26 U.S.C. § 1361 : US Code - Section 1361: S corporation defined

Search 26 U.S.C. § 1361 : US Code - Section 1361: S corporation defined

(a) S corporation defined
(1) In general
For purposes of this title, the term "S corporation" means,
with respect to any taxable year, a small business corporation
for which an election under section 1362(a) is in effect for such
year.
(2) C corporation
For purposes of this title, the term "C corporation" means,
with respect to any taxable year, a corporation which is not an S
corporation for such year.
(b) Small business corporation
(1) In general
For purposes of this subchapter, the term "small business
corporation" means a domestic corporation which is not an
ineligible corporation and which does not -
(A) have more than 100 shareholders,
(B) have as a shareholder a person (other than an estate, a
trust described in subsection (c)(2), or an organization
described in subsection (c)(6)) who is not an individual,
(C) have a nonresident alien as a shareholder, and
(D) have more than 1 class of stock.
(2) Ineligible corporation defined
For purposes of paragraph (1), the term "ineligible
corporation" means any corporation which is -
(A) a financial institution which uses the reserve method of
accounting for bad debts described in section 585,
(B) an insurance company subject to tax under subchapter L,
(C) a corporation to which an election under section 936
applies, or
(D) a DISC or former DISC.
(3) Treatment of certain wholly owned subsidiaries
(A) In general
Except as provided in regulations prescribed by the
Secretary, for purposes of this title -
(i) a corporation which is a qualified subchapter S
subsidiary shall not be treated as a separate corporation,
and
(ii) all assets, liabilities, and items of income,
deduction, and credit of a qualified subchapter S subsidiary
shall be treated as assets, liabilities, and such items (as
the case may be) of the S corporation.
(B) Qualified subchapter S subsidiary
For purposes of this paragraph, the term "qualified
subchapter S subsidiary" means any domestic corporation which
is not an ineligible corporation (as defined in paragraph (2)),
if -
(i) 100 percent of the stock of such corporation is held by
the S corporation, and
(ii) the S corporation elects to treat such corporation as
a qualified subchapter S subsidiary.
(C) Treatment of terminations of qualified subchapter S
subsidiary status
For purposes of this title, if any corporation which was a
qualified subchapter S subsidiary ceases to meet the
requirements of subparagraph (B), such corporation shall be
treated as a new corporation acquiring all of its assets (and
assuming all of its liabilities) immediately before such
cessation from the S corporation in exchange for its stock.
(D) Election after termination
If a corporation's status as a qualified subchapter S
subsidiary terminates, such corporation (and any successor
corporation) shall not be eligible to make -
(i) an election under subparagraph (B)(ii) to be treated as
a qualified subchapter S subsidiary, or
(ii) an election under section 1362(a) to be treated as an
S corporation,
before its 5th taxable year which begins after the 1st taxable
year for which such termination was effective, unless the
Secretary consents to such election.
(E) Information returns
Except to the extent provided by the Secretary, this
paragraph shall not apply to part III of subchapter A of
chapter 61 (relating to information returns).
(c) Special rules for applying subsection (b)
(1) Members of a family treated as 1 shareholder
(A) In general
For purposes of subsection (b)(1)(A), there shall be treated
as one shareholder -
(i) a husband and wife (and their estates), and
(ii) all members of a family (and their estates).
(B) Members of a family
For purposes of this paragraph -
(i) In general
The term "members of a family" means a common ancestor, any
lineal descendant of such common ancestor, and any spouse or
former spouse of such common ancestor or any such lineal
descendant.
(ii) Common ancestor
An individual shall not be considered to be a common
ancestor if, on the applicable date, the individual is more
than 6 generations removed from the youngest generation of
shareholders who would (but for this subparagraph) be members
of the family. For purposes of the preceding sentence, a
spouse (or former spouse) shall be treated as being of the
same generation as the individual to whom such spouse is (or
was) married.
(iii) Applicable date
The term "applicable date" means the latest of -
(I) the date the election under section 1362(a) is made,
(II) the earliest date that an individual described in
clause (i) holds stock in the S corporation, or
(III) October 22, 2004.
(C) Effect of adoption, etc.
Any legally adopted child of an individual, any child who is
lawfully placed with an individual for legal adoption by the
individual, and any eligible foster child of an individual
(within the meaning of section 152(f)(1)(C)), shall be treated
as a child of such individual by blood.
(2) Certain trusts permitted as shareholders
(A) In general
For purposes of subsection (b)(1)(B), the following trusts
may be shareholders:
(i) A trust all of which is treated (under subpart E of
part I of subchapter J of this chapter) as owned by an
individual who is a citizen or resident of the United States.
(ii) A trust which was described in clause (i) immediately
before the death of the deemed owner and which continues in
existence after such death, but only for the 2-year period
beginning on the day of the deemed owner's death.
(iii) A trust with respect to stock transferred to it
pursuant to the terms of a will, but only for the 2-year
period beginning on the day on which such stock is
transferred to it.
(iv) A trust created primarily to exercise the voting power
of stock transferred to it.
(v) An electing small business trust.
(vi) In the case of a corporation which is a bank (as
defined in section 581) or a depository institution holding
company (as defined in section 3(w)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(w)(1)), a trust which
constitutes an individual retirement account under section
408(a), including one designated as a Roth IRA under section
408A, but only to the extent of the stock held by such trust
in such bank or company as of the date of the enactment of
this clause.
This subparagraph shall not apply to any foreign trust.
(B) Treatment as shareholders
For purposes of subsection (b)(1) -
(i) In the case of a trust described in clause (i) of
subparagraph (A), the deemed owner shall be treated as the
shareholder.
(ii) In the case of a trust described in clause (ii) of
subparagraph (A), the estate of the deemed owner shall be
treated as the shareholder.
(iii) In the case of a trust described in clause (iii) of
subparagraph (A), the estate of the testator shall be treated
as the shareholder.
(iv) In the case of a trust described in clause (iv) of
subparagraph (A), each beneficiary of the trust shall be
treated as a shareholder.
(v) In the case of a trust described in clause (v) of
subparagraph (A), each potential current beneficiary of such
trust shall be treated as a shareholder; except that, if for
any period there is no potential current beneficiary of such
trust, such trust shall be treated as the shareholder during
such period.
(vi) In the case of a trust described in clause (vi) of
subparagraph (A), the individual for whose benefit the trust
was created shall be treated as a shareholder.
(3) Estate of individual in bankruptcy may be shareholder
For purposes of subsection (b)(1)(B), the term "estate"
includes the estate of an individual in a case under title 11 of
the United States Code.
(4) Differences in common stock voting rights disregarded
For purposes of subsection (b)(1)(D), a corporation shall not
be treated as having more than 1 class of stock solely because
there are differences in voting rights among the shares of common
stock.
(5) Straight debt safe harbor
(A) In general
For purposes of subsection (b)(1)(D), straight debt shall not
be treated as a second class of stock.
(B) Straight debt defined
For purposes of this paragraph, the term "straight debt"
means any written unconditional promise to pay on demand or on
a specified date a sum certain in money if -
(i) the interest rate (and interest payment dates) are not
contingent on profits, the borrower's discretion, or similar
factors,
(ii) there is no convertibility (directly or indirectly)
into stock, and
(iii) the creditor is an individual (other than a
nonresident alien), an estate, a trust described in paragraph
(2), or a person which is actively and regularly engaged in
the business of lending money.
(C) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to provide for the proper treatment of
straight debt under this subchapter and for the coordination of
such treatment with other provisions of this title.
(6) Certain exempt organizations permitted as shareholders
For purposes of subsection (b)(1)(B), an organization which is -

(A) described in section 401(a) or 501(c)(3), and
(B) exempt from taxation under section 501(a),
may be a shareholder in an S corporation.
(d) Special rule for qualified subchapter S trust
(1) In general
In the case of a qualified subchapter S trust with respect to
which a beneficiary makes an election under paragraph (2) -
(A) such trust shall be treated as a trust described in
subsection (c)(2)(A)(i),
(B) for purposes of section 678(a), the beneficiary of such
trust shall be treated as the owner of that portion of the
trust which consists of stock in an S corporation with respect
to which the election under paragraph (2) is made, and
(C) for purposes of applying sections 465 and 469 to the
beneficiary of the trust, the disposition of the S corporation
stock by the trust shall be treated as a disposition by such
beneficiary.
(2) Election
(A) In general
A beneficiary of a qualified subchapter S trust (or his legal
representative) may elect to have this subsection apply.
(B) Manner and time of election
(i) Separate election with respect to each corporation
An election under this paragraph shall be made separately
with respect to each corporation the stock of which is held
by the trust.
(ii) Elections with respect to successive income
beneficiaries
If there is an election under this paragraph with respect
to any beneficiary, an election under this paragraph shall be
treated as made by each successive beneficiary unless such
beneficiary affirmatively refuses to consent to such
election.
(iii) Time, manner, and form of election
Any election, or refusal, under this paragraph shall be
made in such manner and form, and at such time, as the
Secretary may prescribe.
(C) Election irrevocable
An election under this paragraph, once made, may be revoked
only with the consent of the Secretary.
(D) Grace period
An election under this paragraph shall be effective up to 15
days and 2 months before the date of the election.
(3) Qualified subchapter S trust
For purposes of this subsection, the term "qualified subchapter
S trust" means a trust -
(A) the terms of which require that -
(i) during the life of the current income beneficiary,
there shall be only 1 income beneficiary of the trust,
(ii) any corpus distributed during the life of the current
income beneficiary may be distributed only to such
beneficiary,
(iii) the income interest of the current income beneficiary
in the trust shall terminate on the earlier of such
beneficiary's death or the termination of the trust, and
(iv) upon the termination of the trust during the life of
the current income beneficiary, the trust shall distribute
all of its assets to such beneficiary, and
(B) all of the income (within the meaning of section 643(b))
of which is distributed (or required to be distributed)
currently to 1 individual who is a citizen or resident of the
United States.
A substantially separate and independent share of a trust within
the meaning of section 663(c) shall be treated as a separate
trust for purposes of this subsection and subsection (c).
(4) Trust ceasing to be qualified
(A) Failure to meet requirements of paragraph (3)(A)
If a qualified subchapter S trust ceases to meet any
requirement of paragraph (3)(A), the provisions of this
subsection shall not apply to such trust as of the date it
ceases to meet such requirement.
(B) Failure to meet requirements of paragraph (3)(B)
If any qualified subchapter S trust ceases to meet any
requirement of paragraph (3)(B) but continues to meet the
requirements of paragraph (3)(A), the provisions of this
subsection shall not apply to such trust as of the first day of
the first taxable year beginning after the first taxable year
for which it failed to meet the requirements of paragraph
(3)(B).
(e) Electing small business trust defined
(1) Electing small business trust
For purposes of this section -
(A) In general
Except as provided in subparagraph (B), the term "electing
small business trust" means any trust if -
(i) such trust does not have as a beneficiary any person
other than (I) an individual, (II) an estate, (III) an
organization described in paragraph (2), (3), (4), or (5) of
section 170(c), or (IV) an organization described in section
170(c)(1) which holds a contingent interest in such trust and
is not a potential current beneficiary,
(ii) no interest in such trust was acquired by purchase,
and
(iii) an election under this subsection applies to such
trust.
(B) Certain trusts not eligible
The term "electing small business trust" shall not include -
(i) any qualified subchapter S trust (as defined in
subsection (d)(3)) if an election under subsection (d)(2)
applies to any corporation the stock of which is held by such
trust,
(ii) any trust exempt from tax under this subtitle, and
(iii) any charitable remainder annuity trust or charitable
remainder unitrust (as defined in section 664(d)).
(C) Purchase
For purposes of subparagraph (A), the term "purchase" means
any acquisition if the basis of the property acquired is
determined under section 1012.
(2) Potential current beneficiary
For purposes of this section, the term "potential current
beneficiary" means, with respect to any period, any person who at
any time during such period is entitled to, or at the discretion
of any person may receive, a distribution from the principal or
income of the trust (determined without regard to any power of
appointment to the extent such power remains unexercised at the
end of such period). If a trust disposes of all of the stock
which it holds in an S corporation, then, with respect to such
corporation, the term "potential current beneficiary" does not
include any person who first met the requirements of the
preceding sentence during the 1-year period ending on the date of
such disposition.
(3) Election
An election under this subsection shall be made by the trustee.
Any such election shall apply to the taxable year of the trust
for which made and all subsequent taxable years of such trust
unless revoked with the consent of the Secretary.
(4) Cross reference
For special treatment of electing small business trusts, see
section 641(c).