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Title 26 — Internal Revenue CodeRelease 119-73not60

§537 Reasonable Needs of the Business

Title 26 › Subtitle 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 › § 537

Last updated Apr 5, 2026|Official source

Summary

Defines what counts as a business’s “reasonable needs” for these tax rules. It covers the business’s expected needs, amounts needed for a section 303 stock redemption, and amounts needed to redeem excess business holdings. “Section 303 redemption needs” means the money needed (or expected to be needed) in the corporation’s taxable year when a shareholder dies or later to buy back stock that was in the decedent’s estate, but not more than section 303(a) allows. “Excess business holdings redemption needs” means the money needed (or expected to be needed) to redeem stock a private foundation held on May 26, 1969 (or got by a will or trust under section 4943(c)(5)) that was excess on that date or would have been excess if certain items were counted. Paying an obligation to make such a redemption counts as making the redemption. Saving reasonable amounts for expected product liability losses (as defined in section 172(f) as in effect before the Tax Cuts and Jobs Act), under rules made by the Secretary, counts as expected business needs. For taxable years before the first taxable year mentioned in subsection (b)(1), apply these rules without regard to redemptions that were later made.

Full Legal Text

Title 26, §537

Internal Revenue Code — Source: USLM XML via OLRC

(a)For purposes of this part, the term “reasonable needs of the business” includes—
(1)the reasonably anticipated needs of the business,
(2)the section 303 redemption needs of the business, and
(3)the excess business holdings redemption needs of the business.
(b)For purposes of subsection (a)—
(1)The term “section 303 redemption needs” means, with respect to the taxable year of the corporation in which a shareholder of the corporation died or any taxable year thereafter, the amount needed (or reasonably anticipated to be needed) to make a redemption of stock included in the gross estate of the decedent (but not in excess of the maximum amount of stock to which section 303(a) may apply).
(2)The term “excess business holdings redemption needs” means the amount needed (or reasonably anticipated to be needed) to redeem from a private foundation stock which—
(A)such foundation held on May 26, 1969 (or which was received by such foundation pursuant to a will or irrevocable trust to which section 4943(c)(5) applies), and
(B)constituted excess business holdings on May 26, 1969, or would have constituted excess business holdings as of such date if there were taken into account (i) stock received pursuant to a will or trust described in subparagraph (A), and (ii) the reduction in the total outstanding stock of the corporation which would have resulted solely from the redemption of stock held by the private foundation.
(3)In applying paragraphs (1) and (2), the discharge of any obligation incurred to make a redemption described in such paragraphs shall be treated as the making of such redemption.
(4)The accumulation of reasonable amounts for the payment of reasonably anticipated product liability losses (as defined in section 172(f) (as in effect before the date of enactment of the Tax Cuts and Jobs Act)), as determined under regulations prescribed by the Secretary, shall be treated as accumulated for the reasonably anticipated needs of the business.
(5)The application of this part to any taxable year before the first taxable year specified in paragraph (1) shall be made without regard to the fact that distributions in redemption coming within the terms of such paragraphs were subsequently made.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

References in Text

section 172(f), referred to in subsec. (b)(4), was repealed by Pub. L. 115–97, title I, § 13302(c)(2)(A), Dec. 22, 2017, 131 Stat. 2122. The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (b)(4), probably means the date of enactment of title I of Pub. L. 115–97, which was approved Dec. 22, 2017. Prior versions of the bill that was enacted into law as Pub. L. 115–97 included such

Short Title

, but it was not enacted as part of title I of Pub. L. 115–97.

Amendments

2017—Subsec. (b)(4). Pub. L. 115–97 inserted “(as in effect before the date of enactment of the Tax Cuts and Jobs Act)” after “as defined in section 172(f)”. 1996—Subsec. (b)(4). Pub. L. 104–188 substituted “section 172(f)” for “section 172(i)”. 1978—Subsec. (b)(4), (5). Pub. L. 95–600 added par. (4) and redesignated former par. (4) as (5). 1976—Subsec. (b)(2). Pub. L. 94–455, § 1901(a)(75)(A), struck out “with respect to taxable years of the corporation ending after May 26, 1969” after “ ‘redemption needs’ means”. Subsec. (b)(4). Pub. L. 94–455, § 1901(a)(75)(B), struck out “or (2)” after “paragraph (1)”. 1969—Pub. L. 91–172 designated existing provisions as subsec. (a)(1) and added subsecs. (a)(2), (3) and (b).

Statutory Notes and Related Subsidiaries

Effective Date

of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to net operating losses arising in taxable years beginning after Dec. 31, 2017, see section 13302(e) of Pub. L. 115–97, set out as a note under section 172 of this title.

Effective Date

of 1978 AmendmentAmendment by Pub. L. 95–600 applicable with respect to taxable years beginning after Sept. 30, 1979, see section 371(d) of Pub. L. 95–600, set out as a note under section 172 of this title.

Effective Date

of 1976 AmendmentAmendment by 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 1969 Amendment Pub. L. 91–172, title IX, § 906(b), Dec. 30, 1969, 83 Stat. 715, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The amendment made by subsection (a) [amending this section] shall apply to the tax imposed under section 531 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] with respect to taxable years ending after May 26, 1969.”

Reference

Citations & Metadata

Citation

26 U.S.C. § 537

Title 26 — Internal Revenue Code

Last Updated

Apr 5, 2026

Release point: 119-73not60