Question

Samantha and Darren, each holding a 50% ownership stake in Black Hat Corp., a calendar year S corporation, experienced a change in ownership when Samantha sold her shares to Endora exactly one-half way through the year. The financial results of Black Hat, utilizing normal accounting rules, indicate income through June 30 of $34,000 and income from July 1 to December 31 of $76,000, resulting in a total income for the year of $110,000. In light of this scenario, which of the following statements accurately reflects the tax reporting responsibilities?

1) Samantha will report her share of the full-year income on her individual tax return.
2) Endora will report the full-year income on her individual tax return.
3) Samantha will report her share of the income only for the period until June 30.
4) Darren will be responsible for reporting the full-year income on his individual tax return.

Answer 1

3.Samantha will report her share of the S corporation's income of $34,000 only for the period until June 30. Endora will report her share of $76,000 from July 1 to December 31, and Darren will report his share of the full-year income of $55,000.

Step-by-step explanation:

In the given scenario where there is a change in ownership of Black Hat Corp., an S corporation, during the calendar year, the tax reporting responsibilities are specific to the periods of ownership. Samantha will report her share of the income only for the period she held ownership, which is until June 30. Thus, she would report $34,000 income on her individual tax return, as this represents her share of the S corporation's income while she was an owner. Endora, who bought Samantha's shares, will report her share of the S corporation's income from July 1 to December 31, amounting to $76,000, on her individual tax return. Lastly, Darren will report his share of the full-year income, given his consistent 50% stake throughout the entire year, which would be $55,000 (50% of $110,000).

Therefore, the correct statement reflecting the tax reporting responsibilities is:
3) Samantha will report her share of the income only for the period until June 30.