§7519 — Title 26 Internal Revenue Code | U.S. Code

Summary

Partnerships and S corporations that pick the special taxable year under section 444 must make a required payment when that payment (for the year or a prior year) is more than $500. The payment is set by a formula that uses an applicable percentage, the adjusted highest section 1 tax rate, and the entity’s net base year income, and then subtracts any prior net required payment balance. The applicable percentage is 25% if the election year begins in 1987, 50% if it begins in 1988, 75% if it begins in 1989, and 100% if it begins in 1990 or later, unless more than 50% of the entity’s net income for the short year (if no election) would go to partners or shareholders who would get special benefits under the Tax Reform Act of 1986. Net base year income equals the deferral ratio times the entity’s net income for the base year, plus any excess of (the deferral ratio times applicable payments made in the base year) over the applicable payments made during the deferral period. “Applicable payments” are amounts the partners or shareholders must include in income, but do not include gains on sales between the partner/shareholder and the entity or S corporation dividends; guaranteed payments under section 707(c) are not treated as applicable payments and are excluded from the partnership’s net income. If the computed required payment is less than prior payments, the entity gets a refund. If the election ends or the entity is liquidated, the entity is entitled to a refund of the net required payment balance. Refunds are paid on the later of April 15 of the next calendar year (timing depends on the specific year involved) or 90 days after a claim is filed. Required payments are collected and treated like a tax, are due on or before April 15 of the year after the election year begins (unless the IRS sets a later date), earn or owe interest like a tax (but refunds get no interest), and carry a 10% penalty for underpayment unless there was reasonable cause. Willful failure to follow these rules ends the section 444 election, and the Secretary must issue rules to handle special cases such as two election years in one calendar year or a base year of less than 12 months.

Title 26, §7519

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)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)(1)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)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)Any refund under this subsection shall be payable on the later of—

(A)April 15 of the calendar year following—

(i)in the case of the year referred to in paragraph (1), the calendar year in which it begins,

(ii)in the case of the year referred to in paragraph (2), the calendar year in which it ends, or

(B)the day 90 days after the day on which claim therefor is filed with the Secretary.

(d)For purposes of this section—

(1)An entity’s net base year income shall be equal to the sum of—

(A)the deferral ratio multiplied by the entity’s net income for the base year, plus

(B)the excess (if any) of—

(i)the deferral ratio multiplied by the aggregate amount of applicable payments made by the entity during the base year, over

(ii)the aggregate amount of such applicable payments made during the deferral period of the base year.

(2)Net income is determined by taking into account the aggregate amount of the following items—

(A)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)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)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)(A)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)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)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: 198725 198850 198975 1990 or thereafter100 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)(A)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)For purposes of subparagraph (A), the term “guaranteed payment” means any payment referred to in section 707(c).

(e)For purposes of this section—

(1)The term “deferral period” has the meaning given to such term by section 444(b)(4).

(2)(A)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)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)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)The term “net required payment balance” means the excess (if any) of—

(A)the aggregate of the required payments under this section for all preceding applicable election years, over

(B)the aggregate amount allowable as a refund to the entity under subsection (c) for all preceding applicable election years.

(f)(1)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)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)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)(A)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)For purposes of part II of subchapter A of chapter 68, any payment required by this section shall be treated as a tax.

(C)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)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.

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.

§7519 Required Payments for Entities Electing Not to Have Required Taxable Year

Summary

Title 26, §7519

Notes & Related Subsidiaries

Editorial Notes

References in Text

Amendments

Regulations

Regulations

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Effective Date

Effective Date

Citations & Metadata