USC Subchapter S

USC Subchapter S
in effect

26 U.S.C. § 1371 Coordination with subchapter C

(a) Application of subchapter C rulesExcept 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 yearNo 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 yearNo 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 yearNothing 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 generalExcept 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 electionAny 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)(6). (2) Corporation continues to be liableNotwithstanding 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 recaptureParagraph (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 generalAny 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 firstAn 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. (f) Cash distributions following post-termination transition periodIn the case of a distribution of money by an eligible terminated S corporation (as defined in section 481(d)) after the post-termination transition period, the accumulated adjustments account shall be allocated to such distribution, and the distribution shall be chargeable to accumulated earnings and profits, in the same ratio as the amount of such accumulated adjustments account bears to the amount of such accumulated earnings and profits.

26 U.S.C. § 1372 Partnership rules to apply for fringe benefit purposes

(a) General ruleFor 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 definedFor 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.

26 U.S.C. § 1373 Foreign income

(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 lossFor 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.

26 U.S.C. § 1374 Tax imposed on certain built-in gains

(a) General ruleIf 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 generalThe 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 allowedNotwithstanding 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 generalExcept 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 allowedNotwithstanding 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. (c) Limitations(1) Corporations which were always S corporationsSubsection (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 net recognized built-in gainThe 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 rulesFor purposes of this section—(1) Net unrealized built-in gainThe 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 generalThe 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) CarryoverIf, for any taxable year described in subparagraph (A), 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. (3) Recognized built-in gainThe 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 lossesThe 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 itemsAny 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 itemsAny 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 gainThe 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 propertyIf 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(A) In generalThe term “recognition period” means the 5-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 distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the phrase “5-year”. (B) Installment salesIf an S corporation sells an asset and reports the income from the sale using the installment method under section 453, the treatment of all payments received shall be governed by the provisions of this paragraph applicable to the taxable year in which such sale was made. (8) Treatment of transfer of assets from C corporation to S corporation(A) In generalExcept 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) ModificationsFor purposes of this paragraph, the modifications of this subparagraph are as follows:(i) In generalThe 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 applySubsection (c)(1) shall not apply. (9) Reference to 1st taxable yearAny 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) RegulationsThe 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.

26 U.S.C. § 1375 Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts

(a) General ruleIf 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) DefinitionsFor purposes of this section—(1) Excess net passive income(A) In generalExcept 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) LimitationThe 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 incomeThe 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 1374Notwithstanding 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 allowableNo 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 casesIf the S corporation establishes to the satisfaction of the Secretary that—(1) it determined in good faith that it had no accumulated 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 accumulated 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.

26 U.S.C. § 1366 Pass-thru of items to shareholders

(a) Determination of shareholder’s tax liability(1) In generalIn 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 definedFor 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 thruThe 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 shareholderIn 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 debtThe 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(A) In generalExcept as provided in subparagraph (B), 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. (B) Transfers of stock between spouses or incident to divorceIn the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subparagraph (A) with respect such stock shall be treated as incurred by the corporation in the succeeding taxable year with respect to the transferee. (3) Carryover of disallowed losses and deductions to post-termination transition period(A) In generalIf 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 stockThe 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 stockThe 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 limitationsTo 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). (4) Application of limitation on charitable contributionsIn the case of any charitable contribution of property to which the second sentence of section 1367(a)(2) applies, paragraph (1) shall not apply to the extent of the excess (if any) of—(A) the shareholder’s pro rata share of such contribution, over (B) the shareholder’s pro rata share of the adjusted basis of such property. (e) Treatment of family groupIf an individual who is a member of the family (within the meaning of section 704(e)(2) 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 34Subsection (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 gainsIf 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 incomeIf 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.

26 U.S.C. § 1367 Adjustments to basis of stock of shareholders, etc.

(a) General rule(1) Increases in basisThe 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 basisThe 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). The decrease under subparagraph (B) by reason of a charitable contribution (as defined in section 170(c)) of property shall be the amount equal to the shareholder’s pro rata share of the adjusted basis of such property. (b) Special rules(1) Income itemsAn 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 basisIf 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 basisIf 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 generalIf 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 basisThe 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.

26 U.S.C. § 1368 Distributions

(a) General ruleA 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 profitsIn the case of a distribution described in subsection (a) by an S corporation which has no accumulated earnings and profits—(1) Amount applied against basisThe 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 basisIf 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 profitsIn the case of a distribution described in subsection (a) by an S corporation which has accumulated earnings and profits—(1) Accumulated adjustments accountThat portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b). (2) DividendThat 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 remainderAny 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 accountSubsections (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 rulesFor purposes of this section—(1) Accumulated adjustments account(A) In generalExcept 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 redemptionsIn 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 generalIn 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 adjustmentFor 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 periodThe 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 generalAn 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 shareholderFor 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. (f) Restricted bank director stockIf a director receives a distribution (not in part or full payment in exchange for stock) from an S corporation with respect to any restricted bank director stock (as defined in section 1361(f)), the amount of such distribution—(1) shall be includible in gross income of the director, and (2) shall be deductible by the corporation for the taxable year of such corporation in which or with which ends the taxable year in which such amount is included in the gross income of the director.

26 U.S.C. § 1361 S corporation defined

(a) S corporation defined(1) In generalFor 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 corporationFor 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 generalFor 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 100 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 definedFor 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, or (C) a DISC or former DISC. (3) Treatment of certain wholly owned subsidiaries(A) In generalExcept 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 subsidiaryFor 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(i) In generalFor 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. (ii) Termination by reason of sale of stockIf the failure to meet the requirements of subparagraph (B) is by reason of the sale of stock of a corporation which is a qualified subchapter S subsidiary, the sale of such stock shall be treated as if—(I) the sale were a sale of an undivided interest in the assets of such corporation (based on the percentage of the corporation’s stock sold), and (II) the sale were followed by an acquisition by such corporation of all of its assets (and the assumption by such corporation of all of its liabilities) in a transaction to which section 351 applies. (D) Election after terminationIf 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. (E) Information returnsExcept to the extent provided by the Secretary, this paragraph shall not apply to part III of subchapter A of chapter 61 (relating to information returns). (c) Special rules for applying subsection (b)(1) Members of a family treated as 1 shareholder(A) In generalFor purposes of subsection (b)(1)(A), there shall be treated as one shareholder—(i) a husband and wife (and their estates), and (ii) all members of a family (and their estates). (B) Members of a familyFor purposes of this paragraph—(i) In generalThe term “members of a family” means a common ancestor, any lineal descendant of such common ancestor, and any spouse or former spouse of such common ancestor or any such lineal descendant. (ii) Common ancestorAn individual shall not be considered to be a common ancestor if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders who would (but for this subparagraph) be members of the family. For purposes of the preceding sentence, a spouse (or former spouse) shall be treated as being of the same generation as the individual to whom such spouse is (or was) married. (iii) Applicable dateThe term “applicable date” means the latest of—(I) the date the election under section 1362(a) is made, (II) the earliest date that an individual described in clause (i) holds stock in the S corporation, or (III) October 22, 2004. (C) Effect of adoption, etc.Any legally adopted child of an individual, any child who is lawfully placed with an individual for legal adoption by the individual, and any eligible foster child of an individual (within the meaning of section 152(f)(1)(C)), shall be treated as a child of such individual by blood. (2) Certain trusts permitted as shareholders(A) In generalFor 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. (vi) In the case of a corporation which is a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A, but only to the extent of the stock held by such trust in such bank or company as of the date of the enactment of this clause. This subparagraph shall not apply to any foreign trust. (B) Treatment as shareholdersFor 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. This clause shall not apply for purposes of subsection (b)(1)(C). (vi) In the case of a trust described in clause (vi) of subparagraph (A), the individual for whose benefit the trust was created shall be treated as the shareholder. (3) Estate of individual in bankruptcy may be shareholderFor 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 disregardedFor 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 generalFor purposes of subsection (b)(1)(D), straight debt shall not be treated as a second class of stock. (B) Straight debt definedFor 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) RegulationsThe 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 shareholdersFor 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 generalIn 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), (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, and (C) for purposes of applying sections 465 and 469 to the beneficiary of the trust, the disposition of the S corporation stock by the trust shall be treated as a disposition by such beneficiary. (2) Election(A) In generalA 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 corporationAn 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 beneficiariesIf 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 electionAny 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 irrevocableAn election under this paragraph, once made, may be revoked only with the consent of the Secretary. (D) Grace periodAn election under this paragraph shall be effective up to 15 days and 2 months before the date of the election. (3) Qualified subchapter S trustFor 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 trustFor purposes of this section—(A) In generalExcept 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 eligibleThe 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) PurchaseFor 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 beneficiaryFor 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 (determined without regard to any power of appointment to the extent such power remains unexercised at the end of such period). 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 1-year period ending on the date of such disposition. (3) ElectionAn 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 referenceFor special treatment of electing small business trusts, see section 641(c). (f) Restricted bank director stock(1) In generalRestricted bank director stock shall not be taken into account as outstanding stock of the S corporation in applying this subchapter (other than section 1368(f)). (2) Restricted bank director stockFor purposes of this subsection, the term “restricted bank director stock” means stock in a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), if such stock—(A) is required to be held by an individual under applicable Federal or State law in order to permit such individual to serve as a director, and (B) is subject to an agreement with such bank or company (or a corporation which controls (within the meaning of section 368(c)) such bank or company) pursuant to which the holder is required to sell back such stock (at the same price as the individual acquired such stock) upon ceasing to hold the office of director. (3) Cross referenceFor treatment of certain distributions with respect to restricted bank director stock, see section 1368(f). (g) Special rule for bank required to change from the reserve method of accounting on becoming S corporationIn the case of a bank which changes from the reserve method of accounting for bad debts described in section 585 or 593 for its first taxable year for which an election under section 1362(a) is in effect, the bank may elect to take into account any adjustments under section 481 by reason of such change for the taxable year immediately preceding such first taxable year.

26 U.S.C. § 1362 Election; revocation; termination

(a) Election(1) In generalExcept 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 electionAn 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 generalAn 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 2½ months treated as made for next taxable yearIf—(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 2½ months treated as made for following taxable yearIf—(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 2½ months or lessFor 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 timelyIf—(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 effectiveAn 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 generalAn election under subsection (a) may be terminated by revocation. (B) More than one-half of shares must consent to revocationAn 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 effectiveExcept 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 dateIf 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 generalAn 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 effectiveAny 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 generalAn 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 effectiveAny 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 accountA prior taxable year shall not be taken into account under clause (i) unless the corporation was an S corporation for such taxable year. (B) Gross receipts from the sales of certain assetsFor purposes of this paragraph—(i) 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, and (ii) in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom. (C) Passive investment income defined(i) In generalExcept as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities. (ii) Exception for interest on notes from sales of inventoryThe 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 companiesIf 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 dividendsIf 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. (v) Exception for banks, etc.In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), the term “passive investment income” shall not include—(I) interest income earned by such bank or company, or (II) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank. (e) Treatment of S termination year(1) In generalIn the case of an S termination year, for purposes of this title—(A) S short yearThe 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 yearThe 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 allocationExcept 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 generalA corporation may elect to have paragraph (2) not apply. (B) Shareholders must consent to electionAn 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 yearFor 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 generalThe 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 applySubsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1). (6) Other special rulesFor purposes of this title—(A) Short years treated as 1 year for carryover purposesThe 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 yearThe 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 338Paragraph (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 ownershipParagraph (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 terminationsIf—(1) an election under subsection (a) or section 1361(b)(3)(B)(ii) 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) or section 1361(b)(3)(C), (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 for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or (B) to acquire the required shareholder consents, and (4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) 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 or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary. (g) Election after terminationIf 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.

26 U.S.C. § 1363 Effect of election on corporation

(a) General ruleExcept 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 incomeThe 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 generalExcept as provided in paragraph (2), any election affecting the computation of items derived from an S corporation shall be made by the corporation. (2) ExceptionsIn 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 generalIf—(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 generalAny 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 installmentsThe 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 extensionNotwithstanding 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 amountFor 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 definitionsFor purposes of this subsection—(A) LIFO methodThe term “LIFO method” means the method authorized by section 472. (B) Inventory assetsThe 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 amountThe 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 groupExcept 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). (5) Special ruleSections 1367(a)(2)(D) and 1371(c)(1) shall not apply with respect to any increase in the tax imposed by reason of this subsection.

26 U.S.C. § 1377 Definitions and special rule

(a) Pro rata shareFor purposes of this subchapter—(1) In generalExcept 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 generalUnder 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 shareholdersFor 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 generalFor 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 definedFor 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. (3) Special rules for audit related post-termination transition periods(A) No application to carryoversParagraph (1)(B) shall not apply for purposes of section 1366(d)(3). (B) Limitation on application to distributionsParagraph (1)(B) shall apply to a distribution described in section 1371(e) only to the extent that the amount of such distribution does not exceed the aggregate increase (if any) in the accumulated adjustments account (within the meaning of section 1368(e)) by reason of the adjustments referred to in such paragraph. (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.

26 U.S.C. § 1378 Taxable year of S corporation

(a) General ruleFor purposes of this subtitle, the taxable year of an S corporation shall be a permitted year. (b) Permitted year definedFor 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.

26 U.S.C. § 1379 Transitional rules on enactment

(a) Old electionsAny 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 includedAny 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 incomeIf 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) CarryforwardsIf 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 definedFor purposes of this subsection—(1) Last preenactment yearThe term “last preenactment year” means the last taxable year of a corporation which begins before January 1, 1983. (2) 1st postenactment yearThe term “1st postenactment year” means the 1st taxable year of a corporation which begins after December 31, 1982.