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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Does the Secition 137(a)(2) election need to be signed by all

Customer Question

Does the Secition 137(a)(2) election need to be signed by all stockholders of an S corporation? Or does the election get attached to Form 1120S stating that each affected shareholder consents to the corporation making the election?
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.
Hello, my name is***** & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.
Are you talking about IRC 1362(a)(2)?
I ask because you question asking about IRC 137(a)(2) refers to adoptions, which would not apply to S-Corps?
If you are talking about the S-Corp election under IRC 1362(a)(2), then the answer is YES. All shareholders must sign the election individually. A blanket statement that everyone consents to the election, would not be sufficient.
Hope this helps.
If you have any questions, please don't hesitate to ask.
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Customer: replied 1 year ago.
No, I'm referring to Section 1377(a)(2). Let me know your answer to my question for this Section. Thx.
Expert:  Stephen G. replied 1 year ago.
OK, you are talking about ending the tax year when there is a change of ownership, ie. splitting the year into 2 tax years.
All of the shareholders who owned shares at any time during the calendar year must sign the election. The S-Corp will file 2 tax returns for that split year.
Normally, the election is made by attaching a statement to the S-Corp tax returns, usually on the Company letterhead.
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Customer: replied 1 year ago.
Either I have not made my question clear or you don't understand my question. There is one S corporation. It had one stockholder for many years. On April 1st, 2015 the one stockholder sold all of her stock to another person who effective April 1st, 2015 owns 100% of the stock in the S corporation. Rather than pro-rating the income to each of the two stockholders during the year based on their ownership during part of the year, they or the S corporation can make an election under Section 1377(a)(2) to allocate the S corporation income for the first 3 months of the year to the original stockholder and then allocate the income for the last 9 months of the year to the second stockholder - correct?? In this case the S corporation only files one tax return for all of 2015, but allocates the income to the two stockholders based on what the net income was during the time of the year each person owned the stock. You mentioned above in your answer that the S-Corp will file 2 tax returns for that split year. I don't understand how the S-Corp can file two tax returns for the one calendar year. It seems to me that the S-Corp only files one tax year for the 12 month period but allocates the income for each K-1 by splitting the net income into the first 3 months and the last 9 months of the year. Am I correct or am I totally confused??Can you email me a copy of the election statement that gets attached to the S-Corp tax return? Also, please email me a copy of the IRS rules addressing this specific topic either written by the IRS or by some well know tax research company.Thanks.
Expert:  Stephen G. replied 1 year ago.
No. I mis-spoke; what I meant to say was that the S-Corp will file 1 tax return combining the 2 separate taxable years with each taxable year reporting it's own applicable K-1s, not the entire 1120-S. Basically what gets confusing is that the books must actually be closed twice (once for each short-period taxable year) within the same calendar year.
We aren't given access to your email, so what I can do is give you a sample statement right here that you may use to for the required statement for the election & shareholder consents:
I am sure that you will have to adjust the spacing below, as it seldom comes through as printed in this basic editor.
SAMPLE ELECTION AND CONSENT FORM
TO USE THE INTERIM CLOSING OF THE BOOKS METHOD
During this tax year ended [date] ______________, a shareholder’s entire interest in the corporation was terminated. [Name of S Corporation] elects under IRC § 1377(a)(2) and Reg. § 1.1377-1(b) to have the rules provided in IRC § 1377(a)(1) applied as if the tax year consisted of two separate tax years.
The corporation and each affected shareholder whose signature appears below consent to this election, which is made with respect to the termination of the entire interest of [Name of Shareholder] , as follows:
Manner of Shareholder’s Termination: Sale of Entire Interest
Date of Termination: ____________________
SHAREHOLDER CONSENTS:
The following identified shareholders of [Name of Corporation], TIN [number], hereby consent to the corporation’s election under IRC § 1377(a)(2) and Reg. § 1.1377-1(b) to have the rules provided in IRC § 1377(a)(1) applied as if the tax year consisted of two separate tax years:
Date Shareholder Signature Taxpayer SS# Address
_________ __________________________ _________________ ____________________
....................................................... ____________________
_________ __________________________ _________________ ____________________
....................................................... ____________________
Now as far as "IRS Rules", here's a link from Cornell Law School which explains the relevant sections of the Internal Revenue Code.
https://www.law.Cornell.edu/cfr/text/26/1.1377-1
If you need something else, please let me know.
Please remember to rate my response as that is the only way we receive credit for our work.
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Expert:  Stephen G. replied 1 year ago.
Do you have any additional questions or may I clarify anything for you?
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Expert:  Stephen G. replied 1 year ago.
I would appreciate it if you would take the time to rate my response as that is the only way I receive credit for my work. Despite the fact that you have paid the site for this question, I will not receive credit for responding unless and until you provide a rating.
Thanks very much & thanks for using JustAnswer.com.
****Again, if there's anything else I can do for you, please just ask.****
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