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TITLE 26-INTERNAL REVENUE CODE § 1375. Special rules applicable to distributions of electing small business corporations (a) Capital gains (1) Treatment in hands of shareholders The amount includible in the gross income of a shareholder as dividends (including amounts treated as dividends under section 1373(b)) from an electing small business cor- poration during any taxable year of the cor- poration, to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in sec- tion 316(a)(2), shall be treated as a long-term capital gain to the extent of the shareholder's pro rata share of the corporation's net capital gain for such taxable year. For purposes of this paragraph, such net capital gain shall be deemed not to exceed the corporation's tax- able income (computed as provided in section 1373(d)) for the taxable year. (2) Determination of shareholder's pro rata share A shareholder's pro rata share of such excess for any taxable year shall be an amount which bears the same ratio to such excess as the amount of dividends described in paragraph (1) includible in the sharehold- er's gross income bears to the entire amount of dividends described in paragraph (1) inclu- dible in the gross income of all shareholders. (3) Reduction for taxes imposed For purposes of paragraphs (1) and (2), an electing small business corporation's net cap- ital gain for a taxable year shall be reduced by an amount equal to the amount of the taxes imposed by sections 56 and 1378(a) on such corporation for such year. (b) Dividends not treated as such for certain purposes The amount includible in the gross income of a shareholder as dividends from an electing small business corporation during any taxable year of the corporation (including any amount treated as a dividend under section 1373(b)) shall not be considered a dividend for purposes of section 37 or section 116 to the extent that such amount is a distribution of property out of earnings and profits of the taxable year as specified in section 316(a)(2). For purposes of this subsection, the earnings and profits of the taxable year shall be deemed not to exceed the corporation's taxable income (computed as pro- vided in section 1373(d) for the taxable year. (c) Treatment of family groups Any dividend received by a shareholder from an electing small business corporation (includ- ing any amount treated as a dividend under sec- tion 1373(b)) may be apportioned or allocated by the Secretary between or among sharehold- ers of such corporation who are members of such shareholder's family (as defined in section 704(e)(3)), if he determines that such appor- tionment or allocation is necessary in order to reflect the value of services rendered to the cor- poration by such shareholders. (d) Distributions of undistributed taxable Income pre- viously taxed to shareholders (1) Distributions not considered as dividends An electing small business corporation may distribute, in accordance with regulations pre- scribed by the Secretary, to any shareholder all or any portion of the shareholder's net share of the corporation's undistributed tax- itble income for taxable years prior to the tax- able year in which such distribution is made. Any such distribution shall, for purposes of this chapter, be considered a distribution which is not a dividend, but the earnings and profits of the corporation shall not be re- duced by reason of any such distribution. (2) Shareholder's net share of undistributed taxable income For purposes of this subsection, a share- holder's net share of the undistributed tax- able income of an electing small business cor- poration s an amount equal to- (A) the sum of the amounts included In the gross income of the shareholder under section 1373(b) for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), re- duced by (B) the sum of- (I) the amounts allowable under section 1374(b) as a deduction from gross income of the shareholder for all prior taxable years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year), and (ii) all amounts previously distributed during the taxable year and all prior tax- able years (excluding any taxable year to which the provisions of this section do not apply and all taxable years preceding such year) to the shareholder which under subsection f) or paragraph (1) of this subsection were considered distribu- tions which were not dividends. [(e) Repealed. Pub. L. 89-389, § I(a)(2), Apr. 14, 1966, 80 Stat. III] (f) Distributions within 2 2-month period after close of taxable year (1) Distributions considered as distributions of un- distributed taxable income Any distribution of money made by a corpo- ration after the close of a taxable year with respect to which it was an electing small busi- ness corporation and on or before the 15th day of the third month following the close of such taxable year to a person who was a shar- eholder of such corporation at the close of such taxable year shall be treated as a distri- bution of the corporation's undistributed tax- able income for such year, to the extent such distribution (when added to the sum of all prior distributions of money made to such person by such corporation following the close of such year) does not exceed such per- son's share of the corporation's undistributed taxable income for such year. Any distribu- tion so treated shall, for purposes of this chapter, be considered a distribution which is not a dividend, and the earnings and profits of the corporation shall not be reduced by reason of such distribution. (2) Share of undistributed taxable Income For purposes of paragraph (1), a person's share of a corporation's undistributed taxable income for a taxable year is the amount re- Page 736 § 1375