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

Page 2452 TITLE 26—INTERNAL REVENUE CODE § 1363 then such dealer shall be treated as having received ap- proval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) or such other day as may be permitted under regulations and ending on the date de- termined under section 1378 of such Code and such elec- tion shall be effective for such taxable year.’’ § 1363. Effect of election on corporation (a) General rule Except as otherwise provided in this sub- chapter, an S corporation shall not be subject to the taxes imposed by this chapter. (b) Computation of corporation’s taxable income The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that— (1) the items described in section 1366(a)(1)(A) shall be separately stated, (2) the deductions referred to in section 703(a)(2) shall not be allowed to the corpora- tion, (3) section 248 shall apply, and (4) section 291 shall apply if the S corpora- tion (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years. (c) Elections of the S corporation (1) In general Except as provided in paragraph (2), any election affecting the computation of items derived from an S corporation shall be made by the corporation. (2) Exceptions In the case of an S corporation, elections under the following provisions shall be made by each shareholder separately— (A) section 617 (relating to deduction and recapture of certain mining exploration ex- penditures), and (B) section 901 (relating to taxes of foreign countries and possessions of the United States). (d) Recapture of LIFO benefits (1) In general If— (A) an S corporation was a C corporation for the last taxable year before the first tax- able year for which the election under sec- tion 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 adjust- ments to the basis of inventory shall be made to take into account the amount included in gross income under this paragraph). (2) Additional tax payable in installments (A) In general Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in 4 equal installments. (B) Date for payment of installments The first installment under subparagraph (A) shall be paid on or before the due date (determined without regard to extensions) for the return of the tax imposed by this chapter for the last taxable year for which the corporation was a C corporation and the 3 succeeding installments shall be paid on or before the due date (as so determined) for the corporation’s return for the 3 succeeding taxable years. (C) No interest for period of extension Notwithstanding section 6601(b), for pur- poses of section 6601, the date prescribed for the payment of each installment under this paragraph shall be determined under this paragraph. (3) LIFO recapture amount For purposes of this subsection, the term ‘‘LIFO recapture amount’’ means the amount (if any) by which— (A) the inventory amount of the inventory asset under the first-in, first-out method au- thorized by section 471, exceeds (B) the inventory amount of such assets under the LIFO method. For purposes of the preceding sentence, inven- tory amounts shall be determined as of the close of the last taxable year referred to in paragraph (1). (4) Other definitions For purposes of this subsection— (A) LIFO method The term ‘‘LIFO method’’ means the meth- od authorized by section 472. (B) Inventory assets The term ‘‘inventory assets’’ means stock in trade of the corporation, or other prop- erty of a kind which would properly be in- cluded in the inventory of the corporation if on hand at the close of the taxable year. (C) Method of determining inventory amount The inventory amount of assets under a method authorized by section 471 shall be de- termined— (i) if the corporation uses the retail method of valuing inventories under sec- tion 472, by using such method, or (ii) if clause (i) does not apply, by using cost or market, whichever is lower. (D) Not treated as member of affiliated group Except as provided in regulations, the cor- poration 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 rule Sections 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. (Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1676; amended Pub. L. 98–369, div. A, title VII, § 721(a), (b)(1), (p), July 18, 1984, 98 Stat. 966, 970; Pub. L. 99–514, title V, § 511(d)(2)(C), title VI, § 632(b), title VII, § 701(e)(4)(J), Oct. 22, 1986, 100 Stat. 2249, 2277, 2343; Pub. L. 100–203, title X, § 10227(a), Dec. 22, 1987, 101 Stat. 1330–416; Pub. L. 100–647, title I, § 1006(f)(7), title II, § 2004(n), Nov. 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.