Alabama S Corporations.

Ala. Code tit. 40, ch. 18, art. 6

in effect

Ala. Code § 40-18-160 General Provisions.

40-18-160. General Provisions. (a) An Alabama S corporation shall not be subject to the tax imposed by Section 40-18-31. (b) For purposes of this chapter, an “Alabama S corporation” is a corporation: (1) With respect to which an election under 26 U.S.C. §1362 is in effect; or (2)a. With respect to which there is in effect an election under 26 U.S.C. §1361(b)(3) to treat such corporation as a qualified subchapter S subsidiary; and b. All the stock of which is owned by an S corporation qualifying as an “Alabama S corporation” under subdivision (b)(1). No corporation shall be an Alabama S corporation for any portion of a taxable year of the corporation during which an election under 26 U.S.C. §1362 or §1361(b)(3), whichever is applicable, is not in effect for federal income tax purposes. No corporation shall be an Alabama S corporation if it is a financial institution, as defined in Section 40-16-1. (c) For purposes of this chapter, an “Alabama C corporation” means any corporation other than an Alabama S corporation. (d) With respect to a qualified subchapter S subsidiary for which there is in effect an election under 26 U.S.C. § 1361 (b)(3), all of its assets, liabilities, and items of income, deductions, and credit shall be treated as assets, liabilities, and such items, as the case may be, of the Alabama S corporation owning the stock of the qualified subchapter S subsidiary. (Code 1975, §40-14-90; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §1; Acts 1985, No. 85-515, §3; Acts 1989, No. 89-837, p. 1671, §1; Acts 1997, No. 97-625, p. 1048, §3; Act 99-314, p. 423, §1.)

Ala. Code § 40-18-161 Determination of Taxable Income.

40-18-161. Determination of Taxable Income. (a) The taxable income of an Alabama S corporation shall be determined in the same manner as in the case of an individual except that the items determined in subdivision (1), subsection (a) of Section 40-18-162 shall be separately stated, and the following deductions shall not be allowed: (1) Personal exemptions otherwise allowed by Section 40-18-19. (2) Charitable contributions otherwise allowed by Section 40-18-15, subdivision (a)(10). (3) The net operating loss deduction otherwise allowed by Section 40-18-15, subdivision (a)(16). (4) Medical expenses otherwise allowed by Section 40-18-15, subdivision (a)(13). (5) Alimony otherwise allowed by Section 40-18-15, subdivision (a)(18). (6) The deduction for certain expenses of producing income and determining taxes otherwise allowed by Section 40-18-15, subdivision (a)(14). (7) Contributions to individual retirement accounts otherwise allowed by Section 40-18-15, subdivision (a)(11). (8) Depletion on oil or gas wells otherwise allowed by Section 40-18-15, subdivision (a)(9). (b) Amounts of income, loss, deduction, or credit for purposes of this article shall be determined under the allocation and apportionment rules of Chapter 27. (c) Any election affecting the computation of items derived from an Alabama S corporation shall be made by the corporation. (d)(1) If an Alabama S corporation was an Alabama C corporation for the last taxable year before the first taxable year during which it became an Alabama S corporation, and the corporation inventoried goods under the LIFO method for the last taxable year, the LIFO recapture amount shall be included in the gross income of the corporation for the last taxable year and appropriate adjustments to the basis of the inventory shall be made to take into account the amount included in gross income under this subdivision. (2) Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in four equal installments. The first installment shall be paid not later than the due date, (without extension), for filing the return for the last taxable year before the corporation became an Alabama S corporation and the three succeeding installments shall be paid not later than the due date, (without extension), for filing the returns for the succeeding three years. For purposes of computing interest on underpayments, the last three installments shall not be considered underpayments until after the payment dates specified in the previous sentence. (3) For purposes of this subsection, the term “LIFO recapture amount” means the excess, (if any), of a. the inventory amount of the inventory assets under the first-in, first-out method over 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 before the corporation became an Alabama S corporation. (4) For purposes of this subsection: a. The term “LIFO method” means the method authorized by 26 U.S.C. § 472. b. 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. The inventory amount of assets under the first-in, first-out method shall be determined - as follows: 1. By using the retail method of valuing inventories if the corporation uses that method in connection with the LIFO method, or 2. If subparagraph 1 does not apply, then by using cost or market, whichever is lower. (Code 1975, §40-14-91; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §2; Acts 1989, No. 89-837, p. 1671, §2; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-162 Determination of Tax of Shareholder.

40-18-162. Determination of Tax of Shareholder. (a) In determining the tax of a shareholder for the shareholder’s taxable year in which the taxable year of the Alabama S corporation ends, or for the final taxable year of a shareholder who dies or of a trust or estate that 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: (1) 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, including charitable contributions, and (2) Nonseparately computed income or loss. The term “nonseparately computed income or loss” means gross income minus the deductions allowed to the corporation under this article, determined by excluding all items described in subdivision (1) of this subsection. (b) The character of any item included in a shareholder’s pro rata share under subsection (a) of this section shall be determined as if the 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) In any case where it is necessary to determine the gross income of a shareholder for purposes of this article, such gross income shall include the shareholder’s pro rata share of the gross income of the corporation. (d) The following special rules for losses and deductions shall apply: (1) The aggregate amount of losses and deductions taken into account by a shareholder under subsection (a) of this section for any taxable year shall not exceed the sum of: a. The adjusted basis of the shareholder’s stock in the Alabama S corporation as determined with regard to subsections (a) and (b)(1) of Section 40-18-164 for the taxable year, and b. The shareholder’s adjusted basis of any indebtedness of the Alabama S corporation to the shareholder as determined without regard to any adjustment under subsection (c)(2) of Section 40-18-164 for the taxable year. (2) Any loss or deduction which is disallowed for any taxable year by reason of subdivision (1) of this subsection shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder. (3) The carryover of disallowed losses and deductions to the post-termination transition period shall be determined as follows: a. If for the last taxable year of a corporation for which it was an Alabama S corporation, a loss or deduction was disallowed by reason of subdivision (1) of this subsection, the loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transition period. b. The aggregate amount of losses and deductions taken into account by a shareholder under paragraph a of this subdivision shall not exceed the adjusted basis of the shareholder’s stock in the corporation as determined at the close of the last day of the post-termination transition period and without regard to this paragraph. c. The shareholder’s basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this subdivision. (e) If any Alabama income tax is imposed under Section 40-18-174 for any taxable year on an Alabama S corporation, for purposes of subsection (a), the amount of each recognized built-in gain, within the meaning of Section 40-18-174, for the taxable year shall be reduced by its proportionate share of the tax. (f) If any tax is imposed under Section 40-18-175 for any taxable year on an Alabama 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 the amount of the item bears to the total passive investment income for the taxable year. (Code 1975, §40-14-92; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §3; Acts 1989, No. 89-837, p. 1671, §3; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-163 Adjustments for Services Rendered or Capital Furnished by Spouse, Etc., of Shareholder or Beneficiary.

40-18-163. Adjustments for Services Rendered or Capital Furnished by Spouse, Etc., of Shareholder or Beneficiary. If an individual who is the spouse or lineal descendant or ancestor of one or more shareholders of an Alabama S corporation or who is a spouse, a lineal descendant or ancestor of a beneficiary of a trust which is a shareholder of an Alabama S corporation renders services for the corporation or furnishes capital to the corporation without receiving reasonable compensation therefor, the Department of Revenue 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. (Code 1975, §40-14-93; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §4.)

Ala. Code § 40-18-164 Increase or Decrease in Basis of Shareholder’s Stock; Special Rules.

40-18-164. Increase or Decrease in Basis of Shareholder’s Stock; Special Rules. (a) The basis of each shareholder’s stock in an Alabama S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for the period: (1) The items of income described in subdivision (1) of subsection (a) of Section 40-18-162. (2) Any nonseparately computed income determined under subdivision (2) of subsection (a) of Section 40-18-162. (3) The excess of the deductions for depletion over the basis of the property subject to depletion. (b) The basis of each shareholder’s stock in an Alabama 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 the period: (1) Distributions by the corporation which were not includable in the income of the shareholder by reason of Section 40-18-165. (2) The items of loss and deduction described in subdivision (1) of subsection (a) of Section 40-18-162. (3) Any nonseparately computed loss determined under subdivision (2) of subsection (a) of Section 40-18-162. (4) Any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account. (5) 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 the shareholder. (c) The following special rules shall apply: (1) The increases under subsection (a) and the decreases under subsection (b) shall include the entire amount, without allocation and apportionment under Chapter 27, of the shareholder’s pro rata share of such increases and decreases during the taxable year. (2)a. If for any taxable year the amounts specified in subdivisions (2), (3), (4), and (5) of subsection (b) of this section exceed the amount which reduces the shareholder’s basis to zero, the excess shall be applied to reduce, but not below zero, the shareholder’s basis in any indebtedness of the Alabama S corporation to the shareholder. b. If for any taxable year there is a reduction under paragraph (a) of this subdivision in the shareholder’s basis in the indebtedness of an Alabama S corporation to a shareholder, any net increase, after the application of subsections (a) and (b) of this section, 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 stock of the Alabama S corporation. (3) This section and Sections 40-18-162 and 40-18-163 shall be applied before determining the amount of loss in any taxable year of the shareholder or the corporation in which the security or debt becomes worthless. (4) An item of income which is required to be included in the gross income of a shareholder and shown on his or her return shall be taken into account under subdivisions (a)(1) and (a)(2) of this section only to the extent such amount is included in the shareholder’s gross income on his or her return, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability. If an item of income is subject to allocation and apportionment, the basis increases provided by subdivisions (a)(1), (a)(2), and (c)(1) shall be allowed only in the proportion that the amount of such income reported on the taxpayer’s return bears to the amount of income properly allocated and apportioned to Alabama and required to be included in gross income and reported by the shareholder, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability. (5) Adjustments in case of inherited stock. a. If any person acquires stock in an Alabama S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, then the treatment of any item of income of the S corporation shall be determined in accordance with 26 U.S.C. § 691, which shall be applied as if the decedent had held directly his or her pro rata share of such item. b. The basis determined under Section 40-18-6 of any stock in an S corporation shall be reduced by the portion of the value of the stock that is attributable to items constituting income in respect of the decedent. (Code 1975, §40-14-94; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §5; Acts 1989, No. 89-837, p. 1671, §4; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-165 Distribution of Property Generally.

40-18-165. Distribution of Property Generally. (a) A distribution of property made by an Alabama S corporation with respect to its stock to which, but for this article, Section 40-18-36 would apply shall be treated in the manner provided in subsection (b) or (c) of this section, whichever applies. (b) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has no accumulated earnings and profits: (1) The distribution shall not be included in gross income to the extent that it does not exceed the adjusted basis of the stock. (2) 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) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has accumulated earnings and profits: (1) That portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b) of this section. (2) That portion of the distribution which remains after the application of subdivision (c)(1) of this section shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the Alabama S corporation. (3) Any portion of the distribution remaining after the application of subdivision (2) of this subsection (c) of this section shall be treated in the manner provided by subsection (b) of this section. 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) Subsections (b) and (c) of this section 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 40-18-164, and (2) The adjustments to the accumulated adjustments account which are required by Section 40-18-166. (e) 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 subsection (a) of Section 40-18-164 for the taxable year. (Code 1975, §40-14-95; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §6; Acts 1989, No. 89-837, p. 1671, §5; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-166 “Accumulated Adjustments Account” Defined; Application Generally; “S Period” Defined; Applicability of Subdivision (C)(1) of Section 40-18-165 to Certain Distributions; “Affected Shareholder” Defined.

40-18-166. “Accumulated Adjustments Account” Defined; Application Generally; “S Period” Defined; Applicability of Subdivision (C)(1) of Section 40-18-165 to Certain Distributions; “Affected Shareholder” Defined. (a)(1) Except as provided in subsection (b), for purposes of this article, the term “accumulated adjustments account” means an account of the Alabama S corporation which is adjusted for the S period in a manner similar to the adjustments under Section 40-18-164 hereof including subdivision (4) of subsection (c), except that no adjustment shall be made for income and related expenses which are exempt from tax under this chapter and the phrase “but not below zero” shall be disregarded in Section 40-18-164(c)(2)a. (2) In the case of any redemption which is treated as an exchange under Section 40-18-36, the adjustment in the accumulated adjustments account shall be an amount which bears the same ratio to the balance in the account as the number of shares redeemed in such redemption bears to the number of shares of stock in the corporation immediately before the redemption. (3) In applying this section to distributions during any taxable year, the amount of the accumulated adjustments account as of the close of the taxable year shall be determined without regard to any net negative adjustment for the taxable year. The term “net negative adjustment” means, with respect to any taxable year, the excess, if any, of the reductions in the account for the taxable year, other than for distributions, over the increases in such account for the taxable year. (4) For purposes of this article, the term “S period” means the most recent continuous period during which the corporation has been an Alabama S corporation. The period shall not include any taxable year beginning before January 1, 1985. (b) An Alabama S corporation may, with the consent of all of its affected shareholders, elect to have subdivision (1) of subsection (c) of Section 40-18-165 not apply to all distributions made during the taxable year for which the election is made. For purposes of this subsection, the term “affected shareholder” means any shareholder to whom a distribution is made by the Alabama S corporation during the taxable year. (Code 1975, §40-14-96; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §7; Acts 1989, No. 89-837, p. 1671, §6; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-167 Applicability of Chapter.

40-18-167. Applicability of Chapter. Except to the extent inconsistent with this article, the rules of Article 1 of this chapter shall apply to an Alabama S corporation and its shareholders. (Code 1975, §40-14-97; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §8; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-168 “Carryforward” and “Carryback” Provisions.

40-18-168. “Carryforward” and “Carryback” Provisions. No carryforward and no carryback arising for a taxable year for which a corporation is not an Alabama S corporation may be carried to a taxable year which such corporation is an Alabama S corporation. No carryforward and no carryback shall arise at the corporate level for a taxable year for which a corporation is an Alabama S corporation. Nothing in this section shall prevent treating a taxable year for which a corporation is an Alabama 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. (Code 1975, §40-14-98; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §9.)

Ala. Code § 40-18-169 Adjustments to Earnings and Profits.

40-18-169. Adjustments to Earnings and Profits. (a) Except as provided in subsections (b) and (c) of this section, no adjustment shall be made to the earnings and profits of an Alabama S corporation. (b) In the case of any transaction involving redemption, liquidation, reorganization or division of any Alabama S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made. (c) Subsection (a) of this section shall not apply with respect to that portion of a distribution which is treated as a dividend under subdivision (2) of subsection (c) of Section 40-18-165. (d) 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. An Alabama S corporation may elect to have the first sentence of this subsection not apply to all distributions made during a post-termination transition period described in Section 40-18-172 but only if all the shareholders of the Alabama S corporation to whom distributions are made by the Alabama S corporation during such post-termination transition period consent to such election. (Code 1975, §40-14-99; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §10; Acts 1989, No. 89-837, p. 1671, §7.)

Ala. Code § 40-18-170 Circumstances Under Which Corporation Treated as Partnership; “Two-Percent Shareholder” Defined.

40-18-170. Circumstances Under Which Corporation Treated as Partnership; “Two-Percent Shareholder” Defined. For purposes of applying the provisions of this chapter which relate to employee fringe benefits, the Alabama S corporation shall be treated as a partnership, and any two-percent shareholder of the Alabama S corporation shall be treated as a partner of such partnership. The term “two-percent shareholder” means any person who owns, or is considered as owning in accordance with 26 U.S.C. §318, as in effect from time to time, on any day during the taxable year of the Alabama S corporation more than two percent of the outstanding stock of such corporation or stock possessing more than two percent of the total combined voting power of all stock of such corporation. (Code 1975, §40-14-100; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §11; Acts 1989, No. 89-837, p. 1671, §8.)

Ala. Code § 40-18-171 Determination of Shareholder’s Pro Rata Share; “Affected Shareholders” Defined.

40-18-171. Determination of Shareholder’s Pro Rata Share; “Affected Shareholders” Defined. (a) For purposes of this article, except as provided in subsection (b), 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 by assigning an equal portion of the item to each day of the taxable year, and then by dividing that portion pro rata among the shares outstanding on the day. (b) Under regulations prescribed by the Department of Revenue, if any shareholder terminates his or her interest in the corporation during the taxable year and all affected shareholders and the corporation agree to the application of this subsection, subsection (a) of this section shall be applied to the affected shareholders as if the taxable year consisted of two taxable years the first of which ends on the date of the termination. (c) For purposes of subsection (b), 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. (Code 1975, §40-14-101; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §12; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-172 “Post-Termination Transition Period” and “Determination” Defined.

40-18-172. “Post-Termination Transition Period” and “Determination” Defined. (a) For purposes of this article, the term “post-termination transition period” means: (1) The period beginning on the day after the last day of the corporation’s last taxable year as an Alabama S corporation and ending on the later of: a. The day which is one year after the last day. b. The due date for filing the return for the last year as an Alabama S corporation, including extensions. (2) The 120-day period beginning on the date of a determination pursuant to an audit of the taxpayer which follows the termination of the corporation’s election to be treated as a federal S corporation and which adjusts a subchapter S item of income, loss, or deduction of the corporation arising during the S period. (3) The 120-day period beginning on the date of a determination that the corporation’s election under 26 U.S.C. § 1362 had terminated for a previous taxable year. (b) For purposes of subsection (a), the term “determination” means: (1) A determination as defined in 26 U.S.C. § 1313(a); or (2) An agreement between the corporation and the U.S. Secretary of the Treasury that the corporation failed to qualify as an S corporation. (Code 1975, §40-14-102; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §13; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-173 Interpretation of Article Generally.

40-18-173. Interpretation of Article Generally. Due consideration shall be given in the interpretation of this article to applicable sections of the U.S. Internal Revenue Code in effect from time to time, its rulings and regulations provided such Code, rulings, and regulations are not in direct conflict with any portion of this article. (Code 1975, §40-14-103; Acts 1984, 1st Ex. Sess., No. 84-756, p. 121, §14.)

Ala. Code § 40-18-174 Tax Imposed on Certain Built-In Gains.

40-18-174. Tax Imposed on Certain Built-In Gains. (a) If for any taxable year beginning in the recognition period an Alabama 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)(1) The amount of the tax imposed by subsection (a) shall be computed by multiplying five percent by the net recognized built-in gain of the Alabama S corporation for the taxable year. (2) Notwithstanding Section 40-18-168, any net operating loss carryforward which would be deductible except for Section 40-18-168 and which arose in a taxable year for which the corporation was not an Alabama S corporation, shall be allowed as a deduction against the net recognized built-in gain of the Alabama 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 net recognized built-in gain shall be treated as taxable income. (c) The following limitations shall apply: (1) Subsection (a) shall not apply to any corporation that has had in effect an election to be treated as an S corporation under Subchapter S of the U.S. Internal Revenue Code, Title 26, U.S.C., as in effect from time to time or as recodified, for each of its taxable years. Except as provided in regulations, an Alabama S corporation and any predecessor corporation shall be treated as one corporation for purposes of the preceding sentence. (2) 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 the net unrealized built-in gain over the net recognized built-in gain for prior taxable years beginning in the recognition period. (d) For purposes of this section: (1) The term “net unrealized built-in gain” means the amount (if any) by which the fair market value of the assets of the corporation exceeds the aggregate adjusted basis of such assets as of the beginning of its first taxable year for which it is treated as an Alabama S corporation. (2)a. 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 taxable income of the Alabama S corporation for such taxable year if (except as provided in subsection (b)(2)) 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 subsection (b)(1) of Section 40-18-175). b. If, for any taxable year, the amount referred to in clause (i) of paragraph a. exceeds the amount referred to in clause (ii) of paragraph a., such excess shall be treated as a recognized built-in gain in the succeeding taxable year. (3) 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 Alabama S corporation established that a. Such asset was not held by the Alabama S corporation as of the beginning of the first taxable year for which it was an Alabama S corporation, or b. Such gain exceeds the excess (if any) of the fair market value of such asset as of the beginning of such first taxable year, over the adjusted basis of the asset as of such time. (4) 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 Alabama S corporation establishes that a. Such asset was held by the Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3), and b. Such loss does not exceed the excess of the adjusted basis of such asset as of the beginning of such first taxable year, over the fair market value of such asset as of such time. (5)a. Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the first taxable year for which the corporation was an Alabama S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. b. Any amount which is allowable as a deduction during the recognition period but which is attributable to periods before the first taxable year referred to in paragraph a. shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. c. The amount of the net unrealized built-in gain shall be properly adjusted for amounts treated as recognized built-in gains or losses under this subdivision. (6) 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 Alabama S corporation as of the beginning of the first taxable year referred to in subdivision (3) a. Such asset shall be treated as held by the Alabama S corporation as of the beginning of such first taxable year, and b. Any determination under subdivision (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 first taxable year. (7) The term “recognition period” means the ten-year period beginning with the first day of the first taxable year for which the corporation was an Alabama S corporation. (8)a. Except to the extent provided in regulations, if an Alabama S corporation acquires any asset, and the Alabama 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 an Alabama 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 paragraph b. b. For purposes of this subdivision, the modifications of this paragraph are as follows: (i) The preceding subdivisions of this subsection shall be applied by taking into account the day on which the assets were acquired by the Alabama S corporation in lieu of the beginning of the first taxable year for which the corporation was an Alabama S corporation, and (ii) subdivision (1) of subsection (c) shall not apply. (9) Any reference in this section to the first taxable year for which the corporation was an Alabama S corporation shall be treated as a reference to the first taxable year for which the corporation most recently became an Alabama S corporation. (e) The Department of Revenue 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. (Acts 1989, No. 89-837, p. 1671, §9.)

Ala. Code § 40-18-175 Tax Imposed When Passive Investment Income of Corporation Having Subchapter C Earnings and Profits Exceeds 25 Percent of Gross Receipts.

40-18-175. Tax Imposed When Passive Investment Income of Corporation Having Subchapter C Earnings and Profits Exceeds 25 Percent of Gross Receipts. (a) If for the taxable year an Alabama S corporation has accumulated earnings and profits at the close of the taxable year derived from years during which the corporation was an Alabama C corporation, and gross receipts more than 25 percent of which are passive investment income, then there is imposed a tax on the income of the corporation for the taxable year. The tax shall be computed by multiplying the excess net passive income by five percent. (b) (1) For purposes of this section: a. Except as provided in paragraph b below, 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. The amount of the excess net passive income for any taxable year shall not exceed the corporation’s taxable income for the taxable year as determined under Section 40-18-161 without regard to the deduction under subdivisions (a)(14) and (a)(15) of Section 40-18-35 and under Section 40-18-35.1. (2) The term “net passive income” means passive investment income, reduced by the deductions allowable under this chapter which are directly connected with the production of the income, other than deductions allowable by subdivisions (a)(14) and (a)(15) of Section 40-18-35 and by Section 40-18-35.1. (3) The terms “passive investment income” and “gross receipts” shall have the same respective meanings as when used in 26 U.S.C. § 1362(d)(3). (4) Notwithstanding subdivision (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the Alabama 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 40-18-174. (c) If the Alabama S corporation establishes to the satisfaction of the Department of Revenue that it determined in good faith that it had no earnings and profits at the close of a taxable year derived from years during which it was an Alabama C corporation, and during a reasonable period of time after it was determined that it did have such earnings and profits, the earnings and profits were distributed, the Department of Revenue may waive the tax imposed by subsection (a) for the taxable year. (Acts 1989, No. 89-837, p. 1671, §10; Acts 1997, No. 97-625, p. 1048, §3.)

Ala. Code § 40-18-176 Nonresident Shareholder Composite Returns.

40-18-176. Nonresident Shareholder Composite Returns. (a) The Department of Revenue shall permit an Alabama S corporation to file composite returns and to make composite payments on behalf of some or all of its nonresident shareholders if there are one or more nonresident shareholders during any part of the taxable year. The Department of Revenue may permit composite returns and payments to be made by an Alabama S corporation on behalf of its resident shareholders. (b) For purposes of this section, a “composite return” means an informational return similar in form to U.S. Treasury Department Schedule K-1 containing information concerning one or more Alabama S corporation shareholder’s respective shares of income, deductions and losses passed through to them by virtue of their status as shareholders of an Alabama S corporation, any credit to which the shareholder is entitled to claim by virtue of the Alabama S corporation’s payment of tax on his or her behalf pursuant to subsection (e), and containing other information as the Department of Revenue shall prescribe. For purposes of this section, a “composite payment” means a remittance of tax by the Alabama S corporation on behalf of the shareholder or shareholders to which the accompanying composite return relates, applying the highest marginal Alabama income tax rate applicable to individuals for the period in question. (c) An Alabama S corporation shall file with the Department of Revenue, in the form prescribed by the Department of Revenue, the agreement of each nonresident shareholder of the corporation (1) to file a return and to make timely payment of all taxes imposed by this chapter on the shareholder with respect to the income of the Alabama S corporation, and (2) to be subject to personal jurisdiction in this state for purposes of the collection of unpaid income tax, together with related interest and penalties, from the nonresident shareholder. If the Alabama S corporation fails timely to file the agreements required by the preceding sentence on behalf of each of its nonresident shareholders, then the corporation shall, at the times set forth in subsection (d) for the filing of the agreements, pay to this state on behalf of each nonresident shareholder in respect of whom an agreement has not been timely filed an amount equal to five percent multiplied by the amount of the shareholder’s pro rata share of the income allocated and apportioned to Alabama, as reflected on the corporation’s return for the period in question. The payment made by the Alabama S corporation on behalf of a nonresident shareholder shall be considered a loan from the corporation to the shareholder, payable on demand, bearing interest from the date of the loan to the date of its payment, at the minimum “applicable federal rate” with respect to demand instruments, as provided under 26 U.S.C. § 7872. (d) The agreements required to be filed pursuant to subsection (c) shall be filed at the following times: (1) At the time the annual return is required to be filed for the first taxable year for which the Alabama S corporation becomes subject to this article, and (2) At the time the annual return is required to be filed for any taxable year in which the Alabama S corporation had a nonresident shareholder on whose behalf the agreement has not previously been filed. (e) Any amount paid by the Alabama S corporation to this state pursuant to subsection (a) or (c) shall be considered to be a payment by the shareholder on account of the income tax imposed on the shareholder for the year in question. (Acts 1989, No. 89-837, p. 1671, §11; Acts 1997, No. 97-625, p. 1048, §3.)

Source: Alabama Legislature (alison.legislature.state.al.us)URL: https://alison.legislature.state.al.us/code-of-alabamaFetched: 10/20/2026