26 U.S. Code § 1377 - Definitions and special rule
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(a) Pro rata share
For purposes of this subchapter—
(1) In general
Except as provided in paragraph (2), each shareholder’s pro rata share of any item for any taxable year shall be the sum of the amounts determined with respect to the shareholder—
(2) Election to terminate year
(A) In general
Under regulations prescribed by the Secretary, if any shareholder terminates the shareholder’s interest in the corporation during the taxable year and all affected shareholders and the corporation agree to the application of this paragraph, paragraph (1) shall be applied to the affected shareholders as if the taxable year consisted of 2 taxable years the first of which ends on the date of the termination.
(B) Affected shareholders
For purposes of subparagraph (A), the term “affected shareholders” means the shareholder whose interest is terminated and all shareholders to whom such shareholder has transferred shares during the taxable year. If such shareholder has transferred shares to the corporation, the term “affected shareholders” shall include all persons who are shareholders during the taxable year.
(b) Post-termination transition period
(1) In general
For purposes of this subchapter, the term “post-termination transition period” means—
(A) the period beginning on the day after the last day of the corporation’s last taxable year as an S corporation and ending on the later of—
(B) the 120-day period beginning on the date of any determination pursuant to an audit of the taxpayer which follows the termination of the corporation’s election and which adjusts a subchapter S item of income, loss, or deduction of the corporation arising during the S period (as defined in section 1368 (e)(2)), and
(2) Determination defined
For purposes of paragraph (1), the term “determination” means—
(3) Special rules for audit related post-termination transition periods
(A) No application to carryovers
(B) Limitation on application to distributions
Paragraph (1)(B) shall apply to a distribution described in section 1371 (e) only to the extent that the amount of such distribution does not exceed the aggregate increase (if any) in the accumulated adjustments account (within the meaning of section 1368 (e)) by reason of the adjustments referred to in such paragraph.
Source(Added Pub. L. 97–354, § 2,Oct. 19, 1982, 96 Stat. 1685; amended Pub. L. 104–188, title I, §§ 1306–1307(b),Aug. 20, 1996, 110 Stat. 1780; Pub. L. 108–311, title IV, § 407(a),Oct. 4, 2004, 118 Stat. 1190.)
A prior section 1377, added Pub. L. 85–866, title I, § 64(a),Sept. 2, 1958, 72 Stat. 1656; amended Pub. L. 94–455, title IX, § 902(b)(1), title XIX, § 1901(b)(32)(B)(iv),Oct. 4, 1976, 90 Stat. 1608, 1800, related to special rules applicable to earnings and profits of electing small business corporations, prior to the general revision of this subchapter by section 2 ofPub. L. 97–354.
2004—Subsec. (b)(3). Pub. L. 108–311added par. (3).
1996—Subsec. (a)(2). Pub. L. 104–188, § 1306, reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Under regulations prescribed by the Secretary, if any shareholder terminates his interest in the corporation during the taxable year and all persons who are shareholders during the taxable year agree to the application of this paragraph, paragraph (1) shall be applied as if the taxable year consisted of 2 taxable years the first of which ends on the date of the termination.”
Subsec. (b)(1)(A) to (C). Pub. L. 104–188, § 1307(a), struck out “and” at end of subpar. (A)(ii), added subpar. (B), and redesignated former subpar. (B) as (C).
Subsec. (b)(2)(A) to (C). Pub. L. 104–188, § 1307(b), added subpar. (A), redesignated subpar. (C) as (B), and struck out former subpars. (A) and (B) which read as follows:
“(A) a court decision which becomes final,
“(B) a closing agreement, or”.
Effective Date of 2004 Amendment
Amendment by Pub. L. 108–311effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which such amendment relates, see section 407(c) ofPub. L. 108–311, set out as a note under section 401 of this title.
Effective Date of 1996 Amendments
“(A) Notwithstanding section 1317 of the Small Business Job Protection Act of 1996 [Pub. L. 104–188, enacting provisions set out as notes under sections 641 and 1362 of this title], the amendments made by subsections (a) and (b) ofsection 1307 of such Act [amending this section] shall apply to determinations made after December 31, 1996.
“(B) In no event shall the 120-day period referred to in section 1377(b)(1)(B) of the Internal Revenue Code of 1986 (as added by such section 1307) expire before the end of the 120-day period beginning on the date of the enactment of this Act [Aug. 5, 1997].”
Amendment by Pub. L. 104–188applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) ofPub. L. 104–188, set out as a note under section 641 of this title.