Discussion:Change S Corp Ownership using legal statements
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Discussion Forum Index --> Tax Questions --> Change S Corp Ownership using legal statements
Prof mez66 (talk|edits) said: | 6 November 2009 |
| I am working with a client with a difficult tax situation I have not come across. Situation resembles this scenario so hope someone can share insight. Client owned 100% stock of S corp and had a business agreement with an individual to share 10% percent of stock of company. This fact was never filed. Client is now in civil legal dispute with the individual where documents and statements are made to show evidence of the 10% stock share. Can these legal statements be used to file amend 1120 returns and K1s and show that proper ownership structure among the two people? Does IRS take these legal statements to provide enough information? | |
| 6 November 2009 | |
| If you're lucky the court will decide to award the stock henceforth with some payment (if the company was profitable). If company had losses maybe court will ask for new partner to kick in money to get stock.
I think it would be unlikely for court to decree retroactive ownership... unless something unusual lurks in the back story. | |
Prof mez66 (talk|edits) said: | 6 November 2009 |
| Company was profitable historically. I personally suspect that the court will award the shared ownership and hence payments, thus see it beneficial for my client to amend all the previous corporate returns to reflect the new ownership and pass through the 10% of the net profits to the other owner. My client will then need to amend his personal returns and reduce his tax liabilities.
So, from a corporate tax perspective, will the IRS retroactively recognize the new ownership structure if I provide the legal proceedings as documentation of the intended stock ownership? I just want to make sure I'm doing my best to advise my client so hope someone has experience with this. | |
| 6 November 2009 | |
| Usually, a court is partial to awarding money damages, and not equitable relief. I don't think you can do anything until the court proceedings are finalized. What does the client's attorney think about this idea? If the lawsuit is still going on, this would be a powerful admission against interest by your client, and could show up in evidence against him. I am not a tax attorney, so I'm not giving any tax advice here. I'd get the client's attorney in the loop for sure.
My guess (and it's a guess) is that the court will not order anything but money damages against your client personally for any past transgressions, and maybe just possibly he will order your client to make over a percentage of his stock to the plaintiff going forward. Notice, these would be personal awards and orders against your client as a person. Total guess. | |
Prof mez66 (talk|edits) said: | 6 November 2009 |
| Civil proceedings is finalizing this next week. My client attorney thinks that the court will award the plaintiff. I'm just thinking of tax implications should this happen in the near future. So to look at the situation differently, if the court award the plaintiff and my client does not file any amendments on the corporate returns, would he then be committing tax fraud should he gets audited in the future as he did not report material changes in income/expense? Just wondering if my clients is legally required to do amendments. | |
| 6 November 2009 | |
| My thought would be to get that exact final court Order in your hands and get a good understanding of that Order from the attorney, including the exact parties to the Order (very important). In my opinion, it's still too early to say.
Even if it ends in a settlement, the settlement is made an Order of the court. Maybe a better tax person will come along that can help you. Is the attorney asking you for advice on how to structure the Order? Keep one thing in mind, though the IRS may take such an Order into account, it would not necessarily be bound by an Order it was not a party to, in my opinion. Again, my guess would be that any Order would pertain only to your client as an individual. I doubt this is some kind of corporate dervivative action, since the Plaintiff is not a shareholder on the books. (By Plaintiff, I mean the putative 10% "owner" that is suing). So, I don't see how the corporation itself is even a party to this suit. I am not a California lawyer, and I am not giving you legal advice. | |
