
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1366]

 
                     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 II--TAX TREATMENT OF SHAREHOLDERS
 
Sec. 1366. Pass-thru of items to shareholders


(a) Determination of shareholder's tax liability

                           (1) In general

        In determining the tax under this chapter of a shareholder for 
    the shareholder's taxable year in which the taxable year of the S 
    corporation ends (or for the final taxable year of a shareholder who 
    dies, or of a trust or estate which terminates, before the end of 
    the corporation's taxable year), there shall be taken into account 
    the shareholder's pro rata share of the corporation's--
            (A) items of income (including tax-exempt income), loss, 
        deduction, or credit the separate treatment of which could 
        affect the liability for tax of any shareholder, and
            (B) nonseparately computed income or loss.

    For purposes of the preceding sentence, the items referred to in 
    subparagraph (A) shall include amounts described in paragraph (4) or 
    (6) of section 702(a).

          (2) Nonseparately computed income or loss defined

        For purposes of this subchapter, the term ``nonseparately 
    computed income or loss'' means gross income minus the deductions 
    allowed to the corporation under this chapter, determined by 
    excluding all items described in paragraph (1)(A).

(b) Character passed thru

    The character of any item included in a shareholder's pro rata share 
under paragraph (1) of subsection (a) shall be determined as if such 
item were realized directly from the source from which realized by the 
corporation, or incurred in the same manner as incurred by the 
corporation.

(c) Gross income of a shareholder

    In any case where it is necessary to determine the gross income of a 
shareholder for purposes of this title, such gross income shall include 
the shareholder's pro rata share of the gross income of the corporation.

(d) Special rules for losses and deductions

       (1) Cannot exceed shareholder's basis in stock and debt

        The aggregate amount of losses and deductions taken into account 
    by a shareholder under subsection (a) for any taxable year shall not 
    exceed the sum of--
            (A) the adjusted basis of the shareholder's stock in the S 
        corporation (determined with regard to paragraphs (1) and (2)(A) 
        of section 1367(a) for the taxable year), and
            (B) the shareholder's adjusted basis of any indebtedness of 
        the S corporation to the shareholder (determined without regard 
        to any adjustment under paragraph (2) of section 1367(b) for the 
        taxable year).

    (2) Indefinite carryover of disallowed losses and deductions

        Any loss or deduction which is disallowed for any taxable year 
    by reason of paragraph (1) shall be treated as incurred by the 
    corporation in the succeeding taxable year with respect to that 
    shareholder.

     (3) Carryover of disallowed losses and deductions to post-
                        termination transition period

        (A) In general

            If for the last taxable year of a corporation for which it 
        was an S corporation a loss or deduction was disallowed by 
        reason of paragraph (1), such loss or deduction shall be treated 
        as incurred by the shareholder on the last day of any post-
        termination transition period.

        (B) Cannot exceed shareholder's basis in stock

            The aggregate amount of losses and deductions taken into 
        account by a shareholder under subparagraph (A) shall not exceed 
        the adjusted basis of the shareholder's stock in the corporation 
        (determined at the close of the last day of the post-termination 
        transition period and without regard to this paragraph).

        (C) Adjustment in basis of stock

            The shareholder's basis in the stock of the corporation 
        shall be reduced by the amount allowed as a deduction by reason 
        of this paragraph.

        (D) At-risk limitations

            To the extent that any increase in adjusted basis described 
        in subparagraph (B) would have increased the shareholder's 
        amount at risk under section 465 if such increase had occurred 
        on the day preceding the commencement of the post-termination 
        transition period, rules similar to the rules described in 
        subparagraphs (A) through (C) shall apply to any losses 
        disallowed by reason of section 465(a).

(e) Treatment of family group

    If an individual who is a member of the family (within the meaning 
of section 704(e)(3)) of one or more shareholders of an S corporation 
renders services for the corporation or furnishes capital to the 
corporation without receiving reasonable compensation therefor, the 
Secretary shall make such adjustments in the items taken into account by 
such individual and such shareholders as may be necessary in order to 
reflect the value of such services or capital.

(f) Special rules

     (1) Subsection (a) not to apply to credit allowable under 
                                 section 34

        Subsection (a) shall not apply with respect to any credit 
    allowable under section 34 (relating to certain uses of gasoline and 
    special fuels).

           (2) Treatment of tax imposed on built-in gains

        If any tax is imposed under section 1374 for any taxable year on 
    an S corporation, for purposes of subsection (a), the amount so 
    imposed shall be treated as a loss sustained by the S corporation 
    during such taxable year. The character of such loss shall be 
    determined by allocating the loss proportionately among the 
    recognized built-in gains giving rise to such tax.

      (3) Reduction in pass-thru for tax imposed on excess net 
                               passive income

        If any tax is imposed under section 1375 for any taxable year on 
    an S corporation, for purposes of subsection (a), each item of 
    passive investment income shall be reduced by an amount which bears 
    the same ratio to the amount of such tax as--
            (A) the amount of such item, bears to
            (B) the total passive investment income for the taxable 
        year.

(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1677; amended 
Pub. L. 98-369, div. A, title IV, Sec. 474(r)(26), title VII, 
Sec. 735(c)(16), July 18, 1984, 98 Stat. 844, 985; Pub. L. 99-514, title 
VI, Sec. 632(c)(2), title VII, Sec. 701(e)(4)(K), Oct. 22, 1986, 100 
Stat. 2277, 2343; Pub. L. 100-647, title I, Sec. 1006(f)(5)(E), Nov. 10, 
1988, 102 Stat. 3406; Pub. L. 101-239, title VII, Sec. 7811(c)(7), Dec. 
19, 1989, 103 Stat. 2407; Pub. L. 104-188, title I, Secs. 1302(e), 
1307(c)(3)(A), 1309(a)(1), 1312, Aug. 20, 1996, 110 Stat. 1779, 1782, 
1783, 1784.)


                               Amendments

    1996--Subsec. (a)(1). Pub. L. 104-188, Sec. 1302(e), inserted ``, or 
of a trust or estate which terminates,'' after ``who dies'' in 
introductory provisions.
    Subsec. (d)(1)(A). Pub. L. 104-188, Sec. 1309(a)(1), substituted 
``paragraphs (1) and (2)(A)'' for ``paragraph (1)''.
    Subsec. (d)(3)(D). Pub. L. 104-188, Sec. 1312, added subpar. (D).
    Subsec. (g). Pub. L. 104-188, Sec. 1307(c)(3)(A), struck out subsec. 
(g) which provided a cross reference to subchapter D of chapter 63 of 
this title.
    1989--Subsec. (f)(2). Pub. L. 101-239 substituted ``Treatment of tax 
imposed on built-in gains'' for ``Reduction in pass-thru for tax imposed 
on built-in gains'' in heading and amended text generally. Prior to 
amendment, text read as follows: ``If any tax is imposed under section 
1374 for any taxable year on an S corporation, for purposes of 
subsection (a), the amount of each recognized built-in gain (within the 
meaning of section 1374) for such taxable year shall be reduced by its 
proportionate share of such tax.''
    1988--Subsec. (f)(2). Pub. L. 100-647 substituted ``within the 
meaning of section 1374'' for ``as defined in section 1374(d)(2)''.
    1986--Subsec. (f)(2). Pub. L. 99-514, Sec. 632(c)(2), amended par. 
(2) generally. Prior to amendment, par. (2), reduction in pass-thru for 
tax imposed on capital gain, read as follows: ``If any tax is imposed 
under section 1374 for any taxable year on an S corporation, for 
purposes of subsection (a)--
        ``(A) the amount of the corporation's long-term capital gains 
    for the taxable year shall be reduced by the amount of such tax, and
        ``(B) if the amount of such tax exceeds the amount of such long-
    term capital gains, the corporation's gains from sales or exchanges 
    of property described in section 1231 shall be reduced by the amount 
    of such excess.
For purposes of the preceding sentence, the term `long-term capital 
gain' shall not include any gain from the sale or exchange of property 
described in section 1231.''
    Pub. L. 99-514, Sec. 701(e)(4)(K), struck out ``56 or'' before 
``1374''.
    1984--Subsec. (f). Pub. L. 98-369, Sec. 474(r)(26), substituted 
``section 34'' for ``section 39'' in heading and text.
    Subsec. (f)(1). Pub. L. 98-369, Sec. 735(c)(16), substituted ``and 
special fuels'' for ``, special fuels, and lubricating oil''.


                    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 1989 Amendment

    Amendment by Pub. L. 101-239 effective, except as otherwise 
provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 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 section 632(c)(2) of 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.
    Amendment by section 701(e)(4)(K) 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 section 474(r)(26) 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 735(c)(16) of Pub. L. 98-369 effective, except 
as otherwise provided, as if included in the provisions of the Highway 
Revenue Act of 1982, title V of Pub. L. 97-424, to which such amendment 
relates, see section 736 of Pub. L. 98-369, set out as a note under 
section 4051 of this title.


                             Effective Date

    Section applicable to taxable years beginning after Dec. 31, 1982, 
except that in the case of a taxable year beginning during 1982, subsec. 
(f)(3) of this section and sections 1362(d)(3) and 1375 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.


  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)(K) 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.

                  Section Referred to in Other Sections

    This section is referred to in sections 59, 108, 453B, 512, 641, 
1362, 1363, 1367, 7519 of this title.
