Question

Noelle, the owner of all of the shares of ClockCo, an S corporation, transfers her stock to Grayson on April 1. ClockCo reports a $70,000 NOL for the entire tax year, but only $10,000 of the loss occurs during January-March.

1. Without a short-year election, how much of the loss is allocated to Noelle, and how much is allocated to Grayson?

Answer 1

Without a short-year election, $10,000 of the $70,000 NOL would be allocated to Noelle, and the remaining $60,000 would be allocated to Grayson.

Step-by-step explanation:

In the absence of a short-year election, the allocation of the $70,000 Net Operating Loss (NOL) of ClockCo between Noelle and Grayson would be determined based on their respective ownership of shares during the tax year. Given that Noelle transferred her stock to Grayson on April 1, the allocation is divided to reflect their ownership periods.

For the portion of the NOL that occurred from January to March, corresponding to the period when Noelle still held the shares, Noelle would be allocated this amount. In this case, $10,000 of the NOL was incurred during January-March, and therefore, it would be allocated to Noelle.

Conversely, the remaining $60,000 of the NOL ($70,000 - $10,000) occurred after Noelle's stock transfer to Grayson on April 1. As a result, Grayson would be allocated this portion of the NOL since he assumed ownership during this period.

This allocation strategy ensures a fair distribution of the NOL based on the ownership periods of Noelle and Grayson. It recognizes the timing of the stock transfer and aligns the allocation of the NOL with the period of ownership for each shareholder, adhering to principles of equity and fairness in tax treatment.