SUB-S and DIVIDEND

[duanecpa]

I have a new client that is a single shareholder Sub-S - cash basis. The previous tax preparer had the corporation issue a DIVIDEND which resulted in the net of the corporation to be negative. The DIVIDEND then was listed on the individual income tax return along with the 'loss' - I asked the shareholder if the corporation had paid him a DIVIDEND and he said no.

Normally, there is not a DIVIDEND filed with the IRS and the positive net (in this case) would flow through to the individual income tax return.

The same tax person had also advised the shareholder to have the corporation file a 1099-DIV with the IRS which has been done. I again asked the shareholder if the Sub-S had paid the dividend to him and he said no.

Has anyone encountered a like situation before? If so, would like to know the rationale for the extra step.

Thank you.

[Maribeth]

First impression: the only way that I can think of an S-corporation paying a dividend would be if the corporation had PTI. And a dividend is not a deduction for income tax purposes, so it cannot create a loss. It appears that your client's prior year return was prepared incorrectly.

Maribeth