Discussion:Basis of S Corp Shares Sold
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Discussion Forum Index --> Tax Questions --> Basis of S Corp Shares Sold
| 30 April 2009 | |
| Here's the story:
Client is sole s/h of company. Successful in prior years but 2008 shows big loss. In an effort to turn things around, s/h recruits new partner, experienced in the industry and with strong contacts to become 1/3 owner. Simplified version of facts are as follows: 12/31/07 s/h#1 has 100 shares with total basis of $100,000. 7/1 s/h#1 puts in additional $1,100,000 to business, issues 1,100 new shares at $1,000/sh. Company has $300,000 loss for the year. 12/31/08 s/h#1 recruits new guy (s/h#2). In conjunction with hiring, he converts $300,000 s/h loan to stock, issues 300 additional shares to himself at $1,000/sh, then sells 1/3 of shares (500 shs) to s/h#2 for $100,000. Company has loss of $300k for 2008. 2008 loss is allocated 99.91% to s/h#1 .09% to s/h#2 (33.33% X 1/366 = .09%) What is basis of shares sold? The shares were sold individually, so I don't think compensation would be an issue since the shares were not issued by the corporation. Correct me if you think otherwise. I've calculated an average basis per share. In my example, ($100,000+1,100,000+300,000-299730)/1500shs = $800.18/sh. Client's loss on sale of shares is $100,000 - (800.18 X 500sh) = $300,090. Client figures loss based upon $1,000/sh = $100,000 - ($1,000 X 500 shs) = $400,000 So, ultimately, the question is, can I use a specific identification of shares in determining the loss, or is an average share required? Secondly, in using a specific identification, presumably I would use a per share per day allocation for determining the adjusted basis of the shares issued on 7/1/08 and 12/31/08 (in my example above). | |
| 30 April 2009 | |
| Hi JD the regs require you to time the adjustmetn to your basis in stock as of the close of the corps taxable year and are effective as of that date. If you dispose of stock during the year then your adjustment with respect to that stock is immediately prior to disposition. You have sold at the end of the year so I dont see anything that says you can do a proration. 1.1367-1(d). $300k loss is my answer. Hope all is well. bye | |
Harry Boscoe (talk|edits) said: | 30 April 2009 |
| The only contribution I can make here is that average per share basis calculations are *not* allowed in this context. Each share of stock in an S corporation has its own basis computation. This is not like mutual fund shares, and this is not like an interest in a partnership.
However, I have a faint recollection of making, or having to make, S corporation stock sales effective at the close of business on the day they happened. So if the sale and purchase of the new guy's stock happened on 12/31/08 *and* my memory is not faulty, all the loss for 2008 goes to the sole shareholder. | |
| 30 April 2009 | |
| Wes and Harry, thank you both for pointing me in the right direction. For any coming in later looking for answers to similar questions, here is the documentation I was looking for:
Allocations on the day of stock transferor go to the selling s/h, not the purchaser - see 1.1377-1(a)(2)(ii). Thus, Wes is correct in pointing out that no allocation goes to purchaser for 2008. Basis adjustments are allocable individually to each share, rather than collectively - see 1.3671-(b)(2) and (c)(3). Thus Harry is correct that using my averaging method is not allowed. Thanks to you both. Wes, yes, all is well. Hope so for you too. Regards. | |
