Discussion:Client received 1099-misc for private stock sale
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| 27 June 2008 | |
| My client sold his company stock for $1,500,000 which was a private sale. He gave me a spreadsheet showing all transactions and costs. There was an additional $68,000 paid that represented some leftover A/R that was not paid at the time of sale, but WAS paid in 2007. There was no 1099-B form issued for the original stock sale, and there was a 1099-misc form issued for the additional $68,000 (box 3). My question is, can I report both transactions on Schedule D? Or do I need the issuing party to issue a 1099-B or another form? My client's partner said their CPA just listed it as an installment sale, but that does not seem right to me. Please help! | |
| 27 June 2008 | |
| you don't need a corrected 1099-B to put it on the correct place on the return, but you might want to warn the client that the IRS might be looking for the income and ask where on the return it WAS reported. | |
Southparkcpa (talk|edits) said: | 27 June 2008 |
| It sounds like it may correct. You would report $1,500,000 on schedule D and the 68K is ordinary income. It really depends on how the legal agreement was drafted. | |
| 27 June 2008 | |
| Well, that's what I originally did, but since another CPA disagreed with me, I am now not sure. It makes a big difference for my client, he would much rather get the 15% tax treatment instead of the ordinary income rate. I would rather do what Kevin says and just report it on schedule D, but I also feel like the IRS would question this. What would I need to look for in the legal agreement to justify Capital gains treatment instead of Ordinary income? | |
Southparkcpa (talk|edits) said: | 27 June 2008 |
| Brensan,
Love your profile. Low paid help in the photo???? Anyway, I do quite a bit of M and A work and a occasionally a deal would say that "the sale is $1.5 and any A/R earned after a certain date" belongs to the seller and is paid separately etc.... if you see no language like that, then treat it as capital. However, I would absolutely review the doc's, to be certain because you have strong evidence that it is ordinary income(i.e. the other CPA disagrees with you) If you think it is capital, then on a schedule C put the 68K and show COGS as 68K to net to zero. I personally would never do this without an engagement letter signed by the client stating he understands the capital position as well as the increased audit risk of 68K on a schedule C with NO net income etc... | |
| 27 June 2008 | |
| Thanks Southpark, you've been a great help. Just want to clarify a couple of things. I wanted to treat it as Ordinary Income, and the other CPA disagreed with me. He treated it as an installment sale with a LT Capital gain of 100%. I also don't understand why I would put the Capital Gains (if so treated) on a schedule C, and it would be 100% profit which ever treatment we gave it. Does that change your answer? I have an email out to my client now asking to review the terms of this sale - so that may clear up some questions. I also will amend my engagement letter to him if needed. My "low paid helpers" are tapping their little paws now, ready to go home. Have a great weekend. | |
Southparkcpa (talk|edits) said: | 27 June 2008 |
| OK, now I am lost. Was the original sale in 2006?
Be clear on whether it is capital or not. Only the sale doc's will tell you that. The schedule C point is to simply "fool" the IRS computer. The 1099 misc will generate a search for 68K on line 21 or on schedule C. If you put it on schedule D, you will get a notice of unreported income of 68K because the IRS will NOT look for it on D. If the other CPA is correct, he should not have issued a 1099 misc so he has "contradicted himself" a bit. In my practice, I would E mail the other CPA, get clarification (via response in E mail) that he has treated it as capital and that would be enough for me. | |
| 27 June 2008 | |
| Thanks, I understand the Schedule C point now. No, original sale in 2007 (and I disagree with the "installment sale" scenario). The 1099 is NOT coming from the other CPA, there were a group of people that sold their company. This other CPA has prepared the tax return for another person in that group. I'm sorry I am not explaining myself very well - guess it's late on Friday...
I WILL read the sale documents, I WILL get in touch with the other CPA if possible, and if this additional sale (in the same year) IS supposed to be capital and not ordinary income, I should get the issuer of the 1099 to correct it (or void it) Correct? | |
| 27 June 2008 | |
| There is no 1099-B requirement as this was a private stock sale and not transacted by a broker.
The $68K probably represents an payment on an installment sale as the A/R was temporarily excluded until collected. Therefore, this is all capital gains. | |
| 28 June 2008 | |
| Thanks Incognito. Assuming you are right, and I think you are - what do I do about the 1099-Misc? Ask for it to be voided, send an explanation with the tax return (and report it as a capital gain), or do nothing and report it as a capital gain (or installment sale)? What would you do? | |
| 29 June 2008 | |
| I would get the facts on the 68K. Payors who issue 1099 MIsc are required to furnish a statement to the employee explaining the nature of payment. What does "leftover A/R" mean? Accounts receivable? Before you can do any thing I would suggest you find out what the 68 K represents as this will guide you to the next step.This should be easy by talking to your client.
If Incognito is correct and this was an additional payment related to the sale I can see why the company issued the 1099 Misc because it was paid in a later year (2007 )when your client was apparently no longer an employee. Assuming the 68K is part of the proceeds of the sale a couple of ways to handle the 1099 MISC depending upon your software: 1) Show on the tax return using a the statement feature the 68 K coming into line 21 of tax return as a positive and then going out as a negative with a full explanation. 2) Don't show the 68K on return but have a detailed explanation to the return explaining the amount is included on schedule D and no 1099 B issued because it was a private sale . | |
| 29 June 2008 | |
| The fact that no 1099 B was issued for the sale of " his company stock" makes me a little suspicious that the stock sold may be "qualified small business stock" (sec 1202 ) that would have favorable tax consideration to your client . You may want to dig a little further. | |
| 30 June 2008 | |
| Hi as far as I am concerned what is missing re the BIG picture of the $68K. IF the selling entity is on a cash basis this needs to be reported as income of the entity and then distributed to the old shhrs in "some form or fashion". If the selling entity is an accrual taxpayer it should have been already reported as income and then distributed to the shhrs in "some form or fashion". The documents should have addressed this. Its just not capital gain because no one thinks about the initial reporting. bye | |
