[Federal Register Volume 61, Number 247 (Monday, December 23, 1996)]
[Rules and Regulations]
[Pages 67454-67458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31966]
[[Page 67454]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 18, and 602
[TD 8696]
RIN 1545-AE94
Definitions Under Subchapter S of the Internal Revenue Code
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final regulations for S corporations
and their shareholders relating to the definitions and the special rule
provided in section 1377 of the Internal Revenue Code. The final
regulations reflect changes to the law made by the Subchapter S
Revision Act of 1982 and the Small Business Job Protection Act of 1996.
These final regulations are necessary to provide guidance for taxpayers
to comply with the law.
EFFECTIVE DATE: These regulations are effective January 1, 1997.
FOR FURTHER INFORMATION CONTACT: Laura Howell, (202) 622-3060 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1462. Responses to this collection of information
are required to verify the event giving rise to the making of an
election under section 1377(a)(2) by an S corporation.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per respondent varies from .2 hour to
.5 hour, depending on individual circumstances, with an estimated
average of .25 hour.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On July 12, 1995, the IRS published in the Federal Register a
notice of proposed rulemaking containing proposed amendments to the
Income Tax Regulations (26 CFR part 1) under section 1377 of the
Internal Revenue Code (Code). These amendments were proposed to conform
the regulations to the addition of section 1377 to the Code by section
2 of the Subchapter S Revision Act of 1982, Public Law 97-354 (1982-2
C.B. 702, 710). Written comments responding to this notice were
received. No public hearing was held because no hearing was requested.
On August 20, 1996, the Small Business Job Protection Act of 1996,
Public Law 104-188, 110 Stat. 1755, was enacted. Sections 1306 and 1307
of the Small Business Job Protection Act of 1996 amended section 1377
of the Code. After consideration of all comments received, and the
changes to section 1377 by the Small Business Job Protection Act of
1996, the proposed amendments are adopted as revised by this Treasury
decision.
Explanation of Provisions
Days on Which Stock Has Not Been Issued
Section 1366(a)(1) requires a shareholder of an S corporation to
take into account the shareholder's pro rata share of the corporation's
items of income, loss, deduction, and credit. Section 1377(a) provides
that, except in the case of an election under section 1377(a)(2), each
shareholders's pro rata share of any item for any taxable year shall be
the sum of the amounts determined with respect to the shareholder by
assigning an equal portion of such item to each day of the taxable
year, and then by dividing that portion pro rata among the shares
outstanding on such day. The proposed regulations provide that solely
for purposes of determining a shareholder's pro rata share of an item,
an S corporation's taxable year does not include any day on which the
corporation has no shareholders.
One commentator suggested that a person who beneficially owns the
corporation should be treated as a shareholder of an S corporation for
any day on which the corporation has assets and conducts business, but
has not issued any stock. The final regulations revise the rule
concerning no shareholder days and provide that, solely for purposes of
determining a shareholder's pro rata share of an item for a taxable
year under section 1377(a), the beneficial owners of the corporation
are treated as the shareholders of the corporation for any day on which
the corporation has not issued any stock.
When a Post-Termination Transition Period Arises
The proposed regulations provide that a post-termination transition
period (PTTP) arises following the termination under section 1362(d) of
a corporation's S election. By example, the proposed regulations state
that a PTTP arises when a C corporation acquires the assets of an S
corporation in a transaction to which section 381(a)(2) applies.
Several commentators requested clarification concerning whether the
example results in a termination under section 1362(d) of the
corporation's election to be an S corporation or merely the cessation
of the S corporation's taxable year. The final regulations clarify
that, pursuant to the rule in section 1377(b)(1), a PTTP arises the day
after the last day that an S corporation was in existence if a C
corporation acquires the assets of an S corporation in a transaction to
which section 381(a)(2) applies.
Changes to Section 1377 Made by the Small Business Job Protection
Act of 1996
Agreement to Terminate Year
Section 1306 of the Small Business Job Protection Act of 1996
amended section 1377(a)(2) to provide that only the affected
shareholders and the corporation must consent to an election to treat
the corporation's taxable year as two taxable years in the event of a
complete termination of a shareholder's interest in the corporation. In
addition, the terminating election under section 1377(a)(2) applies
only to the affected shareholders. H.R. Conf. Rep. No. 104-737, 104th
Cong., 2d Sess. 222 (1986). The term affected shareholders is defined
as the shareholder whose interest is terminated and all shareholders to
whom the shareholder has transferred shares during the taxable year. If
the shareholder has transferred shares to the corporation, affected
shareholders include all persons who are shareholders during the
taxable year. The final regulations reflect these changes made to
section 1377(a)(2) by the Small Business Job Protection Act of 1996.
[[Page 67455]]
Expansion of Post-Termination Transition Period
Section 1307(a) of the Small Business Job Protection Act of 1996
expands the definition of PTTP under section 1377(b)(1) to include the
120-day period beginning on the date of any determination pursuant to
an audit of the taxpayer that follows the termination of the S
corporation's election and that adjusts a subchapter S item of income,
loss, or deduction of the S corporation during the S period. In
addition, the definition of determination is expanded to include any
determination under section 1313(a). The effect of this change is to
expand the definition of determination to include a final disposition
by the Secretary of a claim for refund and certain agreements between
the Secretary and any person relating to the tax liability of the
person. The final regulations reflect these changes made to section
1377(b) by section 1307 of the Small Business Job Protection Act of
1996.
Coordination With Other Provisions and Other Clarifying Changes
In response to comments, the final regulations add cross-references
and make certain clarifying revisions. The proposed regulations
coordinate the application of the terminating election under section
1377(a)(2) with the election that may be made under Sec. 1.1368-1(g)(2)
when there is a qualifying disposition by: (i) Removing the section
1377 reference in Sec. 1.1368-1(g)(1) because all of the rules for a
section 1377(a)(2) terminating election are now entirely stated in
these final regulations; and (ii) amending Sec. 1.1368-1(g)(2) to
provide that a qualifying disposition election cannot be made if a
transfer results in a termination of the shareholder's entire interest
as a shareholder.
The proposed regulations provide that a section 1377(a)(2)
terminating election must contain the written consent of each
shareholder. The final regulations revise the shareholder consent rules
by removing the written consent requirement for each shareholder. The
final regulations merely require an S corporation to include a
statement by the corporation that each affected shareholder and the
corporation consent to the election.
In response to comments, the final regulations clarify that a
shareholder's entire interest in an S corporation is not terminated if
the shareholder retains ownership of any stock, including an interest
treated as stock under Sec. 1.1361-1(l), that would result in the
shareholder continuing to be considered a shareholder of the
corporation for purposes of section 1362(a)(2). In addition, the final
regulations clarify that a shareholder whose entire interest in an S
corporation is terminated in an event for which a terminating election
was made is not required to consent to an election under section
1377(a)(2) for a subsequent termination of another shareholder within
the taxable year unless the shareholder is an affected shareholder with
respect to the subsequent termination.
Effective Date
These regulations apply to taxable years of an S corporation
beginning after December 31, 1996.
Special Analysis
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the notice of proposed
rulemaking preceding the regulations was issued prior to March 29,
1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these regulations was submitted
to the Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Laura Howell, Office
of Assistant Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Parts 1 and 18
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 18, and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.1377-1 also issued under 26 U.S.C. 1377 (a)(2) and
(c). * * *
Par. 2. Section 1.1368-0 is amended by:
1. Revising the entry for paragraphs (g) and (g)(1) of Sec. 1.1368-
1.
2. Adding an entry for paragraph (g)(2)(iv) of Sec. 1.1368-1.
The revisions and addition read as follows:
Sec. 1.1368-0 Table of contents.
* * * * *
Sec. 1.1368-1 Distributions by S corporations.
* * * * *
(g) Special rule.
(1) Election to terminate year under Sec. 1.1368-1(g)(2).
(2) * * *
(iv) Coordination with election under section 1377(a)(2).
* * * * *
Par. 3. Section 1.1368-1 is amended by:
1. Revising the heading for paragraph (g).
2. Revising paragraph (g)(1).
3. Adding paragraph (g)(2)(iv).
The revisions and addition read as follows:
Sec. 1.1368-1 Distributions by S corporations.
* * * * *
(g) Special rule--(1) Election to terminate year under Sec. 1.1368-
1(g)(2). If an election is made under paragraph (g)(2) of this section
to terminate the year when there is a qualifying disposition, this
section applies as if the taxable year consisted of separate taxable
years, the first of which ends at the close of the day on which there
is a qualifying disposition of stock.
(2) * * *
(iv) Coordination with election under section 1377(a)(2). If the
event resulting in a qualifying disposition also results in a
termination of a shareholder's entire interest as described in
Sec. 1.1377-1(b)(4), the election under this paragraph (g)(2) cannot be
made. Rather, the election under section 1377(a)(2) and Sec. 1.1377-
1(b) may be made. See Sec. 1.1377-1(b) (concerning the election under
section 1377(a)(2)).
Par. 4. Sections 1.1377-0, 1.1377-1, 1.1377-2, and 1.1377-3 are
added under the undesignated center heading ``Small Business
Corporations and Their Shareholders'' to read as follows:
Sec. 1.1377-0 Table of contents.
The following table of contents is provided to facilitate the use
of Secs. 1.1377-1 through 1.1377-3:
[[Page 67456]]
Sec. 1.1377-1 Pro rata share
(a) Computation of pro rata shares.
(1) In general.
(2) Special rules.
(i) Days on which stock has not been issued.
(ii) Determining shareholder for day of stock disposition.
(b) Election to terminate year.
(1) In general.
(2) Affected shareholders.
(3) Effect of the terminating election.
(i) In general.
(ii) Due date of S corporation return.
(iii) Taxable year of inclusion by shareholder.
(iv) S Corporation that is a partner in a partnership.
(4) Determination of whether an S shareholder's entire interest
has terminated.
(5) Time and manner of making a terminating election.
(i) In general.
(ii) Affected shareholders required to consent.
(iii) More than one terminating election.
(c) Examples.
Sec. 1.1377-2 Post-termination transition period
(a) In general.
(b) Special rules for post-termination transition period.
(c) Determination defined.
(d) Date a determination becomes effective.
(1) Determination under section 1313(a).
(2) Written agreement.
(3) Implied agreement.
Sec. 1.1377-3 Effective date
Sec. 1.1377-1 Pro rata share.
(a) Computation of pro rata shares--(1) In general. For purposes of
subchapter S of chapter 1 of the Internal Revenue Code and this
section, each shareholder's pro rata share of any S corporation item
described in section 1366(a) for any taxable year is the sum of the
amounts determined with respect to the shareholder by assigning an
equal portion of the item to each day of the S corporation's taxable
year, and then dividing that portion pro rata among the shares
outstanding on that day. See paragraph (b) of this section for rules
pertaining to the computation of each shareholder's pro rata share when
an election is made under section 1377(a)(2) to treat the taxable year
of an S corporation as if it consisted of two taxable years in the case
of a termination of a shareholder's entire interest in the corporation.
(2) Special rules--(i) Days on which stock has not been issued.
Solely for purposes of determining a shareholder's pro rata share of an
item for a taxable year under section 1377(a) and this section, the
beneficial owners of the corporation are treated as the shareholders of
the corporation for any day on which the corporation has not issued any
stock.
(ii) Determining shareholder for day of stock disposition. A
shareholder who disposes of stock in an S corporation is treated as the
shareholder for the day of the disposition. A shareholder who dies is
treated as the shareholder for the day of the shareholder's death.
(b) Election to terminate year--(1) In general. If a shareholder's
entire interest in an S corporation is terminated during the S
corporation's taxable year and the corporation and all affected
shareholders agree, the S corporation may elect under section
1377(a)(2) and this paragraph (b) (terminating election) to apply
paragraph (a) of this section to the affected shareholders as if the
corporation's taxable year consisted of two separate taxable years, the
first of which ends at the close of the day on which the shareholder's
entire interest in the S corporation is terminated. If the event
resulting in the termination of the shareholder's entire interest also
constitutes a qualifying disposition as described in Sec. 1.1368-
1(g)(2)(i), the election under Sec. 1.1368-1(g)(2) cannot be made. An S
corporation may not make a terminating election if the cessation of a
shareholder's interest occurs in a transaction that results in a
termination under section 1362(d)(2) of the corporation's election to
be an S corporation. (See section 1362(e)(3) for an election to have
items assigned to each short taxable year under normal tax accounting
rules in the case of a termination of a corporation's election to be an
S corporation.) A terminating election is irrevocable and is effective
only for the terminating event for which it is made.
(2) Affected shareholders. For purposes of the terminating election
under section 1377(a)(2) and paragraph (b) of this section, 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
includes all persons who are shareholders during the taxable year.
(3) Effect of the terminating election--(i) In general. An S
corporation that makes a terminating election for a taxable year must
treat the taxable year as separate taxable years for all affected
shareholders for purposes of allocating items of income (including tax-
exempt income), loss, deduction, and credit; making adjustments to the
accumulated adjustments account, earnings and profits, and basis; and
determining the tax effect of a distribution. An S corporation that
makes a terminating election must assign items of income (including
tax-exempt income), loss, deduction, and credit to each deemed separate
taxable year using its normal method of accounting as determined under
section 446(a).
(ii) Due date of S corporation return. A terminating election does
not affect the due date of the S corporation's return required to be
filed under section 6037(a) for a taxable year (determined without
regard to a terminating election).
(iii) Taxable year of inclusion by shareholder. A terminating
election does not affect the taxable year in which an affected
shareholder must take into account the affected shareholder's pro rata
share of the S corporation's items of income, loss, deduction, and
credit.
(iv) S corporation that is a partner in a partnership. A
terminating election by an S corporation that is a partner in a
partnership is treated as a sale or exchange of the corporation's
entire interest in the partnership for purposes of section 706(c)
(relating to closing the partnership taxable year), if the taxable year
of the partnership ends after the shareholder's interest is terminated
and within the taxable year of the S corporation (determined without
regard to any terminating election) for which the terminating election
is made.
(4) Determination of whether an S shareholder's entire interest has
terminated. For purposes of the terminating election under section
1377(a)(2) and paragraph (b) of this section, a shareholder's entire
interest in an S corporation is terminated on the occurrence of any
event through which a shareholder's entire stock ownership in the S
corporation ceases, including a sale, exchange, or other disposition of
all of the stock held by the shareholder; a gift under section 102(a)
of all the shareholder's stock; a spousal transfer under section
1041(a) of all the shareholder's stock; a redemption, as defined in
section 317(b), of all the shareholder's stock, regardless of the tax
treatment of the redemption under section 302; and the death of the
shareholder. A shareholder's entire interest in an S corporation is not
terminated if the shareholder retains ownership of any stock (including
an interest treated as stock under Sec. 1.1361-1(l)) that would result
in the shareholder continuing to be considered a shareholder of the
corporation for purposes of section 1362(a)(2). Thus, in determining
whether a shareholder's entire interest in an S corporation has been
terminated, any interest held by the shareholder as a creditor,
employee,
[[Page 67457]]
director, or in any other non-shareholder capacity is disregarded.
(5) Time and manner of making a terminating election--(i) In
general. An S corporation makes a terminating election by attaching a
statement to its timely filed original or amended return required to be
filed under section 6037(a) (that is, a Form 1120S) for the taxable
year during which a shareholder's entire interest is terminated. A
single election statement may be filed by the S corporation for all
terminating elections for the taxable year. The election statement must
include--
(A) A declaration by the S corporation that it is electing under
section 1377(a)(2) and this paragraph (b) to treat the taxable year as
if it consisted of two separate taxable years;
(B) Information setting forth when and how the shareholder's entire
interest was terminated (for example, a sale or gift);
(C) The signature on behalf of the S corporation of an authorized
officer of the corporation under penalties of perjury; and
(D) A statement by the corporation that the corporation and each
affected shareholder consent to the S corporation making the
terminating election.
(ii) Affected shareholders required to consent. For purposes of
paragraph (b)(5)(i)(D) of this section, a shareholder of the S
corporation for the taxable year is a shareholder as described in
section 1362(a)(2). For example, the person who under Sec. 1.1362-
6(b)(2) must consent to a corporation's S election in certain special
cases is the person who must consent to the terminating election. In
addition, an executor or administrator of the estate of a deceased
affected shareholder may consent to the terminating election on behalf
of the deceased affected shareholder.
(iii) More than one terminating election. A shareholder whose
entire interest in an S corporation is terminated in an event for which
a terminating election was made is not required to consent to a
terminating election made with respect to a subsequent termination
within the same taxable year unless the shareholder is an affected
shareholder with respect to the subsequent termination.
(c) Examples. The following examples illustrate the provisions of
this section:
Example 1. Shareholder's pro rata share in the case of a partial
disposition of stock. (i) On January 6, 1997, X incorporates as a
calendar year corporation, issues 100 shares of common stock to each
of A and B, and files an election to be an S corporation for its
1997 taxable year. On July 24, 1997, B sells 50 shares of X stock to
C. Thus, in 1997, A owned 50 percent of the outstanding shares of X
on each day of X's 1997 taxable year, B owned 50 percent on each day
from January 6, 1997, to July 24, 1997 (200 days), and 25 percent
from July 25, 1997, to December 31, 1997 (160 days), and C owned 25
percent from July 25, 1997, to December 31, 1997 (160 days).
(ii) Because B's entire interest in X is not terminated when B
sells 50 shares to C on July 24, 1997, X cannot make a terminating
election under section 1377(a)(2) and paragraph (b) of this section
for B's sale of 50 shares to C. Although B's sale of 50 shares to C
is a qualifying disposition under Sec. 1.1368-1(g)(2)(i), X does not
make an election to terminate its taxable year under Sec. 1.1368-
1(g)(2). During its 1997 taxable year, X has nonseparately computed
income of $720,000.
(iii) For each day in X's 1997 taxable year, A's daily pro rata
share of X's nonseparately computed income is $1,000 ($720,000/360
days x 50%). Thus, A's pro rata share of X's nonseparately computed
income for 1997 is $360,000 ($1,000 x 360 days). B's daily pro rata
share of X's nonseparately computed income is $1,000 ($720,000/
360 x 50%) for the first 200 days of X's 1997 taxable year, and $500
($720,000/360 x 25%) for the following 160 days in 1997. Thus, B's
pro rata share of X's nonseparately computed income for 1997 is
$280,000 (($1,000 x 200 days) + ($500 x 160 days)). C's daily pro
rata share of X's nonseparately computed income is $500 ($720,000/
360 x 25%) for 160 days in 1997. Thus, C's pro rata share of X's
nonseparately computed income for 1997 is $80,000 ($500 x 160 days).
Example 2. Shareholder's pro rata share when an S corporation
makes a terminating election under section 1377(a)(2). (i) On
January 6, 1997, X incorporates as a calendar year corporation,
issues 100 shares of common stock to each of A and B, and files an
election to be an S corporation for its 1997 taxable year. On July
24, 1997, B sells B's entire 100 shares of X stock to C. With the
consent of B and C, X makes an election under section 1377(a)(2) and
paragraph (b) of this section for the termination of B's entire
interest arising from B's sale of 100 shares to C. As a result of
the election, the pro rata shares of B and C are determined as if
X's taxable year consisted of two separate taxable years, the first
of which ends on July 24, 1997, the date B's entire interest in X
terminates. Because A is not an affected shareholder as defined by
section 1377(a)(2)(B) and paragraph (b)(2) of this section, the
treatment as separate taxable years does not apply to A.
(ii) During its 1997 taxable year, X has nonseparately computed
income of $720,000. Under X's normal method of accounting, $200,000
of the $720,000 of nonseparately computed income is allocable to the
period of January 6, 1997, through July 24, 1997 (the first deemed
taxable year), and the remaining $520,000 is allocable to the period
of July 25, 1997, through December 31, 1997 (the second deemed
taxable year).
(iii) B's pro rata share of the $200,000 of nonseparately
computed income for the first deemed taxable year is determined by
assigning the $200,000 of nonseparately computed income to each day
of the first deemed taxable year ($200,000/200 days = $1,000 per
day). Because B held 50% of X's authorized and issued shares on each
day of the first deemed taxable year, B's daily pro rata share for
each day of the first deemed taxable year is $500 ($1,000 per day
x 50%). Thus, B's pro rata share of the $200,000 of nonseparately
computed income for the first deemed taxable year is $100,000 ($500
per day x 200 days). B must report this amount for B's taxable
year with or within which X's full taxable year ends (December 31,
1997).
(iv) C's pro rata share of the $520,000 of nonseparately
computed income for the second deemed taxable year is determined by
assigning the $520,000 of nonseparately computed income to each day
of the second deemed taxable year ($520,000/160 days = $3,250 per
day). Because C held 50% of X's authorized and issued shares on each
day of the second deemed taxable year, C's daily pro rata shares for
each day of the second deemed taxable year is $1,625 ($3,250 per day
x 50%). Therefore, C's pro rata share of the $520,000 of
nonseparately computed income is $260,000 ($1,625 per day x 160
days). C must report this amount for C's taxable year with or within
which X's full taxable year ends (December 31, 1997).
Sec. 1.1377-2 Post-termination transition period.
(a) In general. For purposes of subchapter S of chapter 1 of the
Internal Revenue Code (Code) and this section, the term post-
termination transition period means--
(1) 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 the last taxable year
as an S corporation (including extensions);
(2) 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) 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.
(b) Special rules for post-termination transition period. Pursuant
to section 1377(b)(1) and paragraph (a)(1) of this section, a post-
termination transition period arises the day after the last day that an
S corporation was in existence if a C corporation acquires the assets
of the S corporation in a transaction to which section 381(a)(2)
applies. However, if an S corporation acquires the assets of another S
corporation in a
[[Page 67458]]
transaction to which section 381(a)(2) applies, a post-termination
transition period does not arise. (See Sec. 1.1368-2(d)(2) for the
treatment of the acquisition of the assets of an S corporation by
another S corporation in a transaction to which section 381(a)(2)
applies.) The special treatment under section 1371(e)(1) of
distributions of money by a corporation with respect to its stock
during the post-termination transition period is available only to
those shareholders who were shareholders in the S corporation at the
time of the termination.
(c) Determination defined. For purposes of section 1377(b)(1) and
paragraph (a) of this section, the term determination means--
(1) A determination as defined in section 1313(a);
(2) A written agreement between the corporation and the
Commissioner (including a statement acknowledging that the
corporation's election to be an S corporation terminated under section
1362(d)) that the corporation failed to qualify as an S corporation;
(3) For a corporation subject to the audit and assessment
provisions of subchapter C of chapter 63 of subtitle A of the Code, the
expiration of the period specified in section 6226 for filing a
petition for readjustment of a final S corporation administrative
adjustment finding that the corporation failed to qualify as an S
corporation, provided that no petition was timely filed before the
expiration of the period; and
(4) For a corporation not subject to the audit and assessment
provisions of subchapter C of chapter 63 of subtitle A of the Code, the
expiration of the period for filing a petition under section 6213 for
the shareholder's taxable year for which the Commissioner has made a
finding that the corporation failed to qualify as an S corporation,
provided that no petition was timely filed before the expiration of the
period.
(d) Date a determination becomes effective--(1) Determination under
section 1313(a). A determination under paragraph (c)(1) of this section
becomes effective on the date prescribed in section 1313 and the
regulations thereunder.
(2) Written agreement. A determination under paragraph (c)(2) of
this section becomes effective when it is signed by the district
director having jurisdiction over the corporation (or by another
Service official to whom authority to sign the agreement is delegated)
and by an officer of the corporation authorized to sign on its behalf.
Neither the request for a written agreement nor the terms of the
written agreement suspend the running of any statute of limitations.
(3) Implied agreement. A determination under paragraph (c) (3) or
(4) of this section becomes effective on the day after the date of
expiration of the period specified under section 6226 or 6213,
respectively.
Sec. 1.1377-3 Effective date.
Sections 1.1377-1 and 1.1377-2 apply to taxable years of an S
corporation beginning after December 31, 1996.
PART 18--TEMPORARY INCOME TAX REGULATIONS UNDER THE SUBCHAPTER S
REVISION ACT OF 1982
Par. 5. The authority citation for part 18 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 18.1377-1 [Removed]
Par. 6. Section 18.1377-1 is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 7. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 8. In Sec. 602.101, paragraph (c) is amended as follows:
1. Removing the following entry from the table:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
CFR part or section where identified and
described Current OMB control No.
------------------------------------------------------------------------
* * * * *
18.1377-1................................ 1545-0130
* * * * *
------------------------------------------------------------------------
2. Adding an entry in numerical order to the table to read as
follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
CFR part of section where identified and
described Current OMB control No.
------------------------------------------------------------------------
* * * * *
1.1377-1................................. 1545-1462
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: November 1, 1996.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 96-31966 Filed 12-20-96; 8:45 am]
BILLING CODE 4830-01-U
