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

Page 2453 TITLE 26—INTERNAL REVENUE CODE § 1366 10, 1988, 102 Stat. 3407, 3608; Pub. L. 109–135, title IV, § 411(a), Dec. 21, 2005, 119 Stat. 2636.) Editorial Notes AMENDMENTS 2005—Subsec. (d)(5). Pub. L. 109–135 added par. (5). 1988—Subsec. (d). Pub. L. 100–647, § 1006(f)(7), struck out subsec. (d) which related to distributions of appre- ciated property. Subsec. (d)(4)(D). Pub. L. 100–647, § 2004(n), added sub- par. (D). Subsec. (e). Pub. L. 100–647, § 1006(f)(7), struck out sub- sec. (e) which provided that subsec. (d) not apply to re- organizations, etc. 1987—Subsec. (d). Pub. L. 100–203 added subsec. (d) re- lating to recapture of LIFO benefits. 1986—Subsec. (a). Pub. L. 99–514, § 701(e)(4)(J), struck out ‘‘and in section 58(d)’’ after ‘‘this subchapter’’. Subsec. (c)(2). Pub. L. 99–514, § 511(d)(2)(C), redesig- nated subpars. (B) and (C) as (A) and (B), respectively, and struck out former subpar. (A) which read as fol- lows: ‘‘section 163(d) (relating to limitation on interest on investment indebtedness),’’. Subsec. (e). Pub. L. 99–514, § 632(b), amended subsec. (e) generally, substituting ‘‘reorganizations, etc.’’ for ‘‘complete liquidations and reorganizations’’, in head- ing and in text struck out reference to property in com- plete liquidation of the corporation. 1984—Subsec. (b)(4). Pub. L. 98–369, § 721(p), added par. (4). Subsec. (c)(2). Pub. L. 98–369, § 721(b)(1), redesignated subpars. (B) to (D) as (A) to (C), respectively, and struck out subpar. (A) which provided ‘‘subsection (b)(5) or (d)(4) of section 108 (relating to income from discharge of indebtedness),’’. Subsec. (d). Pub. L. 98–369, § 721(a)(2), substituted ‘‘Ex- cept as provided in subsection (e), if’’ for ‘‘If’’. Subsec. (e). Pub. L. 98–369, § 721(a)(1), added subsec. (e). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Pub. L. 109–135, title IV, § 411(b), Dec. 21, 2005, 119 Stat. 2636, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall take effect as if in- cluded in section 10227 of the Omnibus Budget Rec- onciliation Act of 1987 [Pub. L. 100–203].’’ EFFECTIVE DATE OF 1988 AMENDMENT Amendment by section 1006(f)(7) of Pub. L. 100–647 ef- fective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under sec- tion 1 of this title. Amendment by section 2004(n) of Pub. L. 100–647 effec- tive, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under sec- tion 56 of this title. EFFECTIVE DATE OF 1987 AMENDMENT Pub. L. 100–203, title X, § 10227(b), Dec. 22, 1987, 101 Stat. 1330–417, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2) the amendment made by subsection (a) [amending this section] shall apply in the case of elections made after December 17, 1987. ‘‘(2) EXCEPTION.—The amendment made by subsection (a) shall not apply in the case of any election made by a corporation after December 17, 1987, and before Janu- ary 1, 1989, if, on or before December 17, 1987— ‘‘(A) there was a resolution adopted by the board of directors of such corporation to make an election under subchapter S of chapter 1 of the Internal Rev- enue Code of 1986, or ‘‘(B) there was a ruling request with respect to the business filed with the Internal Revenue Service ex- pressing an intent to make such an election.’’ EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 511(d)(2)(C) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title. Amendment by section 632(b) of Pub. L. 99–514 appli- cable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liq- uidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with ex- ceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Effective Date note under section 336 of this title. Amendment by section 701(e)(4)(J) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an Effective Date note under section 55 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as a note under section 1361 of this title. APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99–514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES For applicability of amendment by section 701(e)(4)(J) of Pub. L. 99–514 notwithstanding any treaty obligation of the United States in effect on Oct. 22, 1986, with pro- vision that for such purposes any amendment by title I of Pub. L. 100–647 be treated as if it had been included in the provision of Pub. L. 99–514 to which such amend- ment relates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. PART II—TAX TREATMENT OF SHAREHOLDERS Sec. 1366. Pass-thru of items to shareholders. 1367. Adjustments to basis of stock of shareholders, etc. 1368. Distributions. § 1366. Pass-thru of items to shareholders (a) Determination of shareholder’s tax liability (1) In general In determining the tax under this chapter of a shareholder for the shareholder’s taxable year in which the taxable year of the S cor- poration 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 cor- poration’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 sepa- rate treatment of which could affect the li- ability for tax of any shareholder, and (B) nonseparately computed income or loss. Page 2454 TITLE 26—INTERNAL REVENUE CODE § 1366 For purposes of the preceding sentence, the items referred to in subparagraph (A) shall in- clude amounts described in paragraph (4) or (6) of section 702(a). (2) Nonseparately computed income or loss de- fined For purposes of this subchapter, the term ‘‘nonseparately computed income or loss’’ means gross income minus the deductions al- lowed to the corporation under this chapter, determined by excluding all items described in paragraph (1)(A). (b) Character passed thru The character of any item included in a share- holder’s pro rata share under paragraph (1) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the corporation, or incurred in the same manner as incurred by the corporation. (c) Gross income of a shareholder In any case where it is necessary to determine the gross income of a shareholder for purposes of this title, such gross income shall include the shareholder’s pro rata share of the gross income of the corporation. (d) Special rules for losses and deductions (1) Cannot exceed shareholder’s basis in stock and debt The aggregate amount of losses and deduc- tions 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 sec- tion 1367(b) for the taxable year). (2) Indefinite carryover of disallowed losses and deductions (A) In general Except 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 corpora- tion in the succeeding taxable year with re- spect to that shareholder. (B) Transfers of stock between spouses or in- cident to divorce In the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subpara- graph (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 deduc- tions to post-termination transition period (A) In general If for the last taxable year of a corporation for which it was an S corporation a loss or deduction was disallowed by reason of para- graph (1), such loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transi- tion period. (B) Cannot exceed shareholder’s basis in stock The aggregate amount of losses and deduc- tions 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 transi- tion period and without regard to this para- graph). (C) Adjustment in basis of stock The shareholder’s basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this paragraph. (D) At-risk limitations To the extent that any increase in ad- justed basis described in subparagraph (B) would have increased the shareholder’s amount at risk under section 465 if such in- crease 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 rea- son of section 465(a). (4) Application of limitation on charitable con- tributions In the case of any charitable contribution of property to which the second sentence of sec- tion 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 group If 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 share- holders 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 allow- able under section 34 Subsection (a) shall not apply with respect to any credit allowable under section 34 (relat- ing to certain uses of gasoline and special fuels). (2) Treatment of tax imposed on built-in gains If any tax is imposed under section 1374 for any taxable year on an S corporation, for pur- poses 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 Page 2455 TITLE 26—INTERNAL REVENUE CODE § 1366 recognized built-in gains giving rise to such tax. (3) Reduction in pass-thru for tax imposed on excess net passive income If any tax is imposed under section 1375 for any taxable year on an S corporation, for pur- poses 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. (Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1677; amended Pub. L. 98–369, div. A, title IV, § 474(r)(26), title VII, § 735(c)(16), July 18, 1984, 98 Stat. 844, 985; Pub. L. 99–514, title VI, § 632(c)(2), title VII, § 701(e)(4)(K), Oct. 22, 1986, 100 Stat. 2277, 2343; Pub. L. 100–647, title I, § 1006(f)(5)(E), Nov. 10, 1988, 102 Stat. 3406; Pub. L. 101–239, title VII, § 7811(c)(7), Dec. 19, 1989, 103 Stat. 2407; Pub. L. 104–188, title I, §§ 1302(e), 1307(c)(3)(A), 1309(a)(1), 1312, Aug. 20, 1996, 110 Stat. 1779, 1782, 1783, 1784; Pub. L. 108–357, title II, § 235(a), Oct. 22, 2004, 118 Stat. 1435; Pub. L. 110–172, § 3(b), Dec. 29, 2007, 121 Stat. 2474; Pub. L. 115–141, div. U, title IV, § 401(a)(192), Mar. 23, 2018, 132 Stat. 1193.) Editorial Notes AMENDMENTS 2018—Subsec. (e). Pub. L. 115–141 substituted ‘‘section 704(e)(2)’’ for ‘‘section 704(e)(3)’’. 2007—Subsec. (d)(4). Pub. L. 110–172 added par. (4). 2004—Subsec. (d)(2). Pub. L. 108–357 reenacted heading without change and amended text of par. (2) generally. Prior to amendment, text read as follows: ‘‘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 re- spect to that shareholder.’’ 1996—Subsec. (a)(1). Pub. L. 104–188, § 1302(e), inserted ‘‘, or of a trust or estate which terminates,’’ after ‘‘who dies’’ in introductory provisions. Subsec. (d)(1)(A). Pub. L. 104–188, § 1309(a)(1), sub- stituted ‘‘paragraphs (1) and (2)(A)’’ for ‘‘paragraph (1)’’. Subsec. (d)(3)(D). Pub. L. 104–188, § 1312, added subpar. (D). Subsec. (g). Pub. L. 104–188, § 1307(c)(3)(A), struck out subsec. (g) which provided a cross reference to sub- chapter D of chapter 63 of this title. 1989—Subsec. (f)(2). Pub. L. 101–239 substituted ‘‘Treatment of tax imposed on built-in gains’’ for ‘‘Re- duction in pass-thru for tax imposed on built-in gains’’ in heading and amended text generally. Prior to amendment, text read as follows: ‘‘If any tax is imposed under section 1374 for any taxable year on an S corpora- tion, for purposes of subsection (a), the amount of each recognized built-in gain (within the meaning of section 1374) for such taxable year shall be reduced by its pro- portionate share of such tax.’’ 1988—Subsec. (f)(2). Pub. L. 100–647 substituted ‘‘with- in the meaning of section 1374’’ for ‘‘as defined in sec- tion 1374(d)(2)’’. 1986—Subsec. (f)(2). Pub. L. 99–514, § 632(c)(2), amended par. (2) generally. Prior to amendment, par. (2), reduc- tion in pass-thru for tax imposed on capital gain, read as follows: ‘‘If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a)— ‘‘(A) the amount of the corporation’s long-term capital gains for the taxable year shall be reduced by the amount of such tax, and ‘‘(B) if the amount of such tax exceeds the amount of such long-term capital gains, the corporation’s gains from sales or exchanges of property described in section 1231 shall be reduced by the amount of such excess. For purposes of the preceding sentence, the term ‘long- term capital gain’ shall not include any gain from the sale or exchange of property described in section 1231.’’ Pub. L. 99–514, § 701(e)(4)(K), struck out ‘‘56 or’’ before ‘‘1374’’. 1984—Subsec. (f). Pub. L. 98–369, § 474(r)(26), sub- stituted ‘‘section 34’’ for ‘‘section 39’’ in heading and text. Subsec. (f)(1). Pub. L. 98–369, § 735(c)(16), substituted ‘‘and special fuels’’ for ‘‘, special fuels, and lubricating oil’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2007 AMENDMENT Amendment by Pub. L. 110–172 effective as if included in the provisions of the Pension Protection Act of 2006, Pub. L. 109–280, to which such amendment relates, see section 3(j) of Pub. L. 110–172, set out as a note under section 170 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title II, § 235(b), Oct. 22, 2004, 118 Stat. 1435, as amended by Pub. L. 109–135, title IV, § 403(c), Dec. 21, 2005, 119 Stat. 2620, provided that: ‘‘The amend- ment made by this section [amending this section] shall apply to transfers after December 31, 2004.’’ EFFECTIVE DATE OF 1996 AMENDMENT Amendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 632(c)(2) of Pub. L. 99–514 ap- plicable to taxable years beginning after Dec. 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, as amended, set out as an Effective Date note under section 336 of this title. Amendment by section 701(e)(4)(K) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an Effective Date note under section 55 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by section 474(r)(26) of Pub. L. 98–369 ap- plicable to taxable years beginning after Dec. 31, 1983, and to carrybacks from such years, see section 475(a) of Pub. L. 98–369, set out as a note under section 21 of this title. Amendment by section 735(c)(16) of Pub. L. 98–369 ef- fective, except as otherwise provided, as if included in the provisions of the Highway Revenue Act of 1982, title V of Pub. L. 97–424, to which such amendment relates, see section 736 of Pub. L. 98–369, set out as a note under section 4051 of this title. Page 2456 TITLE 26—INTERNAL REVENUE CODE § 1367 EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, subsec. (f)(3) of this section and sections 1362(d)(3) and 1375 of this title shall apply, and section 1372(e)(5) of this title as in effect on the day be- fore Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title. APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99–514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES For applicability of amendment by section 701(e)(4)(K) of Pub. L. 99–514 notwithstanding any trea- ty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amend- ment by title I of Pub. L. 100–647 be treated as if it had been included in the provision of Pub. L. 99–514 to which such amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. § 1367. Adjustments to basis of stock of share- holders, etc. (a) General rule (1) Increases in basis The basis of each shareholder’s stock in an S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for such pe- riod: (A) the items of income described in sub- paragraph (A) of section 1366(a)(1), (B) any nonseparately computed income determined under subparagraph (B) of sec- tion 1366(a)(1), and (C) the excess of the deductions for deple- tion over the basis of the property subject to depletion. (2) Decreases in basis The basis of each shareholder’s stock in an S corporation shall be decreased for any period (but not below zero) by the sum of the fol- lowing 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 de- scribed in subparagraph (A) of section 1366(a)(1), (C) any nonseparately computed loss de- termined under subparagraph (B) of section 1366(a)(1), (D) any expense of the corporation not de- ductible in computing its taxable income and not properly chargeable to capital ac- count, and (E) the amount of the shareholder’s deduc- tion for depletion for any oil and gas prop- erty held by the S corporation to the extent such deduction does not exceed the propor- tionate share of the adjusted basis of such property allocated to such shareholder under section 613A(c)(11)(B). The decrease under subparagraph (B) by rea- son 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 items An amount which is required to be included in the gross income of a shareholder and shown on his return shall be taken into ac- count under subparagraph (A) or (B) of sub- section (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 redetermina- tion of the shareholder’s tax liability. (2) Adjustments in basis of indebtedness (A) Reduction of basis If for any taxable year the amounts speci- fied 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 in- debtedness of the S corporation to the share- holder. (B) Restoration of basis If for any taxable year beginning after De- cember 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 ap- plication of paragraphs (1) and (2) of sub- section (a)) for any subsequent taxable year shall be applied to restore such reduction in basis before any of it may be used to in- crease the shareholder’s basis in the stock of the S corporation. (3) Coordination with sections 165(g) and 166(d) This section and section 1366 shall be applied before the application of sections 165(g) and 166(d) to any taxable year of the shareholder or the corporation in which the security or debt becomes worthless. (4) Adjustments in case of inherited stock (A) In general If any person acquires stock in an S cor- poration by reason of the death of a decedent or by bequest, devise, or inheritance, section 691 shall be applied with respect to any item of income of the S corporation in the same manner as if the decedent had held directly his pro rata share of such item. (B) Adjustments to basis The basis determined under section 1014 of any stock in an S corporation shall be re- duced by the portion of the value of the stock which is attributable to items consti- tuting income in respect of the decedent. (Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1679; amended Pub. L. 98–369, div. A, title VII, §§ 721(d), (w), 722(e)(2), July 18, 1984, 98 Stat. 967, 971, 974; Pub. L. 104–188, title I, §§ 1313(a), 1702(h)(14), Aug. 20, 1996, 110 Stat. 1785, 1874; Pub. L. 109–280, title XII, § 1203(a), Aug. 17, 2006, 120 Stat. 1066; Pub. L. 110–343, div. C, title III, § 307(a), Oct. 3, 2008, 122 Stat. 3869; Pub. L. 111–312, title VII, § 752(a), Dec. 17, 2010, 124 Stat. 3321; Pub. L. 112–240, title III, § 325(a), Jan. 2, 2013, 126 Stat. 2333; Pub. L. 113–295, div. A, title