diff --git a/lib/coffee-script/lexer.js b/lib/coffee-script/lexer.js
index edf5c9f6f1..68dcf19fcd 100644
--- a/lib/coffee-script/lexer.js
+++ b/lib/coffee-script/lexer.js
@@ -22,6 +22,7 @@
       this.indebt = 0;
       this.outdebt = 0;
       this.indents = [];
+      this.oldDebts = [];
       this.ends = [];
       this.tokens = [];
       this.chunkLine = opts.line || 0;
@@ -347,7 +348,13 @@
       this.seenFor = false;
       size = indent.length - 1 - indent.lastIndexOf('\n');
       noNewlines = this.unfinished();
-      if (size - this.indebt === this.indent) {
+      if (size - this.indebt === this.indent || size + this.outdebt === this.indent) {
+        if (size - this.indebt === this.indent) {
+          this.outdebt = 0;
+        }
+        if (size + this.outdebt === this.indent) {
+          this.indebt = 0;
+        }
         if (noNewlines) {
           this.suppressNewlines();
         } else {
@@ -361,42 +368,50 @@
           this.suppressNewlines();
           return indent.length;
         }
-        diff = size - this.indent + this.outdebt;
+        diff = size - this.indent;
         this.token('INDENT', diff, 0, indent.length);
+        if (this.indebt) {
+          this.oldDebts.push(this.indebt);
+        } else if (this.outdebt) {
+          this.oldDebts.push(-this.outdebt);
+        } else {
+          this.oldDebts.push(0);
+        }
         this.indents.push(diff);
         this.ends.push('OUTDENT');
         this.outdebt = this.indebt = 0;
+        this.indent = size;
       } else {
         this.indebt = 0;
         this.outdentToken(this.indent - size, noNewlines, indent.length);
       }
-      this.indent = size;
       return indent.length;
     };
 
     Lexer.prototype.outdentToken = function(moveOut, noNewlines, outdentLength) {
-      var dent, len;
+      var indent, oldDebt;
       while (moveOut > 0) {
-        len = this.indents.length - 1;
-        if (this.indents[len] === void 0) {
+        indent = last(this.indents);
+        oldDebt = last(this.oldDebts);
+        if (indent == null) {
+          break;
+        }
+        if (indent > moveOut && (!(oldDebt > 0) || indent - moveOut !== oldDebt)) {
+          break;
+        }
+        this.indents.pop();
+        this.oldDebts.pop();
+        moveOut -= indent;
+        this.indent -= indent;
+        this.pair('OUTDENT');
+        this.token('OUTDENT', indent, 0, outdentLength);
+        if (oldDebt > 0 && indent + moveOut === oldDebt) {
+          this.indebt = oldDebt;
           moveOut = 0;
-        } else if (this.indents[len] === this.outdebt) {
-          moveOut -= this.outdebt;
-          this.outdebt = 0;
-        } else if (this.indents[len] < this.outdebt) {
-          this.outdebt -= this.indents[len];
-          moveOut -= this.indents[len];
-        } else {
-          dent = this.indents.pop() + this.outdebt;
-          moveOut -= dent;
-          this.outdebt = 0;
-          this.pair('OUTDENT');
-          this.token('OUTDENT', dent, 0, outdentLength);
+          break;
         }
       }
-      if (dent) {
-        this.outdebt -= moveOut;
-      }
+      this.outdebt = moveOut;
       while (this.value() === ';') {
         this.tokens.pop();
       }
@@ -702,7 +717,7 @@
         if ('OUTDENT' !== wanted) {
           this.error("unmatched " + tag);
         }
-        this.indent -= size = last(this.indents);
+        size = last(this.indents);
         this.outdentToken(size, true);
         return this.pair(tag);
       }
diff --git a/src/lexer.coffee b/src/lexer.coffee
index bfb60c4654..dc2b104c96 100644
--- a/src/lexer.coffee
+++ b/src/lexer.coffee
@@ -40,6 +40,7 @@ exports.Lexer = class Lexer
     @indebt   = 0              # The over-indentation at the current level.
     @outdebt  = 0              # The under-outdentation at the current level.
     @indents  = []             # The stack of all current indentation levels.
+    @oldDebts = []             # Stack of old indebts and outdebts, to go with indents
     @ends     = []             # The stack for pairing up tokens.
     @tokens   = []             # Stream of parsed tokens in the form `['TYPE', value, line]`.
 
@@ -316,7 +317,13 @@ exports.Lexer = class Lexer
     @seenFor = no
     size = indent.length - 1 - indent.lastIndexOf '\n'
     noNewlines = @unfinished()
-    if size - @indebt is @indent
+    #console.log size, @indent, @indents, @indebt, @outdebt, noNewlines
+
+    if size - @indebt is @indent or size + @outdebt is @indent
+      if size - @indebt is @indent
+        @outdebt = 0
+      if size + @outdebt is @indent
+        @indebt = 0
       if noNewlines then @suppressNewlines() else @newlineToken 0
       return indent.length
 
@@ -325,39 +332,50 @@ exports.Lexer = class Lexer
         @indebt = size - @indent
         @suppressNewlines()
         return indent.length
-      diff = size - @indent + @outdebt
+      diff = size - @indent
       @token 'INDENT', diff, 0, indent.length
+
+      # Keep track of old debts, so that we can get back on track later.
+
+      if @indebt
+        @oldDebts.push @indebt
+      else if @outdebt
+        @oldDebts.push -@outdebt
+      else
+        @oldDebts.push 0
+
       @indents.push diff
       @ends.push 'OUTDENT'
       @outdebt = @indebt = 0
+      @indent = size
     else
       @indebt = 0
       @outdentToken @indent - size, noNewlines, indent.length
-    @indent = size
     indent.length
 
   # Record an outdent token or multiple tokens, if we happen to be moving back
   # inwards past several recorded indents.
   outdentToken: (moveOut, noNewlines, outdentLength) ->
     while moveOut > 0
-      len = @indents.length - 1
-      if @indents[len] is undefined
+      indent  = last @indents
+      oldDebt = last @oldDebts
+
+      break if not indent?
+      break if indent > moveOut and (not (oldDebt > 0) or indent - moveOut != oldDebt)
+
+      @indents.pop()
+      @oldDebts.pop()
+      moveOut -= indent
+      @indent -= indent
+      @pair 'OUTDENT'
+      @token 'OUTDENT', indent, 0, outdentLength
+
+      if oldDebt > 0 and indent + moveOut is oldDebt
+        @indebt = oldDebt
         moveOut = 0
-      else if @indents[len] is @outdebt
-        moveOut -= @outdebt
-        @outdebt = 0
-      else if @indents[len] < @outdebt
-        @outdebt -= @indents[len]
-        moveOut  -= @indents[len]
-      else
-        dent = @indents.pop() + @outdebt
-        moveOut -= dent
-        @outdebt = 0
-        @pair 'OUTDENT'
-        @token 'OUTDENT', dent, 0, outdentLength
-    @outdebt -= moveOut if dent
+        break
+    @outdebt = moveOut
     @tokens.pop() while @value() is ';'
-
     @token 'TERMINATOR', '\n', outdentLength, 0 unless @tag() is 'TERMINATOR' or noNewlines
     this
 
@@ -605,7 +623,7 @@ exports.Lexer = class Lexer
       #     el.click((event) ->
       #       el.hide())
       #
-      @indent -= size = last @indents
+      size = last @indents
       @outdentToken size, true
       return @pair tag
     @ends.pop()
diff --git a/test/functions.coffee b/test/functions.coffee
index 2905698e12..3a2a548bc9 100644
--- a/test/functions.coffee
+++ b/test/functions.coffee
@@ -225,3 +225,38 @@ test "#1435 Indented property access", ->
             rec.rec()
           .rec()
     1
+
+test "#1275, Sub-block terminator can cause parent block termination", ->
+  first = (x) -> x
+
+  rec = (x, y) -> if not y then rec: rec else y()
+
+  foo = rec()
+    .rec "test", ->
+      rec("asdads").rec( ->
+        false
+       )
+      1
+  eq foo, 1
+
+  bar = rec()
+    .rec "test", ->
+      rec("asdads").rec( ->
+        false
+      )
+      1
+  eq bar, 1
+
+  baz = ->
+    (
+      1
+      )
+    2
+  eq baz(), 2
+
+  qux = ->
+    (
+      1
+     )
+    2
+  eq qux(), 2
\ No newline at end of file