26 U.S.C. § 1375 — Tax imposed when passive investment in-

Page 2465 TITLE 26—INTERNAL REVENUE CODE § 1375 EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which it relates, see sec- tion 1601(j) of Pub. L. 105–34, set out as a note under section 23 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after Dec. 31, 1986, and with pro- vision that, in the case of any taxable year of an S cor- poration which begins after Dec. 31, 1986, and to which the amendments by section 632 (other than subsec. (b) thereof) of Pub. L. 99–514 do not apply, subsec. (b)(1) of this section (as in effect on the date before Oct. 22, 1986) shall apply as if it read as follows: ‘‘an amount equal to 34 percent of the amount by which the net capital gain of the corporation for the taxable year exceeds $25,000, or’’, and with other exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, as amended, set out as an Effective Date note under sec- tion 336 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by section 102(d)(1) of Pub. L. 98–369 ap- plicable to positions established after July 18, 1984, in taxable years ending after that date, except as other- wise provided, see section 102(f), (g) of Pub. L. 98–369 set out as a note under section 1256 of this title. Amendment by section 474(r)(27) of Pub. L. 98–369 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 721(u) of Pub. L. 98–369 effec- tive as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title. EFFECTIVE DATE OF 1983 AMENDMENT Amendment by Pub. L. 97–448 effective on date of en- actment of Subchapter S Revision Act of 1982 [Oct. 19, 1982], see section 311(c)(4) of Pub. L. 97–448, set out as a note under section 1368 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as a note under section 1361 of this title. SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. § 1375. Tax imposed when passive investment in- come of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts (a) General rule If for the taxable year an S corporation has— (1) accumulated earnings and profits at the close of such taxable year, and (2) gross receipts more than 25 percent of which are passive investment income, then there is hereby imposed a tax on the in- come of such corporation for such taxable year. Such tax shall be computed by multiplying the excess net passive income by the highest rate of tax specified in section 11(b). (b) Definitions For purposes of this section— (1) Excess net passive income (A) In general Except as provided in subparagraph (B), the term ‘‘excess net passive income’’ means an amount which bears the same ratio to the net passive income for the taxable year as— (i) the amount by which the passive in- vestment income for the taxable year ex- ceeds 25 percent of the gross receipts for the taxable year, bears to (ii) the passive investment income for the taxable year. (B) Limitation The amount of the excess net passive in- come for any taxable year shall not exceed the amount of the corporation’s taxable in- come for such taxable year as determined under section 63(a)— (i) without regard to the deductions al- lowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and (ii) without regard to the deduction under section 172. (2) Net passive income The term ‘‘net passive income’’ means— (A) passive investment income, reduced by (B) the deductions allowable under this chapter which are directly connected with the production of such income (other than deductions allowable under section 172 and part VIII of subchapter B). (3) Passive investment income, etc. The terms ‘‘passive investment income’’ and ‘‘gross receipts’’ have the same respective meanings as when used in paragraph (3) of sec- tion 1362(d). (4) Coordination with section 1374 Notwithstanding paragraph (3), the amount of passive investment income shall be deter- mined by not taking into account any recog- nized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374. (c) Credits not allowable No credit shall be allowed under part IV of subchapter A of this chapter (other than section 34) against the tax imposed by subsection (a). Page 2466 TITLE 26—INTERNAL REVENUE CODE § 1377 (d) Waiver of tax in certain cases If the S corporation establishes to the satis- faction 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 accumu- lated 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. (Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1684; amended Pub. L. 98–369, div. A, title IV, § 474(r)(28), title VII, § 721(v), July 18, 1984, 98 Stat. 844, 971; Pub. L. 99–514, title VI, § 632(c)(3), Oct. 22, 1986, 100 Stat. 2277; Pub. L. 100–647, title I, § 1006(f)(5)(B)–(D), Nov. 10, 1988, 102 Stat. 3406; Pub. L. 104–188, title I, § 1311(b)(2)(A)–(C), Aug. 20, 1996, 110 Stat. 1784; Pub. L. 109–135, title IV, § 412(qq), Dec. 21, 2005, 119 Stat. 2640.) Editorial Notes PRIOR PROVISIONS A prior section 1375, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1654; amended Pub. L. 88–272, title II, §§ 201(d)(13), 233(b), Feb. 26, 1964, 78 Stat. 32, 112; Pub. L. 89–389, §§ 1(a), (b), 2(b)(4), Apr. 14, 1966, 80 Stat. 111, 114; Pub. L. 91–172, title III, § 301(b)(11), Dec. 30, 1969, 83 Stat. 586; Pub. L. 94–455, title XIX, §§ 1901(a)(151), (b)(33)(Q), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1788, 1802, 1834; Pub. L. 95–600, title VII, § 703(j)(6), Nov. 6, 1978, 92 Stat. 2941, related to special rules appli- cable to distributions of electing small business cor- porations, prior to the general revision of this sub- chapter by section 2 of Pub. L. 97–354. A prior section 1376, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1655, related to adjustment to basis of stock of, and indebtedness owing, share- holders, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354. AMENDMENTS 2005—Subsec. (d)(1), (2). Pub. L. 109–135 substituted ‘‘accumulated’’ for ‘‘subchapter C’’. 1996—Pub. L. 104–188, § 1311(b)(2)(C), substituted ‘‘ac- cumulated’’ for ‘‘subchapter C’’ in section catchline. Subsec. (a)(1). Pub. L. 104–188, § 1311(b)(2)(A), sub- stituted ‘‘accumulated’’ for ‘‘subchapter C’’. Subsec. (b)(3). Pub. L. 104–188, § 1311(b)(2)(B), amended par. (3) generally. Prior to amendment, par. (3) read as follows: ‘‘(3) PASSIVE INVESTMENT INCOME; ETC.—The terms ‘subchapter C earnings and profits’, ‘passive investment income’, and ‘gross receipts’ shall have the same re- spective meanings as when used in paragraph (3) of sec- tion 1362(d).’’ 1988—Subsec. (b)(1)(B). Pub. L. 100–647, § 1006(f)(5)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘The amount of the excess net passive income for any taxable year shall not ex- ceed the corporation’s taxable income for the taxable year (determined in accordance with section 1374(d)(4)).’’ Subsec. (b)(4). Pub. L. 100–647, § 1006(f)(5)(C), added par. (4). Subsec. (c). Pub. L. 100–647, § 1006(f)(5)(D), amended subsec. (c) generally, in heading substituting ‘‘Credits not allowable’’ for ‘‘Special rules’’, and in text sub- stituting ‘‘No credit’’ for ‘‘(1) DISALLOWANCE OF CRED- IT.—No credit’’, and striking out par. (2) which related to coordination with section 1374. 1986—Subsec. (b)(1)(B). Pub. L. 99–514 substituted ‘‘section 1374(d)(4)’’ for ‘‘section 1374(d)’’. 1984—Subsec. (c)(1). Pub. L. 98–369, § 474(r)(28), sub- stituted ‘‘section 34’’ for ‘‘section 39’’. Subsec. (d). Pub. L. 98–369, § 721(v), added subsec. (d). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1996 AMENDMENT Amendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after Dec. 31, 1986, with excep- tions and special and transitional rules, see section 633 of Pub. L. 99–514, as amended, set out as an Effective Date note under section 336 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by section 474(r)(28) of Pub. L. 98–369 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 721(v) of Pub. L. 98–369 effec- tive as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title. EFFECTIVE DATE This section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, this section and sections 1362(d)(3) and 1366(f)(3) of this title shall apply, and sec- tion 1372(e)(5) of this title as in effect on the day before Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title. PART IV—DEFINITIONS; MISCELLANEOUS Sec. 1377. Definitions and special rule. 1378. Taxable year of S corporation. 1379. Transitional rules on enactment. § 1377. Definitions and special rule (a) Pro rata share For purposes of this subchapter— (1) In general Except as provided in paragraph (2), each shareholder’s pro rata share of any item for any taxable year shall be the sum of the amounts determined with respect to the share- holder— (A) by assigning an equal portion of such item to each day of the taxable year, and (B) then by dividing that portion pro rata among the shares outstanding on such day. (2) Election to terminate year (A) In general Under regulations prescribed by the Sec- retary, if any shareholder terminates the shareholder’s interest in the corporation