Title 26 — Internal Revenue CodeRelease 119-73
§1377 Definitions and Special Rule
Title 26 › Subtitle 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
Summary
In an S corporation, your share of the company's income, losses, and other items is figured by spreading each item evenly across every day of the year, then dividing each day's portion among the shares outstanding that day. If a shareholder completely ends their interest during the year, the corporation and all affected shareholders can agree to treat the year as two separate tax years, with the first ending on the termination date. The rules also define the "post-termination transition period" after a company stops being an S corporation: it runs at least 1 year after the last S corporation day (or until the return due date, if later), plus 120-day windows after an audit adjustment or a determination that the S election had ended in an earlier year.
Full Legal Text
Title 26, §1377
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of this subchapter—
(1)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)(A)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)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)(1)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)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.
(B)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)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
Apr 6, 2026
Release point: 119-73