
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: 26USC280H]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
                      PART IX--ITEMS NOT DEDUCTIBLE
 
Sec. 280H. Limitation on certain amounts paid to employee-owners 
        by personal service corporations electing alternative taxable 
        years
        

(a) General rule

    If--
        (1) an election by a personal service corporation under section 
    444 is in effect for a taxable year, and
        (2) such corporation does not meet the minimum distribution 
    requirements of subsection (c) for such taxable year,

then the deduction otherwise allowed under this chapter for applicable 
amounts paid or incurred by such corporation to employee-owners shall 
not exceed the maximum deductible amount. The preceding sentence shall 
not apply for purposes of subchapter G (relating to personal holding 
companies).

(b) Carryover of nondeductible amounts

    If any amount is not allowed as a deduction for a taxable year under 
subsection (a), such amount shall be treated as paid or incurred in the 
succeeding taxable year.

(c) Minimum distribution requirement

    For purposes of this section--

                           (1) In general

        A personal service corporation meets the minimum distribution 
    requirements of this subsection if the applicable amounts paid or 
    incurred during the deferral period of the taxable year (determined 
    without regard to subsection (b)) equal or exceed the lesser of--
            (A) the product of--
                (i) the applicable amounts paid during the preceding 
            taxable year, divided by the number of months in such 
            taxable year, multiplied by
                (ii) the number of months in the deferral period of the 
            preceding taxable year, or

            (B) the applicable percentage of the adjusted taxable income 
        for the deferral period of the taxable year.

                      (2) Applicable percentage

        The term ``applicable percentage'' means the percentage (not in 
    excess of 95 percent) determined by dividing--
            (A) the applicable amounts paid or incurred during the 3 
        taxable years immediately preceding the taxable year, by
            (B) the adjusted taxable income of such corporation for such 
        3 taxable years.

(d) Maximum deductible amount

    For purposes of this section, the term ``maximum deductible amount'' 
means the sum of--
        (1) the applicable amounts paid during the deferral period, plus
        (2) an amount equal to the product of--
            (A) the amount determined under paragraph (1), divided by 
        the number of months in the deferral period, multiplied by
            (B) the number of months in the nondeferral period.

(e) Disallowance of net operating loss carrybacks

    No net operating loss carryback shall be allowed to (or from) any 
taxable year of a personal service corporation to which an election 
under section 444 applies.

(f) Other definitions and special rules

    For purposes of this section--

                        (1) Applicable amount

        The term ``applicable amount'' means any amount paid to an 
    employee-owner which is includible in the gross income of such 
    employee, other than--
            (A) any gain from the sale or exchange of property between 
        the owner-employee and the corporation, or
            (B) any dividend paid by the corporation.

                         (2) Employee-owner

        The term ``employee-owner'' has the meaning given such term by 
    section 269A(b)(2) (as modified by section 441(i)(2)).

                (3) Nondeferral and deferral periods

        (A) Deferral period

            The term ``deferral period'' has the meaning given to such 
        term by section 444(b)(4).

        (B) Nondeferral period

            The term ``nondeferral period'' means the portion of the 
        taxable year of the personal service corporation which occurs 
        after the portion of such year constituting the deferral period.

                     (4) Adjusted taxable income

        The term ``adjusted taxable income'' means taxable income 
    determined without regard to--
            (A) any amount paid to an employee-owner which is includible 
        in the gross income of such employee-owner, and
            (B) any net operating loss carryover to the extent such 
        carryover is attributable to amounts described in subparagraph 
        (A).

                  (5) Personal service corporation

        The term ``personal service corporation'' has the meaning given 
    to such term by section 441(i)(2).

(Added Pub. L. 100-203, title X, Sec. 10206(c)(1), Dec. 22, 1987, 101 
Stat. 1330-401; amended Pub. L. 100-647, title II, Sec. 2004(e)(2)(B), 
(3), (14)(A), (C), Nov. 10, 1988, 102 Stat. 3600, 3602.)


                               Amendments

    1988--Subsecs. (c)(1)(A)(i), (d)(1). Pub. L. 100-647, 
Sec. 2004(e)(14)(C), substituted ``amounts paid'' for ``amounts paid or 
incurred''.
    Subsec. (f)(2). Pub. L. 100-647, Sec. 2004(e)(3), substituted 
``section 269A(b)(2) (as modified by section 441(i)(2))'' for ``section 
296A(b)(2)''.
    Subsec. (f)(4). Pub. L. 100-647, Sec. 2004(e)(14)(A), amended par. 
(4) generally. Prior to amendment, par. (4) read as follows: ``The term 
`adjusted taxable income' means taxable income increased by any amount 
paid or incurred to an employee-owner which was includible in the gross 
income of such employee-owner.''
    Subsec. (f)(5). Pub. L. 100-647, Sec. 2004(e)(2)(B), added par. (5).


                    Effective Date of 1988 Amendment

    Amendment by 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

    Section applicable to taxable years beginning after Dec. 31, 1986, 
see section 10206(d)(1) of Pub. L. 100-203, set out as a note under 
section 444 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 444, 7519 of this title.
