Another issue that needs to be considered for an S-Corp with substantial E&P is the passive investment income tax under §1375. This section applies specifically to an S-Corp that has carryover E&P from the period it was a C-Corp. If the gross passive investment income, including interest, dividends, certain types of rent, etc., exceeds 25% of gross receipts, the S-Corp may be subject to the tax on its net passive investment income. This section does not apply if the S-Corp does not have any accumulated E&P, but if it does and it has excess passive investment income, then some of the excess net passive investment income may be subject to tax at the highest corporate income tax rate in effect, currently 35%. In XYZ’s case, this tax will need
