S/h Pays S-corp To Build Own Home

[abctax]

I'm having a hard time wrapping my mind around this one, would appreciate opinions.

S/H gets a construction loan, then pays his 100% owned S-corp to build his primary residence. I don't know yet if he paid at just cost to build, or if he also paid more (like you would normally do in an arms-length transaction).

Is this income to the S-corp?
Which is then income to the shareholder as it flows thru...if there is a profit.
And if there isn't a profit, then I don't see this as an arms-length transaction.

The client's rationale for this is that he needs to show income (from the K-1, as he never got around to paying himself on a W-2 !!) in order to qualify for the take-out loan.

From the lenders viewpoint, this just seems fraudulent to me.

Thanks for any input.

[AuditorTurnedGood]

I would think

unless the transaction was done truely at arm's length - contract with reasonable markup and expectation of profit for the S-Corp would seem to be a big one here- the whole thing looks like a sham. Is the S-Corp in the business of building houses? I would think its income to the S-Corp, he just needs to be careful not to lose money on the deal. The arm's length rules are pickier about losses than income in most cases.

[MLINDER42]

S Corp Own Home

He would have a problem with IRS if he did not take a salary from the S corp.He can not take it all on a K-1.

[Lion]

Rock & Hard Place

The predicament that our clients get themselves into thinking they can use the S-corp or whatever entity as their own personal tax shelter. He thought he was going to show little income to not pay himself wages and avoid SE tax. But, he wanted a mortgage and had to convince the bank he earns money from his profitable S-corp! Now he wants you to fix it so he can have his cake and eat it too.

[abctax]

My concern...

Thanks for all your responses - they echo my concerns also. I have discussed the W-2 issue with them extensively.
My biggest concern right now is the loan issue - last thing I'd want is the lender coming back to me the preparer to make good on the loan.
And this whole thing just does not pass my "smell" test.

ATG - yes the S-corp is in the business of building houses (licensed contractor). There were other minor jobs in 2008 (no other houses built tho due to the depressed housing economy) so the bulk of the income is from building the one house for the shareholder. I haven't not seen a contract - I will push for the client to produce it - assuming it exists.

And I was wrong; I did browbeat them into a W-2 for 2008.

[AuditorTurnedGood]

[QUOTE=abctax;86985]My biggest concern right now is the loan issue - last thing I'd want is the lender coming back to me the preparer to make good on the loan.QUOTE]

I actually had a couple of mortgage brokers suggest that I either drive my S-Corp into a loss through my W-2 to produce a W-2 with "enough income" to get a mortgage, or to not claim any expenses against the S-Corp, then after I got the loan, go back and amend the returns and claim the expenses. I was in a position I actually posed the question about the second one to this board, who gave me the very sound advice to tell them to take a hike.

You're right - it's not worth losing your practice over.

[abctax]

Makes one wonder...

why bother to have any ethics when that stuff goes on all the time ! ? ! ?
Well, at least I have no problem going to sleep at night.
Thank you so much for your insight - now to sit down with the client and delineate my position.

[ChEAr$]

I think I might have referred them to Acorn for tax preparation.

(grin)

[Gretel]

Who the hell is Acorn?

Even though the intentions of your taxpayer seem questionable I don't see anything wrong with having your S-Corp. build the personal residence for the shareholder.

I had this last year, but this S-Corp also build other spec homes, two of them located in the same neighborhood of which one was sold at a loss to an outside person, the other one was sold to the shareholder at a small gain. I didn't see anything wrong in making use of the recession that way.