[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.6245-1T]

[Page 202-203]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                               Assessment
 
Sec. 301.6245-1T  Subchapter S items.

    (a) In general. For purposes of subtitle F of the Internal Revenue 
Code of 1986, the following items which are required to be taken into 
account for the taxable year of an S corporation under subtitle A of the 
Code are more appropriately determined at the corporate level than at 
the shareholder level and, therefore, are subchapter S items:
    (1) The S corporation aggregate and each shareholder's share of, and 
any factor necessary to determine, each of the following:
    (i) Items of income, gain, loss, deduction, or credit of the 
corporation;
    (ii) Expenditures by the corporation not deductible in computing its 
taxable income (for example, charitable contributions);
    (iii) Items of the corporation that may be tax preference items 
under section 57(a) for any shareholder;
    (iv) Items of income of the corporation that are exempt from tax;
    (v) Corporate liabilities (including determinations of the amount of 
the liability, whether the corporate liability is to a shareholder of 
the corporation, and changes from the preceding year); and
    (vi) Other amounts determinable at the corporate level with respect 
to corporate assets, investments, transactions, and operations necessary 
to enable the S corporation or the shareholders to determine--
    (A) The general business credit provided by section 38;
    (B) Recapture under section 47 of the credit provided by section 38;
    (C) Amounts at risk in any activity to which section 465 applies;
    (D) The depletion allowance under section 613A with respect to oil 
and gas wells;
    (E) Amortization of reforestation expenses under section 194;
    (F) The credit provided by section 34 for certain uses of gasoline 
and special fuels; and
    (G) The taxes imposed at the corporate level, such as the taxes 
imposed under section 56, 1374, or 1375;
    (2) Any factor necessary to determine whether the entity is an S 
corporation under section 1361, such as the number, eligibility, and 
consent of shareholders and the classes of stock;
    (3) Any factor necessary to determine whether the entity has 
properly elected to be an S corporation under section 1362 for the 
taxable year;
    (4) Any factor necessary to determine whether and when the S 
corporation election of the entity has been revoked or terminated under 
section 1362 for the taxable year (for example, the existence and amount 
of subchapter C earnings and profits, and passive investment income); 
and
    (5) Items relating to the following transactions, to the extent that 
a determination of such items can be made from determinations that the 
corporation is required to make with respect to an amount, the character 
of an amount, or the percentage of stock ownership of a shareholder in 
the corporation, for purposes of the corporation's books and records or 
for purposes of furnishing information to a shareholder:
    (i) Contributions to the corporation; and
    (ii) Distributions from the corporation.
    (b) Factors that affect the determination of subchapter S items. The 
term ``subchapter S item'' includes the accounting practices and the 
legal and factual determinations that underlie the determination of the 
existence, amount, timing, and characterization of items of income, 
credit, gain, loss, deduction, etc. Examples of these determinations 
are: The S corporation's method of accounting, taxable year,

[[Page 203]]

and inventory method; whether an election was made by the corporation; 
whether corporate property is a capital asset, section 1231 property, or 
inventory; whether an item is currently deductible or must be 
capitalized; whether corporate activities had been engaged in with the 
intent to make a profit for purposes of section 183; whether the 
corporation qualified for the credit for increasing research activities 
under section 41; and whether the corporation qualified for the credit 
for clinical testing expenses for a rare disease or condition under 
section 28.
    (c) Illustrations--(1) In general. This paragraph (c) illustrates 
the provisions of paragraph (a)(5) of this section. The determinations 
illustrated in this paragraph (c) that the corporation is required to 
make are not exhaustive; there may be additional determinations that the 
corporation is required to make which relate to a determination listed 
in paragraph (a)(5) of this section. The critical element is that the 
corporation is required to make a determination with respect to a matter 
for the purposes stated; failure by the corporation actually to make a 
determination (for example, because it does not maintain proper books 
and records) does not prevent an item from being a subchapter S item.
    (2) Contributions. For purposes of its books and records, or for 
purposes of furnishing information to a shareholder, the S corporation 
must determine:
    (i) The character of the amount received by the corporation (for 
example, whether it is a contribution, loan, or repayment of a loan);
    (ii) The amount of money received by the corporation; and
    (iii) The basis to the corporation of contributed property 
(including necessary preliminary determinations, such as the 
shareholder's basis in the contributed property).

To the extent that a determination of an item relating to a contribution 
can be made from these and similar determinations that the corporation 
is required to make, that item is a subchapter S item. To the extent 
that the determination requires other information, however, that item is 
not a subchapter S item. Such other information would include those 
factors used in determining whether there is recapture under section 47 
by the contributing shareholder of the general business credit because 
of the contribution of property in circumstances in which that 
determination is irrelevant to the corporation.
    (3) Distributions. For purposes of its books and records, or for 
purposes of furnishing information to a shareholder, the S corporation 
must determine:
    (i) The character of the amount transferred to a shareholder (for 
example, whether it is a dividend, compensation, loan, or repayment of a 
loan);
    (ii) The amount of money distributed to a shareholder;
    (iii) The fair market value of property distributed to a 
shareholder;
    (iv) The adjusted basis to the corporation of distributed property; 
and
    (v) The character of corporation property (for example, whether an 
item is inventory or a capital asset).

To the extent that a determination of an item relating to a distribution 
can be made from these and similar determinations that the corporation 
is required to make, that item is a subchapter S item. To the extent 
that the determination requires other information, however, that item is 
not a subchapter S item. Such other information would include the 
determination of a shareholder's basis in the shareholder's stock or in 
the indebtedness of the S corporation to the shareholder.
    (d) Cross reference. For the definition of subchapter S item for 
purposes of the windfall profit tax, see Sec. 51.6245-1T.
    (e) Effective date. This section shall apply to taxable years 
beginning after December 31, 1982.

[T.D. 8122, 52 FR 3003, Jan. 30, 1987]