What form an S Corp should use to report sharing of a real estate sales proceeds with an individual who is not a member?

[IRonMaN]

Beep, beep, back up.  Paul Harvey would like to hear the rest of the story so he can figure out what is going on.

[Alla123]

I apologize, posted this too quickly:) The story is that there are two shareholders in the rental real estate S-corp, each owns 50%. In 2021 they have decided to dissolve the business, stopped renting back in May (no operational income since then) and sold all their rental properties with the last one being sold in November. One of the shareholders is going through a divorce and as a part of her settlement negotiation agreed to share her portion (50%) of proceeds from the sales of that last property in November with her husband (not a shareholder.) So, the business issues a company check to the husband for 25% of sales proceeds. How should I report transaction on the business tax return (final) and what form to send to the husband. I am thinking creating a K-1 form for him making him a partner as of the last asset sales day and report his portion of sec 1250 gain and depreciation recapture on that form as well full distribution amount.  There will be no income for him though. I would really appreciate your input as i am not sure how to deal with this. I am also entertaining an idea of using form 1099S for reporting of real estate sales but see issues with this form as well. Thank you!

[IRonMaN]

Sounds like she is dragging her marital issues into the corporation with her.  It was a corporate asset and she was a shareholder.  The corporation sold the asset and she elected to give the spouse half of her proceeds.  That was really nice of her, but since the spouse had no ownership, it sounds like everything gets reported to her and she is just splitting marital assets after the fact.

[Alla123]

The reason it was done this way is because she wanted the husband to be responsible for taxes on the proceeds not her. So how should I report this now after the fact? Could I use the K-1 form for the husband assuming that she gave him 25% ownership on the day of the last asset sales? Or report the entire amount to her but this way we’ll be responsible for taxes? What’s the best way to deal with this? Any advice would be greatly appreciated. 

[IRonMaN]

As the Stones sang - you can't always get what you want.  If she wanted him to pay tax on half of the proceeds, she should have given him 50% of her stock.

[Alla123]

Thank you 

[IRonMaN]

You betcha!

[qbteachmt]

"is because she wanted the husband to be responsible for taxes on the proceeds not her"

Just to clarify, though: "The corporation sold the asset"

That means it is reported on the 1120S and passed down to her.

Your issue is Banking, not Taxes. Instead of her paying him, she had him paid directly. That doesn't change what happened.

[Alla123]

You are correct. Thank you for your comment.