S corp. termination of S/H interest - close books?

[KJ Judd]

A 50% S corporation shareholder (A) is going to relinquish her share of the business to the other 50% shareholder (B). Business is relatively new service business and basically has no value. Shareholder A is in intensive care and prognosis is disability for at least one year after released from hospital.

S corporation will continue with Shareholder B owning 100%. We have the option of closing the books at the date of termination of shareholder A's entire interest. Is it required? (I thought only if the S corporation itself terminated.) It probably would be easier to allocate for the entire year.

Shareholders A&B have requested advice on transaction. Neither shareholder has health insurance so would prefer to get transaction done sooner rather than later. But will wait until year end if makes things easier for accounting. Thoughts?

[Uncle Sam]

S Corp Transition

What can be done, is for book purposes, "close" the accounting records as of shareholder A's termination to get his proportionate share of the income/loss until termination, then proceed as usual until end of year. So regardless of what happens AFTER A has left, it will not effect his profit/loss picture for the year.

[Luis Mopeo]

Page 19-6 of TTB.

"If a shareholder's entire interest is terminated during the year, the shareholders may elect to allocate income as if the corporation's taxable year consisted of two taxable years, with the first year ending on the day the interest was terminated. All affected shareholders must agree, including the shareholder whose interest was terminated. Once made, the election is irrevocable, and is effective only for the terminating event for which it is made."

So, yes, you can close the books, but you have to have agreement and process the proper election.

TTB has information about making the election.

[KJ Judd]

I knew we could elect to close the books. I wanted to know if it was required. It sounds like it isn't.

Then shareholder A will have a gain/loss on disposition of her shares on the 2007 tax return.

[Davc]

I knew we could elect to close the books. I wanted to know if it was required. It sounds like it isn't.

Then shareholder A will have a gain/loss on disposition of her shares on the 2007 tax return.

Only if she relinquishes her shares in 2007. The election to close the books is a separate issue. It only determines the method of allocating income or loss to the K-1s.