SCorp Income Split Question with exiting partner

[ed_accountant]

Hi,

I have a small manufacturing SCorp on accrual method between two partners, each having 50% interests, who were both actively involved in the business. Due to a partner dispute, Partner one purchased partner two interest for approx $500K on December 2007 for an amount much greater than his original investment . The sales price was paid by the remaining shareholder and checks cleared before 12/31/07.

The Scorp income through 1/1 - 12/07 is approx 500,000. However, most of the profits were in inventory and receivables, so distributions were much less than the allocated income... Distributions were approximateley 140k to each partner.

I am planning on allocating 50% of income, $250K through 12/1 to the exiting partner even though he received only 140K in distributions. My justification is that he received the 500k sales price and part of this sales price was the unpaid current income..

I would appreciate your opinion.. Thanks

Also, they both had separate attorneys and went through arbitration to come to agreement on the sale of shares and the exiting partner signed an agreement that he could not come back and sue the corp or Partner one if he accepted the sales price...

thanks

[RoyDaleOne]

Quick answer -- two options..

Close the books on date of sale -- 50 50..

Use number of days stock owned to get percentage.

Added..

A shareholder who disposes of stock is treated as a shareholder for the day of disposition for this purpose. Reg. Section 1.1377-1(a)(2)(ii). However, an S corporation may be able to elect out of the per-share, per-day rule if a transfer of shares terminates a shareholder’s interest in the S corporation. Reg. Section 1.1377-1((1).

[OldJack]

As RoyDaleOne points out the two options should result in little difference since there is less than a month in time. Number of days owning stock is the default and the close of the books is an election. You should present and document the option/election decision to your client and stay out of the lawsuit.