Discussion:S Corporation 338 (H)(10) Election Deemed Liquidation

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Discussion Forum Index --> Tax Questions --> S Corporation 338 (H)(10) Election Deemed Liquidation

Fish (talk|edits) said:

9 January 2007
Can anyone point me to guidance on preparing an S Corporation final part-year return as a result of 338 (H)(10)election. I assume that the deemed liquidation is accounted for as a final distribution to the S Corporation shareholders essentially "zeroing" out the AAA account and any other pre-S retained earnings. However, what about the book financial statement presentation on the final S Corporation tax return on page 4 Form 1120S prepared under GAAP for the day before the S Corporation stock sale? Is the deemed liquidation treated as a tax book difference on Schedule M-1?

Eriktax (talk|edits) said:

January 24, 2007
I am a little rusty but here is my recollection.

First, you've got the deemed asset sale whereby Old T sells assets to New T. This triggers gain to Old T, which flows through to the Old T shareholders and increases their basis.

This sale happens while Target is an S corproation.

Next, Old T, having the proceeds in hand (cash and or installment obligations) makes a liquidating distribution of its assets to its shareholders in liquidation of thier stock.

So yes, I think it would be proper to acconf for the deemed liquistaion as a final distribution to the S corp shareholders. SInce this would have zeroed out the assets, wouldn't the closing balnace sheet (book and tax) just be zeros?

Dennis (talk|edits) said:

24 January 2007
Andrew Mitchell Chart

Andydaly (talk|edits) said:

14 January 2008
I am having a problem with a transaction like this with a state audit. The client (S corporation) was sold and a 338(h)(10) election was made. The proceeds were a large sum of cash and a note. There was essentially no basis in the assets of the S corp. The state is saying that the corp. has a large gain on the receipt of the cash which increases my stock basis. Upon the distribution of the cash and note to the sharholder, they are saying I have additional current year gain. They say I have a new installment sale in which the S corp stock is sold, and the basis in the stock (entirely from the corp. level gain just taxed) is allocated to the cash and the distributed installment note. Because I have to allocate that basis to both the cash and the note distributed to the shareholder, I have additional current year gain on the distribution of cash. Any help?

San Diego (talk|edits) said:

14 January 2008
No final return, just switching to an 1120 after the sale.

Andydaly (talk|edits) said:

14 January 2008
Thanks - any ideas for the individual return. That is really where the problem lies.

To give numbers, on the 1120S - assets with no basis are sold for $ 4 million consistion of $3 Million cash and a $1 Million note. The S corp. now has a gain of $3Million and the stock basis increases to $3 Million. The individual then gets the cash and the note. The auditor is saying this: The S corp stock was sold for $ 4 Million on the installment method. In the current year, 75% (3 Million) of the proceeds are received. Basis is only $2,250,000 (75% of $3 Million). Thus most of the installment gain is being accelerated. I am looking for a cite that says the $3,000,000 cash is really a distribution from the AAA but have not found one.

It is a timing issue but penalties and interest could be substantial.

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