Client purchased entire stock in existing SCorp.....

[Safire]

Someone please tell me why his CPA did this to him.

Facts are, client agrees to purchase 100% stock in an S Corp with 3 existing shareholders.

Deal is contingent on buyer obtaining dealer certifications from 3 manufacturors, which will take several months.

10/17/05 - Purchase money and stock certificates are placed in escrow awaiting the dealer certifications.

Agreement states that buyer will be responsible for any and all taxes incurred after 10/17 including any tax involved IF he liquidates the S Corp.

Dealer certificates obtained and deal settled in 03/2006.

Buyer decided that it would be easier to let the current CPA do the returns for 2005.

CPA puts a schedule C on buyers return for 2005.

Does this make ANY sense? The corp was never liquidated, shouldn't the buyer have been listed as 100% shareholder from 10/17 to 12/31? And the other 3 shareholders taken the profit for the earlier part of the year?

[Safire]

And get this, buyer's beginning balance sheet shows 400k equity.

Am I right in thinking that if he liquidates, he will have 400K income?

[rosieea]

You'll need to compute his basis in order to determine gain or loss upon liquidation. The Equity section of the Balance Sheet represents ownership. The shareholder's share of retained earning plus what he paid for the stock will enter into the basis computation.

And, no. Schedule C makes no sense.

[jimmcg]

Why not ask the CPA?

[Unregistered]

I was consulted because they could make no sense of the numbers that the CPA put on the schedule C, none of it seemed to match up to what they had turned into him each month. CPA had explained to him that , that was just what he had to do to make his ( the buyer) numbers and their numbers ( the sellers ) come out right.

The books have been done as if liquidation happened on 10/17, when actually there has been no liquidation. They got him an LLC and new federal ID number and rolled on, when the agreement to buys mentions nothing of liquidation other than, that IF he later liquidates, he is responsible for any tax incurred.


Generally when you are called in to question something a CPA does, you don't call him up to ask.

I did tell the client that if he wished to give the CPA my name so that he could call me, I would be glad to ask him these questions. I told thim that either I was missing some crucial info, or something was bad wrong.

I just hate to see him file a schedule C and later be responsible for SE tax on what could potentially be a very profitable business, when the agreement says he simply bought stock in an existing corporation.

[Unregistered]

not logged in

That message was me, Safire.

[jimmcg]

Sounds like your client deserves some answers from the CPA. Have your client put the relevent questions in writing and submit them to the CPA. If no satisfactory answer is received have your client contact the state accountancy board where the CPA is licensed.. Most state accountancy boards have a protocol for client complaints. Have your client be aggresive and I guarantee they will get some answers!

[taxmandan]

Sounds like you've looked over the sales agreement. Did your client receive the minutes book of the corp and do the minutes reflect the transfer of shares to him? Does he have the stock certificates now for the company? I'm not real impressed with the CPAs actions either, but regardless of what the client thinks, this may have been an asset sale and the total sale of a corps assets automatically liquidates the corp. The CPA needs to clarify for you for sure!

[Safire]

thanks you guys

Wow, thanks, great info to have. The idea to put his questions to the CPA in writing is an excellent one.

From what I understand, the previous owners retained jobs until the settlement and therefore kept their checking account and all records pertaining to transactions prior to 10/17. Per a shoddy bookkeeper, monies were being misplaced into the 2 checking accounts and transferred back and forth, making it virtually impossible for either party to have valid records for the period between 10/17 and 12/31.

Yes I looked over the sales agreement, and although I have not seen the stock certificate issued to the buyer, I believe he told me that he had a certificate. He was of the understanding that he had bought stock. I will ask him to be sure.

The agreement states that upon his obtaining the ok from the manufacturers, that the stock and money would be transferred as of a settlement date. That settlement took place in March 06.

I believe that the whole thing went south with the manufacturers, some confusion about who would be liable to pay them for floor plan inventory. I can understand their concern, but it seems to me that if the deal had to be rearrainged to suit manufacturers, the sales agreement would have been rewritten to have been a total sale of assets to an entirely new entity, namely him doing business as a sole member LLC.

But I am no lawyer, and he said that the lawyer and CPA said that was what he had to do, but even he was not sure what he had done, and how come he had had no one tell him these concerns before now. (My head is spinning)

[OldJack]

Even the dumbest CPA would not file a 1040 Sch-C for business conducted as a S-corp. There is clearly a misunderstanding of what the deal terms are by your client and as the client has related it to you.

Could it be that your client is not getting anything (except the tax on profits), such as the stock, until payment is made by deducting profits for payment. Therefore, the S-corp and stock is still owned by the sellers until payments are made in full. So.. maybe the business operation for tax purposes is reported on a 1040 Sch-C for your client to pay the taxes?

[Safire]

Old Jack, if that were the case I don't think the CPA would have transferred the assets and inventory over to the buyers schedule C. His purchase money and their stock were placed in escrow until settlement, wouldn't the assets have remained where they were until settlement?

There is an itemized list of over 300k worth of tangible property that he (CPA) has set up as new depreciable property on the buyers schedule C as well as having him listed with over a million in beginning inventory. Majority of this inventory is floor plan inventory with a liability back to the manufacturers.

It really looks like they treated the sale as if everything was transferred over as of 10/17 even though the settlement date was not until 03/06.

I think what you said may have been the intention, I think the agreement was that he would have to pay the tax on profits from 10/17 forward. But per the sales agreement I don't think it was handled properly at all. In my mind, he would have become a shareholder with 100% interest in Corp reported to him on K1 as of 10/17 and the other would have K1s for the prior period. The corp would have carried on in existence.

The other thing is, that even though the CPA got the buyer set up as a sole member LLC, and filed him a schedule C, he issued the buyer a W-2 form from the sole member LLC. I would think not even the dumbest CPA would have done that either, but he did.

That W-2 was what really got my gears turning as to what had actually transpired and exactly what entity was the buyer supposed to be.

[Safire]

Oh, and to add, there were no profits!

The schedule C shows a loss of over 40k even though there had been a projected profit of 18k for that time frame.

[geekgirldany]

Sounds like to me that the S-Corp is or was suppose to still keep going with your client as the shareholder. There is a paper to include to prepare the s-corp as though it had two tax years. For this S-Corp it would have been 1/1/05 to 10/17/05 with the 3 shareholders getting K-1 for that part then your client get a K-1 from 10/17/05 to 12/31/05.

Something is wrong here. Especially you mentioning that he did a W-2 for a one member LLC and filing a Schedule C.

That is a good idea to write down the questions for the client to ask the CPA. Although it would be good for you to talk to him.

[Black Bart]

Jim

Sounds like your client deserves some answers from the CPA. Have your client put the relevent questions in writing and submit them to the CPA. If no satisfactory answer is received have your client contact the state accountancy board where the CPA is licensed.. Most state accountancy boards have a protocol for client complaints. Have your client be aggresive and I guarantee they will get some answers!

It sounds like that CPA is wingin' it, alright, but I'd give it some serious thought before turning him in to the state board of public accountancy. He'll realize that, since clients generally don't even know a state board exists, the complaint must have originated with Safire. You're talking about endangering someone's professional credentials and his/her very livelihood and, to say the least, you will have made an enemy for life. If he/she is in a small setting where they'll be coming in contact frequently, it might be very uncomfortable from now on. These things are a two-way street. Occasionally, we make errors or do something stupid.

I had this done to me once by a disgruntled client. She brought a penalty notice to me and I told her I'd work on it, but all of two days later she had not heard anything from IRS. She told a bank examiner where she worked about it and he advised her to complain to the state board. She did and they wrote me a letter asking for an explanation. I gave them one and they accepted it, but I'm still mad about it. I never saw her again, but if it had been a colleague, I'd be looking to get even someday if possible.

[rosieea]

..... this may have been an asset sale and the total sale of a corps assets automatically liquidates the corp. The CPA needs to clarify for you for sure!

It's not that easy. In an asset sale, the Corporation still has assets (cash or receivable from the sale) and stockholders. So, the Corporation still exists. A plan of liquidation must be formulated and reported on Form 966. The remaining assets are distributed to the shareholders in exchange for their stock. The final return of the Corporation reports the gain or loss on the sale. The shareholders report gain or loss on their individual returns for the cash and fair market value of property received in exchange for their stock.