Page:United States Statutes at Large Volume 96 Part 2.djvu/312

 96 STAT. 1674

PUBLIC LAW 97-354—OCT. 19, 1982 "(B) W H E N EFFECTIVE.—Any termination under this paragraph shall be effective on and after the date of cessation. "(3) WHERE PASSIVE INVESTMENT INCOME EXCEEDS 25 PERCENT OF GROSS RECEIPTS FOR 3 CONSECUTIVE TAXABLE YEARS AND CORPORATION HAS SUBCHAPTER C EARNINGS AND PROFITS.— "(A) TERMINATION.—

26 USC 301.

"(i) IN GENERAL.—An election under subsection (a) shall be terminated whenever the corporation— "(I) has subchapter C earnings and profits a t the close of each of 3 consecutive taxable years, and "(n) has gross receipts for each of such taxable years more than 25 percent of which a r e passive investment income. "(ii) W H E N EFFECTIVE.—Any termination under this paragraph shall be effective on and after the first day of the first taxable year beginning after the third consecutive taxable year referred to in clause (i). "(iii) YEARS TAKEN INTO ACCOUNT.—A prior taxable

year shall not be teJ^en into account under clause (i) unless— "(I) such taxable year began after December 31, 1981, and "(II) the corporation was a n S corporation for such taxable year. "(B) SUBCHAPTER C EARNINGS AND PROFITS.—For purposes

Ante, p. 1672.

of subparagraph (A), the term 'subchapter C earnings and profits means esimings and profits of any corporation for any taxable year with respect to which a n election under section 1362(a) (or under section 1372 of prior law) was not in effect. "(C) GROSS RECEIPTS FROM SALES OF CAPITAL ASSETS (OTHER THAN STOCK AND SECURITIES).—For purposes of this para-

graph, in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom. (D) PASSIVE INVESTMENT INCOME DEFINED.—For purposes

of this paragraph— (i) IN GENERAL.—Except as otherwise provided in this subparagraph, the term 'passive investment income' means gross receipts 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). "(ii) EXCEPTION FOR INTEREST ON NOTES FROM SALES OF

INVENTORY.—The term 'passive investment income' shall not include interest on any obligation acquired in the ordinary course of the corporation's trade or business from its sale of property described in section 1221(1). "(iii) TREATMENT OF CERTAIN LENDING OR FINANCE COMPANIES.—If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term 'passive investment income' shall not include gross receipts for the taxable year which are derived directly

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