Subchapter S Revision Act of 1982

(Measure passed Senate, amended)

Subchapter S Revision Act of 1982 - Amends the Internal Revenue Code to revise the tax treatment of small business corporations and their shareholders.

Divides corporations into two classes: (1) S corporations, (formerly Subchapter S corporations) for electing small business corporations; and (2) C corporations, for all other corporations. Increases from 25 to 35 the number of shareholders an S corporation may have. Specifies that a corporation shall not be treated as having more than one class of stock solely because of differences in voting rights among shares of common stock. Specifies that straight debt shall not be treated as a second class of stock for purposes of S corporation eligibility determinations. Requires the Secretary of the Treasury to prescribe regulations for the treatment of straight debt.

Revises the qualifications for an S corporation trust.

Revises the method of electing, revoking, and terminating S corporation elections. Provides that shareholders holding one-half of the stock of an S corporation must consent to revocation of an election. Repeals provisions which allow a new shareholder who refuses to consent to an S corporation election to terminate the election. Provides that a corporation shall cease to be a small business corporation where passive investment income exceeds 25 percent of gross receipts for three consecutive years and where a corporation also has accumulated earnings and profits from years in which the corporation was a C corporation.

Modifies the passive income test to exclude: (1) interest on notes from the sale of inventory; (2) income from the conduct of a lending or finance business; and (3) certain liquidating payments. Provides that only net gain from the disposition of capital assets shall be included in the computation of gross receipts.

Repeals the requirement that an S corporation may not derive more than 80 percent of its gross receipts from foreign sources.

Authorizes the Secretary of the Treasury to waive the termination of an S corporation election in the case of inadvertent terminations.

Provides that S corporation shareholders shall be taxed on their pro rata share of the corporation's items of income. Specifies that such items of income shall retain their character when passed through to the shareholders. Provides special rules for corporate losses and deductions taken into account by a shareholder. Permits shareholders to carry forward certain corporate losses. Reduces the pass-thru for tax imposed on excess net passive income of an S corporation.

Sets forth rules for adjustments to the basis of the shareholders' stock.

Revises rules relating to distributions of S corporations. Provides that distributions made by an S corporation which has no accumulated earnings and profits shall be applied against the basis of the stock and any excess shall be treated as gain. Provides that distributions by corporations with accumulated earnings and profits shall be treated as dividends to the extent they exceed the accumulated adjustments account of a corporation.

Sets forth special rules for the coordination of the taxation of S corporations with the tax provisions for C corporations.

Prescribes rules for the taxation of fringe benefits of owner-employers of S corporations. Specifies that a person owning two percent of the stock in an S corporation shall be treated as a partner, and the S corporation shall be treated as a partnership.

Provides that for purposes of the taxation of foreign income an S corporation shall be treated as a partnership.

Imposes a tax on certain capital gains of an S corporation if its net capital gain exceeds $25,000 and exceeds 50 percent of its taxable income for the year, and if the corporation's taxable income for the year exceeds $25,000. Specifies certain exceptions to such tax liability.

Imposes an additional tax on S corporations with C corporation earnings and profits if the S corporations' passive investment income exceeds 25 percent of its gross receipts.

Sets forth miscellaneous definitions and special rules. Prescribes a method to determine the taxable year of an S corporation. Specifies transitional rules. Provides that S corporations shall be treated like partnerships for purposes of: (1) depletion allowances; (2) the windfall profit tax; (3) the optional write-off of intangible drilling costs as a tax preference item; (4) the investment tax credit for used property; (5) the taxation of income from a discharge of indebtedness; (6) the expensing of certain depreciable business assets; (7) amortization of reforestation expenditures; and (8) the withholding of tax from interest and dividends.

Sets forth provisions for the tax treatment of transactions between S corporations and certain related entities.

Provides that the tax treatment of any S corporation item shall be at the corporate level (rather than the shareholder level). Requires that shareholders' tax returns be consistent with the corporation's return. Requires that all shareholders be notified and given an opportunity to participate in any administrative or judicial proceeding concerning an S corporation tax item.

Extends the application of certain administrative provisions for partnerships to S corporations.

Makes certain technical and conforming changes. States that this Act shall be effective in 1983, with certain exceptions.

Sets forth special transitional rules in the case of: (1) certain oil corporations; (2) existing fringe benefit plans; (3) certain S corporation elections under prior law.