Subchapter S Revision Act of 1982
PL 97-354 (H.R.6055), enacted 10/19/1982

PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1669 
Public Law 97-354 
97th Congress 
An Act 
To revise subchapter S of the Internal Revenue Code of 1954 (relating to small 
Oct. 19, 1982 
business corporations). 
[H.R. 6055] 
Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled. 
Subchapter S 
Revision Act of 
SECTION 1. SHORT TITLE; AMENDMENT OF 1954 CODE. 
1982. 
(a) SHORT TITLE.—This Act may be cited as the "Subchapter S 
^^ ^^ 
^ "°*^-
Revision Act of 1982". 
(b) AMENDMENT OF 1954 CODE.—Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed 
in terms of an amendment to, or repeal of, a section or other 
provision, the reference shall be considered to be made to a section 
or other provision of the Internal Revenue Code of 1954. 
26 use i et seq. 
SEC. 2. AMENDMENT OF SUBCHAPTER S. 
Subchapter S of chapter 1 is amended to read as follows: 
"Subchapter S—Tax Treatment of S Corporations and 
Their Shareholders 
"Part I. In general. 
"Part II. Tax treatment of shareholders. 
"Part III. Special rules. 
"Part IV. Definitions; miscellaneous. 
"PART I—IN GENERAL 
"Sec. 1361. S corporation defined. 
"Sec. 1362. Election; revocation; termination. 
"Sec. 1363. Effect of election on corporation. 
"SEC. 1361. S CORPORATION DEFINED. 
26 USC 1361. 
"(a) S CORPORATION DEFINED.— 
"(1) IN GENERAL.—For purposes of this title, the term *S 
corporation' means, with respect to any taxable year, a small 
business corporation for which an election under section 1362(a) 
is in effect for such year. 
"(2) C CORPORATION.—For purposes of this title, the term 'C 
corporation' means, with respect to any taxable year, a corpora-
tion which is not an S corporation for such year. 
"(b) SMALL BUSINESS CORPORATION.— 
"(1) IN GENERAL.—For purposes of this subchapter, the term 
'small business corporation 
means a domestic corporation 
which is not an ineligible corporation and which does not— 
"(A) have more than 35 shareholders, 
"(B) have as a shareholder a person (other than an estate 
and other than a trust described in subsection (c)(2)) who is 
not an individual, 
"(C) have a nonresident alien as a shareholder, and 
96 STAT. 1670 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(D) have more than 1 class of stock. 
"(2) INELIGIBLE CORPORATION DEFINED.—For purposes of para-
graph (1), the term 'ineligible corporation' means any corpora-
tion which is— 
"(A) a member of an affiliated group (determined under 
section 1504 without regard to the exceptions contained in 
subsection (b) thereof), 
"(B) a financial institution to which section 585 or 593 
applies, 
"(C) an insurance company subject to tax under sub-
26 use 801. 
chapter L, 
"(D) a corporation to which an election under section 936 
applies, or 
"(E) a DISC or former DISC. 
"(c) SPECIAL RULES FOR APPLYING SUBSECTION (b).— 
"(1) HUSBAND AND WIFE TREATED AS i SHAREHOLDER.—For 
purposes of subsection (b)(1)(A), a husband and wife (and their 
estates) shall be treated as 1 shareholder. 
"(2) CERTAIN TRUSTS PERMITTED AS SHAREHOLDERS.— 
"(A) IN GENERAL.—For purposes of subsection (b)(1)(B), 
the following trusts may be shareholders: 
"(i) A trust all of which is treated (under subpart E of 
26 use 671. 
part I of subchapter J of this chapter) as owned by an 
individual who is a citizen or resident of the United 
States. 
"(ii) A trust which was described in clause (i) immedi-
ately before the death of the deemed owner and which 
continues in existence after such death, but only for the 
60-day period beginning on the day of the deemed 
owner's death. If a trust is described in the preceding 
sentence and if the entire corpus of the trust is includ-
ible in the gross estate of the deemed owner, the pre-
ceding sentence shall be applied by substituting '2-year 
period' for '60-day period'. 
"(iii) A trust with respect to stock transferred to it 
pursuant to the terms of a will, but only for the 60-day 
period beginning on the day on which such stock is 
transferred to it. 
"(iv) A trust created primarily to exercise the voting 
power of stock transferred to it. 
This subparagraph shall not apply to any foreign trust. 
"(B) TREATMENT AS SHAREHOLDERS.—For purposes of sub-
section (b)(1)— 
"(i) In the case of a trust described in clause (i) of 
subparagraph (A), the deemed owner shall be treated as 
the shareholder. 
"(ii) In the case of a trust described in clause (ii) of 
subparagraph (A), the estate of the deemed owner shall 
be treated as the shareholder. 
"(iii) In the case of a trust described in clause (iii) of 
subparagraph (A), the estate of the testator shall be 
treated as the shareholder. 
"(iv) In the case of a trust described in clause (iv) of 
subparagraph (A), each beneficiary of the trust shall be 
treated as a shareholder. 
"(3) ESTATE OF INDIVIDUAL IN BANKRUPTCY MAY BE SHARE-
HOLDER.—For purposes of subsection (b)(1)(B), the term 'estate' 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1671 
includes the estate of an individual in a case under title 11 of 
the United States Code. 
n use loi et 
"(4) 
DIFFERENCES IN COMMON STOCK VOTING RIGHTS DISRE- 
^^^ 
GARDED.—For purposes of subsection (b)(1)(D), a corporation 
shall not be treated as having more than 1 class of stock solely 
because there are differences in voting rights among the shares 
of common stock. 
"(5) STRAIGHT DEBT SAFE HARBOR.— 
"(A) IN GENERAL.—For purposes of subsection (b)(1)(D), 
straight debt shall not be treated as a second class of stock. 
"(B) STRAIGHT DEBT DEFINED.—For purposes of this para-
graph, the term 'straight debt' means any written uncondi-
tional promise to pay on demand or on a specified date a 
sum certain in money if— 
"(i) the interest rate (and interest payment dates) are 
not contingent on profits, the borrower's discretion, or 
similar factors, 
"(ii) there is no convertibility (directly or indirectly) 
into stock, and 
"(iii) the creditor is an individual (other than a non-
resident alien), an estate, or a trust described in para-
graph (2). 
"(C) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to provide 
for the proper treatment of straight debt under this sub-
chapter and for the coordination of such treatment with 
other provisions of this title. 
"(6) 
OWNERSHIP OF STOCK IN CERTAIN INACTIVE CORPORA-
TIONS.—For purposes of subsection (b)(2)(A), a corporation shall 
not be treated as a member of an affiliated group at any time 
during any taxable year by reason of the ownership of stock in 
another corporation if such other corporation— 
"(A) has not begun business at any time on or after the 
date of its incorporation and before the close of such taxable 
year, and 
"(B) does not have taxable income for the period included 
within such taxable year. 
*(d) SPECIAL RULE FOR QUALIFIED SUBCHAPTER S TRUST.— 
"(1) IN GENERAL.—In the case of a qualified subchapter S trust 
with respect to which a beneficiary makes an election under 
paragraph (2)— 
"(A) such trust shall be treated as a trust described in 
subsection (c)(2)(A)(i), and 
"(B) for purposes of section 678(a), the beneficiary of such 
trust shall be treated as the owner of that portion of the 
trust which consists of stock in an S corporation with 
respect to which the election under paragraph (2) is made. 
"(2) ELECTION.— 
"(A) IN GENERAL.—A beneficiary of a qualified subchapter 
S trust (or his legal representative) may elect to have this 
subsection apply. 
"(B) MANNER AND TIME OF ELECTION.— 
"(i) SEPARATE ELECTION WITH RESPECT TO EACH S COR-
PORATION.—An election under this paragraph shall be 
made separately with respect to each S corporation the 
stock of which is held by the trust. 
96 STAT. 1672 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(ii) ELECTIONS WITH RESPECT TO SUCCESSIVE INCOME 
BENEFICIARIES.—If there is an election under this para-
graph with respect to any beneficiary, an election 
under this paragraph shall be treated as made by each 
successive beneficiary unless such beneficiary affirma-
tively refuses to consent to such election. 
"(iii) TIME, MANNER, AND FORM OF ELECTION.—Any 
election, or refusal, under this paragraph shall be made 
in such manner and form, and at such time, as the 
Secretary may prescribe. 
"(C) ELECTION IRREVOCABLE.—An election under this 
paragraph, once made, may be revoked only with the con-
sent of the Secretary. 
"(D) GRACE PERIOD.—An election under this paragraph 
shall be effective up to 60 days before the date of the 
election. 
"(3) QuAUFiED S
U
B
C
H
A
P
T
E
R s TRUST.—For purposes of this 
subsection, the term 'qualified subchapter S trust' means a 
trust— 
"(A) which owns stock in 1 or more S corporations, 
"(B) all of the income (within the meaning of section 
643(b)) of which is distributed (or required to be distributed) 
currently to 1 individual who is a citizen or resident of the 
United States, and 
"(C) the terms of which require that— 
"(i) during the life of the current income beneficiary 
there shall be only 1 income beneficiary of the trust, 
"(ii) any corpus distributed during the life of the 
current income beneficiary may be distributed only to 
such beneficiary, 
"(iii) the income interest of the current income bene-
ficianr in the trust shall terminate on the earlier of 
such beneficiary's death or the termination of the trust, 
and 
"(iv) upon the termination of the trust during the life 
of the current income beneficiary, the trust shall dis-
tribute all of its assets to such beneficiary. 
"(4) TRUST CEASING TO BE QUAUFIED.—If a qualified sub-
chapter S trust ceases to meet any requirement under para-
graph (3), the provisions of this subsection shall not apply to 
such trust as of the date it ceases to meet such requirements. 
26 use 1362 
"SEC. 1362. ELECTION; REVOCATION; TERMINATION. 
"(a) ELECTION.— 
"(1) IN GENERAL.—Except as provided in subsection (g), a 
small business corporation may elect, in accordance with the 
provisions of this section, to be an S corporation. 
"(2) ALL SHAREHOLDERS MUST CONSENT TO ELECTION.—An elec-
tion under this subsection shall be valid only if all persons who 
are shareholders in such corporation on the day on which such 
election is made consent to such election. 
"(b) WHEN MADE.— 
"(1) IN GENERAL.—An election under subsection (a) may be 
made by a small business corporation for any taxable year— 
"(A) at any time during the preceding taxable year, or 
"(B) at any time during the taxable year and on or before 
the 15th day of the 3d month of the taxable year. 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1673 
"(2) CERTAIN ELECTIONS MADE DURING IST 2y2 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 
Ante, p. 1669. 
"(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 IST 2y2 MONTHS TREATED AS MADE 
FOR FOLLOWING TAXABLE YEAR.—If— 
"(A) a small business corporation makes an election 
under subsection (a) for any taxable year, and 
"(B) such election is made after the 15th day of the 3d 
month of the taxable year and on or before the last day of 
such taxable year, 
then such election shall be treated as made for the following 
t£ixable year. 
"(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.— 
"(A) IN GENERAL.—An election under subsection (a) may 
be terminated by revocation. 
"(B) MORE THAN ONE-HALF OF SHARES MUST CONSENT TO 
REVOCATION.—An election may be revoked only if share-
holders 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. 
"(C) WHEN EFFECTIVE.—Except as provided in subpara-
graph (D)— 
"(i) a revocation made during the taxable year and on 
or before the 15th day of the 3d month thereof shall be 
effective on the 1st day of such taxable year, and 
"(ii) a revocation made during the taxable year but 
after such 15th day shall be effective on the 1st day of 
the following taxable year. 
"(D) REVOCATION MAY SPECIFY PROSPECTIVE DATE.—If the 
revocation specifies a date for revocation which is on or 
after the day on which the revocation is made, the revoca-
tion shall be effective on and after the date so specified. 
"(2) BY CORPORATION CEASING TO BE SMALL BUSINESS CORPORA-
TION.— 
"(A) IN GENERAL.—An election under subsection (a) shall 
be terminated whenever (at any time on or after the 1st day 
of the ist taxable year for which the corporation is an S 
corporation) such corporation ceases to be a small business 
corporation. 
96 STAT. 1674 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(B) WHEN EFFECTIVE.—^Any termination under this para-
graph shall be effective on and after the date of cessation. 
"(3) WHERE PASSIVE INVESTMENT INCOME EXCEEDS 25 PERCENT OF 
GROSS RECEIPTS FOR 3 CONSECUTIVE TAXABLE YEARS AND CORPORA-
TION HAS SUBCHAPTER C EARNINGS AND PROFITS.— 
"(A) TERMINATION.— 
"(i) IN GENERAL.—An election under subsection (a) 
shall be terminated whenever the corporation— 
26 use 301. 
"(I) has subchapter C earnings and profits at the 
close of each of 3 consecutive taxable years, and 
"(n) has gross receipts for each of such taxable 
years more than 25 percent of which are passive 
investment income. 
"(ii) WHEN EFFECTIVE.—Any termination under this 
paragraph shall be effective on and after the first day 
of the first taxable year beginning after the third 
consecutive taxable year referred to in clause (i). 
"(iii) YEARS TAKEN INTO ACCOUNT.—A prior taxable 
year shall not be teJ^en into account under clause (i) 
unless— 
"(I) such taxable year began after December 31, 
1981, and 
"(II) the corporation was an S corporation for 
such taxable year. 
"(B) SUBCHAPTER C EARNINGS AND PROFITS.—For purposes 
of subparagraph (A), the term 'subchapter C earnings and 
profits means esimings and profits of any corporation for 
any taxable year with respect to which an election under 
Ante, p. 1672. 
scction 1362(a) (or under section 1372 of prior law) was not 
in effect. 
"(C) GROSS RECEIPTS FROM SALES OF CAPITAL ASSETS (OTHER 
THAN STOCK AND SECURITIES).—For purposes of this para-
graph, in the case of dispositions of capital assets (other 
than stock and securities), gross receipts from such disposi-
tions shall be taken into account only to the extent of the 
capital gain net income therefrom. 
(D) PASSIVE INVESTMENT INCOME DEFINED.—For purposes 
of this paragraph— 
(i) IN GENERAL.—Except as otherwise provided in 
this subparagraph, the term 'passive 
investment 
income' means gross receipts derived from royalties, 
rents, dividends, interest, annuities, and sales or ex-
changes of stock or securities (gross receipts from such 
sales or exchanges being taken into account for pur-
poses of this paragraph only to the extent of gains 
therefrom). 
"(ii) EXCEPTION FOR INTEREST ON NOTES FROM SALES OF 
INVENTORY.—TTie term 'passive investment income' 
shall not include interest on any obligation acquired in 
the ordinary course of the corporation's trade or busi-
ness from its sale of property described in section 
1221(1). 
"(iii) TREATMENT OF CERTAIN LENDING OR FINANCE 
COMPANIES.—If the S corporation meets the require-
ments of section 542(cX6) for the taxable year, the term 
'passive investment income' shall not include gross 
receipts for the taxable year which are derived directly 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1675 
from the active and regular conduct of a lending or 
finance business (as defined in section 542(dXl))-
"(iv) TREATMENT OF CERTAIN LIQUIDATIONS.—Gross 
receipts derived from sales or exchanges of stock or 
securities shall not include amounts received by an S 
corporation which are treated under section 331 (relat-
ing to corporate liquidations) as pajnnents in exchange 
for stock where the S corporation owned more than 
50 percent of each class of stock of the liquidating 
corporation. 
"(e) TREATMENT OF S TERMINATION YEAR.— 
"(1) IN GENERAL.—In the case of an S termination year, for 
purposes of this title— 
"(A) S SHORT YEAR.—The portion of such year ending 
before the 1st day for which the termination is effective 
shall be treated as a short taxable year for which the 
corporation is an S corporation. 
"(B) C SHORT YEAR.—The portion of such year beginning 
on such 1st day shall be treated as a short taxable year for 
which the corporation is a C corporation. 
"(2) PRO RATA ALLOCATION.—Except as provided in paragraph 
(3), 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— 
"(A) first by determining for the S termination year— 
"(i) the amount of each of the items of income, loss, 
deduction, or credit described in section 1366(a)(1)(A), Post, p. 1677. 
and 
"(ii) the amount of the nonseparately computed 
income or loss, and 
"(B) then by assigning an equal portion of each amount 
determined under subparagraph (A) to each day of the S 
termination year. 
"(3) ELECTION TO HAVE ITEMS ASSIGNED TO EACH SHORT TAXABLE 
YEAR UNDER NORMAL TAX ACCOUNTING RULES.— 
"(A) IN GENERAL.—A corporation may elect to have para-
graph (2) not apply. 
"(B) ALL SHAREHOLDERS MUST CONSENT TO ELECTION.— 
An election under this paragraph shall be valid only if all 
persons who are shareholders in the corporation at any 
time during the S termination year consent to such 
election. 
"(4) S TERMINATION YEAR.—For purposos 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 ANNUAUZED 
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 
96 STAT. 1676 
PUBLIC LAW 97-354—OCT. 19, 1982 
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)(2) 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 i YEAR FOR CARRYOVER 
PURPOSES.—The short taxable year described in subpara-
graph (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). 
"(f) INADVERTENT TERMINATIONS.—If— 
"(1) an election under subsection (a) by any corporation was 
terminated under paragraph (2) or (3) of subsection (d), 
"(2) the Secretary determines that the termination was 
inadvertent, 
"(3) no later than a reasonable period of time after discovery 
of the event resulting in such termination, steps were taken so 
that the corporation is once more a small business corporation, 
and 
"(4) the corporation, and each person who was a shareholder 
of the corporation at any time during the period specified 
pursuant to this subsection, agrees to make such adjustments 
(consistent with the treatment of the corporation as an S corpo-
ration) as may be required by the Secretary with respect to such 
period, 
then, notwithstanding the terminating event, such corporation shall 
be treated as continuing to be an S corporation during the period 
specified by the Secretary. 
"(g) ELECTION AFTER TERMINATION.—If a small business corpora-
tion 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. 
26 use 1363. 
"SEC. 1363. EFFECT OF ELECTION ON CORPORATION. 
"(a) GENERAL RULE.—Except as otherwise provided in this sub-
chapter and in section 58(d), an S corporation shall not be subject to 
the taxes imposed by this chapter. 
"(b) COMPUTATION OF CORPORATION'S TAXABLE INCOME.—The tax-
able income of an S corporation shall be computed in the same 
manner as in the case of an individual, except that— 
Ante, p. 1677. 
"(1) the items described in section 1366(aXlXA) shall be sepa-
rately stated, 
"(2) the deductions referred to in section 703(a)(2) shall not be 
allowed to the corporation, and 
"(3) section 248 shall apply. 
"(c) ELECTIONS OF THE S CORPORATION.— 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1677 
"(1) IN GENERAL.—Except as provided in paragraph (2), any 
election affecting the computation of items derived from an S 
corporation shall be made by the corporation. 
"(2) EXCEPTIONS.—In the case of an S corporation, elections 
imder the following provisions shall be made by each share-
holder separately— 
"(A) subsection (bX5) or (dX4) of section 108 (relating to 
income from discharge of indebtedness), 
"(B) section 163(d) (relating to limitation on interest on 
investment indebtedness), 
"(C) section 617 (relating to deduction and recapture of 
certain mining exploration expenditures), and 
"(D) section 901 (relating to taxes of foreign countries and 
possessions of the United States). 
"(d) DISTRIBUTIONS OF APPRECIATED PROPERTY.—If— 
"(1) an S corporation makes a distribution of property (other 
than an obligation of such corporation) with respect to its stock, 
and 
"(2) the fair market value of such property exceeds its 
adjusted basis in the hands of the S corporation, 
then, notwithstanding any other provision of this subtitle, gain shall 
be recognized to the S corporation on the distribution in the same 
manner as if it had sold such property to the distributee at its fair 
market vsdue. 
"PART 
II—TAX 
TREATMENT 
OF 
SHAREHOLDERS 
"Sec. 1366. Pass-thru of items to shareholders. 
"Sec. 1367 Adjustments to basis of stock of shareholders, etc. 
"Sec. 1368. Distributions. 
"SEC. 1366. PASS-THRU OF ITEMS TO SHAREHOLDERS. 
26 USC 1366. 
"(a) DETERMINATION OF SHAREHOLDER'S TAX LIABILITY.-
"(1) IN GENERAL.—In determining the tax under this chapter 
of a shareholder for the shareholder's taxable year in which the 
taxable year of the S corporation ends (or for the final taxable 
year of a shareholder who dies before the end of the corpora-
tion's taxable year), there shall be taken into account the 
shareholder's pro rata share of the corporation's— 
"(A) items of income (including tax-exempt income), loss, 
deduction, or credit the separate treatment of which could 
affect the liability for tax of any shareholder, and 
"(B) nonseparately computed income or loss. 
For purposes of the preceding sentence, the items referred to in 
subparagraph (A) shall include amounts described in paragraph 
(4) or (6) of section 702(a). 
"(2) NONSEPARATELY COMPUTED INCOME OR LOSS DEFINED.—For 
purposes of this subchapter, the term 'nonseparately computed 
income or loss' means gross income minus the deductions al-
lowed to the corporation under this chapter, determined by 
excluding all items described in paragraph (IXA). 
"(b) CHARACTER PASSED THRU.—The character of any item in-
cluded in a shareholder's pro rata share under paragraph (1) of 
subsection (a) shall be determined as if such item were realized 
directly from the source from which realized by the corporation, or 
incurred in the same manner as incurred by the corporation. 
96 STAT. 1678 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(c) GROSS INCOME OF A SHAREHOLDER.—In any case where it is 
necessary to determine the gross income of a shareholder for pur-
poses of this title, such gross income shall include the shareholder's 
pro rata share of the gross income of the corporation. 
"(d) SPECIAL RULES FOR LOSSES AND DEDUCTIONS.— 
"(1) CANNOT EXCEED SHAREHOLDER'S BASIS IN STOCK AND 
DEBT.—The aggregate amount of losses and deductions taken 
into account by a shareholder under subsection (a) for any 
taxable year shall not exceed the sum of— 
"(A) the adjusted basis of the shareholder's stock in the S 
corporation (determined with regard to paragraph (1) of 
section 1367(a) for the taxable year), and 
"(B) the shareholder's adjusted basis of any indebtedness 
of the S corporation to the shareholder (determined without 
regard to any adjustment under paragraph (2) of section 
1367(b) for the taxable year). 
"(2) INDEFINITE CARRYOVER OF DISALLOWED LOSSES AND DEDUC-
TIONS.—Any loss or deduction which is disallowed for any tax-
able year by reason of paragraph (1) shall be treated as incurred 
by the corporation in the succeeding taxable year with respect 
to that shareholder. 
"(3) CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS TO 
POST-TERMINATION TRANSITION PERIOD.— 
"(A) IN GENERAL.—If for the last taxable year of a corpo-
ration for which it was an S corporation a loss or deduction 
was disallowed by reason of paragraph (1), such loss or 
deduction shall be treated as incurred by the shareholder 
on the last day of any post-termination transition period. 
"(B) CANNOT EXCEED SHAREHOLDER'S BASIS IN STOCK.—The 
aggregate amount of losses and deductions taken into ac-
count by a shareholder under subparagraph (A) shall not 
exceed the adjusted basis of the shareholder's stock in the 
corporation (determined at the close of the last day of the 
post-termination transition period and without regard to 
this paragraph). 
"(C) ADJUSTMENT IN BASIS OF STOCK.—The shareholder's 
basis in the stock of the corporation shall be reduced by the 
amount allowed as a deduction by reason of this paragraph. 
"(e) TREATMENT OF FAMILY GROUP.—If an individual who is a 
member of the family (within the meaning of section 704(e)(3)) of one 
or more shareholders of an S corporation renders services for the 
corporation or furnishes capital to the corporation without receiving 
reasonable compensation therefor, the Secretary shall make such 
adjustments in the items taken into account by such individual 
and such shareholders as may be necessary in order to reflect the 
value of such services or capital. 
"(f) SPECIAL RULES.— 
"(1) SUBSECTION (a) NOT TO APPLY TO CREDIT ALLOWABLE 
UNDER SECTION 39.—Subsection (a) shall not apply with respect 
to any credit allowable under section 39 (relating to certain uses 
of gasoline, special fuels, and lubricating oil). 
"(2) REDUCTION IN PASS-THRU FOR TAX IMPOSED ON CAPITAL 
Post, p. 1683. 
GAIN.—If any tax is imposed under section 56 or 1374 for any 
taxable year on an S corporation, for purposes of subsection 
(a)-
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1679 
"(A) the amount of the corporation's long-term capital 
gains for the taxable year shall be reduced by the amount of 
such tax, and 
"(B) if the amount of such tax exceeds the amount of such 
long-term capital gains, the corporation's gains from sales 
or exchanges of property described in section 1231 shall be 
reduced by the amount of such excess. 
For purposes of the preceding sentence, the term 'long-term 
"Long-term 
capital gain' shall not include any gain from the sale or ex- capital gam." 
change of property described in section 1231. 
"(3) REDUCTION IN PASS-THRU FOR TAX IMPOSED ON EXCESS NET 
PASSIVE INCOME.—If any tax is imposed under section 1375 for 
Post, p. 1684. 
any taxable year on an S corporation, for purposes of subsection 
(a), each item of passive investment income shall be reduced by 
an amount which bears the same ratio to the amount of such 
tax as— 
"(A) the amount of such item, bears to 
"(B) the total passive investment income for the taxable 
year. 
"(g) CROSS REFERENCE.— 
"For rules relating to procedures for determining the tax treatment of 
subchapter S items, see subchapter D of chapter 63. 
•SEC. 1367. ADJUSTMENTS TO BASIS OF STOCK OF SHAREHOLDERS, ETC. 
26 USC 1367. 
"(a) GENERAL RULE.— 
"(1) INCREASES IN BASIS.—The basis of each shareholder's 
stock in an S corporation shall be increased for any period by 
the sum of the following items determined with respect to that 
shareholder for such period: 
"(A) the items of income described in subparagraph (A) of 
section 1366(a)(1), 
Ante, p. 1677. 
"(B) any nonseparately computed income determined 
under subparagraph (B) of section 1366(a)(1), and 
"(C) the excess of the deductions for depletion over the 
basis of the property subject to depletion. 
"(2) DECREASES IN BASIS.—The basis of each shareholder's 
stock in an S corporation shall be decreased for any period (but 
not below zero) by the sum of the following items determined 
with respect to the shareholder for such period: 
"(A) distributions by the corporation which were not 
includible in the income of the shareholder by reason of 
section 1368, 
"(B) the items of loss and deduction described in subpara-
graph (A) of section 1366(aXl), 
"(C) any nonseparately computed loss determined under 
subparagraph (B) of section 1366(a)(1), 
"(D) any expense of the corporation not deductible in 
computing its taxable income and not properly chargeable 
to capital account, and 
"(E) the amount of the shareholder's deduction for deple-
tion under section 611 with respect to oil and gas wells. 
"(b) SPECIAL RULES.— 
"(1) INCOME ITEMS.—An amount which is required to be in-
cluded in the gross income of a shareholder and shown on his 
return shall be taken into account under subparagraph (A) or 
(B) of subsection (aXD only to the extent such amount is in-
cluded in the shareholder's gross income on his return, in-
96 STAT. 1680 
PUBLIC LAW 97-354—OCT. 19, 1982 
creased or decreased by any adljustment of such amount in a 
redetermination of the shareholder's tax liability. 
"(2) ADJUSTMENTS IN BASIS OF INDEBTEDNESS.— 
"(A) REDUCTION OF BASIS.—If for any taxable year the 
amounts specified in subparagraphs (B), (C), (D), and (E) of 
subsection (aX2) exceed the amount which reduces the 
shareholder's basis to zero, such excess shall be applied to 
reduce (but not below zero) the shareholder's basis in any 
indebtedness of the S corporation to the shareholder. 
"(B) RESTORATION OF BASIS.—If for any taxable year there 
is a reduction under subparagraph (A) in the shareholder's 
basis in the indebtedness of an S corporation to a share-
holder, any net increase (after the application of para-
graphs (1) and (2) of subsection (a)) for any subsequent 
taxable year shall be applied to restore such reduction in 
basis before any of it may be used to increase the share-
holder's basis in the stock of the S corporation. 
"(3) COORDINATION WITH SECTION 165(g).—This section and 
Ante, p. 1677. 
section 1366 shall be applied before the application of section 
165(g) to any taxable year of the shareholder or the corporation 
in which the stock becomes worthless. 
26 u s e 1368. 
"SEC. 1368. DISTRIBUTIONS. 
"(a) GENERAL RULE.—A distribution of property made by an S 
corporation with respect to its stock to which (but for this subsec-
tion) section 301(c) would apply shall be treated in the manner 
provided in subsection (b) or (c), whichever applies. 
"(b) S CORPORATION HAVING NO EARNINGS AND PROFITS.—In the 
case of a distribution described in subsection (a) by an S corporation 
which has no accumulated earnings and profits— 
"(1) AMOUNT APPUED AGAINST BASIS.—The distribution shall 
not be included in gross income to the extent that it does not 
exceed the adjusted basis of the stock. 
"(2) AMOUNT IN EXCESS OF BASIS.—If the amount of the distri-
bution exceeds the adjusted basis of the stock, such excess shall 
be treated as gain from the sale or exchange of property. 
"(c) S CORPORATION HAVING EARNINGS AND PROFITS.—In the case 
of a distribution described in subsection (a) by an S corporation 
which has accumulated earnings and profits— 
"(1) ACCUMULATED ADJUSTMENTS ACCOUNT.—That portion of 
the distribution which does not exceed the accumulated adjust-
ments account shall be treated in the manner provided by 
subsection (b). 
"(2) DIVIDEND.—That portion of the distribution which re-
mains after the application of paragraph (1) shall be treated as a 
dividend to the extent it does not exceed the accumulated 
earnings and profits of the S corporation. 
"(3) TREATMENT OF REMAINDER.—Any portion of the distribu-
tion remaining after the application of paragraph (2) of this 
subsection shall be treated in the manner provided by subsec-
tion (b). 
"(d) CERTAIN ADJUSTMENTS TAKEN INTO ACCOUNT.—Subsections 
(b) and (c) shall be applied by taking into account (to the extent 
proper)— 
"(1) the adjustments to the basis of the shareholder's stock 
Ante, p. 1679. 
described in section 1367, and 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1681 
"(2) the adjustments to the accumulated adjustments account 
which are required by subsection (eXD. 
"(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) ACCUMULATED ADJUSTMENTS ACCOUNT.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'accumulated adjustments account' means an 
account of the S cor^ration which is adjusted for the S 
pNeriod in a manner similar to the adjustments under sec-
tion 1367 (except that no adjustment shall be made for 
^^te, p. i679. 
income which is exempt from tax under this title and no 
adjustment shall be made for any expense not deductible in 
computing the corporation's taxable income and not prop-
erly chargeable to capital account). 
(B) AMOUNT OF ADJUSTMENT IN THE CASE OF REDEMP-
TIONS.—^In the case of any redemption which is treated as 
an exchange under section 302(a) or 303(a), the adjustment 
in the accumulated adjustments account shall be an 
amount which bears the same ratio to the balance in such 
account as the number of shares redeemed in such redemp-
tion bears to the number of shares of stock in the corpora-
tion immediately before such redemption. 
"(2) S PERIOD.—The term *S period' means the most recent 
continuous period during which the corporation has been an S 
corporation. Such period shall not include any taxable year 
beginning before January 1,1983. 
"PART III—SPECIAL RULES 
"Sec. 1371. Coordination with subchapter C. 
"Sec. 1372. Partnership rules to apply for fringe benefit purposes. 
"Sec. 1373. Foreign income. 
"Sec. 1374. Tax imposed on certain capital gains. 
"Sec. 1375. Tax imposed when passive investment income of corporation 
having subchapter C earnings and profits exceeds 25 percent of 
gross receipts. 
"SEC. 1371. COORDINATION WITH SUBCHAPTER C. 
26 USC 1371 
"(a) APPLICATION OF SUBCHAPTER C RULES.— 
"(1) IN GENERAL.—Except as otherwise provided in this title, 
and except to the extent inconsistent with this subchapter, 
subchapter C shall apply to an S corporation and its share-
holders. 
"(2) S CORPORATION AS SHAREHOLDER TREATED LIKE INDIVID-
UAL.—^For purposes of subchapter C, an S corporation in its 
capacity as a shareholder of another corporation shall be 
treated as an individual. 
"(b) NO CARRYOVER BETWEEN C YEAR AND S YEAR.— 
"(1) FROM C YEAR TO S YEAR.—NO carryforward, and no carry-
back, arising for a taxable year for which a corporation is a C 
corporation may be carried to a taxable year for which such 
corporation is an S corporation. 
(2) No C
A
R
R
Y
O
V
E
R F
R
O
M s YEAR.—No Carryforward, and no 
carryback, shall arise at the corporate level for a taxable year 
for which a corporation is an S corporation. 
"(3) TREATMENT OP S YEAR AS ELAPSED YEAR.—Nothing in 
paragraphs (1) and (2) shall prevent treating a taxable year for 
which a corporation is an s corporation as a taxable year for 
96 STAT. 1682 
PUBLIC LAW 97-354—OCT. 19, 1982 
purposes of determining the number of taxable years to which 
an item may be carried back or carried forward. 
"(c) EARNINGS AND PROFITS.— 
"(1) IN GENERAL.—Except as provided in paragraphs (2) and 
(3), no adjustment shall be made to the earnings and profits of 
an S corporation. 
"(2) ADJUSTMENTS FOR REDEMPTIONS, LIQUIDATIONS, REORGANI-
ZATIONS, DivisiVES, ETC.—In the case of any transaction involv-
26 use 301. 
ing the application of subchapter C to any S corporation, proper 
adjustment to any accumulated earnings and profits of the 
corporation shall be made. 
"(3) ADJUSTMENTS IN CASE OF DISTRIBUTIONS TREATED AS DIVI-
DENDS UNDER SECTION 
1368(C)(2).—Paragraph (1) shall not 
apply with respect to that portion of a distribution which is 
Ante, p. 1680. 
treated as a dividend under section 1368(c)(2). 
"(d) COORDINATION WITH INVESTMENT CREDIT RECAPTURE.— 
"(1) No RECAPTURE B
Y REASON OF ELECTION.—Any election 
Ante, p. 1672. 
under section 1362 shall be treated as a mere change in the 
form of conducting a trade or business for purposes of the 
second sentence of section 47(b). 
"(2) CORPORATION CONTINUES TO BE LIABLE.—Notwithstanding 
an election under section 1362, an S corporation shall continue 
to be liable for any increase in tax under section 47 attributable 
to credits allowed for taxable years for which such corporation 
was not an S corporation. 
"(e) CASH DISTRIBUTIONS DURING POST-TERMINATION TRANSITION 
PERIOD.—Any distribution of money by a corporation with respect to 
its stock during a post-termination transition period shall be applied 
against and reduce the adjusted basis of the stock, to the extent that 
the amount of the distribution does not exceed the accumulated 
adjustments account. 
26 use 1372. 
"SEC. 1372. PARTNERSHIP RULES TO APPLY FOR FRINGE BENEFIT PUR-
POSES. 
"(a) GENERAL RULE.—For purposes of applying the provisions of 
this subtitle which relate to employee fringe benefits— 
"(1) the S corporation shall be treated as a partnership, and 
"(2) any 2-percent shareholder of the S corporation shall be 
treated as a partner of such partnership. 
"(b) 2-PERCENT SHAREHOLDER DEFINED.—For purposes of this sec-
tion, the term '2-percent shareholder' means any person who owns 
(or is considered as owning within the meaning of section 318) on 
any day during the taxable year of the S corporation more than 2 
percent of the outstanding stock of such corporation or stock pos-
sessing more than 2 percent of the total combined voting power of 
all stock of such corporation. 
26 use 1373. 
"SEC. 1373. FOREIGN INCOME. 
"(a) S CORPORATION TREATED AS PARTNERSHIP, ETC.—For purposes 
26 use 901, 951. of subparts A and F of part III, and part V, of subchapter N (relating 
26 use 999. 
to income from sources without the United States)— 
"(1) an S corporation shall be treated as a partnership, and 
"(2) the shareholders of such corporation shall be treated as 
partners of such partnership. 
"(b) RECAPTURE OF OVERALL FOREIGN LOSS.—For purposes of sec-
tion 904(f) (relating to recapture of overall foreign loss), the making 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1683 
or termination of an election to be treated as an S corporation shall 
be treated as a disposition of the business. 
"SEC. 1374. TAX IMPOSED ON CERTAIN CAPITAL GAINS. 
26 USC 1374. 
"(a) GENERAL RULE.—If for a taxable year of an S corporation— 
"(1) the net capital gain of such corporation exceeds $25,000, 
and exceeds 50 percent of its taxable income for such year, and 
"(2) the taxable income of such corporation for such year 
exceeds $25,000, 
there is hereby imposed a tax (computed under subsection (b)) on the 
income of such corporation. 
"(b) AMOUNT OF TAX.—The tax imposed by subsection (a) shall be 
the lower of— 
"(1) an amount equal to the tax, determined as provided in 
section 1201(a), on the amount by which the net capital gain of 
the corporation for the taxable year exceeds $25,000, or 
"(2) an amount equal to the tax which would be imposed by 
section 11 on the taxable income of the corporation for the 
taxable year if the corporation were not an S corporation. 
No credit shall be allowable under part IV of subchapter A of this 
chapter (other than under section 39) against the tax imposed by 26 use 31. 
subsection (a). 
"(c) EXCEPTIONS.— 
"(1) IN GENERAL.—Subsection (a) shall not apply to an S 
corporation for any taxable year if the election under section 
1362(a) which is in effect with respect to such corporation for Ante, p. 1672. 
such taxable year has been in effect for the 3 immediately 
preceding taxable years. 
"(2) NEW CORPORATIONS.—Subsection (a) shall not apply to an 
S corporation i
f
— 
"(A) it (and any predecessor corporation) has been in 
existence for less than 4 taxable years, and 
"(B) an election under section 1362(a) has been in effect 
with respect to such corporation for each of its taxable 
years. 
"(3) PROPERTY WITH SUBSTITUTED BASIS.—If— 
"(A) but for paragraph (1) or (2), subsection (a) would 
apply for the taxable year, 
"(B) any long-term capital gain is attributable to property 
acquired by the S corporation during the period beginning 3 
years before the first day of the taxable year and ending on 
the last day of the taxable year, and 
"(C) the basis of such property is determined in whole or 
in part by reference to the basis of any property in the 
hands of another corporation which was not an S corpora-
tion throughout all of the period described in subparagraph 
(B) before the transfer by such other corporation and during 
which such other corporation was in existence, 
then subsection (a) shall apply for the taxable year, but the 
amount of the tax determined under subsection (b) shall not 
exceed a tax, determined as provided in section 1201(a), on the 
net capital gain attributable to property acquired as provided in 
subparagraph (B) and having a basis described in subparagraph 
(C). 
"(d) DETERMINATION OF TAXABLE INCOME.—For purposes of subsec-
tions (a)(2) and (bX2), taxable income of the corporation shall be 
determined under section 63(a) without regard to— 
97-200 O-84-pt. 2 
11 : QL3 
96 STAT. 1684 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(1) the deduction allowed by section 172 (relating to net 
operating loss deduction), and 
26 use 241. 
"(2) the deductions allowed by part VIII of subchapter B 
(other than the deduction allowed by section 248, relating to 
organization expenditures). 
26 u s e 1375. 
"SEC. 1375. TAX IMPOSED WHEN PASSIVE INVESTMENT INCOME OF COR-
PORATION HAVING SUBCHAPTER C EARNINGS AND PROFITS 
EXCEEDS 25 PERCENT OF GROSS RECEIPTS. 
"(a) GENERAL RULE.—If for the taxable year an S corporation 
has— 
26 use 341. 
"(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, 
then there is hereby imposed a tax on the income of such corpora-
tion for such taxable year. Such tax shall be computed by multiply-
ing the excess net passive income by the highest rate of tax specified 
in section 11(b). 
"(b) DEFINITIONS.—For purposes of this section— 
"(1) EXCESS NET PASSIVE INCOME.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'excess net passive income' means an amount 
which bears the same ratio to the net passive income for 
the taxable year as— 
"(i) the amount by which the passive investment 
income for the taxable year exceeds 25 percent of the 
gross receipts for the taxable year, bears to 
"(ii) the passive investment income for the taxable 
year. 
"(B) LIMITATION.—The amount of the excess net passive 
income for any taxable year shall not exceed the corpora-
tion's taxable income for the taxable year (determined in 
Ante, p. 1683. 
accordance with section 1374(d)). 
"(2) NET PASSIVE INCOME.—The term 'net passive income' 
means— 
"(A) passive investment income, reduced by 
"(B) the deductions allowable under this chapter which 
are directly connected with the production of such income 
(other than deductions allowable under section 172 and part 
VIII of subchapter B). 
"(3) PASSIVE INVESTMENT INCOME; ETC.—The terms 'sub-
chapter C earnings and profits', 'passive investment income', 
and 'gross receipts' shall have the same respective meanings as 
Ante, p. 1672. 
when used in paragraph (3) of section 1362(d). 
"(c) SPECIAL RULES.— 
"(1) DISALLOWANCE OF CREDIT.—No credit shall be allowed 
26 use 31. 
under part IV of subchapter A of this chapter (other than 
section 39) against the tax imposed by subsection (a). 
"(2) COORDINATION WITH SECTION 1374.—If any gain— 
"(A) is taken into account in determining passive income 
for purposes of this section, and 
"(B) is taken into account under section 1374, 
the amount of such gain taken into account under section 1374 
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. 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1685 
"PART IV—DEFINITIONS; MISCELLANEOUS 
"Sec. 1377. Definitions and special rule. 
"Sec. 1378. Taxable year of S corporation. 
"Sec. 1379. Transitional rules on enactment. 
"SEC. 1377, DEFINITIONS AND SPECIAL RULE. 
26 USC 1377. 
"(a) PRO RATA SHARE.—For purposes of this subchapter— 
"(1) IN GENERAL.—Except as provided in paragraph (2), each 
shareholder's pro rata share of any item for any taxable year 
shall be the sum of the amounts determined with respect to the 
shareholder— 
"(A) by assigning an equal portion of such item to each 
day of the taxable year, and 
(B) then by dividing that portion pro rata among the 
shares outstanding on such day. 
"(2) ELECTION TO TERMINATE YEAR.—Under regulations pre-
scribed by the Secretary, if any shareholder terminates his 
interest in the corporation during the taxable year and all 
persons who are shareholders during the taxable year agree to 
the application of this paragraph, paragraph (1) shall be applied 
as if the taxable year consisted of 2 taxable years the first of 
which ends on the date of the termination. 
"(b) POST-TERMINATION TRANSITION PERIOD.— 
"(1) IN GENERAL.—For purposes of this subchapter, the term 
'post-termination transition period' means— 
"(A) the period beginning on the day after the last day of 
the corporation's last taxable year as an S corporation and 
ending on the later o
f
— 
"(i) the day which is 1 year after such last day, or 
"(ii) the due date for filing the return for such last 
year as an S corporation (including extensions), and 
"(B) the 120-day period beginning on the date of a deter-
mination that the corporation's election under section 
1362(a) had terminated for a previous taxable year. 
"(2) DETERMINATION DEFINED.—For purposes of paragraph (1), 
the term 'determination' means— 
"(A) a court decision which becomes final, 
"(B) a closing agreement, or 
"(C) an agreement between the corporation and the 
Secretary that the corporation failed to qualify as an S 
corporation. 
"(c) MANNER OF MAKING ELECTIONS, ETC.—Any election under 
this subchapter, and any revocation under section 1362(dXl), shall 
^"^^' P '^^'^^• 
be made in such manner as the Secretary shall by regulations 
prescribe. 
"SEC. 1378. TAXABLE YEAR OF S CORPORATION. 
26 USC 1378. 
"(a) GENERAL RULE.—For purposes of this subtitle— 
"(1) an S corporation shall not change its taxable year to any 
accounting period other than a permitted year, and 
"(2) no corporation may make an election under section 
1362(a) for any taxable year unless such taxable year is a 
permitted year, 
"(b) PERMITTED YEAR DEFINED.—For purposes of this section, the 
term 'permitted year' means a taxable year which— 
"(1) is a year ending December 31, or 
96 STAT. 1686 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(2) is any other accounting period for which the corpora-
tion establishes a business purpose to the satisfaction of the 
Secretary. 
"(c) EXISTING S CORPORATIONS REQUIRED To USE PERMITTED YEAR 
AFTER 50-PERCENT SHIFT IN OWNERSHIP.— 
"(1) IN GENERAL.—A corporation which is an S corporation for 
a taxable year which includes December 31, 1982, shall not be 
treated as an S corporation for any subsequent taxable year 
beginning after the first day on which more than 50 percent of 
the stock is newly owned stock unless such subsequent taxable 
year is a permitted year. 
"(2) NEWLY OWNED STOCK.—For purposes of paragraph (1), the 
stock held by any person on any day shall be treated as newly 
owned stock to the extent that— 
"(A) the percentage of the stock of such corporation 
owned by such person on such day, exceeds 
"(B) the percentage of the stock of such corporation 
owned by such person on December 31,1982. 
"(3) STOCK ACQUIRED BY REASON OF DEATH, GIFT FROM FAMILY 
MEMBER, ETC.— 
"(A) IN GENERAL.—For purposes of paragraph (2), if— 
"(i) a person acquired stock in the corporation after 
December 31,1982, and 
"(ii) such stock was acquired by such person— 
"(I) by reason of the death of a qualified 
transferor, 
"(II) by reason of a gift from a qualified trans-
feror who is a member of such person's family, or 
"(III) by reason of a qualified buy-sell agreement 
from a qualified transferor (or his estate) who was 
a member of such person's family, 
then such stock shall be treated as held on December 31, 
1982, by the person described in clause (i). 
"(B) QUALIFIED TRANSFEROR.—For purposes of subpara-
graph (A), the term 'qualified transferor' means a person— 
"(i) who held the stock in the corporation (or prede-
cessor stock) on December 31,1982, or 
"(ii) who acquired the stock in an acquisition which 
meets the requirements of subparagraph (A). 
"(C) FAMILY.—For purposes of subparagraph (A), the term 
'family' has the meaning given such term by section 
267(c)(4). 
"(D) QUAUFIED BUY-SELL AGREEMENT.—For purpOSeS of 
subparagraph (A), the term 'qualified buy-sell agreement' 
means any agreement which— 
"(i) has been continuously in existence since Septem-
ber 28,1982, and 
"(ii) provides that on the death of any party to such 
agreement, the stock in the S corporation held by such 
party will be sold to surviving parties to such agree-
ment who were parties to such agreement on Septem-
ber 28,1982. 
26 u s e 1379. 
"SEC. 1379. TRANSITIONAL RULES ON ENACTMENT. 
"(a) OLD ELECTIONS.—Any election made under section 1372(a) (as 
in effect before the enactment of the Subchapter S Revision Act of 
Ante, p. 1669. 
1982) shall be treated as an election made under section 1362. 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1687 
"(b) REFERENCES TO PRIOR LAW INCLUDED.—In applying this sub-
chapter to any taxable year beginning after December 31, 1982, any 
reference in this subchapter to another provision of this subchapter 
shall, to the extent not inconsistent with the purposes of this 
subchapter, include a reference to the corresponding provision as in 
effect before the enactment of the Subchapter S Revision Act of 
1982. 
"(c) DISTRIBUTIONS OF UNDISTRIBUTED TAXABLE INCOME.—If a cor-
poration was an electing small business corporation for the last 
preenactment year, subsections (f) and (d) of section 1375 (as in effect 
before the enactment of the Subchapter S Revision Act of 1982) shall 
continue to apply with respect to distributions of undistributed 
taxable income for any taxable year beginning before January 1, 
1983. 
"(d) CARRYFORWARDS.—If a corporation was an electing small 
business corporation for the last preenactment year and is an S 
corporation for the 1st postenactment year, any carryforward to the 
1st postenactment year which arose in a taxable year for which the 
corporation was an electing small business corporation shall be 
treated as arising in the 1st postenactment year. 
"(e) PREENACTMENT AND POSTENACTMENT YEARS DEFINED.—For 
purposes of this subsection— 
"(1) LAST PREENACTMENT YEAR.—The term 'last preenactment 
year' means the last taxable year of a corporation which begins 
before January 1,1983. 
"(2) 1ST POSTENACTMENT YEAR.—The term '1st postenactment 
year' means the 1st taxable year of a corporation which begins 
after December 31,1982." 
SEC. 3. S CORPORATION TREATED LIKE PARTNERSHIP FOR PURPOSES OF 
CERTAIN PROVISIONS. 
(a) DEPLETION IN THE CASE OF OIL AND GAS WELLS (SECTION 
613A).—Subsection (c) of section 613A (relating to exemption for 
26 USC 613A. 
independent producers and royalty owners) is amended by adding at 
the end thereof the following new paragraph: 
"(13) SUBCHAPTER S CORPORATIONS.— 
"(A) COMPUTATION OF DEPLETION ALLOWANCE AT SHARE-
HOLDER LEVEL.—In the case of an S corporation, the allow-
ance for depletion with respect to any oil or gas property 
shall be computed separately by each shareholder. 
"(B) ALLOCATION OF BASIS.—The S corporation shall allo-
cate to each shareholder his pro rata share of the adjusted 
basis of the S corporation in each oil or gas property held by 
the S corporation. The allocation shall be made as of the 
later of the date of acquisition of the property by the S 
corporation, or the first day of the first taxable year of the S 
corporation to which the Subchapter S Revision Act of 1982 
applies. Each shareholder shall separately keep records of 
his share of the adjusted basis in each oil and gas property 
of the S corporation, adjust such share of the adjusted basis 
for any depletion taken on such property, and use such 
adjusted basis each year in the computation of his cost 
depletion or in the computation of his gain or loss on the 
disposition of such property by the S corporation. In the 
case of any distribution of oil or gas property to its share-
holders by the S corporation, the corporation's adjusted 
basis in the property shall be an amount equal to the sum 
96 STAT. 1688 
PUBLIC LAW 97-354—OCT. 19, 1982 
of the shareholders' adjusted bases in such property, as 
determined under this subparagraph. 
"(C) COORDINATION WITH TRANSFER RULE OF PARAGRAPH 
(9).—For purposes of paragraph (9)— 
"(i) an S corporation shall be treated as a partner-
ship, and the shareholders of the S corporation shall be 
treated as partners, and 
"(ii) an election by a C corporation to become an S 
corporation shall be treated as a transfer of all its 
properties effective on the day on which such election 
first takes effect. 
"(D) COORDINATION WITH TRANSFER RULE OF PARAGRAPH 
(10).—For purposes of paragraphs (9) and (10), if an S 
corporation becomes a C corporation, each shareholder 
shall be treated as having transferred to such corporation 
his pro rata share of all the assets of the S corporation." 
(b) WINDFALL PROFIT TAX.— 
26 use 4996. 
(1) Paragraph (1) of section 4996(a) (defining producer) is 
amended by adding at the end thereof the following new 
subparagraph: 
"(C) SUBCHAPTER S CORPORATIONS.— 
"(i) IN GENERAL.—If (but for this subparagraph) an S 
corporation would be treated as a producer of any 
crude oil— 
"(I) such crude oil shall be allocated among the 
shareholders of such corporation, and 
"(II) any shareholder to whom such crude oil is 
allocated (and not the S corporation) shall be 
treated as the producer of such crude oil. 
"(ii) ALLOCATION.—Except to the extent otherwise 
provided in regulations, any allocation under clause 
(iXD shall be determined on the basis of the share-
holder's pro rata share (as determined under section 
Ante, p. 1685. 
1377(a)) of the income of the corporation." 
26 use 4992. 
(2) Section 4992 (relating to independent producer oil) is 
amended by adding at the end thereof the following new 
subsection: 
"(f) S CORPORATION TREATED AS PARTNERSHIP.—For purposes of 
subsections (d) and (e)— 
"(1) an S corporation shall be treated as a partnership, and 
"(2) the shareholders of the S corporation shall be treated as 
partners of such partnership." 
(c) OPTIONAL WRITEOFF OF CERTAIN TAX PREFERENCES (SECTION 
58(i)).-
Ante, p. 417. 
(j) Subparagraph (C) of section 58(iX4) (defining nonlimited 
partnership intangible drilling costs) is amended to read as 
follows: 
"(C) NONUMITED INTANGIBLE DRILLING COSTS.—For pur-
poses of this paragraph, the term 'nonlimited intangible 
drilling costs' means any qualified expenditure described in 
paragraph (2)(C) of an individual which is not allocable to a 
Ante, p. 411. 
limited business interest (as defined in section 55(eX8XC)) of 
such individual." 
(2) Subparagraph (D) of section 58(iX5) is amended— 
(A) by adding at the end thereof the following new sen-
tence: "A similar rule shall apply in the case of an S 
corporation and its shareholders.', and 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1689 
(B) by striking out "PARTNERS" in the subparagraph 
heading and inserting in lieu thereof "PARTNERS AND 
SHAREHOLDERS OF S CORPORATIONS". 
(3) The paragraph heading for paragraph (4) of section 58(i) is 
Ante, p. 417. 
amended by striking out "INTEREST AS LIMITED PARTNER" and 
inserting in lieu thereof "LIMITED BUSINESS INTEREST". 
(d) USED PROPERTY FOR PURPOSES OF INVESTMENT CREDIT (SECTION 
48(c)).—Subparagraph (D) of section 48(c)(2) (relating to partner- 
26USC48. 
ships) is amended— 
(1) by adding at the end thereof the following new sentence: 
"A similar rule shall apply in the case of an S corporation and 
its shareholders.", and 
(2) by striking out "PARTNERSHIPS" in the subparagraph 
heading and inserting in lieu thereof "PARTNERSHIPS AND S 
CORPORATIONS". 
(e) INCOME FROM DISCHARGE OF INDEBTEDNESS (SECTION 108).— 
Paragraph (6) of section 108(d) (relating to application of section at 
26 use 108. 
partner level) is amended to read as follows: 
"(6) SUBSECTIONS (a), (b), AND (C) TO BE APPLIED AT PARTNER 
LEVEL OR S CORPORATION SHAREHOLDER LEVEL.—In the case of a 
partnership, subsections (a), (b), and (c) shall be applied at the 
partner level. In the case of an S corporation, subsections (a), (b), 
and (c) shall be applied at the shareholder level." 
(f) ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS 
(SECTION 179).—Paragraph (8) of section 179(d) (relating to dollar 
95 Stat. 219. 
limitation in the case of partnerships) is amended— 
^" ^^^ ^' ^• 
(1) by adding at the end thereof the following new sentence: 
"A similar rule shall apply in the case of an S corporation and 
its shareholders.", and 
(2) by striking out "PARTNERSHIPS" in the paragraph head-
ing and inserting in lieu thereof 
"PARTNERSHIPS AND S 
CORPORATIONS". 
(g) 
AMORTIZATION OF REFORESTATION EXPENDITURES (SECTION 
194).—Subparagraph (B) of section 194(b)(2) (relating to partner- 
26 USC 194. 
ships) is amended— 
(1) by adding at the end thereof the following new sentence: 
"A similar rule shall apply in the case of an S corporation and 
its shareholders.", and 
(2) by striking out "PARTNERSHIPS" in the subparagraph head-
ing and inserting in lieu thereof 
"PARTNERSHIPS AND S 
CORPORATIONS". 
(h) TREATMENT OF LOSSES AND UNPAID EXPENSES AND INTEREST IN 
THE CASE OF TRANSACTIONS BETWEEN S CORPORATIONS AND CERTAIN 
RELATED ENTITIES (SECTION 267(b)).— 
(1) Subsection (b) of section 267 (relating to losses, expenses, 
26 USC 267. 
and interest with respect to transactions between related tax-
payers) is amended by adding at the end thereof the following 
new paragraphs: 
"(10) An S corporation and a partnership if the same persons 
own— 
"(A) more than 50 percent in value of the outstanding 
stock of the S corporation, and 
"(B) more than 50 percent of the capital interest, or the 
profits interest, in the partnership; 
"(11) An S corporation and another S corporation if the same 
persons own more than 50 percent in value of the outstanding 
stock of each corporation; or 
96 STAT. 1690 
PUBLIC LAW 97-354—OCT. 19, 1982 
"(12) An S corporation and a C corporation, if the same 
individual owns more than 50 percent in value of the outstand-
ing stock of each corporation." 
26 use 267. 
(2) Section 267 is amended by adding at the end thereof the 
following new subsection: 
"(f) SPECIAL RULES FOR UNPAID EXPENSES AND INTEREST OF S 
CORPORATIONS.— 
"(1) IN GENERAL.—In the case of any amount paid or incurred 
by an S corporation, if— 
"(A) by reason of the method of accounting of the person 
to whom the payment is to be made, the amount thereof is 
not (unless paid) includible in the gross income of such 
person, and 
"(B) at the close of the taxable year of the S corporation 
for which Ot)ut for this paragraph) the amount would be 
deductible under section 162, 212, or 163, both the S corpo-
ration and the person to whom the payment is to be paid 
are persons specified in one of the paragraphs of subsection 
(b), 
then no deduction shall be allowed in respect of expenses 
otherwise deductible under section 162 or 212, or of interest 
otherwise deductible under section 163, before the day as of 
which the amount thereof is includible in the gross income of 
the person to whom the pa5niient is made. 
"(2) CERTAIN SHAREHOLDERS, ETC., TREATED AS RELATED PER-
SONS.—For purposes of applying paragraph (1)^ 
"(A) an S corporation, 
"(B) any person who owns, directly or indirectly, 2 per-
cent or more in value of the outstanding stock of such 
corporation, and 
"(C) any person related (within the meaning of subsection 
(b) of this section or section 707(b)(1)(A)) to a person de-
scribed in subparagraph (B), 
shall be treated as persons specified in a paragraph of subsec-
tion (b). 
"(3) SUBSECTION (a)(2) NOT TO APPLY.—Subsection (a)(2) shall 
not apply to any amount paid or incurred by an S corporation." 
(3) Subsection (b) of section 267 is amended by striking out 
"or" at the end of paragraph (8), and by striking out the period 
at the end of paragraph (9) and inserting in lieu thereof a 
semicolon, 
(i) WITHHOLDING FROM INTEREST AND DIVIDENDS.— 
Ante, p. 579. 
(1) Paragraph (1) of section 3453(b) (relating to certain middle-
men treated as payors) is amended by striking out "or" at the 
end of subparagraph (B), by inserting "or" at the end of subpar-
agraph (C), and by inserting after subparagraph (C) the follow-
ing new subparagraph: 
"(D) any S corporation which receives any payment,". 
Ante, p. 580. 
(2) Subsection (b) of section 3454 (defining dividend) is 
amended by striking out paragraph (2) and by redesignating 
paragraph (3) as paragraph (2). 
(3) Paragraph (2) of section 3454(b) (as redesignated by para-
graph (2)) is amended by inserting "and" at the end of subpara-
graph (F), by striking out ", and" at the end of subparagraph (G) 
and inserting in lieu thereof a period, and by striking subpara-
graph (H). 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1691 
(4) Subsection (d) of section 31 (as amended by section 302 of 
the Tax Equity and Fiscal Responsibility Act of 1982) is ^nte, p. 585. 
amended to read as follows: 
"(d) YEAR FOR WHICH CREDIT ALLOWED.—Any credit allowed by 
this section shall be allowed for the taxable year beginning in the 
calendar year in which the amount was withheld (or, in the case of 
subsection (c), in which the wages were received). If more than 1 
taxable year begins in a calendar year, such amount shall be 
allowed as a credit for the last taxable year so beginning." 
SEC. 4. TAX TREATMENT OF SUBCHAPTER S ITEMS. 
(a) GENERAL RULE.—Chapter 63 (relating to assessment) is amend-
ed by adding at the end thereof the following new subchapter: 
"Subchapter D—Tax Treatment of Subchapter S Items 
"Sec. 6241. Tax treatment determined at corporate level. 
"Sec. 6242. Shareholder's return must be consistent with corporate return 
or Secretary notified of inconsistency. 
"Sec. 6243. All shareholders to be notified of proceedings and given oppor-
tunity to participate. 
"Sec. 6244. Certain partnership provisions made applicable. 
"Sec. 6245. Subchapter S item defined. 
"SEC. 
6
2
4
1
. 
TAX 
TREATMENT 
DETERMINED 
AT 
CORPORATE 
LEVEL. 
2
6 
USC 
6
2
4
1 
"Except as otherwise provided in regulations prescribed by the 
Secretary, the tax treatment of any subchapter S item shall be 
determined at the corporate level. 
"SEC. 6242. SHAREHOLDER'S RETURN MUST BE CONSISTENT WITH CORPO- 
26 USC 6242 
RATE RETURN OR SECRETARY NOTIFIED OF INCONSIST-
ENCY. 
"A shareholder of an S corporation shall, on such shareholder's 
return, treat a subchapter S item in a manner which is consistent 
with the treatment of such item on the corporate return unless the 
shareholder notifies the Secretary (at the time and in the manner 
prescribed by regulations) of the inconsistency. 
"SEC. 6243. ALL SHAREHOLDERS TO BE NOTIFIED OF PROCEEDINGS AND 
26 USC 6243 
GIVEN OPPORTUNITY TO PARTICIPATE. 
"In the manner and at the time prescribed in regulations, each 
shareholder in a corporation shall be given notice of, and the right 
to participate in, any administrative or judicial proceeding for the 
determination at the corporate level of any subchapter S item. 
"SEC. 6244. CERTAIN PARTNERSHIP PROVISIONS MADE APPLICABLE. 
26 USC 6244. 
"The provisions of— 
"(1) subchapter C which relate to— 
"(A) assessing deficiencies, and filing claims for credit or 
refund, with respect to partnership items, and 
"(B) judicial determination of partnership items, and 
"(2) so much of the other provisions of this subtitle as relate to 
partnership items, 
are (except to the extent modified or made inapplicable in regula-
tions) hereby extended to and made applicable to subchapter S 
items. 
96 STAT. 1692 
PUBLIC LAW 97-354—OCT. 19, 1982 
26 use 6245. 
"SEC. 6245. SUBCHAPTER S ITEM DEFINED. 
"For purposes of this subchapter, the term 'subchapter S item' 
means any item of an S corporation to the extent regulations 
prescribed by the Secretary provide that, for purposes of this sub-
title, such item is more appropriately determined at the corporate 
level than at the shareholder level." 
(b) CLERICAL AMENDMENT.—The table of subchapters for chapter 
63 is amended by adding at the end thereof the following new item: 
"SUBCHAPTER D. Tax treatment of subchapter S items." 
SEC. 5. TECHNICAL AND CONFORMING AMENDMENTS. 
(a) TECHNICAL AMENDMENTS.— 
26 use 44D. 
(1) SECTION 44D (d)(9) .—Paragraph (9) of section 44D(d) (relat-
ing to pass-thru in the case of subchapter S corporations, etc.) is 
amended to read as follows: 
"(9) PASS-THRU IN THE CASE OF ESTATES AND TRUSTS.—Under 
regulations prescribed by the Secretary, rules similar to the 
rules of subsection (d) of section 52 shall apply." 
26 use 44E. 
(2) SECTION 44E (d)(5) .—Paragraph (5) of section 44E(d) (relat-
ing to pass-thru in the case of subchapter S corporations, etc.) is 
amended to read as follows: 
"(5) PASS-THRU IN THE CASE OF ESTATES AND TRUSTS.—Under 
regulations prescribed by the Secretary, rules similar to the 
rules of subsection (d) of section 52 shall apply." 
95 Stat. 241. 
(3) SECTION 44F.— 
26 use 44F. 
(A) Subparagraph (A) of section 44F(f)(2) (relating to pass-
thru in the case of subchapter S corporations, etc.) is 
amended to read as follows: 
"(A) PASS-THRU IN THE CASE OF ESTATES AND TRUSTS.— 
Under regulations prescribed by the Secretary, rules simi-
lar to the rules of subsection (d) of section 52 shall apply." 
(B) Clause (iv) of section 44F(g)(l)(B) is amended by strik-
ing out "an electing small business corporation (within the 
meaning of section 1371(b))" and inserting in lieu thereof 
"an S corporation". 
26use46. 
(4) SECTION 46(a)(4).—The second sentence of paragraph (4) 
of section 46(a) (defining liability for tax) is amended by striking 
out "section 1378 (relating to tax on certain capital gains of 
subchapter S corporations)," and inserting in lieu thereof 
Ante, p. 1685. 
"section 1374 (relating to tax on certain capital gains of S 
corporations),". 
95 Stat. 229. 
(5) SECTION 46(c)(8)(c).—Subparagraph (C) of section 46(c)(8) 
(relating to special rules for partnerships and subchapter S 
corporations) is amended by striking out "electing small busi-
ness corporation (within the meaning of section 1371(b))" and 
inserting in lieu thereof "S corporation". 
(6) SECTION 46 (eX3).—Paragraph (3) of section 46(e) (relating 
to noncorporate lessors) is amended by striking out "an electing 
small business corporation (as defined in section 1371)" and 
inserting in lieu thereof "an S corporation". 
26 use 48. 
(7) SECTION 48(e).—Subsection (e) of section 48 (relating to 
subchapter S corporations) is hereby repealed. 
(8) SECTION 48 (k)(5KD)(i).—The second sentence of clause (i) 
of section 48(k)(5)(D) (relating to allocation of direct production 
costs) is amended by striking out "an electing small business 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1693 
corporation (within the meaning of section 1371)" and inserting 
in lieu thereof "an S corporation". 
(9) SECTION 50A (a)(3) .—The second sentence of paragraph (3) 26 use 50A. 
of section 50A(a) (defining Hability for tax) is amended by 
striking out "section 1378 (relating to tax on certain capital 
gains of subchapter S corporations)," and inserting in lieu 
thereof "section 1374 (relating to tax on certain capital gains of 
S corporations),". 
(10) SECTION 50B(d) .—Subsection (d) of section 50B (relating to 
26 use 50B. 
subchapter S corporations) is hereby repealed. 
(11) SECTION 52(d).—Section 52 is amended by striking out 
26 use 52. 
subsection (d) and by redesignating subsections (e) and (f) as 
subsections (d) and (e), respectively. 
(12) SECTION 53(a) .—The second sentence of subsection (a) of 26 use 53. 
section 53 (relating to limitation based on amount of tax) is 
amended by striking out "section 1378 (relating to tax on cer-
tain capital gains of subchapter S corporations)," and inserting 
in lieu thereof "section 1374 (relating to tax on certain capital 
gains of S corporations),". 
(13) 
SECTION 55(e)(8)(c).—Subparagraph 
(C) 
of 
section 
^n^, p. 4ii. 
55(e)(8) is amended by striking out "an electing small business 
corporation (as defined in section 1371(b))" and inserting in lieu 
thereof "an S corporation". 
(14) SECTION 57(a) .—The last sentence of section 57(a) (defm- 
26 use 57. 
ing items of tax preference) is amended by striking out "an 
electing small business corporation (as defined in section 
1371(b)) and". 
(15) SECTION 57(b).—Subsection (b) of section 57 is amended— 
(A) by striking out "an applicable corporation" in para-
graph (1) and inserting in lieu thereof "a corporation", 
(B) by striking out "applicable corporation" in paragraph 
(2) and inserting in lieu thereof "corporation", and 
(C) by striking out paragraph (3). 
(16) SECTION 58(d) .—Subsection (d) of section 58 (relating to 
26 use 58. 
electing small business corporations and their shareholders) is 
amended to read as follows: 
"(d) CERTAIN CAPITAL GAINS OF S CORPORATIONS.—If for a taxable 
year of an S corporation a tax is imposed on the income of such 
corporation under section 1374, such corporation shall be subject to 
^"^«' P 1683. 
the tax imposed by section 56, but computed only with reference to 
the item of tax preference set forth in section 57(a)(9)(B) to the 
extent attributable to gains subject to the tax imposed by section 
1374." 
(17) SECTION 62(9) .—Paragraph (9) of section 62 (relating to 
26 use 62. 
pension, etc., plans of an electing small business corporation) is 
hereby repealed. 
(18) SECTION I63 (d)(4) .—Paragraph (4) of section 163(d) (relat- 
26 use 163. 
ing to limitation on interest on investment indebtedness) is 
amended by striking out subparagraphs (B) and (C) and redes-
ignating subparagraph (D) as subparagraph (B). 
(19) SECTION 168(f)(8)(B).—Clause (i) of section 168(f)(8XB) 
95 Stat. 204. 
(relating to special rules for leases), as in effect before the 
^^ ^^^ ^^^ 
enactment of the Tax Equity and Fiscal Responsibility Act of 
1982, is amended by striking out "an electing small business 
Ante, p. 324. 
corporation (within the meaning of section 1371(b))" and insert-
ing in lieu thereof "an S corporation". 
96 STAT. 1694 
PUBLIC LAW 97-354—OCT. 19, 1982 
Ante, p. 442. 
(20) SECTION 168(f) .—Subclause (I) of section 168(f)(8)(C)(i) (as 
added by subsection (a) of section 209 of the Tax Equity and 
Fiscal Responsibility Act of 1982) is amended by striking out 
"an electing small business corporation within the mean-
ing of section 1371(b)" and inserting in lieu thereof "an S 
corporation". 
26 use 170. 
(21) SECTION 170 (e) .— 
(A) Subparagraph (A) of section 170(e)(3) (defining quali-
fied contributions) is amended by striking out "an electing 
small business corporation within the meaning of section 
1371(b))" and inserting in lieu thereof "an S corporation)". 
95 Stat. 248. 
(B) Clause (i) of section 170(e)(4)(D) is amended to read as 
follows: 
"(i) an S corporation,". 
26 use 172. 
(22) SECTION 172 (f) .—Subsection (f) of section 172 (relating to 
disallowance of net operating loss of electing small business 
corporations) is hereby repealed. 
26 use 183. 
(23) SECTION 183 (a) .—Subsection (a) of section 183 (relating to 
activities not engaged in for profit) is amended by striking out 
"an electing small business corporation (as defined in section 
1371(b))" and inserting in lieu thereof "an S corporation". 
Ante, p. 432. 
(24) SECTION 189 (d) .—Paragraph (2) of section 189(d) is 
amended by striking out "an electing small business corpora-
tion (within the meaning of section 1371(b))" and inserting in 
lieu thereof "an S corporation". 
26 use 280. 
(25) SECTION 280 (a) .—The second sentence of subsection (a) of 
section 280 (relating to certain expenditures incurred in produc-
tion of films, books, records, or similar property) is amended by 
striking out "an electing small business corporation (as de-
fined in section 1371(b))," and inserting in lieu thereof "an S 
corporation,". 
26 use 280A. 
(26) SECTION 280A.— 
(A) Subsection (a) of section 280A (relating to disallow-
ance of certain expenses in connection with business use of 
home, rental of vacation homes, etc.) is amended by striking 
out "an electing small business corporation," and inserting 
in lieu thereof "an S corporation,". 
(B) Paragraph (1) of section 280A(e) is amended by strik-
ing out "an electing small business corporation" and insert-
ing in lieu thereof "an S corporation". 
(C) Paragraph (2) of section 280A(f) is amended to read as 
follows: 
"(2) PERSONAL USE BY SHAREHOLDERS OF S CORPORATION.—In 
the case of an S corporation, subparagraphs (A) and (B) of 
subsection (d)(2) shall be applied by substituting 'any share-
holder of the S corporation' for 'the taxpayer' each place it 
appears." 
Ante, p. 423. 
(27) SECTION 291.— 
(A) Subsections (a) and (b) of section 291 are each 
amended by striking out "an applicable corporation" 
each place it appears and inserting in lieu thereof "a 
corporation". 
(B) Subsection (e) of section 291 is amended by striking 
out paragraph (2) and by redesignating paragraph (3) as 
paragraph (2). 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1695 
(28) SECTION 447(C)(1) .—Paragraph (1) of section 447(c) (relat- 2
6 use 447. 
ing to exception for small business and family corporations) is 
amended to read as follows: 
"(1) an S corporation,". 
(29) SECTION 447(g).—Clause (i) of section 447(gX4)(A) is 
Ante, p. i95. 
amended to read as follows: 
"(i) an S corporation, or". 
(30) SECTION 464(C)( i) .—Paragraph (1) of section 464(c) (defin- 
2
6 use 464. 
ing farming syndicate) is amended by striking out "an electing 
small business corporation (as defined in section 1371(b))* 
each place it appears and inserting in lieu thereof "an S 
corporation". 
(31) SECTION 465.— 
26 use 465. 
(A) Paragraph (1) of section 465(a) (relating to deductions 
limited to amount at risk) is amended by adding "and" at 
the end of subparagraph (A), by striking out subparagraph 
(B), and by redesignating subparagraph (C) as subparagraph 
(B). 
(B) Paragraph (3) of section 465(a) is amended— 
(i) by striking out "paragraph (1)(C)" and inserting in 
lieu thereof "paragraph (IXB) , and 
(ii) by striking out "PARAGRAPH (ixo" in the para-
graph heading and inserting in lieu thereof "PARA-
GRAPH (1)(B)". 
(C) The last sentence of paragraph (2) of section 465(c) is 
amended— 
(i) by striking out "an electing small business corpo-
ration the first place it appears and inserting in lieu 
thereof "an S corporation", and 
(ii) by striking out "an electing small business corpo-
ration the second place it appears and inserting in 
lieu thereof "the S corporation . 
(D) Clause (ii) of section 465(c)(3)(B) is amended by strik-
ing out "electing small business corporation (as defined 
in section 1371(b))" and inserting in lieu thereof "an S 
corporation". 
(E) Subparagraph (A) of section 465(c)(4) is amended by 
striking out "subsection (aXlXC)" and inserting in lieu 
thereof "subsection (aXlXB)". 
(32) SECTION 992 (d)(7) .—Paragraph (7) of section 992(d) (relat- 26 use 992. 
ing to corporations not eligible to be a DISC) is amended to read 
as follows: 
"(7) an S corporation." 
(33) SECTION ioi6(a)(i8).—Paragraph (18) of section 1016(a) 26useioi6. 
(relating to adjustments to basis) is amended to read as follows: 
"(18) to the extent provided in section 1367 in the case of 
stock of, and indebtedness owed to, shareholders of an S 
corporation;". 
(34) SECTION iioi(a)(3)(D).—Subparagraph (D) of section 26useii0i. 
1101(aX3) (relating to non-pro rata distributions from certain 
closely held corporations) is amended by striking out "section 
1371(aXl)" and inserting in lieu thereof "section 1361(bXlXA)". 
(35) SECTION 1212 (a) .—Subsection (a) of section 1212 (relating 2
6 use 1212. 
to capital loss carrybacks and carryovers of corporations) is 
amended by striking out paragraph (3) and by redesignating 
paragraph (4) as paragraph (3). 
(36) SECTION 1251(b)(2)(B).— 
96 STAT. 1696 
PUBLIC LAW 97-354—OCT. 19, 1982 
26 use 1251. 
(A) Subparagraph (B) of section 1251(b)(2) (relating to 
excess deductions account) is amended— 
(i) by striking out "an electing small business corpo-
ration (as defined in section 1371(b))," and inserting in 
lieu thereof "an S corporation,", and 
(ii) by striking out "electing small business corpora-
tion" each place it appears in the second and third 
sentences and inserting in lieu thereof "S corporation". 
(B) Subparagraph (D) of section 1251(b)(2) is amended by 
striking out "an electing small business corporation" and 
inserting in lieu thereof "an S corporation". 
26use 1254. 
(37) SECTION 1254(b)(2).—Paragraph (2) of section 1254(b) 
(relating to special rules for gain from dispositions of interest in 
oil, gas, or geothermal property) is amended by striking out "an 
electing small business corporation (as defined in section 
1371(b))," and inserting in lieu thereof "an S corporation,". 
95 Stat. 327. 
(38) SECTION 1256(e)(3)(B).—Subparagraph (B) of 
section 
26 use 1256. 
1256(e)(3) (defining syndicate) is amended by striking out "an 
electing small business corporation within the meaning of sec-
tion 1371(b)" and inserting in lieu thereof "an S corporation". 
26 use 6037. 
(39) SECTION 6037.— 
(A) Section 6037 (relating to return of electing small 
business corporation) is amended— 
(i) by striking out "Every electing small business 
corporation (as defined in section 1371(b))" and insert-
ing in lieu thereof "Every S corporation", 
(ii) by striking out "and such other information" and 
inserting in lieu thereof "each shareholder's pro rata 
share of each item of the corporation for the taxable 
year, and such other information", and 
(iii) by striking out "ELECTING SMALL BUSINESS 
CORPORATION" in the section heading and inserting 
in lieu thereof "S CORPORATION". 
(B) The table of sections for subpart A of part III of 
subchapter A of chapter 61 is amended by striking out 
"electing small business corporation" in the item relat-
ing to section 6037 and inserting in lieu thereof "S 
corporation". 
26 use 6042. 
(40) SECTION 6042(b)(2) .—Paragraph (2) of section 6042(b) 
(defining dividend) is amended to read as follows: 
"(2) EXCEPTIONS.—For purposes of this section, to the extent 
provided in regulations prescribed by the Secretary, the term 
'dividend' does not include any distribution or payment— 
"(A) by a foreign corporation, or 
"(B) to a foreign corporation, a nonresident alien, or a 
partnership not engaged in a trade or business in the 
United States and composed in whole or in part of nonresi-
dent aliens." 
26 use 6362. 
(41) SECTION 6362(f)(7) .—Paragraph (7) of section 6362(f) 
(relating to partnerships, trusts, subchapter S corporations, and 
other conduit entities) is amended— 
(A) by striking out "electing small business corporations 
(within the meaning of section 1371(a))" in subparagraph 
(D) and inserting in lieu thereof "S corporations", and 
(B) by striking out "SUBCHAPTER S CORPORATIONS," in 
the 
paragraph heading. 
PUBLIC LAW 97-354—OCT. 19, 1982 
96 STAT. 1697 
(42) Section 6661(b).—Subparagraph (B) of section 6661(b)(1) is 
Ante, p. 614. 
amended by striking out "an electing small business corpora-
tion (as defined in section 1371(b))" and inserting in lieu thereof 
"an S corporation". 
(43) Subsection (d) of section 408 of the Employee Retirement 
Income Security Act of 1974 is amended by striking out "section 
29 use 1108. 
1379 of the Internal Revenue Code of 1954" and inserting in lieu 
thereof "section 1379 of the Internal Revenue Code of 1954 as in 
effect on the day before the date of the enactment of the 
Subchapter S Revision Act of 1982". 
(b) CLERICAL AMENDMENT.—The table of subchapters for chapter 1 
is amended by striking out the item relating to subchapter S and 
inserting in lieu thereof the following: 
"SUBCHAPTER S. Tax treatment of S corporations and their shareholders." 
SEC. 6. EFFECTIVE DATES. 
26 USC 1361 
, , . 
, . 
. 
note. 
(a) IN GENERAL.—Except as otherwise provided m this section, 
the amendments made by this Act shall apply to taxable years 
beginning after December 31,1982. 
(b) TRANSITIONAL RULES.— 
(1) SECTIONS 1379 AND 62(9) CONTINUE TO APPLY FOR 1983.— 
Sections 1379 and 62(9) of the Internal Revenue Code of 1954 (as 
in effect before the date of the enactment of this Act) shall 
remain in effect for years beginning before January 1, 1984. 
(2) ALLOWANCE OF EXCLUSION OF DEATH BENEFIT.—Notwith-
standing section 241(b) of the Tax Equity and Fiscal Responsibil-
ity Act of 1982, in the case of amounts received under a plan of Ante, p. 520. 
an S corporation, the amendment made by section 239 of such 
Act shall apply with respect to decedents dying after December 
Ante, p. 514. 
31,1982. 
(3) NEW PASSIVE INCOME RULES APPLY TO TAXABLE YEARS BEGIN-
NING DURING 1982.—In the case of a taxable year beginning 
during 1982— 
(A) sections 1362(d)(3), 1366(f)(3), and 1375 of the Internal 
Revenue Code of 1954 (as amended by this Act) shall apply. 
Ante, pp. 1672, 
and 
^^'^'^' ^^^^• 
(B) section 1372(e)(5) of such Code (as in effect on the day 
before the date of the enactment of this Act) shall not 
apply. 
(c) GRANDFATHER RULES.— 
(1) 
SUBSIDIARIES WHICH ARE FOREIGN 
CORPORATIONS OR 
DISC'S.—In the case of any corporation which on September 28, 
1982, would have been a member of the same affiliated group as 
an electing small business corporation but for paragraph (3) or 
(7) of section 1504(b) of the Internal Revenue Code of 1954, 
subparagraph (A) of section 1361(b)(2) of such Code (as amended 
by section 2) shall be applied by substituting "without regard to 
Ante, p. 1669. 
the exceptions contained in paragraphs (1), (2), (4), (5), and (6) of 
subsection (b) thereof for "without regard to the exceptions 
contained in subsection (b) thereof. 
(2) CASUALTY INSURANCE COMPANIES.— 
(A) IN GENERAL.—In the case of any qualified casualty 
insurance electing small business corporation— 
(i) the amendments made by this Act shall not apply, 
and 
96 STAT. 1698 
PUBLIC LAW 97-354—OCT. 19, 1982 
(ii) subchapter S (as in effect on July 1, 1982) of 
26 use 1371. 
chapter 1 of the Internal Revenue Code of 1954 and 
26 use 831. 
part III of subchapter L of chapter 1 of such Code shall 
apply. 
(B) QUALIFIED CASUALTY INSURANCE ELECTING SMALL 
BUSINESS CORPORATION.—The term 
"qualified 
casualty 
insurance electing small business corporation" means any 
corporation described in section 831(a) of the Internal Reve-
nue Code of 1954 i
f
— 
(i) as of July 12, 1982, such corporation was an elect-
ing small business corporation and was described in 
section 831(a) of such Code, 
(ii) such corporation was formed before April 1, 1982, 
and proposed (through a written private offering first 
circulated to investors before such date) to elect to be 
taxed as a subchapter S corporation and to be operated 
on an established insurance exchange, or 
(iii) such corporation is approved for membership on 
an established insurance exchange pursuant to a writ-
ten agreement entered into before December 31, 1982, 
and such corporation is described in section 831(a) of 
such Code as of December 31,1984. 
A corporation shall not be treated as a qualified casualty 
insurance electing small business corporation unless an 
Ante, p. 1669. 
election under subchapter S of chapter 1 of such Code is in 
effect for its first taxable year beginning after December 31, 
1984. 
(3) CERTAIN CORPORATIONS WITH OIL AND GAS PRODUCTION.— 
(A) IN GENERAL.—In the case of any qualified oil 
corporation— 
(i) the amendments made by this Act shall not apply, 
and 
(ii) subchapter S (as in effect on July 1, 1982) of 
chapter 1 of the Internal Revenue Code of 1954 shall 
apply. 
(B) QUALIFIED OIL CORPORATION.—For purposes of this 
paragraph, the term "qualified oil corporation" means any 
corporation i
f
— 
(i) as of September 28,1982, such corporation— 
(I) was an electing small business corporation, or 
(II) was a small business corporation which made 
an election under section 1372(a) after December 
31,1981, and before September 28,1982, 
(ii) for calendar year 1982, the combined average 
daily production of domestic crude oil or natural gas of 
such corporation and any one of its substantial share-
holders exceeds 1,000 barrels, and 
(iii) such corporation makes an election under this 
subparagraph at such time and in such manner as the 
Secretary of the Treasury or his delegate shall 
prescribe. 
(C) AVERAGE DAILY PRODUCTION.—For purposes of subpar-
agraph (B), the average daily production of domestic crude 
oil or domestic natural gas shall be determined under 
section 613A(c)(2) of such Code without regard to the last 
sentence thereof. 
PUBLIC LAW 97-354-OCT. 19, 1982 
96 STAT. 1699 
(D) SUBSTANTIAL SHAREHOLDER.—For purposes of subpara-
graph (B), the term "substantial shareholder" means any 
person who on July 1, 1982, owns more than 40 percent (in 
value) of the stock of the corporation. 
(4) CONTINUITY REQUIRED.— 
(A) IN GENERAL.—This subsection shall cease to apply 
with respect to any corporation after— 
(i) any termination of the election of the corporation 
under subchapter S of chapter 1 of such Code, or Ante, p. 1669. 
(ii) the first day on which more than 50 percent of the 
stock of the corporation is newly owned stock within 
the meaning of section 1378(c)(2) of such Code (as Ante, p. 1685. 
amended by this Act). 
(B) SPECIAL RULES FOR PARAGRAPH (2).— 
(i) Paragraph (2) shall also cease to apply with re-
spect to any corporation after the corporation ceases to 
be described in section 831(a) of such Code. 
(ii) For purposes of determining under subparagraph 
(A)(ii) whether paragraph (2) ceases to apply to any 
corporation, section 1378(c)(2) of such Code (as amended 
by this Act) shall be applied by substituting "December 
31, 1984" for "December 31, 1982" each place it appears 
therein, 
(d) TREATMENT OF EXISTING FRINGE BENEFIT PLANS.— 
(1) IN GENERAL.—In the case of existing fringe benefits of a 
corporation which as of September 28, 1982, was an electing 
small business corporation, section 1372 of the Internal Revenue 
Code of 1954 (as added by this Act) shall apply only with respect Ante, p. 1682. 
to taxable years beginning after December 31, 1987. 
(2) REQUIREMENTS.—This subsection shall cease to apply with 
respect to any corporation after whichever of the following first 
occurs: 
(A) the first day of the first taxable year beginning after 
December 31, 1982, with respect to which the corporation 
does not meet the requirements of section 1372(e)(5) of such 
Code (as in effect on the day before the date of the enact-
ment of this Act), 
(B) any termination after December 31, 1982, of the elec-
tion of the corporation under subchapter S of chapter 1 of 
such Code, or 
(C) the first day on which more than 50 percent of the 
stock of the corporation is newly owned stock within the 
meaning of section 1378(c)(2) of such Code (as amended by 
this Act). 
(3) EXISTING FRINGE BENEFIT.—For purposes of this subsection, 
the term "existing fringe benefit" means any employee fringe 
benefit of a type which the corporation provided to its employ-
ees as of September 28,1982. 
96 STAT. 1700 
PUBLIC LAW 97-354—OCT. 19, 1982 
(e) TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAW.—For 
Ante, p. 1672. 
purposes of section 1362(g) of the Internal Revenue Code of 1954, as 
amended by this Act (relating to no election permitted within 5 
years after termination of prior election), any termination under 
section 1372(e) of such Code (as in effect on the day before the date of 
the enactment of this Act) shall not be taken into account. 
Approved October 19, 1982. 
LEGISLATIVE HISTORY—H.R. 6055: 
HOUSE REPORT No. 97-^26 (Comm. on Ways and Means). 
SENATE REPORT No. 97-640 (Comm. on Finance). 
CONGRESSIONAL RECORD, Vol. 128 (1982): 
Sept. 20, considered and passed House. 
Sept. 30, considered and passed Senate, amended. 
Oct. 1, House agreed to Senate amendments.