§1362 — Election; revocation; termination
41 citing cases
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
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Treas. Reg. §1.1362-0Table of contents
This section lists the captions that appear in the regulations under section 1362.
(a) In general.
(b) Years for which election is effective.
(a) Termination by revocation.
(1) In general.
(2) When effective.
(i) In general.
(ii) Revocations specifying a prospective revocation date.
(3) Effect on taxable year of corporation.
(4) Rescission of a revocation.
(b) Termination by reason of corporation ceasing to be a small business corporation.
(1) In general.
(2) When effective.
(3) Effect on taxable year of corporation.
(c) Termination by reason of excess passive investment income.
(1) In general.
(2) When effective.
(3) Subchapter C earnings and profits.
(4) Gross receipts.
(i) In general.
(ii) Special rules for sales of capital assets, stock and securities.
(A) Sales of capital assets.
(B) Sales of stock or securities.
(1) In general.
(2) Treatment of certain liquidations.
(3) Definition of stock or securities.
(4) General partner interests.
(i) In general.
(ii) Exception.
(iii) Other exclusions from gross receipts.
(5) Passive investment income.
(i) In general.
(ii) Definitions.
(A) Royalties.
(1) In general.
(2) Royalties derived in the ordinary course of a trade or business.
(3) Copyright, mineral, oil and gas, and active business computer software royalties.
(B) Rents.
(1) In general.
(2) Rents derived in the active trade or business of renting property.
(3) Produced film rents.
(4) Income from leasing self-produced tangible property.
(C) Dividends.
(D) Interest.
(1) In general.
(2) Interest on obligations acquired in the ordinary course of a trade or business.
(E) Annuities.
(F) Gross receipts from the sale of stock or securities.
(G) Identified income.
(iii) Special rules.
(A) Options or commodities dealers.
(B) Treatment of certain lending, financing and other businesses.
(1) In general.
(2) Directly derived.
(C) Payment to a patron of a cooperative.
(6) Examples.
(a) In general.
(b) Allocations other than pro rata.
(1) Elections under section 1362(e)(3).
(2) Purchase of stock treated as an asset purchase.
(3) 50 percent change in ownership during S termination year.
(c) Special rules.
(1) S corporation that is a partner in a partnership.
(2) Tax for the C short year.
(3) Each short year treated as taxable year.
(4) Year for carryover purposes.
(5) Due date for S short year return.
(6) Year in which income from S short year is includible.
(d) Examples.
(a) In general.
(b) Inadvertent termination.
(c) Corporation's request for determination of an inadvertent termination.
(d) Adjustments.
(e) Corporation and shareholder consents.
(f) Status of corporation.
(g) Effective/applicability date.
(a) In general.
(b) Successor corporation.
(c) Automatic consent after certain terminations.
(a) Time and manner of making elections.
(1) In general.
(2) Election to be an S corporation.
(i) Manner of making election.
(ii) Time of making election.
(A) In general.
(B) Elections made during the first 2
1/2 months treated as made for the following taxable year.
(C) Definition of month and beginning of the taxable year.
(iii) Examples.
(3) Revocation of S election.
(i) Manner of revoking election.
(ii) Time of revoking election.
(iii) Examples.
(4) Rescission of a revocation.
(i) Manner of rescinding a revocation.
(ii) Time of rescinding a revocation.
(5) Election not to apply pro rata allocation.
(b) Shareholders' consents.
(1) Manner of consents in general.
(2) Persons required to consent.
(i) Community interest in stock.
(ii) Minor.
(iii) Estate.
(iv) Trust.
(3) Special rules for consent of shareholder to election to be an S corporation.
(i) In general.
(ii) Examples.
(iii) Extension of time for filing consents to an election.
(A) In general.
(B) Required consents.
(a) In general.
(b) Special effective date for passive investment income provisions.
(a) In general.
(b) Determination of active or passive earnings and profits.
(1) In general.
(2) Lower tier subsidiaries.
(3) De minimis exception.
(4) Special rules for earnings and profits accumulated by a C corporation prior to 80 percent acquisition.
(5) Gross receipts safe harbor.
(c) Allocating distributions to active or passive earnings and profits.
(1) Distributions from current earnings and profits.
(2) Distributions from accumulated earnings and profits.
(3) Adjustments to active earnings and profits.
(4) Special rules for consolidated groups.
(d) Examples.
(e) Effective date.
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Treas. Reg. §1.1362-0(a)In general.
In general.
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Treas. Reg. §1.1362-0(b)Determination of active or passive earnings and profits.
Determination of active or passive earnings and profits.
(1) In general.
(2) Lower tier subsidiaries.
(3) De minimis exception.
(4) Special rules for earnings and profits accumulated by a C corporation prior to 80 percent acquisition.
(5) Gross receipts safe harbor.
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Treas. Reg. §1.1362-0(c)Allocating distributions to active or passive earnings and profits.
Allocating distributions to active or passive earnings and profits.
(1) Distributions from current earnings and profits.
(2) Distributions from accumulated earnings and profits.
(3) Adjustments to active earnings and profits.
(4) Special rules for consolidated groups.
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Treas. Reg. §1.1362-0(d)Examples.
Examples.
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Treas. Reg. §1.1362-0(e)Effective date.
Effective date.
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Treas. Reg. §1.1362-0(f)Status of corporation.
Status of corporation.
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Treas. Reg. §1.1362-0(g)Effective/applicability date.
Effective/applicability date.
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Treas. Reg. §1.1362-0(i)In general.
In general.
(ii) Examples.
(iii) Extension of time for filing consents to an election.
(A) In general.
(B) Required consents.
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Treas. Reg. §1.1362-1Election to be an S corporation
(a) In general. Except as provided in § 1.1362-5, a small business corporation as defined in section 1361 may elect to be an S corporation under section 1362(a). An election may be made only with the consent of all of the shareholders of the corporation at the time of the election. See § 1.1362-6(a) for rules concerning the time and manner of making this election.
(b) Years for which election is effective. An election under section 1362(a) is effective for the entire taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until the election is terminated.
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Treas. Reg. §1.1362-1(a)In general.
In general. Except as provided in § 1.1362-5, a small business corporation as defined in section 1361 may elect to be an S corporation under section 1362(a). An election may be made only with the consent of all of the shareholders of the corporation at the time of the election. See § 1.1362-6(a) for rules concerning the time and manner of making this election.
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Treas. Reg. §1.1362-1(b)Years for which election is effective.
Years for which election is effective. An election under section 1362(a) is effective for the entire taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until the election is terminated.
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Treas. Reg. §1.1362-2Termination of election
(a) Termination by revocation—(1) In general. An election made under section 1362(a) is terminated if the corporation revokes the election for any taxable year of the corporation for which the election is effective, including the first taxable year. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including non-voting stock) of the corporation. See § 1.1362-6(a) for rules concerning the time and manner of revoking an election made under section 1362(a).
(2) When effective—(i) In general. Except as provided in paragraph (a)(2)(ii) of this section, a revocation made during the taxable year and before the 16th day of the third month of the taxable year is effective on the first day of the taxable year and a revocation made after the 15th day of the third month of the taxable year is effective for the following taxable year. If a corporation makes an election to be an S corporation that is to be effective beginning with the next taxable year and revokes its election on or before the first day of the next taxable year, the corporation is deemed to have revoked its election on the first day of the next taxable year.
(ii) Revocations specifying a prospective revocation date. If a corporation specifies a date for revocation and the date is expressed in terms of a stated day, month, and year that is on or after the date the revocation is filed, the revocation is effective on and after the date so specified.
(iii) Applicability of section 7503. With respect to a revocation made under paragraph (a)(2) of this section, see section 7503 (addressing time for performance of acts where the last day occurs on a Saturday, Sunday, or legal holiday). This paragraph (a)(2)(iii) applies to revocations made under paragraph (a)(2) of this section effective after October 20, 2020. A corporation may apply this paragraph (a)(2)(iii) retroactively to a revocation made by the corporation under paragraph (a)(2) of this section effective on or before October 20, 2020.
(3) Effect on taxable year of corporation. In the case of a corporation that revokes its election to be an S corporation effective on the first day of the first taxable year for which its election is to be effective, any statement made with the election regarding a change in the corporation's taxable year has no effect.
(4) Rescission of a revocation. A corporation may rescind a revocation made under paragraph (a)(2) of this section at any time before the revocation becomes effective. A rescission may be made only with the consent of each person who consented to the revocation and by each person who became a shareholder of the corporation within the period beginning on the first day after the date the revocation was made and ending on the date on which the rescission is made. See § 1.1362-6(a) for rules concerning the time and manner of rescinding a revocation.
(b) Termination by reason of corporation ceasing to be a small business corporation—(1) In general. If a corporation ceases to be a small business corporation, as defined in section 1361(b), at any time on or after the first day of the first taxable year for which its election under section 1362(a) is effective, the election terminates. In the event of a termination under this paragraph (b)(1), the corporation should attach to its return for the taxable year in which the termination occurs a notification that a termination has occurred and the date of the termination.
(2) When effective. If an election terminates because of a specific event that causes the corporation to fail to meet the definition of a small business corporation, the termination is effective as of the date on which the event occurs. If a corporation makes an election to be an S corporation that is effective beginning with the following taxable year and is not a small business corporation on the first day of that following taxable year, the election is treated as having terminated on that first day. If a corporation is a small business corporation on the first day of the taxable year for which its election is effective, its election does not terminate even if the corporation was not a small business corporation during all or part of the period beginning after the date the election was made and ending before the first day of the taxable year for which the election is effective.
(3) Effect on taxable year of corporation. In the case of a corporation that fails to meet the definition of a small business corporation on the first day of the first taxable year for which its election to be an S corporation is to be effective, any statement made with the election regarding a change in the corporation's taxable year has no effect.
(c) Termination by reason of excess passive investment income—(1) In general. A corporation's election under section 1362(a) terminates if the corporation has subchapter C earnings and profits at the close of each of three consecutive taxable years and, for each of those taxable years, has passive investment income in excess of 25 percent of gross receipts. See section 1375 for the tax imposed on excess passive investment income.
(2) When effective. A termination under this paragraph (c) is effective on the first day of the first taxable year beginning after the third consecutive year in which the S corporation had excess passive investment income.
(3) Subchapter C earnings and profits. For purposes of this paragraph (c), subchapter C earnings and profits of a corporation are the earnings and profits of any corporation, including the S corporation or an acquired or predecessor corporation, for any period with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect. The subchapter C earnings and profits of an S corporation are modified as required by section 1371(c).
(4) Gross receipts—(i) In general. For purposes of this paragraph (c), gross receipts generally means the total amount received or accrued under the method of accounting used by the corporation in computing its taxable income and is not reduced by returns and allowances, cost of goods sold, or deductions.
(ii) Special rules for sales of capital assets, stock and securities—(A) Sales of capital assets. For purposes of this paragraph (c), gross receipts from the sales or exchanges of capital assets (as defined in section 1221), other than stock and securities, are taken into account only to the extent of capital gain net income (as defined in section 1222).
(B) Sales of stock or securities—(1) In general. For purposes of this paragraph (c), gross receipts from the sales or exchanges of stock or securities are taken into account only to the extent of gains therefrom. In addition, for purposes of computing gross receipts from sales or exchanges of stock or securities, losses do not offset gains.
(2) Treatment of certain liquidations. Gross receipts from the sales or exchanges of stock or securities do not include amounts described in section 1362(d)(3)(D)(iv), relating to the treatment of certain liquidations. For purposes of section 1362(d)(3)(D)(iv), stock of the liquidating corporation owned by an S corporation shareholder is not treated as owned by the S corporation.
(3) Definition of stock or securities. For purposes of this paragraph (c), stock or securities includes shares or certificates of stock, stock rights or warrants, or an interest in any corporation (including any joint stock company, insurance company, association, or other organization classified as a corporation under section 7701); an interest as a limited partner in a partnership; certificates of interest or participation in any profit-sharing agreement, or in any oil, gas, or other mineral property, or lease; collateral trust certificates; voting trust certificates; bonds; debentures; certificates of indebtedness; notes; car trust certificates; bills of exchange; or obligations issued by or on behalf of a State, Territory, or political subdivision thereof.
(4) General partner interests—(i) In general. Except as provided in paragraph (c)(4)(ii)(B)(4)(ii) of this section, if an S corporation disposes of a general partner interest, the gain on the disposition is treated as gain from the sale of stock or securities to the extent of the amount the S corporation would have received as a distributive share of gain from the sale of stock or securities held by the partnership if all of the stock and securities held by the partnership had been sold by the partnership at fair market value at the time the S corporation disposes of the general partner interest. In applying this rule, the S corporation's distributive share of gain from the sale of stock or securities held by the partnership is not reduced to reflect any loss that would be recognized from the sale of stock or securities held by the partnership. In the case of tiered partnerships, the rules of this section apply by looking through each tier.
(ii) Exception. An S corporation that disposes of a general partner interest may treat the disposition, for purposes of this paragraph (c), in the same manner as the disposition of an interest as a limited partner.
(iii) Other exclusions from gross receipts. For purposes of this paragraph (c), gross receipts do not include—
(A) Amounts received in nontaxable sales or exchanges except to the extent that gain is recognized by the corporation on the sale or exchange; or
(B) Amounts received as a loan, as a repayment of a loan, as a contribution to capital, or on the issuance by the corporation of its own stock.
(5) Passive investment income—(i) In general. In general, passive investment income means gross receipts (as defined in paragraph (c)(4) of this section) derived from royalties, rents, dividends, interest, annuities, and gains from the sales or exchanges of stock or securities.
(ii) Definitions. For purposes of this paragraph (c)(5), the following definitions apply:
(A) Royalties—(1) In general. Royalties means all royalties, including mineral, oil, and gas royalties, and amounts received for the privilege of using patents, copyrights, secret processes and formulas, good will, trademarks, tradebrands, franchises, and other like property. The gross amount of royalties is not reduced by any part of the cost of the rights under which the royalties are received or by any amount allowable as a deduction in computing taxable income.
(2) Royalties derived in the ordinary course of a trade or business. Royalties does not include royalties derived in the ordinary course of a trade or business of franchising or licensing property. Royalties received by a corporation are derived in the ordinary course of a trade or business of franchising or licensing property only if, based on all the facts and circumstances, the corporation—
(i) Created the property; or
(ii) Performed significant services or incurred substantial costs with respect to the development or marketing of the property.
(3) Copyright, mineral, oil and gas, and active business computer software royalties. Royalties does not include copyright royalties, nor mineral, oil and gas royalties if the income from those royalties would not be treated as personal holding company income under sections 543 (a)(3) and (a)(4) if the corporation were a C corporation; amounts received upon disposal of timber, coal, or domestic iron ore with respect to which the special rules of sections 631 (b) and (c) apply; and active business computer software royalties as defined under section 543(d) (without regard to paragraph (d)(5) of section 543).
(B) Rents—(1) In general. Rents means amounts received for the use of, or right to use, property (whether real or personal) of the corporation.
(2) Rents derived in the active trade or business of renting property. Rents does not include rents derived in the active trade or business of renting property. Rents received by a corporation are derived in an active trade or business of renting property only if, based on all the facts and circumstances, the corporation provides significant services or incurs substantial costs in the rental business. Generally, significant services are not rendered and substantial costs are not incurred in connection with net leases. Whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including, but not limited to, the number of persons employed to provide the services and the types and amounts of costs and expenses incurred (other than depreciation).
(3) Produced film rents. Rents does not include produced film rents as defined under section 543(a)(5).
(4) Income from leasing self-produced tangible property. Rents does not include compensation, however designated, for the use of, or right to use, any real or tangible personal property developed, manufactured, or produced by the taxpayer, if during the taxable year the taxpayer is engaged in substantial development, manufacturing, or production of real or tangible personal property of the same type.
(C) Dividends. Dividends includes dividends as defined in section 316, amounts to be included in gross income under section 551 (relating to foreign personal holding company income taxed to U.S. shareholders), and consent dividends as provided in section 565. See paragraphs (c)(5)(iii) (B) and (C) of this section for special rules for the treatment of certain dividends and certain payments to a patron of a cooperative. See § 1.1362-8 for special rules regarding the treatment of dividends received by an S corporation from a C corporation in which the S corporation holds stock meeting the requirements of section 1504(a)(2).
(D) Interest—(1) In general. Interest means any amount received for the use of money (including tax-exempt interest and amounts treated as interest under section 483, 1272, 1274, or 7872). See paragraph (c)(5)(iii)(B) of this section for a special rule for the treatment of interest derived in certain businesses.
(2) Interest on obligations acquired in the ordinary course of a trade or business. Interest does not include interest on any obligation acquired from the sale of property described in section 1221(1) or the performance of services in the ordinary course of a trade or business of selling the property or performing the services.
(E) Annuities. Annuities means the entire amount received as an annuity under an annuity, endowment, or life insurance contract, if any part of the amount would be includible in gross income under section 72.
(F) Gross receipts from the sale of stock or securities. Gross receipts from the sales or exchanges of stock or securities, as described in paragraph (c)(4)(ii)(B) of this section, are passive investment income to the extent of gains therefrom. See paragraph (c)(5)(iii)(B) of this section for a special rule for the treatment of gains derived in certain businesses.
(G) Identified income. Passive investment income does not include income identified by the Commissioner by regulations, revenue ruling, or revenue procedure as income derived in the ordinary course of a trade or business for purposes of this section.
(iii) Special rules. For purposes of this paragraph (c)(5), the following special rules apply:
(A) Options or commodities dealers. In the case of an options dealer or commodities dealer, passive investment income does not include any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from any section 1256 contract or property related to the contract. Options dealer, commodities dealer, and section 1256 contract have the same meaning as in section 1362(d)(3)(E)(ii).
(B) Treatment of certain lending, financing and other business—(1) In general. Passive investment income does not include gross receipts that are directly derived in the ordinary course of a trade or business of—
(i) Lending or financing;
(ii) Dealing in property;
(iii) Purchasing or discounting accounts receivable, notes, or installment obligations; or
(iv) Servicing mortgages.
(2) Directly derived. For purposes of this paragraph (c)(5)(iii)(B), gross receipts directly derived in the ordinary course of business includes gain (as well as interest income) with respect to loans originated in a lending business, or interest income (as well as gain) from debt obligations of a dealer in such obligations. However, interest earned from the investment of idle funds in short-term securities does not constitute gross receipts directly derived in the ordinary course of business. Similarly, a dealer's income or gain from an item of property is not directly derived in the ordinary course of its trade or business if the dealer held the property for investment at any time before the income or gain is recognized.
(C) Payment to a patron of a cooperative. Passive investment income does not include amounts included in the gross income of a patron of a cooperative (within the meaning of section 1381(a), without regard to paragraph (2) (A) or (C) of section 1381(a)) by reason of any payment or allocation to the patron based on patronage occurring in the case of a trade or business of the patron.
(6) Examples. The principles of paragraphs (c)(4) and (c)(5) of this section are illustrated by the following examples. Unless otherwise provided in an example, S is an S corporation with subchapter C earnings and profits, and S's gross receipts from operations are gross receipts not derived from royalties, rents, dividends, interest, annuities, or gains from the sales or exchanges of stock or securities. S is a calendar year taxpayer and its first taxable year as an S corporation is 1993.
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Treas. Reg. §1.1362-2(a)Termination by revocation—(1) In general.
Termination by revocation—(1) In general. An election made under section 1362(a) is terminated if the corporation revokes the election for any taxable year of the corporation for which the election is effective, including the first taxable year. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including non-voting stock) of the corporation. See § 1.1362-6(a) for rules concerning the time and manner of revoking an election made under section 1362(a).
(2) When effective—(i) In general. Except as provided in paragraph (a)(2)(ii) of this section, a revocation made during the taxable year and before the 16th day of the third month of the taxable year is effective on the first day of the taxable year and a revocation made after the 15th day of the third month of the taxable year is effective for the following taxable year. If a corporation makes an election to be an S corporation that is to be effective beginning with the next taxable year and revokes its election on or before the first day of the next taxable year, the corporation is deemed to have revoked its election on the first day of the next taxable year.
(ii) Revocations specifying a prospective revocation date. If a corporation specifies a date for revocation and the date is expressed in terms of a stated day, month, and year that is on or after the date the revocation is filed, the revocation is effective on and after the date so specified.
(iii) Applicability of section 7503. With respect to a revocation made under paragraph (a)(2) of this section, see section 7503 (addressing time for performance of acts where the last day occurs on a Saturday, Sunday, or legal holiday). This paragraph (a)(2)(iii) applies to revocations made under paragraph (a)(2) of this section effective after October 20, 2020. A corporation may apply this paragraph (a)(2)(iii) retroactively to a revocation made by the corporation under paragraph (a)(2) of this section effective on or before October 20, 2020.
(3) Effect on taxable year of corporation. In the case of a corporation that revokes its election to be an S corporation effective on the first day of the first taxable year for which its election is to be effective, any statement made with the election regarding a change in the corporation's taxable year has no effect.
(4) Rescission of a revocation. A corporation may rescind a revocation made under paragraph (a)(2) of this section at any time before the revocation becomes effective. A rescission may be made only with the consent of each person who consented to the revocation and by each person who became a shareholder of the corporation within the period beginning on the first day after the date the revocation was made and ending on the date on which the rescission is made. See § 1.1362-6(a) for rules concerning the time and manner of rescinding a revocation.
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Treas. Reg. §1.1362-2(b)Termination by reason of corporation ceasing to be a small business corporation—(1) In general.
Termination by reason of corporation ceasing to be a small business corporation—(1) In general. If a corporation ceases to be a small business corporation, as defined in section 1361(b), at any time on or after the first day of the first taxable year for which its election under section 1362(a) is effective, the election terminates. In the event of a termination under this paragraph (b)(1), the corporation should attach to its return for the taxable year in which the termination occurs a notification that a termination has occurred and the date of the termination.
(2) When effective. If an election terminates because of a specific event that causes the corporation to fail to meet the definition of a small business corporation, the termination is effective as of the date on which the event occurs. If a corporation makes an election to be an S corporation that is effective beginning with the following taxable year and is not a small business corporation on the first day of that following taxable year, the election is treated as having terminated on that first day. If a corporation is a small business corporation on the first day of the taxable year for which its election is effective, its election does not terminate even if the corporation was not a small business corporation during all or part of the period beginning after the date the election was made and ending before the first day of the taxable year for which the election is effective.
(3) Effect on taxable year of corporation. In the case of a corporation that fails to meet the definition of a small business corporation on the first day of the first taxable year for which its election to be an S corporation is to be effective, any statement made with the election regarding a change in the corporation's taxable year has no effect.
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Treas. Reg. §1.1362-2(c)Termination by reason of excess passive investment income—(1) In general.
Termination by reason of excess passive investment income—(1) In general. A corporation's election under section 1362(a) terminates if the corporation has subchapter C earnings and profits at the close of each of three consecutive taxable years and, for each of those taxable years, has passive investment income in excess of 25 percent of gross receipts. See section 1375 for the tax imposed on excess passive investment income.
(2) When effective. A termination under this paragraph (c) is effective on the first day of the first taxable year beginning after the third consecutive year in which the S corporation had excess passive investment income.
(3) Subchapter C earnings and profits. For purposes of this paragraph (c), subchapter C earnings and profits of a corporation are the earnings and profits of any corporation, including the S corporation or an acquired or predecessor corporation, for any period with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect. The subchapter C earnings and profits of an S corporation are modified as required by section 1371(c).
(4) Gross receipts—(i) In general. For purposes of this paragraph (c), gross receipts generally means the total amount received or accrued under the method of accounting used by the corporation in computing its taxable income and is not reduced by returns and allowances, cost of goods sold, or deductions.
(ii) Special rules for sales of capital assets, stock and securities—(A) Sales of capital assets. For purposes of this paragraph (c), gross receipts from the sales or exchanges of capital assets (as defined in section 1221), other than stock and securities, are taken into account only to the extent of capital gain net income (as defined in section 1222).
(B) Sales of stock or securities—(1) In general. For purposes of this paragraph (c), gross receipts from the sales or exchanges of stock or securities are taken into account only to the extent of gains therefrom. In addition, for purposes of computing gross receipts from sales or exchanges of stock or securities, losses do not offset gains.
(2) Treatment of certain liquidations. Gross receipts from the sales or exchanges of stock or securities do not include amounts described in section 1362(d)(3)(D)(iv), relating to the treatment of certain liquidations. For purposes of section 1362(d)(3)(D)(iv), stock of the liquidating corporation owned by an S corporation shareholder is not treated as owned by the S corporation.
(3) Definition of stock or securities. For purposes of this paragraph (c), stock or securities includes shares or certificates of stock, stock rights or warrants, or an interest in any corporation (including any joint stock company, insurance company, association, or other organization classified as a corporation under section 7701); an interest as a limited partner in a partnership; certificates of interest or participation in any profit-sharing agreement, or in any oil, gas, or other mineral property, or lease; collateral trust certificates; voting trust certificates; bonds; debentures; certificates of indebtedness; notes; car trust certificates; bills of exchange; or obligations issued by or on behalf of a State, Territory, or political subdivision thereof.
(4) General partner interests—(i) In general. Except as provided in paragraph (c)(4)(ii)(B)(4)(ii) of this section, if an S corporation disposes of a general partner interest, the gain on the disposition is treated as gain from the sale of stock or securities to the extent of the amount the S corporation would have received as a distributive share of gain from the sale of stock or securities held by the partnership if all of the stock and securities held by the partnership had been sold by the partnership at fair market value at the time the S corporation disposes of the general partner interest. In applying this rule, the S corporation's distributive share of gain from the sale of stock or securities held by the partnership is not reduced to reflect any loss that would be recognized from the sale of stock or securities held by the partnership. In the case of tiered partnerships, the rules of this section apply by looking through each tier.
(ii) Exception. An S corporation that disposes of a general partner interest may treat the disposition, for purposes of this paragraph (c), in the same manner as the disposition of an interest as a limited partner.
(iii) Other exclusions from gross receipts. For purposes of this paragraph (c), gross receipts do not include—
(A) Amounts received in nontaxable sales or exchanges except to the extent that gain is recognized by the corporation on the sale or exchange; or
(B) Amounts received as a loan, as a repayment of a loan, as a contribution to capital, or on the issuance by the corporation of its own stock.
(5) Passive investment income—(i) In general. In general, passive investment income means gross receipts (as defined in paragraph (c)(4) of this section) derived from royalties, rents, dividends, interest, annuities, and gains from the sales or exchanges of stock or securities.
(ii) Definitions. For purposes of this paragraph (c)(5), the following definitions apply:
(A) Royalties—(1) In general. Royalties means all royalties, including mineral, oil, and gas royalties, and amounts received for the privilege of using patents, copyrights, secret processes and formulas, good will, trademarks, tradebrands, franchises, and other like property. The gross amount of royalties is not reduced by any part of the cost of the rights under which the royalties are received or by any amount allowable as a deduction in computing taxable income.
(2) Royalties derived in the ordinary course of a trade or business. Royalties does not include royalties derived in the ordinary course of a trade or business of franchising or licensing property. Royalties received by a corporation are derived in the ordinary course of a trade or business of franchising or licensing property only if, based on all the facts and circumstances, the corporation—
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Treas. Reg. §1.1362-2(i)§1.1362-2(i)
Lending or financing;
(ii) Dealing in property;
(iii) Purchasing or discounting accounts receivable, notes, or installment obligations; or
(iv) Servicing mortgages.
(2) Directly derived. For purposes of this paragraph (c)(5)(iii)(B), gross receipts directly derived in the ordinary course of business includes gain (as well as interest income) with respect to loans originated in a lending business, or interest income (as well as gain) from debt obligations of a dealer in such obligations. However, interest earned from the investment of idle funds in short-term securities does not constitute gross receipts directly derived in the ordinary course of business. Similarly, a dealer's income or gain from an item of property is not directly derived in the ordinary course of its trade or business if the dealer held the property for investment at any time before the income or gain is recognized.
(C) Payment to a patron of a cooperative. Passive investment income does not include amounts included in the gross income of a patron of a cooperative (within the meaning of section 1381(a), without regard to paragraph (2) (A) or (C) of section 1381(a)) by reason of any payment or allocation to the patron based on patronage occurring in the case of a trade or business of the patron.
(6) Examples. The principles of paragraphs (c)(4) and (c)(5) of this section are illustrated by the following examples. Unless otherwise provided in an example, S is an S corporation with subchapter C earnings and profits, and S's gross receipts from operations are gross receipts not derived from royalties, rents, dividends, interest, annuities, or gains from the sales or exchanges of stock or securities. S is a calendar year taxpayer and its first taxable year as an S corporation is 1993.
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Treas. Reg. §1.1362-3Treatment of S termination year
(a) In general. If an S election terminates under section 1362(d) on a date other than the first day of a taxable year of the corporation, the corporation's taxable year in which the termination occurs is an S termination year. The portion of the S termination year ending at the close of the day prior to the termination is treated as a short taxable year for which the corporation is an S corporation (the S short year). The portion of the S termination year beginning on the day the termination is effective is treated as a short taxable year for which the corporation is a C corporation (the C short year). Except as provided in paragraphs (b) and (c)(1) of this section, the corporation allocates income or loss for the entire year on a pro rata basis as described in section 1362(e)(2). To the extent that income or loss is not allocated on a pro rata basis under this section, items of income, gain, loss, deduction, and credit are assigned to each short taxable year on the basis of the corporation's normal method of accounting as determined under section 446. See, however, § 1.1502-76(b)(1)(ii)(A)(2) for special rules for an S election that terminates under section 1362(d) immediately before the S corporation becomes a member of a consolidated group (within the meaning of § 1.1502-1(h)). See § 1.460-4(k)(3)(iv)(D) for rules relating to the computation of the S corporation's income or loss from a contract accounted for under a long-term contract method of accounting in the S termination year.
(b) Allocations other than pro rata—(1) Elections under section 1362(e)(3). The pro rata allocation rules of section 1362(e)(2) do not apply if the corporation elects to allocate its S termination year income on the basis of its normal tax accounting method. This election may be made only with the consent of each person who is a shareholder in the corporation at any time during the S short year and of each person who is a shareholder in the corporation on the first day of the C short year. See § 1.1362-6(a) for rules concerning the time and manner of making this election.
(2) Purchase of stock treated as an asset purchase. The pro rata allocation rules of section 1362(e)(2) do not apply with respect to any item resulting from the application of section 338.
(3) 50 percent change in ownership during S termination year. The pro rata allocation rules of section 1362(e)(2) do not apply if at any time during the S termination year, as a result of sales or exchanges of stock in the corporation during that year, there is a change in ownership of 50 percent or more of the issued and outstanding shares of stock of the corporation. If stock has already been sold or exchanged during the S termination year, subsequent sales or exchanges of that stock are not taken into account for purposes of this paragraph (b)(3).
(c) Special rules—(1) S corporation that is a partner in a partnership. For purposes of section 706(c) only, the termination of the election of an S corporation that is a partner in a partnership during any portion of the S short year under § 1.1362-2 (a) or (b), is treated as a sale or exchange of the corporation's entire interest in the partnership on the last day of the S short year, if—
(i) The pro rata allocation rules do not apply to the corporation; and
(ii) Any taxable year of the partnership ends with or within the C short year.
(2) Tax for the C short year. The taxable income for the C short year is determined on an annualized basis as described in section 1362(e)(5).
(3) Each short year treated as taxable year—(i) In general. Except as otherwise provided in paragraph (c)(4) of this section, the S and C short years are treated as two separate years for purposes of all provisions of the Internal Revenue Code.
(ii) Application of section 163(j). For purposes of section 163(j), a separate limitation (as defined in § 1.163(j)-1(b)(36)) applies to each S short year and each C short year. Any items necessary to determine the amount of business interest expense (as defined in § 1.163(j)-1(b)(3)) that are deducted in each S short year or C short year must be allocated between the S short year and C short year in accordance with an allocation methodology provided in section 1362(e).
(4) Year for carryover purposes. The S and C short years are treated as one year for purposes of determining the number of taxable years to which any item may be carried back or forward by the corporation.
(5) Due date for S short year return. The date by which the return for the S short year must be filed is the same as the date by which the return for the C short year must be filed (including extensions).
(6) Year in which income from S short year is includible. A shareholder must include in taxable income the shareholder's pro rata share of the items described in section 1366(a) for the S short year for the taxable year with or within which the S termination year ends.
(d) Examples The provisions of this section are illustrated by the following examples:
(1) Example 1.—S termination year not created.
(i) On January 1, 1993, the first day of its taxable year, a subchapter C corporation had three eligible shareholders. During 1993, the corporation properly elected to be treated as an S corporation effective January 1, 1994, the first day of the succeeding taxable year. Subsequently, a transfer of some of the stock in the corporation was made to an ineligible shareholder. The ineligible shareholder still holds the stock on January 1, 1994.
(ii) The corporation fails to meet the definition of a small business corporation on January 1, 1994, and its election is treated as having terminated on that date. See § 1.1362-2(b)(2) for the termination rules. Because the corporation ceases to be a small business corporation on the first day of a taxable year, an S termination year is not created. In addition, if the corporation in the future meets the definition of a small business corporation and desires to elect to be treated as an S corporation, the corporation is automatically granted consent to reelect before the expiration of the 5-year waiting period. See § 1.1362-5 for special rules concerning automatic consent to reelect.
(2) Example 2. More than 50 percent change in ownership during S short year.
A, an individual, owns all 100 outstanding shares of stock of S, a calendar year S corporation. On January 31, 1993, A sells 60 shares of S stock to B, an individual. On June 1, 1993, A sells 5 shares of S stock to PRS, a partnership. S ceases to be a small business corporation on June 1, 1993, and pursuant to section 1362(d)(2), its election terminates on that date. Because there was a more than 50 percent change in ownership of the issued and outstanding shares of S stock, S must assign the items of income, loss, deduction, or credit for the S termination year to the two short taxable years on the basis of S's normal method of accounting under the rules of paragraph (b)(3) of this section.
(3) Example 3. More than 50 percent change in ownership during C short year.
A, an individual, owns all 100 outstanding shares of stock of S, a calendar year S corporation. On June 1, 1993, A sells 5 shares of S stock to PRS, a partnership. S ceases to be a small business corporation on that date and pursuant to section 1362(d)(3), its election terminates on that date. On July 1, 1993, A sells 60 shares of S stock to B, an individual. Since there was a more than 50 percent change in ownership of the issued and outstanding shares of S stock during the S termination year, S must assign the items of income, loss, deduction, or credit for the S termination year to the two short taxable years on the basis of S's normal method of accounting under the rules of paragraph (b)(3) of this section.
(4) Example 4. Stock acquired other than by sale or exchange.
C and D are shareholders in S, a calendar year S corporation. Each owns 50 percent of the issued and outstanding shares of the corporation on December 31, 1993. On March 1, 1994, C makes a gift of his entire shareholder interest to T, a trust not permitted as a shareholder under section 1361(c)(2). S ceases to be a small business corporation on March 1, 1994, and pursuant to section 1362(d)(2), its S corporation election terminates effective on that date. As a result of the gift, T owns 50 percent of S's issued and outstanding stock. However, because T acquired the stock by gift from C rather than by sale or exchange, there has not been a more than 50 percent change in ownership by sale or exchange of S that would cause the rules of paragraph (b)(3) of this section to apply.
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Treas. Reg. §1.1362-3(a)In general.
In general. If an S election terminates under section 1362(d) on a date other than the first day of a taxable year of the corporation, the corporation's taxable year in which the termination occurs is an S termination year. The portion of the S termination year ending at the close of the day prior to the termination is treated as a short taxable year for which the corporation is an S corporation (the S short year). The portion of the S termination year beginning on the day the termination is effective is treated as a short taxable year for which the corporation is a C corporation (the C short year). Except as provided in paragraphs (b) and (c)(1) of this section, the corporation allocates income or loss for the entire year on a pro rata basis as described in section 1362(e)(2). To the extent that income or loss is not allocated on a pro rata basis under this section, items of income, gain, loss, deduction, and credit are assigned to each short taxable year on the basis of the corporation's normal method of accounting as determined under section 446. See, however, § 1.1502-76(b)(1)(ii)(A)(2) for special rules for an S election that terminates under section 1362(d) immediately before the S corporation becomes a member of a consolidated group (within the meaning of § 1.1502-1(h)). See § 1.460-4(k)(3)(iv)(D) for rules relating to the computation of the S corporation's income or loss from a contract accounted for under a long-term contract method of accounting in the S termination year.
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Treas. Reg. §1.1362-3(b)Allocations other than pro rata—(1) Elections under section 1362(e)(3).
Allocations other than pro rata—(1) Elections under section 1362(e)(3). The pro rata allocation rules of section 1362(e)(2) do not apply if the corporation elects to allocate its S termination year income on the basis of its normal tax accounting method. This election may be made only with the consent of each person who is a shareholder in the corporation at any time during the S short year and of each person who is a shareholder in the corporation on the first day of the C short year. See § 1.1362-6(a) for rules concerning the time and manner of making this election.
(2) Purchase of stock treated as an asset purchase. The pro rata allocation rules of section 1362(e)(2) do not apply with respect to any item resulting from the application of section 338.
(3) 50 percent change in ownership during S termination year. The pro rata allocation rules of section 1362(e)(2) do not apply if at any time during the S termination year, as a result of sales or exchanges of stock in the corporation during that year, there is a change in ownership of 50 percent or more of the issued and outstanding shares of stock of the corporation. If stock has already been sold or exchanged during the S termination year, subsequent sales or exchanges of that stock are not taken into account for purposes of this paragraph (b)(3).
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Treas. Reg. §1.1362-3(c)Special rules—(1) S corporation that is a partner in a partnership.
Special rules—(1) S corporation that is a partner in a partnership. For purposes of section 706(c) only, the termination of the election of an S corporation that is a partner in a partnership during any portion of the S short year under § 1.1362-2 (a) or (b), is treated as a sale or exchange of the corporation's entire interest in the partnership on the last day of the S short year, if—
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Treas. Reg. §1.1362-3(d)§1.1362-3(d)
Examples The provisions of this section are illustrated by the following examples:
(1) Example 1.—S termination year not created.
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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.
On January 1, 1993, the first day of its taxable year, a subchapter C corporation had three eligible shareholders. During 1993, the corporation properly elected to be treated as an S corporation effective January 1, 1994, the first day of the succeeding taxable year. Subsequently, a transfer of some of the stock in the corporation was made to an ineligible shareholder. The ineligible shareholder still holds the stock on January 1, 1994.
(ii) The corporation fails to meet the definition of a small business corporation on January 1, 1994, and its election is treated as having terminated on that date. See § 1.1362-2(b)(2) for the termination rules. Because the corporation ceases to be a small business corporation on the first day of a taxable year, an S termination year is not created. In addition, if the corporation in the future meets the definition of a small business corporation and desires to elect to be treated as an S corporation, the corporation is automatically granted consent to reelect before the expiration of the 5-year waiting period. See § 1.1362-5 for special rules concerning automatic consent to reelect.
(2) Example 2. More than 50 percent change in ownership during S short year.
A, an individual, owns all 100 outstanding shares of stock of S, a calendar year S corporation. On January 31, 1993, A sells 60 shares of S stock to B, an individual. On June 1, 1993, A sells 5 shares of S stock to PRS, a partnership. S ceases to be a small business corporation on June 1, 1993, and pursuant to section 1362(d)(2), its election terminates on that date. Because there was a more than 50 percent change in ownership of the issued and outstanding shares of S stock, S must assign the items of income, loss, deduction, or credit for the S termination year to the two short taxable years on the basis of S's normal method of accounting under the rules of paragraph (b)(3) of this section.
(3) Example 3. More than 50 percent change in ownership during C short year.
A, an individual, owns all 100 outstanding shares of stock of S, a calendar year S corporation. On June 1, 1993, A sells 5 shares of S stock to PRS, a partnership. S ceases to be a small business corporation on that date and pursuant to section 1362(d)(3), its election terminates on that date. On July 1, 1993, A sells 60 shares of S stock to B, an individual. Since there was a more than 50 percent change in ownership of the issued and outstanding shares of S stock during the S termination year, S must assign the items of income, loss, deduction, or credit for the S termination year to the two short taxable years on the basis of S's normal method of accounting under the rules of paragraph (b)(3) of this section.
(4) Example 4. Stock acquired other than by sale or exchange.
C and D are shareholders in S, a calendar year S corporation. Each owns 50 percent of the issued and outstanding shares of the corporation on December 31, 1993. On March 1, 1994, C makes a gift of his entire shareholder interest to T, a trust not permitted as a shareholder under section 1361(c)(2). S ceases to be a small business corporation on March 1, 1994, and pursuant to section 1362(d)(2), its S corporation election terminates effective on that date. As a result of the gift, T owns 50 percent of S's issued and outstanding stock. However, because T acquired the stock by gift from C rather than by sale or exchange, there has not been a more than 50 percent change in ownership by sale or exchange of S that would cause the rules of paragraph (b)(3) of this section to apply.
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Treas. Reg. §1.1362-4Inadvertent terminations and inadvertently invalid elections
(a) In general. A corporation is treated as continuing to be an S corporation or a QSub (or, an invalid election to be either an S corporation or a QSub is treated as valid) during the period specified by the Commissioner if—
(1) The corporation made a valid election under section 1362(a) or section 1361(b)(3) and the election terminated or the corporation made an election under section 1362(a) or section 1361(b)(3) that was invalid;
(2) The Commissioner determines that the termination or invalidity was inadvertent;
(3) Within a reasonable period of time after discovery of the terminating event or invalid election, steps were taken so that the corporation for which the election was made or the termination occurred is a small business corporation or a QSub, as the case may be, or to acquire the required shareholder consents; and
(4) The corporation and shareholders agree to adjustments that the Commissioner may require for the period.
(b) Inadvertent termination or inadvertently invalid election. For purposes of paragraph (a) of this section, the determination of whether a termination or invalid election was inadvertent is made by the Commissioner. The corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination or invalid election was inadvertent. The fact that the terminating event or invalidity of the election was not reasonably within the control of the corporation and, in the case of a termination, was not part of a plan to terminate the election, or the fact that the terminating event or circumstance took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard itself against such an event or circumstance, tends to establish that the termination or invalidity of the election was inadvertent.
(c) Corporation's request for determination of an inadvertent termination or invalid election. A corporation that believes that the termination or invalidity of its election was inadvertent may request a determination from the Commissioner that the termination or invalidity of its election was inadvertent. The request is made in the form of a ruling request and should set forth all relevant facts pertaining to the event or circumstance including, but not limited to, the facts described in paragraph (b) of this section, the date of the corporation's election (or intended election) under section 1362(a) or 1361(b)(3), a detailed explanation of the event or circumstance causing the termination or invalidity, when and how the event or circumstance was discovered, and the steps taken under paragraph (a)(3) of this section.
(d) Adjustments. The Commissioner may require any adjustments that are appropriate. In general, the adjustments required should be consistent with the treatment of the corporation as an S corporation or QSub during the period specified by the Commissioner. In the case of stock held by an ineligible shareholder that causes an inadvertent termination or invalid election for an S corporation under section 1362(f), the Commissioner may require the ineligible shareholder to be treated as a shareholder of the S corporation during the period the ineligible shareholder actually held stock in the corporation. Moreover, the Commissioner may require protective adjustments that prevent the loss of any revenue due to the holding of stock by an ineligible shareholder (for example, a nonresident alien).
(e) Corporation and shareholder consents. The corporation and all persons who were shareholders of the corporation at any time during the period specified by the Commissioner must consent to any adjustments that the Commissioner may require. Each consent should be in the form of a statement agreeing to make the adjustments. The statement must be signed by the shareholder (in the case of shareholder consent) or a person authorized to sign the return required by section 6037 (in the case of corporate consent). See § 1.1362-6(b)(2) for persons required to sign consents. A shareholder's consent statement should include the name, address, and taxpayer identification numbers of the corporation and shareholder, the number of shares of stock owned by the shareholder, and the dates on which the shareholder owned any stock. The corporate consent statement should include the name, address, and taxpayer identification numbers of the corporation and each shareholder.
(f) Status of corporation. The status of the corporation after the terminating event or invalid election and before the determination of inadvertence is determined by the Commissioner. Inadvertent termination or inadvertent invalid election relief may be granted retroactively for all years for which the terminating event or circumstance giving rise to invalidity is effective, in which case the corporation is treated as if its election was valid or had not terminated. Alternatively, relief may be granted only for the period in which the corporation became eligible for subchapter S or QSub treatment, in which case the corporation is treated as a C corporation or, in the case of a QSub with an inadvertently terminated or invalid election, as a separate C corporation, during the period for which the corporation was not eligible for its intended status.
(g) Effective/applicability date. Paragraphs (a), (b), (c), (d), and (f) of this section are effective on August 14, 2008.
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Treas. Reg. §1.1362-4(a)In general.
In general. A corporation is treated as continuing to be an S corporation or a QSub (or, an invalid election to be either an S corporation or a QSub is treated as valid) during the period specified by the Commissioner if—
(1) The corporation made a valid election under section 1362(a) or section 1361(b)(3) and the election terminated or the corporation made an election under section 1362(a) or section 1361(b)(3) that was invalid;
(2) The Commissioner determines that the termination or invalidity was inadvertent;
(3) Within a reasonable period of time after discovery of the terminating event or invalid election, steps were taken so that the corporation for which the election was made or the termination occurred is a small business corporation or a QSub, as the case may be, or to acquire the required shareholder consents; and
(4) The corporation and shareholders agree to adjustments that the Commissioner may require for the period.
41 Citing Cases
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 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
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.
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
Each ofpetitioner's operating companies elected to be treated as a small business corporation pursuant to section 1362.
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, 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.
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.
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