
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: 26USC1378]

 
                     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 IV--DEFINITIONS; MISCELLANEOUS
 
Sec. 1378. Taxable year of S corporation


(a) General rule

    For purposes of this subtitle, the taxable year of an S corporation 
shall be a permitted year.

(b) Permitted year defined

    For purposes of this section, the term ``permitted year'' means a 
taxable year which--
        (1) is a year ending December 31, or
        (2) is any other accounting period for which the corporation 
    establishes a business purpose to the satisfaction of the Secretary.

For purposes of paragraph (2), any deferral of income to shareholders 
shall not be treated as a business purpose.

(Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1685; amended 
Pub. L. 98-369, div. A, title VII, Sec. 721(m), (q), July 18, 1984, 98 
Stat. 969, 970; Pub. L. 99-514, title VIII, Sec. 806(b), Oct. 22, 1986, 
100 Stat. 2363.)


                            Prior Provisions

    A prior section 1378, added Pub. L. 89-389, Sec. 2(a), Apr. 14, 
1966, 80 Stat. 113; amended Pub. L. 91-172, title V, Sec. 511(c)(4), 
Dec. 30, 1969, 83 Stat. 638; Pub. L. 94-455, title XIX, 
Sec. 1901(a)(152), (b)(33)(R), Oct. 4, 1976, 90 Stat. 1789, 1802, 
related to tax imposed on certain capital gains, prior to the general 
revision of this subchapter by section 2 of Pub. L. 97-354.


                               Amendments

    1986--Subsec. (a). Pub. L. 99-514, Sec. 806(b)(1), amended subsec. 
(a) generally. Prior to amendment, subsec. (a) read as follows: ``For 
purposes of this subtitle--
        ``(1) an S corporation shall not change its taxable year to any 
    accounting period other than a permitted year, and
        ``(2) no corporation may make an election under section 1362(a) 
    for any taxable year unless such taxable year is a permitted year.''
    Subsec. (b). Pub. L. 99-514, Sec. 806(b)(2), inserted at end ``For 
purposes of paragraph (2), any deferral of income to shareholders shall 
not be treated as a business purpose.''
    Subsec. (c). Pub. L. 99-514, Sec. 806(b)(3), struck out subsec. (c) 
which required existing S corporations to use permitted year after 50-
percent shift in ownership.
    1984--Subsec. (c)(1). Pub. L. 98-369, Sec. 721(m), substituted 
``which includes December 31, 1982 (or which is an S corporation for a 
taxable year beginning during 1983 by reason of an election made on or 
before October 19, 1982)'' for ``which includes December 31, 1982''.
    Subsec. (c)(3)(B)(i). Pub. L. 98-369, Sec. 721(q), substituted ``who 
(or whose estate) held'' for ``who held''.


                    Effective Date of 1986 Amendment

    Section 806(e) of Pub. L. 99-514, as amended by Pub. L. 100-647, 
title I, Sec. 1008(e)(7), (8), (10), Nov. 10, 1988, 102 Stat. 3441, 
provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and sections 267, 441, and 706 of this title] shall apply 
to taxable years beginning after December 31, 1986.
    ``(2) Change in accounting period.--In the case of any partnership, 
S corporation, or personal service corporation required by the 
amendments made by this section to change its accounting period for the 
taxpayer's first taxable year beginning after December 31, 1986--
        ``(A) such change shall be treated as initiated by the 
    partnership, S corporation, or personal service corporation,
        ``(B) such change shall be treated as having been made with the 
    consent of the Secretary, and
        ``(C) with respect to any partner or shareholder of an S 
    corporation which is required to include the items from more than 1 
    taxable year of the partnership or S corporation in any 1 taxable 
    year, income in excess of expenses of such partnership or 
    corporation for the short taxable year required by such amendments 
    shall be taken into account ratably in each of the first 4 taxable 
    years beginning after December 31, 1986, unless such partner or 
    shareholder elects to include all such income in the the [sic] 
    partner's or shareholder's taxable year with or within which the 
    partnership's or S corporation's short taxable year ends.
Subparagraph (C) shall apply to a shareholder of an S corporation only 
if such corporation was an S corporation for a taxable year beginning in 
1986.
    ``(3) Basis, etc. rules--
        ``(A) Basis rule.--The adjusted basis of any partner's interest 
    in a partnership or shareholder's stock in an S corporation shall be 
    determined as if all of the income to be taken into account ratably 
    in the 4 taxable years referred to in paragraph (2)(C) were included 
    in gross income for the 1st of such taxable years.
        ``(B) Treatment of dispositions.--If any interest in a 
    partnership or stock in an S corporation is disposed of before the 
    last taxable year in the spread period, all amounts which would be 
    included in the gross income of the partner or shareholder for 
    subsequent taxable years in the spread period under paragraph (2)(C) 
    and attributable to the interest or stock disposed of shall be 
    included in gross income for the taxable year in which the 
    disposition occurs. For purposes of the preceding sentence, the term 
    `spread period' means the period consisting of the 4 taxable years 
    referred to in paragraph (2)(C).''


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-369 effective as if included in 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.


              Construction of Section 806 of Pub. L. 99-514

    Pub. L. 100-647, title I, Sec. 1008(e)(9), Nov. 10, 1988, 102 Stat. 
3441, provided that: ``Nothing in section 806 of the Reform Act [Pub. L. 
99-514, amending this section and sections 267, 441, and 706 of this 
title and enacting provisions set out above] or in any legislative 
history relating thereto shall be construed as requiring the Secretary 
of the Treasury or his delegate to permit an automatic change of a 
taxable year.''

                  Section Referred to in Other Sections

    This section is referred to in sections 444, 706 of this title.
