NATP "Real World" Question

[Golden Rocket]

This is my first year in NATP, and from what I can tell thus far, a fine organization.

In the area of education, as is the case almost universally, there is a gap between theoretical purity and "real world" practice.

Many of you are members as well. Witness the "Question of the Week" for their January 3rd newsletter. This is presented in their weekly "You Make the Call" feature:

Question: A new client comes in with a Schedule K-1 from an S corporation. He owns 100 percent of the stock and does not know his basis. Could you just use what is available on the balance sheet (i.e. capital stock, additional paid-in capital, and retained earnings) or on the Schedule M-2 of Form 1120S to determine his basis?

Answer:
The client's basis is determined using IRC Sec. 1367. It can consist of stock basis and debt basis. The rules for determining stock basis differ from the rules determining those items listed on the balance sheet and Schedule M-2 (i.e. AAA, OAA, and PTI.) The IRS provides a stock basis worksheet in the Form 1120S Shareholder's Schedule K-1 instructions ....

There you have it folks. A "real world" question. Most of us know about IRC 1367, but none of the elements needed to apply this are known. Does the above answer provide any guidance for the preparer? Yes, but only in a perfect world. A secondary question might be. "So where do we go from here?"

You might get some preparers to offer their opinion as to "Where do we go from here" on a forum such as this one. And even so, they might be criticized by "purists."

No institutionalized source is going to provide any more information beyond what they are potentially liable. I don't blame NATP, I wouldn't have answered any differently either, with attorney wolves out there seeking "jackpot justice" in some kangaroo court. But where do we get answers?

A forum such as this one might be your best bet.

[Bees Knees]

Years ago I remember reading a court case where the taxpayer could not prove basis. The court ruled basis to be zero.

There is an alternative basis rule for partnerships, mentioned in the partnership tab of TTB, but there is no similar alternative basis rule for corporations. The difference is because partners are liable for partnership debts. Thus, it is easy to figure partnership liabilities from the balance sheet are going to add to basis. Shareholders of corporations do not get basis from liabilities, unless they are direct loans.

Thus, you can’t just back into basis in an S corporation using the balance sheet because the rules are much more restrictive than partnerships.

In an audit, your S corporation shareholder would get zero basis, unless he could prove otherwise. Saying that to clients seems to motivate them into somehow discovering prior year records that allow them to calculate basis.

[Golden Rocket]

One Such answer

Bees in his response has provided one such strategy available to us in the "real world." namely:

"Advise the client that if he can't support any basis, he will be treated as having zero. This is to encourage the client to find documents and spur the memory whereas initially he claimed he had absolutely nothing."

"Nothing comes from nothing" - The Sound of Music

I might add that $50,000 in supportable basis might not be as good as $75,000 in suspected basis, but certainly better than zero.

[Koss]

Where do we go from here?

Where are we going?

And why are we in a handbasket?


BMK