§1375 — Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts
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Statute Text — 26 U.S.C. §1375
If for the taxable year an S corporation has—
accumulated earnings and profits at the close of such taxable year, and
gross receipts more than 25 percent of which are passive investment income,
then there is hereby imposed a tax on the income of such corporation for such taxable year. Such tax shall be computed by multiplying the excess net passive income by the highest rate of tax specified in section 11(b).
For purposes of this section—
Except as provided in subparagraph (B), the term “excess net passive income” means an amount which bears the same ratio to the net passive income for the taxable year as—
the amount by which the passive investment income for the taxable year exceeds 25 percent of the gross receipts for the taxable year, bears to
the passive investment income for the taxable year.
The amount of the excess net passive income for any taxable year shall not exceed the amount of the corporation’s taxable income for such taxable year as determined under section 63(a)—
without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and
without regard to the deduction under section 172.
The term “net passive income” means—
passive investment income, reduced by
the deductions allowable under this chapter which are directly connected with the production of such income (other than deductions allowable under section 172 and part VIII of subchapter B).
The terms “passive investment income” and “gross receipts” have the same respective meanings as when used in paragraph (3) of section 1362(d).
Notwithstanding paragraph (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.
No credit shall be allowed under part IV of subchapter A of this chapter (other than section 34) against the tax imposed by subsection (a).
If the S corporation establishes to the satisfaction of the Secretary that—
it determined in good faith that it had no accumulated earnings and profits at the close of a taxable year, and
during a reasonable period of time after it was determined that it did have accumulated earnings and profits at the close of such taxable year such earnings and profits were distributed,
the Secretary may waive the tax imposed by subsection (a) for such taxable year.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1375-1 Tax imposed when passive investment income of corporation having subchapter C earnings and profits exceed 25 percent of gross receipts
- Treas. Reg. §Treas. Reg. §1.1375-1(a) General rule.
- Treas. Reg. §Treas. Reg. §1.1375-1(b) Definitions—(1) Excess net passive income—(i) In general.
- Treas. Reg. §Treas. Reg. §1.1375-1(c) Special rules—(1) Disallowance of credits.
- Treas. Reg. §Treas. Reg. §1.1375-1(d) Waiver of tax in certain cases—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1375-1(e) Reduction in pass-thru for tax imposed on excess net passive income.
- Treas. Reg. §Treas. Reg. §1.1375-1(f) Examples.
- Treas. Reg. §Treas. Reg. §1.1375-1(i) §1.1375-1(i)
20 Citing Cases
105 T.C. 227, 230 (1995). It is essentially a transactional provision, i.e., it deals with the tax treatment of particular activities. In 2 The exceptions are the taxes imposed on built-in gains under sec. 1374 and on excess net passive income under sec. 1375. 3 See infra pp. 20-22 for a discussion of the impact of other provisions of sec. 1371(b). - 7 - determining the existence of a PAL, section 469 treats each activity separately. Section 1371 was enacted in 1982 by section 2 of the Subchapte
to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The exceptions are the taxes imposed on built-in gains under sec. 1374 and on excess net passive income under sec. 1375. See infra pp. 58-59 for a discussion of the impact of other provisions of sec. 1371(b). See, e.g., sec. 170(d)(1) and (2) (charitable contributions); sec. 38(a) (business credit carryforwards and carrybacks); sec. 172 (net operating loss c
n installment obligation, within the meaning of section 453B.3 2 Although Sainte Claire elected to be an S corporation for its 1987 and 1988 taxable years, respondent determined that it was liable for tax on its excess net passive income pursuant to sec. 1375 for 1987 and on its net capital gain pursuant to sec. 1374 for 1988. 3 Petitioners object on grounds of relevance to entries in an exhibit prepared by respondent's agent that relate to payments of interest by James F. Boccardo to Sainte Cla
n installment obligation, within the meaning of section 453B.3 2 Although Sainte Claire elected to be an S corporation for its 1987 and 1988 taxable years, respondent determined that it was liable for tax on its excess net passive income pursuant to sec. 1375 for 1987 and on its net capital gain pursuant to sec. 1374 for 1988. 3 Petitioners object on grounds of relevance to entries in an exhibit prepared by respondent's agent that relate to payments of interest by James F. Boccardo to Sainte Cla