1120S / basis / gain?

[Roberts]

I have an 1120S which owns a parking lot with an original basis of let's say $100,000. The parking lot today is worth $600,000. It is the only asset of the 1120S.

The sole owner of the 1120S has died so the new owner (a trust) has an increased cost basis of their stock as of the date of death BUT the 1120S still has a cost basis of $100,000 on that parking lot. correct?

 

If they sell the parking lot and liquidate the company in the same year, is there a taxable capital gain realized? It seems the K-1 would show a capital gain but then they would show a capital loss for the same amount on the liquidation. Tell me how I'm nuts.

 

edit: selling to a non-related party.

[Lee B]

I am looking forward to seeing what the answer is, since I don't know either ?

[Abby Normal]

38 minutes ago, Roberts said:

K-1 would show a capital gain but then they would show a capital loss for the same amount on the liquidation

The K1 would show a gain and a distribution. but the step-up in basis would increase the worthless stock loss, so yes, you are correct.

 

[Roberts]

30 minutes ago, cbslee said:

I am looking forward to seeing what the answer is, since I don't know either ?

I didn't realize it but I saw most of my thought process on a law firm's website.

[Roberts]

here is one of the websites I saw. One said you must sell and liquidate in the year of death - that seems unreasonable but the value would increase from his death.

https://www.fortenberrylaw.com/step-basis-death-corporation-shareholder/

 

Even though the S corporation’s assets do not receive a basis step-up upon a shareholder’s death, the deceased shareholder’s estate may be able to leverage the stepped-up basis of the deceased shareholder’s stock to reduce tax on the sale of the assets. To do so, the corporation must liquidate and distribute assets in the year of the deceased shareholder’s death. As discussed in Distributions from S Corporations, liquidating distribution is treated as a sale—a payment in exchange for the deceased shareholder’s stock.[1]

At the corporate level, this deemed sale results in gain to the S corporation, which is passed through to the estate of the deceased shareholder.[2] When added to the basis step-up to fair market value by virtue of the deceased shareholder’s death under Code § 1014, the deemed sale increases the basis of the deceased shareholder’s stock in excess of the fair market value.[3] This gives the deceased shareholder’s estate an extra amount of basis.

Because the deceased shareholder’s basis exceeds the fair market value of the stock (due to the enhanced basis increase), the estate is treated as having a capital loss. This capital loss offsets the estate’s gain from the deemed sale (a wash for capital gain purposes).  The estate’s basis in property received as part of the liquidation equals the property’s fair market value.[4]  This effectively gives the estate a full basis step-up in the S corporation’s underlying assets even though the deceased shareholder only owned stock (and not the underlying assets) at the time of death.

[Lion EA]

I just received a K-1 for a client that has a transfer of capital. I'll be back with questions on this topic!

[DANRVAN]

The S-corp stock will go to his estate which will get a stepped up basis for the value of stock on date of death.  Basically estate will report a gain from sale of assets by S-corp and offsetting loss from liquidation of S-corp.  These two transactions must take place in the same tax year.