Bill 3531

                    Current Status

Bill Number:               3531
Ratification Number:       577
Act Number:                480
Introducing Body:          House
Subject:                   Relating to:  Corporate income tax
                           exemptions, exemption from state income tax,
                           deduction one-half capital gains prohibited,
                           Deduction, allowed in computing net income,
                           election

(A480, R577, H3531)

AN ACT TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 12-7-235, SO AS TO EXEMPT FROM THE CORPORATE INCOME TAX CORPORATIONS WITH VALID SUBCHAPTER S ELECTIONS PURSUANT TO THE INTERNAL REVENUE CODE OF 1954, TO PROVIDE THAT SHAREHOLDERS OF THE EXEMPT CORPORATIONS, INCLUDING NONRESIDENT SHAREHOLDERS, SHALL PAY INCOME TAX ON THEIR PROPORTIONATE SHARES OF THE CORPORATIONS' TAXABLE INCOME AND TO PROVIDE THAT SUBCHAPTER S PROVISIONS SHALL GOVERN FOR INCOME TAX PURPOSES; TO AMEND SECTION 12-7-300, RELATING TO INCOME TAX LIABILITIES OF PARTNERS, SO AS TO PROVIDE THAT THE TAX LIABILITIES OF PARTNERS MUST BE DETERMINED ACCORDING TO SUBCHAPTER K OF THE INTERNAL REVENUE CODE OF 1954; TO AMEND SECTION 12-7-330, AS AMENDED, RELATING TO ORGANIZATIONS EXEMPT FROM STATE INCOME TAX, SO AS TO ADOPT THE PROVISIONS OF SECTIONS 501 THROUGH 514 OF THE INTERNAL REVENUE CODE OF 1954 FOR PURPOSES OF DETERMINING EXEMPTIONS AND TO DELETE ITEMS RENDERED OBSOLETE BECAUSE OF THE ADOPTION OF THE FEDERAL PROVISIONS; TO AMEND SECTION 12-7-660, AS AMENDED, RELATING TO DEDUCTIONS PERMITTED TO DETERMINE ADJUSTED GROSS INCOME, SO AS TO PROHIBIT THE DEDUCTION ALLOWED FOR ONE-HALF OF CAPITAL GAINS FOR GAIN REPRESENTED BY RECAPTURE OF DEPRECIATION PURSUANT TO SECTIONS 1245 AND 1250 OF THE INTERNAL REVENUE CODE OF 1954 PREVIOUSLY ALLOWED BY SECTION 12-7-700 OF THE 1976 CODE; TO AMEND SECTION 12-7-700, AS AMENDED, RELATING TO DEDUCTIONS ALLOWED IN COMPUTING NET INCOME, SO AS TO MAKE A TECHNICAL CORRECTION; AND TO AMEND SECTION 12-7-975, RELATING TO THE MANNER WHICH CORPORATIONS MAY ELECT TO DETERMINE GAIN OR LOSS WITH RESPECT TO LIQUIDATIONS, SO AS TO PROVIDE THAT CORPORATIONS MAY ELECT FOR THE TREATMENT OF CERTAIN STOCK PURCHASES AS ASSETS ACQUIRED THE METHOD FOUND IN SECTION 338 OF THE INTERNAL REVENUE CODE OF 1954 AND MAY ELECT FOR THE DISTRIBUTION OF STOCK THE METHOD FOUND IN SECTION 302 OF THE INTERNAL REVENUE CODE OF 1954.

Be it enacted by the General Assembly of the State of South Carolina:

Corporate income tax exemptions

SECTION 1. Article 3, Chapter 7, of Title 12 of the 1976 Code is amended by adding:

"Section 12-7-235. A small business corporation is exempt from the tax imposed by Section 12-7-230 if a valid election under Subchapter S of the Internal Revenue Code of 1954 is in effect. The shareholders of an electing corporation must include in their South Carolina taxable income their proportionate share of the corporation's South Carolina taxable income. A small business corporation with shareholders who are nonresidents of this State is ineligible for the exemption allowed by this section unless the corporation files with its South Carolina return for the taxable year an agreement executed by all nonresident shareholders in which those shareholders agree to pay South Carolina income tax on their proportionate part of the corporation's South Carolina income. For South Carolina income tax purposes, an electing small business corporation and the shareholders must be treated in the same manner provided in Subchapter S of the Internal Revenue Code of 1954 and applicable Federal Regulations and the corporation shall file with the Commission an information return as may be required by the Commission."

Tax liabilities

SECTION 2. Section 12-7-300 of the 1976 Code is amended to read:

"Section 12-7-300. A partnership as such is not subject to the income tax imposed in this chapter. Persons carrying on a business as partners are liable for income tax only in their separate or individual capacities. Liability of each individual partner or individual must be determined in accordance with Subchapter K of the Internal Revenue Code of 1954 as amended through December 31, 1983, and all applicable regulations."

Exemption from state income tax

SECTION 3. Section 12-7-330 of the 1976 Code, as last amended by Act 424 of 1978, is further amended to read:

"Section 12-7-330. The following organizations are exempt from taxation under this chapter:

(1) Organizations described in Sections 501 through 514 of the Internal Revenue Code of 1954 are exempt to the extent provided in those sections as amended through December 31, 1983, and all applicable regulations. The exemption in this section does not preclude license fees required under Chapter 19 of Title 12;

(2) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;

(3) Pension, profit-sharing, stock-bonus and annuity trusts, or combinations thereof, established by employers for the purpose of distributing both the principal and income thereof exclusively to eligible employees, or the beneficiaries of the employees, and constituted so that no part of the corpus or income may be used for, or diverted to any purpose other than for the exclusive benefit of the employees or their beneficiaries, if there is no discrimination as to eligibility requirements, contributions, or benefits in favor of officers, shareholders, supervisors, or highly paid employees. The interest of individual participating employees is irrevocable and nonforfeitable to the extent of any contributions made by them. The Tax Commission may promulgate regulations regarding the qualification of the trusts for exemption under this item. The exemption of any trust under the Internal Revenue Code of 1954, as amended, is a prima facie basis for exemption of the trust under this item;

(4) Nonprofit corporations created for the purpose of providing water supply and sewage disposal or a combination of those services organized pursuant to Sections 33-35-10 to 33-35-170."

Deduction one-half capital gains prohibited

SECTION 4. Item (6) of Section 12-7-660 of the 1976 Code is amended to read:

"(6) One-half of gains and losses arising from the sale or exchange of capital assets, as defined in this chapter, after allowance for expenses relating to such sale or exchange,

provided that gain represented by recapture of depreciation under Sections 1245 and 1250 of the Internal Revenue Code of 1954, as amended through December 31, 1983, and all applicable regulations previously allowed or allowable under Section 12-7-700(8) of the 1976 Code do not qualify for this adjustment; and".

Deduction allowed in computing net income

SECTION 5. The unnumbered item of Section 12-7-700 added by subsection F of Section 29, Part II, of Act 151 of 1983, is amended to read:

"(20) Fees and expenditures as allowed in Section 195 (relating to start-up expenditures), Section 248 (relating to organizational expenditures), and Section 709 (relating to treatment of organization and syndication fees) of the Internal Revenue Code as amended through December 31, 1982."

Election

SECTION 6. Section 12-7-975 of the 1976 Code, as added by the provisions of subsection H, Section 29, Part II of Act 151 of 1983, is amended to read:

"Section 12-7-975. Notwithstanding the provisions of Section 12-7-970, a corporation may elect, for the purpose of determining the basis for computing the amount of gain or loss on sales or exchanges in connection with liquidations, to use the methods referred to in Section 337 of the Internal Revenue Code of 1954 as amended through December 31, 1982, and all applicable regulations pertaining to this section.

Notwithstanding the provisions of Section 12-7-970, a corporation may also elect for the treatment of certain stock purchases as assets acquired the method found in Section 338 of the Internal Revenue Code of 1954, as amended through December 31, 1982, and all applicable regulations pertaining to this section, and may elect for the distribution and redemption of stock the method found in Section 302 of the Internal Revenue Code of 1954, as amended through December 31, 1982, and all applicable regulations pertaining to this section."

Time effective

SECTION 7. This act, upon approval of the Governor, is effective for tax years beginning after December 31, 1983.