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Title 26, Internal Revenue CodeRelease 119-110

§1377 Definitions and Special Rule

Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter S — Tax Treatment of S Corporations and Their Shareholders › PART IV — DEFINITIONS; MISCELLANEOUS › § 1377

Last updated Sep 22, 2026|Official source

Summary

The rule tells how to divide an S corporation’s tax items among shareholders for a year. Each item is spread evenly across the days in the year, and each day’s portion is split among the shares that existed that day. If a shareholder ends ownership during the year and everyone affected and the corporation agree under IRS rules, the year can be treated as two years, with the first ending on the day ownership ended. "Affected shareholders" means the person who left and anyone who received their shares that year (or, if the shares went back to the company, all shareholders that year). It also defines "post-termination transition period" as three possible time spans: from the day after the last S year until the later of one year or the return due date (including extensions), a 120-day period after an audit adjustment of S-period items, or a 120-day period after a determination that the S election had ended earlier. "Determination" means an official audit finding under section 1313(a) or an agreement with the IRS. The 120-day audit window won’t change certain carryover rules and limits how much it applies to some distributions. Any election or revocation must be made as the IRS regulations require.

Full Legal Text

Title 26, §1377

Internal Revenue Code, Source: USLM XML via OLRC

(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—
(A)by assigning an equal portion of such item to each day of the taxable year, and
(B)then by dividing that portion pro rata among the shares outstanding on such day.
(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—
(i)the day which is 1 year after such last day, or
(ii)the due date for filing the return for such last year as an S corporation (including extensions),
(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
(C)the 120-day period beginning on the date of a determination that the corporation’s election under section 1362(a) had terminated for a previous taxable year.
(2)Determination defined
For purposes of paragraph (1), the term “determination” means—
(A)a determination as defined in section 1313(a), or
(B)an agreement between the corporation and the Secretary that the corporation failed to qualify as an S corporation.
(3)Special rules for audit related post-termination transition periods
(A)No application to carryovers
Paragraph (1)(B) shall not apply for purposes of section 1366(d)(3).
(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.
(c)Manner of making elections, etc.
Any election under this subchapter, and any revocation under section 1362(d)(1), shall be made in such manner as the Secretary shall by regulations prescribe.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

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 of Pub. L. 97–354.

Amendments

2004—Subsec. (b)(3). Pub. L. 108–311 added 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”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2004 AmendmentAmendment by Pub. L. 108–311 effective 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) of Pub. L. 108–311, set out as a note under section 401 of this title.

Effective Date

of 1996

Amendments

Pub. L. 105–34, title XVI, § 1601(c)(2), Aug. 5, 1997, 111 Stat. 1087, provided that: “(A) Notwithstanding section 1317 of the Small Business Job Protection Act of 1996 [Pub. L. 104–188, enacting provisions set out as notes under section 641 and 1362 of this title], the

Amendments

made by subsections (a) and (b) of section 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. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as a note under section 1361 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 1377

Title 26, Internal Revenue Code

Last Updated

Sep 22, 2026

Release point: 119-110