(2) Revocation. An election under subsection (a) made by a small business corporation may be revoked by it for any taxable year of the corporation after the first taxable year for which the election is effective. An election may be revoked only if all persons who are shareholders in the corporation on the day on which the revocation is made consent to the revocation. A revocation under this paragraph shall be effective (A) for the taxable year in which made, if made before the close of the first month of such taxable year, (B) for the taxable year following the taxable year in which made, if made after the close of such first month, and for all succeeding taxable years of the corporation. Such revocation shall be made in such manner as the Secretary or his delegate shall prescribe by regulations. (3) Ceases to be small business corporation. An election under subsection (a) made by a small business corporation shall terminate if at any time (A) after 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) after the day on which the election is made, if such election is made after such first day, the corporation ceases to be a small business corporation (as defined in section 1371 (a)). Such termination shall be effective for the taxable year of the corporation in which the corporation ceases to be a small business corporation and for all succeeding taxable years of the corporation. (4) Foreign income. An election under subsection (a) made by a small business corporation shall terminate if for any taxable year of the corporation for which the election is in effect, such corporation derives more than 80 percent of its gross receipts from sources outside the United States. Such termination shall be effective for the taxable year of the corporation in which it derives more than 80 percent of its gross receipts from sources outside the United States, and for all succeeding taxable years of the corporation. (5) Personal holding company income. An election under subsection (a) made by a small business corporation shall terminate if, for any taxable year of the corporation for which the election is in effect, such corporation has gross receipts more than 20 percent of which is derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken into account for purposes of this paragraph only to the extent of gains therefrom). Such termination shall be effective for the taxable year of the corporation in which it has gross receipts of such amount, and for all succeeding taxable years of the corporation. (f) Election after termination. If a small business corporation has made an election under subsection (a) and if such election has been terminated or revoked under subsection (e), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year prior to its fifth taxable year which begins after the first taxable year for which such termination or revocation is effective, unless the Secretary or his delegate consents to such election. (g) Consent to election by certain shareholders of stock held as community property. If a husband and wife owned stock which was community property (or the income from which was community income) under the applicable community property law of a State, and if either spouse filed a timely consent to an election under subsection (a) for a taxable year beginning before January 1, 1961, the time for filing the consent of the other spouse to such election shall not expire prior to May 15, 1961. (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1650, and amended Pub. L. 87-29, § 2, May 4, 1961, 75 Stat. 64.) REFERENCES IN TEXT Date of the enactment of this subchapter, referred to in subsec. (c), was Sept. 2, 1958. AMENDMENTS 1961-Subsec. (g). Pub. L. 87-29 added subsec. (g). 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. § 1373. Corporation undistributed taxable income taxed to shareholders. (a) General rule. The undistributed taxable income of an electing small business corporation for any taxable year shall be included in the gross income of the shareholders of such corporation in the manner and to the extent set forth in this section. (b) Amount included in gross income. Each person who is a shareholder of an electing small business corporation on the last day of a taxable year of such corporation shall include in his gross income, for his taxable year in which or with which the taxable year of the corporation ends, the amount he would have received as a dividend, if on such last day there had been distributed pro rata to its shareholders by such corporation an amount equal to the corporation's undistributed taxable income for the corporation's taxable year. For purposes of this chapter, the amount so included shall be treated as an amount distributed as a dividend on the last day of the taxable year of the corporation. (c) Undistributed taxable income defined. For purposes of this section, the term "undistributed taxable income" means taxable income (computed as provided in subsection (d)) minus the amount of money distributed as dividends during the taxable year, to the extent that any such amount is a distribution out of earnings and profits of the taxable year as specified in section 316 (a) (2). (d) Taxable income. For purposes of this subchapter, the taxable income of an electing small business corporation shall be determined without regard to (1) the deduction allowed by section 172 (relating to net operating loss deduction), and (2) the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures). (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1652.) 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. § 1374. Corporation net operating loss allowed to shareholders. (a) General rule. A net operating loss of an electing small business corporation for any taxable year shall be allowed as a deduction from gross income of the shareholders of such corporation in the manner and to the extent set forth in this section. (b) Allowance of deduction. Each person who is a shareholder of an electing small business corporation at any time during a taxable year of the corporation in which it has a net operating loss shall be allowed as a deduction from gross income, for his taxable year in which or with which the taxable year of the corporation ends (or for the final taxable year of a shareholder who dies before the end of the corporation's taxable year), an amount equal to his portion of the corporation's net operating loss (as determined under subsection (c)). (c) Determination of shareholder's portion. (1) In general. For purposes of this section, a shareholder's portion of the net operating loss of an electing small business corporation is his pro rata share of the corporation's net operating loss (computed as provided in section 172 (c), except that the deductions provided in part VIII (except section 248) of subchapter B shall not be allowed) for his taxable year in which or with which the taxable year of the corporation ends. For purposes of this paragraph, a shareholder's pro rata share of the corporation's net operating loss is the sum of the portions of the corporation's daily net operating loss attributable on a pro rata basis to the shares held by him on each day of the taxable year. For purposes of the preceding sentence, the corporation's daily net operating loss is the corporation's net operating loss divided by the number of days in the taxable year. (2) Limitation. A shareholder's portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of (A) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of the shareholder's stock in the electing small business corporation, determined as of the close of the taxable year of the corporation (or, in respect of stock sold or otherwise disposed of during such taxable year, as of the day before the day of such sale or other disposition), and (B) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation (or, if the shareholder is not a shareholder as of the close of such taxable year, as of the close of the last day in such taxable year on which the shareholder was a shareholder in the corporation). (d) Application with other provisions. (1) In general. The deduction allowed by subsection (b) shall, for purposes of this chapter, be considered as a deduction attributable to a trade or business carried on by the shareholder. (2) Adjustment of net operating loss carrybacks and carryovers of shareholders. For the purposes of determining under section 172, the net operating loss carrybacks to taxable years beginning before January 1, 1958, from a taxable year of the shareholder for which he is allowed a deduction under subsection (b), such deduction shall be disregarded in determining the net operating loss for such taxable year. In the case of a net operating loss for a taxable year in which a shareholder is allowed a deduction under subsection (b), the determination of the portion of such loss which may be carried to subsequent years shall be made without regard to the preceding sentence and in accordance with section 172 (b) (2), but the sum of the taxable incomes for taxable years beginning before January 1, 1958, shall be deemed not to exceed the amount of the net operating loss determined with the application of the preceding sentence. (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1653, and amended Pub. L. 86-376, § 2(b), Sept. 23, 1959, 73 Stat. 699.) AMENDMENTS 1959 Subsec. (b). Pub. L. 86-376 inserted "(or for the final taxable year of a shareholder who dies before the end of the corporation's taxable year)" following "the taxable year of the corporation ends". EFFECTIVE DATE OF 1959 AMENDMENT Section 2(d) of Pub. L. 86-376 provided in part that the amendment of subsec. (b) of this section by section 2(b) of Pub. L. 86-376 shall take effect on Sept. 24, 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 DEDUCTION OF DECEASED SHAREHOLDER'S PRO RATA SHARE OF NET OPERATING Loss Section 30 of Pub. L. 87-834, Oct. 16, 1962, 76 Stat. 1069, provided that: "The amendment made by section 2(b) of Public Law 86-376 (73 Stat. 699) [which inserted "(or for the final taxable year of a shareholder who dies before the end of the corporations taxable year)" in subsec. (b) of this section] shall take effect on September 2, 1958." § 1375. Special rules applicable to distributions of electing small business corporations. (a) Capital gains. (1) Treatment in hands of shareholders. The amount includible in the gross income of a shareholder as dividends (including amounts treated as dividends under section 1373 (b)) from an electing small business corporation during any taxable year of the corporation, to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in section 316 (a) (2), shall be treated as a long-term capital gain to the extent of the shareholder's pro rata share of the excess of the corporation's net long-term capital gain over its net short-term capital loss for such taxable year. For purposes of this paragraph, such excess shall be deemed not to exceed the corporation's taxable income (computed as provided in section 1373 (d)) for the taxable year. (2) Determination of shareholder's pro rata share. A shareholder's pro rata share of such excess for any taxable year shall be an amount which bears the same ratio to such excess as the amount of dividends described in paragraph (1) includible in the shareholder's gross income bears to the entire amount of dividends described in paragraph (1) includible in the gross income of all shareholders. (b) Dividends received credit not allowed. The amount includible in the gross income of a shareholder as dividends from an electing small business corporation during any taxable year of the corporation (including any amount treated as a dividend under section 1373 (b)) shall not be considered a dividend for purposes of section 37 or section 116 to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in section 316(a)(2). For purposes of this subsection, the earnings and profits of the taxable year shall be deemed not to exceed the corporation's taxable income (computed as provided in section 1373 (d) for the taxable year. (c) Treatment of family groups. Any dividend received by a shareholder from an electing small business corporation (including any amount treated as a dividend under section 1373 (b)) may be apportioned or allocated by the Secretary or his delegate between or among shareholders of such corporation who are members of such shareholder's family (as defined in section 704 (e) (3)), if he determines that such apportionment or allocation is necessary in order to reflect the value of services rendered to the corporation by such shareholders. (d) Distributions of undistributed taxable income previously taxed to shareholders. (1) Distributions not considered as dividends. An electing small business corporation may distribute, in accordance with regulations prescribed by the Secretary or his delegate, to any shareholder all or any portion of the shareholder's net share of the corporation's undistributed taxable income for taxable years prior to the taxable year in which such distribution is made. Any such distribution shall, for purposes of this chapter, be considered a distribution which is not a dividend, but the earnings and profits of the corporation shall not be reduced by reason of any such distribution. (2) Shareholder's net share of undistributed taxable income. For purposes of this subsection, a shareholder's net share of the undistributed taxable income of an electing small business corporation is an amount equal to— (A) the sum of the amounts included in the gross income of the shareholder under section 1373 (b) for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), reduced by (B) the sum of— (i) the amounts allowable under section 1374 (b) as a deduction from gross income of the shareholder for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), and (ii) all amounts previously distributed during the taxable year and all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year) to the shareholder which under paragraph (1) were considered distributions which were not dividends. (e) Certain distributions after close of taxable year. (1) In general. For purposes of this chapter, if— (A) a corporation makes a distribution of money to its shareholders on or before the 15th day of the third month following the close of a taxable year with respect to which it was an electing small business corporation, and (B) such distribution is made pursuant to a resolution of the board of directors of the corporation, adopted before the close of such taxable year, to distribute to its shareholders all or a part of the proceeds of one or more sales of capital assets, or of property described in section 1231(b), made during such taxable year, such distribution shall, at the election of the corporation, be treated as a distribution of money made on the last day of such taxable year. (2) Shareholders. An election under paragraph (1) with respect to any distribution may be made by a corporation only if each person who is a shareholder on the day the distribution is received (A) owns the same proportion of the stock of the corporation on such day as he owned on the last day of the taxable year of the corporation preceding the distribution, and (B) consents to such election at such time and in such manner as the Secretary or his delegate shall prescribe by regulations. (3) Manner and time of election. An election under paragraph (1) shall be made in such maner as the Secretary or his delegate shall prescribe by regulations. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year during which the sale was made (including extensions thereof) except that, with respect to any taxable year ending on or before the date of the enactment of the Revenue Act of 1964, such election shall be made within 120 days after such date. (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1654, and amended Pub. L. 88-272, title II, §§ 201(d) (13), 233(b), 78 Stat. 32, 112.) REFERENCE IN TEXT The date of enactment of the Revenue Act of 1964, referred to in subsec. (e) (3), means the date of enactment of Pub. L. 88-272, approved Feb. 26, 1964. AMENDMENTS 1964 - Subsec. (b). Pub. L. 88-272, § 201 (d) (13), deleted "section 34," preceding "section 37." Subsec. (e). Pub. L. 88-272, § 233 (b), added subsec. (e). EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (b) by Pub. L. 88-272 applicable with respect to dividends received after Dec. 31, 1964, in taxable years ending after such date, see section 201(e) of Pub. L. 88-272, set out as a note under section 35 of this title. Amendment of subsec. (e) by Pub. L. 88-272 applicable to taxable years of corporations beginning after Dec. 31, 1957, see section 233 (c) of Pub. L. 88-272, set out as a note under section 1371 of this title. 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. § 1376. Adjustment to basis of stock of, and indebtedness owing, shareholders. (a) Increase in basis of stock for amounts treated as dividends. The basis of a shareholder's stock in an electing small business corporation shall be increased by the amount required to be included in the gross income of such shareholder under section 1373 (b), but only to the extent to which such amount is included in his gross income in his return, increased or decreased by any adjustment of such amount in any redetermination of the shareholder's tax liability. (b) Reduction in basis of stock and indebtedness for shareholder's portion of corporation net operating loss. (1) Reduction in basis of stock. The basis of a shareholder's stock in an electing small business corporation shall be reduced (but not below zero) by an amount equal to the amount of his portion of the corporation's net operating loss for any taxable year attributable to such stock (as determined under section 1374 (c)). (2) Reduction in basis of indebtedness. The basis of any indebtedness of an electing small business corporation to a shareholder of such corporation shall be reduced (but not below zero) by an amount equal to the amount of the shareholder's portion of the corporation's net operating loss for any taxable year (as determined under section 1374 (c), but only to the extent that such amount exceeds the adjusted basis of the stock of such corporation held by the shareholder. (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1655.) 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. § 1377. Special rules applicable to earnings and profits of electing small business corporations. (a) Reduction for undistributed taxable income. The accumulated earnings and profits of an electing small business corporation as of the close of its taxable year shall be reduced to the extent that its undistributed taxable income for such year is required to be included in the gross income of the shareholders of such corporation under section 1373 (b). (b) Current earnings and profits not reduced by any amount not allowable as deduction. The earnings and profits of an electing small business corporation for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income (as provided in section 1373 (d)) for such taxable year. (c) Earnings and profits not affected by net operating loss. The earnings and profits and the accumulated earnings and profits of an electing small business corporation shall not be affected by any item of gross income or any deduction taken into account in determining the amount of any net operating loss (computed as provided in section 1374 (c)) of such corporation. (Added Pub. L. 85-866, title I, § 64 (a), Sept. 2, 1958, 72 Stat. 1656.) (2) any corporation operating on a cooperative basis other than an organization— (A) which is exempt from tax under this chapter, (B) which is subject to the provisions of- (ii) subchapter L (relating to insurance companies), or (C) which is engaged in furnishing electric energy, or providing telephone service, to persons in rural areas. (b) Tax on certain farmers' cooperatives. An organization described in subsection (a) (1) shall be subject to the taxes imposed by section 11 or 1201. (Added Pub. L. 87-834, § 17(a), Oct. 16, 1962, 76 Stat. 1045.) EFFECTIVE DATE Section 17(c) of Pub. L. 87-834 provided that: "(1) For the cooperatives.-Except as provided in paragraph (3), the amendments made by subsections (a) and (b) [adding this subchapter, amending sections 521 and 6072 of this title, and repealing section 522 of this title] shall apply to taxable years of organizations described in section 1381(a) of the Internal Revenue Code of 1954 (as added by subsection (a)) [this section] beginning after December 31, 1962. "(2) For the patrons.-Except as provided in paragraph (3), section 1385 of the Internal Revenue Code of 1954 (as added by subsection (a)) [section 1385 (3) of this title] shall apply with respect to any amount received from any organization described in section 1381(a) of such Code [subsec. (a) of this section], to the extent that such amount is paid by such organization in a taxable year of such organization beginning after December 31, 1962. "(3) Application of existing law.-In the case of any money, written notice of allocation, or other property paid by any organization described in section 1381 (a) [subsec. (a) of this section] "(A) before the first day of the first taxable year of such organization beginning after December 31, 1962, or "(B) on or after such first day with respect to patronage occurring before such first day, the tax treatment of such money, written notice of allocation, or other property (including the tax treatment of gain or loss on the redemption, sale, or other disposition of such written notice of allocation) by any person shall be made under the Internal Revenue Code of 1954 without regard to subchapter T of chapter 1 of such Code [this subchapter]." § 1382. Taxable income of cooperatives. (a) Gross income. Except as provided in subsection (b), the gross income of any organization to which this part applies shall be determined without any adjustment (as a reduction in gross receipts, an increase in cost of goods sold, or otherwise) by reason of any allotion or distribution to a patron out of the net earnings of such organization. (b) Patronage dividends. In determining the taxable income of an organization to which this part applies, there shall not be taken into account amounts paid during the payment period for the taxable year (1) as patronage dividends (as defined in section 1388(a)), to the extent paid in money, qualified written notices of allocation (as defined in section 1388 (c)), or other property (except nonqualified written notices of allocation (as defined in section 1388 (d))) with respect to patronage occurring during such taxable year; or (2) in money or other property (except written notices of allocation) in redemption of a nonqualified written notice of allocation which was paid as a patronage dividend during the payment period for the taxable year during which the patronage occurred. For purposes of this title, any amount not taken into account under the preceding sentence shall be treated in the same manner as an item of gross income and as a deduction therefrom. (c) Deduction for nonpatronage distributions, etc. In determining the taxable income of an organization described in section 1381(a) (1), there shall be allowed as a deduction (in addition to other deductions allowable under this chapter)— (1) amounts paid during the taxable year as dividends on its capital stock; and (2) amounts paid during the payment period for the taxable year (A) in money, qualified written notices of allocation, or other property (except nonqualified written notices of allocation) on a patronage basis to patrons with respect to its earnings during such taxable year which are derived from business done for the United States or any of its agencies or from sources other than patronage, or (B) in money or other property (except written notices of allocation) in redemption of a nonqualified written notice of allocation which was paid, during the payment period for the taxable year during which the earnings were derived, on a patronage basis to a patron with respect to earnings derived from business or sources described in subparagraph (A). (d) Payment period for each taxable year. For purposes of subsections (b) and (c) (2), the payment period for any taxable year is the period beginning with the first day of such taxable year and ending with the fifteenth day of the ninth month following the close of such year. For purposes of subsections (b) (1) and (c) (2) (A), a qualified check issued during the payment period shall be treated as an amount paid in money during such period if endorsed and cashed on or before the 90th day after the close of such period. (e) Products marketed under pooling arrangements. For purposes of subsection (b), in the case of a pooling arrangement for the marketing of products, the patronage shall (to the extent provided in regulations prescribed by the Secretary or his delegate) be treated as patronage occurring during the taxable year in which the pool closes. (f) Treatment of earnings received after patronage occurred. If any portion of the earnings from business done with or for patrons is includible in the organization's gross income for a taxable year after the taxable year during which the patronage occurred, then for purposes of applying subsection (b) to such portion the patronage shall, to the extent provided in regulations prescribed by the Secretary or his delegate, be considered to have occurred during the taxable year of the organization during which such earnings are includible in gross income. (Added Pub. L. 87834, § 17(a), Oct. 16, 1962, 76 Stat. 1046.) |