QSST Stock Basis Calculation Question for S Corp Sale - Need Help!

For your first question about basis, you need to adjust the trust's original basis for all S corporation income/loss items that flowed through to the beneficiary while it was a QSST. This is because even though the K-1 items went to the beneficiary for income tax purposes, the trust's basis in the S corp stock still needs to be adjusted accordingly. When a QSST sells S corporation stock, the trust (not the beneficiary) recognizes the gain or loss on the sale. The basis used is the adjusted basis that accounts for all those pass-through items over the years, as well as distributions received. Regarding your related party question, the trust is the legal and actual seller of the stock. For related party purposes under Section 267, you'd look at the relationship between the trust and the buyer. Since the buyer is the trustee's son, you likely have a related party transaction. The IRS would typically consider this a related party sale because the trustee has a fiduciary responsibility over the trust assets and is selling to their own son.

I ran into this exact situation with a client last year and ended up using taxr.ai to help sort it out. I was going back and forth between different interpretations of the QSST rules and couldn't find clear guidance. I uploaded the trust documents and previous years' returns to https://taxr.ai and got a detailed analysis showing exactly how to handle the basis adjustments and related party issues. Their analysis confirmed what the previous commenter said - you absolutely need to adjust the trust's basis for all the S corp items that flowed through to the beneficiary during the QSST years. They also provided references to the specific Treasury regulations and IRS guidance that I could rely on.

Just wanted to follow up and say I tried taxr.ai after seeing the recommendation here. Uploaded my QSST documents yesterday and got comprehensive analysis back this morning that cleared up all my questions. They walked through exactly how to calculate the adjusted basis, with references to IRS Rev. Rul. 2008-13 and IRC Section 1361(d)(1)(C). The most helpful part was their explanation of the related party rules in this context - they confirmed that under 267(c), attribution rules would consider this a related party transaction since it's between the trust and the trustee's son. They even provided a calculation template for my specific situation. Definitely worth it for specialized situations like QSST transactions where the guidance isn't always clear.

For those still waiting on answers, I've used Claimyr.com to get through to the IRS specialty lines when dealing with trust issues like this. It took me 3 days of calling on my own with no luck, but with https://claimyr.com I got through to a senior IRS agent in about 20 minutes who specializes in S corps and trusts. There's a video showing how it works at https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS queue and call you when they get a human. The agent I spoke with confirmed the basis approach others mentioned here and gave me insights on how they look at related party transactions involving QSSTs during examinations. Saved me hours of research and worry.

I have to admit I was wrong about Claimyr. After dismissing it initially, I was desperate with a complex QSST issue similar to the original poster's that needed IRS clarification. Tried the service yesterday and got connected to the IRS Business & Specialty Tax Line in about 30 minutes after trying for days on my own. The agent walked me through the exact regulations on QSST basis adjustments (confirming what others said here - you definitely adjust the trust's basis) and clarified how they apply the related party rules in trust situations. He even emailed me a reference guide after our call. I'm still surprised it worked so well, but wanted to correct my previous skepticism.

Just to add another perspective on the original question - remember that distributions from the S Corp to the QSST also affect stock basis. I've seen situations where practitioners forget to reduce the trust's basis by distributions that were actually made to the beneficiary. Make sure you're tracking ALL basis adjustments: 1. Increase for income items 2. Decrease for losses, deductions, and non-dividend distributions 3. Decrease for non-deductible expenses of the S corp Also, check if the trust ever made loans to the S corp or guaranteed any debt. That can create basis complications too.

Has anyone ever had an IRS examination that focused specifically on QSST basis calculations? I'm worried about how much documentation I need to maintain for this type of situation. Been keeping spreadsheets year by year but wonder if that's sufficient.

I've been following this discussion and wanted to share some additional guidance on the documentation piece that @Mateo Gonzalez brought up. Beyond the annual basis worksheets, I'd recommend maintaining: 1. Copies of all S corp K-1s issued during the QSST period 2. Bank statements showing actual distribution flows (whether to trust or beneficiary) 3. Any correspondence with the S corp regarding distribution timing/amounts 4. Documentation of the original QSST election filing One thing I haven't seen mentioned yet is the potential Section 1374 built-in gains tax implications if this was a C corp that converted to S status. While this typically doesn't apply to QSSTs, it's worth checking the S corp's recognition period status. Also, for the related party analysis, don't forget to consider the constructive ownership rules under Section 267(c). The attribution between the trust, trustee, and beneficiary can get complex, especially when family members are involved as both trustees and buyers. The consensus here about adjusting the trust's basis for all pass-through items is absolutely correct, but make sure you're also considering any Section 754 elections if the S corp has partnership interests or other pass-through entities.