Scorp dates of distribution required?

[BHoffman]

My software (Drake) has a new data entry screen that creates sort of a worksheet to fill out that lists the dates and amounts of distributions. They cite IRC 6037(a) and suggest attaching the worksheet as a PDF to the efiled 1120S as they claim it does not transmit with the efile.

That's a new one. I've never attached anything to form 1120S regarding the DATES of distribution before, and Drake never had this data entry screen before.

And, here is why:

http://www.rothcpa.com/archives/006620.php

Would anyone happen to know the penalty for not attaching the worksheet with the efiled return? I just found out about this and have already efiled a bunch of 1120S forms.

[BOB W]

My software (Drake) has a new data entry screen that creates sort of a worksheet to fill out that lists the dates and amounts of distributions. They cite IRC 6037(a) and suggest attaching the worksheet as a PDF to the efiled 1120S as they claim it does not transmit with the efile.

That's a new one. I've never attached anything to form 1120S regarding the DATES of distribution before, and Drake never had this data entry screen before.

And, here is why:

http://www.rothcpa.com/archives/006620.php

Would anyone happen to know the penalty for not attaching the worksheet with the efiled return? I just found out about this and have already efiled a bunch of 1120S forms.

This issue has real meaning when there are more than one shareholder in an SCorp. ALL distribution must be equal and within the same time frame to each shareholder according to % of holdings. Failure to make prorata distribution will void an S Election, as a second class of stock.

This issues is an audit item when an audit takes place on an SCorp with more than 1 shareholder.

AND no, I have never heard of any penalty for failure to provide this info with a tax return.

[BHoffman]

I never have heard of any penalty before either, but the link clearly points out that IRS (at least those representatives in attendance at the CPE conference) intends to make this an issue for 2010.

[BHoffman]

And here is something regarding the penalty:

http://www.dixon-hughes.com/res_pubs/sertax_1-15-10_STARsTaxAlert-SCorporationRequiredInformation.pdf

[S T]

This is

Unsettling - I only have one 1120S return, and of course I did not complete the Distribution date and amounts by shareholder.

B Hoffman, Bob W, John H and a few others on the Board - I know that you complete far more of these returns, so I will follow your thinking and guidance.

I am wondering, could we file in amended 1120S with the required Distribution Statements, or should we just forget about it for 2010 and make sure we adhere to this requirement in the 2011 filings.

Thanks,

Sandy

[BHoffman]

Drake's Red Herring

It was nothing but a big fat red herring. I spent (wasted) all day yesterday looking at this and found:

IRC Sec. 1367(a)(2)(A) "Adjustments to basis of stock of shareholders (a) General Rule (2)Decreases in basis (A) distributions by the corporation which were not includible in the income of the shareholder by reason of section 1368."

Treas Reg 1.1367-1(c)(3)(d) says:

"Time at which adjustments to basis of stock are effective - (1)In general. The adjustments described in section 1367(a) to the basis of a shareholder's stock are determined as of the close of the corporations taxable year, and the adjustments generally are effective as of that date. However, if a shareholder disposes of stock during the corporation's taxable year, the adjustments with respect to that stock are effective immediately prior to the disposition."

I'm understanding this to mean that if the shareholder has not disposed of stock during the year, then distributions are effective to the shareholder basis at the close of the tax year, usually 12/31. I believe 1368 and 1367 make the date reporting requirement of 6037(a) moot. So, that's where I'm hanging my hat along with everyone else and I'm going to get on with my work.

[taxxcpa]

Shareholder withdrawals

This issue has real meaning when there are more than one shareholder in an SCorp. ALL distribution must be equal and within the same time frame to each shareholder according to % of holdings. Failure to make prorata distribution will void an S Election, as a second class of stock.

You may be correct, but it does not seem to me to imply a second class of stock, since withdrawals can be made with no tax effect unless they exceed basis.

I doubt that the IRS is likely to make an issue of this unless a shareholder withdraws more than his basis.

[BOB W]

You may be correct, but it does not seem to me to imply a second class of stock, since withdrawals can be made with no tax effect unless they exceed basis.

I doubt that the IRS is likely to make an issue of this unless a shareholder withdraws more than his basis.

If one shareholder is getting more of a distribution than the other (% of ownership taken into consideration) then it means a different treatment per shareholder and creates a different status on distributions. My understanding is that it creates a violation of SCorp rules and grounds for loss of SCorp status.

I understand your point on income allocation must be allocated based on net profits but it also applies to distributions.

The AAA account is owned by all shareholders>Equally. If one is taking more than the other then the shareholder that got less of a distribution is also losing his value in the AAA account. This is a violation of the SCorp rules.

[BOB W]

I found this discussion about distributions being equal:

http://www.asktaxguru.com/422-s-corporation-distributions.html