§1377 Definitions and Special Rule

Summary

Tells how to split a corporation’s items among shareholders, defines the “post‑termination transition period,” and says how to make or end an S election. For splitting items, each item is spread evenly across every day of the taxable year and then divided among the shares that existed on each day. If a shareholder ends their ownership during the year and everyone affected plus the corporation agree, the year can be treated as 2 taxable years, with the first ending on the day ownership ended. “Affected shareholders” means the person who ended their interest and anyone who got shares from them that year; if shares were given back to the corporation, it means everyone who was a shareholder that year. The “post‑termination transition period” means whichever of these applies: the period from the day after the last S year ends until the later of 1 year after that day or the tax return due date (with extensions); the 120‑day period after an audit determination that changes S‑period items; or the 120‑day period after a determination that the S election ended for a prior year. “Determination” means the kind defined in section 1313(a) or an agreement with the Secretary that the company failed to qualify. Two limited exceptions modify how the 120‑day audit rule applies to certain other rules and distributions. Any S election or revocation must be made in the manner the Secretary’s regulations require.