S Corp Stock and Basis

[S T]

Have a new client that formed a S Corp 4/05, calendar year ending 12/31/05.

In reviewing the Articles of Inc, Son is 90% and Mom is 10%. From 2553 form, Son (280 shares) and Mom (20 shares) Total value $5,000 entered into books all paid by son.

Don't the numbers work out to be 93.3% and 6.7%??

Next question if son paid in all $5,000 value of stock, do we allocate according to percentages, or allocate all to son's share and then Mom has -0- basis? (No economic outlay for Mom)

Is Mom receiving 20 shares due to personal service (she is on payroll at the Company)? Not reflected in payroll for value of stock. How does that work? Client does not have a clue!



Thanks for anyone's help!

Sandy

[DTS]

Stock

Sandy,

I have been unable to locate anything on the Internet or any of the research material I have to help you out.

I am wondering if this 10% could be considered gifted to the Mom??? If this is OK, my next question would be if her basis in the stock is zero like you suggested?

Sorry I cannot be more help to you. I will keep checking, just in case. I can see this situation might be a common one and I am interested in the answer as well.

I'm hoping someone will jump in here and lend some guidance.

Dennis

[DTS]

Found something, maybe!

Sandy,

I found this paragraph in some material I have. Don't know if this applies to your situation, but I thought it might with regard to her stock with no basis...

"the shareholder must experience an actual economic outlay to acquire basis. Giving only a note to the corporation or subscribing for additional shares of stock without making payment does not increase basis"

It goes on...

"an S shareholder may increase stock or debt basis by contributing capital or lending funds to the corporation. Because of the economic outlay rules, the shareholder must make the contribution or loan directly to the corporation. A loan from a bank or other third party does not provide debt basis, even if the shareholder guarantees the loan"

I sure hope this helps. I have been all over the Internet for hours looking for something, but have come up empty-handed.

Dennis

[Gretel]

Sandy,

If mom was supposed to get stock through her personal service it should be included in bylaws. The by-laws should also state how the capital was paid in. If you can't find anything I would go with Dennis' suggestion and assume a gift to mom.

Gabriele

[DTS]

Stock

Sandy,

After I got up this morning, I continued to search around more. Did not find much that remotely sounds like your situation.

I am not sure of the true definition of "gift". I would think gift would mean something given without any promise of something in return, which is not the case with Mom, as she is suppose to work for this stock.

However, if you determine this could be a gift, her basis would be the basis of the son, which would be the $500.

Dennis

[S T]

Still Unsure

I don't believe it is personal service. Nothing stated in any of the Corp papers.

I believe son was giving % in Corp to Mom, so probably a gift and Mom would take son's basis in her %.

Now which percentage to use 90/10 or the 93.3/6.7 based on the shares issued?

Sandy

[DTS]

Sandy

I get the % you do, 93.3% & 6.7%.

Dennis

[Gretel]

I agree. Disregard stated % and use actual according to stocks issued, which would be 6.67 and 93.23. Unless there was a mistake when stock certificates were issued. Do you have the book with the stock certificates?

[S T]

I will contact the client

No I don't have the book, but will contact the client and have him look.

Gabriele, what do you think, gift of Mom's shares?? Or??

Thanks

Sandy

[Bees Knees]

I don't see anything wrong with Mom's shares being a gift. The problem is when it comes to distributions. If distributions are not proportionate to ownership percentage, you have two classes of stock, and lose your S status. If son gives mom 10% of the distribution when she only owns 6.7% of stock, that could be a big problem.

I would point out the 90/10 vs 93.3/6.7 difference to them and have them straighten it out. Maybe the son was shooting for a 10% ownership and was just poor at math. You need this straight to avoid S status disqualification when distributions are made.

[Gretel]

No I don't have the book, but will contact the client and have him look.

Gabriele, what do you think, gift of Mom's shares?? Or??

Sandy, yes I see it as a gift and as Bees pointed out, clarity about ownership % is a must. Good luck.

Gabriele

[S T]

Percentage of Stock

Well I think the % of Stock has been resolved, appears that there is a "typo" on the 2553 form showing 280 shares and 20 shares.

It should be "180" shares and 20 shares. Corporate records and stock certificates clearly state the 180 and 20.

How do we correct the 2553 form and the IRS records?

Sandy

[Gretel]

Glad, you could resolve the more difficult problem, Sandy. I would call IRS to find out how to fix the problem. Maybe Bees has another idea since we all know calling the IRS is the last resort.

[Bird Legs]

Form 2553 Correction

Sandy, call this number at the IRS. They are extremely helpful. Just got
through using them myself a few days ago.Tele. # 801/620-3213.
Good Luck

[S T]

Thanks

I did just phone, and they stated to send a letter with the corrections, fax to the business entity line in Ogden at 801-620-7116. Do Not resubmit form 2553!!!

Thanks everyone,

Sandy