
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: 26USC535]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
   Subchapter G--Corporations Used to Avoid Income Tax on Shareholders
 
          PART I--CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
 
Sec. 535. Accumulated taxable income


(a) Definition

    For purposes of this subtitle, the term ``accumulated taxable 
income'' means the taxable income, adjusted in the manner provided in 
subsection (b), minus the sum of the dividends paid deduction (as 
defined in section 561) and the accumulated earnings credit (as defined 
in subsection (c)).

(b) Adjustments to taxable income

    For purposes of subsection (a), taxable income shall be adjusted as 
follows:

                              (1) Taxes

        There shall be allowed as a deduction Federal income and excess 
    profits taxes and income, war profits, and excess profits taxes of 
    foreign countries and possessions of the United States (to the 
    extent not allowable as a deduction under section 275(a)(4)), 
    accrued during the taxable year or deemed to be paid by a domestic 
    corporation under section 902(a) or 960(a)(1) for the taxable year, 
    but not including the accumulated earnings tax imposed by section 
    531, the personal holding company tax imposed by section 541, or the 
    taxes imposed by corresponding sections of a prior income tax law.

                    (2) Charitable contributions

        The deduction for charitable contributions provided under 
    section 170 shall be allowed without regard to section 170(b)(2).

                  (3) Special deductions disallowed

        The special deductions for corporations provided in part VIII 
    (except section 248) of subchapter B (section 241 and following, 
    relating to the deduction for dividends received by corporations, 
    etc.) shall not be allowed.

                       (4) Net operating loss

        The net operating loss deduction provided in section 172 shall 
    not be allowed.

                         (5) Capital losses

        (A) In general

            Except as provided in subparagraph (B), there shall be 
        allowed as a deduction an amount equal to the net capital loss 
        for the taxable year (determined without regard to paragraph 
        (7)(A)).

        (B) Recapture of previous deductions for capital gains

            The aggregate amount allowable as a deduction under 
        subparagraph (A) for any taxable year shall be reduced by the 
        lesser of--
                (i) the nonrecaptured capital gains deductions, or
                (ii) the amount of the accumulated earnings and profits 
            of the corporation as of the close of the preceding taxable 
            year.

        (C) Nonrecaptured capital gains deductions

            For purposes of subparagraph (B), the term ``nonrecaptured 
        capital gains deductions'' means the excess of--
                (i) the aggregate amount allowable as a deduction under 
            paragraph (6) for preceding taxable years beginning after 
            July 18, 1984, over
                (ii) the aggregate of the reductions under subparagraph 
            (B) for preceding taxable years.

                        (6) Net capital gains

        (A) In general

            There shall be allowed as a deduction--
                (i) the net capital gain for the taxable year 
            (determined with the application of paragraph (7)), reduced 
            by
                (ii) the taxes attributable to such net capital gain.

        (B) Attributable taxes

            For purposes of subparagraph (A), the taxes attributable to 
        the net capital gain shall be an amount equal to the difference 
        between--
                (i) the taxes imposed by this subtitle (except the tax 
            imposed by this part) for the taxable year, and
                (ii) such taxes computed for such year without including 
            in taxable income the net capital gain for the taxable year 
            (determined without the application of paragraph (7)).

                     (7) Capital loss carryovers

        (A) Unlimited carryforward

            The net capital loss for any taxable year shall be treated 
        as a short-term capital loss in the next taxable year.

        (B) Section 1212 inapplicable

            No allowance shall be made for the capital loss carryback or 
        carryforward provided in section 1212.

     (8) Special rules for mere holding or investment companies

        In the case of a mere holding or investment company--

        (A) Capital loss deduction, etc., not allowed

            Paragraphs (5) and (7)(A) shall not apply.

        (B) Deduction for certain offsets

            There shall be allowed as a deduction the net short-term 
        capital gain for the taxable year to the extent such gain does 
        not exceed the amount of any capital loss carryover to such 
        taxable year under section 1212 (determined without regard to 
        paragraph (7)(B)).

        (C) Earnings and profits

            For purposes of subchapter C, the accumulated earnings and 
        profits at any time shall not be less than they would be if this 
        subsection had applied to the computation of earnings and 
        profits for all taxable years beginning after July 18, 1984.

      (9) Special rule for capital gains and losses of foreign 
                                corporations

        In the case of a foreign corporation, paragraph (6) shall be 
    applied by taking into account only gains and losses which are 
    effectively connected with the conduct of a trade or business within 
    the United States and are not exempt from tax under treaty.

(c) Accumulated earnings credit

                          (1) General rule

        For purposes of subsection (a), in the case of a corporation 
    other than a mere holding or investment company the accumulated 
    earnings credit is (A) an amount equal to such part of the earnings 
    and profits for the taxable year as are retained for the reasonable 
    needs of the business, minus (B) the deduction allowed by subsection 
    (b)(6). For purposes of this paragraph, the amount of the earnings 
    and profits for the taxable year which are retained is the amount by 
    which the earnings and profits for the taxable year exceed the 
    dividends paid deduction (as defined in section 561) for such year.

                         (2) Minimum credit

        (A) In general

            The credit allowable under paragraph (1) shall in no case be 
        less than the amount by which $250,000 exceeds the accumulated 
        earnings and profits of the corporation at the close of the 
        preceding taxable year.

        (B) Certain service corporations

            In the case of a corporation the principal function of which 
        is the performance of services in the field of health, law, 
        engineering, architecture, accounting, actuarial science, 
        performing arts, or consulting, subparagraph (A) shall be 
        applied by substituting ``$150,000'' for ``$250,000''.

                (3) Holding and investment companies

        In the case of a corporation which is a mere holding or 
    investment company, the accumulated earnings credit is the amount 
    (if any) by which $250,000 exceeds the accumulated earnings and 
    profits of the corporation at the close of the preceding taxable 
    year.

                (4) Accumulated earnings and profits

        For purposes of paragraphs (2) and (3), the accumulated earnings 
    and profits at the close of the preceding taxable year shall be 
    reduced by the dividends which under section 563(a) (relating to 
    dividends paid after the close of the taxable year) are considered 
    as paid during such taxable year.

                         (5) Cross reference

            For denial of credit provided in paragraph (2) or (3) where 
        multiple corporations are formed to avoid tax, see section 1551, 
        and for limitation on such credit in the case of certain 
        controlled corporations, see section 1561.

(d) Income distributed to United States-owned foreign corporation 
        retains United States connection

                           (1) In general

        For purposes of this part, if 10 percent or more of the earnings 
    and profits of any foreign corporation for any taxable year--
            (A) is derived from sources within the United States, or
            (B) is effectively connected with the conduct of a trade or 
        business within the United States,

    any distribution out of such earnings and profits (and any interest 
    payment) received (directly or through 1 or more other entities) by 
    a United States-owned foreign corporation shall be treated as 
    derived by such corporation from sources within the United States.

             (2) United States-owned foreign corporation

        The term ``United States-owned foreign corporation'' has the 
    meaning given to such term by section 904(g)(6).

(Aug. 16, 1954, ch. 736, 68A Stat. 180; Pub. L. 85-866, title I, 
Sec. 31, title II, Sec. 205(a), Sept. 2, 1958, 72 Stat. 1631, 1680; Pub. 
L. 87-403, Sec. 3(b), Feb. 2, 1962, 76 Stat. 6; Pub. L. 87-834, 
Sec. 9(d)(2), Oct. 16, 1962, 76 Stat. 1001; Pub. L. 88-272, title II, 
Sec. 207(b)(4), Feb. 26, 1964, 78 Stat. 42; Pub. L. 91-172, title IV, 
Sec. 401(b)(2)(C), title V, Sec. 512(f)(5), (6), Dec. 30, 1969, 83 Stat. 
602, 641; Pub. L. 94-12, title III, Sec. 304(a), Mar. 29, 1975, 89 Stat. 
45; Pub. L. 94-455, title X, Sec. 1033(b)(3), title XIX, 
Secs. 1901(a)(74), (b)(20)(A), (32)(C), (33)(D), 1906(b)(13)(A), Oct. 4, 
1976, 90 Stat. 1628, 1777, 1797, 1800, 1801, 1834; Pub. L. 97-34, title 
II, Sec. 232(a), (b)(1), Aug. 13, 1981, 95 Stat. 250; Pub. L. 98-369, 
div. A, title I, Secs. 58(b), 125(a), July 18, 1984, 98 Stat. 575, 647; 
Pub. L. 99-514, title XII, Sec. 1225(a), title XVIII, Sec. 1899A(17), 
Oct. 22, 1986, 100 Stat. 2558, 2959; Pub. L. 101-508, title XI, 
Sec. 11801(c)(18), Nov. 5, 1990, 104 Stat. 1388-528.)


                               Amendments

    1990--Subsec. (c)(5). Pub. L. 101-508 substituted ``section 1561'' 
for ``sections 1561 and 1564''.
    1986--Subsec. (b)(5)(C)(i), (8)(C). Pub. L. 99-514, Sec. 1899A(17), 
substituted ``July 18, 1984'' for ``the date of the enactment of the Tax 
Reform Act of 1984''.
    Subsec. (b)(9). Pub. L. 99-514, Sec. 1225(a), added par. (9).
    1984--Subsec. (b)(5). Pub. L. 98-369, Sec. 58(b), designated 
existing provisions as subpar. (A), substituted ``Except as provided in 
subparagraph (B), there shall be allowed as a deduction an amount equal 
to the net capital loss for the taxable year (determined without regard 
to paragraph (7)(A)'' for ``There shall be allowed as deductions losses 
from sales or exchanges of capital assets during the taxable year which 
are disallowed as deductions under section 1211(a) in subpar. (A) as so 
redesignated, and added subpars. (B) and (C).
    Subsec. (b)(6). Pub. L. 98-369, Sec. 58(b), divided existing par. 
(6) into subpars. (A) and (B) and substituted references to the 
application of paragraph (7) for references to capital loss carryback 
and carryover provided in section 1212.
    Subsec. (b)(7). Pub. L. 98-369, Sec. 58(b), substituted ``Capital 
loss carryovers'' for ``Capital loss'' in heading, redesignated existing 
provisions as subpar. (B), and added subpar. (A).
    Subsec. (b)(8). Pub. L. 98-369, Sec. 58(b), added par. (8).
    Subsec. (d). Pub. L. 98-369, Sec. 125(a), added subsec. (d).
    1981--Subsec. (c)(2). Pub. L. 97-34, Sec. 232(a), designated 
existing provisions as subpar. (A), substituted ``$250,000'' for 
``$150,000'', and added subpar. (B).
    Subsec. (c)(3). Pub. L. 97-34, Sec. 232(b)(1), substituted 
``$250,000'' for ``$150,000''.
    1976--Subsec. (b)(1). Pub. L. 94-455, Secs. 1033(b)(3), 1901(a)(74), 
struck out ``(other than the excess profits tax imposed by subchapter E 
of chapter 2 of the Internal Revenue Code of 1939 for taxable years 
beginning after December 31, 1940)'' after ``income and excess profits 
taxes'', and substituted ``section 902(a) or 960(a)(1)'' for ``section 
902(a)(1) or 960(a)(1)(C)'' after ``domestic corporation under''.
    Subsec. (b)(6). Pub. L. 94-455, Sec. 1901(b)(33)(D), substituted 
``Net'' for ``Long-term'' after ``(6)''.
    Subsec. (b)(8). Pub. L. 94-455, Sec. 1901(b)(20)(A), struck out par. 
(8) relating to allowance of deduction by bank affiliates.
    Subsec. (b)(9), (10). Pub. L. 94-455, Sec. 1901(b)(32)(C), struck 
out par. (9) relating to allowance of deduction for distributions of 
divested stock, and struck out par. (10) relating to special adjustment 
on disposition of antitrust stock received as a dividend.
    1975--Subsec. (c)(2), (3). Pub. L. 94-12 substituted ``$150,000'' 
for ``$100,000''.
    1969--Subsec. (b)(6). Pub. L. 91-172, Sec. 512(f)(5), substituted 
``capital loss carryback or carryover'' for ``capital loss carryover'' 
and ``capital loss carryback and carryover'' for ``capital loss 
carryover'' in subpar. (B).
    Subsec. (b)(7). Pub. L. 91-172, Sec. 512(f)(6), substituted 
``Capital loss'' for ``Capital loss carryover'' in heading and ``capital 
loss carryback or carryover'' for ``capital loss carryover'' in text.
    Subsec. (c)(5). Pub. L. 91-172, Sec. 401(b)(2)(C), substituted 
``section 1551, and for limitation on such credit in the case of certain 
controlled corporations, see sections 1561 and 1564'' for ``section 
1551''.
    1964--Subsec. (b)(1). Pub. L. 88-272 substituted ``section 
275(a)(4)'' for ``section 164(b)(6)''.
    1962--Subsec. (b)(1). Pub. L. 87-834 substituted ``accrued during 
the taxable year or deemed to be paid by a domestic corporation under 
section 902(a)(1) or 960(a)(1)(C) for the taxable year'' for ``accrued 
during the taxable year''.
    Subsec. (b)(9), (10). Pub. L. 87-403 added pars. (9) and (10).
    1958--Subsec. (b)(2). Pub. L. 85-866, Sec. 31(a), struck out ``the 
limitation in'' after ``without regard to''.
    Subsec. (b)(6)(B). Pub. L. 85-866, Sec. 31(a), substituted ``in 
taxable income the excess of the net long-term capital gain for the 
taxable year over the net short-term capital loss for such year 
(determined without regard to the capital loss carryover provided in 
section 1212)'' for ``such excess in taxable income''.
    Subsec. (c)(2), (3). Pub. L. 85-866, Sec. 205(a), substituted 
``$100,000'' for ``$60,000''.


                    Effective Date of 1986 Amendment

    Section 1225(c) of Pub. L. 99-514, as amended by Pub. L. 100-647, 
title I, Sec. 1012(k), Nov. 10, 1988, 102 Stat. 3513, provided that: 
``The amendments made by this section [amending this section and section 
545 of this title] shall apply to gains and losses realized on or after 
January 1, 1986.''


                    Effective Date of 1984 Amendment

    Amendment by section 58(b) of Pub. L. 98-369 applicable to taxable 
years beginning after July 18, 1984, see section 58(c) of Pub. L. 98-
369, set out as a note under section 532 of this title.
    Section 125(b) of Pub. L. 98-369, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendment made by subsection (a) [amending this section] shall apply to 
distributions and interest payments received by a United States-owned 
foreign corporation (within the meaning of section 535(d) of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954]) on or after May 
23, 1983, in taxable years ending on or after such date.
    ``(2) Corporations in existence on may 23, 1983.--In the case of a 
United States-owned foreign corporation (as so defined) in existence on 
May 23, 1983, the amendment made by subsection (a) shall apply to 
taxable years beginning after December 31, 1984.''


                    Effective Date of 1981 Amendment

    Section 232(c) of Pub. L. 97-34 provided that: ``The amendments made 
by this section [amending this section and sections 243, 1551, and 1561 
of this title] shall apply to taxable years beginning after December 31, 
1981.''


                    Effective Date of 1976 Amendment

    For effective date of amendment by section 1033(b)(3) of Pub. L. 94-
455, see section 1033(c) of Pub. L. 94-455, set out as a note under 
section 902 of this title.
    Amendment by section 1901(a)(74), (b)(20)(A), (32)(C), (33)(D) of 
Pub. L. 94-455 applicable with respect to taxable years beginning after 
Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as a note 
under section 2 of this title.


                    Effective Date of 1975 Amendment

    Section 305(c) of Pub. L. 94-12 provided that: ``The amendments made 
by section 304 [amending this section and sections 243, 1551, and 1561 
of this title] apply to taxable years beginning after December 31, 
1974.''


                    Effective Date of 1969 Amendment

    Amendment by section 401(b)(2)(C) of Pub. L. 91-172 applicable with 
respect to taxable years beginning after Dec. 31, 1969, see section 
401(h)(2) of Pub. L. 91-172, set out as a note under section 1561 of 
this title.
    Amendment by section 512(f)(5), (6) of Pub. L. 91-172 applicable 
with respect to net capital losses sustained in taxable years beginning 
after Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out as a 
note under section 1212 of this title.


                    Effective Date of 1964 Amendment

    Amendment by Pub. L. 88-272 applicable to taxable years beginning 
after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as a 
note under section 164 of this title.


                    Effective Date of 1962 Amendments

    Amendment by Pub. L. 87-834 applicable in respect of any 
distribution received by a domestic corporation after Dec. 31, 1964, and 
in respect of any distribution received by a domestic corporation before 
Jan. 1, 1965, in a taxable year of such corporation beginning after Dec. 
31, 1962, but only to the extent that such distribution is made out of 
the accumulated profits of a foreign corporation for a taxable year (of 
such foreign corporation) beginning after Dec. 31, 1962, see section 
9(e) of Pub. L. 87-834, set out as a note under section 902 of this 
title.
    Amendment by Pub. L. 87-403 applicable only with respect to 
distributions made after Feb. 2, 1962, see section 3(g) of Pub. L. 87-
403, set out as a note under section 312 of this title.


                    Effective Date of 1958 Amendment

    Amendment by section 31 of Pub. L. 85-866 applicable to taxable 
years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see 
section 1(c)(1) of Pub. L. 85-866, set out as a note under section 165 
of this title.
    Section 205(b) of Pub. L. 85-866 provided that: ``The amendments 
made by subsection (a) [amending this section and section 1551 of this 
title] shall apply with respect to taxable years beginning after 
December 31, 1957.''


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 531, 631, 1551, 1561 of this 
title.
