If, instead, C owned two shares, before the
DEPARTMENT OF REVENUE
COMMONWEALTH OF PENNSYLVANIA
distribution, one bought for $30 and the other
bought for $45, he would have six shares after
the distribution, three with the basis of $10
each and three with the basis of $15 each.
If the stock distribution is taxable, the basis of OF
the new stock is its fair market value at the time
of the distribution. BUSINESS
Taxability of Shareholders on
Undistributed Income AND
Resident shareholders are subject to tax only
when they actually have constructively BUSINESS
received cash or property from the business
corporation or association. ASSOCIATIONS
Taxability of Nonresident
A shareholder that is a nonresident individual,
estate, or trust is not subject to Pennsylvania
tax on any distribution from a business
corporation or business association.
When a taxpayer determines that dividend
income, gains, and other PA taxable income not
subject to withholding can reasonably be
expected to exceed $8,000, the taxpayer must
file a Declaration of Estimated Tax and pay the
tax in full or in installments. PERSONAL INCOME TAX PAMPHLET NO. 2
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF REVENUE
REV-1633 EX (3-02)
Introduction earnings and profits were derived from a the new stock is its fair market value at the time
This pamphlet provides information on the department store operated by the corporation, from of the distribution.
taxation of individuals, trusts, and estates that federal and state obligations and other
are shareholders of business corporations and securities, and from rental properties.
business associations under the personal
Distributions by a business corporation or
income tax law.
Notwithstanding the source of such earnings and business association of its own stock to its
profits, the distribution represents taxable dividend shareholders are not taxable dividend income
For Pennsylvania tax purposes, a business income to B in the taxable year received. or gains if the distribution is not taxable for
association is an unincorporated business federal income tax purposes. For federal and
enterprise that organized a business as a PA purposes, such distributions are taxable
joint-stock company or association, business A resident shareholder must report the excess of only if: (1) any shareholder has the choice of
trust, limited liability company, or other the fair market value of any “return of capital” receiving cash or other property instead of
enterprise that is subject to the PA corporate net distribution over the adjusted basis of his/her/its stock or stock rights; (2) the distribution gives
income tax or is required to make an stock. A “return of capital” distribution is any cash or other property to some shareholders
information return of its payments of distribution that is not made or credited by a and an increase in the percentage interest in the
dividends and earnings and profits to the business corporation or association out of its association’s assets or earnings and profits to
Internal Revenue Service on a Federal Form earnings and profits. other shareholders; (3) the distribution is on
1099-DIV. convertible preferred stock and has the same
result as in item (2); (4) the distribution gives
A resident shareholder decreases his/her/its basis
Business corporations or business associations preferred stock to some common stock
of stock or shares (but not below zero) by any
include, but are not limited to, business trusts, shareholders and common stock to other
distribution that is not taxable dividend income.
federally qualified real estate investment com- common stock shareholders; or (5) the
panies, and Subchapter S Corporations that are distribution is on preferred stock, except for an
not Pennsylvania S Corporations. Example: B Corporation distributes from its increase in the conversion ratio of convertible
capital account $100,000 to its sole stockholder, B, a preferred stock solely to take into account a
resident of Pennsylvania. The adjusted basis of B’s stock dividend or stock split on the stock into
Taxability of Shareholders stock was $ 75,000. which the convertible preferred stock may be
on Distributions converted.
A resident shareholder must report any
distribution by a business corporation or As the distribution is not made out of earnings and
profits, the $100,000 does not represent taxable div- If the stock distribution is not taxable, the
business association out its earnings and
idend income to B. B must, however, decrease the resident shareholder determines the new basis
profits as taxable dividend income in the
adjusted basis of his stock from $75,000 to zero and by dividing the adjusted basis of the old stock
taxable year received or credited. The
report the remaining $25,000 of the $100,000 between the old and new stock.
distributions are PA taxable dividend income
regardless of the manner in which the business ”return of capital” distribution as a taxable gain.
derived the income.
Example: C owned one share of common stock
Dividend Reinvestment Plans that he bought for $45. The corporation gave
Example: B Corporation distributes all of its A resident shareholder must report distributions of two new shares of common stock for the share
earnings and profits for the year to stockholder stock made pursuant to a dividend reinvestment held. C then had three shares of common stock,
B, a resident of Pennsylvania. The corporate plan as taxable dividend income, and the basis of each having a basis of $15.