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The buy-sell agreements also did not provide for any
interest to be paid on the sales price on account of any passage
of time between the effective dates of the sales and the date
payment was ultimately made.
From and after June 30, 1994, the 22 True companies
considered the income and expenses associated with the interests
sold by Jean True to belong to her sons, not to Jean True.
Moreover, the True companies filed their Federal income tax
returns consistently with this consideration. For example, as
part of its Federal partnership return (Form 1065) for 1994, True
Oil filed three Forms 8308, “Report of a Sale or Exchange of
Certain Partnership Interests”; these forms reported that the
“Date of Sale or Exchange of Partnership Interest” with respect
to Jean True’s sale of her interest in True Oil was June 30,
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pro rata share of the corporation’s income for the year of sale,
computed in accordance with the Internal Revenue laws.
Sec. 1377(a)(1) provides that a stockholder’s pro rata share
of S corporation income for a taxable year is calculated by
allocating an equal portion of the corporation’s items to each
day in the year. Under this method, a selling shareholder’s pro
rata share of income for the year of sale will be affected by
corporate items realized after the sale date, because a portion
of such items will be allocated to her period of ownership. Sec.
1377(a)(2), however, provides that under certain circumstances
the shareholders may elect to compute the selling shareholder’s
pro rata share as if the taxable year terminated on the sale
date.
It appears that the True family made the election to compute
Jean True’s pro rata share of income as if the corporation’s
taxable year ended on June 30, 1994, with respect to some (but
not all) of the 15 S corporations in which she sold her stock.
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