Title 26, Internal Revenue CodeRelease 119-110
§7519 Required Payments for Entities Electing Not to Have Required Taxable Year
Title 26 › Subtitle F — Procedure and Administration › CHAPTER 77 — MISCELLANEOUS PROVISIONS › § 7519
Summary
Partnerships and S corporations that pick a special taxable year under section 444 must pay a yearly amount when that election is in effect and the required payment now or in a past year is more than $500. The required payment is a formula: take the applicable percentage of the “adjusted highest section 1 rate” times the entity’s net base year income, then subtract the net required payment balance (prior required payments minus prior refunds). The adjusted highest section 1 rate is the top tax rate under section 1 at the end of the base year plus 1 percentage point (36% for 1987). Net base year income equals a fraction (the deferral ratio) of the base year net income plus any extra of that fraction of payments made in the base year over payments made in the deferral period. The applicable percentage is 25% for 1987, 50% for 1988, 75% for 1989, and 100% for 1990 and later. “Applicable payments” are amounts partners or shareholders must include in income, but not sales between the owner and the entity or S corporation dividends. Guaranteed payments under section 707(c) are excluded. If the balance calculation shows an overpayment, or if the election ends or the entity liquidates, the entity can get a refund. Refunds are paid on the later of April 15 of the next calendar year or 90 days after a claim is filed. Payments are due by April 15 of the calendar year after the election year begins (or a later date the IRS allows). These payments are treated like taxes for collection, interest, and penalties. No interest is paid on refunds. A 10% penalty applies to underpayments unless there was reasonable cause. Willful failure to follow these rules ends the section 444 election. The IRS may issue rules for special cases and entities must report information the IRS needs.
Full Legal Text
Title 26, §7519
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
This section applies to a partnership or S corporation for any taxable year, if—
(1)an election under section 444 is in effect for the taxable year, and
(2)the required payment determined under subsection (b) for such taxable year (or any preceding taxable year) exceeds $500.
(b)Required payment
For purposes of this section, the term “required payment” means, with respect to any applicable election year of a partnership or S corporation, an amount equal to—
(1)the excess of the product of—
(A)the applicable percentage of the adjusted highest section 1 rate, multiplied by
(B)the net base year income of the entity, over
(2)the net required payment balance.
(c)Refund of payments
(1)In general
If, for any applicable election year, the amount determined under subsection (b)(2) exceeds the amount determined under subsection (b)(1), the entity shall be entitled to a refund of such excess for such year.
(2)Termination of elections, etc.
If—
(A)an election under section 444 is terminated effective with respect to any year, or
(B)the entity is liquidated during any year, the entity shall be entitled to a refund of the net required payment balance.
(3)Date on which refund payable
Any refund under this subsection shall be payable on the later of— (A)
(B)the day 90 days after the day on which claim therefor is filed with the Secretary.
(d)Net base year income
For purposes of this section
(1) In general
(2)Net income
Net income is determined by taking into account the aggregate amount of the following items—
(A)Partnerships
In the case of a partnership, net income shall be the amount (not below zero) determined by taking into account the aggregate amount of the partnership’s items described in section 702(a) (other than credits and tax-exempt income).
(B)S corporations
In the case of an S corporation, net income shall be the amount (not below zero) determined by taking into account the aggregate amount of the S corporation’s items described in section 1366(a) (other than credits and tax-exempt income). If the S corporation was a C corporation for the base year, its taxable income for such year shall be treated as its net income for such year (and such corporation shall be treated as an S corporation for such taxable year for purposes of paragraph (3)).
(C)Certain limitations disregarded
For purposes of subparagraph (A) or (B), any limitation on the amount of any item described in either such paragraph which may be taken into account for purposes of computing the taxable income of a partner or shareholder shall be disregarded.
(3)Applicable payments
(A)In general
The term “applicable payment” means amounts paid by a partnership or S corporation which are includible in gross income of a partner or shareholder.
(B)Exceptions
The term “applicable payment” shall not include any—
(i)gain from the sale or exchange of property between the partner or shareholder and the partnership or S corporation, and
(ii)dividend paid by the S corporation.
(4)Applicable percentage
The applicable percentage is the percentage determined in accordance with the following table:
If the applicable election year of the partnership or S corporation begins during: | The applicable percentage is:
1987 | 25
1988 | 50
1989 | 75
1990 or thereafter | 100.
Notwithstanding the preceding provisions of this paragraph, the applicable percentage for any partnership or S corporation shall be 100 percent unless more than 50 percent of such entity’s net income for the short taxable year which would have resulted if the entity had not made an election under section 444 would have been allocated to partners or shareholders who would have been entitled to the benefits of section 806(e)(2)(C) of the Tax Reform Act of 1986 with respect to such income.
(5)Treatment of guaranteed payments
(A)In general
Any guaranteed payment by a partnership shall not be treated as an applicable payment, and the amount of the net income of the partnership shall be determined by not taking such guaranteed payment into account.
(B)Guaranteed payment
For purposes of subparagraph (A), the term “guaranteed payment” means any payment referred to in section 707(c).
(e)Other definitions and special rules
For purposes of this section
(1) Deferral period
(2)Years
(A)Base year
The term “base year” means, with respect to any applicable election year, the taxable year of the partnership or S corporation preceding such applicable election year.
(B)Applicable election year
The term “applicable election year” means any taxable year of a partnership or S corporation with respect to which an election is in effect under section 444.
(3)Requirement of reporting
Each partnership or S corporation which makes an election under section 444 shall include on any required return or statement such information as the Secretary shall prescribe as is necessary to carry out the provisions of this section.
(4)Net required payment balance
The term “net required payment balance” means the excess (if any) of— (A)
(B)the aggregate amount allowable as a refund to the entity under subsection (c) for all preceding applicable election years.
(f)Administrative provisions
(1)In general
Except as otherwise provided in this subsection or in regulations prescribed by the Secretary, any payment required by this section shall be assessed and collected in the same manner as if it were a tax imposed by subtitle C.
(2)Due date
The amount of any payment required by this section shall be paid on or before April 15 of the calendar year following the calendar year in which the applicable election year begins (or such later date as may be prescribed by the Secretary).
(3)Interest
For purposes of determining interest, any payment required by this section shall be treated as a tax; except that no interest shall be allowed with respect to any refund of a payment made under this section.
(4)Penalties
(A)In general
In the case of any failure by any person to pay on the date prescribed therefor any amount required by this section, there shall be imposed on such person a penalty of 10 percent of the underpayment. For purposes of the preceding sentence, the term “underpayment” means the excess of the amount of the payment required under this section over the amount (if any) of such payment paid on or before the date prescribed therefor. No penalty shall be imposed under this subparagraph on any failure which is shown to be due to reasonable cause and not willful neglect.
(B)Negligence and fraud penalties made applicable
For purposes of part II of subchapter A of chapter 68, any payment required by this section shall be treated as a tax.
(C)Willful failure
If any partnership or S corporation willfully fails to comply with the requirements of this section, section 444 shall cease to apply with respect to such partnership or S corporation.
(g)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section and section 280H, including regulations providing for appropriate adjustments in the application of this section and section 280H and 444 in cases where—
(1)2 or more applicable election years begin in the same calendar year, or
(2)the base year is a taxable year of less than 12 months.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 806(e)(2)(C) of the Tax Reform Act of 1986, referred to in subsec. (d)(4), is section 806(e)(2)(C) of Pub. L. 99–514, which is set out as a note under section 1378 of this title.
Amendments
1997—Subsec. (f)(4)(A). Pub. L. 105–34 inserted at end “No penalty shall be imposed under this subparagraph on any failure which is shown to be due to reasonable cause and not willful neglect.” 1990—Subsec. (c)(3). Pub. L. 101–508 substituted “payable on the later of” for “payable on later of”. 1989—Subsec. (d)(4). Pub. L. 101–239, § 7821(b), struck out “for taxable years beginning after 1987,” before “the applicable percentage” and substituted “unless more than 50 percent” for “if more than 50 percent” and “who would have been entitled” for “who would not have been entitled”. Subsec. (f)(4)(B). Pub. L. 101–239, § 7721(c)(12), substituted “part II of subchapter A of chapter 68” for “section 6653”. 1988—Subsec. (b)(2). Pub. L. 100–647, § 2004(e)(4)(A), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “the amount of the required payment for the preceding applicable election year.” Subsec. (c). Pub. L. 100–647, § 2004(e)(5), amended subsec. (c) generally. Prior to amendment, subsec. (c) read as follows: “If the amount determined under subsection (b)(2) exceeds the amount determined under subsection (b)(1), then the entity shall be entitled to a refund of such excess.” Subsec. (d)(2)(A). Pub. L. 100–647, § 2004(e)(10), substituted “(other than credits and tax-exempt income)” for “(other than credits)”. Subsec. (d)(2)(B). Pub. L. 100–647, § 2004(e)(7), (10), substituted “(other than credits and tax-exempt income)” for “(other than credits)” and inserted before period at end “(and such corporation shall be treated as an S corporation for such taxable year for purposes of paragraph (3))”. Subsec. (d)(3)(A). Pub. L. 100–647, § 2004(e)(14)(B), struck out “or incurred” after “amounts paid”. Subsec. (d)(4). Pub. L. 100–647, § 2004(e)(9), inserted at end “Notwithstanding the preceding provisions of this paragraph, for taxable years beginning after 1987, the applicable percentage for any partnership or S corporation shall be 100 percent if more than 50 percent of such entity’s net income for the short taxable year which would have resulted if the entity had not made an election under section 444 would have been allocated to partners or shareholders who would not have been entitled to the benefits of section 806(e)(2)(C) of the Tax Reform Act of 1986 with respect to such income.” Subsec. (d)(5). Pub. L. 100–647, § 2004(e)(8), added par. (5). Subsec. (e)(4). Pub. L. 100–647, § 2004(e)(4)(B), added par. (4). Subsec. (g). Pub. L. 100–647, § 2004(e)(6), substituted “including
Regulations
providing for appropriate adjustments in the application of this section and section 280H and 444 in cases where— “(1) 2 or more applicable election years begin in the same calendar year, or “(2) the base year is a taxable year of less than 12 months” for “including
Regulations
for annualizing the income and applicable payments of an entity if the base year is a taxable year of less than 12 months”.
Statutory Notes and Related Subsidiaries
Effective Date
of 1997 AmendmentAmendment by Pub. L. 105–34 applicable to taxable years beginning after Aug. 5, 1997, see section 1281(e) of Pub. L. 105–34, set out as a note under section 6652 of this title.
Effective Date
of 1989 AmendmentAmendment by section 7721(c)(12) of Pub. L. 101–239 applicable to returns the due date for which (determined without regard to extensions) is after Dec. 31, 1989, see section 7721(d) of Pub. L. 101–239, set out as a note under section 461 of this title. Pub. L. 101–239, title VII, § 7821(b), Dec. 19, 1989, 103 Stat. 2424, provided that the amendment made by that section is effective with respect to taxable years beginning after 1988.
Effective Date
of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.
Effective Date
Section applicable to applicable election years beginning after Dec. 31, 1986, see section 10206(d)(2) of Pub. L. 100–203, set out as a note under section 444 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 7519
Title 26, Internal Revenue Code
Last Updated
Sep 23, 2026
Release point: 119-110