Discussion:Allocating S-Corp distribution with shareholder termination during year

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Discussion Forum Index --> Advanced Tax Questions --> Allocating S-Corp distribution with shareholder termination during year
Discussion Forum Index --> Tax Questions --> Allocating S-Corp distribution with shareholder termination during year

EricJ (talk|edits) said:

31 December 2007

My name is Eric, and I have am a small-business owner with a master's degree in accounting and taxation. I own a small S-corp, and I am going to make a distribution today (the last day of the tax year). I am trying to figure out how to allocate the distribution equally, as one of the shareholders sold all of his stock during the year, terminating his interest.

My friend and I originally owned the S-corp, but on September 13 of this year, I purchased all of his stock, thus terminating his interest in the business. We did not elect to divide the tax year into two parts under Sec. 1377(a)(2), so I will be using the "per day/per share" method to allocate the income this year. Can I also use this "per day/per share" method when making a year-end distribution of cash today so that my friend receives a distribution reflecting his ownership during the year? Or, can I only make a distribution to myself since I'm the only shareholder on the distribution date? (As of today, I own 100% of the corporation, and my friend owns 0% because of the stock sale this year.)

I actually want to give my friend a distribution so he will have money to pay the taxes on his share of the income that he will be allocated on his K-1. I am also trying to allocate the distribution equally so as not to terminate our S-election. Can I use the "per day/per share" method to allocate the distribution so as to reflect the fact my friend owned half of the corpation for 2/3 of the year? Or, can I make a distribution only to myself because I'm the only owner today?

Thanks for your help!

JAD (talk\|edits) said:	31 December 2007
General rule is that the distribution must be proportionate to stock ownership on the date of distribution. But see Treasury Regulations, Subchapter A, Sec. 1.1361-1(l)(2)(iv) for discussion that may help you. The reference to a "governing provision" sounds to me like there should be some formal documentation.