---
kind: "range"
citation: "26 C.F.R. §§ 1.481-1–1.481-5"
title: "26"
from: "1.481-1"
to: "1.481-5"
count: 5
url: "https://uscodex.org/cfr/26/1.481-1..1.481-5"
---

# §1.481-1. Adjustments in general.

- (a)
  - (1) [Section 481](/cfr/26/481.md) prescribes the rules to be followed in computing taxable income in cases where the taxable income of the taxpayer is computed under a method of accounting different from that under which the taxable income was previously computed. A change in method of accounting to which [section 481](/cfr/26/481.md) applies includes a change in the over-all method of accounting for gross income or deductions, or a change in the treatment of a material item. For rules relating to changes in methods of accounting, see [section 446(e)](/cfr/26/446.md?p=e) and [paragraph (e)](/cfr/26/1.446-1.md?p=e) of § 1.446-1. In computing taxable income for the taxable year of the change, there shall be taken into account those adjustments which are determined to be necessary solely by reason of such change in order to prevent amounts from being duplicated or omitted. The “year of the change” is the taxable year for which the taxable income of the taxpayer is computed under a method of accounting different from that used for the preceding taxable year.
  - (2) Unless the adjustments are attributable to a change in method of accounting initiated by the taxpayer, no part of the adjustments required by [subparagraph (1)](#a-1) of this paragraph shall be based on amounts which were taken into account in computing income (or which should have been taken into account had the new method of accounting been used) for taxable years beginning before January 1, 1954, or ending before August 17, 1954 (hereinafter referred to as pre-1954 years).
- (b) The adjustments specified in [section 481(a)](/cfr/26/481.md?p=a) and this section shall take into account inventories, accounts receivable, accounts payable, and any other item determined to be necessary in order to prevent amounts from being duplicated or omitted.
- (c)
  - (1) The term “adjustments”, as used in [section 481](/cfr/26/481.md), has reference to the net amount of the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) and [paragraph (b)](#b) of this section. In the case of a change in the over-all method of accounting, such as from the cash receipts and disbursements method to an accrual method, the term “net amount of the adjustments” means the consolidation of adjustments (whether the amounts thereof represent increases or decreases in items of income or deductions) arising with respect to balances in various accounts, such as inventory, accounts receivable, and accounts payable, at the beginning of the taxable year of the change in method of accounting. With respect to the portion of the adjustments attributable to pre-1954 years, it is immaterial that the same items or class of items with respect to which adjustments would have to be made (for the first taxable year to which [section 481](/cfr/26/481.md) applies) do not exist at the time the actual change in method of accounting occurs. For purposes of [section 481](/cfr/26/481.md), only the net dollar balance is to be taken into account. In the case of a change in the treatment of a single material item, the amount of the adjustment shall be determined with reference only to the net dollar balances in that particular account.
  - (2) If a change in method of accounting is voluntary (i.e., initiated by the taxpayer), the entire amount of the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) is generally taken into account in computing taxable income in the taxable year of the change, regardless of whether the adjustments increase or decrease taxable income. See, however, §§ [1.446-1(e)(3)](/cfr/26/1.446-1.md?p=e-3) and [1.481-4](/cfr/26/1.481-4.md) which provide that the Commissioner may prescribe the taxable year or years in which the adjustments are taken into account.
  - (3) If the change in method of accounting is involuntary (i.e., not initiated by the taxpayer), then only the amount of the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) that is attributable to taxable years beginning after December 31, 1953, and ending after August 16, 1954, (hereinafter referred to as post-1953 years) is taken into account. This amount is generally taken into account in computing taxable income in the taxable year of the change, regardless of whether the adjustments increase or decrease taxable income. See, however, §§ [1.446-1(e)(3)](/cfr/26/1.446-1.md?p=e-3) and [1.481-4](/cfr/26/1.481-4.md) which provide that the Commissioner may prescribe the taxable year or years in which the adjustments are taken into account. See also [§ 1.481-3](/cfr/26/1.481-3.md) for rules relating to adjustments attributable to pre-1954 years.
  - (4) For any adjustments attributable to post-1953 years that are taken into account entirely in the year of change and that increase taxable income by more than $3,000, the limitations on tax provided in [section 481(b)](/cfr/26/481.md?p=b) (1) or (2) apply. See [§ 1.481-2](/cfr/26/1.481-2.md) for rules relating to the limitations on tax provided by [sections 481(b)](/cfr/26/481.md?p=b) (1) and (2).
  - (5) A change in the method of accounting initiated by the taxpayer includes not only a change which he originates by securing the consent of the Commissioner, but also a change from one method of accounting to another made without the advance approval of the Commissioner. A change in the taxpayer's method of accounting required as a result of an examination of the taxpayer's income tax return will not be considered as initiated by the taxpayer. On the other hand, a taxpayer who, on his own initiative, changes his method of accounting in order to conform to the requirements of any Federal income tax regulation or ruling shall not, merely because of such fact, be considered to have made an involuntary change.
- (d) Any adjustments required under [section 481(a)](/cfr/26/481.md?p=a) that are taken into account during a taxable year must be properly taken into account for purposes of computing gross income, adjusted gross income, or taxable income in determining the amount of any item of gain, loss, deduction, or credit that depends on gross income, adjusted gross income, or taxable income.

# §1.481-2. Limitation on tax.

- (a) **Three-year allocation.** [Section 481(b)(1)](/cfr/26/481.md?p=b-1) provides a limitation on the tax under chapter 1 of the Internal Revenue Code for the taxable year of change that is attributable to the adjustments required under [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md) if the entire amount of the adjustments is taken into account in the year of change. If such adjustments increase the taxpayer's taxable income for the taxable year of the change by more than $3,000, then the tax for such taxable year that is attributable to the adjustments shall not exceed the lesser of the tax attributable to taking such adjustments into account in computing taxable income for the taxable year of the change under [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md), or the aggregate of the increases in tax that would result if the adjustments were included ratably in the taxable year of the change and the two preceding taxable years. For the purpose of computing the limitation on tax under [section 481(b)(1)](/cfr/26/481.md?p=b-1), the adjustments shall be allocated ratably to the taxable year of the change and the two preceding taxable years, whether or not the adjustments are in fact attributable in whole or in part to such years. The limitation on the tax provided in this paragraph shall be applicable only if the taxpayer used the method of accounting from which the change was made in computing taxable income for the two taxable years preceding the taxable year of the change.
- (b) **Allocation under new method of accounting.** [Section 481(b)(2)](/cfr/26/481.md?p=b-2) provides a second alternative limitation on the tax for the taxable year of change under chapter 1 of the Internal Revenue Code that is attributable to the adjustments required under [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md) where such adjustments increase taxable income for the taxable year of change by more than $3,000. If the taxpayer establishes from his books of account and other records what his taxable income would have been under the new method of accounting for one or more consecutive taxable years immediately preceding the taxable year of the change, and if the taxpayer in computing taxable income for such years used the method of accounting from which the change was made, then the tax attributable to the adjustments shall not exceed the smallest of the following amounts:
  - (1) The tax attributable to taking the adjustments into account in computing taxable income for the taxable year of the change under [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md);
  - (2) The tax attributable to such adjustments computed under the 3-year allocation provided in [section 481(b)(1)](/cfr/26/481.md?p=b-1), if applicable; or
  - (3) The net increase in the taxes under chapter 1 (or under corresponding provisions of prior revenue laws) which would result from allocating that portion of the adjustments to the one or more consecutive preceding taxable years to which properly allocable under the new method of accounting and from allocating the balance thereof to the taxable year of the change.
- (c) **Rules for computation of tax.**
  - (1) The first step in determining whether either of the limitations described in [section 481(b)](/cfr/26/481.md?p=b) (1) or (2) applies is to compute the increase in tax for the taxable year of the change that is attributable to the increase in taxable income for such year resulting solely from the adjustments required under [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md). This increase in tax is the excess of the tax for the taxable year computed by taking into account such adjustments under [section 481(a)](/cfr/26/481.md?p=a) over the tax computed for such year without taking the adjustments into account.
  - (2) The next step is to compute under [section 481(b)(1)](/cfr/26/481.md?p=b-1) the tax attributable to the adjustments referred to in [paragraph (c)(1)](#c-1) of this section for the taxable year of the change and the two preceding taxable years as if an amount equal to one-third of the net amount of such adjustments had been received or accrued in each of such taxable years. The increase in tax attributable to the adjustments for each such taxable year is the excess of the tax for such year computed with the allocation of one-third of the net adjustments to such taxable year over the tax computed without the allocation of any part of the adjustments to such year. For the purpose of computing the aggregate increase in taxes for such taxable years, there shall be taken into account the increase or decrease in tax for any taxable year preceding the taxable year of the change to which no adjustment is allocated under [section 481(b)(1)](/cfr/26/481.md?p=b-1) but which is affected by a net operating loss under [section 172](/cfr/26/172.md) or by a capital loss carryback or carryover under [section 1212](/cfr/26/1212.md), determined with reference to taxable years with respect to which adjustments under [section 481(b)(1)](/cfr/26/481.md?p=b-1) are allocated.
  - (3) In the event that the taxpayer satisfies the conditions set forth in [section 481(b)(2)](/cfr/26/481.md?p=b-2), the next step is to determine the amount of the net increase in tax attributable to the adjustments referred to in [paragraph (c)(1)](#c-1) of this section for:
    - (i) The taxable year of the change,
    - (ii) The consecutive taxable year or years immediately preceding the taxable year of the change for which the taxpayer can establish his taxable income under the new method of accounting, and
    - (iii) Any taxable year preceding the taxable year of the change to which no adjustment is allocated under [section 481(b)(2)](/cfr/26/481.md?p=b-2), but which is affected by a net operating loss or by a capital loss carryback or carryover determined with reference to taxable years with respect to which such adjustments are allocated.
  - (4) The tax for the taxable year of the change shall be the tax for such year, computed without taking any of the adjustments referred to in [paragraph (c)(1)](#c-1) of this section into account, increased by the smallest of the following amounts—
    - (i) The amount of tax for the taxable year of the change attributable solely to taking into account the entire amount of the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md);
    - (ii) The sum of the increases in tax liability for the taxable year of the change and the two immediately preceding taxable years that would have resulted solely from taking into account one-third of the amount of such adjustments required for each of such years as though such amounts had been properly attributable to such years (computed in accordance with [paragraph (c)(2)](#c-2) of this section); or
    - (iii) The net increase in tax attributable to allocating such adjustments under the new method of accounting (computed in accordance with [paragraph (c)(3)](#c-3) of this section).
  - (5)
    - (i) In the case of a change in method of accounting by a partnership, the adjustments required by [section 481](/cfr/26/481.md) shall be made with respect to the taxable income of the partnership but the limitations on tax under [section 481(b)](/cfr/26/481.md?p=b) shall apply to the individual partners. Each partner shall take into account his distributive share of the partnership items, as so adjusted, for the taxable year of the change. [Section 481(b)](/cfr/26/481.md?p=b) applies to a partner whose taxable income is so increased by more than $3,000 as a result of such adjustments to the partnership taxable income. It is not necessary for the partner to have been a member of the partnership for the two taxable years immediately preceding the taxable year of the change of the partnership's accounting method in order to have the limitation provided by [section 481(b)(1)](/cfr/26/481.md?p=b-1) apply. Further, a partner may apply [section 481(b)(2)](/cfr/26/481.md?p=b-2) even though he was not a member of the partnership for all the taxable years affected by the computation thereunder.
    - (ii) In the case of a change in method of accounting by an electing small business corporation under subchapter S, chapter 1 of the Code, the adjustments required by [section 481](/cfr/26/481.md) shall be made with respect to the taxable income of such electing corporation in the year of the change, but the limitations on tax under [section 481(b)](/cfr/26/481.md?p=b) shall apply to the individual shareholders. [Section 481(b)](/cfr/26/481.md?p=b) applies to a shareholder of an electing small business corporation whose taxable income is so increased by more than $3,000 as a result of such adjustments to such corporation's taxable income. It is not necessary for the shareholder to have been a member of the electing small business corporation, or for such corporation to have been an electing small business corporation, for the two taxable years immediately preceding the taxable year of the change of the corporation's accounting method in order to have the limitation provided by [section 481(b)(1)](/cfr/26/481.md?p=b-1) apply. Further, a shareholder may apply [section 481(b)(2)](/cfr/26/481.md?p=b-2), even though he was not a shareholder, or the corporation was not an electing small business corporation, for all the taxable years affected by the computation thereunder.
  - (6) For the purpose of the successive computations of the limitations on tax under [section 481(b)](/cfr/26/481.md?p=b) (1) or (2), if the treatment of any item under the provisions of the Internal Revenue Code of 1986 (or corresponding provisions of prior internal revenue laws) depends upon the amount of gross income, adjusted gross income, or taxable income (for example, medical expenses, charitable contributions, or credits against the tax), such item shall be determined for the purpose of each such computation by taking into account the proper portion of the amount of any adjustments required to be taken into account under [section 481](/cfr/26/481.md) in each such computation.
  - (7) The increase or decrease in the tax for any taxable year for which an assessment of any deficiency, or a credit or refund of any overpayment, is prevented by any law or rule of law, shall be determined by reference to the tax previously determined (within the meaning [section 1314(a)](/cfr/26/1314.md?p=a) for such year.
  - (8) In applying [section 7807(b)(1)](/cfr/26/7807.md?p=b-1), the provisions of chapter 1 (other than subchapter E, relating to tax on self-employment income) and chapter 2 of the Internal Revenue Code of 1939 shall be treated as the corresponding provisions of the Internal Revenue Code of 1939.
- (d) **Examples.** The application of [section 481(b)](/cfr/26/481.md?p=b) (1) and (2) may be illustrated by the following examples. Although the examples in this paragraph are based upon adjustments required in the case of a change in the over-all method of accounting, the principles illustrated would be equally applicable to adjustments required in the case of a change in method of accounting for a particular material item, provided the treatment of such adjustments is not specifically subject to some other provision of the Internal Revenue Code of 1986.

# §1.481-3. Adjustments attributable to pre-1954 years where change was not initiated by taxpayer.


If the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) and [§ 1.481-1](/cfr/26/1.481-1.md) are attributable to a change in method of accounting which was not initiated by the taxpayer, no portion of any adjustments which is attributable to pre-1954 years shall be taken into account in computing taxable income. For example, if the total adjustments in the case of a change in method of accounting which is not initiated by the taxpayer amount to $10,000, of which $4,000 is attributable to pre-1954 years, only $6,000 of the $10,000 total adjustments is required to be taken into account under [section 481](/cfr/26/481.md) in computing taxable income. The portion of the adjustments which is attributable to pre-1954 years is the net amount of the adjustments which would have been required if the taxpayer had changed his method of accounting in his first taxable year which began after December 31, 1953, and ended after August 16, 1954.


# §1.481-4. Adjustments taken into account with consent.

- (a) In addition to the terms and conditions prescribed by the Commissioner under [§ 1.446-1(e)(3)](/cfr/26/1.446-1.md?p=e-3) for effecting a change in method of accounting, including the taxable year or years in which the amount of the adjustments required by [section 481(a)](/cfr/26/481.md?p=a) is to be taken into account, or the methods of allocation described in [section 481(b)](/cfr/26/481.md?p=b), a taxpayer may request approval of an alternative method of allocating the amount of the adjustments under [section 481](/cfr/26/481.md). See [section 481(c)](/cfr/26/481.md?p=c). Requests for approval of an alternative method of allocation shall set forth in detail the facts and circumstances upon which the taxpayer bases its request. Permission will be granted only if the taxpayer and the Commissioner agree to the terms and conditions under which the allocation is to be effected. See [§ 1.446-1(e)](/cfr/26/1.446-1.md?p=e) for the rules regarding how to secure the Commissioner's consent to a change in method of accounting.
- (b) An agreement to the terms and conditions of a change in method of accounting under [§ 1.446-1(e)(3)](/cfr/26/1.446-1.md?p=e-3), including the taxable year or years prescribed by the Commissioner under that section (or an alternative method described in [paragraph (a)](#a) of this section) for taking the amount of the adjustments under [section 481(a)](/cfr/26/481.md?p=a) into account, shall be in writing and shall be signed by the Commissioner and the taxpayer. It shall set forth the items to be adjusted, the amount of the adjustments, the taxable year or years for which the adjustments are to be taken into account, and the amount of the adjustments allocable to each year. The agreement shall be binding on the parties except upon a showing of fraud, malfeasance, or misrepresentation of material fact.

# §1.481-5. Eligible terminated S corporation.

- (a) **Scope.** Section 481(d)(2) of the Internal Revenue Code (Code) and this section provide rules relating to the qualification of a corporation as an eligible terminated S corporation (ETSC). [Paragraph (b)](#b) of this section sets forth the requirements a corporation must meet to qualify as an ETSC. [Paragraph (c)](#c) of this section describes certain transfers and other events that are disregarded for purposes of determining whether a corporation qualifies as an ETSC, as well as the treatment of revocations for which the effective date is the first day of the taxable year during which the revocation is made. [Paragraph (d)](#d) of this section contains examples illustrating the rules of this section.
- (b) **ETSC qualification.** For a C corporation to qualify as an ETSC, it must satisfy the following requirements:
  - (1) The corporation must have been an S corporation on December 21, 2017;
  - (2) During the 2-year period beginning on December 22, 2017, the corporation must have made a valid revocation of its S election under [section 1362(d)(1)](/cfr/26/1362.md?p=d-1) and the regulatory provisions in this part under section 1362 of the Code (revocation); and
  - (3) Except as provided in [paragraph (c)](#c) of this section, the owners of the shares of stock of the corporation must be the same (and in identical proportions) on both:
    - (i) December 22, 2017; and
    - (ii) **The day on which the revocation is made.**
- (c) **Special rules—**
  - (1) **Certain disregarded events.** The following events are disregarded for purposes of determining whether the requirement in [paragraph (b)(3)](#b-3) of this section is satisfied:
    - (i) Transfers of stock between a shareholder and that shareholder's trust treated as wholly owned by that shareholder under [subpart E](/cfr/26/subpartE.md) of subchapter J of chapter 1 of the Code;
    - (ii) Transfers of stock between a shareholder and an entity owned by that shareholder that is disregarded as separate from its owner under [§ 301.7701-2(c)(2)(i)](/cfr/26/301.7701-2.md?p=c-2-i) of the Procedure and Administration Regulations;
    - (iii) An election by a shareholder trust to be treated as part of a decedent's estate under section 645 of the Code or the termination of an election under that section;
    - (iv) A change in the status of a shareholder trust from one type of eligible S corporation shareholder trust described in section 1361(c)(2)(A) of the Code to another type of eligible S corporation shareholder trust; for example, a trust to which the shares of stock were transferred pursuant to the terms of a will (testamentary trust) described in [section 1361(c)(2)(A)(iii)](/cfr/26/1361.md?p=c-2-A-iii) that elects to become an electing small business trust described in section [1361(c)(2)(A)(v)](/cfr/26/1361.md?p=c-2-A-v) and [(e)](/cfr/26/1361.md?p=c-2-A-e); and
    - (v) **A transaction that includes more than one of the events described in this paragraph (c)(1).**
  - (2) **Certain revocations.** For purposes of paragraphs [(b)(2)](#b-2) and [(b)(3)(ii)](#b-3-ii) of this section, a revocation with an effective date that is the first day of the taxable year during which the revocation is made pursuant to [section 1362(d)(1)(C)(i)](/cfr/26/1362.md?p=d-1-C-i) may be treated as having been made on the day the revocation was made or on the effective date of the revocation.
- (d) **Examples.** [Paragraphs (d)(1) through (3)](#d-1..d-3) of this section (Examples 1 through 3) illustrate the rules of this section. For purposes of [paragraphs (d)(1) through (3)](#d-1..d-3) of this section (Examples 1 through 3), as of December 1, 2017, X is a calendar year S corporation with 100 shares of stock outstanding that is owned equally by unrelated individuals A and B. Pursuant to [section 1362(d)(1)](/cfr/26/1362.md?p=d-1) and §§ [1.1362-2](/cfr/26/1.1362-2.md) and [1.1362-6](/cfr/26/1.1362-6.md), X made a valid revocation of its S election on March 15, 2019, effective on January 1, 2019. X treats the revocation as having been made on March 15, 2019, for purposes of paragraphs [(b)(2)](#b-2) and [(b)(3)(ii)](#b-3-ii). At all times, X has a single class of stock outstanding. [Paragraphs (d)(1) through (3)](#d-1..d-3) of this section (Examples 1 through 3) describe all relevant transactions involving the X stock from December 1, 2017, until March 15, 2019.
  - (1) **Example 1—**
    - (i) **Facts.** On June 5, 2018, A contributed 20 of its shares of X stock to Y, a wholly owned limited liability company that is disregarded as an entity separate from A pursuant to [§ 301.7701-2(c)(2)(i)](/cfr/26/301.7701-2.md?p=c-2-i). On June 14, 2018, A contributed all of its interest in Y to Trust, which was a revocable trust treated as a wholly owned grantor trust of A pursuant to sections [671](/cfr/26/671.md) and [676](/cfr/26/676.md) of the Code. On December 27, 2018, B sold 10 shares of its X stock to C, an unrelated person.
    - (ii) **Analysis.** X is an ETSC if it satisfies the requirements of [paragraph (b)](#b) of this section.
      - (A) **S corporation.** X was an S corporation on December 21, 2017. Therefore, X satisfies the requirement of [paragraph (b)(1)](#b-1) of this section.
      - (B) **Date of revocation.** X made a valid revocation of its S election pursuant to [section 1362(d)(1)](/cfr/26/1362.md?p=d-1) on March 15, 2019, which is during the two-year period specified in [paragraph (b)(2)](#b-2) of this section. Therefore, X satisfies the requirement of [paragraph (b)(2)](#b-2) of this section.
      - (C) **Ownership.** For purposes of the requirement in [paragraph (b)(3)](#b-3) of this section, the relevant dates are: December 22, 2017, and March 15, 2019 (the date X made a revocation of its S corporation status).

        (1) A's ownership interest. As of December 22, 2017, A owned 50 shares of the outstanding shares of X stock. On June 5, 2018, A contributed 20 of its shares of X stock to Y (Transfer). On June 14, 2018, A contributed all of its interest in Y to Trust (Contribution). Both the Transfer and the Contribution are disregarded for purposes of determining whether the requirement of [paragraph (b)(3)](#b-3) of this section is satisfied. See paragraphs [(c)(2)](#c-2) and [(1)](#c-1) of this section, respectively. Therefore, A owns 50 shares of the outstanding stock of X on March 15, 2019.

        (2) B's ownership interest. As of December 22, 2017, B owned 50 shares of the outstanding shares of X stock. On December 27, 2018, B sold 10 shares to C. Therefore, B owns 40 shares of the outstanding stock of X on March 15, 2019.

        (3) C's ownership interest. As of December 22, 2017, C owned no shares of X stock. On December 27, 2018, C purchased 10 shares from B. Therefore, C owns 10 shares of the outstanding stock of X on March 15, 2019.

        (4) Failure to satisfy the requirement in [paragraph (b)(3)](#b-3) of this section. As described in paragraphs (d)(1)(ii)(C)(2) and (3) of this section, B's and C's interest in X were not in the same proportions on December 22, 2017, and March 15, 2019. Therefore, X does not satisfy the requirement of [paragraph (b)(3)](#b-3) of this section and does not qualify as an ETSC.

    - (iii) **Restoration of interests prior to end of PTTP.** If C transferred its shares of X stock back to B on February 1, 2019, then on December 22, 2017, and March 15, 2019, A and B will have owned 50 shares of the outstanding stock of X. Under these facts, X satisfies the requirement of [paragraph (b)(3)](#b-3) of this section and qualifies as an ETSC.
  - (2) **Example 2—**
    - (i) **Facts.** The facts are the same as in [paragraph (d)(1)(i)](#d-1-i) of this section, except that B sold 10 shares of its X stock to C on December 18, 2017, in addition to the sale of 10 shares of X stock on December 27, 2018.
    - (ii) **Analysis.** The analysis in paragraph [(d)(1)(ii)(A)](#d-1-ii-A) and [(B)](#d-1-ii-B) of this section remains the same regarding the requirements of paragraph [(b)(1)](#b-1) and [(2)](#b-2) of this section. With respect to the requirement of [paragraph (b)(3)](#b-3) of this section, on December 22, 2017, A owned 50%, B owned 40%, and C owned 10% of the outstanding stock of X. As in paragraph (d)(1)(ii)(C)(1) of this section, the Transfer and the Contribution are disregarded for purposes of determining whether the requirement of [paragraph (b)(3)](#b-3) of this section is satisfied. Therefore, on March 15, 2019, A owned 50% (50 shares), B owned 30% (30 shares), and C owned 20% (20 shares) of the outstanding shares of X. Even though A, B, and C owned shares of X on December 22, 2017, B's and C's proportionate ownership interest of X stock was not the same on December 22, 2017, and March 15, 2019. Therefore, X does not satisfy the requirement of [paragraph (b)(3)](#b-3) of this section and does not qualify as an ETSC.
  - (3) **Example 3—**
    - (i) **Facts.** The facts are the same as in [paragraph (d)(1)(i)](#d-1-i) of this section, except that X made a valid revocation of its S election on November 1, 2019, effective on January 1, 2020.
    - (ii) **Analysis.** The analysis in [paragraph (d)(1)(ii)(A) through (C)](#d-1-ii-A..d-1-ii-C) of this section remains the same regarding the requirements of [paragraph (b)(1) through (3)](#b-1..b-3) of this section, except that the relevant dates are: December 22, 2017, and November 1, 2019 (the date X made a revocation of its S corporation status). Although the effective date of X's revocation of its S election (January 1, 2020) occurs after the conclusion of the two-year period specified in [paragraph (b)(2)](#b-2) of this section, it is irrelevant for purposes of determining whether the requirements of paragraph [(b)(2)](#b-2) and [(3)](#b-3) of this section are satisfied.