-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
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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) Earnings and profits
(1) In general
Except as provided in paragraphs (2) and (3) and subsection
(d)(3), no adjustment shall be made to the earnings and profits
of an S corporation.
(2) Adjustments for redemptions, liquidations, reorganizations,
divisives, etc.
In the case of any transaction involving the application of
subchapter C to any S corporation, proper adjustment to any
accumulated earnings and profits of the corporation shall be
made.
(3) Adjustments in case of distributions treated as dividends
under section 1368(c)(2)
Paragraph (1) shall not apply with respect to that portion of a
distribution which is treated as a dividend under section
1368(c)(2).
(d) Coordination with investment credit recapture
(1) No recapture by reason of election
Any election under section 1362 shall be treated as a mere
change in the form of conducting a trade or business for purposes
of the second sentence of section 50(a)(4).
(2) Corporation continues to be liable
Notwithstanding an election under section 1362, an S
corporation shall continue to be liable for any increase in tax
under section 49(b) or 50(a) attributable to credits allowed for
taxable years for which such corporation was not an S
corporation.
(3) Adjustment to earnings and profits for amount of recapture
Paragraph (1) of subsection (c) shall not apply to any increase
in tax under section 49(b) or 50(a) for which the S corporation
is liable.
(e) Cash distributions during post-termination transition period
(1) In general
Any distribution of money by a corporation with respect to its
stock during a post-termination transition period shall be
applied against and reduce the adjusted basis of the stock, to
the extent that the amount of the distribution does not exceed
the accumulated adjustments account (within the meaning of
section 1368(e)).
(2) Election to distribute earnings first
An S corporation may elect to have paragraph (1) not apply to
all distributions made during a post-termination transition
period described in section 1377(b)(1)(A). Such election shall
not be effective unless all shareholders of the S corporation to
whom distributions are made by the S corporation during such
post-termination transition period consent to such election.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1681;
amended Pub. L. 98-369, div. A, title VII, Sec. 721(e), (o),
(x)(3), July 18, 1984, 98 Stat. 967, 970, 971; Pub. L. 99-514,
title XVIII, Sec. 1899A(33), (34), Oct. 22, 1986, 100 Stat. 2960;
Pub. L. 101-508, title XI, Sec. 11813(b)(23), Nov. 5, 1990, 104
Stat. 1388-555; Pub. L. 104-188, title I, Sec. 1310, Aug. 20, 1996,
110 Stat. 1784.)
-MISC1-
PRIOR PROVISIONS
A prior section 1371, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1650; amended Pub. L. 86-376, Sec. 2(a),
Sept. 23, 1959, 73 Stat. 699; Pub. L. 88-272, title II, Sec.
233(a), Feb. 26, 1964, 78 Stat. 112; Pub. L. 94-455, title IX, Sec.
902(a)(1), (2), (c)(1), (2), Oct. 4, 1976, 90 Stat. 1608, 1609;
Pub. L. 95-600, title III, Secs. 341, 342, title VII, Sec.
701(y)(1), Nov. 6, 1978, 92 Stat. 2843, 2921; Pub. L. 96-589, Sec.
5(d), Dec. 24, 1980, 94 Stat. 3406; Pub. L. 97-34, title II, Secs.
233(a), 234(a), (b), Aug. 13, 1981, 95 Stat. 250, 251; Pub. L.
97-448, title I, Sec. 102(i)(1), Jan. 12, 1983, 96 Stat. 2372,
related to definitions applicable to election of small business
corporations as to taxable status, prior to the general revision of
this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1996 - Subsec. (a). Pub. L. 104-188 reenacted heading without
change and amended text generally. Prior to amendment, text read as
follows:
"(1) In general. - 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.
"(2) S corporation as shareholder treated like individual. - For
purposes of subchapter C, an S corporation in its capacity as a
shareholder of another corporation shall be treated as an
individual."
1990 - Subsec. (d)(1). Pub. L. 101-508, Sec. 11813(b)(23)(A),
substituted "section 50(a)(4)" for "section 47(b)".
Subsec. (d)(2), (3). Pub. L. 101-508, Sec. 11813(b)(23)(B),
substituted "section 49(b) or 50(a)" for "section 47".
1986 - Subsec. (e)(1). Pub. L. 99-514, Sec. 1899A(33), inserted
"(within the meaning of section 1368(e))".
Subsec. (e)(2). Pub. L. 99-514, Sec. 1899A(34), struck out
"(within the meaning of section 1368(e))" after "to such election".
1984 - Subsec. (c)(1). Pub. L. 98-369, Sec. 621(e)(2),
substituted "paragraphs (2) and (3) and subsection (d)(3)" for
"paragraphs (2) and (3)".
Subsec. (d)(3). Pub. L. 98-369, Sec. 721(e)(1), added par. (3).
Subsec. (e). Pub. L. 98-369, Sec. 721(o), amended subsec. (e)
generally, designating existing provisions as par. (1) and adding
par. (2).
Subsec. (e)(2). Pub. L. 98-369, Sec. 721(x)(3), inserted "(within
the meaning of section 1368(e))".
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 1990 AMENDMENT
Amendment by Pub. L. 101-508 applicable to property placed in
service after Dec. 31, 1990, but not applicable to any transition
property (as defined in section 49(e) of this title), any property
with respect to which qualified progress expenditures were
previously taken into account under section 46(d) of this title,
and any property described in section 46(b)(2)(C) of this title, as
such sections were in effect on Nov. 4, 1990, see section 11813(c)
of Pub. L. 101-508, set out as a note under section 29 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.
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit
taken into account prior to Nov. 5, 1990, for purposes of
determining liability for tax for periods ending after Nov. 5,
1990, see section 11821(b) of Pub. L. 101-508, set out as a note
under section 29 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 1374, 6655 of this title.
-End-
-CITE-
26 USC Sec. 1372 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. 1372. Partnership rules to apply for fringe benefit purposes
-STATUTE-
(a) General rule
For purposes of applying the provisions of this subtitle which
relate to employee fringe benefits -
(1) the S corporation shall be treated as a partnership, and
(2) any 2-percent shareholder of the S corporation shall be
treated as a partner of such partnership.
(b) 2-percent shareholder defined
For purposes of this section, the term "2-percent shareholder"
means any person who owns (or is considered as owning within the
meaning of section 318) on any day during the taxable year of the S
corporation more than 2 percent of the outstanding stock of such
corporation or stock possessing more than 2 percent of the total
combined voting power of all stock of such corporation.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1682.)
-MISC1-
PRIOR PROVISIONS
A prior section 1372, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1650; amended Pub. L. 87-29, Sec. 2, May 4,
1961, 75 Stat. 64; Pub. L. 89-389, Secs. 2(b)(2), 3(a), Apr. 14,
1966, 80 Stat. 114; Pub. L. 91-683, Sec. 1(a), Jan. 12, 1971, 84
Stat. 2067; Pub. L. 94-455, title IX, Sec. 902(c)(3), title XIX,
Secs. 1901(a)(149), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1609,
1788, 1834; Pub. L. 95-600, title III, Sec. 343, Nov. 6, 1978, 92
Stat. 2843; Pub. L. 95-628, Sec. 5(a), (b), Nov. 10, 1978, 92 Stat.
3628, related to manner, effect, termination, etc., of an election
not to be subject to taxes imposed under this chapter, prior to the
general revision of this subchapter by section 2 of Pub. L. 97-354.
EFFECTIVE DATE
Section applicable to taxable years beginning after Dec. 31,
1982, except that in the case of a taxable year beginning during
1982, sections 1362(d)(3), 1366(f)(3), and 1375 of this title shall
apply and subsec. (e)(5) of this section 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 existing
fringe benefit plans and the application of this section, see
section 6(d) 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 section 162 of this title.
-End-
-CITE-
26 USC Sec. 1373 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. 1373. Foreign income
-STATUTE-
(a) S corporation treated as partnership, etc.
For purposes of subparts A and F of part III, and part V, of
subchapter N (relating to income from sources without the United
States) -
(1) an S corporation shall be treated as a partnership, and
(2) the shareholders of such corporation shall be treated as
partners of such partnership.
(b) Recapture of overall foreign loss
For purposes of section 904(f) (relating to recapture of overall
foreign loss), the making or termination of an election to be
treated as an S corporation shall be treated as a disposition of
the business.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1682.)
-MISC1-
PRIOR PROVISIONS
A prior section 1373, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1652; amended Pub. L. 89-389, Sec. 2(b)(3),
Apr. 14, 1966, 80 Stat. 114; Pub. L. 91-172, title III, Sec.
301(b)(10), Dec. 30, 1969, 83 Stat. 586, related to taxation of
corporation undistributed taxable income to shareholders, prior to
the general revision of this subchapter by section 2 of Pub. L.
97-354.
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.
-End-
-CITE-
26 USC Sec. 1374 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. 1374. Tax imposed on certain built-in gains
-STATUTE-
(a) General rule
If for any taxable year beginning in the recognition period an S
corporation has a net recognized built-in gain, there is hereby
imposed a tax (computed under subsection (b)) on the income of such
corporation for such taxable year.
(b) Amount of tax
(1) In general
The amount of the tax imposed by subsection (a) shall be
computed by applying the highest rate of tax specified in section
11(b) to the net recognized built-in gain of the S corporation
for the taxable year.
(2) Net operating loss carryforwards from C years allowed
Notwithstanding section 1371(b)(1), any net operating loss
carryforward arising in a taxable year for which the corporation
was a C corporation shall be allowed for purposes of this section
as a deduction against the net recognized built-in gain of the S
corporation for the taxable year. For purposes of determining the
amount of any such loss which may be carried to subsequent
taxable years, the amount of the net recognized built-in gain
shall be treated as taxable income. Rules similar to the rules of
the preceding sentences of this paragraph shall apply in the case
of a capital loss carryforward arising in a taxable year for
which the corporation was a C corporation.
(3) Credits
(A) In general
Except as provided in subparagraph (B), no credit shall be
allowable under part IV of subchapter A of this chapter (other
than under section 34) against the tax imposed by subsection
(a).
(B) Business credit carryforwards from C years allowed
Notwithstanding section 1371(b)(1), any business credit
carryforward under section 39 arising in a taxable year for
which the corporation was a C corporation shall be allowed as a
credit against the tax imposed by subsection (a) in the same
manner as if it were imposed by section 11. A similar rule
shall apply in the case of the minimum tax credit under section
53 to the extent attributable to taxable years for which the
corporation was a C corporation.
(4) Coordination with section 1201(a)
For purposes of section 1201(a) -
(A) the tax imposed by subsection (a) shall be treated as if
it were imposed by section 11, and
(B) the amount of the net recognized built-in gain shall be
treated as the taxable income.
(c) Limitations
(1) Corporations which were always S corporations
Subsection (a) shall not apply to any corporation if an
election under section 1362(a) has been in effect with respect to
such corporation for each of its taxable years. Except as
provided in regulations, an S corporation and any predecessor
corporation shall be treated as 1 corporation for purposes of the
preceding sentence.
(2) Limitation on amount of recognized built-in gains
The amount of the net recognized built-in gain taken into
account under this section for any taxable year shall not exceed
the excess (if any) of -
(A) the net unrealized built-in gain, over
(B) the net recognized built-in gain for prior taxable years
beginning in the recognition period.
(d) Definitions and special rules
For purposes of this section -
(1) Net unrealized built-in gain
The term "net unrealized built-in gain" means the amount (if
any) by which -
(A) the fair market value of the assets of the S corporation
as of the beginning of its 1st taxable year for which an
election under section 1362(a) is in effect, exceeds
(B) the aggregate adjusted bases of such assets at such time.
(2) Net recognized built-in gain
(A) In general
The term "net recognized built-in gain" means, with respect
to any taxable year in the recognition period, the lesser of -
(i) the amount which would be the taxable income of the S
corporation for such taxable year if only recognized built-in
gains and recognized built-in losses were taken into account,
or
(ii) such corporation's taxable income for such taxable
year (determined as provided in section 1375(b)(1)(B)).
(B) Carryover
If, for any taxable year, the amount referred to in clause
(i) of subparagraph (A) exceeds the amount referred to in
clause (ii) of subparagraph (A), such excess shall be treated
as a recognized built-in gain in the succeeding taxable year.
The preceding sentence shall apply only in the case of a
corporation treated as an S corporation by reason of an
election made on or after March 31, 1988.
(3) Recognized built-in gain
The term "recognized built-in gain" means any gain recognized
during the recognition period on the disposition of any asset
except to the extent that the S corporation establishes that -
(A) such asset was not held by the S corporation as of the
beginning of the 1st taxable year for which it was an S
corporation, or
(B) such gain exceeds the excess (if any) of -
(i) the fair market value of such asset as of the beginning
of such 1st taxable year, over
(ii) the adjusted basis of the asset as of such time.
(4) Recognized built-in losses
The term "recognized built-in loss" means any loss recognized
during the recognition period on the disposition of any asset to
the extent that the S corporation establishes that -
(A) such asset was held by the S corporation as of the
beginning of the 1st taxable year referred to in paragraph (3),
and
(B) such loss does not exceed the excess of -
(i) the adjusted basis of such asset as of the beginning of
such 1st taxable year, over
(ii) the fair market value of such asset as of such time.
(5) Treatment of certain built-in items
(A) Income items
Any item of income which is properly taken into account
during the recognition period but which is attributable to
periods before the 1st taxable year for which the corporation
was an S corporation shall be treated as a recognized built-in
gain for the taxable year in which it is properly taken into
account.
(B) Deduction items
Any amount which is allowable as a deduction during the
recognition period (determined without regard to any carryover)
but which is attributable to periods before the 1st taxable
year referred to in subparagraph (A) shall be treated as a
recognized built-in loss for the taxable year for which it is
allowable as a deduction.
(C) Adjustment to net unrealized built-in gain
The amount of the net unrealized built-in gain shall be
properly adjusted for amounts which would be treated as
recognized built-in gains or losses under this paragraph if
such amounts were properly taken into account (or allowable as
a deduction) during the recognition period.
(6) Treatment of certain property
If the adjusted basis of any asset is determined (in whole or
in part) by reference to the adjusted basis of any other asset
held by the S corporation as of the beginning of the 1st taxable
year referred to in paragraph (3) -
(A) such asset shall be treated as held by the S corporation
as of the beginning of such 1st taxable year, and
(B) any determination under paragraph (3)(B) or (4)(B) with
respect to such asset shall be made by reference to the fair
market value and adjusted basis of such other asset as of the
beginning of such 1st taxable year.
(7) Recognition period
The term "recognition period" means the 10-year period
beginning with the 1st day of the 1st taxable year for which the
corporation was an S corporation. For purposes of applying this
section to any amount includible in income by reason of section
593(e), the preceding sentence shall be applied without regard to
the phrase "10-year".
(8) Treatment of transfer of assets from C corporation to S
corporation
(A) In general
Except to the extent provided in regulations, if -
(i) an S corporation acquires any asset, and
(ii) the S corporation's basis in such asset is determined
(in whole or in part) by reference to the basis of such asset
(or any other property) in the hands of a C corporation,
then a tax is hereby imposed on any net recognized built-in
gain attributable to any such assets for any taxable year
beginning in the recognition period. The amount of such tax
shall be determined under the rules of this section as modified
by subparagraph (B).
(B) Modifications
For purposes of this paragraph, the modifications of this
subparagraph are as follows:
(i) In general
The preceding paragraphs of this subsection shall be
applied by taking into account the day on which the assets
were acquired by the S corporation in lieu of the beginning
of the 1st taxable year for which the corporation was an S
corporation.
(ii) Subsection (c)(1) not to apply
Subsection (c)(1) shall not apply.
(9) Reference to 1st taxable year
Any reference in this section to the 1st taxable year for which
the corporation was an S corporation shall be treated as a
reference to the 1st taxable year for which the corporation was
an S corporation pursuant to its most recent election under
section 1362.
(e) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this section including
regulations providing for the appropriate treatment of successor
corporations.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1683;
amended Pub. L. 97-448, title III, Sec. 305(d)(3), Jan. 12, 1983,
96 Stat. 2400; Pub. L. 98-369, div. A, title I, Sec. 102(d)(1),
title IV, Sec. 474(r)(27), title VII, Sec. 721(u), July 18, 1984,
98 Stat. 623, 844, 971; Pub. L. 99-514, title VI, Sec. 632(a), Oct.
22, 1986, 100 Stat. 2275; Pub. L. 100-647, title I, Sec.
1006(f)(1)-(5)(A), Nov. 10, 1988, 102 Stat. 3403, 3404; Pub. L.
101-239, title VII, Sec. 7811(c)(4), (5)(B), (8), Dec. 19, 1989,
103 Stat. 2407, 2408; Pub. L. 105-34, title XVI, Sec.
1601(f)(5)(B), Aug. 5, 1997, 111 Stat. 1091.)
-MISC1-
PRIOR PROVISIONS
A prior section 1374, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1653; amended Pub. L. 86-376, Sec. 2(b),
Sept. 23, 1959, 73 Stat. 699; Pub. L. 94-455, title XIX, Sec.
1901(a)(150), Oct. 4, 1976, 90 Stat. 1788, related to allowance to
shareholders of corporation net operating loss, prior to the
general revision of this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1997 - Subsec. (d)(7). Pub. L. 105-34 inserted at end "For
purposes of applying this section to any amount includible in
income by reason of section 593(e), the preceding sentence shall be
applied without regard to the phrase '10-year'."
1989 - Subsec. (b)(3)(B). Pub. L. 101-239, Sec. 7811(c)(8),
inserted at end "A similar rule shall apply in the case of the
minimum tax credit under section 53 to the extent attributable to
taxable years for which the corporation was a C corporation."
Subsec. (d)(2)(A)(i). Pub. L. 101-239, Sec. 7811(c)(4), struck
out "(except as provided in subsection (b)(2))" after "taxable year
if".
Subsec. (d)(5)(B). Pub. L. 101-239, Sec. 7811(c)(5)(B)(i),
inserted "(determined without regard to any carryover)" after
"during the recognition period".
Subsec. (d)(5)(C). Pub. L. 101-239, Sec. 7811(c)(5)(B)(ii),
substituted "which would be treated as recognized built-in gains or
losses under this paragraph if such amounts were properly taken
into account (or allowable as a deduction) during the recognition
period" for "treated as recognized built-in gains or losses under
this paragraph".
1988 - Subsec. (a). Pub. L. 100-647, Sec. 1006(f)(1), inserted
"net" before "recognized".
Subsec. (b)(1). Pub. L. 100-647, Sec. 1006(f)(2), added par. (1)
and struck out former par. (1) which read as follows: "The tax
imposed by subsection (a) shall be a tax computed by applying the
highest rate of tax specified in section 11(b) to the lesser of -
"(A) the recognized built-in gains of the S corporation for the
taxable year, or
"(B) the amount which would be the taxable income of the
corporation for such taxable year if such corporation were not an
S corporation."
Subsec. (b)(2). Pub. L. 100-647, Sec. 1006(f)(2), added par. (2)
and struck out former par. (2) which read as follows:
"Notwithstanding section 1371(b)(1), any net operating loss
carryforward arising in a taxable year for which the corporation
was a C corporation shall be allowed as a deduction against the
lesser of the amounts referred to in subparagraph (A) or (B) of
paragraph (1). For purposes of determining the amount of any such
loss which may be carried to subsequent taxable years, the lesser
of the amounts referred to in subparagraph (A) or (B) of paragraph
(1) shall be treated as taxable income."
Subsec. (b)(4)(B). Pub. L. 100-647, Sec. 1006(f)(3), amended
subpar. (B) generally. Prior to amendment, subpar. (B) read as
follows: "the lower of the amounts specified in subparagraphs (A)
and (B) of paragraph (1) shall be treated as the taxable income."
Subsec. (c)(2). Pub. L. 100-647, Sec. 1006(f)(4), substituted
"net recognized built-in gain" for "recognized built-in gains" in
introductory provisions and in subpar. (B).
Subsec. (d)(2) to (9). Pub. L. 100-647, Sec. 1006(f)(5)(A), added
pars. (2) to (9) and struck out former pars. (2), (3), and (4),
which related to recognized built-in gain, recognition period, and
taxable income, respectively.
Subsec. (e). Pub. L. 100-647, Sec. 1006(f)(5)(A), added subsec.
(e).
1986 - Pub. L. 99-514 amended section generally, substituting
provisions imposing tax on certain built-in gains for provisions
imposing tax on certain capital gains which had declared in:
subsec. (a), general rule for capital gains tax on S corporations;
subsec. (b), amount of tax; subsec. (c), general rule as to
exceptions from subsec. (a) in par. (1), exception as to new
corporations in par. (2), provisions relating to property with
substituted basis in par. (3), and treatment of certain gains of
options and commodities dealers in par. (4); and subsec. (d),
determination of taxable income of corporation.
1984 - Subsec. (b). Pub. L. 98-369, Sec. 474(r)(27), substituted
"section 34" for "section 39" in provisions following par. (2).
Subsec. (c)(2). Pub. L. 98-369, Sec. 721(u), struck out "(and any
predecessor corporation)" before "has been in existence" in subpar.
(A), and inserted provision that to the extent provided in
regulations, an S corporation and any predecessor corporation shall
be treated as 1 corporation for purposes of this paragraph and
paragraph (1).
Subsec. (c)(4). Pub. L. 98-369, Sec. 102(d)(1), added par. (4).
1983 - Subsec. (d). Pub. L. 97-448 substituted "this section" for
"subsections (a)(2) and (b)(2)".
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 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 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, and with provision that, in the case of any taxable year of
an S corporation which begins after Dec. 31, 1986, and to which the
amendments by section 632 (other than subsec. (b) thereof) of Pub.
L. 99-514 do not apply, subsec. (b)(1) of this section (as in
effect on the date before Oct. 22, 1986) shall apply as if it read
as follows: "an amount equal to 34 percent of the amount by which
the net capital gain of the corporation for the taxable year
exceeds $25,000, or", and with other 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.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by section 102(d)(1) 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 474(r)(27) 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 721(u) 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.
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 97-448 effective on date of enactment of
Subchapter S Revision Act of 1982 [Oct. 19, 1982], see section
311(c)(4) of Pub. L. 97-448, set out as a note under section 1368
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.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 26, 1366, 1375, 6655 of
this title.
-End-
-CITE-
26 USC Sec. 1375 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. 1375. Tax imposed when passive investment income of
corporation having accumulated earnings and profits exceeds 25
percent of gross receipts
-STATUTE-
(a) General rule
If for the taxable year an S corporation has -
(1) accumulated earnings and profits at the close of such
taxable year, and
(2) gross receipts more than 25 percent of which are passive
investment income,
then there is hereby imposed a tax on the income of such
corporation for such taxable year. Such tax shall be computed by
multiplying the excess net passive income by the highest rate of
tax specified in section 11(b).
(b) Definitions
For purposes of this section -
(1) Excess net passive income
(A) In general
Except as provided in subparagraph (B), the term "excess net
passive income" means an amount which bears the same ratio to
the net passive income for the taxable year as -
(i) the amount by which the passive investment income for
the taxable year exceeds 25 percent of the gross receipts for
the taxable year, bears to
(ii) the passive investment income for the taxable year.
(B) Limitation
The amount of the excess net passive income for any taxable
year shall not exceed the amount of the corporation's taxable
income for such taxable year as determined under section 63(a)
-
(i) without regard to the deductions allowed by part VIII
of subchapter B (other than the deduction allowed by section
248, relating to organization expenditures), and
(ii) without regard to the deduction under section 172.
(2) Net passive income
The term "net passive income" means -
(A) passive investment income, reduced by
(B) the deductions allowable under this chapter which are
directly connected with the production of such income (other
than deductions allowable under section 172 and part VIII of
subchapter B).
(3) Passive investment income, etc.
The terms "passive investment income" and "gross receipts" have
the same respective meanings as when used in paragraph (3) of
section 1362(d).
(4) Coordination with section 1374
Notwithstanding paragraph (3), the amount of passive investment
income shall be determined by not taking into account any
recognized built-in gain or loss of the S corporation for any
taxable year in the recognition period. Terms used in the
preceding sentence shall have the same respective meanings as
when used in section 1374.
(c) Credits not allowable
No credit shall be allowed under part IV of subchapter A of this
chapter (other than section 34) against the tax imposed by
subsection (a).
(d) Waiver of tax in certain cases
If the S corporation establishes to the satisfaction of the
Secretary that -
(1) it determined in good faith that it had no subchapter C
earnings and profits at the close of a taxable year, and
(2) during a reasonable period of time after it was determined
that it did have subchapter C earnings and profits at the close
of such taxable year such earnings and profits were distributed,
the Secretary may waive the tax imposed by subsection (a) for such
taxable year.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1684;
amended Pub. L. 98-369, div. A, title IV, Sec. 474(r)(28), title
VII, Sec. 721(v), July 18, 1984, 98 Stat. 844, 971; Pub. L. 99-514,
title VI, Sec. 632(c)(3), Oct. 22, 1986, 100 Stat. 2277; Pub. L.
100-647, title I, Sec. 1006(f)(5)(B)-(D), Nov. 10, 1988, 102 Stat.
3406; Pub. L. 104-188, title I, Sec. 1311(b)(2)(A)-(C), Aug. 20,
1996, 110 Stat. 1784.)
-MISC1-
PRIOR PROVISIONS
A prior section 1375, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1654; amended Pub. L. 88-272, title II,
Secs. 201(d)(13), 233(b), Feb. 26, 1964, 78 Stat. 32, 112; Pub. L.
89-389, Secs. 1(a), (b), 2(b)(4), Apr. 14, 1966, 80 Stat. 111, 114;
Pub. L. 91-172, title III, Sec. 301(b)(11), Dec. 30, 1969, 83 Stat.
586; Pub. L. 94-455, title XIX, Secs. 1901(a)(151), (b)(33)(Q),
1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1788, 1802, 1834; Pub. L.
95-600, title VII, Sec. 703(j)(6), Nov. 6, 1978, 92 Stat. 2941,
related to special rules applicable to distributions of electing
small business corporations, prior to the general revision of this
subchapter by section 2 of Pub. L. 97-354.
A prior section 1376, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1655, related to adjustment to basis of
stock of, and indebtedness owing, shareholders, prior to the
general revision of this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1996 - Pub. L. 104-188, Sec. 1311(b)(2)(C), substituted
"accumulated" for "subchapter C" in section catchline.
Subsec. (a)(1). Pub. L. 104-188, Sec. 1311(b)(2)(A), substituted
"accumulated" for "subchapter C".
Subsec. (b)(3). Pub. L. 104-188, Sec. 1311(b)(2)(B), amended par.
(3) generally. Prior to amendment, par. (3) read as follows:
"(3) Passive investment income; etc. - The terms 'subchapter C
earnings and profits', 'passive investment income', and 'gross
receipts' shall have the same respective meanings as when used in
paragraph (3) of section 1362(d)."
1988 - Subsec. (b)(1)(B). Pub. L. 100-647, Sec. 1006(f)(5)(B),
amended subpar. (B) generally. Prior to amendment, subpar. (B) read
as follows: "The amount of the excess net passive income for any
taxable year shall not exceed the corporation's taxable income for
the taxable year (determined in accordance with section
1374(d)(4))."
Subsec. (b)(4). Pub. L. 100-647, Sec. 1006(f)(5)(C), added par.
(4).
Subsec. (c). Pub. L. 100-647, Sec. 1006(f)(5)(D), amended subsec.
(c) generally, in heading substituting "Credits not allowable" for
"Special rules", and in text substituting "No credit" for "(1)
Disallowance of credit. - No credit", and striking out par. (2)
which related to coordination with section 1374.
1986 - Subsec. (b)(1)(B). Pub. L. 99-514 substituted "section
1374(d)(4)" for "section 1374(d)".
1984 - Subsec. (c)(1). Pub. L. 98-369, Sec. 474(r)(28),
substituted "section 34" for "section 39".
Subsec. (d). Pub. L. 98-369, Sec. 721(v), added subsec. (d).
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 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 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.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by section 474(r)(28) 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 721(v) 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.
EFFECTIVE DATE
This section applicable to taxable years beginning after Dec. 31,
1982, except that in the case of a taxable year beginning during
1982, this section and sections 1362(d)(3) and 1366(f)(3) 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.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 26, 1366, 1374, 6655 of
this title.
-End-
-CITE-
26 USC PART IV - DEFINITIONS; MISCELLANEOUS 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 IV - DEFINITIONS; MISCELLANEOUS
-HEAD-
PART IV - DEFINITIONS; MISCELLANEOUS
-MISC1-
Sec.
1377. Definitions and special rule.
1378. Taxable year of S corporation.
1379. Transitional rules on enactment.
-End-
-CITE-
26 USC Sec. 1377 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 IV - DEFINITIONS; MISCELLANEOUS
-HEAD-
Sec. 1377. Definitions and special rule
-STATUTE-
(a) Pro rata share
For purposes of this subchapter -
(1) In general
Except as provided in paragraph (2), each shareholder's pro
rata share of any item for any taxable year shall be the sum of
the amounts determined with respect to the shareholder -
(A) by assigning an equal portion of such item to each day of
the taxable year, and
(B) then by dividing that portion pro rata among the shares
outstanding on such day.
(2) Election to terminate year
(A) In general
Under regulations prescribed by the Secretary, if any
shareholder terminates the shareholder's interest in the
corporation during the taxable year and all affected
shareholders and the corporation agree to the application of
this paragraph, paragraph (1) shall be applied to the affected
shareholders as if the taxable year consisted of 2 taxable
years the first of which ends on the date of the termination.
(B) Affected shareholders
For purposes of subparagraph (A), the term "affected
shareholders" means the shareholder whose interest is
terminated and all shareholders to whom such shareholder has
transferred shares during the taxable year. If such shareholder
has transferred shares to the corporation, the term "affected
shareholders" shall include all persons who are shareholders
during the taxable year.
(b) Post-termination transition period
(1) In general
For purposes of this subchapter, the term "post-termination
transition period" means -
(A) the period beginning on the day after the last day of the
corporation's last taxable year as an S corporation and ending
on the later of -
(i) the day which is 1 year after such last day, or
(ii) the due date for filing the return for such last year
as an S corporation (including extensions),
(B) the 120-day period beginning on the date of any
determination pursuant to an audit of the taxpayer which
follows the termination of the corporation's election and which
adjusts a subchapter S item of income, loss, or deduction of
the corporation arising during the S period (as defined in
section 1368(e)(2)), and
(C) the 120-day period beginning on the date of a
determination that the corporation's election under section
1362(a) had terminated for a previous taxable year.
(2) Determination defined
For purposes of paragraph (1), the term "determination" means -
(A) a determination as defined in section 1313(a), or
(B) an agreement between the corporation and the Secretary
that the corporation failed to qualify as an S corporation.
(c) Manner of making elections, etc.
Any election under this subchapter, and any revocation under
section 1362(d)(1), shall be made in such manner as the Secretary
shall by regulations prescribe.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1685;
amended Pub. L. 104-188, title I, Secs. 1306-1307(b), Aug. 20,
1996, 110 Stat. 1780.)
-MISC1-
PRIOR PROVISIONS
A prior section 1377, added Pub. L. 85-866, title I, Sec. 64(a),
Sept. 2, 1958, 72 Stat. 1656; amended Pub. L. 94-455, title IX,
Sec. 902(b)(1), title XIX, Sec. 1901(b)(32)(B)(iv), Oct. 4, 1976,
90 Stat. 1608, 1800, related to special rules applicable to
earnings and profits of electing small business corporations, prior
to the general revision of this subchapter by section 2 of Pub. L.
97-354.
AMENDMENTS
1996 - Subsec. (a)(2). Pub. L. 104-188, Sec. 1306, reenacted
heading without change and amended text generally. Prior to
amendment, text read as follows: "Under regulations prescribed by
the Secretary, if any shareholder terminates his interest in the
corporation during the taxable year and all persons who are
shareholders during the taxable year agree to the application of
this paragraph, paragraph (1) shall be applied as if the taxable
year consisted of 2 taxable years the first of which ends on the
date of the termination."
Subsec. (b)(1)(A) to (C). Pub. L. 104-188, Sec. 1307(a), struck
out "and" at end of subpar. (A)(ii), added subpar. (B), and
redesignated former subpar. (B) as (C).
Subsec. (b)(2)(A) to (C). Pub. L. 104-188, Sec. 1307(b), added
subpar. (A), redesignated subpar. (C) as (B), and struck out former
subpars. (A) and (B) which read as follows:
"(A) a court decision which becomes final,
"(B) a closing agreement, or".
EFFECTIVE DATE OF 1996 AMENDMENTS
Pub. L. 105-34, title XVI, Sec. 1601(c)(2), Aug. 5, 1997, 111
Stat. 1087, provided that:
"(A) Notwithstanding section 1317 of the Small Business Job
Protection Act of 1996 [Pub. L. 104-188, enacting provisions set
out as notes under sections 641 and 1362 of this title], the
amendments made by subsections (a) and (b) of section 1307 of such
Act [amending this section] shall apply to determinations made
after December 31, 1996.
"(B) In no event shall the 120-day period referred to in section
1377(b)(1)(B) of the Internal Revenue Code of 1986 (as added by
such section 1307) expire before the end of the 120-day period
beginning on the date of the enactment of this Act [Aug. 5, 1997]."
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
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 section 1371 of this title.
-End-
-CITE-
26 USC Sec. 1378 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 IV - DEFINITIONS; MISCELLANEOUS
-HEAD-
Sec. 1378. Taxable year of S corporation
-STATUTE-
(a) General rule
For purposes of this subtitle, the taxable year of an S
corporation shall be a permitted year.
(b) Permitted year defined
For purposes of this section, the term "permitted year" means a
taxable year which -
(1) is a year ending December 31, or
(2) is any other accounting period for which the corporation
establishes a business purpose to the satisfaction of the
Secretary.
For purposes of paragraph (2), any deferral of income to
shareholders shall not be treated as a business purpose.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1685;
amended Pub. L. 98-369, div. A, title VII, Sec. 721(m), (q), July
18, 1984, 98 Stat. 969, 970; Pub. L. 99-514, title VIII, Sec.
806(b), Oct. 22, 1986, 100 Stat. 2363.)
-MISC1-
PRIOR PROVISIONS
A prior section 1378, added Pub. L. 89-389, Sec. 2(a), Apr. 14,
1966, 80 Stat. 113; amended Pub. L. 91-172, title V, Sec.
511(c)(4), Dec. 30, 1969, 83 Stat. 638; Pub. L. 94-455, title XIX,
Sec. 1901(a)(152), (b)(33)(R), Oct. 4, 1976, 90 Stat. 1789, 1802,
related to tax imposed on certain capital gains, prior to the
general revision of this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1986 - Subsec. (a). Pub. L. 99-514, Sec. 806(b)(1), amended
subsec. (a) generally. Prior to amendment, subsec. (a) read as
follows: "For purposes of this subtitle -
"(1) an S corporation shall not change its taxable year to any
accounting period other than a permitted year, and
"(2) no corporation may make an election under section 1362(a)
for any taxable year unless such taxable year is a permitted
year."
Subsec. (b). Pub. L. 99-514, Sec. 806(b)(2), inserted at end "For
purposes of paragraph (2), any deferral of income to shareholders
shall not be treated as a business purpose."
Subsec. (c). Pub. L. 99-514, Sec. 806(b)(3), struck out subsec.
(c) which required existing S corporations to use permitted year
after 50-percent shift in ownership.
1984 - Subsec. (c)(1). Pub. L. 98-369, Sec. 721(m), substituted
"which includes December 31, 1982 (or which is an S corporation for
a taxable year beginning during 1983 by reason of an election made
on or before October 19, 1982)" for "which includes December 31,
1982".
Subsec. (c)(3)(B)(i). Pub. L. 98-369, Sec. 721(q), substituted
"who (or whose estate) held" for "who held".
EFFECTIVE DATE OF 1986 AMENDMENT
Section 806(e) of Pub. L. 99-514, as amended by Pub. L. 100-647,
title I, Sec. 1008(e)(7), (8), (10), Nov. 10, 1988, 102 Stat. 3441,
provided that:
"(1) In general. - The amendments made by this section [amending
this section and sections 267, 441, and 706 of this title] shall
apply to taxable years beginning after December 31, 1986.
"(2) Change in accounting period. - In the case of any
partnership, S corporation, or personal service corporation
required by the amendments made by this section to change its
accounting period for the taxpayer's first taxable year beginning
after December 31, 1986 -
"(A) such change shall be treated as initiated by the
partnership, S corporation, or personal service corporation,
"(B) such change shall be treated as having been made with the
consent of the Secretary, and
"(C) with respect to any partner or shareholder of an S
corporation which is required to include the items from more than
1 taxable year of the partnership or S corporation in any 1
taxable year, income in excess of expenses of such partnership or
corporation for the short taxable year required by such
amendments shall be taken into account ratably in each of the
first 4 taxable years beginning after December 31, 1986, unless
such partner or shareholder elects to include all such income in
the the [sic] partner's or shareholder's taxable year with or
within which the partnership's or S corporation's short taxable
year ends.
Subparagraph (C) shall apply to a shareholder of an S corporation
only if such corporation was an S corporation for a taxable year
beginning in 1986.
"(3) Basis, etc. rules -
"(A) Basis rule. - The adjusted basis of any partner's interest
in a partnership or shareholder's stock in an S corporation shall
be determined as if all of the income to be taken into account
ratably in the 4 taxable years referred to in paragraph (2)(C)
were included in gross income for the 1st of such taxable years.
"(B) Treatment of dispositions. - If any interest in a
partnership or stock in an S corporation is disposed of before
the last taxable year in the spread period, all amounts which
would be included in the gross income of the partner or
shareholder for subsequent taxable years in the spread period
under paragraph (2)(C) and attributable to the interest or stock
disposed of shall be included in gross income for the taxable
year in which the disposition occurs. For purposes of the
preceding sentence, the term 'spread period' means the period
consisting of the 4 taxable years referred to in paragraph
(2)(C)."
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-369 effective as if included in
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.
CONSTRUCTION OF SECTION 806 OF PUB. L. 99-514
Pub. L. 100-647, title I, Sec. 1008(e)(9), Nov. 10, 1988, 102
Stat. 3441, provided that: "Nothing in section 806 of the Reform
Act [Pub. L. 99-514, amending this section and sections 267, 441,
and 706 of this title and enacting provisions set out above] or in
any legislative history relating thereto shall be construed as
requiring the Secretary of the Treasury or his delegate to permit
an automatic change of a taxable year."
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 444, 706 of this title.
-End-
-CITE-
26 USC Sec. 1379 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 IV - DEFINITIONS; MISCELLANEOUS
-HEAD-
Sec. 1379. Transitional rules on enactment
-STATUTE-
(a) Old elections
Any election made under section 1372(a) (as in effect before the
enactment of the Subchapter S Revision Act of 1982) shall be
treated as an election made under section 1362.
(b) References to prior law included
Any references in this title to a provision of this subchapter
shall, to the extent not inconsistent with the purposes of this
subchapter, include a reference to the corresponding provision as
in effect before the enactment of the Subchapter S Revision Act of
1982.
(c) Distributions of undistributed taxable income
If a corporation was an electing small business corporation for
the last preenactment year, subsections (f) and (d) of section 1375
(as in effect before the enactment of the Subchapter S Revision Act
of 1982) shall continue to apply with respect to distributions of
undistributed taxable income for any taxable year beginning before
January 1, 1983.
(d) Carryforwards
If a corporation was an electing small business corporation for
the last preenactment year and is an S corporation for the 1st
postenactment year, any carryforward to the 1st postenactment year
which arose in a taxable year for which the corporation was an
electing small business corporation shall be treated as arising in
the 1st postenactment year.
(e) Preenactment and postenactment years defined
For purposes of this subsection -
(1) Last preenactment year
The term "last preenactment year" means the last taxable year
of a corporation which begins before January 1, 1983.
(2) 1st postenactment year
The term "1st postenactment year" means the 1st taxable year of
a corporation which begins after December 31, 1982.
-SOURCE-
(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1686;
amended Pub. L. 98-369, div. A, title VII, Sec. 721(n), July 18,
1984, 98 Stat. 969.)
-REFTEXT-
REFERENCES IN TEXT
The enactment of the Subchapter S Revision Act of 1982, referred
to in subsecs. (a) to (c), is the enactment of Pub. L. 97-354,
which was approved Oct. 19, 1982.
-MISC1-
PRIOR PROVISIONS
A prior section 1379, added Pub. L. 91-172, title V, Sec. 531(a),
Dec. 30, 1969, 83 Stat. 654; amended Pub. L. 93-406, title II, Sec.
2001(b), Sept. 2, 1974, 88 Stat. 952; Pub. L. 97-34, title III,
Sec. 312(c)(6), Aug. 13, 1981, 95 Stat. 284; Pub. L. 97-248, title
II, Sec. 238(c), Sept. 3, 1982, 96 Stat. 513, related to certain
qualified pension, etc., plans, prior to the general revision of
this subchapter by section 2 of Pub. L. 97-354.
AMENDMENTS
1984 - Subsec. (b). Pub. L. 98-369 struck out "In applying this
subchapter to any taxable year beginning after December 31, 1982,"
and substituted "Any references in this title to a provision" for
"any reference in this subchapter to another provision".
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-369 effective as if included in
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,
1983, except that this section as in effect before Oct. 19, 1982,
to remain in effect for years beginning before Jan. 1, 1984, see
section 6(a), (b)(1) of Pub. L. 97-354, set out as a note under
section 1361 of this title.
COORDINATION OF REPEALS OF CERTAIN SECTIONS
Subsec. (b) of this section as in effect on day before Sept. 3,
1982, inapplicable to any section 401(j) plan, see section
713(d)(8) of Pub. L. 98-369, set out as a note under section 404 of
this title.
-End-
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