§1363 — Effect of election on corporation
16 cases·4 followed·1 distinguished·1 questioned·10 cited—25% support
Statute Text — 26 U.S.C. §1363
Except as otherwise provided in this subchapter, an S corporation shall not be subject to the taxes imposed by this chapter.
The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that—
the items described in section 1366(a)(1)(A) shall be separately stated,
the deductions referred to in section 703(a)(2) shall not be allowed to the corporation,
section 248 shall apply, and
section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.
Except as provided in paragraph (2), any election affecting the computation of items derived from an S corporation shall be made by the corporation.
In the case of an S corporation, elections under the following provisions shall be made by each shareholder separately—
section 617 (relating to deduction and recapture of certain mining exploration expenditures), and
section 901 (relating to taxes of foreign countries and possessions of the United States).
If—
an S corporation was a C corporation for the last taxable year before the first taxable year for which the election under section 1362(a) was effective, and
the corporation inventoried goods under the LIFO method for such last taxable year,
the LIFO recapture amount shall be included in the gross income of the corporation for such last taxable year (and appropriate adjustments to the basis of inventory shall be made to take into account the amount included in gross income under this paragraph).
Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in 4 equal installments.
The first installment under subparagraph (A) shall be paid on or before the due date (determined without regard to extensions) for the return of the tax imposed by this chapter for the last taxable year for which the corporation was a C corporation and the 3 succeeding installments shall be paid on or before the due date (as so determined) for the corporation’s return for the 3 succeeding taxable years.
Notwithstanding section 6601(b), for purposes of section 6601, the date prescribed for the payment of each installment under this paragraph shall be determined under this paragraph.
For purposes of this subsection, the term “LIFO recapture amount” means the amount (if any) by which—
the inventory amount of the inventory asset under the first-in, first-out method authorized by section 471, exceeds
the inventory amount of such assets under the LIFO method.
For purposes of the preceding sentence, inventory amounts shall be determined as of the close of the last taxable year referred to in paragraph (1).
For purposes of this subsection—
The term “LIFO method” means the method authorized by section 472.
The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year.
The inventory amount of assets under a method authorized by section 471 shall be determined—
if the corporation uses the retail method of valuing inventories under section 472, by using such method, or
if clause (i) does not apply, by using cost or market, whichever is lower.
Except as provided in regulations, the corporation referred to in paragraph (1) shall not be treated as a member of an affiliated group with respect to the amount included in gross income under paragraph (1).
Sections 1367(a)(2)(D) and 1371(c)(1) shall not apply with respect to any increase in the tax imposed by reason of this subsection.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1363-1 Effect of election on corporation
- Treas. Reg. §Treas. Reg. §1.1363-1(a) Exemption of corporation from income tax—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1363-1(b) Computation of corporate taxable income.
- Treas. Reg. §Treas. Reg. §1.1363-1(c) Elections of the S corporation—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1363-1(d) Effective date.
- Treas. Reg. §Treas. Reg. §1.1363-2 Recapture of LIFO benefits
- Treas. Reg. §Treas. Reg. §1.1363-2(a) In general.
- Treas. Reg. §Treas. Reg. §1.1363-2(b) LIFO inventory held indirectly through partnership.
- Treas. Reg. §Treas. Reg. §1.1363-2(c) Definitions and special rules—(1) Recapture date.
- Treas. Reg. §Treas. Reg. §1.1363-2(d) Payment of tax.
- Treas. Reg. §Treas. Reg. §1.1363-2(e) Basis adjustments—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.1363-2(f) Examples.
- Treas. Reg. §Treas. Reg. §1.1363-2(g) Effective dates.
- Treas. Reg. §Treas. Reg. §1.1363-2(i) §1.1363-2(i)
16 Citing Cases
d, 387 F.3d 27 (1st Cir. 2004). A great many small and medium-sized businesses elect S corporation status because the Code affords them special treatment— income earned by the corporation escapes corporate-level taxation. Mourad, 121 T.C. at 3; see §§ 1363, 1366. That income is instead “passed through” to its shareholders pro rata. See §§ 1363, 1366. But electing to be an S corporation is not enough. The Code has several other requirements. These include having no more than 100 shareholders, hav
5 In addition to Holdings, the Braens acted through other corporate entities, including Stone Industries, Inc., a wholly owned subsidiary of Holdings, and Ramapo Mountain Land Co., which was formed in 1996 to facilitate this deal. The distinctions between these family entities are not meaningful for purposes of these cases, and, for s
4 In their Posttrial Briefs petitioners assert that they should not be liable for section 6662 accuracy-related penalties. Respondent did not determine any penalties in the notices of deficiency, and petitioners are not liable for any penalties. Any remaining adjustments are computational. 5 Mr. and Mrs. Hurring’s Petition, sent by ce
rate-level taxation.” Mourad v. Commissioner, 121 T.C. 1, 3 (2003), aff’d, 387 F.3d 27 (1st Cir. 2004). “Thus, an S corporation’s income passes through the entity and is, generally, taxed only at the shareholder level on a pro rata basis.” Id.; see §§ 1363, 1366. 3 [*3] The IRS thereafter conducted an examination into Mr. Chinweze’s tax liabilities for these years, which led to the issuance of a notice of deficiency on March 4, 2014. Among other things, the notice “adjusted [Mr. Chinweze’s] shar
1363.7 Thus, an S corporation’s income passes through the entity and is, generally, taxed only at the shareholder level on a pro rata basis. See secs. 1363, 1366. An election to be an S corporation continues until terminated. See sec. 1362(d). An S corporation election terminates in one of three ways: (1) Revocation by the shareholder(s); (2)
Thus, an S corporation’s income passes through the entity and is, generally, taxed only at the shareholder level on a pro rata basis. See secs. 1363, 1366. An election to be an S corporation continues until terminated. See sec. 1362(d). An S corporation election terminates in one of three ways: (1) Revocation by the shareholder(s); (2) t