§1375 — Title 26 Internal Revenue Code | U.S. Code

Summary

An S corporation pays a special tax if it has accumulated earnings and profits at year end and more than 25% of its gross receipts come from passive investment income. The tax equals the portion of the corporation’s net passive income that matches how much passive investment income is over 25% of gross receipts. The tax amount cannot be bigger than the corporation’s taxable income figured under section 63(a) when you leave out deductions under part VIII of subchapter B (except the organization expense rule in section 248) and when you leave out the net operating loss deduction under section 172. Most tax credits cannot reduce this special tax, except the credit under section 34. When figuring passive investment income, you do not count any recognized built-in gain or loss during the recognition period. Excess net passive income: the part of net passive income that corresponds to how much passive investment income exceeds 25% of gross receipts. Net passive income: passive investment income minus the expenses directly tied to earning that income (not including the deductions under section 172 or part VIII). Passive investment income and gross receipts: defined the same way as in paragraph (3) of section 1362(d). An S corporation can show the IRS it reasonably thought it had no accumulated earnings and profits at year end and that, after finding out otherwise, it distributed those earnings within a reasonable time.

Title 26, §1375

Internal Revenue Code — Source: USLM XML via OLRC

(a)If for the taxable year an S corporation has—

(1)accumulated earnings and profits at the close of such taxable year, and

(2)gross receipts more than 25 percent of which are passive investment income,

(b)For purposes of this section—

(1)(A)Except as provided in subparagraph (B), the term “excess net passive income” means an amount which bears the same ratio to the net passive income for the taxable year as—

(i)the amount by which the passive investment income for the taxable year exceeds 25 percent of the gross receipts for the taxable year, bears to

(ii)the passive investment income for the taxable year.

(B)The amount of the excess net passive income for any taxable year shall not exceed the amount of the corporation’s taxable income for such taxable year as determined under section 63(a)—

(i)without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and

(ii)without regard to the deduction under section 172.

(2)The term “net passive income” means—

(A)passive investment income, reduced by

(B)the deductions allowable under this chapter which are directly connected with the production of such income (other than deductions allowable under section 172 and part VIII of subchapter B).

(3)The terms “passive investment income” and “gross receipts” have the same respective meanings as when used in paragraph (3) of section 1362(d).

(4)Notwithstanding paragraph (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.

(c)No credit shall be allowed under part IV of subchapter A of this chapter (other than section 34) against the tax imposed by subsection (a).

(d)If the S corporation establishes to the satisfaction of the Secretary that—

(1)it determined in good faith that it had no accumulated earnings and profits at the close of a taxable year, and

(2)during a reasonable period of time after it was determined that it did have accumulated earnings and profits at the close of such taxable year such earnings and profits were distributed,

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

A prior section 1375, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1654; amended Pub. L. 88–272, title II, §§ 201(d)(13), 233(b), Feb. 26, 1964, 78 Stat. 32, 112; Pub. L. 89–389, §§ 1(a), (b), 2(b)(4), Apr. 14, 1966, 80 Stat. 111, 114; Pub. L. 91–172, title III, § 301(b)(11), Dec. 30, 1969, 83 Stat. 586; Pub. L. 94–455, title XIX, §§ 1901(a)(151), (b)(33)(Q), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1788, 1802, 1834; Pub. L. 95–600, title VII, § 703(j)(6), Nov. 6, 1978, 92 Stat. 2941, related to special rules applicable to distributions of electing small business corporations, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354. A prior section 1376, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1655, related to adjustment to basis of stock of, and indebtedness owing, shareholders, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354.

Amendments

2005—Subsec. (d)(1), (2). Pub. L. 109–135 substituted “accumulated” for “subchapter C”. 1996—Pub. L. 104–188, § 1311(b)(2)(C), substituted “accumulated” for “subchapter C” in section catchline. Subsec. (a)(1). Pub. L. 104–188, § 1311(b)(2)(A), substituted “accumulated” for “subchapter C”. Subsec. (b)(3). Pub. L. 104–188, § 1311(b)(2)(B), amended par. (3) generally. Prior to amendment, par. (3) read as follows: “(3) Passive investment income; etc.—The terms ‘subchapter C earnings and profits’, ‘passive investment income’, and ‘gross receipts’ shall have the same respective meanings as when used in paragraph (3) of section 1362(d).” 1988—Subsec. (b)(1)(B). Pub. L. 100–647, § 1006(f)(5)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “The amount of the excess net passive income for any taxable year shall not exceed the corporation’s taxable income for the taxable year (determined in accordance with section 1374(d)(4)).” Subsec. (b)(4). Pub. L. 100–647, § 1006(f)(5)(C), added par. (4). Subsec. (c). Pub. L. 100–647, § 1006(f)(5)(D), amended subsec. (c) generally, in heading substituting “Credits not allowable” for “Special rules”, and in text substituting “No credit” for “(1) Disallowance of credit.—No credit”, and striking out par. (2) which related to coordination with section 1374. 1986—Subsec. (b)(1)(B). Pub. L. 99–514 substituted “section 1374(d)(4)” for “section 1374(d)”. 1984—Subsec. (c)(1). Pub. L. 98–369, § 474(r)(28), substituted “section 34” for “section 39”. Subsec. (d). Pub. L. 98–369, § 721(v), added subsec. (d).

Statutory Notes and Related Subsidiaries

Effective Date

of 1996 AmendmentAmendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, as amended, set out as an

Effective Date

note under section 336 of this title.

Effective Date

of 1984 AmendmentAmendment by section 474(r)(28) of Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, and to carrybacks from such years, see section 475(a) of Pub. L. 98–369, set out as a note under section 21 of this title. Amendment by section 721(v) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title.

Effective Date

This section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, this section and section 1362(d)(3) and 1366(f)(3) of this title shall apply, and section 1372(e)(5) of this title as in effect on the day before Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title.

§1375 Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts

Summary

Title 26, §1375

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Effective Date

Effective Date

Effective Date

Effective Date

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