26 U.S.C. § 1378: Taxable year of S corporation

For purposes of this subtitle, the taxable year of an S corporation shall be a permitted year. is a year ending December 31, or is any other accounting period for which the corporation establishes a business purpose to the satisfaction of the Secretary. The amendments made by this section [amending this section and sections 267, 441, and 706 of this title] shall apply to taxable years beginning after December 31, 1986 . such change shall be treated as initiated by the partnership, S corporation, or personal service corporation, such change shall be treated as having been made with the consent of the Secretary, and with respect to any partner or shareholder of an S corporation which is required to include the items from more than 1 taxable year of the partnership or S corporation in any 1 taxable year, income in excess of expenses of such partnership or corporation for the short taxable year required by such amendments shall be taken into account ratably in each of the first 4 taxable years beginning after December 31, 1986 , unless such partner or shareholder elects to include all such income in the the [sic] partner’s or shareholder’s taxable year with or within which the partnership’s or S corporation’s short taxable year ends. The adjusted basis of any partner’s interest in a partnership or shareholder’s stock in an S corporation shall be determined as if all of the income to be taken into account ratably in the 4 taxable years referred to in paragraph (2)(C) were included in gross income for the 1st of such taxable years. If any interest in a partnership or stock in an S corporation is disposed of before the last taxable year in the spread period, all amounts which would be included in the gross income of the partner or shareholder for subsequent taxable years in the spread period under paragraph (2)(C) and attributable to the interest or stock disposed of shall be included in gross income for the taxable year in which the disposition occurs. For purposes of the preceding sentence, the term ‘spread period’ means the period consisting of the 4 taxable years referred to in paragraph (2)(C).”