Discussion:S corporation termination during the year
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Discussion Forum Index --> Basic Tax Questions --> S corporation termination during the year
Discussion Forum Index --> Tax Questions --> S corporation termination during the year
| 18 October 2007 | |
| In the year an S corporation is terminated (due to corporation purchasing % of stock 11/1/07), does the S corp file a short year tax return 1/1-10/31 & corp file short year 11/1/07 to 12/31/07? | |
| 18 October 2007 | |
| due to corporation purchasing % of stock 11/1/07
Please explain the above. What relationship does a corporation purchase of stock have to do with termination of S Corp, unless there's a shareholder involved not permitted to own S shares or some other violation of S corp provision? What is the transaction that's changing the S corp? When you make that clear, then you will get a clear answer. | |
| 18 October 2007 | |
| The S corporation is currently owned by individuals. A corporation wants to buy 20% of the S Corporation stock. An S corporation can not be owned by a corporation; therefore, the S election will be terminated on the date the corporation will purchase the S Corporation's stock. | |
| 18 October 2007 | |
| In light of above, does S corp file short year tax return 1/1-10/31/07 & when S corp is terminated files 11/1-12/31/07 as corporation? Please confirm if my understanding is correct. | |
| October 18, 2007 | |
| Yes, I believe that this is the one time that you do file two returns... | |
| 24 October 2008 | |
| I have a 100% C corporation owner buying an S corporation. It seems clear there is an automatic termination of the S corporation election as this purchased S corporation now "fails to qualify as an S corporation." This also automatically creates two short tax years. If less than 50% of the stock changes hands to the ineligible shareholder then these 2 years can be split pro-rata if the shareholders want this for ease of transition. Otherwise all of the S Shareholders need to consent to a close of the books on the date of termination. Since over 50% of the stock in my deal will now be ineligible, there is a mandatory closing of the books. It seems pretty clear in the 2007 tax year Tax Book page 19-5&6.
Just thought I would post on this page as I was reviewing the rules and noting how best to explain it to my client that wants me to comment on the tax matters article in their closing agreement. I'd be interested if anyone has had any problems with these rules, but it seems about as clear as tax law gets. | |
RoyDaleOne (talk|edits) said: | 24 October 2008 |
| The regulations are clear:
(3) 50 PERCENT CHANGE IN OWNERSHIP DURING S TERMINATION YEAR. The pro
rata allocation rules of section 1362(e)(2) do not apply if at any
time during the S termination year, as a result of sales or exchanges
of stock in the corporation during that year, there is a change in
ownership of 50 percent or more of the issued and outstanding shares
of stock of the corporation. If stock has already been sold or
exchanged during the S termination year, subsequent sales or
exchanges of that stock are not taken into account for purposes of
this paragraph (b)(3).
| |
| 25 October 2008 | |
| Sheldon, the prorata allocation method is not available if the S election is terminated on the date of purchase. | |
RoyDaleOne (talk|edits) said: | 25 October 2008 |
| I don't understand Riley's comment. | |
| 6 November 2008 | |
| I think Riley2 was just agreeing with your statement that you have to have 2 short years with a 50% change of ownership that does not qualify as S corporation owners and I agree witht that. | |
| 7 November 2008 | |
| Actually, what I was trying to say is that the books close on the date that the S corporation acquires an ineligible shareholder. I see now that this would not be true unless the shareholders made a 1362(e)(3) election or there was a more than 50% change in ownership. | |
