Death of SH in Corporation... subsequent sale of land

[Unregistered]

I have a new client that is a SH in an S Corporation. The only other shareholder passed away on March 31, 2005. The remaining shareholder purchased the deceased's share of the company from the estate. After the purchase, the corporation sold a piece of land at a large loss. How do you account for the sale of the land? The remaining shareholder was under the impression that he would be receiving the benefit from the loss but his partner would not. Another CPA prepared his return and did not treat it as such. Any help would be appreciated.

[OldJack]

If it was investment land it probably was reported by the S-corp as a loss on Sch-D. The loss would be allocated to the shareholders depending upon if the S-corp elected to allocate the loss on a per day of ownership at the end of the year or from closing the books and allocating as of the date of death. At any case a portion, if not all, of the loss would be reported on your shareholder's 1120S-k1, box 8a as net long term capital loss. The problem is that your shareholder may not have had enough stock basis to deduct the loss on his 1040. If so the loss carries over to the next year for deduction if he will increase his basis by making a loan to the S-corp.

[Unregistered]

If it was investment land it probably was reported by the S-corp as a loss on Sch-D. The loss would be allocated to the shareholders depending upon if the S-corp elected to allocate the loss on a per day of ownership at the end of the year or from closing the books and allocating as of the date of death. At any case a portion, if not all, of the loss would be reported on your shareholder's 1120S-k1, box 8a as net long term capital loss. The problem is that your shareholder may not have had enough stock basis to deduct the loss on his 1040. If so the loss carries over to the next year for deduction if he will increase his basis by making a loan to the S-corp.

So it sounds like the previous CPA reported the loss on a per day of ownership where as he expected them to do the closing of the books method. Would you recommend amending the return to get the desired result?

[OldJack]

It is probably to late to elect to allocate on date of death and that is probably why the CPA didn't try to do it. I would recommend that you get a complete copy of the tax return to see if there is a loss carryforward and maybe even talk to the CPA to understand why things were handled as they were.

[Gretel]

...and please share your findings with us.

[Unregistered]

It is probably to late to elect to allocate on date of death and that is probably why the CPA didn't try to do it. I would recommend that you get a complete copy of the tax return to see if there is a loss carryforward and maybe even talk to the CPA to understand why things were handled as they were.

When do you have to elect to allocate?

[Bees Knees]

TTB page 19-6, "To make the election, the corporation must attach a statement to a timely filed original or amended Form 1120S for the tax year for which the election is made."

I looked it up in the regs, and those are the exact words right out of the regs. So what does "timely filed original or amended" return mean? Can you amend the return to make the election? I take that to read you can go back and amend the return to take the election, provided the 3 year time period to amend has not yet expired.

[Unregistered]

Thanks Bees Knees - That is what I was thinking too. So if you make the election, do you end up filing TWO short year returns?

[Bees Knees]

Thanks Bees Knees - That is what I was thinking too. So if you make the election, do you end up filing TWO short year returns?

No, there is still only one tax return. The closing the books creating two short years is only used for purposes of allocating profits and losses to the shareholder's K-1s.