Question

Tip Corporation is a calendar-year S corporation with 10,000 shares outstanding, 2,000 of which are owned by Will and 8,000 of which are owned by Nancy. During the year Tip has ordinary business income of $540,000 and a long term capital gain of $230,000 from a transaction that occurred on April 3. On 11/1 Nancy sells Yolanda 3000 of her shares. How would the income be allocated to each shareholder?

Answer 1

As per general rule the shareholder is allocated a share of entire year’s income or loss unless a special allocation method to elect closing the books on the date of disposition is selected, since in the problem there is no such mention, we will allocate income through general rule.

Will have 20% shares so 20% of total income will be allocated to Will = (540000+230000)x20% = 154000

Balance 80% of income for 10/12 to Nancy + 50% of income for 2/12 to nancy

770000 x 80% x 10/12 + 770000 x 50% x 2/12 = $577,500

And 770000 x 30% x 2/12 = 38500 to Yolanda