§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 corporation's 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.

(Added Pub. L. 97–354, §2, Oct. 19, 1982, 96 Stat. 1684 ; amended Pub. L. 98–369, div. A, title IV, §474(r)(28), title VII, §721(v), July 18, 1984, 98 Stat. 844 , 971; Pub. L. 99–514, title VI, §632(c)(3), Oct. 22, 1986, 100 Stat. 2277 ; Pub. L. 100–647, title I, §1006(f)(5)(B)–(D), Nov. 10, 1988, 102 Stat. 3406 ; Pub. L. 104–188, title I, §1311(b)(2)(A)–(C), Aug. 20, 1996, 110 Stat. 1784 ; Pub. L. 109–135, title IV, §412(qq), Dec. 21, 2005, 119 Stat. 2640 .)

Editorial Notes

Prior Provisions

A prior section 1375, added Pub. L. 85–866, title I, §64(a), Sept. 2, 1958, 72 Stat. 1654 ; amended Pub. L. 88–272, title II, §§201(d)(13), 233(b), Feb. 26, 1964, 78 Stat. 32 , 112; Pub. L. 89–389, §§1(a), (b), 2(b)(4), Apr. 14, 1966, 80 Stat. 111 , 114; Pub. L. 91–172, title III, §301(b)(11), Dec. 30, 1969, 83 Stat. 586 ; Pub. L. 94–455, title XIX, §§1901(a)(151), (b)(33)(Q), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1788 , 1802, 1834; Pub. L. 95–600, title VII, §703(j)(6), Nov. 6, 1978, 92 Stat. 2941 , related to special rules applicable to distributions of electing small business corporations, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354.

A prior section 1376, added Pub. L. 85–866, title I, §64(a), Sept. 2, 1958, 72 Stat. 1655 , related to adjustment to basis of stock of, and indebtedness owing, shareholders, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354.

Amendments

2005-Subsec. (d)(1), (2). Pub. L. 109–135 substituted "accumulated" for "subchapter C".

1996-Pub. L. 104–188, §1311(b)(2)(C), substituted "accumulated" for "subchapter C" in section catchline.

Subsec. (a)(1). Pub. L. 104–188, §1311(b)(2)(A), substituted "accumulated" for "subchapter C".

Subsec. (b)(3). Pub. L. 104–188, §1311(b)(2)(B), amended par. (3) generally. Prior to amendment, par. (3) read as follows:

"(3) Passive investment income; etc.-The terms 'subchapter C earnings and profits', 'passive investment income', and 'gross receipts' shall have the same respective meanings as when used in paragraph (3) of section 1362(d)."

1988-Subsec. (b)(1)(B). Pub. L. 100–647, §1006(f)(5)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: "The amount of the excess net passive income for any taxable year shall not exceed the corporation's taxable income for the taxable year (determined in accordance with section 1374(d)(4))."

Subsec. (b)(4). Pub. L. 100–647, §1006(f)(5)(C), added par. (4).

Subsec. (c). Pub. L. 100–647, §1006(f)(5)(D), amended subsec. (c) generally, in heading substituting "Credits not allowable" for "Special rules", and in text substituting "No credit" for "(1) Disallowance of credit.-No credit", and striking out par. (2) which related to coordination with section 1374.

1986-Subsec. (b)(1)(B). Pub. L. 99–514 substituted "section 1374(d)(4)" for "section 1374(d)".

1984-Subsec. (c)(1). Pub. L. 98–369, §474(r)(28), substituted "section 34" for "section 39".

Subsec. (d). Pub. L. 98–369, §721(v), added subsec. (d).

Statutory Notes and Related Subsidiaries

Effective Date of 1996 Amendment

Amendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.

Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, as amended, set out as an Effective Date note under section 336 of this title.

Effective Date of 1984 Amendment

Amendment by section 474(r)(28) of Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, and to carrybacks from such years, see section 475(a) of Pub. L. 98–369, set out as a note under section 21 of this title.

Amendment by section 721(v) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title.

Effective Date

This section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, this section and sections 1362(d)(3) and 1366(f)(3) of this title shall apply, and section 1372(e)(5) of this title as in effect on the day before Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title.