RULES AND REGULATIONS
Title 61--REVENUE
DEPARTMENT OF REVENUE
[61 PA. CODE CHS. 155 AND 170]
Single Factor Apportionment and Student Loan Assets Exempt by Public Policy; Corporation Taxes
[28 Pa.B. 5886] The Department of Revenue (Department), under the authority contained in sections 408 and 603 of the Tax Reform Code of 1971 (TRC) (72 P. S. §§ 7408 and 7603), by this order adopts amendments to § 155.10 (relating to single factor apportionment) and deletes § 170.2 (relating to student loan assets exempt by public policy) to read as set forth in Annex A.
Purpose
It has long been the public policy of the Commonwealth to improve higher educational opportunities by assisting persons in meeting the educational expenses of higher education and by enabling the Pennsylvania Higher Education Assistance Agency, other lenders and educational institutions to make loans available to students and the parents of students for educational purposes. Financial assistance to students is provided through various Federal, State and private student loan programs.
The business trust form is frequently used as a financing vehicle to increase the availability of financing for student loans. In these trust structures, a trust is established to acquire student loan notes from originators of student loans. The trust certificates of beneficial interest and debt securities issued by the trusts to raise funds to acquire student loans from originators are secured by the student loan notes acquired, related Federal and State guarantees and subsidies of the student loans, and certain other related assets commonly held by student loan trusts to facilitate the ownership, maintenance and management of, and investment in or purchase and sale of, student loans. Legal title to the student loan notes is typically held by a financial institution serving as trustee and qualifying to hold title to the loans under applicable student loan laws and regulations. The investment in student loans through the trust structures serves the public purpose of increasing liquidity in the student loan market and increasing the total funding available to make student loans.
The act of May 7, 1997 (P. L. 85, No. 7) (Act 7) amended section 601 of the TRC (72 P. S. § 7601) so as to change the definitions of ''domestic entity'' and ''foreign entity'' with the effect of subjecting all business trusts to the capital stock tax/foreign franchise tax, effective for tax years beginning on or after January 1, 1998. This amendment caused business trusts created for the securitization of student loans to be subject to the capital stock or foreign franchise tax.
Prior to the effective date of Act 7's amendments to the definitions, the Department determined that student loan assets held or owned by an entity created for the securitization of student loans should be exempt from taxation by reason of public policy. The Department published a statement of policy in the Pennsylvania Bulletin adopting this policy on November 14, 1997. See 61 Pa. Code § 170.2.
The Department's regulations also list certain assets that have been determined to be exempt from taxation by reason of public policy. See § 155.10(d)(4). Therefore, the Department published a proposed amendment on November 14, 1997, to revise the list of assets exempt from taxation by reason of public policy to include student loan assets held or owned by an entity created for the securitization of student loans.
Article VI of the TRC (72 P. S. §§ 7601--7603) has now been amended by Act 45 to specifically provide a statutory exemption from taxation for student loan assets held or owned by an entity created for the securitization of student loans. This statutory exemption applies to all taxable years beginning after December 31, 1997.
Explanation of Regulatory Requirements
Currently, assets that are statutorily exempt from the capital stock and foreign franchise tax are listed in § 155.10(d)(3). For purposes of implementing Act 45, the list of assets specifically exempt from taxation by Commonwealth statute is being amended to include student loan assets held or owned by an entity created for the securitization of student loans.
Act 45 also supersedes the Department's statement of policy exempting student loan assets from taxation by reason of public policy. Therefore, § 170.2 is being deleted contemporaneous with the promulgation of this amendment.
Affected Parties
Taxpayers subject to the capital stock or foreign franchise tax may be affected by this amendment.
Comment and Response Summary
Notice of proposed rulemaking was published at 28 Pa.B. 380 (January 24, 1998). The amendment is being adopted with changes to the proposed rulemaking.
The Department received comments from the Independent Regulatory Review Commission (IRRC). The Department did not receive any comments during the public comment period. No objections or comments were raised by the Senate Finance Committee or the House Finance Committee.
IRRC had two comments. First, IRRC questioned the Department's authority to exempt student loan assets held by securitization trusts. IRRC requested the Department to cite specific statutory authority for the exemption.
Act 45 was enacted subsequent to the completion of IRRC's comments. Act 45 specifically amended section 602 of the TRC (72 P. S. § 7602) to provide that student loan assets held or owned by an entity created for the securitization of student loans are exempt from the capital stock and foreign franchise tax. See 72 P. S. § 7602. Section 601 of the TRC was also amended to provide a definition of ''student loan assets.'' 72 P. S. § 7601.
IRRC also recommended that the phrase ''or with respect to'' be deleted from § 155.10(d)(4)(vi)(F) as unnecessary language. This phrase is also included within the definition of ''student loan assets'' adopted by the Legislature in Act 45. The Department recognizes IRRC's concern, but has elected to retain the language in the regulation for purposes of conforming the regulatory exemption with the recently enacted statutory language.
Fiscal Impact
The Department has determined that the amendment will have no fiscal impact on the Commonwealth.
Paperwork
The amendment will not generate additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The amendment will become effective upon final publication in the Pennsylvania Bulletin. The amendment is scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
The contact person for an explanation of the final-form regulation is Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on January 13, 1998, the Department submitted a copy of the notice of proposed rulemaking, published at 28 Pa.B. 380 to IRRC and the Chairpersons of the House Committee on Finance and the Senate Committee on Finance for review and comment. In compliance with section 5(c) of the Regulatory Review Act, the Department also provided IRRC and the Committees with copies of the comments received, as well as other documentation.
In preparing this final-form regulation, the Department has considered the comments received from IRRC, the Committees and the public.
This final-form regulation was deemed approved by the House and Senate Committee on October 27, 1998. IRRC met on November 5, 1998, and approved the final-form regulation in accordance with section 5(e) of the Regulatory Review Act.
Findings
The Department finds that:
(1) Public notice of intention to adopt the regulation has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 469, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The regulation is necessary and appropriate for the administration and enforcement of the authorizing statute.
Order
The Department acting under the authorizing statute, orders:
(a) The regulations of the Department, 61 Pa. Code Chapters 155 and 170, are amended by amending § 155.10 and deleting the statement of policy at § 170.2 to read as set forth in Annex A, with ellipses referring to the existing text of the regulation.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
ROBERT A. JUDGE, SR.,
SecretaryFiscal Note: 15-397. No fiscal impact; (8) recommends adoption.
(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 28 Pa.B. 5818 (November 21, 1998).)
Annex A
TITLE 61. REVENUE
PART I. DEPARTMENT OF REVENUE
Subpart B. GENERAL FUND REVENUES
ARTICLE VI. CORPORATION TAXES
CHAPTER 155. CAPITAL STOCK TAX AND FOREIGN FRANCHISE TAX § 155.10. Single factor apportionment.
* * * * * (d) Exempt and taxable assets. The following assets are exempt or taxable, as specified, for purposes of the taxable assets fraction. This listing is not exclusive.
* * * * * (3) Certain assets are specifically exempt by Commonwealth statute. These include:
* * * * * (v) Student loan assets that are owned or held by an entity created for the securitization of student loans, or by a trustee on its behalf, including:
(A) Student loan notes.
(B) Federal, State or private subsidies or guarantees of student loans.
(C) Instruments that represent a guarantee of debt, certificates or other securities issued by an entity created for the securitization of student loans, or by a trustee on its behalf.
(D) Contract rights to acquire or dispose of student loans and interest rate swap agreements related to student loans.
(E) Interests in or debt obligations of other student loan securitization trusts or entities.
(F) Cash or cash equivalents representing reserve funds or payments on or with respect to student loan notes, the securities issued by an entity created for the securitization of student loans, or the other student loan related assets. Solely for purposes of this exemption for student loan assets, ''cash or cash equivalents'' shall include:
(I) Direct obligations of the United States Department of the Treasury.
(II) Obligations of Federal agencies which obligations represent the full faith and credit of the United States of America.
(III) Investment grade debt obligations or commercial paper.
(IV) Deposit accounts.
(V) Federal funds and banker's acceptances.
(VI) Prefunded municipal obligations.
(VII) Money market instruments and money market funds.
* * * * *
CHAPTER 170. CORPORATION TAX PRONOUNCEMENTS--STATEMENT OF POLICY § 170.2. (Reserved).
(Editor's Note: This statement of policy is being deleted comtemporaneously with the amendment to rule § 155.10 because the act of April 23, 1998 (P. L. 239, No. 45) supersedes § 170.2.)
[Pa.B. Doc. No. 98-1984. Filed for public inspection December 4, 1998, 9:00 a.m.]
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