under such paragraph (4), be carried back to the same extent and in the same manner as is provided under section 172; and

(B) in any case where the exclusion referred to in paragraph (5) (B) of subsection (a) results in a net operating loss or capital loss for the prior taxable year (or years), such loss shall, for purposes of computing the decrease in tax for the prior taxable year (or years) under such paragraph (5) (B), be carried back and carried over to the same extent and in the same manner as is provided under section 172 or section 1212, except that no carryover beyond the taxable year shall be taken into account.

(5) For purposes of this chapter, the net operating loss described in paragraph (4) (A) of this subsection, or the net operating loss or capital loss described in paragraph (4) (B) of this subsection, as the case may be, shall (after the application of paragraph (4) or (5) (B) of subsection (a) for the taxable year) be taken into account under section 172 or 1212 for taxable years after the taxable year to the same extent and in the same

manner as

(A) a net operating loss sustained for the taxable year, if paragraph (4) of subsection (a) applied, or

(B) a net operating loss or capital loss sustained for the prior taxable year (or years), if paragraph (5) (B) of subsection (a) applied. (Aug. 16, 1954, ch. 736, 68A Stat. 348; Sept. 2, 1958, Pub. L. 85-866, title I, § 60(a)—(d), 72 Stat. 1647; Oct. 23, 1962, Pub. L. 87-863, § 5(a), 76 Stat. 1142; Feb. 26, 1964, Pub. L. 88-272, title II, § 234 (b) (7), 78 Stat. 116.)

1958 Subsec. (a).

Pub. L. 85-866, § 60 (a), inserted in the last sentence "and subchapter E of chapter 2 of such code".

Subsec. (b) (2), Pub. L. 85–866, § 60 (b), (c), in second sentence inserted "with respect to rates" and added “, or by an order of a court, or are made in settlement of litigation or under threat or imminence of litigation" and added last sentence.

Subsec. (b) (3). Pub. L. 85-866, § 60(d), added subsec. (b) (3).

EFFECTIVE DATE OF 1964 AMENDMENT

Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 234 (c) of Pub. L. 88-272, set out as a note under section 1503 of this title.

EFFECTIVE DATE OF 1962 AMENDMENT Section 5(b) of Pub. L. 87-863 provided that: "The amendment made by subsection (a) [to this section] shall be effective with respect to taxable years beginning on or after January 1, 1962."

EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (a) and the last sentence of subsec. (b) (2) of this section by Pub. L. 85-866, and subsec. (b) (3) of this section, applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

Section 60 (e) of Pub. L. 85-866 provided that: "The amendment made by subsection (b) [to second sentence

of subsec. (b) of this section] shall apply with respect to taxable years beginning after December 31, 1957. No interest shall be allowed or paid on any overpayment resulting from the application of the amendment made by subsection (c)."

CROSS REFERENCES

Taxable year of inclusion of gross income, see section 451 (a) of this title.

§ 1342. Computation of tax where taxpayer recovers substantial amount held by another under claim of right.

(a) General rule. If

(1) an item was deducted from gross income for a prior taxable year (or years) because it appeared that another person held an unrestricted right to such item as a result of a court decision in a patent infringement suit (whether or not the taxpayer is a party to such suit); and

(2) gross income is increased for the taxable year because it was established after the close of such prior taxable year (or years) that such other person did not have an unrestricted right to such item or to a portion of such item because of the subsequent reversal of such court decision on the ground that such decision was induced by fraud or undue influence; and

(3) the amount of such increase in gross income exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following:

(4) the tax for the taxable year computed with the gross income so increased; or (5) an amount equal to

(A) the tax for the taxable year computed without such increase in gross income, plus

(B) the increase in tax (including interest) under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the elimination of such item (or portion thereof) as a deduction from gross income for such prior taxable year (or years).

from gross income for the taxable year, and the deduction allowed in respect thereof in such prior taxable year treated as not having been allowable, if—

(1) the taxpayer elects in writing (at such time and in such manner as may be prescribed by regulations prescribed by the Secretary or his delegate) to treat such deduction as not having been allowable for such prior taxable year, and

(2) the taxpayer consents in writing to the assessment, within such period as may be agreed on, of any deficiency resulting from such treatment, even though the statutory period for the assessment of any such deficiency had expired before the filing of such consent. (Aug. 16, 1954, ch. 736, 68A Stat. 349.)

§ 1347. Claims against United States involving acquisition of property.

In the case of amounts (other than interest) received by a taxpayer from the United States with respect to a claim against the United States involving the acquisition of property and remaining unpaid for more than 15 years, the surtax imposed by section 1 attributable to such receipt shall not exceed 30 percent of the amount (other than interest) so received. This section shall apply only if claim was filed with the United States before January 1, 1958. (Aug. 16, 1954, ch. 736, 68A Stat. 349; Sept. 2, 1958, Pub. L. 85-866, title I, § 61(a), 72 Stat. 1648.)

AMENDMENTS

1958-Pub. L. 85-866 substituted "surtax" for "tax" and added sentence "this section shall apply only if claim was filed with the United States before January 1, 1958".

EFFECTIVE DATE OF 1958 AMENDMENT

Section 61 (b) of Pub. L. 85-866 provided that: “The amendment made by subsection (a) (1) [to first sentence of this section] shall apply only with respect to taxable years beginning after December 31, 1957."

Last sentence of this section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

Subchapter R.-Election of Certain Partnerships and Proprietorships as to Taxable Status

Sec.

1361. Unincorporated business enterprises electing to be taxed as domestic corporations.

§ 1361. Unincorporated business enterprises electing to be taxed as domestic corporations.

(a) General rule.

Subject to the qualifications in subsection (b), an election may be made, in accordance with regulations prescribed by the Secretary or his delegate, not later than 60 days after the close of any taxable year of a proprietorship or partnership owning an unincorporated business enterprise, by the proprietor or all the partners, owning an interest in such enterprise at any time on or after the first day of the first taxable year to which the election applies or of the year described in subsection (f), to be subject to the taxes described in subsection (h) as a domestic corporation for such year and subsequent years. (b) Qualifications.

The election described in subsection (a) may not be made with respect to an unincorporated business enterprise unless at all times during the period on or after the first day of the first taxable year to

which the election applies or of the year described in subsection (f), as the case may be, and on or before the date of election

(1) such enterprise is owned by an individual, or by a partnership consisting of not more than 50 individual members;

(2) no proprietor or partner having more than a 10 percent interest in profits or capital of such enterprise is a proprietor or a partner having more than a 10 percent interest in profits or capital of any other unincorporated business enterprise taxable as a domestic corporation;

(3) no proprietor or partner of such enterprise is a nonresident alien or a foreign partnership; and

(4) such enterprise is one in which capital is a material income producing factor, or 50 percent or more of the gross income of such enterprise consists of gains, profits, or income derived from trading as a principal or from buying and selling real property, stock, securities, or commodities for the account of others.

(c) Corporate provisions applicable.

Under regulations prescribed by the Secretary or his delegate, an unincorporated business enterprise as to which an election has been made under subsection (a), shall, except as provided in subsection (m), be considered a corporation for purposes of this subtitle, except chapter 2 thereof, with respect to operation, distributions, sale of an interest, and any other purpose; and each owner of an interest in such enterprise shall be considered a shareholder thereof in proportion to his interest.

(d) Limitation.

A partner or proprietor of an unincorporated business enterprise as to which an election has been made under subsection (a) shall not be considered an employee for purposes of section 401(a) (relating to employees' pension trusts, etc.) other than an employee within the meaning of section 401(c) (1) (relating to self-employed individuals) or for purposes of section 405 (relating to qualified bond purchase plans) other than an employee described in section 405(f).

(e) Election irrevocable.

Except as provided in subsection (f), the election described in subsection (a) shall be irrevocable

(1) with respect to an enterprise as to which such election has been made and the proprietor or partners of such enterprise; and

(2) any unincorporated successor to the business of such enterprise and the proprietor or partners of such successor.

(f) Change of ownership.

In any year in which the electing proprietor or partners have an interest of 80 percent or less in profits and capital of an enterprise described in subsection (e), such enterprise shall not be considered a domestic corporation for such year or for subsequent years unless the proprietor or partners of such enterprise make a new election in accordance with subsection (a).

(g) Constructive ownership.

For purposes of subsection (f), the ownership of an interest shall be determined in accordance with

the rules for constructive ownership of stock provided in section 267 (c) other than paragraph (3) thereof.

(h) Imposition of taxes.

The unincorporated business enterprise as to which an election has been made under subsection (a) shall be subject to

(1) the normal tax and surtax imposed by section 11,

(2) the accumulated earnings tax imposed by section 531, and

(3) the alternative tax for capital gains imposed by section 1201.

(i) Personal holding company income.

(1) Excluded from income of enterprise.

There shall be excluded from the gross income of the enterprise as to which an election has been made under subsection (a) any item of gross income (computed without regard to the adjustments provided in section 543(b) (3) or (4)) if, but for this paragraph, such item (adjusted, where applicable, as provided in section 543(b) (3) or (4)) would constitute personal holding company income (as defined in section 543(a)) of such enterprise.

(2) Income and deductions of owners.

Items excluded from the gross income of the enterprise under paragraph (1), and the expenses attributable thereto, shall be treated as the income and deductions of the proprietor or partners (in accordance with their distributive shares of partnership income) of such enterprise.

(3) Distributions.

If

(A) the amount excluded from gross income under paragraph (2) exceeds the expenses attributable thereto, and

(B) any portion of such excess is distributed to the proprietor or partner during the year earned,

such portion shall not be taxed as a corporate distribution. The portion of such excess not distributed during such year shall be considered as paidin surplus or as a contribution to capital as of the close of such year.

(j) Computation of taxable income.

In computing the taxable income of an unincorporated business enterprise as to which an election has been made under subsection (a)

(1) a reasonable deduction shall be allowed for salary or compensation to a proprietor or partner for services actually rendered; and

(2) there shall be allowed as deductions only such items properly allocable to the operation of the business of such enterprise, except deductions allocable to the proprietor or partners under subsection (i) (2).

(k) Distributions other than in liquidation.

Except as provided in subsection (1), a distribution with respect to a proprietorship or partnership interest by an enterprise as to which an election has been made under subsection (a), other than a distribution of personal holding company income under subsection (i) (3), shall be treated as a

corporate distribution in accordance with part I of subchapter C of this chapter. (1) Distributions in liquidation.

A distribution in partial or complete liquidation with respect to a proprietorship or partnership interest by an enterprise as to which an election has been made under subsection (a), shall be treated as a corporate liquidation in accordance with part II of subchapter C of this chapter.

(m) Organizations and reorganizations.

An enterprise as to which an election has been made under subsection (a) shall not be considered a corporation, nor shall the proprietor or partners of such enterprise be considered shareholders, for purposes of parts III and IV of subchapter C of this chapter (relating to corporate organizations, and reorganizations, and insolvency reorganizations) except in the case of

(1) a contribution of property, constituting either paid-in surplus or a contribution to capital, on which gain or loss is recognized; and

(2) the organization of an enterprise as to which the election described in subsection (a) is made for its first taxable year.

(Aug. 16, 1954, ch. 736, 68A Stat. 350; Oct. 10, 1962, Pub. L. 87-792, § 7(h), 76 Stat. 829; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(k) (5), 78 Stat. 94.) AMENDMENTS

1964 Subsec. (1). Pub. L. 88-272 substituted "item of gross income (computed without regard to the adjustments provided in section 543(b) (3) or (4)) if, but for this paragraph, such item (adjusted, where applicable, as provided in section 543(b) (3) or (4)) would constitute personal holding company income (as defined in section 543(a)) of such enterprise" for "personal holding company income (as defined in section 543), except income earned by such enterprise from buying and selling real property, stock, securities, or commodities for the account of others", in par. (1), made changes in phraseology in pars. (2) and (3), and eliminated par. (4) which related to rents and royalties.

1962--Subsec. (d). Pub. L. 87-792 inserted clause "other than an employee within the meaning of section 401(c)(1) (relating to self-employed individuals), or for purposes of section 405 (relating to qualified bond purchase plans) other than an employee described in section 405 (f)."

EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225 (1) of Pub. L. 88-272 set out as a note under section 316 of this title.

EFFECTIVE DATE OF 1962 AMENDMENT Amendment of section by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as a note under section 37 of this title.

REVOCATION OF ELECTION PERMITTING CERTAIN PROPRIETORSHIPS AND PARTNERSHIPS TO BE TAXED AS CORPORATIONS Pub. L. 85-866, title I, § 63, Sept. 2, 1958, 72 Stat. 1649, provided:

"(a) Revocation of Election.

"If

"(1) a statement of an election to be taxed as a domestic corporation is heretofore or hereafter filed with respect to any unincorporated business enterprise under section 1361 of the Internal Revenue Code of 1954 [this section], and

"(2) such filing is in accordance with regulations prescribed by the Secretary of the Treasury or his delegate, then such statement of election shall be treated as a

valid election; but such election may be revoked (in accordance with regulations prescribed by the Secretary of the Treasury or his delegate) after the date of the enactment of this section [Sept. 2, 1958] and on or before the last day of the third month following the month in which regulations prescribed under such section 1361 [this section] are published in the Federal Register. "(b) Tolling of statute of limitations.

"In the case of any election referred to in subsection (a) with respect to any unincorporated business enterprise"(1) The statutory period for the assessment of any deficiency against any taxpayer for any taxable year, to the extent such deficiency is attributable to such enterprise and to the period to which such election applies (or would apply but for a revocation under subsection (a)), shall not expire before the expiration date specified in subsection (c); and such deficiency may be assessed at any time on or before such expiration date, notwithstanding any law or rule of law which would otherwise prevent such assessment.

"(2) If credit or refund of the amount of any overpayment is prevented, at any time on or before the expiration date specified in subsection (c), by the operation of any law or rule of law (other than chapter 74 of the Internal Revenue Code of 1954, relating to closing agreements and compromises), credit or refund of such overpayment may, nevertheless, be allowed or made, to the extent such overpayment is attributable to such enterprise and to the period referred to in paragraph (1), if claim therefor is filed on or before the expiration date specified in subsection (c).

“(c) Expiration date defined.

"For purposes of subsection (b), the term 'expiration date' means that day which is one year after whichever of the following days is the earlier:

"(1) The last day of the third month following the month in which regulations prescribed under section 1361 of the Internal Revenue Code of 1954 [this section] are published in the Federal Register; or

"(2) if the election is revoked under subsection (a), the day on which such revocation is filed with the Secretary of the Treasury or his delegate.

which is not a member of an affiliated group (as defined in section 1504) and which does not

(1) have more than 10 shareholders;

(2) have as a shareholder a person (other than an estate) who is not an individual;

(3) have a nonresident alien as a shareholder; and

(4) have more than one class of stock.

(b) Electing small business corporation.

For purposes of this subchapter, the term "electing small business corporation" means, with respect to any taxable year, a small business corporation which has made an election under section 1372 (a) which, under section 1372, is in effect for such taxable year.

(c) Stock owned by husband and wife.

For purposes of subsection (a) (1) stock which

(1) is community property of a husband and wife (or the income from which is community income) under the applicable community property law of a State, or

(2) is held by a husband and wife as joint tenants, tenants by the entirety, or tenants in common,

shall be treated as owned by one shareholder. (d) Ownership of certain stock.

For púrposes of subsection (a), a corporation shall not be considered a member of an affiliated group at any time during any taxable year by reason of the ownership of stock in another corporation if such other corporation—

(1) has not begun business at any time on or after the date of its incorporation and before the close of such taxable year, and

(2) does not have taxable income for the period included within such taxable year.

(Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1650, and amended Pub. L. 86-376, § 2(a), Sept. 23, 1959, 73 Stat. 699; Pub. L. 88-272, title II, § 233 (a), Feb. 26, 1964, 78 Stat. 112.)

AMENDMENTS

1964-Subsec. (d). Pub. L. 88-272 added subsec. (d). 1959-Subsec. (c). Pub. L. 86-376 added subsec. (c). EFFECTIVE DATE OF 1964 AMENDMENT

Section 233 (c) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to this section] shall apply with respect to taxable years of corporations beginning after December 31, 1962. The amendment made by subsection (b) [to section 1375 of this title] shall apply with respect to taxable years of corporations beginning after December 31, 1957."

EFFECTIVE DATE OF 1959 AMENDMENT

Section 2(d) of Pub. L. 86-376 provided in part that the amendment by section 2(a) of Pub. L. 86-376 adding subsec. (c) of this section shall apply to taxable years beginning after Dec. 31, 1959.

EFFECTIVE DATE

Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 64 (e) of Pub. L. 85-866, set out as a note under section 172 of this title. APPLICATION OF SUBSEC. (c) TO TAXABLE YEARS BEGINNING AFTER DEC. 31, 1957, AND BEFORE JAN. 1, 1960

Section 23 of Pub. L. 87-834, Oct. 16, 1962, 76 Stat. 1065, provided that:

"(a) In general.-Subject to the provisions of subsection (b), section 1371 (c) of the Internal Revenue Code of 1954 [subsec. (c) of this section] (as added by section 2(a) of the Act entitled 'An Act to amend the

Internal Revenue Code of 1954 to provide a personal exemption for children placed for adoption and to clarify certain provisions relating to the election of small business corporations as to taxable status', approved September 23, 1959 (Public Law 86-376)), shall (not withstanding the provisions of the first sentence of section 2(d) of such Act) also apply to taxable years beginning after December 31, 1957, and before January 1, 1960.

"(b) Election and consent by corporations; consents by shareholders.-Subsection (a) shall apply with respect to any corporation and its shareholders only if, within one year after the date of the enactment of this Act [Oct. 16, 1962]

"(1) such corporation (in such manner as the Secretary of the Treasury or his delegate prescribes by regulations) elects to have the provisions of subsection (a) apply and consents to the application of subsection (c); and

"(2) each person who is a shareholder of such corporation on the date on which such corporation makes such election, and each person who was a shareholder of such corporation during any taxable year of such corporation beginning after December 31, 1957, and ending before the date of such election, consents (in such manner and at such time as the Secretary of the Treasury or his delegate prescribes by regulations) to such election and to the application of subsection (c). "(c) Tolling of statutes of limitations.-In any case in which a corporation makes an election under subsection (b)—

"(1) if the assessment of any deficiency against the corporation making such election, or any shareholder of such corporation who consents to such election, for any taxable year is prevented, at any time on or before the expiration of one year after the date of such election, by the operation of any law or rule of law, assessment of such deficiency may, nevertheless, be made, to the extent such deficiency is attributable to the application of subsection (a), at any time on or before the expiration of such one-year period; and

"(2) if credit or refund of any overpayment of tax by the corporation making such election, or any shareholder of such corporation who consents to such election, for any taxable year is prevented, at any time on or before the expiration of one year after the date of such election, by the operation of any law or rule of law, credit or refund of such overpayment may, nevertheless, be allowed or made, to the extent such overpayment is attributable to the application of subsection (a), if claim therefor is filed on or before the expiration of such one-year period."

§ 1372. Election by small business corporation. (a) Eligibility.

Except as provided in subsection (f), any small business corporation may elect, in accordance with the provisions of this section, not to be subject to the taxes imposed by this chapter. Such election shall be valid only if all persons who are shareholders in such corporation

(1) on the first day of the first taxable year for which such election is effective, if such election is made on or before such first day, or

(2) on the day on which the election is made, if the election is made after such first day, consent to such election.

(b) Effect.

If a small business corporation makes an election under subsection (a), then

(1) with respect to the taxable years of the corporation for which such election is in effect, such corporation shall not be subject to the taxes imposed by this chapter and, with respect to such taxable years and all succeeding taxable years, the provisions of section 1377 shall apply to such corporation, and

(2) with respect to the taxable years of a shareholder of such corporation in which or with which the taxable years of the corporation for which such election is in effect end, the provisions of sections 1373, 1374, and 1375 shall apply to such shareholder, and with respect to such taxable years and all succeeding taxable years, the provisions of section 1376 shall apply to such shareholder.

(c) Where and how made.

(1) In general.

An election under subsection (a) may be made by a small business corporation for any taxable year at any time during the first month of such taxable year, or at any time during the month preceding such first month. Such election shall be made in such manner as the Secretary or his delegate shall prescribe by regulations.

(2) Taxable years beginning before date of enactment.

An election may be made under subsection (a) by a small business corporation for its first taxable year which begins after December 31, 1957, and on or before the date of the enactment of this subchapter, and ends after such date at any time

(A) within the 90-day period beginning on the day after the date of the enactment of this subchapter, or

(B) if its taxable year ends within such 90day period, before the close of such taxable year.

An election may be made pursuant to this paragraph only if the small business corporation has been a small business corporation (as defined in section 1371 (a)) on each day after the date of the enactment of this subchapter and before the day of such election.

(d) Years for which effective.

An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, unless it is terminated, with respect to any such taxable year, under subsection (e). (e) Termination.

(1) New shareholders.

An election under subsection (a) made by a small business corporation shall terminate if any person who was not a shareholder in such corporation

(A) on the first day of the first taxable year of the corporation for which the election is effective, if such election is made on or before such first day, or

(B) on the day on which the election is made, if such election is made after such first day, becomes a shareholder in such corporation and does not consent to such election within such time as the Secretary or his delegate shall prescribe by regulations. Such termination shall be effective for the taxable year of the corporation in which such person becomes a shareholder in the corporation and for all succeeding taxable years of the corporation.