26 USC 1362 - Election; revocation; termination

View all text of Part I [§ 1361 - § 1363]

§ 1362. Election; revocation; termination

(a) Election

(1) In general

(2) All shareholders must consent to election

(b) When made

(1) In generalAn election under subsection (a) may be made by a small business corporation for any taxable year—

(A) at any time during the preceding taxable year, or

(B) at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year.

(2) Certain elections made during 1st 2½ months treated as made for next taxable yearIf—

(A) an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but

(B) either—

(i) on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or

(ii) 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election,

then such election shall be treated as made for the following taxable year.

(3) Election made after 1st 2½ months treated as made for following taxable yearIf—

(A) a small business corporation makes an election under subsection (a) for any taxable year, and

(B) such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year,

then such election shall be treated as made for the following taxable year.

(4) Taxable years of 2½ months or less

(5) Authority to treat late elections, etc., as timelyIf—

(A) an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and

(B) the Secretary determines that there was reasonable cause for the failure to timely make such election,

the Secretary may treat such an election as timely made for such taxable year (and paragraph (3) shall not apply).

(d) Termination

(1) By revocation

(A) In general

(B) More than one-half of shares must consent to revocation

(i) a revocation made during the taxable year and on or before the 15th day of the 3d month thereof shall be effective on the 1st day of such taxable year, and

(ii) a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year.

(D) Revocation may specify prospective date

By corporation ceasing to be small business corporation

(A) In general

(B) When effective

(3) Where passive investment income exceeds 25 percent of gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits

(A) Termination

(i) In generalAn election under subsection (a) shall be terminated whenever the corporation—(I) has accumulated earnings and profits at the close of each of 3 consecutive taxable years, and(II) has gross receipts for each of such taxable years more than 25 percent of which are passive investment income.

(ii) When effective

(iii) Years taken into account

(B) Gross receipts from the sales of certain assetsFor purposes of this paragraph—

(i) in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom, and

(ii) in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom.

(i) In general

(ii) Exception for interest on notes from sales of inventory

(iii) Treatment of certain lending or finance companies

(iv) Treatment of certain dividends

(v) Exception for banks, etc.In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), the term “passive investment income” shall not include—(I) interest income earned by such bank or company, or(II) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.

(e) Treatment of S termination year

(1) In generalIn the case of an S termination year, for purposes of this title—

(A) S short year

(B) C short year

(2) Pro rata allocationExcept as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6), the determination of which items are to be taken into account for each of the short taxable years referred to in paragraph (1) shall be made—

(A) first by determining for the S termination year—

(i) the amount of each of the items of income, loss, deduction, or credit described in section 1366(a)(1)(A), and

(ii) the amount of the nonseparately computed income or loss, and

(B) then by assigning an equal portion of each amount determined under subparagraph (A) to each day of the S termination year.

(3) Election to have items assigned to each short taxable year under normal tax accounting rules

(A) In general

(B) Shareholders must consent to election

(4) S termination year

(5) Tax for C short year determined on annualized basis

(A) In general

(B) Section 443(d)(2) to apply

(6) Other special rulesFor purposes of this title—

(A) Short years treated as 1 year for carryover purposes

(B) Due date for S year

(D) Pro rata allocation for S termination year not to apply if 50-percent change in ownership

(f) Inadvertent invalid elections or terminationsIf—

(1) an election under subsection (a) or section 1361(b)(3)(B)(ii) by any corporation—

(A) was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or

(B) was terminated under paragraph (2) or (3) of subsection (d) or section 1361(b)(3)(C),

(2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent,

(3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—

(A) so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or

(B) to acquire the required shareholder consents, and

(4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period,

then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary.

(g) Election after termination

(Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1672; amended Pub. L. 98–369, div. A, title I, § 102(d)(2), title VII, § 721(g), (h), (l), (t), July 18, 1984, 98 Stat. 623, 968, 969, 971; Pub. L. 100–647, title I, §§ 1006(f)(6), 1007(g)(9), Nov. 10, 1988, 102 Stat. 3406, 3435; Pub. L. 104–188, title I, §§ 1305(a), (b), 1308(c), 1311(b)(1), Aug. 20, 1996, 110 Stat. 1779, 1780, 1783, 1784; Pub. L. 106–170, title V, § 532(c)(2)(T), Dec. 17, 1999, 113 Stat. 1931; Pub. L. 108–357, title II, §§ 231(b), 237(a), 238(a), Oct. 22, 2004, 118 Stat. 1433, 1436; Pub. L. 109–135, title IV, § 413(b), Dec. 21, 2005, 119 Stat. 2641; Pub. L. 110–28, title VIII, § 8231(a), May 25, 2007, 121 Stat. 196; Pub. L. 110–172, § 11(a)(25), Dec. 29, 2007, 121 Stat. 2487; Pub. L. 113–295, div. A, title II, § 221(a)(88), Dec. 19, 2014, 128 Stat. 4050; Pub. L. 115–141, div. U, title IV, § 401(a)(190), (191), Mar. 23, 2018, 132 Stat. 1193.)