§ 1361. S corporation defined
(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—
(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,
(3)
Treatment of certain wholly owned subsidiaries
(A)
In general
Except as provided in regulations prescribed by the Secretary, for purposes of this title—
(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—
(C)
Treatment of terminations of qualified subchapter S subsidiary status
(i)
In general
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.
(ii)
Termination by reason of sale of stock
If the failure to meet the requirements of subparagraph (B) is by reason of the sale of stock of a corporation which is a qualified subchapter S subsidiary, the sale of such stock shall be treated as if—
(I)
the sale were a sale of an undivided interest in the assets of such corporation (based on the percentage of the corporation’s stock sold), and
(II)
the sale were followed by an acquisition by such corporation of all of its assets (and the assumption by such corporation of all of its liabilities) in a transaction to which section
351 applies.
(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—
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.
(c)
Special rules for applying subsection (b)
(1)
Members of a family treated as 1 shareholder
(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.
(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.
(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.
(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—
(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)—
(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.
(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,
(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
(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,
(B)
Certain trusts not eligible
The term “electing small business trust” shall not include—
(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.
(f)
Restricted bank director stock
(2)
Restricted bank director stock
For purposes of this subsection, the term “restricted bank director stock” means stock in 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)),[1] if such stock—
(A)
is required to be held by an individual under applicable Federal or State law in order to permit such individual to serve as a director, and
(B)
is subject to an agreement with such bank or company (or a corporation which controls (within the meaning of section
368
(c)) such bank or company) pursuant to which the holder is required to sell back such stock (at the same price as the individual acquired such stock) upon ceasing to hold the office of director.
(g)
Special rule for bank required to change from the reserve method of accounting on becoming S corporation
In the case of a bank which changes from the reserve method of accounting for bad debts described in section
585 or
593 for its first taxable year for which an election under section
1362
(a) is in effect, the bank may elect to take into account any adjustments under section
481 by reason of such change for the taxable year immediately preceding such first taxable year.
[1] So in original. Another closing parenthesis probably should precede the comma.