Under subsection (g), an S corporation may not assume the tax liability of its shareholders and then deduct that as an expense in calculating its annual net income for capital stock purposes. Scott Electric Co. v. Commonwealth, 692 A.2d 289 (Pa. 1997); exceptions overruled, decision adhered to 704 A.2d 205 (Pa. Cmwlth. 1998).
‘‘Net income per books’’ as the term is used in calculating tax liability on capital stock values for Subchapter S Corporations did not permit corporations to deduct hyphothetical Federal income tax it did not pay. Tool Sales and Service Co., Inc. v. Commonwealth, 613 A.2d 143 (Pa. Cmwlth. 1992); affirmed 637 A.2d 607 (Pa. 1993).
Capital Stock Value
Corporation has not demonstrated a due process violation, but can claim only that where the total property, payroll, and sales of the unitary business enterprise included in the fractions of the three-factor formula, its tax due would be approximately 44.5% less than the figure arrived at by the Board of Finance and Revenue in its calculation under the three-factor formula because the 44.5% disparity between calculations does not lie outside of the constitutional margin of error delineated by the United States Supreme Court. Unisys Corp. v. Commonwealth, 812 A.2d 448 (Pa. 2002); cert. denied 540 U. S. 812 (U. S. 2003).
Consistent with GAAP
The regulatory treatment of income per books, by not allowing for adjustments for extraordinary or nonrecurring items, is consistent with the GAAP treatment of the same. Shawnee Development, Inc. v. Commonwealth, 799 A.2d 882 (Pa. Cmwlth. 2002); dec. vacated 799 A.2d 882 (Pa. Cmwlth. 2002), ord. aff’d 819 A.2d 528 (Pa. 2003).
Fiscal Year
There was no inconsistency between this regulation and section 601 of the Tax Reform Code (72 P. S. § 7601). This regulation reasonably supplements the statute by providing for a case where a corporation changes its fiscal year and shortens the period of its taxable year. The Department’s expertise in this area is entitled to deference in interpreting the statutes they enforce, particularly when such interpretation treats both new and old corporations in a uniform rather than discriminatory manner. Consolidated Rail Corp. v. Commonwealth, 670 A.2d 722 (Pa. Cmwlth. 1996); affirmed 691 A.2d 456 (Pa. 1997).
Not Clearly Erroneous; Nonconfiscatory
The taxpayer’s bald assertion that its stock must be of no value because it is insolvent is not sufficient to meet its heavy burden to show that the regulation is clearly erroneous, or that it works an unconstitutional confiscation of its property. Shawnee Development, Inc. v. Commonwealth, 799 A.2d 882 (Pa. Cmwlth. 2002), dec. vacated 799 A.2d 882 (Pa. Cmwlth. 2002), order aff’d. 819 A.2d 528 (Pa. 2003).
This section cited in 61 Pa. Code § 155.21 (relating to general).