Gift of S Corp stock Jan 1 2006

[sandysea]

My client was a 90% s/h in an s corp. His father owned the 10% at the end of 2005. Retroactively for 2006, father gifted son his 10% of the stock and now my client owns 100% of the stock of the corporation.

Father also gifted to son residence that was previously rental property. The basis of the property is subject to gift splitting so hopefully no gift tax return will need to be prepared for the father.

Now...for the gifting of the stock....does not an appraisal need to be done for this gift of stock? And when I prepare the 1120S for 2006, how do I rid the basis for the father when his 2005 K-1 did not state it was a final K-1?

Thanks for any insight

[jainen]

new concept

>>basis of the property is subject to gift splitting<<

The amount of the gift is FMV, not basis. This gets added to the FMV of the stock (yes, they will need some kind of appraisal to determine value) in determining if a gift tax return must be filed. Anyway, gift splitting always requires a return.

Somebody else can answer about retroactive gifting. That's a new concept for me.

[sandysea]

No gift tax I meant to say....the gift of the property can meet the annual exclusion because the son paid the difference of the FMV over the adjusted basis in the rental property. They wanted to meet the exclusion for gift taxation.

The stock is my main concern and I don't know how to approach this with the client. The son is my client, but his father is also a close friend (although uses another accountant due to my relationship with his son)...

Thanks for the insight....

[OldJack]

Somebody else can answer about retroactive gifting. That's a new concept for me.

I don't believe there is such a thing allowed in the tax code, but attorneys have a magic code and pen.

There is only one exclusion per year per person. Father is going to have to file a gift tax return for something as the fair market value of both gifts are bound to be more than the exclusion and if so all gifts to the son during the year has to be listed on the gift tax return.

[OldJack]

>>but his father is also a close friend (although uses another accountant due to my relationship with his son)...<<

Father has the responsibility to file the gift tax return... so the appraisal should be arranged and the gift tax return should be prepared by father's accountant. You are not independent with father.

[jainen]

$142,500

>>son paid the difference of the FMV over the adjusted basis<<

Okay. So if the donor isn't your client then why are you asking about his gift tax return and the value to use on it? The other accountant has to do something with that. Maybe not a formal appraisal, but he will need some bona fide way to establish the value.

For the corporation, prepare a K1 for the minority shareholder's information through the date of gift. Personally, I wouldn't go for a "retroactive gift" but if you happen to find that the documents were all signed in 2005 then you can amend that return.

Your client needs to calculate basis for the rental. I'll invent numbers so you can follow my thinking. The adjusted basis is 20K and the FMV is 160K. He paid 140K and the gift part was within the annual exclusion for gift splitting. Since the gift was 20/160 (1/8) of the value, his new basis is 140 plus 1/8 of 20, or $142,500.

[sandysea]

Thank you Jack. I understand I don't have an independent relationship with the father but he still comes to me as it pertains to his tax situation. I only want to make sure I can provide him with the necessary information so that he is not in non compliance when it comes to his taxation of this "gift". He uses h&r block every year, so he needs as much information as he can get when he goes in for his t/r. Thanks again!!