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‘‘(5) DISPROPORTIONATE
APPLICABLE
PAY-
MENTS DURING DEFERRAL PERIOD.—
‘‘(A) DEDUCTION NOT ALLOWED.—In de-
termining applicable income, no deduction shall
be allowed for disproportionate deferral period
applicable payments.
‘‘(B) DISPROPORTIONATE
DEFERRAL
PE-
RIOD APPLICABLE PAYMENTS.—For purposes of
subparagraph (A), the term ‘disproportionate
deferral period applicable payments’ means the
excess (if any) of—
‘‘(i) the product of the deferral ratio
and the aggregate applicable payments
made to owners during the entity’s entire
taxable year, over
‘‘(ii) the aggregate applicable pay-
ments made to owners during the deferral
period.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) the term ‘applicable payments’
has the meaning given to such term by sec-
tion 7519(d)(3), except that in the case of
an S corporation only payments to 2 per-
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cent shareholders (as defined in section
1372(b)) shall be taken into account,
‘‘(ii) the term ‘deferral period’ means
the months in the period beginning with
the first day of the entity’s taxable year
and ending on December 31, and
‘‘(iii) the term ‘deferral ratio’ means
the ratio which the number of months in
the deferral period bears to the total num-
ber of months in the taxable year.
‘‘(6) ANNUALIZED APPLICABLE INCOME.—The
applicable income taken into account for any quarter
for purposes of the annualized income method of
subsection (g) shall be the product of—
‘‘(A) the applicable income determined in
the manner provided in paragraphs (1) through
(5) for the period consisting of the months in
the entity’s taxable year ending before the due
date for the installment for such quarter, and
‘‘(B) a fraction—
‘‘(i) the numerator of which is 12, and
‘‘(ii) the denominator of which is the
number of months in such period.
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‘‘(i) DUE DATES FOR INSTALLMENTS.—Quarterly in-
stallments shall be due on the 15th day of the 3rd, 5th,
8th, and 12th months of the taxable year.
‘‘(j) ELECTION.—
‘‘(1) IN
GENERAL.—An election under sub-
section (a) for a taxable year may be made at any
time on or before the 15th day of the 3rd month of
the first taxable year of 12 months under the elec-
tion. An election, once in effect, shall continue in ef-
fect until terminated under paragraph (3) or (4) or
under subsection (k)(1)(B).
‘‘(2) COORDINATION WITH SECTIONS 442 AND
443.—A change in its annual accounting period
made by an entity pursuant to an election under this
section shall be treated for purposes of sections 442
and 443 as a change approved by the Secretary.
‘‘(3) TERMINATION BY REVOCATION.—An elec-
tion under subsection (a) may be terminated by rev-
ocation, but only if owners of more than one-half of
the equity interests in the entity on the day on
which the revocation is made consent to the revoca-
tion.
‘‘(4) ENTITY TERMINATES.—An election under
subsection (a) terminates whenever there is—
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‘‘(A) a termination of the partnership
under section 708(b)(1), or
‘‘(B) the corporation ceases to be an S cor-
poration.
Subparagraph (B) shall not apply to an inadvertent
termination if the corporation is treated as a con-
tinuing S corporation under section 1362(f).
‘‘(5) WHEN
TERMINATIONS
TAKE
EFFECT.—
For purposes of this section and sections 35 and
6654A, a termination under paragraph (3) or (4) or
under subsection (k)(1)(B) shall take effect as pro-
vided in regulations.
‘‘(6) ELECTION AFTER TERMINATION.—
‘‘(A) If an entity has made an election
under subsection (a) and if such election has
been terminated, such entity shall not be eligi-
ble to make any election under subsection (a)
for any taxable year before its 5th taxable year
beginning after the 1st taxable year for which
such termination is effective, unless the Sec-
retary consents to such election.
‘‘(B) The Secretary shall prescribe regula-
tions applying subparagraph (A) to any succes-
sor entity more than one-half of the equity in-
terests in which are owned by the person or
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persons who owned the predecessor entity at
the time the election was terminated.
‘‘(7) EQUITY INTERESTS DEFINED.—For pur-
poses of paragraphs (3) and (6) and subsection
(n)(2), the term ‘equity interests’ means—
‘‘(A) in the case of a partnership, the cap-
ital interests, and
‘‘(B) in the case of an S corporation, the
shares of stock of the corporation (whether vot-
ing or nonvoting.)
‘‘(k) TIERED STRUCTURES.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2)—
‘‘(A) no election may be made under sub-
section (a) with respect to any entity which is
part of a tiered structure, and
‘‘(B) an election under subsection (a) with
respect to an entity shall be terminated if such
entity becomes part of a tiered structure.
‘‘(2) ENTITIES
ELECTING
SAME
TAXABLE
YEAR.—Paragraph (1) shall not apply to any tiered
structure which consists only of partnerships or S
corporations (or both) all of which have elected the
same taxable year.
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‘‘(3) REGULATIONS.—The Secretary shall pre-
scribe regulations describing the conditions and
manner for the application of paragraph (2) and de-
scribing the rules for avoiding duplicate inclusions of
income and payments of estimated tax with the
tiered structure.
‘‘(l) HIGH AVERAGE INCOME ENTITY DEFINED.—
‘‘(1) IN GENERAL.—For purposes of subsection
(c)(4)(B) (providing an applicable rate of 39.6 per-
cent for certain entities), the term ‘‘high average in-
come entity’ means an entity where the average ap-
plicable income of the 2 percent owners for the base
year is $250,000 or more. The term also includes
any partnership, the applicable income of which for
the base year is $10,000,000 or more.
‘‘(2) 2 PERCENT
OWNERS.—For purposes of
this subsection, the term ‘2 percent owner’ means—
‘‘(A) in the case of a partnership, any per-
son who owns (or is considered as owning with-
in the meaning of section 318) on any day dur-
ing the base year more than 2 percent of the
capital interests of the partnership, and
‘‘(B) in the case of an S corporation, a 2
percent shareholder (as defined in section
1372(b)).
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‘‘(3) BASE YEAR.—For purposes of this sub-
section—
‘‘(A) IN GENERAL.—The base year shall be
the most recent prior taxable year containing
12 months.
‘‘(B) NO BASE YEAR.—In the case of an
entity having no base year, this subsection shall
not apply, and the applicable rate for the tax-
able year shall be 34 percent.
‘‘(m) ESTIMATED TAX PAYMENT WITH ELECTION.—
‘‘(1) PAYMENT REQUIRED.—If, by reason of an
election under this section, an entity has a short
year, the entity shall make an additional payment of
estimated tax on or before the due date for such
election.
‘‘(2) AMOUNT OF PAYMENT.—The amount of
the payment required by paragraph (1) shall be the
product of—
‘‘(A) the lesser of—
‘‘(i) the entity’s applicable income for
the short year, or
‘‘(ii) 110 percent of the entity’s appli-
cable income for the base period, and
‘‘(B) the applicable rate.
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‘‘(3) ALLOWANCE OF CREDIT.—For purposes of
section 35, each owner shall be allowed a credit (for
the owner’s first taxable year ending with or after
the close of the entity’s short year) equal to the own-
er’s allocable share of the payment required by para-
graph (1).
‘‘(4) PENALTY FOR UNDERPAYMENT.—
‘‘(A) TREATMENT AS REQUIRED INSTALL-
MENT.—For purposes of section 6654A, the
payment required by paragraph (1) shall be
treated as a required installment the due date
for which was the last day for making the elec-
tion under this section for the taxable year.
‘‘(B) ENDING DATE FOR UNDERPAYMENT
PERIOD.—The alternative ending date for the
underpayment period provided by subparagraph
(B) of section 6654A(d)(1) shall be the first
April 15 more than 3 months after the close of
the short year.
‘‘(5) DEFINITIONS.—For purposes of this sub-
section.—
‘‘(A) SHORT YEAR.—The term ‘short year’
means a taxable year of less than 12 months.
‘‘(B) APPLICABLE
INCOME
FOR
SHORT
YEAR.—The applicable income for the short
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year shall be determined in the manner pro-
vided by subsection (h).
‘‘(C) APPLICABLE INCOME FOR BASE PE-
RIOD.—The applicable income for the base pe-
riod shall be—
‘‘(i) the amount of the applicable in-
come (determined in the manner provided
by subsection (h)) for the entity’s most re-
cent taxable year of 12 months preceding
the short year, multiplied by
‘‘(ii) a fraction the numerator of
which is the number of months in the
short year and the denominator of which is
12.
‘‘(D) ALLOCABLE SHARE.—An owner’s al-
locable share of the payment required by para-
graph (1) shall be determined in the manner
provided by section 35(b).
‘‘(n) LOSSES IN SHORT TAXABLE YEARS.—
‘‘(1) IN GENERAL.—If, by reason of an election
under this section, an entity has a short taxable
year, any net operating loss arising in such short
taxable year shall be treated for purposes of this
title as arising one-third in such year and one-third
in each of the two succeeding taxable years.
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‘‘(2) SPREADING OF LOSS NOT REQUIRED FOR
NEW ENTITIES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to a new entity (other than a succes-
sor entity).
‘‘(B) SUCCESSOR ENTITY.—For purposes
of subparagraph (A), an entity is a successor
entity if more than one-half of the equity inter-
ests are owned by the person or persons who
owned another entity carrying on the same
business.
‘‘(o) INFORMATION
REQUIRED
ON
ENTITY
RE-
TURNS.—For authority to prescribe by regulations the in-
formation required on returns made by the entity, see sec-
tion 6031(a) (for partnerships) and 6037(a) (for S cor-
porations).
‘‘(p) ALTERNATIVE TAXABLE YEARS.—Nothing in
this section shall be construed to affect the right to have
an alternative taxable year if the entity—
‘‘(1) establishes a business purpose therefor as
provided in section 706 (b)(1)(C) or 1378(b)(2), or
‘‘(2) meets the requirements set forth in Reve-
nue Procedure 87–32.’’.
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SEC. 3. FAILURE BY ENTITY TO PAY ESTIMATED TAX.
Part I of subchapter A of chapter 68 of the Internal
Revenue Code of 1986 (relating to additions to the tax
and additional amounts) is amended by inserting after sec-
tion 6654 the following new section:
‘‘SEC. 6654A. FAILURE BY ELECTING PARTNERSHIP OR S
CORPORATION TO PAY ESTIMATED TAX.
‘‘(a) PENALTY.—
‘‘(1) IN GENERAL.—If any entity to which an
election under section 444(a) applies has an
underpayment of any quarterly installment required
under section 444, such entity shall pay a penalty
determined as provided in subsection (b).
‘‘(2) CROSS REFERENCES.—
‘‘(A) For assessment, collection, and pay-
ment of penalty as tax, see section 6665(a).
‘‘(B) For nonapplication of deficiency pro-
cedures to penalty except when no return is
filed, see section 6665(b).
‘‘(b) DETERMINATION OF PENALTY.—The amount of
any penalty described in subsection (a) for any quarter
shall be determined by applying—
‘‘(1) the underpayment rate established under
section 6621,
‘‘(2) to the amount of the underpayment, and
‘‘(3) for the period of the underpayment.
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‘‘(c) AMOUNT OF UNDERPAYMENT.—For purposes of
subsection (a), the amount of the underpayment for any
installment shall be the excess of—
‘‘(1) the required installment (determined under
section 444(d)), over
‘‘(2) the amount of the installment paid by the
entity on or before the due date for the installment.
‘‘(d) PERIOD OF UNDERPAYMENT.—
‘‘(1) IN GENERAL.—The period for any portion
of an underpayment shall run from the date for the
installment to the earlier of—
‘‘(A) the date the entity pays the portion,
or
‘‘(B) the first April 15 more than 3
months after the close of the entity’s taxable
year.
‘‘(2) ORDER
OF
CREDITING
PAYMENTS.—For
purposes of paragraph (1), payments shall be cred-
ited against unpaid required installments in the
order in which such installments are required to be
paid.
‘‘(e) DEPOSITS OF ESTIMATED TAX ARE TOO SMALL
OR TOO LARGE.—
‘‘(1) SHORTFALLS.—If, as of the first April 15
more than 3 months after the close of the entity’s
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taxable year, the aggregate deposits made by the en-
tity under section 444 for such year are less than
the aggregate amount of allocable shares of esti-
mated tax payments shown on the entity’s return for
such year, such shortfall shall be treated for all pur-
poses of this Code as tax under subtitle A owed by
the entity which became due on such April 15.
‘‘(2) EXCESS
DEPOSITS.—If, instead of the
shortfall described in paragraph (1), there are excess
deposits as of such April 15, such excess shall be
treated for all purposes of the Code as an overpay-
ment of tax under subtitle A made by the entity on
such April 15.
‘‘(f) COORDINATION WITH PAYMENTS BY OWN-
ERS.—
‘‘(1) RELIEF FROM DOUBLE PAYMENT.—If the
entity fails to pay estimated tax under section 444
and thereafter the owner pays the income tax
against which such estimated tax was creditable, any
shortfall of deposits attributable to such failure to
pay estimated tax shall not be collected from the en-
tity.
‘‘(2) COORDINATION
WITH
PENALTY.—Para-
graph (1) shall not grant relief from the penalty pro-
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vided by subsection (a) for any period before the
owner pays the related income tax.
‘‘(g) WAIVER IN CERTAIN CASES.—No addition to
tax shall be imposed under subsection (a) with respect to
any underpayment to the extent the Secretary determines
that the entity meets the exception under section
6654(e)(3)(A).’’
SEC. 4. CREDIT.
Subchapter C of part IV of subchapter A of chapter
1 of the Internal Revenue Code of 1986 (relating to re-
fundable credits), is amended by redesignating section 35
as section 36 and by inserting after section 34 the follow-
ing new section:
‘‘SEC. 35. CREDIT FOR ESTIMATED TAX PAID BY PARTNER-
SHIPS AND S CORPORATIONS.
‘‘(a) ALLOWANCE OF CREDIT.—
‘‘(1) IN GENERAL.—An owner’s allocable share
of estimated payments made by an entity shall be al-
lowed to the owner as a credit against the tax im-
posed by this subtitle.
‘‘(2) YEAR OF CREDIT.—The owner’s allocable
share for any entity’s taxable year shall be allowed
as a credit for the owner’s first taxable year ending
with or after the close of the entity’s taxable year.
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‘‘(b) OWNER’S SHARE OF TAX PAYMENTS PROPOR-
TIONAL TO OWNER’S SHARE OF APPLICABLE INCOME.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, an owner’s allocable share of the entity’s esti-
mated tax payments for the entity’s taxable year
shall be an amount which bears the same ratio to
such payments as the owner’s applicable income for
such year bears to the sum of all applicable incomes
of owners for such year. For this purpose the appli-
cable income of each owner shall be separately deter-
mined in the manner provided by section 444(h).
‘‘(2) 
QUARTERLY
APPLICATION
FOR
ANNUALIZED INCOME METHOD.—If the entity selects
the annualized income method for any quarter, para-
graph (1) shall be applied on a quarter-by-quarter
basis.
‘‘(3) INTERIM CLOSING OF BOOKS.—Where dur-
ing any taxable year there is an interim closing of
the books of an entity under section 706(d)(1),
1377(a)(2), or any other provision, this subsection
shall be applied separately to the segment of the tax-
able year before the closing and the segment after
the closing.’’.
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SEC. 5. COORDINATION WITH INDIVIDUAL’S LIABILITY TO
PAY ESTIMATED TAX.
(a) DEFINITION OF TAX FOR PURPOSES OF INDIVID-
UAL’S LIABILITY.—Paragraph (3) of section 6654(f) of
the Internal Revenue Code of 1986 (relating to computa-
tion of tax after application of credits) is amended to read
as follows:
‘‘(3) the credits against tax provided by part IV
of subchapter A of chapter 1 (relating to the tax
withheld on wages), other than the credits against
tax provided by—
‘‘(A) section 31 (relating to taxes withheld
on wages), and
‘‘(B) section 35 (relating to estimated tax
paid by partnerships and S corporations.’’.
(b) ESTIMATED TAX PAID
FOR INDIVIDUAL BY
PARTNERSHIP
OR S CORPORATION.—Section 6654 of
such Code (relating to failure by individual to pay esti-
mated income tax) is amended by redesignating subsection
(m) as subsection (n) and by inserting after subsection
(l) the following new subsection:
‘‘(m) ESTIMATED TAX PAID BY PARTNERSHIP OR S
CORPORATION.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, an individual entitled to a credit under section
35 for his or her taxable year shall be treated as
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having paid on the due date for the estimated tax
installment for each quarter of such year—
‘‘(A) except as provided in subparagraph
(B), an amount equal to one-fourth of such
credit, or
‘‘(B) if the annualized income method de-
scribed in section 444(g) applies to any quarter
in the entity’s taxable year, an amount equal to
the portion of such credit attributable to the in-
dividual’s allocable share of the entity’s alloca-
ble income for the corresponding quarter.
‘‘(2) SPECIAL RULES.—
‘‘(A) CREDIT EQUALS AMOUNT SHOWN ON
ENTITY’S RETURN.—For purposes of this sec-
tion, an individual’s section 35 credit is the
amount shown for such individual on the enti-
ty’s return for its taxable year under section
6031 or 6037, as the case may be.
‘‘(B) CORRESPONDING
QUARTERS.—For
purposes of paragraph (1)(B), the individual’s
first quarter shall correspond to the entity’s
first quarter, the second to the second, etc.’’.
SEC. 6. COORDINATION OF OLD AND NEW SECTION 444.
(a) NO NEW ELECTIONS UNDER OLD SECTION 444
FOR PARTNERSHIPS AND S CORPORATIONS.—Subsection
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(b) of section 445 of such Code (as redesignated by section
1 of this Act) is amended by adding at the end thereof
the following new paragraph:
‘‘(5) NO NEW ELECTIONS FOR PARTNERSHIPS
AND
S
CORPORATIONS.—No election under sub-
section (a) may be made by a partnership or S cor-
poration if the entity’s first taxable year of 12
months under such election would begin after the
date of the enactment of new section 444.’’.
(b) PARTNERSHIPS
AND S CORPORATIONS MAY
ELECT UNDER NEW SECTION 444.—Such section 445 is
amended by redesignating subsection (g) as subsection (h)
and by inserting after subsection (f) the following new
subsection:
‘‘(g) PARTNERSHIPS
AND S CORPORATIONS MAY
ELECT UNDER NEW SECTION 444.—
‘‘(1) IN
GENERAL.—A partnership or S cor-
poration to which an election under this section ap-
plies may make an election under section 444 at the
time and in the manner provided by section 444(j).
‘‘(2) EFFECT OF ELECTION.—An election de-
scribed in paragraph (1) shall terminate the election
of the entity under this section and entitle it to a
credit or refund with respect to the required pay-
ment under section 7519. The entity shall make the