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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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Last modified: May 25, 2011