NY LLC formed 2012. Two members with 50/50%. Form 1065 filed for 2012-2015. Service business, no real property owned.

December 2015 one member was diagnosed terminally ill. The LLC remained a partnership through 12/31/2015 as that is how it was operated the entire year. Terminal partner is (and has been since Dec 30, 2015) unable to physically work and wanted out of the partnership immediately. Both partners agreed.

Healthy partner finds themselves facing SMLLC and in February 2016 decides to file FORM 2553 for S-Corp treatment beginning 01/01/2016 and it was granted. On 01/02/2016 the company agrees to purchase 100% of terminally ill shareholders 50% holdings for 42k.

I have several questions in regards to that and mind you I have just enough knowledge to be dangerous...

1. Would the LLC, which is now considered an S-Corp for tax purposes have to go back and Amend the 2015 return to report a Final K-1 Form 1065 on the partnership? To check the "Final K-1" Box and correct the distributions to zero out the partners tax basis ending capital account? And then contribute it as capital to the S-Corp on the Form 1120S for 01/01/2016?

Or without Amending can that all be accomplished by accounting for it all on the 2016 Form 1120S? The company had no activity from 01/01/2016 - 01/15/2016 and the EIN hasn't changed. Just the tax treatment.

2. Is/should the 42k worth of stock that was purchased by the company be considered treasury stock owned by the S-Corp?

3. If the 42k worth of stock is treasury stock, how does that get reported on Form 1120S by the company?

4. And what is the result of that transaction? As in what does it mean to the now sole owner of the S-Corp for 2016?

If I'm at all on the right track, for the terminal partner the stock basis is 23k and he received 42k leaving a 19k capital gain reported by him on Schedule D. If that's accurate it wouldn't stand to reason that the S-Corp shareholder would then also pay tax on the $42,000 that was used to purchase the stock back by the company. Is the 42k deducted by the company somehow so that distribution doesn't flow to Box 1 of the K-1? Amortized?

5. Would the S-Corp necessarily have to issue a 1099B to the shareholder that only held the shares for one day of the tax/calendar year?

6. Random question since it's on my list - Is there any real benefit to having the S-Corp reimburse health insurance premiums to the shareholder/taxpayer? I understand the difference between the straight line deduction and itemized deduction, but does the math really work out that less tax is paid putting the health insurance premiums on a W2, since it's getting reported as income and washed back out as an adjustment. If an AGI is needed to answer that question, I'll throw out $100,000 arbitrarily and wouldn't expect the Schedule A medical expense limitation to be met. It would be disallowed. Is there a reason to then bother being accountable to the company for that? It seems like unnecessary work to come up with the same result?

If your instinct (wisely so) wants to scream - "Why don't you just dissolve the LLC on 12/31/2015 and the healthy member can form a new LLC and be taxed as an S-Corp without all of the maneuvering?" - it isn't an option. That choice would require renewing a contract that expires in 2022 that there was never an intention of renewing due to retirement goals.


I'm open to all advice and direction that is offered. I'm just trying to do the best I can with what I have to work with during an unexpected and miserable situation. The good news is that the terminal partner is still with me and cooperative in helping to close any loose ends if they've been missed and any damage control if we're able and regain some control what feels very uncontrolled at this point. I would be very grateful for any patience and advice that is available as I am determined to understand the mechanics of all of this.

1. Would the LLC, which is now considered an S-Corp for tax purposes have to go back and Amend the 2015 return to report a Final K-1 Form 1065 on the partnership? To check the "Final K-1" Box and correct the distributions to zero out the partners tax basis ending capital account? And then contribute it as capital to the S-Corp on the Form 1120S for 01/01/2016?=======>> Because of a member?s death or otherwise, MM LLCs often change to SMLLCs. When this change occurs, dangerous legal and tax consequences can easily result.. Correct as you can see, the SMLLC elected to be taxed as an S corp BOUGHT all of the terminally ill SH 50% holdings; Also MMLLC needs to amend/report any profits or losses allocated to each partner for the year from the sale( each SH needs to adjust his/her MMLLC basis((outside basis or etc)) by filing Sch K-1 of form 1065 /1040.


Or without Amending can that all be accomplished by accounting for it all on the 2016 Form 1120S? The company had no activity from 01/01/2016 - 01/15/2016 and the EIN hasn't changed. Just the tax treatment.====>>As said previously.

2. Is/should the 42k worth of stock that was purchased by the company be considered treasury stock owned by the S-Corp? ===>I do not thnk so; Treasury stock are shares issued by a corp( the MMLLC can not issue shares unless it is taxed as C or S corp asfaras I know) that it either repurchased from a shareholder or issued but did not sell. types of securities

3. If the 42k worth of stock is treasury stock, how does that get reported on Form 1120S by the company?=>> As mentioned previously.

4. And what is the result of that transaction? As in what does it mean to the now sole owner of the S-Corp for 2016? .N/A

If I'm at all on the right track, for the terminal partner the stock basis is 23k and he received 42k leaving a 19k capital gain reported by him on Schedule D. If that's accurate it wouldn't stand to reason that the S-Corp shareholder would then also pay tax on the $42,000 that was used to purchase the stock back by the company. Is the 42k deducted by the company somehow so that distribution doesn't flow to Box 1 of the K-1? Amortized?

5. Would the S-Corp necessarily have to issue a 1099B to the shareholder that only held the shares for one day of the tax/calendar year? ====>Aslongas he is a shareholder/owner of the S corp then yes; however the ill partner is not an S corp shareholder.owner as you said,the MMLLC converted into SMLLC on jan 1, 2016 and elcted to be taxed as an S corp in February 2016

6. Random question since it's on my list - Is there any real benefit to having the S-Corp reimburse health insurance premiums to the shareholder/taxpayer? I understand the difference between the straight line deduction and itemized deduction, but does the math really work out that less tax is paid putting the health insurance premiums on a W2, since it's getting reported as income and washed back out as an adjustment. If an AGI is needed to answer that question, I'll throw out $100,000 arbitrarily and wouldn't expect the Schedule A medical expense limitation to be met. It would be disallowed. Is there a reason to then bother being accountable to the company for that? It seems like unnecessary work to come up with the same result?=========>> An S corp deducts the premiums it pays for accident and health insurance to cover a 2% shareholder/employee as compensation paid to the shareholder/employee. In other words, the premiums are included in the shareholder/employee's salary and reported on the individual's W-2 form; if you're a more-than-2% shareholder/employee in an S corp, a you may only deduct health insurance premiums directly on Form 1040, line 29 if the health insurance plan is considered to have been established by the business and not by you personally

We now understand why an amended is a necessary evil. All of the information was valuable and appreciated. With only a basic knowledge of such things on my part, that was NOT an easy post to respond too. You did a wonderful job explaining and considerate deed as a bonus.


Thank you again!