
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: 26USC1375]

 
                     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 III--SPECIAL RULES
 
Sec. 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 subchapter C 
    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 subchapter C 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, Sec. 2, Oct. 19, 1982, 96 Stat. 1684; amended 
Pub. L. 98-369, div. A, title IV, Sec. 474(r)(28), title VII, 
Sec. 721(v), July 18, 1984, 98 Stat. 844, 971; Pub. L. 99-514, title VI, 
Sec. 632(c)(3), Oct. 22, 1986, 100 Stat. 2277; Pub. L. 100-647, title I, 
Sec. 1006(f)(5)(B)-(D), Nov. 10, 1988, 102 Stat. 3406; Pub. L. 104-188, 
title I, Sec. 1311(b)(2)(A)-(C), Aug. 20, 1996, 110 Stat. 1784.)


                            Prior Provisions

    A prior section 1375, added Pub. L. 85-866, title I, Sec. 64(a), 
Sept. 2, 1958, 72 Stat. 1654; amended Pub. L. 88-272, title II, 
Secs. 201(d)(13), 233(b), Feb. 26, 1964, 78 Stat. 32, 112; Pub. L. 89-
389, Secs. 1(a), (b), 2(b)(4), Apr. 14, 1966, 80 Stat. 111, 114; Pub. L. 
91-172, title III, Sec. 301(b)(11), Dec. 30, 1969, 83 Stat. 586; Pub. L. 
94-455, title XIX, Secs. 1901(a)(151), (b)(33)(Q), 1906(b)(13)(A), Oct. 
4, 1976, 90 Stat. 1788, 1802, 1834; Pub. L. 95-600, title VII, 
Sec. 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, Sec. 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

    1996--Pub. L. 104-188, Sec. 1311(b)(2)(C), substituted 
``accumulated'' for ``subchapter C'' in section catchline.
    Subsec. (a)(1). Pub. L. 104-188, Sec. 1311(b)(2)(A), substituted 
``accumulated'' for ``subchapter C''.
    Subsec. (b)(3). Pub. L. 104-188, Sec. 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, Sec. 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, Sec. 1006(f)(5)(C), added par. (4).
    Subsec. (c). Pub. L. 100-647, Sec. 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, Sec. 474(r)(28), substituted 
``section 34'' for ``section 39''.
    Subsec. (d). Pub. L. 98-369, Sec. 721(v), added subsec. (d).


                    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.

                  Section Referred to in Other Sections

    This section is referred to in sections 26, 1366, 1374, 6655 of this 
title.
