THE GENERAL ASSEMBLY OF PENNSYLVANIA

HOUSE BILL

INTRODUCED BY ADOLPH, KILLION, MICCARELLI, MICOZZIE, BAKER, BEAR, BENNINGHOFF, BOBACK, CALTAGIRONE, CARROLL, CLYMER, CREIGHTON, DALEY, DENLINGER, DONATUCCI, J. EVANS, EVERETT, FARRY, FLECK, GEIST, GILLEN, GINGRICH, GRELL, HARHART, HESS, JOSEPHS, F. KELLER, M. K. KELLER, W. KELLER, KOTIK, LONGIETTI, MARSICO, MILLARD, MOUL, MURT, O'NEILL, PAYNE, PEIFER, PICKETT, QUIGLEY, QUINN, RAPP, READSHAW, ROSS, SANTONI, SCHRODER, SWANGER, TAYLOR, TOOHIL, VULAKOVICH AND WATSON, JUNE 17, 2011

REFERRED TO COMMITTEE ON FINANCE, JUNE 17, 2011  

AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," in personal income tax, further providing for

classes of income.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Section 303 of the act of March 4, 1971 (P.L.6,

No.2), known as the Tax Reform Code of 1971, is amended by

adding a subsection to read:

Section 303.  Classes of Income.--* * *

(a.8)  (1)  A taxpayer is entitled to claim a loss from a

fraudulent investment arrangement for which the taxpayer is

permitted a deduction under section 165 of the Internal Revenue

Code of 1986, as amended.

(2)  (i)  A "fraudulent investment arrangement" shall include

an arrangement in which a party:

(A)  receives cash or property from investors;

(B)  purports to earn income for the investors;

(C)  reports income amounts to the investors that are

partially or wholly fictitious;

(D)  makes payments, if any, of purported income or principal

to some investors from amounts that other investors invested in

the fraudulent arrangement; and

(E)  appropriates some or all of the cash or property of

investors.

(ii)  A fraudulent investment arrangement shall not include a

tax shelter as defined in section 6662(d)(2)(C) of the Internal

Revenue Code of 1986, as amended, or any other investment

arrangement, if a significant purpose of that investment

arrangement is the avoidance or evasion of the tax imposed under

this article.

(3)  (i)  Except as provided in subparagraph (iii), a loss

from a fraudulent investment arrangement shall be recognized in

the taxable year in which the taxpayer discovers the loss. The

year in which the taxpayer discovers the loss shall be

determined in accordance with section 165(e) of the Internal

Revenue Code of 1986, as amended.

(ii)  If during the year of discovery there exists a claim

for reimbursement with respect to which there is a reasonable

prospect of recovery, a taxpayer shall not recognize any portion

of the loss for which reimbursement may be received until the

taxable year in which it can be ascertained with reasonable

certainty whether reimbursement will be received. Whether a

reasonable prospect of recovery exists is a question of fact to

be determined upon examination of all facts and circumstances.

(iii)  Subject to subparagraph (ii), a taxpayer may make an

irrevocable election to recognize a loss or portion of a loss,

whichever is applicable, in the taxable year in which the

taxpayer included the amount claimed as a loss or portion of a

loss in income if:

(A)  the taxpayer actually paid tax under this article on

that income; and

(B)  the taxpayer files either an amended return within three

years from the due date, including any extension, of the

original return in which the income giving rise to the loss was

included, or a petition for refund with the department within

the applicable statute of limitations provided in section

3003.1.

(iv)  A taxpayer shall make the irrevocable election with the

timely filing of either the amended return or the petition for

refund.

(v)  A taxpayer is only permitted to claim a loss or portion

of a loss, whichever is applicable, in a prior taxable year

through the filing of a petition for refund in circumstances

where the amount or class of income to which the loss relates is

the subject of an administrative or judicial appeal.

(4)  (i)  The amount of a loss that a taxpayer is entitled to

recognize from a fraudulent investment arrangement shall equal

the amount of the taxpayer's investment in the arrangement,

including any additional investments, less all withdrawals,

distributions, reimbursements or other recoveries and the amount

of all claims to which there is a reasonable prospect of

recovery. Additional investments shall include an amount

reported to a taxpayer as income in years prior to the year of

discovery of the loss if the taxpayer:

(A)  included the amount in income;

(B)  paid tax under this article on that income; and

(C)  reinvested the amount in the fraudulent investment

arrangement.

(ii)  A taxpayer may not claim a loss for amounts invested in

a fraudulent investment arrangement that were borrowed from any

individual or entity that was involved in the conduct of the

fraudulent investment arrangement to the extent that the

borrowed funds were not repaid at the time the loss was

discovered.

(5)  (i)  A loss attributable to income upon which a taxpayer

previously paid tax under this article shall be included in the

same class or classes of income as the income to which the loss

relates.

(ii)  A loss not attributable to income upon which a taxpayer

previously paid tax under this article shall be included in the

appropriate class or classes of income.

(iii)  To the extent that a taxpayer is unable to trace a

loss to a specific class of income, the loss must be allocated

to the applicable classes of income in a reasonable manner.

(iv)  A taxpayer may not source the same loss or the same

portion of a loss, whichever is applicable, to more than one

class of income.

(6)  (i)  (A)  If a taxpayer recovers an amount in a later

taxable year for which the taxpayer recognized a loss in an

earlier taxable year, the taxpayer shall recognize the amount

recovered in the later taxable year to the extent that the

recognized loss to which the recovery relates reduced the

taxable income of the taxpayer in the earlier taxable year.

(B)  The amount recovered must be included in the same class

or classes of income that the related loss reduced taxable

income in the earlier taxable year. In the event that the amount

recovered relates to more than one class of income, the amount

recovered must be allocated between or among the applicable

classes of income in a reasonable manner to the extent that the

taxpayer is unable to trace the amount recovered to a specific

class of income.

(C)  The taxpayer shall not report the recovery on an amended

return for the earlier taxable year whether or not the statute

of limitations has expired.

(ii)  (A)  If a taxpayer recovers less than an amount covered

by a claim for reimbursement with respect to which there is a

reasonable prospect of recovery that reduced a deduction in an

earlier taxable year, the taxpayer shall recognize the

difference as a loss in the tax year in which the amount of

recovery is ascertained with reasonable certainty.

(B)  In the event that the additional loss relates to more

than one class of income, the taxpayer must allocate the amount

of the recovery between or among the applicable classes of

income in a reasonable manner to the extent that the additional

loss is unable to be traced to a specific class of income.

(7)  A taxpayer may not carry back or carry over any unused

losses to another taxable year.

(8)  The taxpayer has the burden of proving the entitlement

and amount of any loss recognized from a fraudulent investment

arrangement. The department shall not deny a loss from a

fraudulent investment arrangement claimed on an original return,

amended return or petition for refund merely because the

transaction is not reported on an original or corrected Federal

Form 1099, Federal Schedule K-1, PA-20S/PA-65 RK-1, PA-20S/PA-65

NRK-1 or similar document.

Section 2.  The addition of section 303(a.8) of the act shall

apply to losses from fraudulent investment arrangements

discovered on or after January 1, 2009.

Section 3.  This act shall take effect in 60 days.