S Corp Asset Installment Sale

[David]

S Corp SH retired from his insurance business. He sold office furniture, equipment, etc. to the new guy taking his place with the agency. There is 3 year installment agreement.

If I'm not mistaken, the sale of equipment doesn't get reported on the S Corp return and the resulting gain/loss doesn't get reported either since there is an installment agreement. The gain/loss from the installment agreement gets reported on the SH's personal tax return.

Is my understanding correct?

Also, no one buys his business. He just leaves.

The insurance agency pays him a certain amount over several years.

Does this get reported as regular income or does it get included in the installment sale?

Thanks.

[kcjenkins]

The insurance agency pays him a certain amount over several years.

Does this get reported as regular income or does it get included in the installment 

Need to look at the contract;

[David]

Ok, thanks.

Do I report all assets as converted to personal use and report the installment sale on his personal return or do I report the sale of all assets on his S Corp return?

[Abby Normal]

Assuming sole S corp shareholder and the assets were owned by the S corp, the S corp shows the installment sale but then the installment sale is 'distributed' to the shareholder where he will continue to report on his 1040.

Edited March 16, 2015 by jmdaviscpa

[OldJack]

Sale of S-corp assets on an installment sale is not an installment sale that can be distributed to the shareholders without taxable gain to the S-corp.  If distributed to the shareholder, it would require the S-corp to recognize the full gain and pass the taxable income to the shareholder in the year of disposition.  An S-corp is not a partnership that can convert to personal and pass basis to shareholders tax free.

[Abby Normal]

If the S corporation acquires an installment obligation from the sale of its assets during the 12-month period beginning with the adoption of the plan of liquidation, the S corporation will not be required to report the deferred gain when it distributes the installment obligation to its shareholders in liquidation. (IRC section 453(h) and IRC section 453B(h)). If the S corporation is not required to report the deferred gain when it distributes the installment obligation (i.e., the obligation was acquired during the final 12 months and after the adoption of a plan of liquidation), then the shareholder reports the gain on the installment obligation as payments are received. In other words, the shareholder can treat the payments received on the note, rather than the note itself, as consideration received for the stock in liquidation. The basis of the installment obligation is ignored, and the shareholder's "allocated" stock basis in substituted for the basis in the installment obligation

 

http://www.irs.gov/irm/part4/irm_04-011-007.html#d0e306

[Terry D EA]

If the S corporation acquires an installment obligation from the sale of its assets during the 12-month period beginning with the adoption of the plan of liquidation, the S corporation will not be required to report the deferred gain when it distributes the installment obligation to its shareholders in liquidation. (IRC section 453(h) and IRC section 453B(h)). If the S corporation is not required to report the deferred gain when it distributes the installment obligation (i.e., the obligation was acquired during the final 12 months and after the adoption of a plan of liquidation), then the shareholder reports the gain on the installment obligation as payments are received. In other words, the shareholder can treat the payments received on the note, rather than the note itself, as consideration received for the stock in liquidation. The basis of the installment obligation is ignored, and the shareholder's "allocated" stock basis in substituted for the basis in the installment obligation

 

http://www.irs.gov/irm/part4/irm_04-011-007.html#d0e306

According to the original post, it doesn't appear this was a "liquidation". The shareholder retired and therefore I have to agree with Old Jack on this one. The only other thing that may come into play is if the shareholder has loaned the S-Corp money and the assets could be converted to personal use as a return of capital.

[OldJack]

You might ask the client if they filed Form 966 , Corporate Dissolution or Liquidation, as this would have been required before the installment sale to meet the liquidation exception.

[OldJack]

The only other thing that may come into play is if the shareholder has loaned the S-Corp money and the assets could be converted to personal use as a return of capital.

 

I agree it could be distributed 1040 tax-free as a return of capital for the shareholder's 1040 tax calculation, but I don't think that would keep the S-Corp from the requirement of recognizing full gain as of the dividend/distribution date. We have to remember that an S-Corp is a taxable corporation that simply is "allowed to pass" current taxable income to its shareholders for individual taxation.  Current taxable income in this case is from the disposition of the S-Corp assets at a taxable gain.  Sounds like most of the gain was from depreciable assets that would require full tax of the ordinary gain in the year of sale anyway.  The return of capital is really nothing more than a note receivable in lieu of cash.  The dividend/distribution is only a common tax-free note receivable in the hands of the shareholder as they did not sell the asset to qualify for deferred installment sale tax treatment.