Sale of S-Corp

[JoshinNC]

Got a call from a client today. He sold all 1000 shares of an S-Corp that he was the sole shareholder of on 3/1/06. He received a letter from the buyer that the buyer's accountant wants to do a short year return because it will be "easier for everyone involved". My understanding is that since the buyer bought 100% of the shares he became responsible for reporting 100% of the income and deductions for the year of purchase, even during the period in which my client owned the shares. My client reports the gain (loss) from the sale of the shares on Sch. D.

What would be the benefit of doing a short year, if any? Sounds like the buyer is just trying to tie some income on my client that he doesn't want to report.

[OldJack]

No Josh.. the seller and the buyer both get a 1120S-k1 for their share of income items during the period they own shares of stock. There are 2 methods of allocating the income, one method is based on the short year (elected) meaning the books are close as the sale date and income allocated to the seller with the rest of the year to the buyer. The second method, the default method, is to allocate the year-end numbers on the days of share ownership. Since the short year method is an election the other accountant is asking for the sellers approval of the election. This stock is an S-corp you are thinking of stock of a C-corp.

[JoshinNC]

Ok.

So, what would you do if it were your client? I'm thinking that if we are going to be required to report a proportionate share of income based upon days of ownership (default method) than we should be privy to what the numbers will look like under that method and make a choice as to which method we want to use (based on which one is more beneficial to my client).

Do you agree?

[OldJack]

Do you agree?

Sure. However, from Jan 1 until date of sale should be the true income/profit that your seller incurred had he not sold. Remember, when your seller elected S-corp status he agreed to pay all income taxes personally for the shares he owned. That ownership ended only when he sold the same so he therefore owes the tax on anything up to that date.

[JoshinNC]

As best I understand that period was a loss.

Maybe it will work out better for him to take this loss on his return. I will follow up with him to figure out the best course of action.

Thanks for your help.