Reporting Sale of S-Corporation

[MikiD]

Hi Everyone,

I have a client who sold his S-Corp business and I want to make sure I set up the sale correctly for 2022. The client was a sole owner of the S-Corp. It was a chiropractor practice.

The sale to a colleague was for approximately $120k and included transfer of clients and medical equipment/instrumentation and chiropractic tables. It was one transaction, and they did not bother to break it down or distinguish the assets. I know to set this up on his personal 1040 schedule D, with the number of shares he sold, but my biggest confusion is with respect to the basis. Also, I want to confirm how to close out the 1120S with respect to the sale and final return.

On the 1120S - The medical equipment/tables are listed under his assets (and the balance sheet) but are fully depreciated now. The other item he has on the balance sheet is Goodwill from when he had purchased a clientele from another chiro years ago, and about half of that was amortized. The biggest items on his balance sheet are cash for assets and retained earnings under liabilities. I believe cash and retained earnings will be excluded from the basis...? 

When he started the business his initial investment/basis was about $300k ($160k in medical equipment purchases - now fully depreciated, and another $140k in Goodwill - now half amortized). It is the Goodwill that throws me off and also reporting disposition of the assets.

Overall, for his basis on 1040 Schedule D, do I use the $70k - what is left of his Goodwill investment? and proceeds $120k? But how do I report the disposal of the assets on 1120S to prepare final return?

Any advice or guidance would be greatly appreciated. Thank you

[BobKamman]

And this is for a return that is due tomorrow?  Half of the narrative sounds like it was an asset sale, the other half sounds like it was a stock sale.  

[MikiD]

Yes, he's one of the worst procrastinators I have ever known...

It's a stock sale for sure because the corporation is now closed, but I'm not sure how to prepare the final 1120S return showing no remaining assets and how to treat the goodwill...

[IRonMaN]

But if it was a stock sale, the corporation would still be open.  Have you read the actual sales agreement?

[BobKamman]

Here's some great news.  If the buyer bought the corporation, it's his responsibility to file the 2023 return now, and you can take tomorrow off!

[MikiD]

I read your reply and got all happy, and then I got another email; some more clarity, but still waiting on actual paperwork.

So, it looks like the sale was for all assets and not stock. The client is working on closing the corporation but just needs a final return. In this case I'm thinking just set up a bulk sale, with $120k being the proceeds for all the assets, right? Would I include the Goodwill here as well?

[joshuabarksatlcs]

RE:  Would I include the Goodwill here as well?

It would help if you had a copy of the buy/sell agreement.  What exactly did your client sell?  Did it include the hamster that's still running on the wheel in his old office?

If there was no written agreement, how about the bar napkin that they scribbled on?

If no bar napkin, how about your client's best recollection?

Your fellow Intuit product users in a random forum likely aren't in the best position to tell if Goodwill should be included.  Except perhaps @IRonMaN  thru the words of Ivar or Olga.

[BobKamman · Accepted solution]

Include as high an amount for goodwill as you think you can get away with.  It's capital gain, the rest of the stuff has depreciation recapture.  Was it all owner-created goodwill, or had he purchased some originally?

[MikiD]

The goodwill was purchased 

[rbynaker]

Both buyer and seller are required to file Form 8594:

https://www.irs.gov/pub/irs-pdf/f8594.pdf

Theoretically if the forms don't match, the IRS will get grumpy.  Reality is probably different, but advise your client of the possibility of audit.

[BobKamman]

Likely the same situation where the big CPA firm up north screwed up and nearly cost my client tens of thousands in taxes until they came to me for help and I found the relevant PLR.  Your client might have purchased goodwill many years ago, and amortized it.  If that goodwill still had value, at least some of the amortization has to be recaptured.  But if those patients and their friends are long since gone, the goodwill sold was not what was amortized, and you don't have a recapture problem.  Lots of facts and circumstances to be sorted out in a day.  

[BobKamman]

There is no little man with a green eyeshade, sitting at an IRS desk comparing Forms 8594.  There is a requirement that both parties file a Form 8594.  If they happen to match, IRS can still audit them, but is more likely to assume that they are reasonable because what's favorable for one party is usually unfavorable for the other.  Here is what Code Section 1060 says:

"If in connection with an applicable asset acquisition, the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate."

[sjrcpa]

"The client is working on closing the corporation but just needs a final return."

If the asset sale took place in 2022 and client is working on closing the corporation now, 9/15/23, 2022 is not a final return.

@BobKamman About 6 months ago or so I read that IRS said they were going to (finally) start matching 8594s. It's probably on the back burner now that they're going after millionaires.

If this were in my office, the return would not be going out today.

[BobKamman]

@sjrcpa 

When you stop to think about it, you realize how useless a 100% matching of Forms 8594 would be. Disclosure laws prevent IRS from telling one party what was on the other’s return. What you likely saw is a reference to this one audit project, which is listed among more than 20 others at

https://www.irs.gov/businesses/corporations/lbi-active-campaigns 

Practice Area: Western Compliance

“Parties that enter into taxable asset transactions under either IRC § 1060 or IRC § 338(h)(10) must report the transaction on either Form 8594 or Form 8883, which must be attached to their tax return. This campaign addresses LB&I business entities that either did not report a transaction on Form 8594 or Form 8883, or that reported the transaction inconsistent with the other party’s reporting of the transaction.”

So they will pull a few dozen returns, some of which should have had an 8594 but didn’t and some that did. Of those, if allocations look squirrelly they might pull the other party's return also. If this "campaign" leads to significant revenue, the audit selection process might be tweaked so that more business sales are examined. Like, 2 percent of them rather than just 1 percent.

My read on Section 1060 is that it puts the burden of proof on IRS, if the numbers match for buyer and seller.  But if you do a search for all Tax Court cases in which Form 8594 is mentioned, there are only seven since 1996.  The reference is often in a footnote, and matching does not appear as a factor.  

[qbteachmt]

Here is where it gets confusing: "and included transfer of clients and medical equipment/instrumentation and chiropractic tables."

If your client sold the shares of the corporation, the corporation would still exist and still own that equipment. If that transfer is in fact what sold, then the shares were not also sold. Your client still has a corporation, which now has no reason to be in business and would be a shell and can be closed. Or, your client sold the equipment and assets, as well as an empty shell of a corporation.

This is another conflicting statement: "I know to set this up on his personal 1040 schedule D"

The corporation sold its assets, liabilities, and reason to exist and operate. That is not your client's personal 1040. If the shares were sold, then no assets, liabilities, or other changes happened. Or, you have both conditions: the corporation reports all its sales and your client reports the sale of shares of an empty corporation which still exists.

[sjrcpa]

@BobKamman I think that is what I saw.

.