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-CITE-
    26 USC Subchapter S - Tax Treatment of S Corporations and
           Their Shareholders                              01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                

-HEAD-
         SUBCHAPTER S - TAX TREATMENT OF S CORPORATIONS AND THEIR
                               SHAREHOLDERS

-MISC1-
    Part                                                     
    I.          In general.                                           
    II.         Tax treatment of shareholders.                        
    III.        Special rules.                                        
    IV.         Definitions; miscellaneous.                           

-SECREF-
                 SUBCHAPTER REFERRED TO IN OTHER SECTIONS             
      This subchapter is referred to in sections 1366, 1379, 6037 of
    this title.

-End-


-CITE-
    26 USC PART I - IN GENERAL                                  01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART I - IN GENERAL

-HEAD-
                            PART I - IN GENERAL                        

-MISC1-
    Sec.                                                     
    1361.       S corporation defined.                                
    1362.       Election; revocation; termination.                    
    1363.       Effect of election on corporation.                    

-End-



-CITE-
    26 USC Sec. 1361                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART I - IN GENERAL

-HEAD-
    Sec. 1361. S corporation defined

-STATUTE-
    (a) S corporation defined
      (1) In general
        For purposes of this title, the term "S corporation" means,
      with respect to any taxable year, a small business corporation
      for which an election under section 1362(a) is in effect for such
      year.
      (2) C corporation
        For purposes of this title, the term "C corporation" means,
      with respect to any taxable year, a corporation which is not an S
      corporation for such year.
    (b) Small business corporation
      (1) In general
        For purposes of this subchapter, the term "small business
      corporation" means a domestic corporation which is not an
      ineligible corporation and which does not - 
          (A) have more than 75 shareholders,
          (B) have as a shareholder a person (other than an estate, a
        trust described in subsection (c)(2), or an organization
        described in subsection (c)(6)) who is not an individual,
          (C) have a nonresident alien as a shareholder, and
          (D) have more than 1 class of stock.
      (2) Ineligible corporation defined
        For purposes of paragraph (1), the term "ineligible
      corporation" means any corporation which is - 
          (A) a financial institution which uses the reserve method of
        accounting for bad debts described in section 585,
          (B) an insurance company subject to tax under subchapter L,
          (C) a corporation to which an election under section 936
        applies, or
          (D) a DISC or former DISC.
      (3) Treatment of certain wholly owned subsidiaries
        (A) In general
          Except as provided in regulations prescribed by the
        Secretary, for purposes of this title - 
            (i) a corporation which is a qualified subchapter S
          subsidiary shall not be treated as a separate corporation,
          and
            (ii) all assets, liabilities, and items of income,
          deduction, and credit of a qualified subchapter S subsidiary
          shall be treated as assets, liabilities, and such items (as
          the case may be) of the S corporation.
        (B) Qualified subchapter S subsidiary
          For purposes of this paragraph, the term "qualified
        subchapter S subsidiary" means any domestic corporation which
        is not an ineligible corporation (as defined in paragraph (2)),
        if - 
            (i) 100 percent of the stock of such corporation is held by
          the S corporation, and
            (ii) the S corporation elects to treat such corporation as
          a qualified subchapter S subsidiary.
        (C) Treatment of terminations of qualified subchapter S
          subsidiary status
          For purposes of this title, if any corporation which was a
        qualified subchapter S subsidiary ceases to meet the
        requirements of subparagraph (B), such corporation shall be
        treated as a new corporation acquiring all of its assets (and
        assuming all of its liabilities) immediately before such
        cessation from the S corporation in exchange for its stock.
        (D) Election after termination
          If a corporation's status as a qualified subchapter S
        subsidiary terminates, such corporation (and any successor
        corporation) shall not be eligible to make - 
            (i) an election under subparagraph (B)(ii) to be treated as
          a qualified subchapter S subsidiary, or
            (ii) an election under section 1362(a) to be treated as an
          S corporation,

        before its 5th taxable year which begins after the 1st taxable
        year for which such termination was effective, unless the
        Secretary consents to such election.
    (c) Special rules for applying subsection (b)
      (1) Husband and wife treated as 1 shareholder
        For purposes of subsection (b)(1)(A), a husband and wife (and
      their estates) shall be treated as 1 shareholder.
      (2) Certain trusts permitted as shareholders
        (A) In general
          For purposes of subsection (b)(1)(B), the following trusts
        may be shareholders:
            (i) A trust all of which is treated (under subpart E of
          part I of subchapter J of this chapter) as owned by an
          individual who is a citizen or resident of the United States.
            (ii) A trust which was described in clause (i) immediately
          before the death of the deemed owner and which continues in
          existence after such death, but only for the 2-year period
          beginning on the day of the deemed owner's death.
            (iii) A trust with respect to stock transferred to it
          pursuant to the terms of a will, but only for the 2-year
          period beginning on the day on which such stock is
          transferred to it.
            (iv) A trust created primarily to exercise the voting power
          of stock transferred to it.
            (v) An electing small business trust.

        This subparagraph shall not apply to any foreign trust.
        (B) Treatment as shareholders
          For purposes of subsection (b)(1) - 
            (i) In the case of a trust described in clause (i) of
          subparagraph (A), the deemed owner shall be treated as the
          shareholder.
            (ii) In the case of a trust described in clause (ii) of
          subparagraph (A), the estate of the deemed owner shall be
          treated as the shareholder.
            (iii) In the case of a trust described in clause (iii) of
          subparagraph (A), the estate of the testator shall be treated
          as the shareholder.
            (iv) In the case of a trust described in clause (iv) of
          subparagraph (A), each beneficiary of the trust shall be
          treated as a shareholder.
            (v) In the case of a trust described in clause (v) of
          subparagraph (A), each potential current beneficiary of such
          trust shall be treated as a shareholder; except that, if for
          any period there is no potential current beneficiary of such
          trust, such trust shall be treated as the shareholder during
          such period.
      (3) Estate of individual in bankruptcy may be shareholder
        For purposes of subsection (b)(1)(B), the term "estate"
      includes the estate of an individual in a case under title 11 of
      the United States Code.
      (4) Differences in common stock voting rights disregarded
        For purposes of subsection (b)(1)(D), a corporation shall not
      be treated as having more than 1 class of stock solely because
      there are differences in voting rights among the shares of common
      stock.
      (5) Straight debt safe harbor
        (A) In general
          For purposes of subsection (b)(1)(D), straight debt shall not
        be treated as a second class of stock.
        (B) Straight debt defined
          For purposes of this paragraph, the term "straight debt"
        means any written unconditional promise to pay on demand or on
        a specified date a sum certain in money if - 
            (i) the interest rate (and interest payment dates) are not
          contingent on profits, the borrower's discretion, or similar
          factors,
            (ii) there is no convertibility (directly or indirectly)
          into stock, and
            (iii) the creditor is an individual (other than a
          nonresident alien), an estate, a trust described in paragraph
          (2), or a person which is actively and regularly engaged in
          the business of lending money.
        (C) Regulations
          The Secretary shall prescribe such regulations as may be
        necessary or appropriate to provide for the proper treatment of
        straight debt under this subchapter and for the coordination of
        such treatment with other provisions of this title.
      (6) Certain exempt organizations permitted as shareholders
        For purposes of subsection (b)(1)(B), an organization which is
      - 
          (A) described in section 401(a) or 501(c)(3), and
          (B) exempt from taxation under section 501(a),

      may be a shareholder in an S corporation.
    (d) Special rule for qualified subchapter S trust
      (1) In general
        In the case of a qualified subchapter S trust with respect to
      which a beneficiary makes an election under paragraph (2) - 
          (A) such trust shall be treated as a trust described in
        subsection (c)(2)(A)(i), and
          (B) for purposes of section 678(a), the beneficiary of such
        trust shall be treated as the owner of that portion of the
        trust which consists of stock in an S corporation with respect
        to which the election under paragraph (2) is made.
      (2) Election
        (A) In general
          A beneficiary of a qualified subchapter S trust (or his legal
        representative) may elect to have this subsection apply.
        (B) Manner and time of election
          (i) Separate election with respect to each corporation
            An election under this paragraph shall be made separately
          with respect to each corporation the stock of which is held
          by the trust.
          (ii) Elections with respect to successive income
            beneficiaries
            If there is an election under this paragraph with respect
          to any beneficiary, an election under this paragraph shall be
          treated as made by each successive beneficiary unless such
          beneficiary affirmatively refuses to consent to such
          election.
          (iii) Time, manner, and form of election
            Any election, or refusal, under this paragraph shall be
          made in such manner and form, and at such time, as the
          Secretary may prescribe.
        (C) Election irrevocable
          An election under this paragraph, once made, may be revoked
        only with the consent of the Secretary.
        (D) Grace period
          An election under this paragraph shall be effective up to 15
        days and 2 months before the date of the election.
      (3) Qualified subchapter S trust
        For purposes of this subsection, the term "qualified subchapter
      S trust" means a trust - 
          (A) the terms of which require that - 
            (i) during the life of the current income beneficiary,
          there shall be only 1 income beneficiary of the trust,
            (ii) any corpus distributed during the life of the current
          income beneficiary may be distributed only to such
          beneficiary,
            (iii) the income interest of the current income beneficiary
          in the trust shall terminate on the earlier of such
          beneficiary's death or the termination of the trust, and
            (iv) upon the termination of the trust during the life of
          the current income beneficiary, the trust shall distribute
          all of its assets to such beneficiary, and

          (B) all of the income (within the meaning of section 643(b))
        of which is distributed (or required to be distributed)
        currently to 1 individual who is a citizen or resident of the
        United States.

      A substantially separate and independent share of a trust within
      the meaning of section 663(c) shall be treated as a separate
      trust for purposes of this subsection and subsection (c).
      (4) Trust ceasing to be qualified
        (A) Failure to meet requirements of paragraph (3)(A)
          If a qualified subchapter S trust ceases to meet any
        requirement of paragraph (3)(A), the provisions of this
        subsection shall not apply to such trust as of the date it
        ceases to meet such requirement.
        (B) Failure to meet requirements of paragraph (3)(B)
          If any qualified subchapter S trust ceases to meet any
        requirement of paragraph (3)(B) but continues to meet the
        requirements of paragraph (3)(A), the provisions of this
        subsection shall not apply to such trust as of the first day of
        the first taxable year beginning after the first taxable year
        for which it failed to meet the requirements of paragraph
        (3)(B).
    (e) Electing small business trust defined
      (1) Electing small business trust
        For purposes of this section - 
        (A) In general
          Except as provided in subparagraph (B), the term "electing
        small business trust" means any trust if - 
            (i) such trust does not have as a beneficiary any person
          other than (I) an individual, (II) an estate, (III) an
          organization described in paragraph (2), (3), (4), or (5) of
          section 170(c), or (IV) an organization described in section
          170(c)(1) which holds a contingent interest in such trust and
          is not a potential current beneficiary,
            (ii) no interest in such trust was acquired by purchase,
          and
            (iii) an election under this subsection applies to such
          trust.
        (B) Certain trusts not eligible
          The term "electing small business trust" shall not include - 
            (i) any qualified subchapter S trust (as defined in
          subsection (d)(3)) if an election under subsection (d)(2)
          applies to any corporation the stock of which is held by such
          trust,
            (ii) any trust exempt from tax under this subtitle, and
            (iii) any charitable remainder annuity trust or charitable
          remainder unitrust (as defined in section 664(d)).
        (C) Purchase
          For purposes of subparagraph (A), the term "purchase" means
        any acquisition if the basis of the property acquired is
        determined under section 1012.
      (2) Potential current beneficiary
        For purposes of this section, the term "potential current
      beneficiary" means, with respect to any period, any person who at
      any time during such period is entitled to, or at the discretion
      of any person may receive, a distribution from the principal or
      income of the trust. If a trust disposes of all of the stock
      which it holds in an S corporation, then, with respect to such
      corporation, the term "potential current beneficiary" does not
      include any person who first met the requirements of the
      preceding sentence during the 60-day period ending on the date of
      such disposition.
      (3) Election
        An election under this subsection shall be made by the trustee.
      Any such election shall apply to the taxable year of the trust
      for which made and all subsequent taxable years of such trust
      unless revoked with the consent of the Secretary.
      (4) Cross reference
          For special treatment of electing small business trusts, see
        section 641(c).

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1669;
    amended Pub. L. 98-369, div. A, title VII, Sec. 721(c), (f), July
    18, 1984, 98 Stat. 967; Pub. L. 99-514, title IX, Sec.
    901(d)(4)(G), title XVIII, Sec. 1879(m)(1)(A), Oct. 22, 1986, 100
    Stat. 2380, 2910; Pub. L. 100-647, title I, Sec. 1018(q)(2), Nov.
    10, 1988, 102 Stat. 3585; Pub. L. 101-239, title VII, Sec.
    7811(c)(6), Dec. 19, 1989, 103 Stat. 2407; Pub. L. 104-188, title
    I, Secs. 1301-1302(c), 1303, 1304, 1308(a), (b), (d)(1), 1315,
    1316(a), (e), 1616(b)(15), Aug. 20, 1996, 110 Stat. 1777, 1779,
    1782, 1783, 1785, 1786, 1857; Pub. L. 105-34, title XVI, Sec.
    1601(c)(1), (3), (4)(B), (C), Aug. 5, 1997, 111 Stat. 1087; Pub. L.
    105-206, title VI, Sec. 6007(f)(3), July 22, 1998, 112 Stat. 810;
    Pub. L. 106-554, Sec. 1(a)(7) [title III, Sec. 316(b)], Dec. 21,
    2000, 114 Stat. 2763, 2763A-644.)


-MISC1-
                             PRIOR PROVISIONS                         
      A prior section 1361, act Aug. 16, 1954, as amended, constituted
    subchapter R, prior to repeal by Pub. L. 89-389, Sec. 4(b)(1), Apr.
    14, 1966, 80 Stat. 116. For further details, see matter set out
    preceding subchapter S.

                                AMENDMENTS                            
      2000 - Subsec. (e)(1)(A)(i)(IV). Pub. L. 106-554 added subcl.
    (IV).
      1998 - Subsec. (e)(4). Pub. L. 105-206 substituted "section
    641(c)" for "section 641(d)".
      1997 - Subsec. (b)(1)(B). Pub. L. 105-34, Sec. 1601(c)(4)(C),
    substituted "subsection (c)(6)" for "subsection (c)(7)".
      Subsec. (b)(3)(A). Pub. L. 105-34, Sec. 1601(c)(3), substituted
    "Except as provided in regulations prescribed by the Secretary, for
    purposes of this title" for "For purposes of this title".
      Subsec. (c)(6), (7). Pub. L. 105-34, Sec. 1601(c)(4)(B),
    redesignated par. (7) as (6).
      Subsec. (e)(1)(B)(iii). Pub. L. 105-34, Sec. 1601(c)(1), added
    cl. (iii).
      1996 - Subsec. (b)(1)(A). Pub. L. 104-188, Sec. 1301, substituted
    "75" for "35".
      Subsec. (b)(1)(B). Pub. L. 104-188, Sec. 1316(a)(1), amended
    subpar. (B) generally. Prior to amendment, subpar. (B) read as
    follows: "have as a shareholder a person (other than an estate and
    other than a trust described in subsection (c)(2)) who is not an
    individual,".
      Subsec. (b)(2)(A). Pub. L. 104-188, Sec. 1315, amended subpar.
    (A) generally. Prior to amendment, subpar. (A) read as follows: "a
    financial institution to which section 585 applies (or would apply
    but for subsection (c) thereof),".
      Pub. L. 104-188, Sec. 1308(a), redesignated subpar. (B) as (A)
    and struck out former subpar. (A) which read as follows: "a member
    of an affiliated group (determined under section 1504 without
    regard to the exceptions contained in subsection (b) thereof),".
      Subsec. (b)(2)(B). Pub. L. 104-188, Sec. 1308(a), redesignated
    subpar. (C) as (B). Former subpar. (B) redesignated (A).
      Pub. L. 104-188, Sec. 1616(b)(15), struck out "or to which
    section 593 applies" after "subsection (c) thereof)".
      Subsec. (b)(2)(C) to (E). Pub. L. 104-188, Sec. 1308(a),
    redesignated subpars. (D) and (E) as (C) and (D), respectively.
    Former subpar. (C) redesignated (B).
      Subsec. (b)(3). Pub. L. 104-188, Sec. 1308(b), added par. (3).
      Subsec. (c)(2)(A)(ii). Pub. L. 104-188, Sec. 1303, substituted
    "2-year period" for "60-day period" in first sentence and struck
    out at end "If a trust is described in the preceding sentence and
    if the entire corpus of the trust is includible in the gross estate
    of the deemed owner, the preceding sentence shall be applied by
    substituting '2-year period' for '60-day period'."
      Subsec. (c)(2)(A)(iii). Pub. L. 104-188, Sec. 1303(1),
    substituted "2-year period" for "60-day period".
      Subsec. (c)(2)(A)(v). Pub. L. 104-188, Sec. 1302(a), added cl.
    (v).
      Subsec. (c)(2)(B)(v). Pub. L. 104-188, Sec. 1302(b), added cl.
    (v).
      Subsec. (c)(5)(B)(iii). Pub. L. 104-188, Sec. 1304, substituted
    "a trust described in paragraph (2), or a person which is actively
    and regularly engaged in the business of lending money" for "or a
    trust described in paragraph (2)".
      Subsec. (c)(6). Pub. L. 104-188, Sec. 1308(d)(1), struck out par.
    (6) which read as follows:
      "(6) Ownership of stock in certain inactive corporations. - For
    purposes of subsection (b)(2)(A), a corporation shall not be
    treated as a member of an affiliated group during any period within
    a taxable year by reason of the ownership of stock in another
    corporation if such other corporation - 
        "(A) has not begun business at any time on or before the close
      of such period, and
        "(B) does not have gross income for such period."
      Subsec. (c)(7). Pub. L. 104-188, Sec. 1316(a)(2), added par. (7).
      Subsec. (e). Pub. L. 104-188, Sec. 1302(c), added subsec. (e).
      Subsec. (e)(1)(A)(i). Pub. L. 104-188, Sec. 1316(e), struck out
    "which holds a contingent interest and is not a potential current
    beneficiary" after "170(c)".
      1989 - Subsec. (b)(2)(B). Pub. L. 101-239 amended subpar. (B)
    generally. Prior to amendment, subpar. (B) read as follows: "a
    financial institution which is a bank (as defined in section
    585(a)(2)) or to which section 593 applies,".
      1988 - Subsec. (d)(3). Pub. L. 100-647 substituted "within the
    meaning of" for "treated as a separate trust under" in last
    sentence.
      1986 - Subsec. (b)(2)(B). Pub. L. 99-514, Sec. 901(d)(4)(G),
    substituted "which is a bank (as defined in section 585(a)(2)) or
    to which section 593 applies" for "to which section 585 or 593
    applies".
      Subsec. (d)(3). Pub. L. 99-514, Sec. 1879(m)(1)(A), inserted at
    end "A substantially separate and independent share of a trust
    treated as a separate trust under section 663(c) shall be treated
    as a separate trust for purposes of this subsection and subsection
    (c)."
      1984 - Subsec. (c)(6). Pub. L. 98-369, Sec. 721(c), amended par.
    (6) generally, substituting "during any period within a taxable
    year" for "during any taxable year" in provisions preceding subpar.
    (A), and substituting "on or before the close of such period" for
    "on or after the date of its incorporation and before the close of
    such taxable year" in subpar. (A), and "does not have gross income
    for such period" for "does not have taxable income for the period
    included within such taxable year" in subpar. (B).
      Subsec. (d)(2)(B)(i). Pub. L. 98-369, Sec. 721(f)(3), substituted
    "corporation" for "S corporation" in heading and text.
      Subsec. (d)(2)(D). Pub. L. 98-369, Sec. 721(f)(1), substituted
    "15 days and 2 months" for "60 days".
      Subsec. (d)(3). Pub. L. 98-369, Sec. 721(f)(2), in amending par.
    (3) generally, redesignated subpar. (C) as (A), substituted a
    period for ", and" at end of subpar. (B), and struck out former
    subpar. (A) which read "which owns stock in 1 or more S
    corporations".
      Subsec. (d)(4). Pub. L. 98-369, Sec. 721(f)(2), in amending par.
    (4) generally, redesignated existing provisions as subpar. (A),
    inserted "Failure to meet requirements of paragraph (3)(A)" as
    subpar. (A) heading, substituted "of paragraph (3)(A)" for "under
    paragraph (3)", and added subpar. (B).

                     EFFECTIVE DATE OF 2000 AMENDMENT                 
      Amendment by Pub. L. 106-554 effective as if included in the
    provisions of the Small Business Job Protection Act of 1996, Pub.
    L. 104-188, to which such amendment relates, see section 1(a)(7)
    [title III, Sec. 316(e)] of Pub. L. 106-554, set out as a note
    under section 51 of this title.

                     EFFECTIVE DATE OF 1998 AMENDMENT                 
      Amendment by Pub. L. 105-206 effective, except as otherwise
    provided, as if included in the provisions of the Taxpayer Relief
    Act of 1997, Pub. L. 105-34, to which such amendment relates, see
    section 6024 of Pub. L. 105-206, set out as a note under section 1
    of this title.

                     EFFECTIVE DATE OF 1997 AMENDMENT                 
      Amendment by Pub. L. 105-34 effective as if included in the
    provisions of the Small Business Job Protection Act of 1996, Pub.
    L. 104-188, to which it relates, see section 1601(j) of Pub. L.
    105-34, set out as a note under section 23 of this title.

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Amendment by sections 1301-1302(c), 1303, 1304, 1308(a), (b),
    (d)(1), and 1315 of Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1996, see section 1317(a) of Pub. L.
    104-188, set out as a note under section 641 of this title.
      Amendment by sections 1316(a), (e) of Pub. L. 104-188 applicable
    to taxable years beginning after Dec. 31, 1997, see section 1316(f)
    of Pub. L. 104-188, set out as a note under section 170 of this
    title.
      Amendment by section 1616(b)(15) of Pub. L. 104-188 applicable to
    taxable years beginning after Dec. 31, 1995, see section 1616(c) of
    Pub. L. 104-188, set out as a note under section 593 of this title.

                     EFFECTIVE DATE OF 1989 AMENDMENT                 
      Amendment by Pub. L. 101-239 effective, except as otherwise
    provided, as if included in the provision of the Technical and
    Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such
    amendment relates, see section 7817 of Pub. L. 101-239, set out as
    a note under section 1 of this title.

                     EFFECTIVE DATE OF 1988 AMENDMENT                 
      Amendment by Pub. L. 100-647 effective, except as otherwise
    provided, as if included in the provision of the Tax Reform Act of
    1986, Pub. L. 99-514, to which such amendment relates, see section
    1019(a) of Pub. L. 100-647, set out as a note under section 1 of
    this title.

                     EFFECTIVE DATE OF 1986 AMENDMENT                 
      Amendment by section 901(d)(4)(G) of Pub. L. 99-514 applicable to
    taxable years beginning after Dec. 31, 1986, see section 901(e) of
    Pub. L. 99-514, set out as a note under section 166 of this title.
      Section 1879(m)(2) of Pub. L. 99-514 provided that: "The
    amendments made by this subsection [amending this section and
    section 1368 of this title] shall apply to taxable years beginning
    after December 31, 1982."

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Section 721(y) of Pub. L. 98-369, as amended by Pub. L. 99-514,
    Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
      "(1) In general. - Except as otherwise provided in this
    subsection, any amendment made by this section [amending this
    section, sections 48, 108, 267, 318, 465, 1362, 1363, 1367, 1368,
    1371, 1374, 1375, 1378, 1379, 6362, and 6659 and provisions set out
    as a note under this section] shall take effect as if included in
    the Subchapter S Revision Act of 1982 [Pub. L. 97-354].
      "(2) Amendment made by subsection (b)(2). - Subparagraph (C) of
    section 108(d)(7) of the Internal Revenue Code of 1986 [formerly
    I.R.C. 1954] (as amended by subsection (b)(2)) shall apply to
    contributions to capital after December 31, 1980, in taxable years
    ending after such date.
      "(3) Amendment made by subsection (g)(1). - If - 
        "(A) any portion of a qualified stock purchase is pursuant to a
      binding contract entered into on or after October 19, 1982, and
      before the date of the enactment of this Act [July 18, 1984], and
        "(B) the purchasing corporation establishes by clear and
      convincing evidence that such contract was negotiated on the
      contemplation that, with respect to the deemed sale under section
      338 of the Internal Revenue Code of 1986, paragraph (2) of
      section 1362(e) of such Code would apply,
    then the amendment made by paragraph (1) of subsection (g)
    [amending section 1362 of this title] shall not apply to such
    qualified stock purchase.
      "(4) Amendments made by subsection (l). - The amendments made by
    subsection (l) [amending section 1362 of this title] shall apply to
    any election under section 1362 of the Internal Revenue Code of
    1986 (or any corresponding provision of prior law) made after
    October 19, 1982.
      "(5) Amendment made by subsection (t). - If - 
        "(A) on or before the date of the enactment of this Act [July
      18, 1984] 50 percent or more of the stock of an S corporation has
      been sold or exchanged in 1 or more transactions, and
        "(B) the person (or persons) acquiring such stock establish by
      clear and convincing evidence that such acquisitions were
      negotiated on the contemplation that paragraph (2) of section
      1362(e) of the Internal Revenue Code of 1986 would apply to the S
      termination year in which such sales or exchanges occur,
    then the amendment made by subsection (t) [amending section 1362 of
    this title] shall not apply to such S termination year."

                              EFFECTIVE DATE                          
      Section 6 of Pub. L. 97-354, as amended by Pub. L. 97-448, title
    III, Sec. 305(d)(1)(A), Jan. 12, 1983, 96 Stat. 2399; Pub. L.
    98-369, div. A, title VII, Sec. 721(i), (k), July 18, 1984, 98
    Stat. 969; Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095,
    provided that:
      "(a) In General. - Except as otherwise provided in this section,
    the amendments made by this Act [enacting this section and sections
    1362, 1363, 1366 to 1368, 1371 to 1375, 1377 to 1379, and 6241 to
    6245 of this title, amending sections 31, 44D to 44F, 46, 48, 50A,
    50B, 52, 53, 55, 57, 58, 62, 108, 163, 168, 170, 172, 179, 183,
    189, 194, 267, 280, 280A, 291, 447, 464, 465, 613A, 992, 1016,
    1101, 1212, 1251, 1254, 1256, 3453, 3454, 4992, 4996, 6037, 6042,
    6362, and 6661 of this title and section 1108 of Title 29, Labor,
    omitting section 1376 of this title, and enacting provisions set
    out as a note under section 1 of this title] shall apply to taxable
    years beginning after December 31, 1982.
      "(b) Transitional Rules. - 
        "(1) Sections 1379 and 62(9) continue to apply for 1983. -
      Sections 1379 and 62(9) of the Internal Revenue Code of 1986
      [formerly I.R.C. 1954] (as in effect before the date of the
      enactment of this Act [Oct. 19, 1982]) shall remain in effect for
      years beginning before January 1, 1984.
        "(2) Allowance of exclusion of death benefit. - Notwithstanding
      section 241(b) of the Tax Equity and Fiscal Responsibility Act of
      1982 [section 241(b) of Pub. L. 97-248, set out as a note under
      section 416 of this title] in the case of amounts received under
      a plan of an S corporation, the amendment made by section 239 of
      such Act [section 239 of Pub. L. 97-248, amending section 101 of
      this title] shall apply with respect to decedents dying after
      December 31, 1982.
        "(3) New passive income rules apply to taxable years beginning
      during 1982. - In the case of a taxable year beginning during
      1982 - 
          "(A) sections 1362(d)(3), 1366(f)(3), and 1375 of the
        Internal Revenue Code of 1986 (as amended by this Act [Pub. L.
        97-354]) shall apply, and
          "(B) section 1372(e)(5) of such Code (as in effect on the day
        before the date of the enactment of this Act [Oct. 19, 1982])
        shall not apply.
      The preceding sentence shall not apply in the case of any
      corporation which elects (at such time and in such manner as the
      Secretary of the Treasury or his delegate shall prescribe) to
      have such sentence not apply. Subsection (e) shall not apply to
      any termination resulting from an election under the preceding
      sentence.
      "(c) Grandfather Rules. - 
        "(1) Subsidiaries which are foreign corporations or disc's. -
      In the case of any corporation which on September 28, 1982, would
      have been a member of the same affiliated group as an electing
      small business corporation but for paragraph (3) or (7) of
      section 1504(b) of the Internal Revenue Code of 1986,
      subparagraph (A) of section 1361(b)(2) of such Code (as amended
      by section 2) shall be applied by substituting 'without regard to
      the exceptions contained in paragraphs (1), (2), (4), (5), and
      (6) of subsection (b) thereof' for 'without regard to the
      exceptions contained in subsection (b) thereof'.
        "(2) Casualty insurance companies. - 
          "(A) In general. - In the case of any qualified casualty
        insurance electing small business corporation - 
            "(i) the amendments made by this Act shall not apply, and
            "(ii) subchapter S (as in effect on July 1, 1982) of
          chapter 1 of the Internal Revenue Code of 1986 [former
          sections 1371 to 1379 of this title] and part III of
          subchapter L of chapter 1 of such Code [section 831 et seq.
          of this title] shall apply.
          "(B) Qualified casualty insurance electing small business
        corporation. - The term 'qualified casualty insurance electing
        small business corporation' means any corporation described in
        section 831(a) of the Internal Revenue Code of 1986 if - 
            "(i) as of July 12, 1982, such corporation was an electing
          small business corporation and was described in section
          831(a) of such Code,
            "(ii) such corporation was formed before April 1, 1982, and
          proposed (through a written private offering first circulated
          to investors before such date) to elect to be taxed as a
          subchapter S corporation and to be operated on an established
          insurance exchange, or
            "(iii) such corporation is approved for membership on an
          established insurance exchange pursuant to a written
          agreement entered into before December 31, 1982, and such
          corporation is described in section 831(a) of such Code as of
          December 31, 1984.
      A corporation shall not be treated as a qualified casualty
      insurance electing small business corporation unless an election
      under subchapter S of chapter 1 of such Code is in effect for its
      first taxable year beginning after December 31, 1984.
        "(3) Certain corporations with oil and gas production. - 
          "(A) In general. - In the case of any qualified oil
        corporation - 
            "(i) the amendments made by this Act shall not apply, and
            "(ii) subchapter S (as in effect on July 1, 1982) of
          chapter 1 of the Internal Revenue Code of 1986 [former
          sections 1371 to 1379 of this title] shall apply.
          "(B) Qualified oil corporation. - For purposes of this
        paragraph, the term 'qualified oil corporation' means any
        corporation if - 
            "(i) as of September 28, 1982, such corporation - 
           "(I) was an electing small business corporation, or
           "(II) was a small business corporation which made an
          election under section 1372(a) after December 31, 1981, and
          before September 28, 1982,
            "(ii) for calendar year 1982, the combined average daily
          production of domestic crude oil or natural gas of such
          corporation and any one of its substantial shareholders
          exceeds 1,000 barrels, and
            "(iii) such corporation makes an election under this
          subparagraph at such time and in such manner as the Secretary
          of the Treasury or his delegate shall prescribe.
          "(C) Average daily production. - For purposes of subparagraph
        (B), the average daily production of domestic crude oil or
        domestic natural gas shall be determined under section
        613A(c)(2) of such Code without regard to the last sentence
        thereof.
          "(D) Substantial shareholder. - For purposes of subparagraph
        (B), the term 'substantial shareholder' means any person who on
        July 1, 1982, owns more than 40 percent (in value) of the stock
        of the corporation.
        "(4) Continuity required. - 
          "(A) In general. - This subsection shall cease to apply with
        respect to any corporation after - 
            "(i) any termination of the election of the corporation
          under subchapter S of chapter 1 of such Code, or
            "(ii) the first day on which more than 50 percent of the
          stock of the corporation is newly owned stock within the
          meaning of section 1378(c)(2) of such Code (as amended by
          this Act [Pub. L. 97-354]).
          "(B) Special rules for paragraph (2). - 
            "(i) Paragraph (2) shall also cease to apply with respect
          to any corporation after the corporation ceases to be
          described in section 831(a) of such Code.
            "(ii) For purposes of determining under subparagraph
          (A)(ii) whether paragraph (2) ceases to apply to any
          corporation, section 1378(c)(2) of such Code (as amended by
          this Act [Pub. L. 97-354]) shall be applied by substituting
          'December 31, 1984' for 'December 31, 1982' each place it
          appears therein.
      "(d) Treatment of Existing Fringe Benefit Plans. - 
        "(1) In general. - In the case of existing fringe benefits of a
      corporation which as of September 28, 1982, was an electing small
      business corporation, section 1372 of the Internal Revenue Code
      of 1986 (as added by this Act [Pub. L. 97-354]) shall apply only
      with respect to taxable years beginning after December 31, 1987.
        "(2) Requirements. - This subsection shall cease to apply with
      respect to any corporation after whichever of the following first
      occurs:
          "(A) the first day of the first taxable year beginning after
        December 31, 1982, with respect to which the corporation does
        not meet the requirements of section 1372(e)(5) of such Code
        (as in effect on the day before the date of the enactment of
        this Act [Oct. 19, 1982]),
          "(B) any termination after December 31, 1982, of the election
        of the corporation under subchapter S of chapter 1 of such
        Code, or
          "(C) the first day on which more than 50 percent of the stock
        of the corporation is newly owned stock within the meaning of
        section 1378(c)(2) of such Code (as amended by this Act [Pub.
        L. 97-354]).
        "(3) Existing fringe benefit. - For purposes of this
      subsection, the term 'existing fringe benefit' means any employee
      fringe benefit of a type which the corporation provided to its
      employees as of September 28, 1982.
      "(e) Treatment of Certain Elections Under Prior Law. - For
    purposes of section 1362(g) of the Internal Revenue Code of 1986,
    as amended by this Act [Pub. L. 97-354] (relating to no election
    permitted within 5 years after termination of prior election), any
    termination or revocation under section 1372(e) of such Code (as in
    effect on the day before the date of the enactment of this Act
    [Oct. 19, 1982]) shall not be taken into account.
      "(f) Taxable Year of S Corporations. - Section 1378 of the
    Internal Revenue Code of 1986 (as added by this Act [Pub. L.
    97-354]) shall take effect on the day after the date of the
    enactment of this Act [Oct. 19, 1982]. For purposes of applying
    such section, the reference in subsection (a)(2) of such section to
    an election under section 1362(a) shall include a reference to an
    election under section 1372(a) of such Code as in effect on the day
    before the date of the enactment of this Act [Oct. 19, 1982]."

                ELIMINATION OF CERTAIN EARNINGS AND PROFITS            
      Section 1311(a) of Pub. L. 104-188 provided that: "If - 
        "(1) a corporation was an electing small business corporation
      under subchapter S of chapter 1 of the Internal Revenue Code of
      1986 for any taxable year beginning before January 1, 1983, and
        "(2) such corporation is an S corporation under subchapter S of
      chapter 1 of such Code for its first taxable year beginning after
      December 31, 1996,
    the amount of such corporation's accumulated earnings and profits
    (as of the beginning of such first taxable year) shall be reduced
    by an amount equal to the portion (if any) of such accumulated
    earnings and profits which were accumulated in any taxable year
    beginning before January 1, 1983, for which such corporation was an
    electing small business corporation under such subchapter S."

            PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989        
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
    title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an
    amendment to any plan, such plan amendment shall not be required to
    be made before the first plan year beginning on or after Jan. 1,
    1989, see section 1140 of Pub. L. 99-514, as amended, set out as a
    note under section 401 of this title.

                          TRANSITIONAL PROVISIONS                      
      Pub. L. 97-448, title III, Sec. 305(d)(1)(B), Jan. 12, 1983, 96
    Stat. 2399, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986,
    100 Stat. 2095, provided that: "If - 
        "(i) after September 30, 1982, and on or before the date of the
      enactment of this Act [Jan. 12, 1983], stock or securities were
      transferred to a small business corporation (as defined in
      section 1361(b) of the Internal Revenue Code of 1986 [formerly
      I.R.C. 1954] as amended by the Subchapter S Revision Act of 1982
      [Pub. L. 97-354]) in a transaction to which section 351 of such
      Code applies, and
        "(ii) such corporation is liquidated under section 333 of such
      Code before March 1, 1983,
    then such stock or securities shall not be taken into account under
    section 333(e)(2) of such Code."

-SECREF-
                   SECTION REFERRED TO IN OTHER SECTIONS               
      This section is referred to in sections 280G, 512, 641, 678, 856,
    1362 of this title; title 29 sections 1021, 1108.

-End-



-CITE-
    26 USC Sec. 1362                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART I - IN GENERAL

-HEAD-
    Sec. 1362. Election; revocation; termination

-STATUTE-
    (a) Election
      (1) In general
        Except as provided in subsection (g), a small business
      corporation may elect, in accordance with the provisions of this
      section, to be an S corporation.
      (2) All shareholders must consent to election
        An election under this subsection shall be valid only if all
      persons who are shareholders in such corporation on the day on
      which such election is made consent to such election.
    (b) When made
      (1) In general
        An election under subsection (a) may be made by a small
      business corporation for any taxable year - 
          (A) at any time during the preceding taxable year, or
          (B) at any time during the taxable year and on or before the
        15th day of the 3d month of the taxable year.
      (2) Certain elections made during 1st 2 1/2  months treated as
        made for next taxable year
        If - 
          (A) an election under subsection (a) is made for any taxable
        year during such year and on or before the 15th day of the 3d
        month of such year, but
          (B) either - 
            (i) on 1 or more days in such taxable year before the day
          on which the election was made the corporation did not meet
          the requirements of subsection (b) of section 1361, or
            (ii) 1 or more of the persons who held stock in the
          corporation during such taxable year and before the election
          was made did not consent to the election,

      then such election shall be treated as made for the following
      taxable year.
      (3) Election made after 1st 2 1/2  months treated as made for
        following taxable year
        If - 
          (A) a small business corporation makes an election under
        subsection (a) for any taxable year, and
          (B) such election is made after the 15th day of the 3d month
        of the taxable year and on or before the 15th day of the 3rd
        month of the following taxable year,

      then such election shall be treated as made for the following
      taxable year.
      (4) Taxable years of 2 1/2  months or less
        For purposes of this subsection, an election for a taxable year
      made not later than 2 months and 15 days after the first day of
      the taxable year shall be treated as timely made during such
      year.
      (5) Authority to treat late elections, etc., as timely
        If - 
          (A) an election under subsection (a) is made for any taxable
        year (determined without regard to paragraph (3)) after the
        date prescribed by this subsection for making such election for
        such taxable year or no such election is made for any taxable
        year, and
          (B) the Secretary determines that there was reasonable cause
        for the failure to timely make such election,

      the Secretary may treat such an election as timely made for such
      taxable year (and paragraph (3) shall not apply).
    (c) Years for which effective
      An election under subsection (a) shall be effective for the
    taxable year of the corporation for which it is made and for all
    succeeding taxable years of the corporation, until such election is
    terminated under subsection (d).
    (d) Termination
      (1) By revocation
        (A) In general
          An election under subsection (a) may be terminated by
        revocation.
        (B) More than one-half of shares must consent to revocation
          An election may be revoked only if shareholders holding more
        than one-half of the shares of stock of the corporation on the
        day on which the revocation is made consent to the revocation.
        (C) When effective
          Except as provided in subparagraph (D) - 
            (i) a revocation made during the taxable year and on or
          before the 15th day of the 3d month thereof shall be
          effective on the 1st day of such taxable year, and
            (ii) a revocation made during the taxable year but after
          such 15th day shall be effective on the 1st day of the
          following taxable year.
        (D) Revocation may specify prospective date
          If the revocation specifies a date for revocation which is on
        or after the day on which the revocation is made, the
        revocation shall be effective on and after the date so
        specified.
      (2) By corporation ceasing to be small business corporation
        (A) In general
          An election under subsection (a) shall be terminated whenever
        (at any time on or after the 1st day of the 1st taxable year
        for which the corporation is an S corporation) such corporation
        ceases to be a small business corporation.
        (B) When effective
          Any termination under this paragraph shall be effective on
        and after the date of cessation.
      (3) Where passive investment income exceeds 25 percent of gross
        receipts for 3 consecutive taxable years and corporation has
        accumulated earnings and profits
        (A) Termination
          (i) In general
            An election under subsection (a) shall be terminated
          whenever the corporation - 
              (I) has accumulated earnings and profits at the close of
            each of 3 consecutive taxable years, and
              (II) has gross receipts for each of such taxable years
            more than 25 percent of which are passive investment
            income.
          (ii) When effective
            Any termination under this paragraph shall be effective on
          and after the first day of the first taxable year beginning
          after the third consecutive taxable year referred to in
          clause (i).
          (iii) Years taken into account
            A prior taxable year shall not be taken into account under
          clause (i) unless - 
              (I) such taxable year began after December 31, 1981, and
              (II) the corporation was an S corporation for such
            taxable year.
        (B) Gross receipts from sales of capital assets (other than
          stock and securities)
          For purposes of this paragraph, in the case of dispositions
        of capital assets (other than stock and securities), gross
        receipts from such dispositions shall be taken into account
        only to the extent of the capital gain net income therefrom.
        (C) Passive investment income defined
          For purposes of this paragraph - 
          (i) In general
            Except as otherwise provided in this subparagraph, the term
          "passive investment income" means gross receipts derived from
          royalties, rents, dividends, interest, annuities, and sales
          or exchanges of stock or securities (gross receipts from such
          sales or exchanges being taken into account for purposes of
          this paragraph only to the extent of gains therefrom).
          (ii) Exception for interest on notes from sales of inventory
            The term "passive investment income" shall not include
          interest on any obligation acquired in the ordinary course of
          the corporation's trade or business from its sale of property
          described in section 1221(a)(1).
          (iii) Treatment of certain lending or finance companies
            If the S corporation meets the requirements of section
          542(c)(6) for the taxable year, the term "passive investment
          income" shall not include gross receipts for the taxable year
          which are derived directly from the active and regular
          conduct of a lending or finance business (as defined in
          section 542(d)(1)).
          (iv) Treatment of certain liquidations
            Gross receipts derived from sales or exchanges of stock or
          securities shall not include amounts received by an S
          corporation which are treated under section 331 (relating to
          corporate liquidations) as payments in exchange for stock
          where the S corporation owned more than 50 percent of each
          class of stock of the liquidating corporation.
        (D) Special rule for options and commodity dealings
          (i) In general
            In the case of any options dealer or commodities dealer,
          passive investment income shall be determined by not taking
          into account any gain or loss (in the normal course of the
          taxpayer's activity of dealing in or trading section 1256
          contracts) from any section 1256 contract or property related
          to such a contract.
          (ii) Definitions
            For purposes of this subparagraph - 
            (I) Options dealer
              The term "options dealer" has the meaning given such term
            by section 1256(g)(8).
            (II) Commodities dealer
              The term "commodities dealer" means a person who is
            actively engaged in trading section 1256 contracts and is
            registered with a domestic board of trade which is
            designated as a contract market by the Commodities Futures
            Trading Commission.
            (III) Section 1256 contract
              The term "section 1256 contract" has the meaning given to
            such term by section 1256(b).
        (E) Treatment of certain dividends
          If an S corporation holds stock in a C corporation meeting
        the requirements of section 1504(a)(2), the term "passive
        investment income" shall not include dividends from such C
        corporation to the extent such dividends are attributable to
        the earnings and profits of such C corporation derived from the
        active conduct of a trade or business.
    (e) Treatment of S termination year
      (1) In general
        In the case of an S termination year, for purposes of this
      title - 
        (A) S short year
          The portion of such year ending before the 1st day for which
        the termination is effective shall be treated as a short
        taxable year for which the corporation is an S corporation.
        (B) C short year
          The portion of such year beginning on such 1st day shall be
        treated as a short taxable year for which the corporation is a
        C corporation.
      (2) Pro rata allocation
        Except as provided in paragraph (3) and subparagraphs (C) and
      (D) of paragraph (6), the determination of which items are to be
      taken into account for each of the short taxable years referred
      to in paragraph (1) shall be made - 
          (A) first by determining for the S termination year - 
            (i) the amount of each of the items of income, loss,
          deduction, or credit described in section 1366(a)(1)(A), and
            (ii) the amount of the nonseparately computed income or
          loss, and

          (B) then by assigning an equal portion of each amount
        determined under subparagraph (A) to each day of the S
        termination year.
      (3) Election to have items assigned to each short taxable year
        under normal tax accounting rules
        (A) In general
          A corporation may elect to have paragraph (2) not apply.
        (B) Shareholders must consent to election
          An election under this subsection shall be valid only if all
        persons who are shareholders in the corporation at any time
        during the S short year and all persons who are shareholders in
        the corporation on the first day of the C short year consent to
        such election.
      (4) S termination year
        For purposes of this subsection, the term "S termination year"
      means any taxable year of a corporation (determined without
      regard to this subsection) in which a termination of an election
      made under subsection (a) takes effect (other than on the 1st day
      thereof).
      (5) Tax for C short year determined on annualized basis
        (A) In general
          The taxable income for the short year described in
        subparagraph (B) of paragraph (1) shall be placed on an annual
        basis by multiplying the taxable income for such short year by
        the number of days in the S termination year and by dividing
        the result by the number of days in the short year. The tax
        shall be the same part of the tax computed on the annual basis
        as the number of days in such short year is of the number of
        days in the S termination year.
        (B) Section 443(d)(2) to apply
          Subsection (d) of section 443 shall apply to the short
        taxable year described in subparagraph (B) of paragraph (1).
      (6) Other special rules
        For purposes of this title - 
        (A) Short years treated as 1 year for carryover purposes
          The short taxable year described in subparagraph (A) of
        paragraph (1) shall not be taken into account for purposes of
        determining the number of taxable years to which any item may
        be carried back or carried forward by the corporation.
        (B) Due date for S year
          The due date for filing the return for the short taxable year
        described in subparagraph (A) of paragraph (1) shall be the
        same as the due date for filing the return for the short
        taxable year described in subparagraph (B) of paragraph (1)
        (including extensions thereof).
        (C) Paragraph (2) not to apply to items resulting from section
          338
          Paragraph (2) shall not apply with respect to any item
        resulting from the application of section 338.
        (D) Pro rata allocation for S termination year not to apply if
          50-percent change in ownership
          Paragraph (2) shall not apply to an S termination year if
        there is a sale or exchange of 50 percent or more of the stock
        in such corporation during such year.
    (f) Inadvertent invalid elections or terminations
      If - 
        (1) an election under subsection (a) by any corporation - 
          (A) was not effective for the taxable year for which made
        (determined without regard to subsection (b)(2)) by reason of a
        failure to meet the requirements of section 1361(b) or to
        obtain shareholder consents, or
          (B) was terminated under paragraph (2) or (3) of subsection
        (d),

        (2) the Secretary determines that the circumstances resulting
      in such ineffectiveness or termination were inadvertent,
        (3) no later than a reasonable period of time after discovery
      of the circumstances resulting in such ineffectiveness or
      termination, steps were taken - 
          (A) so that the corporation is a small business corporation,
        or
          (B) to acquire the required shareholder consents, and

        (4) the corporation, and each person who was a shareholder in
      the corporation at any time during the period specified pursuant
      to this subsection, agrees to make such adjustments (consistent
      with the treatment of the corporation as an S corporation) as may
      be required by the Secretary with respect to such period,

    then, notwithstanding the circumstances resulting in such
    ineffectiveness or termination, such corporation shall be treated
    as an S corporation during the period specified by the Secretary.
    (g) Election after termination
      If a small business corporation has made an election under
    subsection (a) and if such election has been terminated under
    subsection (d), such corporation (and any successor corporation)
    shall not be eligible to make an election under subsection (a) for
    any taxable year before its 5th taxable year which begins after the
    1st taxable year for which such termination is effective, unless
    the Secretary consents to such election.

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1672;
    amended Pub. L. 98-369, div. A, title I, Sec. 102(d)(2), title VII,
    Sec. 721(g), (h), (l), (t), July 18, 1984, 98 Stat. 623, 968, 969,
    971; Pub. L. 100-647, title I, Secs. 1006(f)(6), 1007(g)(9), Nov.
    10, 1988, 102 Stat. 3406, 3435; Pub. L. 104-188, title I, Secs.
    1305(a), (b), 1308(c), 1311(b)(1), Aug. 20, 1996, 110 Stat. 1779,
    1780, 1783, 1784; Pub. L. 106-170, title V, Sec. 532(c)(2)(T), Dec.
    17, 1999, 113 Stat. 1931.)


-MISC1-
                                AMENDMENTS                            
      1999 - Subsec. (d)(3)(C)(ii). Pub. L. 106-170 substituted
    "section 1221(a)(1)" for "section 1221(1)".
      1996 - Subsec. (b)(5). Pub. L. 104-188, Sec. 1305(b), added par.
    (5).
      Subsec. (d)(3). Pub. L. 104-188, Sec. 1311(b)(1)(A), in heading
    substituted "accumulated" for "subchapter C".
      Subsec. (d)(3)(A)(i)(I). Pub. L. 104-188, Sec. 1311(b)(1)(B),
    substituted "accumulated" for "subchapter C".
      Subsec. (d)(3)(B) to (E). Pub. L. 104-188, Sec. 1311(b)(1)(C),
    redesignated subpars. (C) to (F) as (B) to (E), respectively, and
    struck out former subpar. (B) which read as follows:
      "(B) Subchapter c earnings and profits. - For purposes of
    subparagraph (A), the term 'subchapter C earnings and profits'
    means earnings and profits of any corporation for any taxable year
    with respect to which an election under section 1362(a) (or under
    section 1372 of prior law) was not in effect."
      Subsec. (d)(3)(F). Pub. L. 104-188, Sec. 1311(b)(1)(C),
    redesignated subpar. (F) as (E).
      Pub. L. 104-188, Sec. 1308(c), added subpar. (F).
      Subsec. (f). Pub. L. 104-188, Sec. 1305(a), amended subsec. (f)
    generally. Prior to amendment, subsec. (f) read as follows:
      "(f) Inadvertent Terminations. - If - 
        "(1) an election under subsection (a) by any corporation was
      terminated under paragraph (2) or (3) of subsection (d),
        "(2) the Secretary determines that the termination was
      inadvertent,
        "(3) no later than a reasonable period of time after discovery
      of the event resulting in such termination, steps were taken so
      that the corporation is once more a small business corporation,
      and
        "(4) the corporation, and each person who was a shareholder of
      the corporation at any time during the period specified pursuant
      to this subsection, agrees to make such adjustments (consistent
      with the treatment of the corporation as an S corporation) as may
      be required by the Secretary with respect to such period,
    then, notwithstanding the terminating event, such corporation shall
    be treated as continuing to be an S corporation during the period
    specified by the Secretary."
      1988 - Subsec. (d)(3)(D)(v). Pub. L. 100-647, Sec. 1006(f)(6)(A),
    struck out cl. (v) which related to special rule for options and
    commodities dealers.
      Subsec. (d)(3)(E). Pub. L. 100-647, Sec. 1006(f)(6)(B), added
    subpar. (E).
      Subsec. (e)(5)(B). Pub. L. 100-647, Sec. 1007(g)(9), substituted
    "Subsection (d)" for "Subsection (d)(2)".
      1984 - Subsec. (b)(3)(B). Pub. L. 98-369, Sec. 721(l)(2),
    substituted "on or before the 15th day of the 3rd month of the
    following taxable year" for "on or before the last day of such
    taxable year".
      Subsec. (b)(4). Pub. L. 98-369, Sec. 721(l)(1), added par. (4).
      Subsec. (d)(3)(D)(v). Pub. L. 98-369, Sec. 102(d)(2), added cl.
    (v).
      Subsec. (e)(2). Pub. L. 98-369, Sec. 721(g)(2), substituted "as
    provided in paragraph (3) and subparagraphs (C) and (D) of
    paragraph (6)" for "as provided in paragraph (3)".
      Subsec. (e)(3)(B). Pub. L. 98-369, Sec. 721(h), struck out "All"
    in heading, and substituted "subsection" for "paragraph" and "S
    short year and all persons who are shareholders in the corporation
    on the first day of the C short year" for "S termination year" in
    text.
      Subsec. (e)(6)(C). Pub. L. 98-369, Sec. 721(g)(1), added subpar.
    (C).
      Subsec. (e)(6)(D). Pub. L. 98-369, Sec. 721(t), added subpar.
    (D).

                     EFFECTIVE DATE OF 1999 AMENDMENT                 
      Amendment by Pub. L. 106-170 applicable to any instrument held,
    acquired, or entered into, any transaction entered into, and
    supplies held or acquired on or after Dec. 17, 1999, see section
    532(d) of Pub. L. 106-170, set out as a note under section 170 of
    this title.

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Section 1305(c) of Pub. L. 104-188 provided that: "The amendments
    made by subsections (a) and (b) [amending this section] shall apply
    with respect to elections for taxable years beginning after
    December 31, 1982."
      Amendment by sections 1308(c) and 1311(b)(1) of Pub. L. 104-188
    applicable to taxable years beginning after Dec. 31, 1996, see
    section 1317(a) of Pub. L. 104-188, set out as a note under section
    641 of this title.

                     EFFECTIVE DATE OF 1988 AMENDMENT                 
      Amendment by Pub. L. 100-647 effective, except as otherwise
    provided, as if included in the provision of the Tax Reform Act of
    1986, Pub. L. 99-514, to which such amendment relates, see section
    1019(a) of Pub. L. 100-647, set out as a note under section 1 of
    this title.

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by section 102(d)(2) of Pub. L. 98-369 applicable to
    positions established after July 18, 1984, in taxable years ending
    after that date except as otherwise provided, see section 102(f),
    (g) of Pub. L. 98-369, set out as a note under section 1256 of this
    title.
      Amendment by section 721(g), (h), (l), (t) of Pub. L. 98-369
    effective as if included in the Subchapter S Revision Act of 1982,
    Pub. L. 97-354, except that amendment by section 721(g)(1) is not
    applicable to certain qualified stock purchases, amendment by
    section 721(l) is applicable to any election under this section (or
    any corresponding provision of prior law) made after Oct. 19, 1982,
    and amendment by section 721(t) is not applicable to certain S
    termination years, see section 721(y) of Pub. L. 98-369, set out as
    a note under section 1361 of this title.

                              EFFECTIVE DATE                          
      Section applicable to taxable years beginning after Dec. 31,
    1982, except that in the case of a taxable year beginning during
    1982, subsec. (d)(3) of this section and sections 1366(f)(3) and
    1375 of this title shall apply, and section 1372(e)(5) of this
    title as in effect on the day before Oct. 19, 1982, shall not
    apply, see section 6(a), (b)(3) of Pub. L. 97-354, set out as a
    note under section 1361 of this title. For additional provisions
    relating to the treatment of certain elections under prior law for
    purposes of subsec. (g) of this section, see section 6(e) of Pub.
    L. 97-354, set out as a note under section 1361 of this title.

              TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAW          
      Section 1317(b) of Pub. L. 104-188 provided that: "For purposes
    of section 1362(g) of the Internal Revenue Code of 1986 (relating
    to election after termination), any termination under section
    1362(d) of such Code in a taxable year beginning before January 1,
    1997, shall not be taken into account."

                           SUBCHAPTER S ELECTION                       
      Section 102(d)(3) of Pub. L. 98-369, as amended by Pub. L.
    99-514, Sec. 2, title XVIII, Sec. 1808(a)(2), Oct. 22, 1986, 100
    Stat. 2095, 2817, provided that: "If a commodities dealer or an
    options dealer - 
        "(A) becomes a small business corporation (as defined in
      section 1361(b) of the Internal Revenue Code of 1986 [formerly
      I.R.C. 1954]) at any time before the close of the 75th day after
      the date of the enactment of this Act [July 18, 1984], and
        "(B) makes the election under section 1362(a) of such Code
      before the close of such 75th day,
    then such dealer shall be treated as having received approval for
    and adopted a taxable year beginning on the first day during 1984
    on which it was a small business corporation (as so defined) or
    such other day as may be permitted under regulations and ending on
    the date determined under section 1378 of such Code and such
    election shall be effective for such taxable year."

-SECREF-
                   SECTION REFERRED TO IN OTHER SECTIONS               
      This section is referred to in sections 943, 1042, 1361, 1363,
    1371, 1374, 1375, 1377, 1379, 6103 of this title.

-End-



-CITE-
    26 USC Sec. 1363                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART I - IN GENERAL

-HEAD-
    Sec. 1363. Effect of election on corporation

-STATUTE-
    (a) General rule
      Except as otherwise provided in this subchapter, an S corporation
    shall not be subject to the taxes imposed by this chapter.
    (b) Computation of corporation's taxable income
      The taxable income of an S corporation shall be computed in the
    same manner as in the case of an individual, except that - 
        (1) the items described in section 1366(a)(1)(A) shall be
      separately stated,
        (2) the deductions referred to in section 703(a)(2) shall not
      be allowed to the corporation,
        (3) section 248 shall apply, and
        (4) section 291 shall apply if the S corporation (or any
      predecessor) was a C corporation for any of the 3 immediately
      preceding taxable years.
    (c) Elections of the S corporation
      (1) In general
        Except as provided in paragraph (2), any election affecting the
      computation of items derived from an S corporation shall be made
      by the corporation.
      (2) Exceptions
        In the case of an S corporation, elections under the following
      provisions shall be made by each shareholder separately - 
          (A) section 617 (relating to deduction and recapture of
        certain mining exploration expenditures), and
          (B) section 901 (relating to taxes of foreign countries and
        possessions of the United States).
    (d) Recapture of LIFO benefits
      (1) In general
        If - 
          (A) an S corporation was a C corporation for the last taxable
        year before the first taxable year for which the election under
        section 1362(a) was effective, and
          (B) the corporation inventoried goods under the LIFO method
        for such last taxable year,

      the LIFO recapture amount shall be included in the gross income
      of the corporation for such last taxable year (and appropriate
      adjustments to the basis of inventory shall be made to take into
      account the amount included in gross income under this
      paragraph).
      (2) Additional tax payable in installments
        (A) In general
          Any increase in the tax imposed by this chapter by reason of
        this subsection shall be payable in 4 equal installments.
        (B) Date for payment of installments
          The first installment under subparagraph (A) shall be paid on
        or before the due date (determined without regard to
        extensions) for the return of the tax imposed by this chapter
        for the last taxable year for which the corporation was a C
        corporation and the 3 succeeding installments shall be paid on
        or before the due date (as so determined) for the corporation's
        return for the 3 succeeding taxable years.
        (C) No interest for period of extension
          Notwithstanding section 6601(b), for purposes of section
        6601, the date prescribed for the payment of each installment
        under this paragraph shall be determined under this paragraph.
      (3) LIFO recapture amount
        For purposes of this subsection, the term "LIFO recapture
      amount" means the amount (if any) by which - 
          (A) the inventory amount of the inventory asset under the
        first-in, first-out method authorized by section 471, exceeds
          (B) the inventory amount of such assets under the LIFO
        method.

      For purposes of the preceding sentence, inventory amounts shall
      be determined as of the close of the last taxable year referred
      to in paragraph (1).
      (4) Other definitions
        For purposes of this subsection - 
        (A) LIFO method
          The term "LIFO method" means the method authorized by section
        472.
        (B) Inventory assets
          The term "inventory assets" means stock in trade of the
        corporation, or other property of a kind which would properly
        be included in the inventory of the corporation if on hand at
        the close of the taxable year.
        (C) Method of determining inventory amount
          The inventory amount of assets under a method authorized by
        section 471 shall be determined - 
            (i) if the corporation uses the retail method of valuing
          inventories under section 472, by using such method, or
            (ii) if clause (i) does not apply, by using cost or market,
          whichever is lower.
        (D) Not treated as member of affiliated group
          Except as provided in regulations, the corporation referred
        to in paragraph (1) shall not be treated as a member of an
        affiliated group with respect to the amount included in gross
        income under paragraph (1).

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1676;
    amended Pub. L. 98-369, div. A, title VII, Sec. 721(a), (b)(1),
    (p), July 18, 1984, 98 Stat. 966, 970; Pub. L. 99-514, title V,
    Sec. 511(d)(2)(C), title VI, Sec. 632(b), title VII, Sec.
    701(e)(4)(J), Oct. 22, 1986, 100 Stat. 2249, 2277, 2343; Pub. L.
    100-203, title X, Sec. 10227(a), Dec. 22, 1987, 101 Stat. 1330-416;
    Pub. L. 100-647, title I, Sec. 1006(f)(7), title II, Sec. 2004(n),
    Nov. 10, 1988, 102 Stat. 3407, 3608.)


-MISC1-
                                AMENDMENTS                            
      1988 - Subsec. (d). Pub. L. 100-647, Sec. 1006(f)(7), struck out
    subsec. (d) which related to distributions of appreciated property.
      Subsec. (d)(4)(D). Pub. L. 100-647, Sec. 2004(n), added subpar.
    (D).
      Subsec. (e). Pub. L. 100-647, Sec. 1006(f)(7), struck out subsec.
    (e) which provided that subsec. (d) not apply to reorganizations,
    etc.
      1987 - Subsec. (d). Pub. L. 100-203 added subsec. (d) relating to
    recapture of LIFO benefits.
      1986 - Subsec. (a). Pub. L. 99-514, Sec. 701(e)(4)(J), struck out
    "and in section 58(d)" after "this subchapter".
      Subsec. (c)(2). Pub. L. 99-514, Sec. 511(d)(2)(C), redesignated
    subpars. (B) and (C) as (A) and (B), respectively, and struck out
    former subpar. (A) which read as follows: "section 163(d) (relating
    to limitation on interest on investment indebtedness),".
      Subsec. (e). Pub. L. 99-514, Sec. 632(b), amended subsec. (e)
    generally, substituting "reorganizations, etc." for "complete
    liquidations and reorganizations", in heading and in text struck
    out reference to property in complete liquidation of the
    corporation.
      1984 - Subsec. (b)(4). Pub. L. 98-369, Sec. 721(p), added par.
    (4).
      Subsec. (c)(2). Pub. L. 98-369, Sec. 721(b)(1), redesignated
    subpars. (B) to (D) as (A) to (C), respectively, and struck out
    subpar. (A) which provided "subsection (b)(5) or (d)(4) of section
    108 (relating to income from discharge of indebtedness),".
      Subsec. (d). Pub. L. 98-369, Sec. 721(a)(2), substituted "Except
    as provided in subsection (e), if" for "If".
      Subsec. (e). Pub. L. 98-369, Sec. 721(a)(1), added subsec. (e).

                     EFFECTIVE DATE OF 1988 AMENDMENT                 
      Amendment by section 1006(f)(7) of Pub. L. 100-647 effective,
    except as otherwise provided, as if included in the provision of
    the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment
    relates, see section 1019(a) of Pub. L. 100-647, set out as a note
    under section 1 of this title.
      Amendment by section 2004(n) of Pub. L. 100-647 effective, except
    as otherwise provided, as if included in the provisions of the
    Revenue Act of 1987, Pub. L. 100-203, title X, to which such
    amendment relates, see section 2004(u) of Pub. L. 100-647, set out
    as a note under section 56 of this title.

                     EFFECTIVE DATE OF 1987 AMENDMENT                 
      Section 10227(b) of Pub. L. 100-203 provided that:
      "(1) In general. - Except as provided in paragraph (2) the
    amendment made by subsection (a) [amending this section] shall
    apply in the case of elections made after December 17, 1987.
      "(2) Exception. - The amendment made by subsection (a) shall not
    apply in the case of any election made by a corporation after
    December 17, 1987, and before January 1, 1989, if, on or before
    December 17, 1987 - 
        "(A) there was a resolution adopted by the board of directors
      of such corporation to make an election under subchapter S of
      chapter 1 of the Internal Revenue Code of 1986, or
        "(B) there was a ruling request with respect to the business
      filed with the Internal Revenue Service expressing an intent to
      make such an election."

                     EFFECTIVE DATE OF 1986 AMENDMENT                 
      Amendment by section 511(d)(2)(C) of Pub. L. 99-514 applicable to
    taxable years beginning after Dec. 31, 1986, see section 511(e) of
    Pub. L. 99-514, set out as a note under section 163 of this title.
      Amendment by section 632(b) of Pub. L. 99-514 applicable to any
    distribution in complete liquidation, and any sale or exchange,
    made by a corporation after July 31, 1986, unless such corporation
    is completely liquidated before Jan. 1, 1987, any transaction
    described in section 338 of this title for which the acquisition
    date occurs after Dec. 31, 1986, and any distribution, not in
    complete liquidation, made after Dec. 31, 1986, with exceptions and
    special and transitional rules, see section 633 of Pub. L. 99-514,
    set out as an Effective Date note under section 336 of this title.
      Amendment by section 701(e)(4)(J) of Pub. L. 99-514 applicable to
    taxable years beginning after Dec. 31, 1986, with certain
    exceptions and qualifications, see section 701(f) of Pub. L.
    99-514, set out as an Effective Date note under section 55 of this
    title.

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by Pub. L. 98-369 effective as if included in the
    Subchapter S Revision Act of 1982, Pub. L. 97-354, see section
    721(y)(1) of Pub. L. 98-369, set out as a note under section 1361
    of this title.

                              EFFECTIVE DATE                          
      Section applicable to taxable years beginning after Dec. 31,
    1982, see section 6(a) of Pub. L. 97-354, set out as a note under
    section 1361 of this title.

     APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99-514 IN RELATION
                  TO TREATY OBLIGATIONS OF UNITED STATES
      For applicability of amendment by section 701(e)(4)(J) of Pub. L.
    99-514 notwithstanding any treaty obligation of the United States
    in effect on Oct. 22, 1986, with provision that for such purposes
    any amendment by title I of Pub. L. 100-647 be treated as if it had
    been included in the provision of Pub. L. 99-514 to which such
    amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100-647,
    set out as a note under section 861 of this title.

-End-


-CITE-
    26 USC PART II - TAX TREATMENT OF SHAREHOLDERS              01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART II - TAX TREATMENT OF SHAREHOLDERS

-HEAD-
                  PART II - TAX TREATMENT OF SHAREHOLDERS              

-MISC1-
    Sec.                                                     
    1366.       Pass-thru of items to shareholders.                   
    1367.       Adjustments to basis of stock of shareholders, etc.   
    1368.       Distributions.                                        

-End-



-CITE-
    26 USC Sec. 1366                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART II - TAX TREATMENT OF SHAREHOLDERS

-HEAD-
    Sec. 1366. Pass-thru of items to shareholders

-STATUTE-
    (a) Determination of shareholder's tax liability
      (1) In general
        In determining the tax under this chapter of a shareholder for
      the shareholder's taxable year in which the taxable year of the S
      corporation ends (or for the final taxable year of a shareholder
      who dies, or of a trust or estate which terminates, before the
      end of the corporation's taxable year), there shall be taken into
      account the shareholder's pro rata share of the corporation's - 
          (A) items of income (including tax-exempt income), loss,
        deduction, or credit the separate treatment of which could
        affect the liability for tax of any shareholder, and
          (B) nonseparately computed income or loss.

      For purposes of the preceding sentence, the items referred to in
      subparagraph (A) shall include amounts described in paragraph (4)
      or (6) of section 702(a).
      (2) Nonseparately computed income or loss defined
        For purposes of this subchapter, the term "nonseparately
      computed income or loss" means gross income minus the deductions
      allowed to the corporation under this chapter, determined by
      excluding all items described in paragraph (1)(A).
    (b) Character passed thru
      The character of any item included in a shareholder's pro rata
    share under paragraph (1) of subsection (a) shall be determined as
    if such item were realized directly from the source from which
    realized by the corporation, or incurred in the same manner as
    incurred by the corporation.
    (c) Gross income of a shareholder
      In any case where it is necessary to determine the gross income
    of a shareholder for purposes of this title, such gross income
    shall include the shareholder's pro rata share of the gross income
    of the corporation.
    (d) Special rules for losses and deductions
      (1) Cannot exceed shareholder's basis in stock and debt
        The aggregate amount of losses and deductions taken into
      account by a shareholder under subsection (a) for any taxable
      year shall not exceed the sum of - 
          (A) the adjusted basis of the shareholder's stock in the S
        corporation (determined with regard to paragraphs (1) and
        (2)(A) of section 1367(a) for the taxable year), and
          (B) the shareholder's adjusted basis of any indebtedness of
        the S corporation to the shareholder (determined without regard
        to any adjustment under paragraph (2) of section 1367(b) for
        the taxable year).
      (2) Indefinite carryover of disallowed losses and deductions
        Any loss or deduction which is disallowed for any taxable year
      by reason of paragraph (1) shall be treated as incurred by the
      corporation in the succeeding taxable year with respect to that
      shareholder.
      (3) Carryover of disallowed losses and deductions to
        post-termination transition period
        (A) In general
          If for the last taxable year of a corporation for which it
        was an S corporation a loss or deduction was disallowed by
        reason of paragraph (1), such loss or deduction shall be
        treated as incurred by the shareholder on the last day of any
        post-termination transition period.
        (B) Cannot exceed shareholder's basis in stock
          The aggregate amount of losses and deductions taken into
        account by a shareholder under subparagraph (A) shall not
        exceed the adjusted basis of the shareholder's stock in the
        corporation (determined at the close of the last day of the
        post-termination transition period and without regard to this
        paragraph).
        (C) Adjustment in basis of stock
          The shareholder's basis in the stock of the corporation shall
        be reduced by the amount allowed as a deduction by reason of
        this paragraph.
        (D) At-risk limitations
          To the extent that any increase in adjusted basis described
        in subparagraph (B) would have increased the shareholder's
        amount at risk under section 465 if such increase had occurred
        on the day preceding the commencement of the post-termination
        transition period, rules similar to the rules described in
        subparagraphs (A) through (C) shall apply to any losses
        disallowed by reason of section 465(a).
    (e) Treatment of family group
      If an individual who is a member of the family (within the
    meaning of section 704(e)(3)) of one or more shareholders of an S
    corporation renders services for the corporation or furnishes
    capital to the corporation without receiving reasonable
    compensation therefor, the Secretary shall make such adjustments in
    the items taken into account by such individual and such
    shareholders as may be necessary in order to reflect the value of
    such services or capital.
    (f) Special rules
      (1) Subsection (a) not to apply to credit allowable under section
        34
        Subsection (a) shall not apply with respect to any credit
      allowable under section 34 (relating to certain uses of gasoline
      and special fuels).
      (2) Treatment of tax imposed on built-in gains
        If any tax is imposed under section 1374 for any taxable year
      on an S corporation, for purposes of subsection (a), the amount
      so imposed shall be treated as a loss sustained by the S
      corporation during such taxable year. The character of such loss
      shall be determined by allocating the loss proportionately among
      the recognized built-in gains giving rise to such tax.
      (3) Reduction in pass-thru for tax imposed on excess net passive
        income
        If any tax is imposed under section 1375 for any taxable year
      on an S corporation, for purposes of subsection (a), each item of
      passive investment income shall be reduced by an amount which
      bears the same ratio to the amount of such tax as - 
          (A) the amount of such item, bears to
          (B) the total passive investment income for the taxable year.

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1677;
    amended Pub. L. 98-369, div. A, title IV, Sec. 474(r)(26), title
    VII, Sec. 735(c)(16), July 18, 1984, 98 Stat. 844, 985; Pub. L.
    99-514, title VI, Sec. 632(c)(2), title VII, Sec. 701(e)(4)(K),
    Oct. 22, 1986, 100 Stat. 2277, 2343; Pub. L. 100-647, title I, Sec.
    1006(f)(5)(E), Nov. 10, 1988, 102 Stat. 3406; Pub. L. 101-239,
    title VII, Sec. 7811(c)(7), Dec. 19, 1989, 103 Stat. 2407; Pub. L.
    104-188, title I, Secs. 1302(e), 1307(c)(3)(A), 1309(a)(1), 1312,
    Aug. 20, 1996, 110 Stat. 1779, 1782, 1783, 1784.)


-MISC1-
                                AMENDMENTS                            
      1996 - Subsec. (a)(1). Pub. L. 104-188, Sec. 1302(e), inserted ",
    or of a trust or estate which terminates," after "who dies" in
    introductory provisions.
      Subsec. (d)(1)(A). Pub. L. 104-188, Sec. 1309(a)(1), substituted
    "paragraphs (1) and (2)(A)" for "paragraph (1)".
      Subsec. (d)(3)(D). Pub. L. 104-188, Sec. 1312, added subpar. (D).
      Subsec. (g). Pub. L. 104-188, Sec. 1307(c)(3)(A), struck out
    subsec. (g) which provided a cross reference to subchapter D of
    chapter 63 of this title.
      1989 - Subsec. (f)(2). Pub. L. 101-239 substituted "Treatment of
    tax imposed on built-in gains" for "Reduction in pass-thru for tax
    imposed on built-in gains" in heading and amended text generally.
    Prior to amendment, text read as follows: "If any tax is imposed
    under section 1374 for any taxable year on an S corporation, for
    purposes of subsection (a), the amount of each recognized built-in
    gain (within the meaning of section 1374) for such taxable year
    shall be reduced by its proportionate share of such tax."
      1988 - Subsec. (f)(2). Pub. L. 100-647 substituted "within the
    meaning of section 1374" for "as defined in section 1374(d)(2)".
      1986 - Subsec. (f)(2). Pub. L. 99-514, Sec. 632(c)(2), amended
    par. (2) generally. Prior to amendment, par. (2), reduction in
    pass-thru for tax imposed on capital gain, read as follows: "If any
    tax is imposed under section 1374 for any taxable year on an S
    corporation, for purposes of subsection (a) - 
        "(A) the amount of the corporation's long-term capital gains
      for the taxable year shall be reduced by the amount of such tax,
      and
        "(B) if the amount of such tax exceeds the amount of such
      long-term capital gains, the corporation's gains from sales or
      exchanges of property described in section 1231 shall be reduced
      by the amount of such excess.
    For purposes of the preceding sentence, the term 'long-term capital
    gain' shall not include any gain from the sale or exchange of
    property described in section 1231."
      Pub. L. 99-514, Sec. 701(e)(4)(K), struck out "56 or" before
    "1374".
      1984 - Subsec. (f). Pub. L. 98-369, Sec. 474(r)(26), substituted
    "section 34" for "section 39" in heading and text.
      Subsec. (f)(1). Pub. L. 98-369, Sec. 735(c)(16), substituted "and
    special fuels" for ", special fuels, and lubricating oil".

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Amendment by Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1996, see section 1317(a) of Pub. L.
    104-188, set out as a note under section 641 of this title.

                     EFFECTIVE DATE OF 1989 AMENDMENT                 
      Amendment by Pub. L. 101-239 effective, except as otherwise
    provided, as if included in the provision of the Technical and
    Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such
    amendment relates, see section 7817 of Pub. L. 101-239, set out as
    a note under section 1 of this title.

                     EFFECTIVE DATE OF 1988 AMENDMENT                 
      Amendment by Pub. L. 100-647 effective, except as otherwise
    provided, as if included in the provision of the Tax Reform Act of
    1986, Pub. L. 99-514, to which such amendment relates, see section
    1019(a) of Pub. L. 100-647, set out as a note under section 1 of
    this title.

                     EFFECTIVE DATE OF 1986 AMENDMENT                 
      Amendment by section 632(c)(2) of Pub. L. 99-514 applicable to
    taxable years beginning after Dec. 31, 1986, but only in cases
    where the return for the taxable year is filed pursuant to an S
    election made after Dec. 31, 1986, with exceptions and special and
    transitional rules, see section 633 of Pub. L. 99-514, as amended,
    set out as an Effective Date note under section 336 of this title.
      Amendment by section 701(e)(4)(K) of Pub. L. 99-514 applicable to
    taxable years beginning after Dec. 31, 1986, with certain
    exceptions and qualifications, see section 701(f) of Pub. L.
    99-514, set out as an Effective Date note under section 55 of this
    title.

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by section 474(r)(26) of Pub. L. 98-369 applicable to
    taxable years beginning after Dec. 31, 1983, and to carrybacks from
    such years, see section 475(a) of Pub. L. 98-369, set out as a note
    under section 21 of this title.
      Amendment by section 735(c)(16) of Pub. L. 98-369 effective,
    except as otherwise provided, as if included in the provisions of
    the Highway Revenue Act of 1982, title V of Pub. L. 97-424, to
    which such amendment relates, see section 736 of Pub. L. 98-369,
    set out as a note under section 4051 of this title.

                              EFFECTIVE DATE                          
      Section applicable to taxable years beginning after Dec. 31,
    1982, except that in the case of a taxable year beginning during
    1982, subsec. (f)(3) of this section and sections 1362(d)(3) and
    1375 of this title shall apply, and section 1372(e)(5) of this
    title as in effect on the day before Oct. 19, 1982, shall not
    apply, see section 6(a), (b)(3) of Pub. L. 97-354, set out as a
    note under section 1361 of this title.

     APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99-514 IN RELATION
                  TO TREATY OBLIGATIONS OF UNITED STATES
      For applicability of amendment by section 701(e)(4)(K) of Pub. L.
    99-514 notwithstanding any treaty obligation of the United States
    in effect on Oct. 22, 1986, with provision that for such purposes
    any amendment by title I of Pub. L. 100-647 be treated as if it had
    been included in the provision of Pub. L. 99-514 to which such
    amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100-647,
    set out as a note under section 861 of this title.

-SECREF-
                   SECTION REFERRED TO IN OTHER SECTIONS               
      This section is referred to in sections 59, 108, 453B, 512, 641,
    1362, 1363, 1367, 7519 of this title.

-End-



-CITE-
    26 USC Sec. 1367                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART II - TAX TREATMENT OF SHAREHOLDERS

-HEAD-
    Sec. 1367. Adjustments to basis of stock of shareholders, etc.

-STATUTE-
    (a) General rule
      (1) Increases in basis
        The basis of each shareholder's stock in an S corporation shall
      be increased for any period by the sum of the following items
      determined with respect to that shareholder for such period:
          (A) the items of income described in subparagraph (A) of
        section 1366(a)(1),
          (B) any nonseparately computed income determined under
        subparagraph (B) of section 1366(a)(1), and
          (C) the excess of the deductions for depletion over the basis
        of the property subject to depletion.
      (2) Decreases in basis
        The basis of each shareholder's stock in an S corporation shall
      be decreased for any period (but not below zero) by the sum of
      the following items determined with respect to the shareholder
      for such period:
          (A) distributions by the corporation which were not
        includible in the income of the shareholder by reason of
        section 1368,
          (B) the items of loss and deduction described in subparagraph
        (A) of section 1366(a)(1),
          (C) any nonseparately computed loss determined under
        subparagraph (B) of section 1366(a)(1),
          (D) any expense of the corporation not deductible in
        computing its taxable income and not properly chargeable to
        capital account, and
          (E) the amount of the shareholder's deduction for depletion
        for any oil and gas property held by the S corporation to the
        extent such deduction does not exceed the proportionate share
        of the adjusted basis of such property allocated to such
        shareholder under section 613A(c)(11)(B).
    (b) Special rules
      (1) Income items
        An amount which is required to be included in the gross income
      of a shareholder and shown on his return shall be taken into
      account under subparagraph (A) or (B) of subsection (a)(1) only
      to the extent such amount is included in the shareholder's gross
      income on his return, increased or decreased by any adjustment of
      such amount in a redetermination of the shareholder's tax
      liability.
      (2) Adjustments in basis of indebtedness
        (A) Reduction of basis
          If for any taxable year the amounts specified in
        subparagraphs (B), (C), (D), and (E) of subsection (a)(2)
        exceed the amount which reduces the shareholder's basis to
        zero, such excess shall be applied to reduce (but not below
        zero) the shareholder's basis in any indebtedness of the S
        corporation to the shareholder.
        (B) Restoration of basis
          If for any taxable year beginning after December 31, 1982,
        there is a reduction under subparagraph (A) in the
        shareholder's basis in the indebtedness of an S corporation to
        a shareholder, any net increase (after the application of
        paragraphs (1) and (2) of subsection (a)) for any subsequent
        taxable year shall be applied to restore such reduction in
        basis before any of it may be used to increase the
        shareholder's basis in the stock of the S corporation.
      (3) Coordination with sections 165(g) and 166(d)
        This section and section 1366 shall be applied before the
      application of sections 165(g) and 166(d) to any taxable year of
      the shareholder or the corporation in which the security or debt
      becomes worthless.
      (4) Adjustments in case of inherited stock
        (A) In general
          If any person acquires stock in an S corporation by reason of
        the death of a decedent or by bequest, devise, or inheritance,
        section 691 shall be applied with respect to any item of income
        of the S corporation in the same manner as if the decedent had
        held directly his pro rata share of such item.
        (B) Adjustments to basis
          The basis determined under section 1014 of any stock in an S
        corporation shall be reduced by the portion of the value of the
        stock which is attributable to items constituting income in
        respect of the decedent.

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1679;
    amended Pub. L. 98-369, div. A, title VII, Secs. 721(d), (w),
    722(e)(2), July 18, 1984, 98 Stat. 967, 971, 974; Pub. L. 104-188,
    title I, Secs. 1313(a), 1702(h)(14), Aug. 20, 1996, 110 Stat. 1785,
    1874.)


-MISC1-
                                AMENDMENTS                            
      1996 - Subsec. (a)(2)(E). Pub. L. 104-188, Sec. 1702(h)(14),
    substituted "section 613A(c)(11)(B)" for "section 613A(c)(13)(B)".
      Subsec. (b)(4). Pub. L. 104-188, Sec. 1313(a), added par. (4).
      1984 - Subsec. (a)(2)(E). Pub. L. 98-369, Sec. 722(e)(2),
    substituted "for any oil and gas property held by the S corporation
    to the extent such deduction does not exceed the proportionate
    share of the adjusted basis of such property allocated to such
    shareholder under section 613A(c)(13)(B)" for "under section 611
    with respect to oil and gas wells".
      Subsec. (b)(2)(B). Pub. L. 98-369, Sec. 721(w), substituted "for
    any taxable year beginning after December 31, 1982, there is" for
    "for any taxable year there is".
      Subsec. (b)(3). Pub. L. 98-369, Sec. 721(d), inserted "and
    166(d)" in heading and text.

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Section 1313(b) of Pub. L. 104-188 provided that: "The amendment
    made by subsection (a) [amending this section] shall apply in the
    case of decedents dying after the date of the enactment of this Act
    [Aug. 20, 1996]."
      Amendment by section 1702(h)(14) of Pub. L. 104-188 effective,
    except as otherwise expressly provided, as if included in the
    provision of the Revenue Reconciliation Act of 1990, Pub. L.
    101-508, title XI, to which such amendment relates, see section
    1702(i) of Pub. L. 104-188, set out as a note under section 38 of
    this title.

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by section 721(d), (w) of Pub. L. 98-369 effective as
    if included in the Subchapter S Revision Act of 1982, Pub. L.
    97-354, see section 721(y)(1) of Pub. L. 98-369, set out as a note
    under section 1361 of this title.
      Section 722(b)(3)(B) of Pub. L. 98-369 provided that: "The
    amendment made by paragraph (2) [amending this section] shall apply
    to taxable years beginning after December 31, 1982."

                              EFFECTIVE DATE                          
      Section applicable to taxable years beginning after Dec. 31,
    1982, see section 6(a) of Pub. L. 97-354, set out as a note under
    section 1361 of this title.

-SECREF-
                   SECTION REFERRED TO IN OTHER SECTIONS               
      This section is referred to in sections 108, 1016, 1366, 1368 of
    this title.

-End-



-CITE-
    26 USC Sec. 1368                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART II - TAX TREATMENT OF SHAREHOLDERS

-HEAD-
    Sec. 1368. Distributions

-STATUTE-
    (a) General rule
      A distribution of property made by an S corporation with respect
    to its stock to which (but for this subsection) section 301(c)
    would apply shall be treated in the manner provided in subsection
    (b) or (c), whichever applies.
    (b) S corporation having no earnings and profits
      In the case of a distribution described in subsection (a) by an S
    corporation which has no accumulated earnings and profits - 
      (1) Amount applied against basis
        The distribution shall not be included in gross income to the
      extent that it does not exceed the adjusted basis of the stock.
      (2) Amount in excess of basis
        If the amount of the distribution exceeds the adjusted basis of
      the stock, such excess shall be treated as gain from the sale or
      exchange of property.
    (c) S corporation having earnings and profits
      In the case of a distribution described in subsection (a) by an S
    corporation which has accumulated earnings and profits - 
      (1) Accumulated adjustments account
        That portion of the distribution which does not exceed the
      accumulated adjustments account shall be treated in the manner
      provided by subsection (b).
      (2) Dividend
        That portion of the distribution which remains after the
      application of paragraph (1) shall be treated as a dividend to
      the extent it does not exceed the accumulated earnings and
      profits of the S corporation.
      (3) Treatment of remainder
        Any portion of the distribution remaining after the application
      of paragraph (2) of this subsection shall be treated in the
      manner provided by subsection (b).

    Except to the extent provided in regulations, if the distributions
    during the taxable year exceed the amount in the accumulated
    adjustments account at the close of the taxable year, for purposes
    of this subsection, the balance of such account shall be allocated
    among such distributions in proportion to their respective sizes.
    (d) Certain adjustments taken into account
      Subsections (b) and (c) shall be applied by taking into account
    (to the extent proper) - 
        (1) the adjustments to the basis of the shareholder's stock
      described in section 1367, and
        (2) the adjustments to the accumulated adjustments account
      which are required by subsection (e)(1).

    In the case of any distribution made during any taxable year, the
    adjusted basis of the stock shall be determined with regard to the
    adjustments provided in paragraph (1) of section 1367(a) for the
    taxable year.
    (e) Definitions and special rules
      For purposes of this section - 
      (1) Accumulated adjustments account
        (A) In general
          Except as otherwise provided in this paragraph, the term
        "accumulated adjustments account" means an account of the S
        corporation which is adjusted for the S period in a manner
        similar to the adjustments under section 1367 (except that no
        adjustment shall be made for income (and related expenses)
        which is exempt from tax under this title and the phrase "(but
        not below zero)" shall be disregarded in section 1367(a)(2))
        and no adjustment shall be made for Federal taxes attributable
        to any taxable year in which the corporation was a C
        corporation.
        (B) Amount of adjustment in the case of redemptions
          In the case of any redemption which is treated as an exchange
        under section 302(a) or 303(a), the adjustment in the
        accumulated adjustments account shall be an amount which bears
        the same ratio to the balance in such account as the number of
        shares redeemed in such redemption bears to the number of
        shares of stock in the corporation immediately before such
        redemption.
        (C) Net loss for year disregarded
          (i) In general
            In applying this section to distributions made during any
          taxable year, the amount in the accumulated adjustments
          account as of the close of such taxable year shall be
          determined without regard to any net negative adjustment for
          such taxable year.
          (ii) Net negative adjustment
            For purposes of clause (i), the term "net negative
          adjustment" means, with respect to any taxable year, the
          excess (if any) of - 
              (I) the reductions in the account for the taxable year
            (other than for distributions), over
              (II) the increases in such account for such taxable year.
      (2) S period
        The term "S period" means the most recent continuous period
      during which the corporation has been an S corporation. Such
      period shall not include any taxable year beginning before
      January 1, 1983.
      (3) Election to distribute earnings first
        (A) In general
          An S corporation may, with the consent of all of its affected
        shareholders, elect to have paragraph (1) of subsection (c) not
        apply to all distributions made during the taxable year for
        which the election is made.
        (B) Affected shareholder
          For purposes of subparagraph (A), the term "affected
        shareholder" means any shareholder to whom a distribution is
        made by the S corporation during the taxable year.

-SOURCE-
    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1680;
    amended Pub. L. 97-448, title III, Sec. 305(d)(2), Jan. 12, 1983,
    96 Stat. 2399; Pub. L. 98-369, div. A, title VII, Sec. 721(r), July
    18, 1984, 98 Stat. 970; Pub. L. 99-514, title XVIII, Sec.
    1879(m)(1)(B), Oct. 22, 1986, 100 Stat. 2910; Pub. L. 104-188,
    title I, Sec. 1309(a)(2)-(c), Aug. 20, 1996, 110 Stat. 1783.)


-MISC1-
                                AMENDMENTS                            
      1996 - Subsec. (d). Pub. L. 104-188, Sec. 1309(a)(2), inserted at
    end "In the case of any distribution made during any taxable year,
    the adjusted basis of the stock shall be determined with regard to
    the adjustments provided in paragraph (1) of section 1367(a) for
    the taxable year."
      Subsec. (e)(1)(A). Pub. L. 104-188, Sec. 1309(c), substituted "as
    otherwise provided in this paragraph" for "as provided in
    subparagraph (B)" and "section 1367(a)(2)" for "section
    1367(b)(2)(A)".
      Subsec. (e)(1)(C). Pub. L. 104-188, Sec. 1309(b), added subpar.
    (C).
      1986 - Subsec. (e)(1)(A). Pub. L. 99-514 inserted "and no
    adjustment shall be made for Federal taxes attributable to any
    taxable year in which the corporation was a C corporation" before
    period at end.
      1984 - Subsec. (c). Pub. L. 98-369, Sec. 721(r)(2), inserted
    "Except to the extent provided in regulations, if the distributions
    during the taxable year exceed the amount in the accumulated
    adjustments account at the close of the taxable year, for purposes
    of this subsection, the balance of such account shall be allocated
    among such distributions in proportion to their respective sizes."
      Subsec. (e)(1)(A). Pub. L. 98-369, Sec. 721(r)(1), substituted
    "(except that no adjustment shall be made for income (and related
    expenses) which is exempt from tax under this title and the phrase
    '(but not below zero)' shall be disregarded in section
    1367(b)(2)(A))" for "(except that no adjustment shall be made for
    income which is exempt from tax under this title and no adjustment
    shall be made for any expense not deductible in computing the
    corporation's taxable income and not properly chargeable to capital
    account)".
      1983 - Subsec. (e)(3). Pub. L. 97-448 added par. (3).

                     EFFECTIVE DATE OF 1996 AMENDMENT                 
      Amendment by Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1996, see section 1317(a) of Pub. L.
    104-188, set out as a note under section 641 of this title.

                     EFFECTIVE DATE OF 1986 AMENDMENT                 
      Amendment by Pub. L. 99-514 applicable to taxable years beginning
    after Dec. 31, 1982, see section 1879(m)(2) of Pub. L. 99-514, set
    out as a note under section 1361 of this title.

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by Pub. L. 98-369 effective as if included in the
    Subchapter S Revision Act of 1982, Pub. L. 97-354, see section
    721(y)(1) of Pub. L. 98-369, set out as a note under section 1361
    of this title.

                     EFFECTIVE DATE OF 1983 AMENDMENT                 
      Section 311(c)(4) of Pub. L. 97-448 provided that: "The
    amendments made by subsection (d) of section 305 [amending this
    section and sections 221, 1374, and 4975 of this title, enacting
    provisions set out as a note under section 1361 of this title, and
    amending provisions set out as a note under section 1361 of this
    title] shall take effect on the date of the enactment of the
    Subchapter S Revision Act of 1982 [Oct. 19, 1982]."

                              EFFECTIVE DATE                          
      Section applicable to taxable years beginning after Dec. 31,
    1982, see section 6(a) of Pub. L. 97-354, set out as a note under
    section 1361 of this title.

            PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989        
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
    title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an
    amendment to any plan, such plan amendment shall not be required to
    be made before the first plan year beginning on or after Jan. 1,
    1989, see section 1140 of Pub. L. 99-514, as amended, set out as a
    note under section 401 of this title.

-SECREF-
                   SECTION REFERRED TO IN OTHER SECTIONS               
      This section is referred to in sections 593, 1367, 1371, 1377 of
    this title.

-End-


-CITE-
    26 USC PART III - SPECIAL RULES                             01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART III - SPECIAL RULES

-HEAD-
                         PART III - SPECIAL RULES                     

-MISC1-
    Sec.                                                     
    1371.       Coordination with subchapter C.                       
    1372.       Partnership rules to apply for fringe benefit
                 purposes.                                            
    1373.       Foreign income.                                       
    1374.       Tax imposed on certain built-in gains.                
    1375.       Tax imposed when passive investment income of
                 corporation having accumulated earnings and profits
                 exceeds 25 percent of gross receipts.                

                                AMENDMENTS                            
      1996 - Pub. L. 104-188, title I, Sec. 1311(b)(2)(D), Aug. 20,
    1996, 110 Stat. 1784, substituted "accumulated" for "subchapter C"
    in item 1375.
      1986 - Pub. L. 99-514, title VI, Sec. 632(d), Oct. 22, 1986, 100
    Stat. 2277, substituted "built-in" for "capital" in item 1374.

-End-



-CITE-
    26 USC Sec. 1371                                            01/19/04

-EXPCITE-
    TITLE 26 - INTERNAL REVENUE CODE
    Subtitle A - Income Taxes
    CHAPTER 1 - NORMAL TAXES AND SURTAXES
    Subchapter S - Tax Treatment of S Corporations and Their
                    Shareholders                
    PART III - SPECIAL RULES

-HEAD-
    Sec. 1371. Coordination with subchapter C

-STATUTE-
    (a) Application of subchapter C rules
      Except as otherwise provided in this title, and except to the
    extent inconsistent with this subchapter, subchapter C shall apply
    to an S corporation and its shareholders.
    (b) No carryover between C year and S year
      (1) From C year to S year
        No carryforward, and no carryback, arising for a taxable year
      for which a corporation is a C corporation may be carried to a
      taxable year for which such corporation is an S corporation.
      (2) No carryover from S year
        No carryforward, and no carryback, shall arise at the corporate
      level for a taxable year for which a corporation is an S
      corporation.
      (3) Treatment of S year as elapsed year
        Nothing in paragraphs (1) and (2) shall prevent treating a
      taxable year for which a corporation is an S corporation as a
      taxable year for purposes of determining the number of taxable
      years to which an item may be carried back or carried forward.
    (c)