Section 336(e) election

[Daven]

A client is selling a majority stake in his S Corporation and as per the attorney's recommendation, both buyer and seller have agreed to make the Section 336(e) election to allow the buyer to take depreciation deduction for Goodwill etc.  While I got a general understanding of how the Section 336(e) works, I don't know how to handle it for tax filing purposes (filing the tax return for the seller till the date of sale, and then subsequently for the buyer post sale).  I am seeking support from a professional who is familiar with this Code section as well has worked on it for his/her clients.  This will be a paid consultation.  Please send an email [removed] if you are able to assist.  Thanks.

[PhoebeRoberts]

The tax returns essentially work the same as they would in an asset sale. If you have a 7/31 effective date, seller files a final 1120S for the short period ending 7/31, with income and expense determined the same way you would normally. The deemed sale transaction is basically handled as if the 1120S sold the assets and distributed cash to the selling shareholder on 7/31.

Buyer files an initial 1120S for the short period beginning 8/1. Technically, a new S-election should be filed; in my experience the IRS will just send back a letter saying "You're already an S-corp," but I file the new election within 75 days of effective date, regardless. The deemed purchase transaction is handled as if the purchasing shareholder contributed cash and the 1120S bought the assets.

If the preparer of both returns is the same person / firm, there's a conflict of interest you should request the buyer and seller waive. If the preparers are different people, each preparer should get a release from their respective client authorizing information sharing sufficient to prepare complete, accurate, and consistent tax returns.

Note that the minority shareholder(s) must also consent in writing to the election.