26 U.S.C. § 7519 — Required payments for entities electing not to have required taxable year

(a) General rule This section applies to a partnership or S corporation for a tax year if both of these are true: it has an election under section 444 in effect for that year, letting it use a non-standard tax year; and the "required payment" figured under subsection (b) — for that year or any earlier year — is more than $500. (b) Required payment Here's how the required payment is figured, step by step. Start with the entity's "net base year income" (explained in subsection (d)). Multiply that by the "applicable percentage" (explained below) and by the "adjusted highest section 1 rate." That adjusted rate is the highest individual tax rate in effect at the end of the base year, plus one percentage point — or, for election years beginning in 1987, a flat 36%. That gives one number. Now subtract the "net required payment balance," which is past required payments minus past refunds (explained in subsection (e)). What's left is the required payment. (c) Refund of payments If, for a given election year, the net required payment balance already paid in turns out to be more than the required payment actually owed, the entity gets a refund of the difference. The entity also gets a refund of its whole net required payment balance if, during a year, either its section 444 election ends, or the entity is liquidated. The refund is paid on whichever date is later: April 15 of the year after the relevant year ends, or 90 days after the entity files its refund claim. (d) Net base year income To find "net base year income," start with the entity's net income for its base year (the tax year right before the election year). Multiply that by the "deferral ratio" — the number of months in the base year's deferral period, divided by the number of months in the entity's whole tax year. Then add one more piece: take the payments the entity made to partners or shareholders during the base year (called "applicable payments"), multiply that total by the deferral ratio, and subtract the applicable payments actually made during the base year's deferral period. If the result is positive, add it in. "Net income" is figured this way: for a partnership, it's the total of the items described in section 702(a) — except credits and tax-exempt income — but never less than zero. For an S corporation, it's the same idea using the items described in section 1366(a). If the S corporation used to be a C corporation, its taxable income for the base year counts as its net income for that year. Any dollar limits that would normally cap how much of an item a partner or shareholder can claim are ignored for this calculation. "Applicable payment" means an amount the partnership or S corporation pays that a partner or shareholder must include in gross income. It does not include gain from a sale or exchange of property between the partner or shareholder and the entity, or a dividend an S corporation pays. The "applicable percentage" comes from this table, based on the year the election year begins: 1987 is 25%; 1988 is 50%; 1989 is 75%; and 1990 or later is 100%. There's an exception, though: the applicable percentage is always 100%, unless more than half of the entity's net income — figured as if it had never made the section 444 election — would have gone to partners or shareholders entitled to the benefit described in section 806(e)(2)(C) of the Tax Reform Act of 1986. Guaranteed payments (the kind described in section 707(c)) are treated specially: they don't count as "applicable payments," and the partnership's net income is figured without counting them. (e) Other definitions and special rules "Deferral period" has the meaning given in section 444(b)(4). "Base year" means the tax year right before the applicable election year. "Applicable election year" means any tax year for which the entity has a section 444 election in effect. A partnership or S corporation with a section 444 election must include, on any required return or statement, whatever information the Secretary requires to carry out this section. "Net required payment balance" means the total of all required payments made under this section for earlier applicable election years, minus the total of all refunds allowed to the entity under subsection (c) for those earlier years. (f) Administrative provisions Except as this subsection or IRS regulations provide otherwise, a payment required by this section is assessed and collected the same way as a tax imposed by subtitle C. The payment is due on or before April 15 of the year after the calendar year in which the applicable election year begins, unless the Secretary sets a later date. For interest purposes, this payment is treated as a tax — but no interest applies to a refund of a payment made under this section. If someone fails to pay this amount on time, a penalty of 10% of the underpayment applies. "Underpayment" means the required amount minus whatever was actually paid on time. No penalty applies if the failure is shown to be due to reasonable cause and not willful neglect. The negligence and fraud penalty rules also treat this payment as a tax. And if a partnership or S corporation willfully fails to comply with this section, its section 444 election stops applying. (g) Regulations The Secretary must issue regulations needed to carry out this section and section 280H, including rules for special situations — such as when two or more applicable election years begin in the same calendar year, or when the base year is shorter than 12 months.