S-Corp / Separate statement of certain K-1 items

[bbrownatl]

I'm about to amend a 2011 tax return (Form 1120S) for a client who contributed the assets and liabilities to another Corp and realized an $87K gain as the liabilities exceeded the assets transferred via Sec. 357. For the year 2011, the total taxable income was $106K (and this includes the $87K). My question - During August 2011, the initial sole(A) owner sold 60% of the stock to my client(B). I was going to prepare the pro rata income allocation per share per day rather than elect per IRC Section 1377(a)(2) to treat it as two separate years. The big $87K gain came right at year end so you would think that the now 40% partner would want to treat the year as two separate periods. My understanding is that both need to agree to the election. The original owner (A) had quite a bit of flow through losses in the prior years. The new part owner (B) does not want to take the full hit for the $87K. Thus, again, going the pro rata allocation route. Agree with this treatment? Second question, is this something that needs to be separately stated on the K-1 and if so, where?

Much thanks in advance.

[bbrownatl]

Determining the Character of Section 357(c) Gain

So, one more question, any insight on the characterization of the Sec. 357(c) gain? Basically, it was inventory ($29K) and a promissory note ($116K) which nets to the $87K gain. I'm thinking ordinary but my mind is not necessarily IRS code!! I've seen various bits of guidance indicating numerous methods based on the fair value. Though, in this case, it is inventory and debt (not related to each other).