Equalizing tax burden between S Corp shareholders

[DaveinTexas]

Hmmm, no

call it by any other name if you wish. The plan creates unequal distributions which must be dealt with by the corporation to compensate for the inequality. Not a good idear.

How? The distributions are equal. Let’s say higher tax guy’s tax liability is $15,000. Lower tax guy’s liability is only $12,000. You just make a $15,000 distribution to each shareholder. What the lower taxed shareholder decides to do with the extra funds is up to him.

[BHoffman]

I do the same thing as Dave. Once in awhile, the company doesn't have enough cash on hand to make the larger total distribution. In that case, the lower taxed guy chooses to lend the difference to the company with a proper promissory note and in compliance with the Loan from Shareholder rules and the loan is repaid ASAP.

Here is a PLR from a case where equal distributions were made, but not in the same year. Note that PLRs cannot be used as precedent. https://www.irs.gov/pub/irs-wd/0010023.pdf

There is absolutely no way I would ever go the Sch M route. Distributions are not expenses, deductible or not. That's just a gross misclassification. :P

[Snaggletooth]

I'll stick to my story

Once in awhile, the company doesn't have enough cash on hand to make the larger total distribution. In that case, the lower taxed guy chooses to lend the difference to the company with a proper promissory note and in compliance with the Loan from Shareholder rules and the loan is repaid ASAP.

Beth, the original post mentioned nothing about the introduction of loans, and clearly did not have loans in mind when this incongruous plot was hatched. Of course, they can bail out of the unequal distribution by booking loans this year, but will they ever be rectified? What happens next year when they want to do some other incongruous distribution? Will the same parties just add to the loan because they [may/may not] be insolvent? I did mention that "the plan...must be dealt with by the corporation to compensate for the inequality.

Dave in Texas, of course given an infinite supply of cash the distributions can be raised to respect a proportional amount where certain of the shareholders are awash with extra funds. Corporation needs extra cash to do this, but yes, it would work.