Deferred compensation in Pennsylvania: clarification and update.

A news story on page 90 of the March-April 2004 issue of The Tax Executive proved to be premature. As explained in TEI's Comments Foster Taxpayer Victories in Pennsylvania, there were positive indications that the Commonwealth of Pennsylvania had decided to concede two cases involving the issue of when deferred compensation becomes subject to the Commonwealth's personal income tax. The two consolidated cases, Ignatz v. Pennsylvania and Peabody v. Pennsylvania, challenged the Pennsylvania Department of Revenue's position that deferred compensation is subject to Pennsylvania income tax at the time of deferral, asserting that it is not subject to tax until the time of distribution (the issue arises either through an audit of the employee's Pennsylvania return or through an audit of an employer's withholding tax return). There are also many pending cases dealing with the same issue awaiting a final resolution of these two cases.

Despite the expectation by taxpayer representatives that Pennsylvania would concede the tax liability, the Commonwealth did not, and a hearing in the two cases was held as scheduled. More significantly, the Commonwealth Court of Pennsylvania decided the issue against the taxpayers in an opinion issued May 12, 2004. The taxpayers have filed exceptions to the court's decision, and the cases are ongoing. TEI regrets any confusion the earlier story may have caused.