closely held pass-thru entity
(4) Simplified look-back method for pass-thru entities (A) In general In the case of a pass-thru entity— (i) the look-back method of paragraph (2) shall be applied at the entity level, (ii) in determining overpayments and underpayments for purposes of applying paragraph (2)(B)— (I) any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and (II) any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and (iii) any interest required to be paid by the taxpayer under paragraph (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity). (B) Exceptions (i) Closely held pass-thru entities This paragraph shall not apply to any closely held pass-thru entity. (ii) Foreign contracts This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States. (C) Other definitions For purposes of this paragraph— (i) Highest rate The term “highest rate” means— (I) the highest rate of tax specified in section 11, or (II) if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1. (ii) Pass-thru entity The term “pass-thru entity” means any— (I) partnership, (II) S corporation, or (III) trust. (iii) Closely held pass-thru entity The term “closely held pass-thru entity” means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply.