(a) If for the taxable year an Alabama S corporation has accumulated earnings and profits at the close of the taxable year derived from years during which the corporation was an Alabama C corporation, and gross receipts more than 25 percent of which are passive investment income, then there is imposed a tax on the income of the corporation for the taxable year. The tax shall be computed by multiplying the excess net passive income by five percent.

(b) (1) For purposes of this section:

a. Except as provided in paragraph b below, the term "excess net passive income" means an amount which bears the same ratio to the net passive income for the taxable year as (i) the amount by which the passive investment income for the taxable year exceeds 25 percent of the gross receipts for the taxable year, bears to (ii) the passive investment income for the taxable year.

b. The amount of the excess net passive income for any taxable year shall not exceed the corporation's taxable income for the taxable year as determined under Section 40-18-161 without regard to the deduction under subdivisions (a)(14) and (a)(15) of Section 40-18-35 and under Section 40-18-35.1.

(2) The term "net passive income" means passive investment income, reduced by the deductions allowable under this chapter which are directly connected with the production of the income, other than deductions allowable by subdivisions (a)(14) and (a)(15) of Section 40-18-35 and by Section 40-18-35.1.

(3) The terms "passive investment income" and "gross receipts" shall have the same respective meanings as when used in 26 U.S.C. § 1362(d)(3).

(4) Notwithstanding subdivision (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the Alabama S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in Section 40-18-174.

(c) If the Alabama S corporation establishes to the satisfaction of the Department of Revenue that it determined in good faith that it had no earnings and profits at the close of a taxable year derived from years during which it was an Alabama C corporation, and during a reasonable period of time after it was determined that it did have such earnings and profits, the earnings and profits were distributed, the Department of Revenue may waive the tax imposed by subsection (a) for the taxable year.