RESOLUTION SUPPORTING AMENDMENT OF PENNSYLVANIA DEFINITION OF SMALL CORPORATION

WHEREAS , the Commonwealth enacted Act 7 into law in May 1997, which amended various Articles of the Tax Reform Code of 1971, including Article III which relates to the Personal Income Tax;

WHEREAS , in amending various sections of Article III relating to the definition of Small Corporation for purposes of the Personal Income Tax, the intent of the Department of Revenue was to place the definition of Small Corporation, which relates to Pennsylvania S corporations in conformity with various changes to the provisions of subchapter S of Chapter 1 of the Internal Revenue Code of 1986, as amended relating to Federal S corporations;

WHEREAS , the provisions of Act 7 amending the definition of Small Corporation retained the language which excludes from the definition of Small Corporation, any corporation which has passive investment income in excess of twenty-five percent of its gross receipts. Passive investment income is defined to include gross receipts derived from royalties, rents, dividends, interest, annuities and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken into account only to the extent of gains therefrom);

WHEREAS , the provisions of subchapter S of Chapter 1 of the Internal Revenue Code of 1954, as amended, prior to 1982 did contain a passive income test in order to qualify for status as an S corporation for federal income tax purposes;

WHEREAS , the provisions of subchapter S of Chapter 1 of the Internal Revenue Code of 1954 were amended in 1982 to permit newly-formed corporations, and certain Subchapter C corporations with no earnings and profits, to elect status as an S corporation for federal income tax purposes irrespective of the amount of their passive income;

WHEREAS , in order to conform the provisions of Article III of the Tax Reform Code of 1971, as amended with the provisions of subchapter S of Chapter 1 of the Internal Revenue Code of  1986, as amended;

NOW, THEREFORE, BE IT RESOLVED that the Philadelphia Bar Association use its best efforts to effect a legislative change in Article III, Section 301(5.2) of the Tax Reform Code of 1971, as amended, eliminating from the definition of Small Corporation the following:

"and which does not have passive income in excess of twenty-five percent of its gross receipts. For the purposes of this clause, passive investment income means gross receipts derived from royalties, rents, dividends, interest, annuities and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken only to the extent of gains therefrom)."

PHILADELPHIA BAR ASSOCIATION
BOARD OF GOVERNORS
ADOPTED: MARCH 26, 1998