For 1035 exchanges PA tax law follows Federal rules. A Commonwealth of Pennsylvania website states:
"Exchange of Insurance Contracts Under IRC Section 1035
For taxable years beginning after Dec. 31, 2004, Act 40 of July 7, 2005 provides that exchanges of insurance contracts under IRC Section 1035 that are tax exempt for federal income tax purposes are also tax exempt for Pennsylvania personal income tax purposes. Therefore, do not report the gain (loss) on the sale, exchange or disposition of any insurance contracts that include:
- An exchange of a life insurance contract for another life insurance contract, an endowment contract, or an annuity contract;
- An exchange of an annuity contract for another annuity contract;
- An exchange of an endowment contract for an annuity contract;
- An exchange of one endowment contract for another endowment contract if the dates for payments begin on or before the original contract’s payment dates."
You shouldn't be getting a Schedule D from a 1035 exchange - are you possibly getting the Schedule D from the gain or loss on the sale of something else on your return?
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