Tax-Operation Corporation Law and Legal Definition

Tax-operation corporation refers to a corporation whose income is taxed through its shareholders rather than through the corporation itself. Only corporations with a limited number of shareholders can elect tax-operation corporation that is subject to the provisions of Internal Revenue Code. Tax-operation corporation is not subject to income tax on its taxable income. Instead, it files an information return and the shareholders report their pro rata share of the S corporation's gross income and are liable for the taxes due on the corporate income. Tax-operation corporation is required to file a return setting forth items of income, deductions, and distributions of property which affect the income tax liability of its shareholders [Fehlhaber v. Commissioner, 94 T.C. 863 (T.C. 1990)]. It is also known as subchapter S corporation or S corporation.