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TITLE 26-INTERNAL REVENUE CODE § 1376. Adjustment to basis of stock of, and indebted- ness owing, shareholders (a) Increase in basis of stock for amounts treated as dividends The basis of a shareholder's stock In an elect- ing small business corporation shall be In- creased by the amount required to be included in the gross income of such shareholder under section 1373(b), but only to the extent to which such amount Is included in his gross income in his return, increased or decreased by any ad- Justment of such amount in any redetermina- tion of the shareholder's tax liability. (b) Reduction in basis of stock and indebtedness for shareholder's portion of corporation net operat- ing loss (1) Reduction in basis of stock The basis of a shareholder's stock in an electing small business corporation shall be reduced (but not below zero) by an amount equal to the amount of his portion of the cor- poration's net operating loss for any taxable year attributable to such stock (as deter- mined under section 1374(c)). (2) Reduction in basis of indebtedness The basis of any Indebtedness of an electing small business corporation to a shareholder of such corporation shall be reduced (but not below zero) by an amount equal to the amount of the shareholder's portion of the corporation's net operating loss for any tax- able year (a0s determined under section 1374(c)), but only to the extent that such amount exceeds the adjusted basis of the stock of such corporation held by the share- holder. (Added Pub. L. 85-866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1655.) ErnEcTrvE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 64(e) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 172 of this title. SEcTIoN REFERE TO IN OTHR SECTIONS This section Is referred to in sections 1016, 1372, 1374 of this title. § 1377. Special rules applicable to earnings and prof- its of electing small business corporations (a) Reduction for undistributed taxable income The accumulated earnings and profits of an electing small business corporation as of the close of its taxable year shall be reduced to the extent that its undistributed taxable income for such year is required to be included in the gross income of the shareholders of such corporation under section 1373(b). (b) Current earnings and profits not reduced by any amount not allowable as deduction The earnings and profits of an electing small business corporation for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not al. lowable as a deduction in computing its taxable income (as provided in section 1373(d)) for such taxable year. (c) Earnings and profits not affected by net operating loss The earnings and profits and the accumulat- ed earnings and profits of an electing small business corporation shall not be affected by any item of gross income or any deduction taken into account in determining the amount of any net operating loss (computed as provided in section 1374(c)) of such corporation. (d) Distributions of undistributed taxable income pre- viously taxed to shareholders For purposes of determining whether a distri- bution by an electing small business corpora- tion constitutes a distribution of such corpora- tion's undistributed taxable income previously taxed to shareholders (as provided for in sec- tion 1375(d)), the earnings and profits of such corporation for the taxable year in which the distribution is made shall be computed without regard to section 312(k). Such computation shall be made without regard to section 312(k) only for such purposes. (Added Pub. L. 85-866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1656, and amended Pub. L. 94- 455, title IX, § 902(b)(1), title XIX, § 1901(b)(32)(B)(lv), Oct. 4, 1976, 90 Stat. 1608, 1800.) AMENOMENTS 1976-Subsec. W). Pub. L. 94-455, § 902(b)(1), added subsec. (d), and section 1901(b)(32)(B)(iv) of Pub. L. 94-455 substituted "section 312(k)" for "section 312(m)" in two places in subsec. (d). EpFCTIvE DATE OF 1976 AmMEaINT Section 902(b)(2) of Pub. L. 94-455 provided that: "The amendment made by this subsection enactLig subsec. (d) of this section] shall apply to taxable years beginning after December 31, 1975." Amendment of subsec. (d) by section 1901(b)(32)(B)(iv) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. Ern'cr'vz DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 64(e) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 1'72 of this title. SECTION REFERM TO IN OnhER SECrxONS This section is referred to in section 1372 of this title. § 1378. Tax imposed on certain capital gains (a) General rule If for a taxable year of an electing small busi- ness corporation- (1) the net capital gain of such corporation exceeds $25,000, and exceeds 50 percent of its taxable income for such year, and (2) the taxable income of such corporation for such year exceeds $25,000, there is hereby imposed a tax (computed under subsection (b)) on the income of such corpora- tion. (b) Amount of tax The tax imposed by subsection (a) shall be the lower of- § 1376 Page 738