Discussion:Basis of S Corp Shares Sold

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).