S-Corp Stock Basis

[Acownt4it]

Client was an employee for an S-Corp. Employees are able to purchase stocks from the owners. He just retired and we are trying to figure out his basis in this stock because he sold it. This company is very successful. Every quarter there are dividends. Stockholders receive approx 8% in cash dividends the other 92% is reinvested in the company. Client has received a K-1 every year.

He owns 20,000 shares. Purchased at various times. We know the dates and purchase various purchase prices.

His K-1 this year is typical of previous years. It looks like this

Line 1 Ordinary business income 583,615
Line 4 Interest Income 7,781
Line 5a Ordinary dividends 25,511
Line 5b Qualified dividends 25,511
16C Items affecting sh basis 303 (Nondeductible expenses)
16D Items affecting sh basis 545,000 (Property distributions)
17A Other Information 33,292 (investment income)

Dividends declared and paid in 2006 were $27.25/per share for a total of $545,000 (line 16d on K-1).

My dilemma is this:
Since my client has owned stock since 1996, I do not have all the K-1's, but the controller of the company said to figure his basis with this calculation:

(Sale Price - Purchase price)-(Sale price book value - Purchase price book value) = Capital Gain.

The controller has provided a spreadsheet with all the figures needed.

Does this look correct? What I gather from this calculation, the controller is calculating the book value based on the dividends and profit that is in AAA.

[Acownt4it]

Figured it out

But now....

Client sold 13,700 share to other employees and the remainder 6,300 shares are on an installment sale.
Problem is there is a loss on on the shares he sold on installment. I know how to compute an installment sale when there is a gain, what happens when there is a loss?

[veritas]

Sounds like a big mess.

Stock bought at various times for multiple employees? Doesn't smell right.

A loss is reported in full in the year of sale even if it is sold on an installment sale

[Acownt4it]

I don't think

I phrased it right.

He purchased stock over the years for investment in the company. He retired this year and the corporate bylaws state only employees can own stock so they can only sell to other employees of the company or the major stockholders. A couple of the employees did not have the $$ to buy the stock outright, so he is selling to them on an installment basis.

Because the company made so much money over the years and did not distribute the cash, there is ALOT of money in the owner equity account, that is why his basis exceeds the sale price.

I am coming up with a loss on the sale of the remaining 6,300 shares. I am trying to figure out the best way to handle this.
If I use the first in/first out method he has a loss on the sale of the 6,300 shares. If I use a last in/first out method he has a gain of $130,000 on those same 6,300 shares.

Does this make sense?
Any advice?

[Acownt4it]

Additional info

If I calculate the total gain on the sale of 20,000 shares of stock it is $34,000.
The problem is determining the gain or loss on the installment shares.

[veritas]

The stock basis

is what he paid for it plus increases to basis and less decreases to basis for the time he owned them. If he bought the stock in blocks on a single date in each year it might not be to hard to compute. You will need his k1s'.

[Acownt4it]

I am

comfortable with the basis that the controller of the company supplied my client.
He only made 5 different purchases over the past 10 years and I have the spreadsheet from the controller that details out the bookvalue, purchase price and sale prices. TP only made one sale on 1/1/07.
My issue is really which stock purchases I apply to the Installment sale. Like I mentioned ealier, if I use the first stock purchased with the cash sale stocks, the installment shares have a loss. If I use the last stocks purchased with the cash sale stocks, the installment sales have a gain.

I am inclined to use the last in/first out approach. He can carry the losses foward to offset the installment sale gains.

[veritas]

What does book value

have to do with basis in S-Corp stock?

[Acownt4it]

that was

my initial confusion too. Hence the reason for my original post.

The controller of the company computes the book value based on the undistributed dividends and profit. So what he has basically done is kept track of the adjustments to basis in an equity account. And that is how he helps the employees compute the basis in the stock.
It took me a few hours and many spreadsheets to tie to his numbers, but it worked out correctly (as best as I can tell).

Once I got through that basis stuff, I ran into the loss situation on the installment sale.

Man I tell you I get some real doozies sometimes. They really push my abilities.

[veritas]

So then we are back

to your question. If you can identify the stocks sold specifically you may use that method. If not then first in and first out.

[Acownt4it]

Cool

thanks for your help. I appreciate it.