26 CFR 1.1375-1 - Tax imposed when passive investment income of corporation having subchapter C earnings and profits exceed 25 percent of gross receipts.

§ 1.1375-1 Tax imposed when passive investment income of corporation having subchapter C earnings and profits exceed 25 percent of gross receipts.

(a)General rule. For taxable years beginning after 1981, section 1375(a) imposes a tax on the income of certain S corporations that have passive investment income. In the case of a taxable year beginning during 1982, an electing small business corporation may elect to have the rules under this section not apply. See the regulations under section 1362 for rules on the election. For purposes of this section, the term S corporation shall include an electing small business corporation under prior law. This tax shall apply to an S corporation for a taxable year if the S corporation has -

(1) Subchapter C earnings and profits at the close of such taxable year, and

(2) Gross receipts more than 25 percent of which are passive investment income

If the S corporation has no subchapter C earnings and profits at the close of the taxable year (because, for example, such earnings and profits were distributed in accordance with section 1368), the tax shall not be imposed even though the S corporation has passive investment income for the taxable year. If the tax is imposed, the tax shall be computed by multiplying the excess net passive income (as defined in paragraph (b) of this section) by the highest rate of tax specified in section 11(b).

(b)Definitions -

(1)Excess net passive income -

(i)In general. The term excess net passive income is defined in section 1375(b)(1), and can be expressed by the following formula:

Where:
ENPI = excess net passive income
NPI = net passive income
PII = passive investment income
GR = total gross receipts

(ii)Limitation. The amount of the excess net passive income for any taxable year shall not exceed the corporation's taxable income for the taxable year (determined in accordance with section 1374(d) and § 1.1374-1(d)).

(2)Net passive income. The term net passive income means -

(i) Passive investment income, reduced by

(ii) The deductions allowable under chapter 1 of the Internal Revenue Code of 1954 which are directly connected (within the meaning of paragraph (b)(3) of this section) with the production of such income (other than deductions allowable under section 172 and part VIII of subchapter B).

(3)Directly connected -

(i)In general. For purposes of paragraph (b)(2)(ii) of this section to be directly connected with the production of income, an item of deduction must have proximate and primary relationship to the income. Expenses, depreciation, and similar items attributable solely to such income qualify for deduction.

(ii)Allocation of deduction. If an item of deduction is attributable (within the meaning of paragraph (b)(3)(i) of this section) inpart to passive investment income and in part to income other than passive investment income, the deduction shall be allocated between the two types of items on a reasonable basis. The portion of any deduction so allocated to passive investment income shall be treated as proximately and primarily related to such income.

(4)Other definitions. The termssubchapter C earnings and profits, passive investment income, and gross receipts shall have the same meaning given these terms in section 1362(d)(3) and the regulations thereunder.

(c)Special rules -

(1)Disallowance of credits. No credit is allowed under part IV of subchapter A of chapter 1 of the Code (other than section 34) against the tax imposed by section 1375(a) and this section.

(2)Coordination with section 1374. If any gain -

(i) Is taken into account in determining passive income for purposes of this section, and

(ii) Is taken into account under section 1374,

the amount of such gain taken into account under section 1374(b) and § 1.1374-1(b) (1) and (2) in determining the amount of tax shall be reduced by the portion of the excess net passive income for the taxable year which is attributable (on a pro rata basis) to such gain. For purposes of the preceding sentence, the portion of excess net passive income for the taxable year which is attributable to such capital gain is equal to the amount determined by multiplying the excess net passive income by the following fraction:
Where:
NCG = net capital gain
NPI = net passive income.
E = Expense attributable to net capital gain.

(d)Waiver of tax in certain cases -

(1)In general. If an S corporation establishes to the satisfaction of the Commissioner that -

(i) It determined in good faith that it had no subchapter C earnings and profits at the close of the taxable year, and

(ii) During a reasonable period of time after it was determined that it did have subchapter C earnings and profits at the close of such taxable year such earnings and profits were distributed,

the Commissioner may waive the tax imposed by section 1375 for such taxable year. The S corporation has the burden of establishing that under the relevant facts and circumsances the Commissioner should waive the tax.

For example, if an S corporation establishes that in good faith and using due diligence it determined that it had no subchapter C earnings and profits at the close of a taxable year, but it was later determined on audit that it did have subchapter C earnings and profits at the close of such taxable year, and if the corporation establishes that it distributed such earnings and profits within a reasonable time after the audit, it may be appropriate for the Commissioner to waive the tax on passive income for such taxable year.

(2)Corporation's request for a waiver. A request for waiver of the tax imposed by section 1375 shall be made in writing to the district director and shall contain all relevant facts to establish that the requirements of paragraph (d)(1) of this section are met. Such request shall contain a description of how and on what date the S corporation in good faith and using due diligence determined that it had no subchapter C earnings and profits at the close of the taxable year, a description of how and on what date it was determined that the S corporation had subchapter C earnings and profits at the close of the year and a description (including dates) of any steps taken to distribute such earnings and profits. If the earnings and profits have not yet been distributed, the request shall contain a timetable for distribution and an explanation of why such timetable is reasonable. On the date the waiver is to become effective, all subchapter C earnings and profits must have been distributed.

(e)Reduction in pass-thru for tax imposed on excess net passive income. See section 1366(f)(3) for a special rule reducing each item of the corporation's passive investment income for purposes of section 1366(a) if a tax is imposed on the corporation under section 1375.

(f)Examples. The following examples illustrate the principles of this section:

Example 1.
Assume Corporation M, an S corporation, has for its taxable year total gross receipts of $200,000, passive investment income of $100,000, $60,000 of which is interest income, and expenses directly connected with the production of such interest income in the amount of $10,000. Assume also that at the end of the taxable year Corporation M has subchapter C earnings and profits. Since more than 25 percent of the Corporation M's total gross receipts are passive investment income, and since Corporation M has subchapter C earnings and profits at the end of the taxable year, Corporation M will be subject to the tax imposed by section 1375. The amount of excess net passive investment income is $45,000 ($90,000 × (50,000 / 100,000)). Assume that the other $40,000 of passive investment income is attributable to net capital gain and that there are no expenses directly connected with such gain. Under these facts, $20,000 of the excess net passive income is attributable to the net capital gain ($45,000 × ($40,000 / $90,000)). Accordingly, the amount of gain taken into account under section 1374(b)(1) and the taxable income of Corporation M under section 1374(b)(2) shall be reduced by $20,000.
Example 2.
Assume an S corporation with subchapter C earnings and profits has tax-exempt income of $400, its only passive income, gross receipts of $1,000 and taxable income of $250 and there are no expenses associated with the tax-exempt income. The corporation's excess net income for the taxable year would total $150 (400 × ((400 − 250 / 400)). This amount is subject to the tax imposed by section 1375, notwithstanding that such amount is otherwise tax-exempt income.
[T.D. 8104, 51 FR 34203, Sept. 26, 1986; 52 FR 9162, Mar. 23, 1987. Redesignated and amended by T.D. 8419, 57 FR 22653, May 29, 1992]

This is a list of United States Code sections, Statutes at Large, Public Laws, and Presidential Documents, which provide rulemaking authority for this CFR Part.

This list is taken from the Parallel Table of Authorities and Rules provided by GPO [Government Printing Office].

It is not guaranteed to be accurate or up-to-date, though we do refresh the database weekly. More limitations on accuracy are described at the GPO site.


United States Code
U.S. Code: Title 26 - INTERNAL REVENUE CODE

§ 1 - Tax imposed

§ 21 - Expenses for household and dependent care services necessary for gainful employment

§ 23 - Adoption expenses

§ 25 - Interest on certain home mortgages

§ 25A - Hope and Lifetime Learning credits

§ 28 - Renumbered § 45C]

§ 30 - Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(A), Dec. 19, 2014, 128 Stat. 4037]

§ 36B - Refundable credit for coverage under a qualified health plan

§ 38 - General business credit

§ 40 - Alcohol, etc., used as fuel

§ 41 - Credit for increasing research activities

§ 42 - Low-income housing credit

§ 43 - Enhanced oil recovery credit

§ 45D - New markets tax credit

§ 46 - Amount of credit

§ 47 - Rehabilitation credit

§ 52 - Special rules

§ 56 - Adjustments in computing alternative minimum taxable income

§ 58 - Denial of certain losses

§ 61 - Gross income defined

§ 62 - Adjusted gross income defined

§ 66 - Treatment of community income

§ 67 - 2-percent floor on miscellaneous itemized deductions

§ 72 - Annuities; certain proceeds of endowment and life insurance contracts

§ 101 - Certain death benefits

§ 103 - Interest on State and local bonds

§ 103A - Repealed. Pub. L. 99–514, title XIII, § 1301(j)(1), Oct. 22, 1986, 100 Stat. 2657]

§ 108 - Income from discharge of indebtedness

§ 110 - Qualified lessee construction allowances for short-term leases

§ 129 - Dependent care assistance programs

§ 132 - Certain fringe benefits

§ 148 - Arbitrage

§ 149 - Bonds must be registered to be tax exempt; other requirements

§ 150 - Definitions and special rules

§ 152 - Dependent defined

§ 162 - Trade or business expenses

§ 163 - Interest

§ 165 - Losses

§ 166 - Bad debts

§ 168 - Accelerated cost recovery system

§ 170 - Charitable, etc., contributions and gifts

§ 171 - Amortizable bond premium

§ 179 - Election to expense certain depreciable business assets

§ 179A - Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(A), Dec. 19, 2014, 128 Stat. 4042]

§ 197 - Amortization of goodwill and certain other intangibles

§ 199 - Income attributable to domestic production activities

§ 216 - Deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder

§ 221 - Interest on education loans

§ 263A - Capitalization and inclusion in inventory costs of certain expenses

§ 267 - Losses, expenses, and interest with respect to transactions between related taxpayers

§ 274 - Disallowance of certain entertainment, etc., expenses

§ 280C - Certain expenses for which credits are allowable

§ 280F - Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes

§ 280G - Golden parachute payments

§ 301 - Distributions of property

§ 304 - Redemption through use of related corporations

§ 305 - Distributions of stock and stock rights

§ 324

§ 336 - Gain or loss recognized on property distributed in complete liquidation

§ 337 - Nonrecognition for property distributed to parent in complete liquidation of subsidiary

§ 338 - Certain stock purchases treated as asset acquisitions

§ 351 - Transfer to corporation controlled by transferor

§ 355 - Distribution of stock and securities of a controlled corporation

§ 357 - Assumption of liability

§ 358 - Basis to distributees

§ 362 - Basis to corporations

§ 367 - Foreign corporations

§ 382 - Limitation on net operating loss carryforwards and certain built-in losses following ownership change

§ 383 - Special limitations on certain excess credits, etc.

§ 401 - Qualified pension, profit-sharing, and stock bonus plans

§ 401 note - Qualified pension, profit-sharing, and stock bonus plans

§ 402A - Optional treatment of elective deferrals as Roth contributions

§ 403 - Taxation of employee annuities

§ 404 - Deduction for contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred-payment plan

§ 408 - Individual retirement accounts

§ 408A - Roth IRAs

§ 409 - Qualifications for tax credit employee stock ownership plans

§ 410 - Minimum participation standards

§ 411 - Minimum vesting standards

§ 414 - Definitions and special rules

§ 417 - Definitions and special rules for purposes of minimum survivor annuity requirements

§ 419A - Qualified asset account; limitation on additions to account

§ 420 - Transfers of excess pension assets to retiree health accounts

§ 441 - Period for computation of taxable income

§ 442 - Change of annual accounting period

§ 444 - Election of taxable year other than required taxable year

§ 446 - General rule for methods of accounting

§ 453 - Installment method

§ 453A - Special rules for nondealers

§ 458 - Magazines, paperbacks, and records returned after the close of the taxable year

§ 460 - Special rules for long-term contracts

§ 461 - General rule for taxable year of deduction

§ 465 - Deductions limited to amount at risk

§ 466 - Repealed. Pub. L. 99–514, title VIII, § 823(a), Oct. 22, 1986, 100 Stat. 2373]

§ 467 - Certain payments for the use of property or services

§ 468A - Special rules for nuclear decommissioning costs

§ 468B - Special rules for designated settlement funds

§ 469 - Passive activity losses and credits limited

§ 471 - General rule for inventories

§ 472 - Last-in, first-out inventories

§ 475 - Mark to market accounting method for dealers in securities

§ 481 - Adjustments required by changes in method of accounting

§ 482 - Allocation of income and deductions among taxpayers

§ 483 - Interest on certain deferred payments

§ 493

§ 504 - Status after organization ceases to qualify for exemption under section 501(c)(3) because of substantial lobbying or because of political activities

§ 514 - Unrelated debt-financed income

§ 527 - Political organizations

§ 585 - Reserves for losses on loans of banks

§ 597 - Treatment of transactions in which Federal financial assistance provided

§ 642 - Special rules for credits and deductions

§ 643 - Definitions applicable to subparts A, B, C, and D

§ 645 - Certain revocable trusts treated as part of estate

§ 663 - Special rules applicable to sections 661 and 662

§ 664 - Charitable remainder trusts

§ 672 - Definitions and rules

§ 679 - Foreign trusts having one or more United States beneficiaries

§ 701 - Partners, not partnership, subject to tax

§ 702 - Income and credits of partner

§ 703 - Partnership computations

§ 704 - Partner’s distributive share

§ 705 - Determination of basis of partner’s interest

§ 706 - Taxable years of partner and partnership

§ 707 - Transactions between partner and partnership

§ 708 - Continuation of partnership

§ 709 - Treatment of organization and syndication fees

§ 721 - Nonrecognition of gain or loss on contribution

§ 722 - Basis of contributing partner’s interest

§ 723 - Basis of property contributed to partnership

§ 724 - Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property

§ 731 - Extent of recognition of gain or loss on distribution

§ 732 - Basis of distributed property other than money

§ 733 - Basis of distributee partner’s interest

§ 734 - Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

§ 735 - Character of gain or loss on disposition of distributed property

§ 736 - Payments to a retiring partner or a deceased partner’s successor in interest

§ 737 - Recognition of precontribution gain in case of certain distributions to contributing partner

§ 741 - Recognition and character of gain or loss on sale or exchange

§ 742 - Basis of transferee partner’s interest

§ 743 - Special rules where section 754 election or substantial built-in loss

§ 751 - Unrealized receivables and inventory items

§ 752 - Treatment of certain liabilities

§ 753 - Partner receiving income in respect of decedent

§ 754 - Manner of electing optional adjustment to basis of partnership property

§ 755 - Rules for allocation of basis

§ 761 - Terms defined

§ 809 - Repealed. Pub. L. 108–218, title II, § 205(a), Apr. 10, 2004, 118 Stat. 610]

§ 817A - Special rules for modified guaranteed contracts

§ 832 - Insurance company taxable income

§ 845 - Certain reinsurance agreements

§ 846 - Discounted unpaid losses defined

§ 848 - Capitalization of certain policy acquisition expenses

§ 852 - Taxation of regulated investment companies and their shareholders

§ 860E - Treatment of income in excess of daily accruals on residual interests

§ 860G - Other definitions and special rules

§ 863 - Special rules for determining source

§ 864 - Definitions and special rules

§ 865 - Source rules for personal property sales

§ 874 - Allowance of deductions and credits

§ 882 - Tax on income of foreign corporations connected with United States business

§ 883 - Exclusions from gross income

§ 884 - Branch profits tax

§ 892 - Income of foreign governments and of international organizations

§ 894 - Income affected by treaty

§ 897 - Disposition of investment in United States real property

§ 901 - Taxes of foreign countries and of possessions of United States

§ 902 - Deemed paid credit where domestic corporation owns 10 percent or more of voting stock of foreign corporation

§ 904 - Limitation on credit

§ 907 - Special rules in case of foreign oil and gas income

§ 911 - Citizens or residents of the United States living abroad

§ 924

§ 925

§ 927

§ 934 - Limitation on reduction in income tax liability incurred to the Virgin Islands

§ 936 - Puerto Rico and possession tax credit

§ 937 - Residence and source rules involving possessions

§ 954 - Foreign base company income

§ 956 - Investment of earnings in United States property

§ 957 - Controlled foreign corporations; United States persons

§ 960 - Special rules for foreign tax credit

§ 963 - Repealed. Pub. L. 94–12, title VI, § 602(a)(1), Mar. 29, 1975, 89 Stat. 58]

§ 985 - Functional currency

§ 987 - Branch transactions

§ 988 - Treatment of certain foreign currency transactions

§ 989 - Other definitions and special rules

§ 1017 - Discharge of indebtedness

§ 1032 - Exchange of stock for property

§ 1059 - Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends

§ 1060 - Special allocation rules for certain asset acquisitions

§ 1092 - Straddles

§ 1202 - Partial exclusion for gain from certain small business stock

§ 1221 - Capital asset defined

§ 1244 - Losses on small business stock

§ 1248 - Gain from certain sales or exchanges of stock in certain foreign corporations

§ 1254 - Gain from disposition of interest in oil, gas, geothermal, or other mineral properties

§ 1275 - Other definitions and special rules

§ 1286 - Tax treatment of stripped bonds

§ 1291 - Interest on tax deferral

§ 1293 - Current taxation of income from qualified electing funds

§ 1294 - Election to extend time for payment of tax on undistributed earnings

§ 1295 - Qualified electing fund

§ 1296 - Election of mark to market for marketable stock

§ 1297 - Passive foreign investment company

§ 1298 - Special rules

§ 1301 - Averaging of farm income

§ 1361 - S corporation defined

§ 1368 - Distributions

§ 1374 - Tax imposed on certain built-in gains

§ 1377 - Definitions and special rule

§ 1378 - Taxable year of S corporation

§ 1397D - Qualified zone property defined

§ 1397E - Credit to holders of qualified zone academy bonds

§ 1402 - Definitions

§ 1441 - Withholding of tax on nonresident aliens

§ 1443 - Foreign tax-exempt organizations

§ 1445 - Withholding of tax on dispositions of United States real property interests

§ 1471 - Withholdable payments to foreign financial institutions

§ 1472 - Withholdable payments to other foreign entities

§ 1473 - Definitions

§ 1474 - Special rules

§ 1502 - Regulations

§ 1503 - Computation and payment of tax

§ 1504 - Definitions

§ 1561 - Limitations on certain multiple tax benefits in the case of certain controlled corporations

§ 3401 - Definitions

§ 5000 - Certain group health plans

§ 5000A - Requirement to maintain minimum essential coverage

§ 6001 - Notice or regulations requiring records, statements, and special returns

§ 6011 - General requirement of return, statement, or list

§ 6015 - Relief from joint and several liability on joint return

§ 6033 - Returns by exempt organizations

§ 6035 - Basis information to persons acquiring property from decedent

§ 6038 - Information reporting with respect to certain foreign corporations and partnerships

§ 6038A - Information with respect to certain foreign-owned corporations

§ 6038B - Notice of certain transfers to foreign persons

§ 6038D - Information with respect to foreign financial assets

§ 6039I - Returns and records with respect to employer-owned life insurance contracts

§ 6041 - Information at source

§ 6043 - Liquidating, etc., transactions

§ 6045 - Returns of brokers

§ 6046A - Returns as to interests in foreign partnerships

§ 6049 - Returns regarding payments of interest

§ 6050E - State and local income tax refunds

§ 6050H - Returns relating to mortgage interest received in trade or business from individuals

§ 6050I-1

§ 6050K - Returns relating to exchanges of certain partnership interests

§ 6050M - Returns relating to persons receiving contracts from Federal executive agencies

§ 6050P - Returns relating to the cancellation of indebtedness by certain entities

§ 6050S - Returns relating to higher education tuition and related expenses

§ 6060 - Information returns of tax return preparers

§ 6061 - Signing of returns and other documents

§ 6065 - Verification of returns

§ 6081 - Extension of time for filing returns

§ 6103 - Confidentiality and disclosure of returns and return information

§ 6109 - Identifying numbers

§ 6302 - Mode or time of collection

§ 6402 - Authority to make credits or refunds

§ 6411 - Tentative carryback and refund adjustments

§ 6655 - Failure by corporation to pay estimated income tax

§ 6662 - Imposition of accuracy-related penalty on underpayments

§ 6695 - Other assessable penalties with respect to the preparation of tax returns for other persons

§ 6851 - Termination assessments of income tax

§ 7520 - Valuation tables

§ 7654 - Coordination of United States and certain possession individual income taxes

§ 7701 - Definitions

§ 7702 - Life insurance contract defined

§ 7805 - Rules and regulations

§ 7872 - Treatment of loans with below-market interest rates

§ 7874 - Rules relating to expatriated entities and their foreign parents

U.S. Code: Title 29 - LABOR
Statutes at Large
Public Laws
Presidential Documents

Reorganization ... 1978 Plan No. 4

Title 26 published on 16-Jun-2017 03:58

The following are ALL rules, proposed rules, and notices (chronologically) published in the Federal Register relating to 26 CFR Part 1 after this date.

  • 2017-06-30; vol. 82 # 125 - Friday, June 30, 2017
    1. 82 FR 29719 - Regulations Regarding Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment; Correction
      GPO FDSys XML | Text
      DEPARTMENT OF THE TREASURY, Internal Revenue Service
      Correcting amendment.
        Effective Date: These corrections are effective June 30, 2017. Applicability Date: The corrections to §§ 1.1441-0; 1.1441-1(b)(7)(ii)(B), (e)(3)(iv)(B) and (C), (e)(4)(ii)(B)( 11 ), (e)(4)(ix)(D), (e)(5)(ii) through (e)(5)(ii)(B), (e)(5)(ii)(D) through (e)(5)(v)(B)( 3 ), (e)(5)(v)(B)( 5 ) through (e)(5)(v)(D), and (f) through (f)(4); 1.1441-1T; 1.1441-3(d)(1); 1.1441-4; 1.6045-1(m)(2)(ii) and (n)(12)(ii); and 1.6049-5(c)(1) through (c)(4) are applicable on January 6, 2017.
      26 CFR Part 1

Pages

The section you are viewing is cited by the following CFR sections.