TITLE 26 - US CODE - PART III - SPECIAL RULES

26 USC 1371 - Coordination with subchapter C

(a) Application of subchapter C rules 
Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.
(b) No carryover between C year and S year 

(1) From C year to S year 
No carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation.
(2) No carryover from S year 
No carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation.
(3) Treatment of S year as elapsed year 
Nothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.
(c) Earnings and profits 

(1) In general 
Except as provided in paragraphs (2) and (3) and subsection (d)(3), no adjustment shall be made to the earnings and profits of an S corporation.
(2) Adjustments for redemptions, liquidations, reorganizations, divisives, etc. 
In the case of any transaction involving the application of subchapter C to any S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made.
(3) Adjustments in case of distributions treated as dividends under section 1368 (c)(2) 
Paragraph (1) shall not apply with respect to that portion of a distribution which is treated as a dividend under section 1368 (c)(2).
(d) Coordination with investment credit recapture 

(1) No recapture by reason of election 
Any election under section 1362 shall be treated as a mere change in the form of conducting a trade or business for purposes of the second sentence of section 50 (a)(4).
(2) Corporation continues to be liable 
Notwithstanding an election under section 1362, an S corporation shall continue to be liable for any increase in tax under section 49 (b) or 50 (a) attributable to credits allowed for taxable years for which such corporation was not an S corporation.
(3) Adjustment to earnings and profits for amount of recapture 
Paragraph (1) of subsection (c) shall not apply to any increase in tax under section 49 (b) or 50 (a) for which the S corporation is liable.
(e) Cash distributions during post-termination transition period 

(1) In general 
Any distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account (within the meaning of section 1368 (e)).
(2) Election to distribute earnings first 
An S corporation may elect to have paragraph (1) not apply to all distributions made during a post-termination transition period described in section 1377 (b)(1)(A). Such election shall not be effective unless all shareholders of the S corporation to whom distributions are made by the S corporation during such post-termination transition period consent to such election.

26 USC 1372 - Partnership rules to apply for fringe benefit purposes

(a) General rule 
For purposes of applying the provisions of this subtitle which relate to employee fringe benefits
(1) the S corporation shall be treated as a partnership, and
(2) any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.
(b) 2-percent shareholder defined 
For purposes of this section, the term 2-percent shareholder means any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.

26 USC 1373 - Foreign income

(a) S corporation treated as partnership, etc. 
For purposes of subparts A and F of part III, and part V, of subchapter N (relating to income from sources without the United States)
(1) an S corporation shall be treated as a partnership, and
(2) the shareholders of such corporation shall be treated as partners of such partnership.
(b) Recapture of overall foreign loss 
For purposes of section 904 (f) (relating to recapture of overall foreign loss), the making or termination of an election to be treated as an S corporation shall be treated as a disposition of the business.

26 USC 1374 - Tax imposed on certain built-in gains

(a) General rule 
If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year.
(b) Amount of tax 

(1) In general 
The amount of the tax imposed by subsection (a) shall be computed by applying the highest rate of tax specified in section 11 (b) to the net recognized built-in gain of the S corporation for the taxable year.
(2) Net operating loss carryforwards from C years allowed 
Notwithstanding section 1371 (b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed for purposes of this section as a deduction against the net recognized built-in gain of the S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules similar to the rules of the preceding sentences of this paragraph shall apply in the case of a capital loss carryforward arising in a taxable year for which the corporation was a C corporation.
(3) Credits 

(A) In general 
Except as provided in subparagraph (B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) against the tax imposed by subsection (a).
(B) Business credit carryforwards from C years allowed 
Notwithstanding section 1371 (b)(1), any business credit carryforward under section 39 arising in a taxable year for which the corporation was a C corporation shall be allowed as a credit against the tax imposed by subsection (a) in the same manner as if it were imposed by section 11. A similar rule shall apply in the case of the minimum tax credit under section 53 to the extent attributable to taxable years for which the corporation was a C corporation.
(4) Coordination with section 1201 (a) 
For purposes of section 1201 (a)
(A) the tax imposed by subsection (a) shall be treated as if it were imposed by section 11, and
(B) the amount of the net recognized built-in gain shall be treated as the taxable income.
(c) Limitations 

(1) Corporations which were always S corporations 
Subsection (a) shall not apply to any corporation if an election under section 1362 (a) has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, an S corporation and any predecessor corporation shall be treated as 1 corporation for purposes of the preceding sentence.
(2) Limitation on amount of recognized built-in gains 
The amount of the net recognized built-in gain taken into account under this section for any taxable year shall not exceed the excess (if any) of
(A) the net unrealized built-in gain, over
(B) the net recognized built-in gain for prior taxable years beginning in the recognition period.
(d) Definitions and special rules 
For purposes of this section
(1) Net unrealized built-in gain 
The term net unrealized built-in gain means the amount (if any) by which
(A) the fair market value of the assets of the S corporation as of the beginning of its 1st taxable year for which an election under section 1362 (a) is in effect, exceeds
(B) the aggregate adjusted bases of such assets at such time.
(2) Net recognized built-in gain 

(A) In general 
The term net recognized built-in gain means, with respect to any taxable year in the recognition period, the lesser of
(i) the amount which would be the taxable income of the S corporation for such taxable year if only recognized built-in gains and recognized built-in losses were taken into account, or
(ii) such corporations taxable income for such taxable year (determined as provided in section 1375 (b)(1)(B)).
(B) Carryover 
If, for any taxable year, the amount referred to in clause (i) of subparagraph (A) exceeds the amount referred to in clause (ii) of subparagraph (A), such excess shall be treated as a recognized built-in gain in the succeeding taxable year. The preceding sentence shall apply only in the case of a corporation treated as an S corporation by reason of an election made on or after March 31, 1988.
(3) Recognized built-in gain 
The term recognized built-in gain means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that
(A) such asset was not held by the S corporation as of the beginning of the 1st taxable year for which it was an S corporation, or
(B) such gain exceeds the excess (if any) of
(i) the fair market value of such asset as of the beginning of such 1st taxable year, over
(ii) the adjusted basis of the asset as of such time.
(4) Recognized built-in losses 
The term recognized built-in loss means any loss recognized during the recognition period on the disposition of any asset to the extent that the S corporation establishes that
(A) such asset was held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3), and
(B) such loss does not exceed the excess of
(i) the adjusted basis of such asset as of the beginning of such 1st taxable year, over
(ii) the fair market value of such asset as of such time.
(5) Treatment of certain built-in items 

(A) Income items 
Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the 1st taxable year for which the corporation was an S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.
(B) Deduction items 
Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the 1st taxable year referred to in subparagraph (A) shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.
(C) Adjustment to net unrealized built-in gain 
The amount of the net unrealized built-in gain shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period.
(6) Treatment of certain property 
If the adjusted basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3)
(A) such asset shall be treated as held by the S corporation as of the beginning of such 1st taxable year, and
(B) any determination under paragraph (3)(B) or (4)(B) with respect to such asset shall be made by reference to the fair market value and adjusted basis of such other asset as of the beginning of such 1st taxable year.
(7) Recognition period 
The term recognition period means the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. For purposes of applying this section to any amount includible in income by reason of section 593 (e), the preceding sentence shall be applied without regard to the phrase 10-year.
(8) Treatment of transfer of assets from C corporation to S corporation 

(A) In general 
Except to the extent provided in regulations, if
(i) an S corporation acquires any asset, and
(ii) the S corporations basis in such asset is determined (in whole or in part) by reference to the basis of such asset (or any other property) in the hands of a C corporation,

then a tax is hereby imposed on any net recognized built-in gain attributable to any such assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by subparagraph (B).

(B) Modifications 
For purposes of this paragraph, the modifications of this subparagraph are as follows:
(i) In general The preceding paragraphs of this subsection shall be applied by taking into account the day on which the assets were acquired by the S corporation in lieu of the beginning of the 1st taxable year for which the corporation was an S corporation.
(ii) Subsection (c)(1) not to apply Subsection (c)(1) shall not apply.
(9) Reference to 1st taxable year 
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.
(e) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section including regulations providing for the appropriate treatment of successor corporations.

26 USC 1375 - Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts

(a) General rule 
If for the taxable year an S corporation has
(1) accumulated earnings and profits at the close of such taxable year, and
(2) 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).

(b) Definitions 
For purposes of this section
(1) Excess net passive income 

(A) In general 
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
(i) 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
(ii) the passive investment income for the taxable year.
(B) Limitation 
The amount of the excess net passive income for any taxable year shall not exceed the amount of the corporations taxable income for such taxable year as determined under section 63 (a)
(i) 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
(ii) without regard to the deduction under section 172.
(2) Net passive income 
The term net passive income means
(A) passive investment income, reduced by
(B) 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).
(3) Passive investment income, etc. 
The terms passive investment income and gross receipts have the same respective meanings as when used in paragraph (3) of section 1362 (d).
(4) Coordination with section 1374 
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.
(c) Credits not allowable 
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).
(d) Waiver of tax in certain cases 
If the S corporation establishes to the satisfaction of the Secretary that
(1) it determined in good faith that it had no accumulated earnings and profits at the close of a taxable year, and
(2) 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.