Discussion:Sec 1377 Election with 1120S
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Discussion Forum Index --> Tax Questions --> Sec 1377 Election with 1120S
Me and the Boss (talk|edits) said: | 6 October 2009 |
| I know the answer and KatieJ has already answered the question, but I need something in black and white, because that is "just that kind of client" I am dealing with.
S Corporation has three shareholders (52%,24% and 24%). One of the 24%ers is retiring and the S Corp will cash him out effective 9/30/09. Everyone agrees to make the Sec 1377(a) election to treat the the 2009 tax year as if it was two tax years. I am quite certain that only one SCorp return is filed for 2009 and the items of income and expense are allocated according to the terms of Example 2 in Reg 1377-1(c). However, the client reads Reg Sec 1377-1(b)(1) "as if the corporation's taxable year consisted of two separate taxable years" to mean that I should file two separate tax returns. I know that down that path lies only disaster. So, OK, the Regs may be somewhat ambiguous, but, as far as the 1377 (a) election goes, I have been there and done that before, and only filed one 1120S per year. I need something, a Rev Proc, a JofT article, anything that says clearly that we only file one tax return. Any help will be gratefully appreciated and if Harry can solve this problem, I will FAX him a case of PBR! | |
| 6 October 2009 | |
| (5) Time and manner of making a terminating election
(i) In general. --An S corporation makes a terminating election by attaching a statement to its timely filed original or amended return required to be filed under section 6037(a) (that is, a Form 1120S) for the taxable year during which a shareholder's entire interest is terminated. A single election statement may be filed by the S corporation for all terminating elections for the taxable year. The election statement must include -- If each "taxable year" required a separate return, how could you file a single election statement for all terminating elections? | |
| 6 October 2009 | |
| You and the Boss, would IRS 1120S instructions be satisfactory to your client? If so, copy page 21 of the 1120S instructions and highlight the paragraph under Special Rules which reads "to make the election, the corporation must attach a statement to a timely filed original return....." . I think that will be good enough for a reasonable person. | |
| October 6, 2009 | |
| "as if" the corp's taxable year consisted of two...Not actually. As if. | |
Me and the Boss (talk|edits) said: | 6 October 2009 |
| Thanks so far, guys. I know we all know the right answer, but...
I have a great client, her attention to detail is phenomenal, which is why she is so successful. However, if I say "the sky is blue" she wants to know if it is "azure" or perhaps "teal" I am still looking for that "published" piece that clearly states you only file one return and one return only. But if it ain't there, it ain't there. | |
| October 6, 2009 | |
| Ask her what the S in S Corp means, then. Or documentation that 1+1=whatever she's willing to pay for. But usually 2. Must be an engineer, sorry for you. | |
Southparkcpa (talk|edits) said: | 6 October 2009 |
| The deeper issue is that if your client is dictating to you the procedure, the relationship should be looked at as well.
Why do they doubt you? | |
| 21 January 2010 | |
| If all parties agree, you prepare the return as if there were two separate tax years, allocating income and expenses to each k-1 based on each parties actual income and expenses. In my opinion, the easiest way to do this is to prepare two separate returns and prepare the K-1's, then merge the two 1120S' together, attach the statement and mail in the return.
I always recommend to my clients to put this in the purchase agreement so that we don't have to go back to all the parties during tax season and try to get them all to agree to allocate income and expenses based on actual amounts. If you tried sending two tax returns, the second one would get rejected. | |
| 21 January 2010 | |
| Check out the wording in this IRB 1997-06 that goes into detail about final regs for §1377 beginning on page 4. Note the examples on page 8 discussing how to allocate "as if" two tax years etc. Maybe you can print and highlight appropriate portions for your client. | |
| 21 January 2010 | |
| Sorry - here is the url for that IRB: | |
| 3 June 2010 | |
| can anyone share the election statement to be submitted along with the letter ? | |
| 3 June 2010 | |
| Your software will probably handle this. Look for a 1377(a)(2) election. | |
| 4 June 2010 | |
| I checked the software. It just writes a line on the top of 1120s that the corporation elects to file under the section 1377a.2 | |
| 9 June 2010 | |
| "Must be an engineer, sorry for you."
OK, that one gave me a really good laugh. I hear you and know exactly what you mean. Some of them seem to think they can take a first-time read of the tax rules and literature and second guess my 25 years in the trenches of actually applying all those rules. | |
| 10 June 2010 | |
| Praheja, here are the required contents of the election.
(i) In general. An S corporation makes a terminating election by attaching a statement to its timely filed original or amended return required to be filed under section 6037(a) (that is, a Form 1120S) for the taxable year during which a shareholder's entire interest is terminated. A single election statement may be filed by the S corporation for all terminating elections for the taxable year. The election statement must include (A) A declaration by the S corporation that it is electing under section 1377(a)(2) and this paragraph (b) to treat the taxable year as if it consisted of two separate taxable years; | |
