
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1363]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
  Subchapter S--Tax Treatment of S Corporations and Their Shareholders
 
                           PART I--IN GENERAL
 
Sec. 1363. Effect of election on corporation


(a) General rule

    Except as otherwise provided in this subchapter, an S corporation 
shall not be subject to the taxes imposed by this chapter.

(b) Computation of corporation's taxable income

    The taxable income of an S corporation shall be computed in the same 
manner as in the case of an individual, except that--
        (1) the items described in section 1366(a)(1)(A) shall be 
    separately stated,
        (2) the deductions referred to in section 703(a)(2) shall not be 
    allowed to the corporation,
        (3) section 248 shall apply, and
        (4) section 291 shall apply if the S corporation (or any 
    predecessor) was a C corporation for any of the 3 immediately 
    preceding taxable years.

(c) Elections of the S corporation

                           (1) In general

        Except as provided in paragraph (2), any election affecting the 
    computation of items derived from an S corporation shall be made by 
    the corporation.

                           (2) Exceptions

        In the case of an S corporation, elections under the following 
    provisions shall be made by each shareholder separately--
            (A) section 617 (relating to deduction and recapture of 
        certain mining exploration expenditures), and
            (B) section 901 (relating to taxes of foreign countries and 
        possessions of the United States).

(d) Recapture of LIFO benefits

                           (1) In general

        If--
            (A) 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
            (B) 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).

             (2) Additional tax payable in installments

        (A) In general

            Any increase in the tax imposed by this chapter by reason of 
        this subsection shall be payable in 4 equal installments.

        (B) Date for payment of 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.

        (C) No interest for period of extension

            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.

                      (3) LIFO recapture amount

        For purposes of this subsection, the term ``LIFO recapture 
    amount'' means the amount (if any) by which--
            (A) the inventory amount of the inventory asset under the 
        first-in, first-out method authorized by section 471, exceeds
            (B) 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).

                        (4) Other definitions

        For purposes of this subsection--

        (A) LIFO method

            The term ``LIFO method'' means the method authorized by 
        section 472.

        (B) Inventory assets

            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.

        (C) Method of determining inventory amount

            The inventory amount of assets under a method authorized by 
        section 471 shall be determined--
                (i) if the corporation uses the retail method of valuing 
            inventories under section 472, by using such method, or
                (ii) if clause (i) does not apply, by using cost or 
            market, whichever is lower.

        (D) Not treated as member of affiliated group

            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).

(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1676; amended 
Pub. L. 98-369, div. A, title VII, Sec. 721(a), (b)(1), (p), July 18, 
1984, 98 Stat. 966, 970; Pub. L. 99-514, title V, Sec. 511(d)(2)(C), 
title VI, Sec. 632(b), title VII, Sec. 701(e)(4)(J), Oct. 22, 1986, 100 
Stat. 2249, 2277, 2343; Pub. L. 100-203, title X, Sec. 10227(a), Dec. 
22, 1987, 101 Stat. 1330-416; Pub. L. 100-647, title I, Sec. 1006(f)(7), 
title II, Sec. 2004(n), Nov. 10, 1988, 102 Stat. 3407, 3608.)


                               Amendments

    1988--Subsec. (d). Pub. L. 100-647, Sec. 1006(f)(7), struck out 
subsec. (d) which related to distributions of appreciated property.
    Subsec. (d)(4)(D). Pub. L. 100-647, Sec. 2004(n), added subpar. (D).
    Subsec. (e). Pub. L. 100-647, Sec. 1006(f)(7), struck out subsec. 
(e) which provided that subsec. (d) not apply to reorganizations, etc.
    1987--Subsec. (d). Pub. L. 100-203 added subsec. (d) relating to 
recapture of LIFO benefits.
    1986--Subsec. (a). Pub. L. 99-514, Sec. 701(e)(4)(J), struck out 
``and in section 58(d)'' after ``this subchapter''.
    Subsec. (c)(2). Pub. L. 99-514, Sec. 511(d)(2)(C), redesignated 
subpars. (B) and (C) as (A) and (B), respectively, and struck out former 
subpar. (A) which read as follows: ``section 163(d) (relating to 
limitation on interest on investment indebtedness),''.
    Subsec. (e). Pub. L. 99-514, Sec. 632(b), amended subsec. (e) 
generally, substituting ``reorganizations, etc.'' for ``complete 
liquidations and reorganizations'', in heading and in text struck out 
reference to property in complete liquidation of the corporation.
    1984--Subsec. (b)(4). Pub. L. 98-369, Sec. 721(p), added par. (4).
    Subsec. (c)(2). Pub. L. 98-369, Sec. 721(b)(1), redesignated 
subpars. (B) to (D) as (A) to (C), respectively, and struck out subpar. 
(A) which provided ``subsection (b)(5) or (d)(4) of section 108 
(relating to income from discharge of indebtedness),''.
    Subsec. (d). Pub. L. 98-369, Sec. 721(a)(2), substituted ``Except as 
provided in subsection (e), if'' for ``If''.
    Subsec. (e). Pub. L. 98-369, Sec. 721(a)(1), added subsec. (e).


                    Effective Date of 1988 Amendment

    Amendment by section 1006(f)(7) of 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.
    Amendment by section 2004(n) of Pub. L. 100-647 effective, except as 
otherwise provided, as if included in the provisions of the Revenue Act 
of 1987, Pub. L. 100-203, title X, to which such amendment relates, see 
section 2004(u) of Pub. L. 100-647, set out as a note under section 56 
of this title.


                    Effective Date of 1987 Amendment

    Section 10227(b) of Pub. L. 100-203 provided that:
    ``(1) In general.--Except as provided in paragraph (2) the amendment 
made by subsection (a) [amending this section] shall apply in the case 
of elections made after December 17, 1987.
    ``(2) Exception.--The amendment made by subsection (a) shall not 
apply in the case of any election made by a corporation after December 
17, 1987, and before January 1, 1989, if, on or before December 17, 
1987--
        ``(A) there was a resolution adopted by the board of directors 
    of such corporation to make an election under subchapter S of 
    chapter 1 of the Internal Revenue Code of 1986, or
        ``(B) there was a ruling request with respect to the business 
    filed with the Internal Revenue Service expressing an intent to make 
    such an election.''


                    Effective Date of 1986 Amendment

    Amendment by section 511(d)(2)(C) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. 
L. 99-514, set out as a note under section 163 of this title.
    Amendment by section 632(b) of Pub. L. 99-514 applicable to any 
distribution in complete liquidation, and any sale or exchange, made by 
a corporation after July 31, 1986, unless such corporation is completely 
liquidated before Jan. 1, 1987, any transaction described in section 338 
of this title for which the acquisition date occurs after Dec. 31, 1986, 
and any distribution, not in complete liquidation, made after Dec. 31, 
1986, with exceptions and special and transitional rules, see section 
633 of Pub. L. 99-514, set out as an Effective Date note under section 
336 of this title.
    Amendment by section 701(e)(4)(J) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, with certain exceptions and 
qualifications, see section 701(f) of Pub. L. 99-514, set out as an 
Effective Date note under section 55 of this title.


                    Effective Date of 1984 Amendment

    Amendment by 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

    Section applicable to taxable years beginning after Dec. 31, 1982, 
see section 6(a) of Pub. L. 97-354, set out as a note under section 1361 
of this title.


  Applicability of Certain Amendments by Pub. L. 99-514 in Relation to 
                   Treaty Obligations of United States

    For applicability of amendment by section 701(e)(4)(J) of Pub. L. 
99-514 notwithstanding any treaty obligation of the United States in 
effect on Oct. 22, 1986, with provision that for such purposes any 
amendment by title I of Pub. L. 100-647 be treated as if it had been 
included in the provision of Pub. L. 99-514 to which such amendment 
relates, see section 1012(aa)(2), (4) of Pub. L. 100-647, set out as a 
note under section 861 of this title.
