ENTITIES MAY ELECT TAXABLE YEARS OTHER THAN REQUIRED TAXABLE YEAR.

SEC. 10206. ENTITIES MAY ELECT TAXABLE YEARS OTHER THAN REQUIRED TAXABLE YEAR. (a) Election of Different Year.— (1) In general.— Part I of subchapter E of chapter 1 (relating to accounting periods) is amended by adding at the end thereof the following new section:109109 Copy read “section.”. “SEC. 444. ELECTION OF TAXABLE YEAR OTHER THAN REQUIRED TAXABLE YEAR. “(a) General Rule.— Except as provided in subsections (b) and (c), a partnership, S corporation, or personal service corporation may elect to have a taxable year other than the required taxable year. “(b) Limitations on Taxable Years Which May Be Elected.— “(1) In general.— Except as provided in paragraphs (2) and (3), an election may be made under subsection (a) only if the deferral period of the taxable year elected is not longer than 3 months. “(2) Changes in taxable year.— Except as provided in paragraph (3), in the case of an entity changing a taxable year, an election may be made under subsection (a) only if the deferral period of the taxable year elected is not longer than the shorter of— “(A) 3 months, or 101 STAT. 1330–398 “(B) the deferral period of the taxable year which is being changed. “(3) Special rule for entities retaining 1986 taxable years.— In the case of an entity’s 1st taxable year beginning after December 31, 1986, an entity may elect a taxable year under subsection (a) which is the same as the entity’s last taxable year beginning in 1986. “(4) Deferral period.— For purposes of this subsection, the term ‘deferral period’ means, with respect to any taxable year of the entity, the months between— “(A) the beginning of such year, and “(B) the close of the 1st required taxable year ending within such year. “(c) Effect of Election.— If an entity makes an election under subsection (a), then— “(1) in the case of a partnership or S corporation, such entity shall make the payments required by section 7519, and “(2) in the case of a personal service corporation, such corporation shall be subject to the deduction limitations of section 280H. “(d) Elections.— “(1) Person making election.— An election under subsection (a) shall be made by the partnership, S corporation, or personal service corporation. “(2) Period of election.— “(A) In general.— Any election under subsection (a) shall remain in effect until the partnership, S corporation, or personal service corporation changes its taxable year. Any change to a required taxable year may be made without the consent of the Secretary. “(B) No further election.— If an election is terminated under subparagraph (A), the partnership, S corporation, or personal service corporation may not make another election under subsection (a). “(3) Tiered structures, etc.— No election may be made under subsection (a) with respect to an entity which is part of a tiered structure other than a tiered structure comprised of 1 or more partnerships or S corporations all of which have the same taxable year. “(e) Required Taxable Year.— For purposes of this section, the term ‘required taxable year’ means the taxable year determined under section 706(b), 1378, or 44l(i) without taking into account any taxable year which is allowable by reason of business purposes. Solely for purposes of the preceding sentence, sections 706(b), 1378, and 441(i) shall be treated as in effect for taxable years beginning before January 1, 1987. “(f) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section, including regulations to prevent the avoidance of subsection (h)(2)(B) or (d)(2)(B) through the change in form of an entity.” (2) Conforming amendment.— The table of sections for part I of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: “Sec. 444. Election of taxable year other than required taxable year.” (b) Required Payments.— 101 STAT. 1330–399 (1) In general.— Chapter 77 is amended by adding at the end thereof the following new section: “SEC. 7519. REQUIRED PAYMENTS FOR ENTITIES ELECTING NOT TO HAVE REQUIRED TAXABLE YEAR. “(a) General Rule.— This section applies to a partnership or S corporation for any taxable year, if— “(1) an election under section 444 is in effect for the taxable year, and “(2) the required payment determined under subsection (b) for such taxable year (or any preceding taxable year) exceeds $500. “(b) Required Payment.— For purposes of this section, the term ‘required payment’ means, with respect to any applicable election year of a partnership or S corporation, an amount equal to— “(1) the excess of the product of— “(A) the applicable percentage of the adjusted highest section 1 rate, multiplied by “(B) the net base year income of the entity, over “(2) the amount of the required payment for the preceding applicable election year. For purposes of paragraph (1)(A), the term ‘adjusted highest section 1 rate’ means the highest rate of tax in effect under section 1 as of the end of the base year plus 1 percentage point (or, in the case of applicable election years beginning in 1987, 36 percent). “(c) Refund of Payments.— If the amount determined under subsection (b)(2) exceeds the amount determined under subsection (b)(1), then the entity shall be entitled to a refund of such excess. “(d) Net Base Year Income.— For purposes of this section— “(1) In general.— An entity’s net base year income shall be equal to the sum of— “(A) the deferral ratio multiplied by the entity’s net income for the base year, plus “(B) the excess (if any) of— “(i) the deferral ratio multiplied by the aggregate amount of applicable payments made by the entity during the base year, over “(ii) the aggregate amount of such applicable payments made during the deferral period of the base year. For purposes of this paragraph, the term ‘deferral ratio’ means the ratio which the number of months in the deferral period of the base year bears to the number of months in the partnership’s or S corporation’s taxable year. “(2) Net income.— Net income is determined by taking into account the aggregate amount of the following items— “(A) Partnerships.— In the case of a partnership, net income shall be the amount (not below zero) determined by taking into account the aggregate amount of the partnership’s items described in section 702(a) (other than credits). “(B) S corporations.— In the case of an S corporation, net income shall be the amount (not below zero) determined by taking into account the aggregate amount of the S corporation’s items described in section 1366(a) (other than credits). If the S corporation was a C corporation for the base year, its taxable income for such year shall be treated as its net income for such year. “(C) Certain limitations disregarded.— For purposes of subparagraph (A) or (B), any limitation on the amount of 101 STAT. 1330–400any item described in either such paragraph which may be taken into account for purposes of computing the taxable income of a partner or shareholder shall be disregarded. “(3) Applicable payments.— “(A) In general.— The term ‘applicable payment’ means amounts paid or incurred by a partnership or S corporation which are includible in gross income of a partner or shareholder. “(B) Exceptions.— The term ‘applicable payment’ shall not include any— “(i) gain from the sale or exchange of property between the partner or shareholder and the partnership or S corporation, and “(ii) dividend paid by the S corporation. “(4) Applicable percentage.— The applicable percentage is the percentage determined in accordance with the following table: “If the applicable election year of the partnership or S corporation begins during: The applicable percentage is: 1987 25 1988 50 1989 75 1990 or thereafter 100. “(e) Other Definitions and Special Rules.— For purposes of this section— “(1) Deferral period.— The term ‘deferral period’ has the meaning given to such term by section 444(b)(4). “(2) Years.— “(A) Base year.— The term ‘base year’ means, with respect to any applicable election year, the taxable year of the partnership or S corporation preceding such applicable election year. “(B) Applicable election year.— The term ‘applicable election year’ means any taxable year of a partnership or S corporation with respect to which an election is in effect under section 444. “(3) Requirement of reporting.— Each partnership or S corporation which makes an election under section 444 shall include on any required return or statement such information as the Secretary shall prescribe as is necessary to carry out the provisions of this section. (f) Administrative Provisions.— “(1) In general.— Except as otherwise provided in this subsection or in regulations prescribed by the Secretary, any payment required by this section shall be assessed and collected in the same manner as if it were a tax imposed by subtitle C. “(2) Due date.— The amount of any payment required by this section shall be paid on or before April 15 of the calendar year following the calendar year in which the applicable election year begins (or such later date as may be prescribed by the Secretary). “(3) Interest.— For purposes of determining interest, any payment required by this section shall be treated as a tax; except that no interest shall be allowed with respect to any refund of a payment made under this section. “(4) Penalties.— 101 STAT. 1330–401 “(A) In general.— In the case of any failure by any person to pay on the date prescribed therefor any amount required by this section, there shall be imposed on such person a penalty of 10 percent of the underpayment. For purposes of the preceding sentence, the term ‘underpayment’ means the excess of the amount of the payment required under this section over the amount (if any) of such payment paid on or before the date prescribed therefor. “(B) Negligence and fraud penalties made applicable.— For purposes of section 6653, any payment required by this section shall be treated as a tax. “(C) Willful 110110 Copy read “Willfull” failure.— If any partnership or S corporation willfully fails to comply with the requirements of this section, section 444 shall cease to apply with respect to such partnership or S corporation. “(g) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section and section 280H, including regulations for annualizing the income and applicable payments of an entity if the base year is a taxable year of less than 12 months.” (2) Conforming amendment.— The table of sections for chapter 77 is amended by adding at the end thereof the following new item: “Sec. 7519. Required payments for entities electing not to have required taxable year.” (c) Deduction Limitations.— (1) In general.— Part IX of subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 280H. LIMITATION ON CERTAIN AMOUNTS PAID TO EMPLOYEE-OWNERS BY PERSONAL SERVICE CORPORATIONS ELECTING ALTERNATIVE TAXABLE YEARS. “(a) General Rule.— If— “(1) an election by a personal service corporation under section 444 is in effect for a taxable year, and “(2) such corporation does not meet the minimum distribution requirements of subsection (c) for such taxable year, then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to employee-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to personal holding companies). “(b) Carryover of Nondeductible Amounts.— If any amount is not allowed as a deduction for a taxable year under subsection (a), such amount shall be treated as paid or incurred in the succeeding taxable year. “(c) Minimum Distribution Requirement.— For purposes of this section— “(1) In general.— A personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period 101 STAT. 1330–402of the taxable year (determined without regard to subsection (b)) equal or exceed the lesser of— “(A) the product of— “(i) the applicable amounts paid or incurred during the preceding taxable year, divided by the number of months in such taxable year, multiplied by “(ii) the number of months in the deferral period of the preceding taxable year, or “(B) the applicable percentage of the adjusted taxable income for the deferral period of the taxable year. “(2) Applicable percentage.— 110110a Copy read “Percentage.—”. The term ‘applicable percentage’ means the percentage (not in excess of 95 percent) determined by dividing— “(A) the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by “(B) the adjusted taxable income of such corporation for such 3 taxable years. “(d) Maximum Deductible Amount.— For purposes of this section, the term ‘maximum deductible amount’ means the sum of— “(1) the applicable amounts paid or incurred during the deferral period, plus “(2) an amount equal to the product of— “(A) the amount determined under paragraph (1), divided by the number of months in the deferral period, multiplied by “(B) the number of months in the nondeferral period. “(e) Disallowance of Net Operating Loss Carrybacks.— No net operating loss carryback shall be allowed to (or from) any taxable year of a personal service corporation to which an election under section 444 applies. “(f) Other Definitions and Special Rules.— For purposes of this section— “(1) Applicable amount.— The term ‘applicable amount’ means any amount paid to an employee-owner which is includible in the gross income of such employee, other than— “(A) any gain from the sale or exchange of property between the owner-employee and the corporation, or “(B) any dividend paid by the corporation. “(2) Employee-owner.— The term ‘employee-owner’ has the meaning given such term by section 296A(b)(2). “(3) Nondeferral and deferral periods.— “(A) Deferral period.— The term ‘deferral period’ has the meaning given to such term by section 444(b)(4). “(B) Nondeferral period.— The term ‘nondeferral period’ means the portion of the taxable year of the personal service corporation which occurs after the portion of such year constituting the deferral period. 111111 Copy read “period.’ ”. “(4) Adjusted taxable income.— The term ‘adjusted taxable income’ means taxable income increased by any amount paid or incurred to an employee-owner which was includible in the gross income of such employee-owner.” (2) Clerical amendment.— The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following item: 101 STAT. 1330–403 “Sec. 280H. Limitation on certain amounts paid to owner-employees by personal service corporations electing alternative taxable years.” (d) Effective Dates.— (1) In general.— Except as provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) Required payments.— The amendments made by subsection (b) shall apply to applicable election years beginning after December 31, 1986. (3) Elections.— Any election under section 444 of the Internal Revenue Code of 1986 (as added by subsection (a)) for an entity’s 1st taxable year beginning after December 31, 1986, shall not be required to be made before the 90th day after the date of the enactment of this Act. (4) Special rule for existing entities electing s corporation status.— If a C corporation (within the meaning of section 1361(a)(2)112112 Copy read “1361(a)(2))”. of the Internal Revenue Code of 1986) with a taxable year other than the calendar year— (A) made an election after September 18, 1986, and before January 1, 1988, under section 1362 of such Code to be treated as an S corporation, and (B) elected to have the calendar year as the taxable year of the S corporation, then section 444(b)(2)(B) of such Code shall be applied by taking into account the deferral period of the last taxable year of the C corporation rather than the deferral period of the taxable year being changed.