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Mark D
Mark D, Enrolled Agent
Category: Tax
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Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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I have an accounting question. I have a new client. For

Resolved Question:

I have an accounting question.

I have a new client. For whatever reason, her prior CPA made her company a C-Corp. Her 2008 tax liability was $96,000. Anyway, during 2008, she had a partner who owned 50% of the stock. The partnership went south. The partner had about $55,000 in debt to the company that was not paid back. The prior accountant left the debt on the Balance Sheet. I want to get this off.

What do you think? Amend the 1120 to show additional dividends to the former stockholder? This was my first choice.

The client however is adamant that the 2008 tax return CANNOT be amended. Probably afraid of opening up a can of worms.

Since it was a stockholder and we don't have a promissory note and it's impossible to get one, we really can't write it off. HELP!
Submitted: 4 years ago.
Category: Tax
Expert:  Mark D replied 4 years ago.
May,

Dividends would probably not work as they need to be equal to ownership percentage (assuming one class of stock). What is the common stock balance on the books? I would suggest you look at this a treasury stock purchase, debiting Cost of Treasury Stock and crediting the loan asset. In theory, the "selling" shareholder would report the stock sale on his/her Schedule D.

Bad debt expense would not be an option as they were related parties and this would be hard to prove to be a bona fide debt (no note). Please let me know if you have further questions.

Regards,

Mark D
Customer: replied 4 years ago.

At 12/31/08, the Equity Section on the B/S prepared by the prior accountant had the following entries:

 

Additional Paid In Capital 22,658.53

Common Stock 20.00

Treasury Stock (50,000.00)

 

The surviving partner, my client, paid the prior partner $50,000 out of company funds for her share of the stock.

 

I think you're on to something here. I'm thinking about this in a new way. The treasury stock should have been purchased back with the receivable owed by partner to the company. Instead, she received cash. Stupid. Stupid. Stupid.

 

I'm thinking the surviving partner is going to end up recognizing that receivable as a dividend.

 

Any additional thoughts?

 

Thanks,

Loren

Las Vegas, NV

 

 

Expert:  Mark D replied 4 years ago.
Customer

No dividend. I would look at combining the receivable withe the cash paid out for a total of $100K paid for treasury stock.

Regards,

Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 989
Experience: MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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