(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.

(A) In general 
Under regulations prescribed by the Secretary, if any shareholder terminates the shareholders 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.

(A) the period beginning on the day after the last day of the corporations last taxable year as an S corporation and ending on the later of

(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 corporations 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 corporations election under section 1362 (a) had terminated for a previous taxable year.

(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.

(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.