§ 1377. Definitions and special rule
(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
(3)
Special rules for audit related post-termination transition periods
(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.