applies when the S election terminates, regardless of whether the termination occurs voluntarily because the corporation revokes its S election or involuntarily (e.g., an ineligible shareholder acquires stock in the corporation).
If an S corporation converts to a C corporation, it can still make tax-free cash distributions to the extent of AAA during the PTTP
. According to IRC section 1377(b)(1), the PTTP
runs from the day after the last day of the corporation's last taxable year as an S corporation to the later of one year after that day or the due date for filing the return, including extensions, for the corporation's last year as an S corporation.
Previous rules gave two definitions for PTTP
. The first was 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 the day which is one year after the beginning or the due date for filing the return for the last year that the business was an S corporation.
represents a last chance to bail previously taxed cash and basis out of the corporation in a tax-free manner.
In addition, the statute provides for an additional PTTP
in the event of a subsequent IRS audit.
1371(e) allows a one-year (or more) post-termination transition period (PTTP
) during which a corporation may make distributions of its accumulated adjustments account (AAA) following termination of S status.
1366 losses can be claimed only during a post-termination transition period (PTTP
), up to the amount of stock basis as of the last day of the PTTP
However, if the S election terminates, distributions of AAA during the post-termination transition period (PTTP
) are reported on Form 5452.
Election to distribute E&P Separate election statement first during post-termination signed by a corporate officer transition period (PTTP
1366(d)(3) post-termination transition-period (PTTP
The IRS held in FSA 200207015 (10) that when an S shareholder has suspended losses and the corporation terminates S status, the sale of some of the company's stock (with a zero basis) does not reduce the losses; the shareholder's use of the sales proceeds to buy additional stock generates basis for loss at the end of the post-termination transition period (PTTP