scorp stock sale

[rick in cal]

An scorp has three stock holders.The two major stock holders are going to buy out the third stock holder (20% owner). this will take place in Jan. or Feb. and the scorp will elect to file a return as two short years. All parties agree that the ordinary income reported and paid to the selling stock holder in this manner will more than compensate him for his stock. His stock has no basis and he will be paid a nominal amt. for his stock to make things simple. This is something I rarely deal with and would appreciate any opinions or criticisms. I will make sure the stock is transferred properly and all the corporate officers sign off where needed and may even suggest they use an attorney if it seems too complicated.

[jainen]

>>the scorp will elect to file a return as two short years<<

Why is that exactly?

[rick in cal]

>>the scorp will elect to file a return as two short years<<

Why is that exactly?

Jainen,It is best explained by The Tax Book (small business edition) pg 19-7.It's for allocating income only and you actually file it all on one return. This scorp will meet all the requirements. You can also find it in Quick Books Small Business pg D-5.

[jainen]

>>Quick Books Small Business pg D-5<<

[The citation explains that if all shareholders agree when a 20% share is disposed of, income can be allocated as if there were two short years. This does not change the way the return is filed as a single full year.]

One would expect a corporation with net income would have at least a going concern value even if no assets, so a 20% share would represent some amount of equity. But there are various reasons why that might not translate into FMV for the stock. To be thorough, you should document the applicable reasons (assuming your position is that the transfer was an arms-length transaction). Your own notes of the interview should be sufficient for the purpose.