Assuming that the S Corp were audited, if it really gifted away its profits, this would not alter the fact that it had taxable profits. A gift is not deductible, so the S Corp's gift giving, whether or not bona fide, would not turn a profit into a loss.
In short, your partners appear to be sewing the emperor's new clothes.
If you want to report the S Corp to the IRS, you can file a Form 211
, and see where it goes. You could end up getting some money from the deal, if the IRS collects from the S Corp management. If the IRS believes there's tax
money to be had, it will audit the S Corp, and if it decides that the management is engaged in some sort of fraud, the management could be looking at criminal charges.
Hope this helps.
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