Shannon D. Mullins - Page 9

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          year.3  Sec. 1377(a)(1).  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 his or her             
          period of ownership.                                                        
               In the present case, petitioner admits that he owes taxes              
          for a portion of the items of S corporation income and deductions           
          reported on the Schedule K-1, but he argues that his pro rata               
          share should be computed with a date of sale of April 3, 2001.              
          Respondent contends that the date of sale occurred on October 26,           
          2001, the date on which petitioner received his first payment for           
          his stock.                                                                  
               Although petitioner claims that “the deal was done” on April           
          3, 2001, there was no written agreement evidencing a sale of the            
          shares to Mr. Taylor, and petitioner did not receive any payment            
          for his shares.  The only evidence introduced by petitioner was a           
          letter faxed to the Kentucky Board of Embalmers and Funeral                 
          Directors on February 14, 2001, which informed the Commonwealth’s           
          licensing agency of an “upcoming sale of the business”.  This               

               3  Under some circumstances, a selling shareholder may elect           
          to compute the selling shareholder’s pro rata share as if the               
          taxable year terminated on the sale date.  Sec. 1377(a)(2).                 
          Petitioner did not make such an election to “close the books” on            
          the date of sale.                                                           

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