1120-US: What constitutes a terminating election under IRC 1377(a)(2)? (FAQ)

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Question

What constitutes a terminating election under IRC 1377(a)(2)?

Answer

According to IRC 1377, if any shareholder terminates interest in the S corporation during the taxable year, and all affected shareholders agree, each shareholder's pro rata share shall be the sum of the amounts determined with respect to the shareholder by (A) 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 sharers outstanding on such day, as if the taxable year consisted of 2 taxable years, the first of which ends on the date of the termination.

Affected shareholders is any shareholder whose interest is terminated and all other shareholders to whom the terminating shareholder transferred shares during the taxable year. If the terminating shareholder has transferred shares to the corporation, all persons who are shareholders during the taxable year are affected.

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