Final K-1 from an S-corporation

[Lion EA]

My client received a final K-1 from an S-corporation. The S-corp sold the firms's only asset, a commercial building it owned and dissolved the corporation. It reported rent, interest, unrecaptured section 1250 gain, and net section 1231 gain on the final K-1. Also, a distribution of $302,114 in Box 16D.

Do I report all the items on the K-1 as in past years? Does his stock basis come into play? How?

Client now has early onset Alzheimer's, so won't be able to answer any questions for me. Such as how much did you invest in this company. He may have inherited his shares from his father, but his father isn't alive, so I can't ask.

I'm reading my S-corp book, but it is over my head, or maybe it's just the jargon. Any and all guidance will be appreciated.

[Evan S. Golar]

Is there any way of determining WHEN he inherited the stock from his father and be able to retrieve copy of 1120-S for that year, or request it from IRS?

[Gail in Virginia]

If he inherited stock in the S-Corp, his basis in the stock would be what it was worth at the time he inherited it.  One approach would be what Evan is suggesting, to look at the balance sheet for that year and see what the company was worth at that time.  But that does not take into account either intangibles or appreciation of assets, as a rule.  Another approach might be to try to locate the inventory for the estate of his father and see what value was used at the time the estate was probated.  I don't know if that would be a matter of public record in your state.  I don't know if it is in my state. I don't envy you this trying to find this out when your client is unable to help.  Does the client have a lawyer or children who might have access to his papers and be able to look for any records?

[Lion EA]

Spouse seems to think that the father gifted my client (and his brothers) shares while still alive (and uncle gifted cousins, but not necessarily at the same time). That's all the mother was able to tell my client/spouse. I guess that makes it worse, trying to find out dad's cost basis when no one's sure when the gifting took place.

The CPA for the corporation is refusing any help. Or, maybe, he wants to charge for it. The family is taxpayer with Alzheimer's, spouse an aging actress so not working much, and two college kids, one with costly medical issues. I know I'm missing something in the flow that would lower their taxes, and they really need them lowered. This distribution has to last them the rest of their lives, especially now that two in the family have costly health needs.

But, how do I work with the basis? On Form 4797 where the building sale is reported, the building sold by the S-corp? But, the S-corp sold the building, not my client. The S-corp dissolved, so my client's stock is worthless. He had a distribution from the S-corp that must've zeroed out the balance sheet, but he still had basis so the distribution isn't taxable.

I've had clients sell their stock in an entity, but I haven't had a stockholder client at the time a corporation dissolved.

[Evan S. Golar]

Did your client's father have any estate return filed? Can the family remember WHICH YEAR the father died?

[jklcpa]

You may be able to find his DOD by Googling for "his name & obituary".

[Evan S. Golar]

Without appearing nosy into the cousins' personal finances, would you be able to get any pertinent details from the cousins as to dates of their inheritance from this family business?

[Lion EA]

Gift. Spouse is making inquiries, mostly to MIL. Taxpayer was gifted S-corp shares in 2012, it's looking like. Spouse thinks she can get MIL's joint return for 2012 &/or 1120-S. However, the CPA has not been including a capital account nor basis information for Taxpayer, and through 2017 issued Taxpayer Form 1040-MISC as well as a K-1, so I'm not sure if we'll get the donor's basis when he gifted shares.

But, what do I do with the basis? Obviously Taxpayer had basis in the S-corp when it was dissolved to receive a distribution. Would his basis be his distribution? If so, the distribution wouldn't show up as income on the joint returns. (CPA has been promising me Taxpayer's beginning basis since 2014 when I started preparing the joint returns; prior to that, they were DIYers.) 

Taxpayer has $300,000 or so in passthrough income (see my OP). But, if the building sold for about $1.7M and there were six shareholders, then I don't see that the proceeds were reduced by any basis before reporting on the K-1.

This is only Part 1. I'll have separate questions about a trust that has an EIN with brokerage statements issued to Spouse who is trustee. But, the donor is Taxpayer's mother, and it's a revocable trust. Does that sound like a donor trust, reportable on donor's/mother's tax return under her SSN? Don't get me started.

And, I really appreciate everyone's help and education. Thank you!

[Gail in Virginia]

I don't envy you, Lion.  I think that the sale of the building was reported on the corporate return, and the information on the K-1 gives you the pass through that is reported on the taxpayer's return.  The stock in the S Corp, I believe, would be treated the same as any corporation that goes out of business.  The sale price is 0, but the real question s what is the basis?  And if this is gifted rather than inherited, I have no idea how you will find that out.  Can the CPA at least provide a copy of the first return that showed your client on the K-1?  That will give you a balance sheet to start from, but no idea really of what the father's basis was....

[Evan S. Golar]

Are you (or your client) able to get cooperation from donor mother regarding the Trust? Basis information should be able to be easier to obtain since brokerage firms are not required - since around 2010 - to track basis, and applicable dates and amounts of investments prior to that to trace basis.

[Lion EA]

Thank you all. I think Spouse via MIL can get me 2012 info that seems to be year of gifted stock shares. They were DIYers in between, and biz people (as well as show people, a musician and an actress) so hopefully have their 2012-2013 returns; I began 2014.

I know I'm being thick about this, but I had two grandchildren in two different states in June and one very sick DIL, so I'm sleep-deprived and distracted. So, the K-1 info is on the return as usual, the 1250 and 1231 gains are really his share of the profits from the sale of the building, OK?

His "sale" of stock will be a LT Sch D transaction, right? Zero sales price and what I can determine as his basis. That will offset the $300,000 in gains with only $3,000/year, right? But, he did get a distribution, so that lowers his basis. Because the firm dissolved, I'm thinking that distribution would zero out his basis, no?

Sorry to muddy the waters with the trust. That's a whole different topic, I think. (CPA gave them the brokerage statement as if it's reported on their joint return.) They didn't tell me about it. Discovered the brokerage statement in their paperwork. I now have the trust document, and it uses language like Donor and Revocable. But, MIL's/donor's lawyer obtained an EIN for the trust. So, I'm not sure if it's a standalone on a 1041 by my client or if it needs to be reported by MIL/donor. But I told client that as it was a surprise to me, it's not on my schedule for right now. I will return to that after managing to complete their personal returns and preparing returns for a couple other clients.

Love you guys.

Trying to get this off my desk before we leave next Wednesday for a week for hubby's family reunion in MA. I hope I can get some R&R then, but won't if this complex mess is still on my mind !!

[Bart]

2 hours ago, Lion EA said:

Sorry to muddy the waters with the trust. That's a whole different topic, I think. (CPA gave them the brokerage statement as if it's reported on their joint return.) They didn't tell me about it. Discovered the brokerage statement in their paperwork. I now have the trust document, and it uses language like Donor and Revocable. But, MIL's/donor's lawyer obtained an EIN for the trust. So, I'm not sure if it's a standalone on a 1041 by my client or if it needs to be reported by MIL/donor. But I told client that as it was a surprise to me, it's not on my schedule for right now. I will return to that after managing to complete their personal returns and preparing returns for a couple other clients.

 

If the trust is a revocable trust, even if it has a federal ID number, it is reported on the donor's tax return.

[Roberts]

I have a final year 1120S with essentially 1 major asset in it and only one owner who died. The estate attorney has transferred the asset (non-depreciable land) from the 1120S to an irrevocable trust. I'm guessing the cost basis is his date of death and this isn't a taxable distribution? The trust will sell it next year with this new cost basis.

 

Edit: I'd report the distribution but have an equal cost basis I'm guessing?

[Roberts]

33 minutes ago, Bart said:

If the trust is a revocable trust, even if it has a federal ID number, it is reported on the donor's tax return.

Wouldn't it be irrevocable upon death?

[Lion EA]

Bart, that's what I'm thinking. But, the lawyer and broker gave the statement to the trustee and not to the donor. Donor of trust did NOT die, so that trust is still irrevocable, right? Her husband, who gifted S-corp shares while alive, has passed away so looking for K-1 answers from others.

And, unlike Roberts' case, depreciated commercial building was sold within the S-corp and reported on final K-1. The trust was funded with cash from the donor/my client's mother.

[Lion EA]

...her husband who gifted S-corp shares TO MY CLIENT personally, not into the trust, while alive, has passed away...

[Bart]

5 hours ago, Lion EA said:

Donor of trust did NOT die, so that trust is still irrevocable, right? 

Donor of the trust did NOT die, so that trust is still REVOCABLE by the donor.

[Lion EA]

Yes, Revocable by the donor. Not only can't I do the numbers, now letters are eluding my grasp! Thank you, Bart.

[Gail in Virginia]

19 hours ago, Roberts said:

I have a final year 1120S with essentially 1 major asset in it and only one owner who died. The estate attorney has transferred the asset (non-depreciable land) from the 1120S to an irrevocable trust. I'm guessing the cost basis is his date of death and this isn't a taxable distribution? The trust will sell it next year with this new cost basis.

 

Edit: I'd report the distribution but have an equal cost basis I'm guessing?

There might be a step up in basis for the S-corp, but the land was held in a corporation which did not die, so there is no step up in basis on the land itself as I understand it. 

[Roberts]

51 minutes ago, Gail in Virginia said:

There might be a step up in basis for the S-corp, but the land was held in a corporation which did not die, so there is no step up in basis on the land itself as I understand it. 

The land doesn't receive the stepped up basis but the corp stock does for his widow. To sell the farm land and flow through the stepped up basis, the company needs to be shut down in the same calendar year (the company reports a gain via the K-1 and then the widow reports an essentially equal loss on liquidation of shares). The attorney's know this but are supposedly moving the farmland out of the corp before selling it which I believe is a problem.

 

 

 

 

[Max W]

On 8/14/2019 at 5:38 PM, jklcpa said:

You may be able to find his DOD by Googling for "his name & obituary".

This is  good way to do it as long as it is not a name ike John Brown where you could get a hundred hits.   We were trying to contact a client who had seemingly dropped out of sight.   He was in his thirties so checking obits was not the first thought, but nevertheless went ahead and Bingo.  The guy had died of an embbolism.

If there is mor than one person with the same name that comes up, having the address is essential.

Searching for others, I have seen some obits go back to the late 1700's.

[Max W]

From what I see here, unless the probate can be uncovered, I think it unlikely that the requisite information will be found to offset the distribution.  

However, once the tax is assessed for 2018, it would be ripe for an OIC under Exceptional Circumstances (Effective Tax Administration).  With the health and age conditions and the inability to earn any income, the distribution money would be needed to maintain basic living expenses.   Of course this assumess they have no other property with equity other than their home.

[Lion EA]

Husband did not pass away, but is now deep into early-onset Alzheimer's so not remembering receiving a gift from his father. His father did pass away, but gifted the shares in the company while still alive. So, the two men most involved with that company are not available to answer questions or recreate anything about the past.  The CPA was reporting partner wages on a 1099-MISC, so I don't know how much I trust his accuracy.

By the way, my father is John Brown!

I just received an amended K-1 for a partnership on the same joint return as my main question re an S-corp K-1. The partnership now has Box L information, but I had suspected it was negative. Nice to have something on paper.

Still waiting for wife who is dealing with mother in law re gift tax return &/or father's last K-1 plus a couple more K-1s prior to coming to me, so I can carry husbands basis forward againts the large distribution he received when the S-corp dissolved.

This return has four partnership K-1s, one S-corp K-1, three Schedules C, a W-2, and a lot of medical expenses. I prepared the returns that generated two of the K-1s, so I have basis info for those two!

I think I see about what all the amounts should be and how they flow, but still need some more documentation if the wife can track it down.

Thank you, everyone, for pitching in to help me. I appreciate it more than you can know.

[DANRVAN]

On 8/16/2019 at 7:00 AM, Roberts said:

The attorney's know this but are supposedly moving the farmland out of the corp before selling it which I believe is a problem.

In this particular situation I don't think it is a problem as long as the S-corp is dissolved in the same tax year as the asset transfer.

The transfer to shareholder is a deemed sale of the asset.  

S-corp recognizes gain and passes through to shareholder (estate).

Estate now has a basis equal to FMV on date of transfer to offset future sale of the property.

Since the farm property was the only asset held by the S-corp,  basis of stock held by estate = fmv on date of death.

Estate will recognize loss on liquidation of S-corp which should offset gain on transfer of property.