§ 1362. Election; revocation; termination
(a)
Election
(b)
When made
(1)
In general
An election under subsection (a) may be made by a small business corporation for any taxable year—
(2)
Certain elections made during 1st 21/2 months treated as made for next taxable year
If—
(A)
an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but
(B)
either—
(i)
on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section
1361, or
(ii)
1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election,
then such election shall be treated as made for the following taxable year.
(3)
Election made after 1st 21/2 months treated as made for following taxable year
If—
(B)
such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year,
then such election shall be treated as made for the following taxable year.
(4)
Taxable years of 21/2 months or less
For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year.
(5)
Authority to treat late elections, etc., as timely
If—
(A)
an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and
(B)
the Secretary determines that there was reasonable cause for the failure to timely make such election,
the Secretary may treat such an election as timely made for such taxable year (and paragraph (3) shall not apply).
(c)
Years for which effective
An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until such election is terminated under subsection (d).
(d)
Termination
(1)
By revocation
(B)
More than one-half of shares must consent to revocation
An election may be revoked only if shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation.
(2)
By corporation ceasing to be small business corporation
(3)
Where passive investment income exceeds 25 percent of gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits
(A)
Termination
(B)
Gross receipts from the sales of certain assets
For purposes of this paragraph—
(C)
Passive investment income defined
(i)
In general
Except as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities.
(ii)
Exception for interest on notes from sales of inventory
The term “passive investment income” shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section
1221
(a)(1).
(iii)
Treatment of certain lending or finance companies
If the S corporation meets the requirements of section
542
(c)(6) for the taxable year, the term “passive investment income” shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section
542
(d)(1)).
(iv)
Treatment of certain dividends
If an S corporation holds stock in a C corporation meeting the requirements of section
1504
(a)(2), the term “passive investment income” shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business.
(e)
Treatment of S termination year
(1)
In general
In the case of an S termination year, for purposes of this title—
(2)
Pro rata allocation
Except as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6), the determination of which items are to be taken into account for each of the short taxable years referred to in paragraph (1) shall be made—
(3)
Election to have items assigned to each short taxable year under normal tax accounting rules
(B)
Shareholders must consent to election
An election under this subsection shall be valid only if all persons who are shareholders in the corporation at any time during the S short year and all persons who are shareholders in the corporation on the first day of the C short year consent to such election.
(4)
S termination year
For purposes of this subsection, the term “S termination year” means any taxable year of a corporation (determined without regard to this subsection) in which a termination of an election made under subsection (a) takes effect (other than on the 1st day thereof).
(5)
Tax for C short year determined on annualized basis
(A)
In general
The taxable income for the short year described in subparagraph (B) of paragraph (1) shall be placed on an annual basis by multiplying the taxable income for such short year by the number of days in the S termination year and by dividing the result by the number of days in the short year. The tax shall be the same part of the tax computed on the annual basis as the number of days in such short year is of the number of days in the S termination year.
(B)
Section
443
(d)(2) to apply
Subsection (d) of section
443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1).
(6)
Other special rules
For purposes of this title—
(A)
Short years treated as 1 year for carryover purposes
The short taxable year described in subparagraph (A) of paragraph (1) shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation.
(B)
Due date for S year
The due date for filing the return for the short taxable year described in subparagraph (A) of paragraph (1) shall be the same as the due date for filing the return for the short taxable year described in subparagraph (B) of paragraph (1) (including extensions thereof).
(C)
Paragraph (2) not to apply to items resulting from section
338
Paragraph (2) shall not apply with respect to any item resulting from the application of section
338.
(f)
Inadvertent invalid elections or terminations
If—
(1)
an election under subsection (a) or section
1361
(b)(3)(B)(ii) by any corporation—
(2)
the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent,
(3)
no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—
(4)
the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period,
then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be [2] during the period specified by the Secretary.
(g)
Election after termination
If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.
[1] So in original. Another closing parenthesis probably should precede the comma.
[2] So in original. Probably should be followed by a comma.