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    C Corporation Return of Capital

    I have a new client who is a sole shareholder C corporation. She invested $90,000 in the corporation four years ago. The previous accountant put the $90,000 in the retained earnings account to make the balance sheet look more attractive for bank financing she was applying for. She wants to know if it is possible to amend the prior corporation tax returns and show the $90,000 as paid in capital and then take the money back out without any tax implications? She pays herself over $200,000 in salary annually, so the retained earnings will actually be negative by quite a bit if the $90,000 is backed out.

    #2
    Originally posted by PaulF View Post
    I have a new client who is a sole shareholder C corporation. She invested $90,000 in the corporation four years ago. The previous accountant put the $90,000 in the retained earnings account to make the balance sheet look more attractive for bank financing she was applying for. She wants to know if it is possible to amend the prior corporation tax returns and show the $90,000 as paid in capital and then take the money back out without any tax implications? She pays herself over $200,000 in salary annually, so the retained earnings will actually be negative by quite a bit if the $90,000 is backed out.
    How was the M2 handled in the year of the investment? Was it entered as line 3 other increases? If so, I would think you could put the amount on other decreases for CY with an explanation as opposed to amending.

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      #3
      She took cash out of the corporation during the last four years in question and the prior accountant showed it as dividends because she had sufficient earnings and profits. He also prepared 1099-DIVs for the distributions, so this affected her personal tax returns as well. She is currently in an audit for two years just prior to the previous accountant taking over, so she has that hanging over her. I think this has the possibility of becoming a colossal mess. The IRS is going think that we are doing this just to avoid her paying the tax on the dividends. I told her this will probably open her up to more scrutiny by the IRS for the last four years, but she is wiling to risk it. She has copies of the canceled checks and bank statements, otherwise I would not even consider messing around with this.

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        #4
        Have you actually looked at the books for the year in question, or going by what client said happened? From what I understand you are saying is that acct made an entry to debit cash and credit RE. A direct entry like this to RE is definitely wrong. Are you sure that instead of posting to RE earnings it was not posted to dividends that then got rolled into RE? For example say dividend account prior to the 90K transaction was 100K. Did the accountant happen to post to dividend and in turn make the 1099 DIV out to be 10K instead of 100K in this example?

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          #5
          She is working on getting the financial statements together for the period in question. She told me the accountant made the debit entry to cash and credit to retained earnings so the balance sheet would look better because she did not have any retained earnings when she was applying for a line of credit. She shows very little net income each year.

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            #6
            If it was me, I would wait until I had more information and understanding of the accounting entry before making any determination if an amended return is needed. While you are waiting on the financial statements the tax returns and specifically the M2 for the year of the transaction and the prior year may shed some light on what happened. Specifically look to make sure the balance at end of year from PY matches the balance at beginning of year for the year of the transaction. If is does then look at which line of the M2 the 90K was reported on.

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