§1362 — Election; revocation; termination
40 cases·7 followed·1 questioned·1 criticized·1 overruled·30 cited—18% support
Statute Text — 26 U.S.C. §1362
Except as provided in subsection (g), a small business corporation may elect, in accordance with the provisions of this section, to be an S corporation.
An 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.
An election under subsection (a) may be made by a small business corporation for any taxable year—
at any time during the preceding taxable year, or
at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year.
If—
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
either—
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
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.
If—
a small business corporation makes an election under subsection (a) for any taxable year, and
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.
For 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.
If—
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
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).
An 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).
An election under subsection (a) may be terminated by revocation.
An 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.
Except as provided in subparagraph (D)—
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
a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year.
If 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.
An 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.
Any termination under this paragraph shall be effective on and after the date of cessation.
An election under subsection (a) shall be terminated whenever the corporation—
has accumulated earnings and profits at the close of each of 3 consecutive taxable years, and
has gross receipts for each of such taxable years more than 25 percent of which are passive investment income.
Any 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).
A prior taxable year shall not be taken into account under clause (i) unless the corporation was an S corporation for such taxable year.
For purposes of this paragraph—
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
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.
Except as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities.
The 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).
If 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)).
If 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.
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—
interest income earned by such bank or company, or
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.
In the case of an S termination year, for purposes of this title—
The 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.
The 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.
Except 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—
first by determining for the S termination year—
the amount of each of the items of income, loss, deduction, or credit described in section 1366(a)(1)(A), and
the amount of the nonseparately computed income or loss, and
then by assigning an equal portion of each amount determined under subparagraph (A) to each day of the S termination year.
A corporation may elect to have paragraph (2) not apply.
An 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.
For 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).
The 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.
Subsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1).
For purposes of this title—
The 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.
The 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).
Paragraph (2) shall not apply with respect to any item resulting from the application of section 338.
Paragraph (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.
If—
an election under subsection (a) or section 1361(b)(3)(B)(ii) by any corporation—
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
was terminated under paragraph (2) or (3) of subsection (d) or section 1361(b)(3)(C),
the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent,
no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—
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
to acquire the required shareholder consents, and
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.
If 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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1362-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.1362-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.1362-0(b) Determination of active or passive earnings and profits.
- Treas. Reg. §Treas. Reg. §1.1362-0(c) Allocating distributions to active or passive earnings and profits.
- Treas. Reg. §Treas. Reg. §1.1362-0(d) Examples.
- Treas. Reg. §Treas. Reg. §1.1362-0(e) Effective date.
- Treas. Reg. §Treas. Reg. §1.1362-0(f) Status of corporation.
- Treas. Reg. §Treas. Reg. §1.1362-0(g) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.1362-0(i) In general.
- Treas. Reg. §Treas. Reg. §1.1362-1 Election to be an S corporation
- Treas. Reg. §Treas. Reg. §1.1362-1(a) In general.
- Treas. Reg. §Treas. Reg. §1.1362-1(b) Years for which election is effective.
- Treas. Reg. §Treas. Reg. §1.1362-2 Termination of election
- Treas. Reg. §Treas. Reg. §1.1362-2(a) Termination by revocation—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1362-2(b) Termination by reason of corporation ceasing to be a small business corporation—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1362-2(c) Termination by reason of excess passive investment income—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1362-2(i) §1.1362-2(i)
- Treas. Reg. §Treas. Reg. §1.1362-3 Treatment of S termination year
- Treas. Reg. §Treas. Reg. §1.1362-3(a) In general.
- Treas. Reg. §Treas. Reg. §1.1362-3(b) Allocations other than pro rata—(1) Elections under section 1362(e)(3).
- Treas. Reg. §Treas. Reg. §1.1362-3(c) Special rules—(1) S corporation that is a partner in a partnership.
- Treas. Reg. §Treas. Reg. §1.1362-3(d) §1.1362-3(d)
- Treas. Reg. §Treas. Reg. §1.1362-3(i) On January 1, 1993, the first day of its taxable year, a subchapter C corporation had three eligible shareholders.
- Treas. Reg. §Treas. Reg. §1.1362-4 Inadvertent terminations and inadvertently invalid elections
- Treas. Reg. §Treas. Reg. §1.1362-4(a) In general.
40 Citing Cases
Although we are skeptical of this reading, we need not decide whether it is correct because petitioners have not suggested any other characterizations of the arrangement; and even if Risk Retention was a reserve for self-insurance, it was an incorporated one.
and had it elect to be taxed as a small business corporation (S corporation) pursuant to section 1362.
- 6 - [*6] (Trading S Corp), a Texas for-profit corporation that elected treatment as an S corporation pursuant to section 1362; Standish Investments, Ltd.
Each ofpetitioner's operating companies elected to be treated as a small business corporation pursuant to section 1362.
Because we are not addressing the validity of the Form 2553 as submitted in March 1991 with the effective date missing, we see little point in specifically addressing the cases relied upon by petitioner in support of his claim that the omission of the date was inconsequential. Suffice it to say that we disagree with petitioner's argument
Section 1362 specifies the procedure for electing S corporation status. If an entity qualifies as a “small business corporation” (petitioners do not dispute that YCI so qualified), it may make an election “on or before the 15th day of the 3d month of the taxable year.” Sec. 1362(b)(1)(B). To make an election the entity must file “a completed Form 2
If so, petitioners properly claimed a deduction for the loss attributable to Legal Search on their 1995 Federal income tax return. See sec. 1366. If not, respondent properly disallowed the deduction. Section 1362(a)(1) allows a small business corporation, as defined pursuant to section 1361, to elect S corporation status. An S corporatio
ECC had properly elected to be treated as an S corporation pursuant to section 1362 prior to 1990, and such election was effective for ECC's taxable year ended December 31, 1990.
As of the close of 2016, petitioners owned 100% of the stock of Homes. According to petitioners, Homes was formed to provide advice and guidance to real estate owners and investors, although the specific services that Homes intended to offer and/or provide to customers is unclear. Nothing in the record suggests that petitioners or Homes wer
Section 1362 allows a small business corporation to elect treatment as an S corporation for tax purposes. Both Quintanilla and his accountant credibly testified about their recordkeeping and tax-preparation routine. Quintanilla diligently collected receipts and made notes about his expenses. He then organized them in envelopes by category and hande
Compliance With Section 1362 Section 1362(a) provides that a "small business corporation" may elect to be taxed as a passthrough entity under subchapter S of the Code.
Items to be taken into account in the Post-Clds- ing Short Period Tax Returns shall be determined usina the "closing-the-books" method as described in Section 1362(e) (3) of the Code and the regulations thereunder, and the Buyer and Seller<agree to make an election,« if necessary, under Section 1362 (e) (3) of the Code.
an S corporation under section 1362 .2 'Nancy P .
Anschutz Co. was incorporated in Delaware on July 25, 1991. At the time it filed its petition, Anschutz Co.’s principal place of business was Denver, Colorado. Anschutz Co. elected, effective August 1, 1999, to be treated as an S corporation under section 1362. TAC was incorporated in Kansas on December 17, 1959, and its principal place of business was in Denver, Colorado. At all times during 2000 and 2001 Anschutz Co. owned all of the outstanding stock of TAC. Anschutz Co. elected to treat TAC
Preiser, petitioners' accountant, prepared Form SS-4, Application for Employer Identification Number, and Form 2553, Election by a Small Business Corporation (Under Section 1362 of the Internal Revenue Code), for the corporation.
Portman prepared BAC’s Form 2553, Election by a Small Business Corporation (Under section 1362 of the Internal Revenue Code), and sent the Form 2553 to petitioner with instructions for Mrs.
Portman prepared BAC’s Form 2553, Election by a Small Business Corporation (Under section 1362 of the Internal Revenue Code), and sent the Form 2553 to petitioner with instructions for Mrs.
Section 1374(d)(9), as amended, states: “Any 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.” “Built-in” gain is the increase in - 4 - asset value accrued prior to conversion from C to S corporation status.
Section 1374(d)(9), as amended, provides: “Any 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.” “Built-in” gain is the increase in asset value accrued prior to conversion from C to S corporation status.
No election under section 1362 was filed with respect to McGee Landscaping.
No election under section 1362 was filed with respect to McGee Landscaping.
If so, then petitioner properly claimed a loss attributable to Management on his 1993 Federal income tax return. See sec. 1366. If not, then respondent properly disallowed the loss so claimed. An election to be treated as an S corporation must "be made in such manner as the Secretary shall by regulations prescribe." Sec. 1377(c). Pursuan
Flair was a cash method taxpayer that used the calendar year to compute its taxable income.3 Flair filed an election under section 1362 to be treated as an S corporation on January 6, 1986, and filed a U.S.
The temporary regulations under section 1362 in effect for the years in issue also did not define the term.
Under the new provisions of IRS Section 1362 referenced above, we are requesting that the IRS validate the S Corporation election for Spirit Horse Ranch, Inc.