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PUBLIC LAW 86-866-SEPT. 2, 1968

[72 S T A T.

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 "See. 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 elect* ing small business corporations. "SEC. 1371. DEFINITIONS. " (a) SMALL BUSINESS CORPORATION.—For purposes of this sub-

26 USC 1504.

chapter, 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.

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