david3
Level 7

Two shareholders of several S Corps parted ways in 2020. There are 3 S Corps - my client was left with one of the S Corps and the other shareholder was left with the other two S Corps. Both were 50% owners of each entity.

Of course I didn't find out about this until after the fact. The attorney drew up the transfer/sale of stock between the shareholders with an effective date of January 1, 2020. All parties agree that no profit will be allocated to the departing shareholder in 2020 - all agree that the true transfer date is midnight December 31, 2019. My thinking is that if the agreement is effective January 1, 2020 then there should be one day of profit allocated to the departing shareholder. Even the attorney agrees that the intent is no profit allocation in 2020.

The departing shareholder for the entity that I am preparing the tax return received a distribution in the first quarter of 2020, which is not proportionate to her ownership interest. 

My client received a K-1 from the two entities that he has transferred his shares. The K-1 show zero income and reports distributions.

When preparing the 1120S for my client, PS only allows me to enter 1/1/20 as the final date for the departing shareholder. PS then allocates one day of profit to this shareholder. 

How do I get PS to report the K-1 with zero income and a distribution to the departing SH? Of course this will create a problem between the parties if the K-1s aren't reported in the same manner.

Also, for my client, I am thinking that whatever final distribution he received would be considered payment for his shares in the other entities and the difference between his basis and the amount he received will be reported as a loss from sale. Is this correct?

Thanks for your help.

0 Cheers