S Corp Stock and Basis

[Bird Legs]

Sandy,

Do not know how they came across with you on the phone but when I was talking
with them I could not believe it was IRS employees on that end of the phone.
They were extremely informative and nice.

[S T]

Me Too

I have made several phones to the business entity or practitioner hotline over the last few months, and everyone has been extremely helpful and nice.

Sandy

[OldJack]

strange

Why all the fuss.... why not ask mom what she owns and if she is going to pay for the stock or was it a gift. Why would you assume it was a gift? Mom could just temporarily owe the corp for the shares until she gets some profit to pay for it.

Also, form 2553 number of shares in this case is not something the IRS could care about as long as there are 2 signatures accounting for "all" the stock. All the stock was accounted for including more than had been issued.... they did issue stock didn't they? If they lied on form 2553 and had not issued stock, that would be of more concern than the listing the number on form 2553. Best policy is never ask the IRS anything and you want get an answer you don't like.

[S T]

Okay maybe

Old Jack,

Sorry you didn't jump in earlier, I was watching for your posts. I don't like to leave things undone,or incorrect and this client has just sent me into a whirlwind of accounting problems, etc. I hate audits, questions, etc.,

No assumption now on gift, finally spoke with the 90% shareholder, and he confirmed gift to Mom, and it is set up to "will" back if she dies! Improper accounting from prior accountant as there was no notation and separation of capital accounts for shareholders. Among many other items among which we now find out is "typo" on the form 2553. You know clients, they know nothing!

So when the client told me verbally 90/10 and the form 2553 was 93.3/6.7, and I noticed the difference, it seemed to be a legitimate question. Bee's somewhat confirmed that it could be an issue. So finally we arrived at the "truth" of the matter, and found out it was a "typo" Not a big thing, but really wanted the "first" year to be correct and not have problems in subsequent years. Isn't that what we are suppose to do? I have to admit openly on this Board, that I have not had a lot of experience in 1120S, therefore so many questions rather than assumptions!

So easy correcting measures on the issue of %%. Mom, it really is a gift, so I just am adjusting the capital accounts to reflect.

I only phoned IRS to find out the procedure for correcting an incorrect "disclosure" of stock ownership on the form 2553. I don't have a power of attorney as yet that has been filed, so it was a general question. I do believe I probably received a correct answer or at least one that seems to be correct. DO NOT FILE ANOTHER FORM 2553, simply submit a letter to the correction.

Don't you think that we would be obligated to notify the IRS of the correction so as not to jeopardize the client or a S Corp election? As of tonight I feel like I am in a better place as an accountant and tax preparer than I was 24 hours ago

Sandy

[OldJack]

Sandy, if it were me:

1) I would report the current 1120S-k1 with the proper percentages (90/10) on form 1120S-k1, item H. No corp book entry should be required as AAA account is not split per shareholders as the account is owned by all shareholders on a per share basis at liquidation.

2) I would NOT do anything about the 2553 as it doesn't matter who owns what after the initial filing of the form. The only question that might make the election invalid is were there shareholders that did not sign...and the answer is no so the 2553 is still valid. And, I don't see any problem leaving the number of shares error on the original filing.

3) I would not be concerned about a gift tax return as gift was only $5,000*10% = $500 and not required to file. Other issues concerning the will gifting back is a personal matter and of no concern.

[Bees Knees]

I agree that Form 2553 seems to be a non-issue. It is possible for stock ownership percentages to change after the filing of the 2553, with no need to file a new one or inform IRS when that happens.

The real issue IRS will look at is the ownership percentages listed on the K-1s. THOSE ownership percentages better match the proportionate distributions to shareholders that are required to maintain your S status.

[outwest]

Right on OldJack..

just a point of emphasis: Shareholder capital accounts are not kept in a S Corp. Reason: Profit is allocated per share and all distributions are equal per share.

That last point is a trap. If the 90% shareholder takes $5 per share, you must also distribute $5 per share to the 10% owner.

Doug