61 Pa. Code § 101.7 — Receipt of income

(a) General rule. An amount, the privilege of receiving which is taxable, shall be considered as received in the year in which it is actually or constructively received unless includable for a different year in accordance with the method of accounting of the taxpayer. Under an accrual method of accounting, income shall be includable in gross income when all the events have occurred which fix the right to receive the income and the amount thereof may be determined with reasonable accuracy. Therefore, under such a method of accounting if, in the case of compensation for services, no determination may be made as to the right to the compensation or the amount thereof until the services are completed, the amount of compensation is ordinarily income for the taxable year in which the determination can be made. Under the cash receipts and disbursements method of accounting, such an amount shall be includable in gross income when actually or constructively received. Where an amount of income is properly accrued on the basis of a reasonable estimate and the exact amount is subsequently determined, the difference, if any, shall be taken into account for the taxable year in which the determination is made. To the extent that income is attributable to the recovery of bad debts for accounts charged off in prior years, it shall be includable in the year of recovery in accordance with the method of accounting of the taxpayer regardless of the date when the amounts were charged off. If a taxpayer ascertains that an item should have been included in gross income in a prior taxable year, he should file an amended return and pay an additional tax due. Similarly, if a taxpayer ascertains that an item was improperly included in gross income in a prior taxable year, he should, if within the period of limitation, file a claim for credit or refund of an overpayment of tax arising therefrom. (b) Special rule in case of death. The taxable year of a taxpayer ends on the date of his death. See § 117.3 (relating to deceased individuals). In computing taxable income for the year, there shall be included only amounts properly includable under the method of accounting used by the taxpayer. However, if the taxpayer used an accrual method of accounting, amounts accrued only by reason of his death may not be included in computing taxable income for the year. If the taxpayer uses no regular accounting method, only amounts actually or constructively received during the year shall be included. (c) Constructive receipt of income. Income although not actually reduced to possession shall be constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time. However, income may not be constructively received if the control by the taxpayer of its receipt is subject to substantial limitations or restrictions. Therefore, if a corporation credits its employees with bonus stock, but the stock is not available to the employees until some future date, the mere crediting on the books of the corporation does not constitute receipt. In the case of interest, dividends or other earnings credited in respect of a deposit or account in a bank, building and loan association, savings and loan association, or similar institution, the following are not substantial limitations or restrictions on the control by the taxpayer over the receipt of the earnings: (1) A requirement that the deposit or account and the earnings thereon shall be withdrawn in multiples of even amounts. (2) A requirement that a notice of intention to withdraw shall be given in advance of the withdrawal. (d) Examples of constructive receipt. Interest coupons which have matured and are payable but which have not been cashed are constructively received in the taxable year during which the coupons mature, unless it is shown that there are no funds available for payment of the interest during the year. Dividends on corporate stock shall be constructively received when unqualifiedly made subject to the demand of the shareholder. However, if a dividend is declared payable on December 31 and the corporation followed its usual practice of paying the dividends by checks mailed so that the shareholders would not receive them until January of the following year, the dividends are not be considered to have been constructively received in December. Generally, the amount of dividends or interest credited on savings bank deposits or to shareholders of organizations such as building and loan associations or cooperative banks is income to the depositors or shareholders for the taxable year when credited. However, if a portion of the dividends or interest is not subject to withdrawal at the time credited, the portion may not be constructively received and does not constitute income to the depositor or shareholder until the taxable year in which the portion first may be withdrawn. Accordingly, if under a bonus or forfeiture plan a portion of the dividends or interest is accumulated and may not be withdrawn until the maturity of the plan, the crediting of the portion to the account of the shareholder or depositor may not constitute constructive receipt. However, in this case the credited portion shall be income to the depositor or shareholder in the year in which the plan matures. Accrued interest on unwithdrawn insurance policy dividends is gross income to the taxpayer for the first taxable year during which the interest may be withdrawn by him. (e) Present economic benefit. An amount paid as a contribution shall be considered as received if an employee receives rights, such as coverage under a plan that are the following: (1) Of a value which can in no event fall materially below the amount of the contribution. (2) Presently belonging to the employee. (3) Unequivocally provided for the ultimate benefit of the employee under whatever contingency and whatever circumstance the occasion for the benefit should arise. (f) Wage and salary deductions; taxability. (1) Except as provided in paragraph (2), any amount lawfully deducted and withheld by an employer from the remuneration of an employee and accounted for as a part of the employee’s total remuneration shall be considered to have been paid to the employee as compensation at the time the deduction is made. (2) An amount will not be considered to have been paid to the employee because the amount is specified in a written cafeteria plan document as being available to the participant for the purpose of selecting or purchasing benefits under a plan or as additional cash remuneration received in lieu of coverage under a plan. Whether an amount is specified in a cafeteria plan document as being available to a participant shall be determined using Federal rules. Example. Employer M is a manufacturing company situated in this Commonwealth and under its collective bargaining agreement with a union, all nonmanagement personnel must contribute $15 per week from their gross salary toward the purchase of Blue Cross/Blue Shield coverage and $3 per week toward the purchase of group life insurance. The plan is not a Federally qualifying cafeteria plan. Conclusion: M shall withhold Pennsylvania Personal Income Tax from the $18 contributed by each nonmanagement employee toward benefits. Authority The provisions of this § 101.7 amended under section 354 of the Tax Reform Code of 1971 (72 P. S. § 7254). Source The provisions of this § 101.7 amended August 4, 2000, effective August 5, 2000, 30 Pa.B. 3938. Immediately preceding text appears at serial pages (261967) to (261969) and (205345). Notes of Decisions If a cash basis taxpayer actually receives a lump sum distribution from a profit sharing trust, the entire amount is taxable unless the taxpayer can demonstrate that a portion of the distribution was constructively received prior to June 1, 1971. Gosewisch v. Department of Revenue, 397 A.2d 1288 (Pa. Cmwlth. 1979). If a taxpayer does not have a legal right to money in an employer-sponsored profit sharing trust until termination of employment, disability or death, payments to the trust are not considered to be constructively received by the taxpayer. Gosewisch v. Department of Revenue, 397 A.2d 1288 (Pa. Cmwlth. 1979). 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