Q:

Subject: S Corp problem

Two shareholders own a 66% share of a Tennessee S Corp. The other 33% shareholder left disgruntled and formed a C Corp that bought his 33% share of the S Corp stock. The sale takes effect as of January 1, 2005. I am an Enrolled Agent with the IRS but do not understand the legal ramifications. Also this is not my area of expertise for tax consequences either. I understand that this terminates the S status but how else does it affect the corp and its shareholders? Can you share your expertise?

A:

Actually, because this change is effective precisely at the end of the previous tax year, this should be relatively easy to deal with.  The 2004 1120S will be marked as final and then you will report 2005 on an 1120.

It would have been messier if the change were mid-year and you had to file two short-year returns.

There are some other statements that will need to be attached to the returns and you will need to do some calculations of the retained earnings to prevent previously taxed income from being taxed again. 

I strongly encourage you to buy a copy of the Small Business Quickfinder book.  It covers this in much more detail than I can right now.  It's my number one reference tool for questions about all non-1040 tax returns. You can order it from www.quickfinders.com

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2005 06:30:00 PM Send this post: