ELECTION OF CERTAIN SMALL BUSINESS CORPORATIONS.

SEC. 64. ELECTION OF CERTAIN SMALL BUSINESS CORPORATIONS. (a) Election as to Taxable Status.—Chapter 1 (relating to normal taxes and surtaxes) is amended by adding at the end thereof the following new subchapter: “Subchapter S—Election of Certain Small Business Corporations as to Taxable Status “Sec. 1371. Definitions. “Sec. 1372. Election by small business corporation. “Sec. 1373. Corporation undistributed taxable income taxed to shareholders. “Sec. 1374. Corporation net operating loss allowed to shareholders. “Sec. 1375. Special rules applicable to distributions of electing small business corporations. “Sec. 1376. Adjustment to basis of stock of, and indebtedness owing, shareholders. “Sec. 1377. Special rules applicable to earnings and profits of electing small business corporations. “SEC. 1371. DEFINITIONS. “(a) Small Business Corporation.— For purposes of this subchapter, the term ‘small business corporation’ means a domestic corporation which is not a member of an affiliated group (as defined in section 1504) and which does not— “(1) have more than 10 shareholders; “(2) have as a shareholder a person (other than an estate) who is not an individual; “(3) have a nonresident alien as a shareholder; and “(4) have more than one class of stock. “(b) Electing Small Business Corporation.—For purposes of this subchapter, the term ‘electing small business corporation’ means, with respect to any taxable year, a small business corporation which has made an election under section 1372 (a) which, under section 1372, is in effect for such taxable year. “SEC. 1372. ELECTION BY SMALL BUSINESS CORPORATION. “(a) Eligibility.— Except as provided in subsection (f), any small business corporation may elect, in accordance with the provisions of this section, not to be subject to the taxes imposed by this chapter. Such election shall be valid only if all persons who are shareholders in such corporation— “(1) on the first day of the first taxable year for which such election is effective, if such election is made on or before such first day, or “(2) on the day on which the election is made, if the election is made after such first day, consent to such election. “(b) Effect.— If a small business corporation makes an election under subsection (a), then— “(1) with respect to the taxable years of the corporation for which such election is in effect, such corporation shall not be subject to the taxes imposed by this chapter and, with respect to such taxable years and all succeeding taxable years, the provisions of section 1377 shall apply to such corporation, and “(2) with respect to the taxable years of a shareholder of such corporation in which or with which the taxable years of the corporation for which such election is in effect end, the provisions of sections 1373, 1374, and 1375 shall apply to such shareholder, and with respect to such taxable years and all succeeding taxable years, the provisions of section 1376 shall apply to such shareholder. 72 Stat. 1651 “(c) Where and How Made.— “(1) In general.—An election under subsection (a) may be made by a small business corporation for any taxable year at any time during the first month of such taxable year, or at any time during the month preceding such first month. Such election shall be made in such manner as the Secretary or his delegate shall prescribe by regulations. “(2) Taxable years beginning before date of enactment.— An election may be made under subsection (a) by a small business corporation for its first taxable year which begins after December 31, 1957, and on or before the date of the enactment of this subchapter, and ends after such date at any time— “(A) within the 90-day period beginning on the day after the date of the enactment of this subchapter, or “(B) if its taxable year ends within such 90-day period, before the close of such taxable year. An election may be made pursuant to this paragraph only if the small business corporation has been a small business corporation (as defined in section 1371 (a)) on each day after the date of the enactment of this subchapter and before the day of such election. “(d) 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, unless it is terminated, with respect to any such taxable year, under subsection (e). “(e) Termination.— “(1) New shareholders.— An election under subsection (a) made by a small business corporation shall terminate if any person who was not a shareholder in such corporation— “(A) on the first day of the first taxable year of the corporation for which the election is effective, if such election is made on or before such first day, or “(B) on the day on which the election is made, if such election is made after such first day, becomes a shareholder in such corporation and does not consent to such election within such time as the Secretary or his delegate shall prescribe by regulations. Such termination shall be effective for the taxable year of the corporation in which such person becomes a shareholder in the corporation and for all succeeding taxable years of the corporation. “(2) Revocation.— An election under subsection (a) made by a small business corporation may be revoked by it for any taxable year of the corporation after the first taxable year for which the election is effective. An election may be revoked only if all persons who are shareholders in the corporation on the day on which the revocation is made consent to the revocation. A revocation under this paragraph shall be effective— “(A) for the taxable year in which made, if made before the close of the first month of such taxable year, “(B) for the taxable year following the taxable year in which made, if made after the close of such first month, and for all succeeding taxable years of the corporation. Such revocation shall be made in such manner as the Secretary or his delegate shall prescribe by regulations. “(3) Ceases to be small business corporation.— An election under subsection (a) made by a small business corporation shall terminate if at any time— 72 Stat. 1652 “(A) after the first day of the first taxable year of the corporation for which the election is effective, if such election is made on or before such first day, or “(B) after the day on which the election is made, if such election is made after such first day, the corporation ceases to be a small business corporation (as defined in section 1371 (a)). Such termination shall be effective for the taxable year of the corporation in which the corporation ceases to be a small business corporation and for all succeeding taxable years of the corporation. “(4) Foreign income.—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 derives more than 80 percent of its gross receipts from sources outside the United States. Such termination shall be effective for the taxable year of the corporation in which it derives more than 80 percent of its gross receipts from sources outside the United States, and for all succeeding taxable years of the corporation. “(5) Personal holding company income.—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 receipts more than 20 percent of which is derived from royalties, 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). Such termination shall be effective for the taxable year of the corporation in which it has gross receipts of such amount, and for all succeeding taxable years of the corporation. “(f) Election After Termination.—If a small business corporation has made an election under subsection (a) and if such election has been terminated or revoked under subsection (e), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year prior to its fifth taxable year which begins after the first taxable year for which such termination or revocation is effective, unless the Secretary or his delegate consents to such election. “SEC. 1373. CORPORATION UNDISTRIBUTED TAXABLE INCOME TAXED TO SHAREHOLDERS. “(a) General Rule.—The undistributed taxable income of an electing small business corporation for any taxable year shall be included in the gross income of the shareholders of such corporation in the manner and to the extent set forth in this section. “(b) Amount Included in Gross Income.—Each person who is a shareholder of an electing small business corporation on the last day of a taxable year of such corporation shall include in his gross income, for his taxable year in which or with which the taxable year of the corporation ends, the amount he would have received as a dividend, if on such last day there had been distributed pro rata to its shareholders by such corporation an amount equal to the corporation’s undistributed taxable income for the corporation’s taxable year. For purposes of this chapter, the amount so included shall be treated as an amount distributed as a dividend on the last day of the taxable year of the corporation. “(c) Undistributed Taxable Income Defined.—For purposes of this section, the term ‘undistributed taxable income’ means taxable income (computed as provided in subsection (d)) minus the amount of money distributed as dividends during the taxable year, to the 72 Stat. 1653extent that any such amount is a distribution out of earnings and profits of the taxable year as specified in section 316 (a) (2). “(d) Taxable Income.— For purposes of this subchapter, the taxable income of an electing small business corporation shall be determined without regard to— “(1) the deduction allowed by section 172 (relating to net operating loss deduction), and “(2) the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures). “SEC. 1374. CORPORATION NET OPERATING LOSS ALLOWED TO SHAREHOLDERS. “(a) General Rule.—A net operating loss of an electing small business corporation for any taxable year shall be allowed as a deduction from gross income of the shareholders of such corporation in the manner and to the extent set forth in this section. “(b) Allowance of Deduction.—Each person who is a shareholder of an electing small business corporation at any time during a taxable year of the corporation in which it has a net operating loss shall be allowed as a deduction from gross income, for his taxable year in which or with which the taxable year of the corporation ends, an amount equal to his portion of the corporation’s net operating loss (as determined under subsection (c)). “(c) Determination of Shareholder’s Portion.— “(1) In general.—For purposes of this section, a shareholder’s portion of the net operating loss of an electing small business corporation is his pro rata share of the corporation’s net operating loss (computed as provided in section 172 (c), except that the deductions provided in part VIII (except section 248) of subchapter B shall not be allowed) for his taxable year in which or with which the taxable year of the corporation ends. For purposes of this paragraph, a shareholder’s pro rata share of the corporation’s net operating loss is the sum of the portions of the corporation’s daily net operating loss attributable on a pro rata basis to the shares held by him on each day of the taxable year. For purposes of the preceding sentence, the corporation’s daily net operating loss is the corporation’s net operating loss divided by the number of days in the taxable year. “(2) Limitation.— A shareholder’s portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of— “(A) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of the shareholder’s stock in the electing small business corporation, determined as of the close of the taxable year of the corporation (or, in respect of stock sold or otherwise disposed of during such taxable year, as of the day before the day of such sale or other disposition), and “(B) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation (or, if the shareholder is not a shareholder as of the close of such taxable year, as of the close of the last day in such taxable year on which the shareholder was a shareholder in the corporation). “(d) Application With Other Provisions.— “(1) In general.—The deduction allowed by subsection (b) shall, for purposes of this chapter, be considered as a deduction attributable to a trade or business carried on by the shareholder. 72 Stat. 1654 “(2) Adjustment of net operating loss carrybacks and carryovers of shareholders.—For purposes of determining, under section 172, the net operating loss carrybacks to taxable years beginning before January 1, 1958, from a taxable year of the shareholder for which he is allowed a deduction under subsection (b), such deduction shall be disregarded in determining the net operating loss for such taxable year. In the case of a net operating loss for a taxable year in which a shareholder is allowed a deduction under subsection (b), the determination of the portion of such loss which may be carried to subsequent years shall be made without regard to the preceding sentence and in accordance with section 172 (b) (2), but the sum of the taxable incomes for taxable years beginning before January 1, 1958, shall be deemed not to exceed the amount of the net operating loss determined with the application of the preceding sentence. “SEC. 1375. SPECIAL RULES APPLICABLE TO DISTRIBUTIONS OF ELECTING SMALL BUSINESS CORPORATIONS. “(a) Capital Gains.— “(1) Treatment in hands of shareholders.—The amount includible in the gross income of a shareholder as dividends (including amounts treated as dividends under section 1373 (b)) from an electing small business corporation during any taxable year of the corporation, to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in section 316 (a) (2), shall be treated as a long-term capital gain to the extent of the shareholder’s pro rata share of the excess of the corporation’s net long-term capital gain over its net short-term capital loss for such taxable year. For purposes of this paragraph, such excess shall be deemed not to exceed the corporation’s taxable income (computed as provided in section 1373 (d)) for the taxable year. “(2) Determination of shareholder’s pro rata share.—A shareholder’s pro rata share of such excess for any taxable year shall be an amount which bears the same ratio to such excess as the amount of dividends described in paragraph (1) includible in the shareholder’s gross income bears to the entire amount of dividends described in paragraph (1) includible in the gross income of all shareholders. “(b) Dividends Received Credit Not Allowed.—The amount includible in the gross income of a shareholder as dividends from an electing small business corporation during any taxable year of the corporation (including any amount treated as a dividend under section 1373 (b)) shall not be considered a dividend for purposes of section 34, section 37, or section 116 to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in section 316 (a) (2). For purposes of this subsection, the earnings and profits of the taxable year shall be deemed not to exceed the corporation’s taxable income (computed as provided in section 1373 (d)) for the taxable year. “(c) Treatment of Family Groups.—Any dividend received by a shareholder from an electing small business corporation (including any amount treated as a dividend under section 1373 (b)) may be apportioned or allocated by the Secretary or his delegate between or among shareholders of such corporation who are members of such shareholder’s family (as defined in section 704 (e) (3)), if he determines that such apportionment or allocation is necessary in order to reflect the value of services rendered to the corporation by such shareholders. 72 Stat. 1655 “(d) Distributions of Undistributed Taxable Income Previously Taxed to Shareholders.— “(1) Distributions not considered as dividends.—An electing small business corporation may distribute, in accordance with regulations prescribed by the Secretary or his delegate, to any shareholder all or any portion of the shareholder’s net share of the corporation’s undistributed taxable income for taxable years prior to the taxable year in which such distribution is made. Any such distribution shall, for purposes of this chapter, be considered a distribution which is not a dividend, but the earnings and profits of the corporation shall not be reduced by reason of any such distribution. “(2) Shareholder’s net share of undistributed taxable income.— For purposes of this subsection, a shareholder’s net share of the undistributed taxable income of an electing small business corporation is an amount equal to— “(A) the sum of the amounts included in the gross income of the shareholder under section 1373 (b) for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), reduced by “(B) the sum of— “(i) the amounts allowable under section 1374 (b) as a deduction from gross income of the shareholder for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), and “(ii) all amounts previously distributed during the taxable year and all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year) to the shareholder which under paragraph (1) were considered distributions which were not dividends. “SEC. 1376. ADJUSTMENT TO BASIS OF STOCK OF, AND INDEBTEDNESS OWING, SHAREHOLDERS. “(a) Increase in Basis of Stock for Amounts Treated as Dividends.—The basis of a shareholder’s stock in an electing small business corporation shall be increased by the amount required to be included in the gross income of such shareholder under section 1373 (b), but only to the extent to which such amount is included in his gross income in his return, increased or decreased by any adjustment of such amount in any redetermination of the shareholder’s tax liability. “(b) Reduction in Basis of Stock and Indebtedness for Shareholder’s Portion of Corporation Net Operating Loss.— “(1) Reduction in basis of stock.—The basis of a shareholder’s stock in an electing small business corporation shall be reduced (but not below zero) by an amount equal to the amount of his portion of the corporation’s net operating loss for any taxable year attributable to such stock (as determined under section 1374 (c)). “(2) Reduction in basis of indebtedness.—The basis of any indebtedness of an electing small business corporation to a shareholder of such corporation shall be reduced (but not below zero) by an amount equal to the amount of the shareholder’s portion of the corporation’s net operating loss for any taxable year (as determined under section 1374 (c)), but only to the extent that such amount exceeds the adjusted basis of the stock of such corporation held by the shareholder. 72 Stat. 1656 “SEC. 1377. SPECIAL RULES APPLICABLE TO EARNINGS AND PROFITS OF ELECTING SMALL BUSINESS CORPORATIONS. “(a) Reduction for Undistributed Taxable Income.—The accumulated earnings and profits of an electing small business corporation as of the close of its taxable year shall be reduced to the extent that its undistributed taxable income for such year is required to be included in the gross income of the shareholders of such corporation under section 1373 (b). “(b) Current Earnings and Profits Not Reduced by Any Amount Not Allowable as Deduction.—The earnings and profits of an electing small business corporation for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income (as provided in section 1373 (d)) for such taxable year. “(c) Earnings and Profits Not Affected by Net Operating Loss.—The earnings and profits and the accumulated earnings and profits of an electing small business corporation shall not be affected by any item of gross income or any deduction taken into account in determining the amount of any net operating loss (computed as provided in section 1374 (c)) of such corporation.” (b) Net Operating Loss Disallowed to Electing Small Business Corporation.—Section 172 (relating to net operating loss deduction) is amended by redesignating subsection (h) as (i), and by inserting after subsection (g) the following new subsection: “(h) Disallowance of Net Operating Loss of Electing Small Business Corporations.—In determining the amount of the net operating loss deduction under subsection (a) of any corporation, there shall be disregarded the net operating loss of such corporation for any taxable year for which such corporation is an electing small business corporation under subchapter S.” (c) Returns by Electing Small Business Corporations.—Subpart A of part III of subchapter A of chapter 61 (relating to information returns) is amended by renumbering section 6037 as 6038, and by inserting after section 6036 the following new section: “SEC. 6037. RETURN OF ELECTING SMALL BUSINESS CORPORATION. “Every electing small business corporation (as defined in section 1371 (a) (2)) shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowable by subtitle A, the names and addresses of all persons owning stock in the corporation at any time during the taxable year, the number of shares of stock owned by each shareholder at all times during the taxable year, the amount of money and other property distributed by the corporation during the taxable year to each shareholder, the date of each such distribution, and such other information, for the purpose of carrying out the provisions of subchapter S of chapter 1, as the Secretary or his delegate may by forms and regulations prescribe. Any return filed pursuant to this section shall, for purposes of chapter 66 (relating to limitations), be treated as a return filed by the corporation under section 6012.” (d) Technical Amendments.— (1) The table of subchapters for chapter 1 is amended by adding at the end thereof “Subchapter S .—Election of certain small business corporations as to taxable status.” (2) Section 1016 (a) (relating to adjustments of basis) is amended by striking out the period at the end of paragraph (17) (as added by section 16 (b) of this Act) and inserting in lieu 72 Stat. 1657 thereof a semicolon, and by adding after paragraph (17) the following new paragraph: “(18) to the extent provided in section 1376 in the case of stock of, and indebtedness owing, shareholders of an electing small business corporation (as denned in section 1371 (b)).” (3) Section 1504 (b) (relating to definition of includible corporation) is amended by adding at the end thereof the following new paragraph: “(8) An electing small business corporation (as defined in section 1371 (b)).” (4) The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by striking out “Sec. 6037. Cross references.” and inserting in lieu thereof “Sec. 6037. Return of electing small business corporation. “Sec. 6038. Cross references.” (e) Effective Date.—The amendments made by this section shall apply only with respect to taxable years beginning after December 31, 1957.