S-Corp, APIC, and dissolution

[qwerty]

First time posting...long time reader.

Facts: S-corp is disolved. All assets distributed and recorded appropriately. However, APIC (by one shareholder) remains. It's not flowing through to the K-1 nor reflected within the shareholder basis.

My understanding is that this may not be "distributable" - is that true? What happens to the remaining APIC?

Thanks in advance to all "knowledgable" and humorous replies.

[OldJack]

I know I should be able to figure out what APIC means but its too early in the morning. I guess others will have to try answer your question. You really should not use abbreviations as I would guess at least half of the readers here would not know what you are talking about.

[qwerty]

Apic...

Additional Paid In Capital

Sorry 'bout that. Just been up awhile on this one.

[Brad Imsdahl]

If one of the stockholders paid in the additional paid in capital, then it would be reflected in that stockholder’s basis, and gain or loss upon liquidation of the corporation would be affected by that additional basis.

[OldJack]

Additional Paid in Capital is part of the stock basis and is set-out on the S-corp books simply because the stock has a par value or because it was capital invested where no stock was issued.

The final distributions from, a C-corp or S-corp, is the remaining capital or retained earnings and its what enters into determining capital gain or loss on schedule D. True, this is not always a distribution in cash since there may be no cash to distribute, but it is still a distribution for accounting purposes and should result in the balance sheet showing zero or only debt that remains unpaid at the closing of the corporation.

True.. some accountants don't show it as a distribution and prefer to leave it on page 4, balance sheet to point out the amount for gain or loss. But if you show it as a distribution the amount is divided per shareholder on the k-1 and some say it makes the gain loss obvious to the shareholder inthat they had more or less distribution than their basis.

It is too early in the morning for such deep subject... sorry if I am not clear.

[OldJack]

If one of the stockholders paid in the additional paid in capital, then it would be reflected in that stockholder’s basis, and gain or loss upon liquidation of the corporation would be affected by that additional basis.

Well.. if only one shareholder contributed the paid in capital it would figure into his "outside" basis (for his gain or loss on Sch-D), but the paid in capital is distributed or owned equally per share. The corporation can't just allocate or distribute capital or earnings to a specific shareholder.

[Brad Imsdahl]

Well.. if only one shareholder contributed the paid in capital it would figure into his "outside" basis (for his gain or loss on Sch-D), but the paid in capital is distributed or owned equally per share. The corporation can't just allocate or distribute capital or earnings to a specific shareholder.

I agree. However, the original post suggested it was all paid by one shareholder. I didn't bring it up before, but if one shareholder did pay in all that additional paid in capital, that shareholder needed to have his ownership interest increase accordingly. If not, they may have disqualified their S corp status as it may have been considered two classes of stock..

[OldJack]

I agree. However, the original post suggested it was all paid by one shareholder. I didn't bring it up before, but if one shareholder did pay in all that additional paid in capital, that shareholder needed to have his ownership interest increase accordingly. If not, they may have disqualified their S corp status as it may have been considered two classes of stock..

Two classes of stock? That is an interesting question. However, I don't think it would create an additional class of stock as the amount only represents an accounting entry for the difference between par value of the stock and actual sale price of the shares sold or issued. A corporation, "C" or "S", can sell stock for whatever the market will bear and when issued at different times the FMV of the sale is going to vary resulting in an accounting difference in the additional paid in capital account since there is no gain or loss recognized on the sale of stock by the corporation. Its much the same as accounting for treasury stock in as much as the purchase or sale of the same is accounted for in a separate account on the balance sheet. Therefore, I don't see how additional paid-in capital could possibly be considered as a second class of stock to terminate the S-corp status unless there were some written restrictions or agreements associated with the issue of the stock. Such agreements or restrictions themselves would be what terminates the S-corp status and not the shares issued at different sale prices.

As to the shareholders ownership interest in a corporation.. that is only according to his number of shares issued and cannot have anything to do with how much he paid for his shares of stock. If he wanted more ownership interest he should have negotiated for more shares for his purchase price. Its too late to change or issue shares after the purchase is a done deal.

[jainen]

Be careful

Additional Paid in Capital is part of the stock basis and is set-out on the S-corp books simply because the stock has a par value or because it was capital invested where no stock was issued.

The final distributions from, a C-corp or S-corp, is the remaining capital or retained earnings and its what enters into determining capital gain or loss on schedule D. True, this is not always a distribution in cash since there may be no cash to distribute, but it is still a distribution for accounting purposes and should result in the balance sheet showing zero or only debt that remains unpaid at the closing of the corporation.

True.. some accountants don't show it as a distribution and prefer to leave it on page 4, balance sheet to point out the amount for gain or loss. But if you show it as a distribution the amount is divided per shareholder on the k-1 and some say it makes the gain loss obvious to the shareholder inthat they had more or less distribution than their basis.

Be careful, old friend. It's Sunday morning -- you could hurt yourself.

[qwerty]

Thank you to all...

I appreciate your candor and wise words. I'll look a bit more at the return...tomorrow...You've all been great!

[Brad Imsdahl]

It is true that simply paying different amounts for a share of stock does not create a second class of stock. But why would anyone pay something for zero stock?

That is kind of what additional paid in capital is. Stick more money into the business because it is short of cash, but don’t bother issuing additional shares of stock. What happens in real life is the guy sticking that extra money in for no stock thinks he is going to get that cash back out first. Kind of like preferred stock that has no voting or dividend rights, but is first in line upon liquidation. Being first in line for liquidation is a second class of stock.

Maybe this situation didn’t create a second class of stock. But the question should be asked; what were the circumstances that created the additional paid in capital?

[OldJack]

But why would anyone pay something for zero stock?

But the question should be asked; what were the circumstances that created the additional paid in capital?

Well there you go again Brad, trying to use logic of a partnership or proprietorship when it is a corporation.

The additional paid-in capital account is not created by a shareholder putting more money into a corporation because it needs capital. That would be a shareholder loan. To add such investment to the paid-in capital account would be an accounting error.

True.. certain shareholder loans with certain key factors can be re-characterized by the IRS as equity under the "thin corporation" rules. The IRS has at least 16 key factors that are relevant in order to make such re-characterization and that is not an easy task. The re-characterization still does not change the balance sheet or the additional paid-in capital account as the re-characterization only changes the interest paid on the loan as taxable dividends. And re-characterization with taxable dividends are only applicable with a C-corp, therefore that does not apply to our case of a S-corp shareholder loan.

A corporation does not have an owner capital investment account like a partnership or proprietorship. The ONLY thing added to the additional paid-in capital account has to be associated with the price of the shares sold by the corporation. Fact is if the shares of stock are "no par" stock there would be no additional paid-in capital account.

As to your confusion about "But why would anyone pay something for zero stock?". They of course wouldn't unless they were stupid. Now let me give you an example of additional paid-in capital by that stupid person:

Facts:
1) I incorporate today and open a corporate bank account with my new EIN and I deposit $100 from my personal funds in exchange for 1 share of 1$ par value common stock of the corporation that I properly elected as an S-corp.

2) I open the corporate manual set of books with the ink entry of $100 cash in the bank, $1 common stock issued at par, and $99 additional paid in capital. The balance sheet shows:
Cash in Bank............................$100
Common Stock issued at par.........$1
Additional Paid-In Capital.............$99

3) From the corporate checking account I purchase, for $50, an antique framed pencil drawing of an old sailing ship to hang in my personal office in my home since the corporation has yet to obtain a proper office for me. That office at home does not qualify for a deductible office in the home.

4) No income or expense has occurred as the asset is an antique and not depreciable (if you disagree call it gold coins). Therefore, the assets are $50 cash and $50 property and the equity accounts balance at $100.

5) I decided I did not like the frame of that old drawing so when I removed it I discovered an old document that looks like it may be an original signed issue of the declaration of independence. If it is an original with signatures it could be worth millions, but if it is a fake it could be worth your mentioned zero.

6) YOU find out about my old document and want to purchase $500,000 in shares of stock in my corporation that owns the document. I'm not stupid... I want some of your money.

7) We agree that the corporation will sell you 1 shares of its $1 par common stock for $500,000. The balance sheet after the sale is:

Cash in the Bank.........................$500,050.
Property (the drawing)...........................$50.

Common Stock issued at par.................$2.
Additional Paid-in Capital.............$500,098.

You own 1 share and I own 1 share so we are equal shareholders of the corporation.

8) The old document is later determined to only be worth $50 (our cost) and we decide to sell it and liquidate the corporation.

9) The end result is the corporation has $500,100 in cash to split to the shareholders on a per share basis and each therefore gets half or $250,050. I have a capital gain of $249,950 ($500,100/2 less my cost of $100) and YOU have a capital loss of $249,950 ($500,100/2 less $500,000 cost).

Draw your own conclusions as to who is stupid.

True... In the real world I would not let the corporation sell YOU the 1 shares until I had canceled my 1 shares and re-issued myself 1 million shares (Bill Gates and others), then I would sell YOU the 1 shares if YOU were stupid enough to buy it. However, my entry on the corporate books for the re-issue would not change a single dollar number and would only be a note that the number of shares authorized and issued had changed. The balance sheet when you purchased your shares would not change from what is shown in item #7.

edit: I should point out the liquidation resulting entries -
For each check:
Credit Cash In the Bank...........$250,050
Debit Common Stock Issued....$ 1
Additional Paid-In Capital.........$249,950

Result is the corporate balance sheet is zero assets, zero liabilities, and zero equity accounts. There are no entries on 1120S, page 3, line 16d, "property distributions" and 1120S, page 4 is blank as there is no profit/loss for AAA distributions and no balance sheet as it all happened in the same year with zero at the end.

The corporation then issues a 1099DIV to each shareholder with $250,050 in box 8, "cash liquidations distributions". Each shareholder than reports the gain or loss on their 1040 Sch-D.

[Brad Imsdahl]

OldJack, you are assuming people who form corporations know and follow all of these rules, and bookkeepers who prepare balance sheets understand and know all of these rules.

You think a single shareholder corporation who gives you his income statement and balance sheet prepared using QuickBooks is going to calculate the excess amount paid for stock above par value and have that listed on the balance sheet as paid in capital?

I stand by my original comment: The question should be asked; what were the circumstances that created the additional paid in capital? I doubt it would be anything close to what you described. More than likely it was the guy sticking more money into the corp without bothering to issue additional shares of stock.

[OldJack]

OldJack, you are assuming people who form corporations know and follow all of these rules, and bookkeepers who prepare balance sheets understand and know all of these rules.

You think a single shareholder corporation who gives you his income statement and balance sheet prepared using QuickBooks is going to calculate the excess amount paid for stock above par value and have that listed on the balance sheet as paid in capital?

I stand by my original comment: The question should be asked; what were the circumstances that created the additional paid in capital? I doubt it would be anything close to what you described. More than likely it was the guy sticking more money into the corp without bothering to issue additional shares of stock.

Ask any policeman giving you a ticket and he will tell you ignorance of the law is no excuse.

If lawyers setting up small business corporations knew anything about accounting or tax laws they would not designate the common stock as "par value" stock. If the common stock was designated as "no par value" stock there would never be an Additional Paid-In Capital account and whatever amount was shown as purchase for stock would all be just that "Common Stock Issued......$ ".

If one is the financial adviser or bookkeeper for the corporation they should follow all these rules or they should be sued for malpractice. If one doesn't know the rules of a corporation they should stick to preparing 1040s.

If a tax preparer is going to prepare the corporate tax return from the clients Quickbooks statement (s)he should be able to recognize an error in the equity section as that is the most basic thing on the balance sheet. If the tax preparer can't see that obvious error (s)he don't know diddle squat and should withdraw from the engagement.

You imply the same incorrect attitude as your client that these things don't matter as its all the individuals money. That is what causes the corporate vail to be pierced in a court of law.

As to sticking to your comment... If the additional paid-in capital account was created under any circumstances other than stock purchase in excess of par value, it would be an error on the corporation books and an error that must be corrected. You have to get over your thinking of partnership and proprietorship accounting when dealing with a corporation.

[OldJack]

Obviously the Univ of Minnesota text book only cops-out as what to do with an error. They actually agree that only excess of stated value of par value stock should be in the Paid-In Capital account by their statement and comment that other amounts should be discouraged. I expect that if one had time for a research of other textbooks it would show a different result. Unfortunately I am in tax season and do not have time for such research. I also would expect that research would show that allowing additional contributions to the account would be found to not be in accordance with GAAP and would cause a problem for an independent audit report.

I strongly disagree with the last sentence that says "Use this account if any nonshareholders contribute capital to the corporation." I believe that would have to be in an income account or a liability account depending upon the terms or strings attached to the contribution. Even not-for-profit corporations have to report charitable contributions as income.