Internal Revenue Code · 26 U.S.C.
§ 1362. Election; revocation; termination
Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).
Cite as 26 U.S.C. § 1362
At a glance
Read from the text, the source credit and the official notes. Not part of the law.
- Status
- In force
- Added
- October 19, 1982 by Pub. L. 97–354
- Last amended
- March 23, 2018 by Pub. L. 115–141
- Amendments
- 10 dated changes in the source credit
- Length
- 7 subsections · 2,318 words · about 10 min to read
- Defines
- 6 terms
- Cross-references
- cites 8; cited by 11 Code sections and 39 other regulations
- Regulations
- 9 issued under this section
An election under this subsection shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election.
For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year.
An election may be revoked only if shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation.
If the revocation specifies a date for revocation which is on or after the day on which the revocation is made, the revocation shall be effective on and after the date so specified.
Any termination under this paragraph shall be effective on and after the date of cessation.
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).
A prior taxable year shall not be taken into account under clause (i) unless the corporation was an S corporation for such taxable year.
Except as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities.
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(a)(1).
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 from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)).
If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term “passive investment income” shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business.
The portion of such year ending before the 1st day for which the termination is effective shall be treated as a short taxable year for which the corporation is an S corporation.
The portion of such year beginning on such 1st day shall be treated as a short taxable year for which the corporation is a C corporation.
An election under this subsection shall be valid only if all persons who are shareholders in the corporation at any time during the S short year and all persons who are shareholders in the corporation on the first day of the C short year consent to such election.
The taxable income for the short year described in subparagraph (B) of paragraph (1) shall be placed on an annual basis by multiplying the taxable income for such short year by the number of days in the S termination year and by dividing the result by the number of days in the short year. The tax shall be the same part of the tax computed on the annual basis as the number of days in such short year is of the number of days in the S termination year.
Subsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1).
The short taxable year described in subparagraph (A) of paragraph (1) shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation.
The due date for filing the return for the short taxable year described in subparagraph (A) of paragraph (1) shall be the same as the due date for filing the return for the short taxable year described in subparagraph (B) of paragraph (1) (including extensions thereof).
Paragraph (2) shall not apply with respect to any item resulting from the application of section 338.
Paragraph (2) shall not apply to an S termination year if there is a sale or exchange of 50 percent or more of the stock in such corporation during such year.
If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.
(Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1672; amended Pub. L. 98–369, div. A, title I, § 102(d)(2), title VII, § 721(g), (h), (l), (t), July 18, 1984, 98 Stat. 623, 968, 969, 971; Pub. L. 100–647, title I, §§ 1006(f)(6), 1007(g)(9), Nov. 10, 1988, 102 Stat. 3406, 3435; Pub. L. 104–188, title I, §§ 1305(a), (b), 1308(c), 1311(b)(1), Aug. 20, 1996, 110 Stat. 1779, 1780, 1783, 1784; Pub. L. 106–170, title V, § 532(c)(2)(T), Dec. 17, 1999, 113 Stat. 1931; Pub. L. 108–357, title II, §§ 231(b), 237(a), 238(a), Oct. 22, 2004, 118 Stat. 1433, 1436; Pub. L. 109–135, title IV, § 413(b), Dec. 21, 2005, 119 Stat. 2641; Pub. L. 110–28, title VIII, § 8231(a), May 25, 2007, 121 Stat. 196; Pub. L. 110–172, § 11(a)(25), Dec. 29, 2007, 121 Stat. 2487; Pub. L. 113–295, div. A, title II, § 221(a)(88), Dec. 19, 2014, 128 Stat. 4050; Pub. L. 115–141, div. U, title IV, § 401(a)(190), (191), Mar. 23, 2018, 132 Stat. 1193.)
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
Regulations under this section
Treasury regulations (26 CFR) issued under § 1362
- § 1.1362-0 Table of contents.
- § 1.1362-1 Election to be an S corporation.
- § 1.1362-2 Termination of election.
- § 1.1362-3 Treatment of S termination year.
- § 1.1362-4 Inadvertent terminations and inadvertently invalid elections.
- § 1.1362-5 Election after termination.
- § 1.1362-6 Elections and consents.
- § 1.1362-7 Effective dates.
- § 1.1362-8 Dividends received from affiliated subsidiaries.
Cross-references
Computed from the citations in the text of Title 26 and 26 CFR.
This section cites 8 other sections
- § 1361 S corporation defined
- § 1221(a)(1) Capital asset defined
- § 542(c)(6) Definition of personal holding company
- § 1504(a)(2) Definitions
- § 581 Definition of bank
- § 1366(a)(1)(A) Pass-thru of items to shareholders
- § 443(d)(2) Returns for a period of less than 12 months
- § 338 Certain stock purchases treated as asset acquisitions
Cited by 11 Code sections
- § 481(d)(2)(A)(ii) Adjustments required by changes in method of accounting
- § 1042(c)(4)(A)(i) Sales of stock to employee stock ownership plans or certain cooperatives
- § 1361(a)(1) S corporation defined
- § 1363(d)(1)(A) Effect of election on corporation
- § 1371(d)(1) Coordination with subchapter C
- § 1374(c)(1) Tax imposed on certain built-in gains
- § 1375(b)(3) Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts
- § 1377(b)(1)(C) Definitions and special rule
- § 1379(a) Transitional rules on enactment
- § 4975(d)(16)(C) Tax on prohibited transactions
- § 6103(e)(1)(D)(iv) Confidentiality and disclosure of returns and return information
Cited in 39 regulations not issued under it
- § 1.108(i)-2 Application of section 108(i) to partnerships and S corporations.
- § 1.336-2 Availability, mechanics, and consequences of section 336(e) election.
- § 1.338(h)(10)-1 Deemed asset sale and liquidation.
- § 1.409(p)-1 Prohibited allocation of securities in an S corporation.
- § 1.409(p)-1T Prohibited allocations of securities in an S corporation (temporary).
- § 1.444-1T Election to use a taxable year other than the required taxable year (temporary).
- § 1.460-4 Methods of accounting for long-term contracts.
- § 1.481-5 Eligible terminated S corporation.
- § 1.932-1 Coordination of United States and Virgin Islands income taxes.
- § 1.935-1 Coordination of individual income taxes with Guam and the Northern Mariana Islands.
- § 1.965-7 Elections, payment, and other special rules.
- § 1.1042-1T Questions and answers relating to the sales of stock to employee stock ownership plans or certain cooperatives (temporary).
- § 1.1061-3 Exceptions to the definition of an API.
- § 1.1254-4 Special rules for S corporations and their shareholders.
- § 1.1361-1 S corporation defined.
- § 1.1361-4 Effect of QSub election.
- § 1.1361-5 Termination of QSub election.
- § 1.1363-1 Effect of election on corporation.
- § 1.1363-2 Recapture of LIFO benefits.
- § 1.1368-1 Distributions by S corporations.
- § 1.1368-2 Accumulated adjustments account (AAA).
- § 1.1371-1 Distributions of money by an eligible terminated S corporation.
- § 1.1371-2 Impact of Audit PTTP on ETSC Period.
- § 1.1374-10 Effective date and additional rules.
Show 15 more
- § 1.1375-1 Tax imposed when passive investment income of corporation having subchapter C earnings and profits exceed 25 percent of gross receipts.
- § 1.1377-1 Pro rata share.
- § 1.1377-2 Post-termination transition period.
- § 1.1378-1 Taxable year of S corporation.
- § 1.1374-1A Tax imposed on certain capital gains.
- § 1.1400Z2(a)-1 Deferring tax on capital gains by investing in opportunity zones.
- § 1.1400Z2(b)-1 Inclusion of gains that have been deferred under section 1400Z-2(a).
- § 1.1502-76 Taxable year of members of group.
- § 1.1503(d)-6 Exceptions to the domestic use limitation rule.
- § 1.6043-4 Information returns relating to certain acquisitions of control and changes in capital structure.
- § 1.6662-4 Substantial understatement of income tax.
- § 18.1379-1 Transitional rules on enactment.
- § 301.7701-3 Classification of certain business entities.
- § 301.7701(i)-4 Special rules for certain entities.
- § 301.9100-6T Time and manner of making certain elections under the Deficit Reduction Act of 1984.
Amendment history
From the source credit and the official notes, newest first.
- Amended by Pub. L. 115–141Parts changed in 2018: (d)(3)(C)(v) (f)
- Amended by Pub. L. 113–295Parts changed in 2014: (d)(3)(A)(iii)
- Amended by Pub. L. 110–172Parts changed in 2007: (d)(3)(B) (f)(1)
- Amended by Pub. L. 110–28
- Amended by Pub. L. 109–135Parts changed in 2005: (d)(3)(F)
- Amended by Pub. L. 108–357Parts changed in 2004: (d)(3)(F) (f) (f)(1) (f)(1)(B) (f)(3)(A) (f)(4)
- Amended by Pub. L. 106–170Parts changed in 1999: (d)(3)(C)(ii)
- Amended by Pub. L. 104–188Parts changed in 1996: (b)(5) (d)(3) (d)(3)(A)(i)(I) (d)(3)(B) (d)(3)(F) (f)
- Amended by Pub. L. 100–647Parts changed in 1988: (d)(3)(D)(v) (d)(3)(E) (e)(5)(B)
- Amended by Pub. L. 98–369Parts changed in 1984: (b)(3)(B) (b)(4) (d)(3)(D)(v) (e)(2) (e)(3)(B) (e)(6)(C) (e)(6)(D)
- Added by Pub. L. 97–354
Where it sits in the Code
- Subtitle A Income Taxes
- Chapter 1 NORMAL TAXES AND SURTAXES
- Subchapter S Tax Treatment of S Corporations and Their Shareholders
- Part I IN GENERAL
Nearby sections
- § 1361 S corporation defined
- § 1362 Election; revocation; termination
- § 1363 Effect of election on corporation
Official notes
Show the Law Revision Counsel's notes (amendments, effective dates)
Editorial Notes
Amendments
2018—Subsec. (d)(3)(C)(v). Pub. L. 115–141, § 401(a)(190), substituted “1813(w)(1))),” for “1813(w)(1)),” in introductory provisions.
Subsec. (f). Pub. L. 115–141, § 401(a)(191), substituted “may be, during” for “may be during” in concluding provisions.
2014—Subsec. (d)(3)(A)(iii). Pub. L. 113–295 substituted “unless the corporation was an S corporation for such taxable year.” for “unless—
“(I) such taxable year began after December 31, 1981, and
“(II) the corporation was an S corporation for such taxable year.”
2007—Subsec. (d)(3)(B) to (F). Pub. L. 110–28 added subpars. (B) and (C) and struck out former subpar. (B), which related to gross receipts from dispositions of capital assets (other than stock and securities) being taken into account only to the extent of the capital gain net income therefrom, subpar. (C), which defined passive investment income, subpar. (D), which provided that, in the case of any options dealer or commodities dealer, passive investment income was to be determined by not taking into account any gain or loss from any section 1256 contract or property related to such a contract, subpar. (E), which related to certain dividends not being treated as passive investment income if an S corporation held stock in a C corporation meeting the requirements of section 1504(a)(2), and subpar. (F), which related to the exception from passive investment income for banks and depository institution holding companies.
Subsec. (f)(1). Pub. L. 110–172 substituted “or section 1361(b)(3)(B)(ii)” for “, section 1361(b)(3)(B)(ii), or section 1361(c)(1)(A)(ii)” in introductory provisions and “or section 1361(b)(3)(C)” for “, section 1361(b)(3)(C), or section 1361(c)(1)(D)(iii)” in subpar. (B).
2005—Subsec. (d)(3)(F). Pub. L. 109–135 substituted “a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))” for “a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a financial holding company (within the meaning of section 2(p) of such Act)”.
2004—Subsec. (d)(3)(F). Pub. L. 108–357, § 237(a), added subpar. (F).
Subsec. (f). Pub. L. 108–357, § 238(a)(5), inserted “or a qualified subchapter S subsidiary, as the case may be” after “S corporation” in concluding provisions.
Subsec. (f)(1). Pub. L. 108–357, § 238(a)(1), inserted “, section 1361(b)(3)(B)(ii),” after “subsection (a)” in introductory provisions.
Pub. L. 108–357, § 231(b)(1), inserted “or section 1361(c)(1)(A)(ii)” after “section 1361(b)(3)(B)(ii),” in introductory provisions.
Subsec. (f)(1)(B). Pub. L. 108–357, § 238(a)(2), inserted “, section 1361(b)(3)(C),” after “subsection (d)”.
Pub. L. 108–357, § 231(b)(2), inserted “or section 1361(c)(1)(D)(iii)” after “section 1361(b)(3)(C),”.
Subsec. (f)(3)(A). Pub. L. 108–357, § 238(a)(3), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “so that the corporation is a small business corporation, or”.
Subsec. (f)(4). Pub. L. 108–357, § 238(a)(4), amended par. (4) generally. Prior to amendment, par. (4) read as follows: “the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period,”.
1999—Subsec. (d)(3)(C)(ii). Pub. L. 106–170 substituted “section 1221(a)(1)” for “section 1221(1)”.
1996—Subsec. (b)(5). Pub. L. 104–188, § 1305(b), added par. (5).
Subsec. (d)(3). Pub. L. 104–188, § 1311(b)(1)(A), in heading substituted “accumulated” for “subchapter C”.
Subsec. (d)(3)(A)(i)(I). Pub. L. 104–188, § 1311(b)(1)(B), substituted “accumulated” for “subchapter C”.
Subsec. (d)(3)(B) to (E). Pub. L. 104–188, § 1311(b)(1)(C), redesignated subpars. (C) to (F) as (B) to (E), respectively, and struck out former subpar. (B) which read as follows:
“(B) Subchapter c earnings and profits.—For purposes of subparagraph (A), the term ‘subchapter C earnings and profits’ means earnings and profits of any corporation for any taxable year with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect.”
Subsec. (d)(3)(F). Pub. L. 104–188, § 1311(b)(1)(C), redesignated subpar. (F) as (E).
Pub. L. 104–188, § 1308(c), added subpar. (F).
Subsec. (f). Pub. L. 104–188, § 1305(a), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows:
“(f) Inadvertent Terminations.—If—
“(1) an election under subsection (a) by any corporation was terminated under paragraph (2) or (3) of subsection (d),
“(2) the Secretary determines that the termination was inadvertent,
“(3) no later than a reasonable period of time after discovery of the event resulting in such termination, steps were taken so that the corporation is once more a small business corporation, and
“(4) the corporation, and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period,
then, notwithstanding the terminating event, such corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.”
1988—Subsec. (d)(3)(D)(v). Pub. L. 100–647, § 1006(f)(6)(A), struck out cl. (v) which related to special rule for options and commodities dealers.
Subsec. (d)(3)(E). Pub. L. 100–647, § 1006(f)(6)(B), added subpar. (E).
Subsec. (e)(5)(B). Pub. L. 100–647, § 1007(g)(9), substituted “Subsection (d)” for “Subsection (d)(2)”.
1984—Subsec. (b)(3)(B). Pub. L. 98–369, § 721(l)(2), substituted “on or before the 15th day of the 3rd month of the following taxable year” for “on or before the last day of such taxable year”.
Subsec. (b)(4). Pub. L. 98–369, § 721(l)(1), added par. (4).
Subsec. (d)(3)(D)(v). Pub. L. 98–369, § 102(d)(2), added cl. (v).
Subsec. (e)(2). Pub. L. 98–369, § 721(g)(2), substituted “as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6)” for “as provided in paragraph (3)”.
Subsec. (e)(3)(B). Pub. L. 98–369, § 721(h), struck out “All” in heading, and substituted “subsection” for “paragraph” and “S short year and all persons who are shareholders in the corporation on the first day of the C short year” for “S termination year” in text.
Subsec. (e)(6)(C). Pub. L. 98–369, § 721(g)(1), added subpar. (C).
Subsec. (e)(6)(D). Pub. L. 98–369, § 721(t), added subpar. (D).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.
Effective Date of 2007 Amendment
Pub. L. 110–28, title VIII, § 8231(b), May 25, 2007, 121 Stat. 197, provided that: “The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [May 25, 2007].”
Effective Date of 2005 Amendment
Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 413(d) of Pub. L. 109–135, set out as a note under section 1361 of this title.
Effective Date of 2004 Amendment
Pub. L. 108–357, title II, § 231(c)(2), Oct. 22, 2004, 118 Stat. 1434, provided that: “The amendments made by subsection (b) [amending this section] shall apply to elections and terminations made after December 31, 2004.”
Pub. L. 108–357, title II, § 237(b), Oct. 22, 2004, 118 Stat. 1436, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2004.”
Pub. L. 108–357, title II, § 238(b), Oct. 22, 2004, 118 Stat. 1436, provided that: “The amendments made by this section [amending this section] shall apply to elections made and terminations made after December 31, 2004.”
Effective Date of 1999 Amendment
Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date of 1996 Amendment
Pub. L. 104–188, title I, § 1305(c), Aug. 20, 1996, 110 Stat. 1780, provided that: “The amendments made by subsections (a) and (b) [amending this section] shall apply with respect to elections for taxable years beginning after December 31, 1982.”
Amendment by sections 1308(c) and 1311(b)(1) of Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date of 1984 Amendment
Amendment by section 102(d)(2) of Pub. L. 98–369 applicable to positions established after July 18, 1984, in taxable years ending after that date except as otherwise provided, see section 102(f), (g) of Pub. L. 98–369, set out as a note under section 1256 of this title.
Amendment by section 721(g), (h), (l), (t) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, except that amendment by section 721(g)(1) is not applicable to certain qualified stock purchases, amendment by section 721(l) is applicable to any election under this section (or any corresponding provision of prior law) made after Oct. 19, 1982, and amendment by section 721(t) is not applicable to certain S termination years, see section 721(y) of Pub. L. 98–369, set out as a note under section 1361 of this title.
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, subsec. (d)(3) of this section and sections 1366(f)(3) and 1375 of this title shall apply, and section 1372(e)(5) of this title as in effect on the day before Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title. For additional provisions relating to the treatment of certain elections under prior law for purposes of subsec. (g) of this section, see section 6(e) of Pub. L. 97–354, set out as a note under section 1361 of this title.
Treatment of Certain Elections Under Prior Law
Pub. L. 104–188, title I, § 1317(b), Aug. 20, 1996, 110 Stat. 1787, provided that: “For purposes of section 1362(g) of the Internal Revenue Code of 1986 (relating to election after termination), any termination under section 1362(d) of such Code in a taxable year beginning before January 1, 1997, shall not be taken into account.”
Subchapter S Election
Pub. L. 98–369, div. A, title I, § 102(d)(3), July 18, 1984, 98 Stat. 623, as amended by Pub. L. 99–514, § 2, title XVIII, § 1808(a)(2), Oct. 22, 1986, 100 Stat. 2095, 2817, provided that:
“If a commodities dealer or an options dealer—“(A) becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) at any time before the close of the 75th day after the date of the enactment of this Act [July 18, 1984], and“(B) makes the election under section 1362(a) of such Code before the close of such 75th day,then such dealer shall be treated as having received approval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) or such other day as may be permitted under regulations and ending on the date determined under section 1378 of such Code and such election shall be effective for such taxable year.”