I

104TH CONGRESS

1ST SESSION H. R. 1661

To permit partnerships and S corporations to elect taxable years other than

required years.

IN THE HOUSE OF REPRESENTATIVES

MAY 17, 1995

Mr. SHAW introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To permit partnerships and S corporations to elect taxable

years other than required years.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Small Business Tax Flexibility Act of 1995’’.

6 SEC. 2. ELECTION OF TAXABLE YEAR.

7 Part I of subchapter E of chapter 1 of the Internal

8 Revenue Code of 1986 (relating to accounting periods) is

9 amended by redesignating section 444 as section 445 and

10 by inserting after section 443 the following new section:
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1 ‘‘SEC. 444. PARTNERSHIPS AND S CORPORATIONS MAY

2 ELECT ANY TAXABLE YEAR.

3 ‘‘(a) GENERAL RULE.—Except as otherwise provided

4 in this section, a partnership or S corporation may elect

5 to have a taxable year other than the required taxable

6 year.

7 ‘‘(b) EFFECT OF ELECTION.—If an entity makes an

8 election under subsection (a), then—

9 ‘‘(1) the entity shall pay estimated tax at the

10 applicable rate on behalf of the owners as provided

11 in this section,

12 ‘‘(2) if there is any underpayment of estimated

13 tax by the entity, the entity shall pay a penalty de14 termined under section 6654A, and

15 ‘‘(3) in the manner provided in sections 35 and

16 6654, the owners may credit against their respective

17 liabilities for tax their allocable shares of the esti18 mated tax payments made by the entity.

19 ‘‘(c) DEFINITIONS.—For purposes of this section,

20 section 35, and section 6654A:

21 ‘‘(1) ENTITY.—The term ‘entity’ means a part22 nership or S corporation, as the case may be.

23 ‘‘(2) OWNER.—The term ‘owner’ means a part24 ner in a partnership or a shareholder in an S cor25 poration, as the case may be.
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1 ‘‘(3) REQUIRED TAXABLE YEAR.—The term ‘re2 quired taxable year’ means the taxable year deter3 mined under section 706(b) or 1378.

4 ‘‘(4) APPLICABLE RATE.—The term ‘applicable

5 rate’ means—

6 ‘‘(A) except as provided in subparagraph

7 (B), 34 percent, and

8 ‘‘(B) in the case of a high average income

9 entity (as defined in subsection (l), 39.6 per10 cent.

11 ‘‘(d) REQUIRED QUARTERLY INSTALLMENTS.—

12 ‘‘(1) REQUIREMENT.—An entity shall pay a re13 quired installment for each quarter of a taxable year

14 for which an election under subsection (a) is in ef15 fect.

16 ‘‘(2) NO REQUIRED PAYMENTS WHERE ENTI17 TY’S LIABILITY IS LESS THAN $5,000.—

18 ‘‘(A) IN GENERAL.—An entity shall not be

19 required to make estimated payments under

20 this section for any taxable year for which (but

21 for this subparagraph) its aggregate liability

22 under this section would be less than $5,000.

23 ‘‘(B) ENTITIES UNDER COMMON CON24 TROL.—If 2 or more entities are under common
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1 control, such entities shall be treated as one en2 tity for purposes of applying subparagraph (A).

3 ‘‘(C) COMMON CONTROL DEFINED.—For

4 purposes of subparagraph (B), two entities are

5 under common control if the same person or

6 persons own more than 50 percent of the cap7 ital interest or profits interest in the partner8 ship or more than 50 percent in value of the

9 outstanding stock of the S corporation, as the

10 case may be. For purposes of the preceding sen11 tence, the constructive ownership rules of sec12 tion 267(c) shall apply except that such rules

13 shall be applied to interests in partnerships as

14 well as to stock.

15 ‘‘(3) AMOUNT.—The amount of the required in16 stallment for any quarter shall be determined under

17 whichever of the following is the entity’s applicable

18 method for that quarter.

19 ‘‘(A) The 110 percent method.

20 ‘‘(B) The 100 percent method.

21 ‘‘(C) The annualized income method.

22 ‘‘(4) APPLICABLE METHOD.—Unless the 100

23 percent method or the annualized income method

24 applies to a quarter by reason of subsection (e)(4)

25 or a timely selection under subsection (f) or (g), the
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1 applicable method for an entity for any quarter shall

2 be the 110 percent method.

3 ‘‘(e) 110-PERCENT METHOD.—

4 ‘‘(1) IN GENERAL.—The required quarterly installment under the 110 percent method shall be 1 5 ⁄4

6 of 110 percent of the product of—

7 ‘‘(A) the entity’s applicable income for its

8 base year, and

9 ‘‘(B) the applicable rate.

10 ‘‘(2) C CORPORATION FOR BASE YEAR.—

11 ‘‘(A) IN GENERAL.—For purposes of this

12 subsection, if an S corporation was a C cor13 poration for its base year, its taxable income for

14 its base year shall be substituted for its applica15 ble income.

16 ‘‘(3) BASE YEAR DEFINED—For purposes of

17 this subsection, the term ‘base year’ means the most

18 recent prior taxable year containing 12 months.

19 ‘‘(4) 110-PERCENT METHOD NOT AVAILABLE

20 WHERE LARGE INCREASE IN INCOME.—

21 ‘‘(A) IN GENERAL.—If an entity’s applica22 ble income for the taxable year exceeds its ap23 plicable income for the base year by more than

24 $750,000, the 110-percent method will not

25 apply to the entity for the taxable year. Instead,
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1 the 110-percent method shall apply unless the

2 entity selects the annualized income method.

3 ‘‘(B) ENTITIES UNDER COMMON CON4 TROL.—If 2 or more entities are under common

5 control (as defined in subsection (d)(2)(C)),

6 such entities shall be treated as one entity for

7 purposes of applying subparagraph (A).

8 ‘‘(f) 100-PERCENT METHOD.—

9 ‘‘(1) IN GENERAL.—The required quarterly installment under the 100-percent method shall be 1 10 ⁄4

11 of 100 percent of the product of—

12 ‘‘(A) the entity’s applicable income for the

13 current taxable year, and

14 ‘‘(B) the applicable rate.

15 ‘‘(2) 100-PERCENT METHOD MUST BE SE16 LECTED BY DUE DATE FOR FIRST QUARTER.—Ex17 cept as provided in subsection (e)(4), the 100-per18 cent method shall apply to an entity’s taxable year

19 only if the entity selects that method for that year

20 on or before the due date for the first quarterly in21 stallment for that year.

22 ‘‘(g) ANNUALIZED INCOME METHOD.—

23 ‘‘(1) IN GENERAL.—The required quarterly in24 stallment under the annualized income method shall

be 1 25 ⁄4 of the product of—
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1 ‘‘(A) the entity’s annualized applicable in2 come (determined under subsection (h)(6)), and

3 ‘‘(B) the applicable rate.

4 ‘‘(2) ADJUSTMENTS IN AMOUNT.—The required

5 installment under this subsection for any quarter

6 shall be increased or decreased by any amount by

7 which the entity’s quarterly installments for prior

8 quarters in the year were higher or lower than such

9 installments would have been if computed under this

10 subsection using the annualized applicable income

11 for the current quarter.

12 ‘‘(3) TIME FOR SELECTING METHOD.—The

13 annualized income method shall apply to an entity

14 for a quarter only if the entity selects that method

15 on or before the due date for such quarter.

16 ‘‘(4) CONSISTENCY FOR REMAINING QUAR17 TERS.—If an entity selects the annualized income

18 method for any quarter, that method shall also apply

19 to the remaining quarters in the entity’s taxable

20 year.

21 ‘‘(h) APPLICABLE INCOME.—

22 ‘‘(1) IN GENERAL.—For purposes of this sec23 tion, the applicable income for any taxable year shall

24 be the net amount (not less than zero) determined—
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1 ‘‘(A) by taking into account the entity’s

2 items in the manner and with the exceptions

3 provided in section 703(a) or 1363(b), as the

4 case may be, and

5 ‘‘(B) by making the further adjustments

6 provided in paragraphs (2), (3), (4), and (5) of

7 this subsection.

8 ‘‘(2) CERTAIN DEDUCTIONS ALLOWED.—In de9 termining applicable income the following amounts

10 shall be allowed as deductions:

11 ‘‘(A) Contributions to organizations de12 scribed in section 170(c).

13 ‘‘(B) Taxes described in section 901(c)

14 paid or accrued to foreign countries or posses15 sions of the United States.

16 ‘‘(3) CERTAIN LIMITATIONS DISREGARDED.—

17 For purposes of paragraphs (1) and (2), any limita18 tion on the amount of any item which may be taken

19 into account for purposes of computing the taxable

20 income of a partner or shareholder shall be dis21 regarded.

22 ‘‘(4) GUARANTEED PAYMENTS TO PARTNERS

23 NOT DEDUCTED.—In determining applicable income

24 a guaranteed payment to a partner shall not be

25 treated as an item of deduction.
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1 ‘‘(5) DISPROPORTIONATE APPLICABLE PAY2 MENTS DURING DEFERRAL PERIOD.—

3 ‘‘(A) DEDUCTION NOT ALLOWED.—In de4 termining applicable income, no deduction shall

5 be allowed for disproportionate deferral period

6 applicable payments.

7 ‘‘(B) DISPROPORTIONATE DEFERRAL PE8 RIOD APPLICABLE PAYMENTS.—For purposes of

9 subparagraph (A), the term ‘disproportionate

10 deferral period applicable payments’ means the

11 excess (if any) of—

12 ‘‘(i) the product of the deferral ratio

13 and the aggregate applicable payments

14 made to owners during the entity’s entire

15 taxable year, over

16 ‘‘(ii) the aggregate applicable pay17 ments made to owners during the deferral

18 period.

19 ‘‘(C) DEFINITIONS.—For purposes of this

20 paragraph—

21 ‘‘(i) the term ‘applicable payments’

22 has the meaning given to such term by sec23 tion 7519(d)(3), except that in the case of

24 an S corporation only payments to 2 per-
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1 cent shareholders (as defined in section

2 1372(b)) shall be taken into account,

3 ‘‘(ii) the term ‘deferral period’ means

4 the months in the period beginning with

5 the first day of the entity’s taxable year

6 and ending on December 31, and

7 ‘‘(iii) the term ‘deferral ratio’ means

8 the ratio which the number of months in

9 the deferral period bears to the total num10 ber of months in the taxable year.

11 ‘‘(6) ANNUALIZED APPLICABLE INCOME.—The

12 applicable income taken into account for any quarter

13 for purposes of the annualized income method of

14 subsection (g) shall be the product of—

15 ‘‘(A) the applicable income determined in

16 the manner provided in paragraphs (1) through

17 (5) for the period consisting of the months in

18 the entity’s taxable year ending before the due

19 date for the installment for such quarter, and

20 ‘‘(B) a fraction—

21 ‘‘(i) the numerator of which is 12, and

22 ‘‘(ii) the denominator of which is the

23 number of months in such period.
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1 ‘‘(i) DUE DATES FOR INSTALLMENTS.—Quarterly in2 stallments shall be due on the 15th day of the 3rd, 5th,

3 8th, and 12th months of the taxable year.

4 ‘‘(j) ELECTION.—

5 ‘‘(1) IN GENERAL.—An election under sub6 section (a) for a taxable year may be made at any

7 time on or before the 15th day of the 3rd month of

8 the first taxable year of 12 months under the elec9 tion. An election, once in effect, shall continue in ef10 fect until terminated under paragraph (3) or (4) or

11 under subsection (k)(1)(B).

12 ‘‘(2) COORDINATION WITH SECTIONS 442 AND

13 443.—A change in its annual accounting period

14 made by an entity pursuant to an election under this

15 section shall be treated for purposes of sections 442

16 and 443 as a change approved by the Secretary.

17 ‘‘(3) TERMINATION BY REVOCATION.—An elec18 tion under subsection (a) may be terminated by rev19 ocation, but only if owners of more than one-half of

20 the equity interests in the entity on the day on

21 which the revocation is made consent to the revoca22 tion.

23 ‘‘(4) ENTITY TERMINATES.—An election under

24 subsection (a) terminates whenever there is—
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1 ‘‘(A) a termination of the partnership

2 under section 708(b)(1), or

3 ‘‘(B) the corporation ceases to be an S cor4 poration.

5 Subparagraph (B) shall not apply to an inadvertent

6 termination if the corporation is treated as a con7 tinuing S corporation under section 1362(f).

8 ‘‘(5) WHEN TERMINATIONS TAKE EFFECT.—

9 For purposes of this section and sections 35 and

10 6654A, a termination under paragraph (3) or (4) or

11 under subsection (k)(1)(B) shall take effect as pro12 vided in regulations.

13 ‘‘(6) ELECTION AFTER TERMINATION.—

14 ‘‘(A) If an entity has made an election

15 under subsection (a) and if such election has

16 been terminated, such entity shall not be eligi17 ble to make any election under subsection (a)

18 for any taxable year before its 5th taxable year

19 beginning after the 1st taxable year for which

20 such termination is effective, unless the Sec21 retary consents to such election.

22 ‘‘(B) The Secretary shall prescribe regula23 tions applying subparagraph (A) to any succes24 sor entity more than one-half of the equity in25 terests in which are owned by the person or
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1 persons who owned the predecessor entity at

2 the time the election was terminated.

3 ‘‘(7) EQUITY INTERESTS DEFINED.—For pur4 poses of paragraphs (3) and (6) and subsection

5 (n)(2), the term ‘equity interests’ means—

6 ‘‘(A) in the case of a partnership, the cap7 ital interests, and

8 ‘‘(B) in the case of an S corporation, the

9 shares of stock of the corporation (whether vot10 ing or nonvoting.)

11 ‘‘(k) TIERED STRUCTURES.—

12 ‘‘(1) IN GENERAL.—Except as provided in para13 graph (2)—

14 ‘‘(A) no election may be made under sub15 section (a) with respect to any entity which is

16 part of a tiered structure, and

17 ‘‘(B) an election under subsection (a) with

18 respect to an entity shall be terminated if such

19 entity becomes part of a tiered structure.

20 ‘‘(2) ENTITIES ELECTING SAME TAXABLE

21 YEAR.—Paragraph (1) shall not apply to any tiered

22 structure which consists only of partnerships or S

23 corporations (or both) all of which have elected the

24 same taxable year.
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1 ‘‘(3) REGULATIONS.—The Secretary shall pre2 scribe regulations describing the conditions and

3 manner for the application of paragraph (2) and de4 scribing the rules for avoiding duplicate inclusions of

5 income and payments of estimated tax with the

6 tiered structure.

7 ‘‘(l) HIGH AVERAGE INCOME ENTITY DEFINED.—

8 ‘‘(1) IN GENERAL.—For purposes of subsection

9 (c)(4)(B) (providing an applicable rate of 39.6 per10 cent for certain entities), the term ‘‘high average in11 come entity’ means an entity where the average ap12 plicable income of the 2 percent owners for the base

13 year is $250,000 or more. The term also includes

14 any partnership, the applicable income of which for

15 the base year is $10,000,000 or more.

16 ‘‘(2) 2 PERCENT OWNERS.—For purposes of

17 this subsection, the term ‘2 percent owner’ means—

18 ‘‘(A) in the case of a partnership, any per19 son who owns (or is considered as owning with20 in the meaning of section 318) on any day dur21 ing the base year more than 2 percent of the

22 capital interests of the partnership, and

23 ‘‘(B) in the case of an S corporation, a 2

24 percent shareholder (as defined in section

25 1372(b)).
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1 ‘‘(3) BASE YEAR.—For purposes of this sub2 section—

3 ‘‘(A) IN GENERAL.—The base year shall be

4 the most recent prior taxable year containing

5 12 months.

6 ‘‘(B) NO BASE YEAR.—In the case of an

7 entity having no base year, this subsection shall

8 not apply, and the applicable rate for the tax9 able year shall be 34 percent.

10 ‘‘(m) ESTIMATED TAX PAYMENT WITH ELECTION.—

11 ‘‘(1) PAYMENT REQUIRED.—If, by reason of an

12 election under this section, an entity has a short

13 year, the entity shall make an additional payment of

14 estimated tax on or before the due date for such

15 election.

16 ‘‘(2) AMOUNT OF PAYMENT.—The amount of

17 the payment required by paragraph (1) shall be the

18 product of—

19 ‘‘(A) the lesser of—

20 ‘‘(i) the entity’s applicable income for

21 the short year, or

22 ‘‘(ii) 110 percent of the entity’s appli23 cable income for the base period, and

24 ‘‘(B) the applicable rate.
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1 ‘‘(3) ALLOWANCE OF CREDIT.—For purposes of

2 section 35, each owner shall be allowed a credit (for

3 the owner’s first taxable year ending with or after

4 the close of the entity’s short year) equal to the own5 er’s allocable share of the payment required by para6 graph (1).

7 ‘‘(4) PENALTY FOR UNDERPAYMENT.—

8 ‘‘(A) TREATMENT AS REQUIRED INSTALL9 MENT.—For purposes of section 6654A, the

10 payment required by paragraph (1) shall be

11 treated as a required installment the due date

12 for which was the last day for making the elec13 tion under this section for the taxable year.

14 ‘‘(B) ENDING DATE FOR UNDERPAYMENT

15 PERIOD.—The alternative ending date for the

16 underpayment period provided by subparagraph

17 (B) of section 6654A(d)(1) shall be the first

18 April 15 more than 3 months after the close of

19 the short year.

20 ‘‘(5) DEFINITIONS.—For purposes of this sub21 section.—

22 ‘‘(A) SHORT YEAR.—The term ‘short year’

23 means a taxable year of less than 12 months.

24 ‘‘(B) APPLICABLE INCOME FOR SHORT

25 YEAR.—The applicable income for the short
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1 year shall be determined in the manner pro2 vided by subsection (h).

3 ‘‘(C) APPLICABLE INCOME FOR BASE PE4 RIOD.—The applicable income for the base pe5 riod shall be—

6 ‘‘(i) the amount of the applicable in7 come (determined in the manner provided

8 by subsection (h)) for the entity’s most re9 cent taxable year of 12 months preceding

10 the short year, multiplied by

11 ‘‘(ii) a fraction the numerator of

12 which is the number of months in the

13 short year and the denominator of which is

14 12.

15 ‘‘(D) ALLOCABLE SHARE.—An owner’s al16 locable share of the payment required by para17 graph (1) shall be determined in the manner

18 provided by section 35(b).

19 ‘‘(n) LOSSES IN SHORT TAXABLE YEARS.—

20 ‘‘(1) IN GENERAL.—If, by reason of an election

21 under this section, an entity has a short taxable

22 year, any net operating loss arising in such short

23 taxable year shall be treated for purposes of this

24 title as arising one-third in such year and one-third

25 in each of the two succeeding taxable years.
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1 ‘‘(2) SPREADING OF LOSS NOT REQUIRED FOR

2 NEW ENTITIES.—

3 ‘‘(A) IN GENERAL.—Paragraph (1) shall

4 not apply to a new entity (other than a succes5 sor entity).

6 ‘‘(B) SUCCESSOR ENTITY.—For purposes

7 of subparagraph (A), an entity is a successor

8 entity if more than one-half of the equity inter9 ests are owned by the person or persons who

10 owned another entity carrying on the same

11 business.

12 ‘‘(o) INFORMATION REQUIRED ON ENTITY RE13 TURNS.—For authority to prescribe by regulations the in14 formation required on returns made by the entity, see sec15 tion 6031(a) (for partnerships) and 6037(a) (for S cor16 porations).

17 ‘‘(p) ALTERNATIVE TAXABLE YEARS.—Nothing in

18 this section shall be construed to affect the right to have

19 an alternative taxable year if the entity—

20 ‘‘(1) establishes a business purpose therefor as

21 provided in section 706 (b)(1)(C) or 1378(b)(2), or

22 ‘‘(2) meets the requirements set forth in Reve23 nue Procedure 87–32.’’.
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1 SEC. 3. FAILURE BY ENTITY TO PAY ESTIMATED TAX.

2 Part I of subchapter A of chapter 68 of the Internal

3 Revenue Code of 1986 (relating to additions to the tax

4 and additional amounts) is amended by inserting after sec5 tion 6654 the following new section:

6 ‘‘SEC. 6654A. FAILURE BY ELECTING PARTNERSHIP OR S

7 CORPORATION TO PAY ESTIMATED TAX.

8 ‘‘(a) PENALTY.—

9 ‘‘(1) IN GENERAL.—If any entity to which an

10 election under section 444(a) applies has an

11 underpayment of any quarterly installment required

12 under section 444, such entity shall pay a penalty

13 determined as provided in subsection (b).

14 ‘‘(2) CROSS REFERENCES.—

15 ‘‘(A) For assessment, collection, and pay16 ment of penalty as tax, see section 6665(a).

17 ‘‘(B) For nonapplication of deficiency pro18 cedures to penalty except when no return is

19 filed, see section 6665(b).

20 ‘‘(b) DETERMINATION OF PENALTY.—The amount of

21 any penalty described in subsection (a) for any quarter

22 shall be determined by applying—

23 ‘‘(1) the underpayment rate established under

24 section 6621,

25 ‘‘(2) to the amount of the underpayment, and

26 ‘‘(3) for the period of the underpayment.
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1 ‘‘(c) AMOUNT OF UNDERPAYMENT.—For purposes of

2 subsection (a), the amount of the underpayment for any

3 installment shall be the excess of—

4 ‘‘(1) the required installment (determined under

5 section 444(d)), over

6 ‘‘(2) the amount of the installment paid by the

7 entity on or before the due date for the installment.

8 ‘‘(d) PERIOD OF UNDERPAYMENT.—

9 ‘‘(1) IN GENERAL.—The period for any portion

10 of an underpayment shall run from the date for the

11 installment to the earlier of—

12 ‘‘(A) the date the entity pays the portion,

13 or

14 ‘‘(B) the first April 15 more than 3

15 months after the close of the entity’s taxable

16 year.

17 ‘‘(2) ORDER OF CREDITING PAYMENTS.—For

18 purposes of paragraph (1), payments shall be cred19 ited against unpaid required installments in the

20 order in which such installments are required to be

21 paid.

22 ‘‘(e) DEPOSITS OF ESTIMATED TAX ARE TOO SMALL

23 OR TOO LARGE.—

24 ‘‘(1) SHORTFALLS.—If, as of the first April 15

25 more than 3 months after the close of the entity’s
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1 taxable year, the aggregate deposits made by the en2 tity under section 444 for such year are less than

3 the aggregate amount of allocable shares of esti4 mated tax payments shown on the entity’s return for

5 such year, such shortfall shall be treated for all pur6 poses of this Code as tax under subtitle A owed by

7 the entity which became due on such April 15.

8 ‘‘(2) EXCESS DEPOSITS.—If, instead of the

9 shortfall described in paragraph (1), there are excess

10 deposits as of such April 15, such excess shall be

11 treated for all purposes of the Code as an overpay12 ment of tax under subtitle A made by the entity on

13 such April 15.

14 ‘‘(f) COORDINATION WITH PAYMENTS BY OWN15 ERS.—

16 ‘‘(1) RELIEF FROM DOUBLE PAYMENT.—If the

17 entity fails to pay estimated tax under section 444

18 and thereafter the owner pays the income tax

19 against which such estimated tax was creditable, any

20 shortfall of deposits attributable to such failure to

21 pay estimated tax shall not be collected from the en22 tity.

23 ‘‘(2) COORDINATION WITH PENALTY.—Para24 graph (1) shall not grant relief from the penalty pro-
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1 vided by subsection (a) for any period before the

2 owner pays the related income tax.

3 ‘‘(g) WAIVER IN CERTAIN CASES.—No addition to

4 tax shall be imposed under subsection (a) with respect to

5 any underpayment to the extent the Secretary determines

6 that the entity meets the exception under section

7 6654(e)(3)(A).’’

8 SEC. 4. CREDIT.

9 Subchapter C of part IV of subchapter A of chapter

10 1 of the Internal Revenue Code of 1986 (relating to re11 fundable credits), is amended by redesignating section 35

12 as section 36 and by inserting after section 34 the follow13 ing new section:

14 ‘‘SEC. 35. CREDIT FOR ESTIMATED TAX PAID BY PARTNER15 SHIPS AND S CORPORATIONS.

16 ‘‘(a) ALLOWANCE OF CREDIT.—

17 ‘‘(1) IN GENERAL.—An owner’s allocable share

18 of estimated payments made by an entity shall be al19 lowed to the owner as a credit against the tax im20 posed by this subtitle.

21 ‘‘(2) YEAR OF CREDIT.—The owner’s allocable

22 share for any entity’s taxable year shall be allowed

23 as a credit for the owner’s first taxable year ending

24 with or after the close of the entity’s taxable year.
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1 ‘‘(b) OWNER’S SHARE OF TAX PAYMENTS PROPOR2 TIONAL TO OWNER’S SHARE OF APPLICABLE INCOME.—

3 ‘‘(1) IN GENERAL.—For purposes of this sec4 tion, an owner’s allocable share of the entity’s esti5 mated tax payments for the entity’s taxable year

6 shall be an amount which bears the same ratio to

7 such payments as the owner’s applicable income for

8 such year bears to the sum of all applicable incomes

9 of owners for such year. For this purpose the appli10 cable income of each owner shall be separately deter11 mined in the manner provided by section 444(h).

12 ‘‘(2) QUARTERLY APPLICATION FOR

13 ANNUALIZED INCOME METHOD.—If the entity selects

14 the annualized income method for any quarter, para15 graph (1) shall be applied on a quarter-by-quarter

16 basis.

17 ‘‘(3) INTERIM CLOSING OF BOOKS.—Where dur18 ing any taxable year there is an interim closing of

19 the books of an entity under section 706(d)(1),

20 1377(a)(2), or any other provision, this subsection

21 shall be applied separately to the segment of the tax22 able year before the closing and the segment after

23 the closing.’’.
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1 SEC. 5. COORDINATION WITH INDIVIDUAL’S LIABILITY TO

2 PAY ESTIMATED TAX.

3 (a) DEFINITION OF TAX FOR PURPOSES OF INDIVID4 UAL’S LIABILITY.—Paragraph (3) of section 6654(f) of

5 the Internal Revenue Code of 1986 (relating to computa6 tion of tax after application of credits) is amended to read

7 as follows:

8 ‘‘(3) the credits against tax provided by part IV

9 of subchapter A of chapter 1 (relating to the tax

10 withheld on wages), other than the credits against

11 tax provided by—

12 ‘‘(A) section 31 (relating to taxes withheld

13 on wages), and

14 ‘‘(B) section 35 (relating to estimated tax

15 paid by partnerships and S corporations.’’.

16 (b) ESTIMATED TAX PAID FOR INDIVIDUAL BY

17 PARTNERSHIP OR S CORPORATION.—Section 6654 of

18 such Code (relating to failure by individual to pay esti19 mated income tax) is amended by redesignating subsection

20 (m) as subsection (n) and by inserting after subsection

21 (l) the following new subsection:

22 ‘‘(m) ESTIMATED TAX PAID BY PARTNERSHIP OR S

23 CORPORATION.—

24 ‘‘(1) IN GENERAL.—For purposes of this sec25 tion, an individual entitled to a credit under section

26 35 for his or her taxable year shall be treated as
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1 having paid on the due date for the estimated tax

2 installment for each quarter of such year—

3 ‘‘(A) except as provided in subparagraph

4 (B), an amount equal to one-fourth of such

5 credit, or

6 ‘‘(B) if the annualized income method de7 scribed in section 444(g) applies to any quarter

8 in the entity’s taxable year, an amount equal to

9 the portion of such credit attributable to the in10 dividual’s allocable share of the entity’s alloca11 ble income for the corresponding quarter.

12 ‘‘(2) SPECIAL RULES.—

13 ‘‘(A) CREDIT EQUALS AMOUNT SHOWN ON

14 ENTITY’S RETURN.—For purposes of this sec15 tion, an individual’s section 35 credit is the

16 amount shown for such individual on the enti17 ty’s return for its taxable year under section

18 6031 or 6037, as the case may be.

19 ‘‘(B) CORRESPONDING QUARTERS.—For

20 purposes of paragraph (1)(B), the individual’s

21 first quarter shall correspond to the entity’s

22 first quarter, the second to the second, etc.’’.

23 SEC. 6. COORDINATION OF OLD AND NEW SECTION 444.

24 (a) NO NEW ELECTIONS UNDER OLD SECTION 444

25 FOR PARTNERSHIPS AND S CORPORATIONS.—Subsection
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1 (b) of section 445 of such Code (as redesignated by section

2 1 of this Act) is amended by adding at the end thereof

3 the following new paragraph:

4 ‘‘(5) NO NEW ELECTIONS FOR PARTNERSHIPS

5 AND S CORPORATIONS.—No election under sub6 section (a) may be made by a partnership or S cor7 poration if the entity’s first taxable year of 12

8 months under such election would begin after the

9 date of the enactment of new section 444.’’.

10 (b) PARTNERSHIPS AND S CORPORATIONS MAY

11 ELECT UNDER NEW SECTION 444.—Such section 445 is

12 amended by redesignating subsection (g) as subsection (h)

13 and by inserting after subsection (f) the following new

14 subsection:

15 ‘‘(g) PARTNERSHIPS AND S CORPORATIONS MAY

16 ELECT UNDER NEW SECTION 444.—

17 ‘‘(1) IN GENERAL.—A partnership or S cor18 poration to which an election under this section ap19 plies may make an election under section 444 at the

20 time and in the manner provided by section 444(j).

21 ‘‘(2) EFFECT OF ELECTION.—An election de22 scribed in paragraph (1) shall terminate the election

23 of the entity under this section and entitle it to a

24 credit or refund with respect to the required pay25 ment under section 7519. The entity shall make the
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1 selection between the credit and the refund at the

2 time it makes its election under section 444.

3 ‘‘(3) CREDIT.—If the entity selects a credit, it

4 shall be treated as having paid under section 444,

5 for its first taxable year of 12 months under the sec6 tion 444 election, an amount of estimated tax equal

7 to its net required payment balance (within the

8 meaning of section 7519(e)(4)).

9 ‘‘(4) REFUND.—If the entity selects a refund, it

10 shall be entitled to a refund of such net required

11 payment balance at the time provided in section

12 7519(c)(3).’’.

13 SEC. 7. TECHNICAL AMENDMENTS.

14 (a) RULES FOR ASSESSING THE PENALTY UNDER

15 SECTION 6654A.—Section 6665(b) of such Code (relating

16 to procedures for assessing certain additions to tax) is

17 amended—

18 (1) by striking ‘‘6654,’’ and inserting ‘‘6654,

19 6654A,’’, and

20 (2) by striking ‘‘6654 or’’ and inserting ‘‘6654,

21 6654A, or’’.

22 (b) REASONABLE CAUSE EXCEPTION ALLOWED FOR

23 PENALTY UNDER SECTION 7519.—Effective with respect

24 to taxable years beginning after December 31, 1986, the

25 first sentence of section 7519(f)(4)(A) of such Code (relat-
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1 ing to failure to make required payments) is amended by

2 inserting ‘‘unless it is shown that such failure is due to

3 reasonable cause and not to willful neglect,’’ after ‘‘any

4 amount required by this section’’.

5 (c) INTEREST ON LATE REFUNDS UNDER SECTION

6 7519.—Effective with respect to refunds under section

7 7519 of such Code paid after the date of the enactment

8 of this Act, section 7519(f)(3) of such Code is amended

9 by striking ‘‘no interest shall be allowed with respect to

10 any refund of a payment under this section’’ and inserting

11 ‘‘interest shall be allowed with respect to any refund of

12 a payment under this section for any period before the

13 payable date for such refund determined under subsection

14 (c)(3)’’.

15 (d) SPECIAL BASIS ORDERING RULES FOR S COR16 PORATIONS.—Subsection (e) of section 1368 of such Code

17 (relating to definitions and special rules for distribution

18 of S corporations) is amended by adding at the end thereof

19 the following new paragraph:

20 ‘‘(4) CREDITS UNDER SECTION 35.—In the case

21 of any deemed distribution attributable to a credit

22 under section 35, under regulations prescribed by

23 the Secretary—
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1 ‘‘(A) the adjusted basis of the stock shall

2 be determined with regard to the adjustments

3 in section 1367(a)(1), and

4 ‘‘(B) the amount in the accumulated ad5 justments account shall be determined without

6 regard to any net operating loss for the taxable

7 year.’’.

8 SEC. 8 CLERICAL AMENDMENTS.

9 (a) SECTION 35.—The table of sections for subpart

10 C of part IV of subchapter A of chapter 1 of the Internal

11 Revenue Code of 1986 is amended by striking the item

12 relating to section 35 and inserting:

‘‘Sec. 35. Credit for estimated tax paid by partnerships and S corporations.

‘‘Sec. 36. Overpayments of tax.’’.

13 (b) SECTION 444.—The table of sections for part I

14 of subchapter E of chapter 1 of such Code is amended

15 by striking the item relating to section 444 and inserting:

‘‘Sec. 444. Partnerships and S corporations may elect any taxable year.

‘‘Sec. 445. Election of taxable year other than required taxable year.’’.

16 (c) REFERENCES TO OLD SECTION 444.—Sections

17 7519 and 280H of such Code are amended by striking

18 ‘‘444’’ each place it appears and inserting ‘‘445’’.

19 (d) SECTION 6654A.—The table of sections for part

20 I of subchapter A of chapter 68 of such Code is amended

21 by inserting after the item relating to section 6654 the

22 following new item:

‘‘Sec. 6654A. Failure by electing partnership or S corporation to pay estimated

tax.’’.
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1 SEC. 9 EFFECTIVE DATE.

2 Except as provided in subsections (b) and (c) or sec3 tion 6, the amendments made by this Act shall apply to

4 taxable years beginning after December 31, 1995.

Æ