An Act to amend subchapter S of chapter 1 of the Internal Revenue Code of 1954, and for other purposes
PL 89-389 (H.R.9883), enacted 04/14/1966

80 STAT. ] 
PUBLIC LAW 89-389-APRIL 14, 1966 
111 
Public Law 89-389 
A N A C T 
April 14, 1966 
To aiiieiul subchapter S of chapter 1 of the Internal Revenue Code of 1954, 
[H. R. 9883] 
and for other purposes. 
Be it enacted hy the Senate and House of Repr^esentatives of the 
ignited States of America in Congress assembled, That (a) (1) section 
Taxes. 
1375 of the Internal Revenue Code of 1954 (rehxting to special rules cor^o^rati"ns"^spl-
applicable to distributions of electing- small business corporations) is ^lai options 
amended by adding at the end thereof the following new subsection: 
^^ ^'^*" ^^'^'* 
' ' ( f ) 
DlSTRIBL'TIOXS W i T H I N Sl/^-MoNTH 
P E R I O D A F T E R 
C L O S E OF 
TAXABLE YEAR.— 
"(1) DISTRIBUTIONS CONSIDERED AS DISTRIBUTIONS OF UNDIS-
TRIBUTED TAXABLE INCOME.—Any distribution of money made by 
a corporation after the close of a taxable year with respect to 
which it was an electing small business corporation and on or 
before the 15th day of the third month following the close of such 
taxable year to a person who was a shareholder of such corpora-
tion at the close of such taxable year shall be treated as a distribu-
tion of the corporation's undistributed taxable income for such 
year, to the extent such distribution (when added to the sum of 
all prior distributions of money made to such person by sudh 
corporation following the close of such year) does not exceed such 
person's share of the corporation's undistributed taxable income 
for such year. 
Any distribution so treated shall, for purposes of 
this chapter, be considered a distribution which is not a dividend, 
and the earnings and profits of the corporation shall not be 
reduced by reason of such distribution. 
"(2) SHARE or UNDISTRIBUTED TAXABLE INCOME.—For purposes 
of paragraph (1), a person's share of a corporation's undistrib-
uted taxable income for a taxable year is the amount required to be 
included in his gross income under section 1373(b) as a share-
holder of such corporation for his taxable year in which or with 
which the taxable year of the corporation ends. 
"(3) ELECTION UNDER SUBSECTION (e),—Paragraph (1) shall 
not apply to any distribution with respect to which an election 
under subsection (e) applies." 
(2) Subsection (e) of section 1375 of the Internal Revenue Code of 
Repeal. 
1954 is repealed effective with respect to distributions made after the 
^^ ^*^'- ^^'-
dose of any taxable year of the corporation beginning after the date 
of the enactment of this Act. 
(b) Section 1375(d) (2)(B)(ii) of such Code is amended by striking 
out "under paragraph (1)" and inserting in lieu thereof "under sub-
section (f) or paragraph (1) of this subsection". 
(c) Except as provided by subsection (d), the amendments made by 
subsections (a) (1) and (b) shall apply only with respect to distribu-
tions made after the date of the enactment of this Act. 
(d) (1) The amendments made b j subsections (a) (1) and (b) shall 
also apply with respect to distributions of money (other than distribu-
tions with respect to which an election under section 1375(e) of the 
Internal Revenue Code of 1954 applies) made by a corporation on or 
before the date of the enactment of this Act and on or after the date 
of the first distribution of money during the taxable year designated 
by the corporation if— 
(A) such corporation elects to have such amendments apply 
to all such distributions made by it, and 
(B) except as otherwise provided by this subsection, all per-
sons (or their personal representatives) who were shareholders 
72 Stat. 1655. 
Ante, p. 111. 
112 
PUBLIC LAW 89-389-APRIL 14, 1966 
[80 STAT. 
of such corporation at any time on or after the date of such first 
distribution and before the date on which the corporation files 
the election with the Secretary of the Treasury or his delegate 
consent to such election and to the application of this subsection. 
Pubu^c\'t°o"nm 
^^^ ^ ^ electlou by a corporation under this subsection, and the 
Federal Regrster. couseut thereto of the persons who are or were shareholders of such 
corporation, shall be made in such manner and within such time as 
the Secretary of the Treasury or his delegate prescribes by regulations, 
but the period for making such election shall not expire l^fore one 
year after the date on which the regulations prescrioed under this 
subsection are published in the Federal Register. 
(3) In applymg paragraphs (1) and (2), the consent of a person 
(or his personal representative) slxall not be required if, under regula-
tions prescribed under this subsection, it is shown to the satisfaction 
of the Secretary of the Treasury or his delegate that the liability of 
such person for Federal income tax for any taxable year cannot be 
affected by the election of the corporation of which he is or was .a 
shareholder. 
(4) In applying this subsection, the reference in section 1375(f) 
of the Internal Revenue Code of 1954 (as added by subsection (a)(1)) 
to the 15th day of the third month following the close of the taxable 
year shall be treated as referring to the 15th day of the fourth month 
following the close of the taxable year. 
(5) The statutory period for the assessment of any deficiency for 
any taxable year against the corporation filing the election or any 
person consenting thereto, to the extent such deficiency is attributable 
to an election under this subsection, shall not expire before the last day 
of the 2-year period beginning on the date on which the regulations 
prescribed under this subsection are published in the Federal Register; 
and such deficiency may be assessed at any time before the expiration 
of such 2-year period, notwithstanding any law or rule of law which 
would otherwise prevent such assessment. 
(6) 
I f -
(A) credit or refund of the amount of any overpayment for 
any taxable year attributable to an election under this subsection 
is not prevented, on the date of the enactment of this Act, by 
the operation of any.law or rule of law, and 
(B) credit or refund of the amount of such overpayment is 
prevented, by the operation of any law or rule of law (other 
than chapter 74 of the Internal Revenue Code of 1954, relating 
to closing agreements and compromises), at any time on or before 
the expiration of the 2-year period beginning on the date on 
which the regulations prescribed under this subsection are pub-
lished in the Federal Register, 
credit or refund of such overpayment may, nevertheless, be allowed 
or made, to the extent such overpayment is attributable to such elec-
tion, if claim therefor is filed before the expiration of such 2-year 
period. 
(7) I f -
(A) (i) one or more consecutive distributions of money made 
by the corporation after the close of a taxable year and on or 
before the 15th day of the fourth month following the close of 
the taxable year were substantially the same in amount as the 
undistributed taxable income of such corporation for such year, or 
(ii) it is established to the satisfaction of the Secretary of the 
Treasury or his delegate that one or more distributions of money 
made by the corporation during the period described in clause (i) 
were intended to be distributions of the undistributed taxable 
income of such corporation for the taxable year preceding such 
period, and 
26 u s e 7121 
7123. 
80 STAT. ] 
PUBLIC LAW 89-389-APRIL 14, 1966 
113 
(B) credit or refund of the amount of any overpayment for 
the taxable year in which such distribution or distributions were 
received is prevented on the date of the enactment of this Act, by 
the operation of any law or rule of law (other than chapter 74 of 
the Internal Eevenue Code of 1954, relating to closing agreements 71^23"^*^ ^^^^ 
and compromises), 
credit or refund of such overpayment may, nevertheless, be allowed or 
made, to the extent such overpayment is attributable to an election 
under this subsection, if claim therefor is filed before the expiration 
of the 2-year period beginning on the date on which the regulations 
prescribed under this subsection are published in the Federal Register. 
(8) No interest on any deficiency attributable to an election under 
this subsection shall be assessed or collected for any period before the 
expiration of the 2-year period beginning on the date on which 
the regulations prescribed under this subsection are published in the 
Federal Register. 
No interest on any overpayment attributable to 
an election under this subsection shall be allowed or paid for any 
period before the expiration of such 2-year period. 
SEC. 2. (a) Subchapter S of chapter 1 of the Internal Revenue Code 
of 1954 (relating to election by certain small business corporations 
7
2 stat. leso. 
as to taxable status) is amended by adding at the end thereof the fol-
lowing new section: 
"SEC. 1378. TAX IMPOSED ON CERTAIN CAPITAL GAINS. 
" (a) GENERAL RULE.—If for a taxable year of an electing small busi-
ness corporation— 
"(1) the excess of the net long-term capital gain over the net 
short-term capital loss 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 25 percent of the amount by which 
the excess of the net long-term capital gain over the net short-
term capital loss 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 (computed as provided in section 
1373(d)) of the corporation for the taxable year if the corpora-
tion was not an electmg small business corporation. 
No credit shall be allowable under part IV of subchapter A of this 
^^ "sc 31-40. 
chapter (other than under section 39) against the tax imposed by 
^^ stat. lev. 
subsection (a). 
"(c) 
EXCEPTIONS.— 
"(1) I N GENERAL.—Subsection (a) shall not apply to an elect-
ing small business corporation for any taxable year if the election 
under section 1372(a) which is in effect with respect to such 
corporation for such taxable year has been in effect for the 3 
immediately preceding taxable years. 
"(2) NEW CORPORATIONS.—Subsection (a) shall not apply to 
Nonappucabiuty 
an electing small business corporation if— 
" (A) it has been in existence for less than 4 taxable years, 
and 
"(B) an election under section 1372(a) has been in effect 
with respect to such corporation for each of its taxable years. 
provisions. 
114 
PUBLIC LAW 89-389-APRIL 14, 1966 
[80 STAT. 
"(3) 
PROPERTY WITH SUBSTITUTED BASIS.—If— 
"(A) but for paragraph (1) or (2), Sfubsection (a) would 
apply for the taxable year, 
"(B) any long-term capital gain is attributable to prop-
erty acquired by the electing small business corporation dur-
ing 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 electing small busi-
ness corporation throughout all of the period described in 
subparagraph (B) before the transfer by such other corpo-
ration and during w^hich 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 25 percent of the excess of the net long-term capital gain 
over the net short-term capital loss attributable to property 
acquired as provided in subparagraph (B) and having a basis 
described in subparagraph (C)." 
(b) (1) The table of sections for subchapter S of chapter 1 of such 
72 Stat. 1650. 
(^^odc is amended by adding at the end thereof the following new item: 
"Sec. 1378. Tax imposed on certain capital gains." 
(2) Section 1372(b) (1) of such Code (relating to effect of election 
by small business corporation) is amended by inserting "(other than 
Ante, p. 113. 
^j^g ^g^^ imposcd by section 1378)" after "this chapter'". 
(3) Section 1373(c) of such Code (relating to definition of undis-
tributed taxable income) is amended by inserting "the sum of (1) 
the tax imposed by section 1378(a) and (2)" after "minus"'. 
(4) Section 1375(a) of such Code (relating to treatment of capital 
gains in the hands of shareholders) is amended by adding at the end 
thereof the following new paragraph: 
"(3) REDUCTION FOR TAX IMPOSED BY SECTION i.s-s.—For pur-
poses of paragraphs (1) and (2), the excess of an electing small 
business corporation's net long-term capital gain over its net 
short-term capital loss for a taxable year shall be reduced by an 
amount equal to the amount of the tax imposed by section 1378 (a) 
on the income of such corporation for such year." 
vsstlTsi^^' 
^^) Section 46(a) (3) of such Code (relating to liability for tax for 
purposes of the credit for investment in certain depreciable property) 
68A Stat. 182; 
jg amended by striking out "or by section 541 (relating to personal 
holding company tax) ' and inserting m lieu thereof ", section 541 
(relating to personal holding company tax), or section 1378 (relating 
to tax on certain capital gains of subchapter S corporations)'". 
Applicability. 
(g^ 'pj^g, amendments made by this section shall apply with respect 
to taxable years of electing small business corporations beginning 
after the date of the enactment of this Act, but such amendments shall 
not apply with respect to sales or exchanges occurring before February 
24, 1966. 
SEC. 3. (a) Section 1372(e)(5) of the Internal Revenue Code of 
1954 (relating to termination of election by small business corpora-
tions) is amended to read as follows: 
"(5) 
PASSIVE INVESTMENT INCOME.— 
"(A) Except as provided in subparagraph (B), an election 
under subsection (a) made by a small business corporation 
shall terminate if, for any taxable year of the corporation 
for which the election is in effect, such corporation has gross 
80 STAT. ] 
PUBLIC LAW 89-389-APRIL 14, 1966 
115 
receipts more than 20 percent of which is passive investment 
income. Such termination shall be effective for the taxable 
year of the corporation in whicli it has gross receipts of such 
amount, and for all succeeding taxable years of the 
corporation. 
"(B) Subparagraph (A) shall not apply with respect to a 
Nonappucabiuty 
taxable year in which a small business corporation has gross P*^""'®^""^ 
receipts more than 20 percent of which is passive investment 
income, if— 
" (i) such taxable year is the first taxable year in which 
the corporation commenced the active conduct of any 
trade or business or the next succeeding taxable year; and 
"(ii) the amount of passive investment income for 
such taxable year is less than $3,000. 
"(C) For purposes of this paragraph, the term 'passive 
"Passive in-
^ . ' 
.
-
1 
•
,
!
• 
I P 
vestment income. 
investment income means gross receipts derived from roy-
alties, rents, dividends, interest, annuities, and sales or 
exchanges of stock or securities (gross receipts from such sales 
or exchanges being taken into account for purposes of this 
paragraph only to the extent of gains therefrom)." 
(b) The amendment made by subsection (a) shall apply to taxable „ applicability 
» 1 
' 
n
i
' 
• 
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1
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i? provisions. 
years of electing small business corporations ending after the date oi 
the enactment of this Act. 
Such amendment shall also apply with 
respect to taxable years beginning after December 31,1962, and ending 
on or before such date of enactment, if (at such time and in such 
manner as the Secretary of the Treasury or his delegate prescribes by 
regulations) — 
(1) the corporation elects to have such amendment so apply, 
and 
(2) all persons (or their personal representatives) who were 
shareholders of such corporation at any time during any taxable 
year beginning after December 31,1962, and ending on or before 
the date of the enactment of this Act consent to such election and 
to the application of the amendment made by subsection (a). 
SEC. 4. (a) Section 1361 of the Internal Revenue Code of 1954 
SSA stat. 350. 
(relating to unincorporated business enterprises electing to be taxed 
as domestic corporations) is amended— 
(1) by adding at the end of subsection (a) the following 
new sentence: "No election (other than an election referred to in 
subsection (f)) may be made under this subsection after the 
date of the enactment of this sentence."; 
(2) by striking out in subsection (c) ", except as provided in 
subsection (m)^"; 
(3) by striking out "subsection (f)" in subsection (e) and 
inserting in lieu thereof "subsections (i) and (n)"; 
(4) by striking out subsection (m); and 
(5) by adding at the end of such section the following new 
subsection: 
"(n) 
REVOCATION AND TERMINATION OF ELECTIONS.— 
"(1) REVOCATION.—An election under subsection (a) 
with 
respect to an unincorporated business enterprise may be revoked 
after the date of the enactment of this subsection by the proprietor 
of such enterprise or by all the partners owning an interest in 
such enterprise on the date on which the revocation is made. 
Such enterj)rise shall not be considered a domestic corporation 
for any period on or after the effective date of such revocation. 
A revocation under this paragraph shall be made in such manner 
as the Secretary or his delegate may prescribe by regulations. 
116 
PUBLIC LAW 89-390-APRIL 14, 1966 
[80 STAT. 
'•(2) TERMIXATIOX.—If a revocation under paragraph (1) of 
an election under subsection (a) with respect to any unincor-
porated business enterprise is not effective on or before December 
31, 1968, such election shall terminate on January 1, 1969, and 
such enterprise shall not be considered a domestic corporation 
for any period on or after January 1, 1969." 
Effective date. 
(b) Effcctive ou Jauuary 1,1969— 
(1) subchapter R of chapter 1 of such Code (relating to elec-
tion of certain partnerships and proprietorships as to taxable 
status) is repealed; 
68A Stat. 4. 
^2) the table of subchapters for chapter 1 of such Code is 
amended by striking out the item relating to subchapter R; .and 
(3) section 1504(b) of such Code (relating to definition of 
includible corporation) is amended by striking out paragraph 
Applicability. 
(c) The amendments made by subsections (a) (2) and (4) shall 
apply with respect to transactions occurring after the date of the 
enactment of this Act. 
Approved April 14, 1966. 
Public Law 89-390 
April 14, 1966 
^N ACT 
1
^
^
- 2642] 
TQ authorize the release of platinum from the national stockpile, and for other 
purposes. 
Disposal. 
60 Stat. 596. 
Be it enacted hy the Senate and House of Representatives 
of the 
nil^,^!""?' 
United States of America in Congress assembled^ That the Adminis-
trator of General Services is hereby authorized to dispose of, by 
negotiation or otherwise, approximately three hundred sixteen thou-
sand three hundred ounces of platinum from the national stockpile 
established pursuant to the Strategic and Critical Materials Stock 
Piling Act (50 U.S.C. 98-98h). 
Such disposition may be made with-
out regard to the provisions of section 3 of the Strategic and Critical 
Materials Stock Piling Act: Provided^ That the time and method of 
disposition shall be fixed with due regard to the protection of the 
r'nited States against avoidable loss and the protection of producers, 
processors, and consumers against avoidable disruption of their usual 
markets. 
SEC. 2. The platinum covered by this Act, materials in the inventory 
maintained under the Defense Production Act of 1950, as amended 
64 Stat. 798. 
^59 U.S.C. App. 2061-2166), and materials in the national stockpile 
73 Stat. 607. 
.^nd the supplemental stockpile (7 U.S.C. 1704(b)) the disposition of 
which has been or may hereafter be authorized pursuant to law, shall 
be available, without reimbursement, for transfer at fair market value 
in payment of the purchase price and other expenses of acquisition 
(including transportation and other accessorial expenses) of pal-
ladium for the national stockpile. No acquisition of palladium shall 
be made pursuant to the authority of this section if, as a result of such 
acquisition, the aggregate quantity of palladium in the national stock-
pile and the supplemental stockpile would exceed the palladium stock-
I)ile objective established pursuant to the Strategic and Critical Mate-
rials Stock Piling Act. 
Approved April 14, 1966.