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03 - Accounting & Taxes Accounting Help & Tax Strategies

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  #1  
Old 10-07-2005, 12:23 PM
MightyBrave MightyBrave is offline
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Default s-corp distributions

If the company I am involved in has never had a meeting stating where the distributions are going to go to, Can the president (who owns 85% of the company) just decide to pay down the AAA debt with the profits that the company has? Would it be possible to have my lawyer say that because there was no meeting he has to distribute my portion of the profits to me?
I am trying to figure out how to get out of this company without having to take a large loss. He has only offered to by my stock back at 20% of its value, and I want full value. How should I handle this? Does he have to obey by the by-laws?, if not what happens? I am trying to help my lawyer and find out what I can do also.
thanks
Lonnie
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  #2  
Old 10-07-2005, 01:04 PM
OldJack
 
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First, You should not rely upon someone on the internet to give you legal advice as we do not know all the facts and the laws of your state and we are not lawyers.

You should understand that the AAA account is only a bookkeeping account to keep track of profit that has been allocated to shareholders that have paid/or will pay tax on the profit so that it can be taken out tax-free at a future time. It is not a separate fund of cash and profits are not paid into it. The AAA account does not belong to any specific shareholder. It is simply an accounting of profits that are S-corp profits and not C-corp profits that would have to pay double tax if distributed.

Payments of property distributions (C-corp or S-corp at FMV), cash dividends (C-corp profits), or tax-free cash distributions (S-corp profits) from a corporation have to be paid equally to each and every shareholder on a per share basis. No exception. But, payments do not have to ever be made unless the Board of Directors decide to make such payments or the corporation is liquidating.

Again... in some states a minority shareholder has the right to sue for liquidation of the corporation and distribution of all assets to the shareholders. Justification for this type suit is may be such things as the shareholder controlling the corporation is not following the bylaws of the corporation, mismanagement, and/or operating in an unlawful manner. You should discuss this option with your attorney. Sometimes just the threat of this will bring cooperation from the majority owner. If there has been questionable accounting and tax preparation, your attorney might point out that you are considering notifying the IRS for a tax audit.

Therefore to clarify answers to your question: Not conducting meetings and following the bylaws does not mean profits have to be distributed to you. What it means is that the president of the company is not following the bylaws and might be held responsible for his actions of violating the corporate bylaws in a lawsuit to relieve him of his position as a president and officer of the company.

The best advice I might offer is to make sure your attorney understands everything and then take your attorneys advice or seek another attorney. A good attorney should cause enough concern that the majority owner would be happy to buy you out at a fair price to both of you.
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  #3  
Old 10-07-2005, 06:58 PM
MightyBrave MightyBrave is offline
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Default AAA loan

The company has an AAA loan that is -100,000. The profits were paid to this account. I am confused on how the profits can be paid to this account and how the account can be a negative. I know he borrowed money for operating expenses and other items that make up this account. However shouldn't money be paid to this account within the business so that I don't have to pay income taxes on my profits that were used to pay on this loan. Oh and this -100,000 is a loan from a bank. He was the personal guarantee on the loan.
thanks
Lonnie
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  #4  
Old 10-07-2005, 09:37 PM
OldJack
 
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You are not listening! The AAA account is just a running total of all the profits/losses left in the company that were S-corp amounts each year that has been passed to you on the 1120S-k1 for you to deduct if a loss or pay tax on if it was a profit. The AAA account is not a loan account nor is it a cash account. It is just a bookkeeping account that keeps track of how much profit or loss the business has had in prior years. The account is increased each year by the amount of any yearly profit, decreased by any yearly loss, and decreased by any profits paid out in cash to the shareholders. The company books would not balance without the AAA account in this fashion. If the company has had more losses than profits the AAA account would be negative by such excess.

If you have not been a shareholder since the beginning of the corporation, it is quite possible that the AAA account was negative due to losses before you became an owner. Therefore, the losses were pass by the 1120S-k1 to shareholders before you owned shares and you therefore know nothing about such losses until now.

If the corporation borrows money it does not get posted to the AAA account it would be shown as a loan payable (in the liability section of the balance sheet) due to the bank or whoever. The AAA account is in the equity section. If he borrowed money, however, the money being spent could create more expense than income which would therefore create a years loss that changes the balance of the AAA account to negative. Payments on loans do not effect the profit or loss for the year and you therefore are not paying for it out of your share of the profit. Such payments do however reduce the cash in the company but realistically it is the same cash that was borrowed plus interest that was due. Only the interest paid is an expense that reduces profit.

I should point out to you that if you start throwing rocks you should be prepared to also duck when rocks are thrown back. I don't know how smart this guy is but he can also cause you problems. As an example, This guy could very well sell shares of stock to his wife for say $100,000 cash and then turn around and pay himself a bonus salary of $100,000. You say what good would that do? Your 15% ownership would suddenly be maybe 1% or less and also the $100,000 salary created a big loss for the year thereby reducing the value of the company ensuring that your stock value is virtually worthless. Sure his big bonus is taxable income to him but it gets offset by the big loss it created of which 99% would be deductible against the salary on his 1040 tax return. I doubt this guy is smart enough to do such things like this but he may have a good CPA or lawyer.

Your best bet is to negotiate a settlement buyout that is fair to you and the other guy and walk away a smarter investor than before.
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  #5  
Old 10-08-2005, 12:13 PM
MightyBrave MightyBrave is offline
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Old Jack,
Ok thanks for the clarification. Also can you explain to me what line 20 of the schedule L that says 'Morgages, notes, bonds payble in 1 year or more' means. It shows there is $138,000 on this line? Also the the total liability and shareholders equity is 98,000 (line 27). Does this mean that the companies assests is 98,000. I am trying to come up with a fair market value for this stock, he wants to give me 2,000 for it and I want 12,000. The company had 28,000 in profits last year. My lawyer is working this now so I only take your information as personal advice nothing more. I basically want out of the company but not for the 2,000 he is trying to pay me. My lawyer is trying to find out how I can make him give me fair market value or close to it.
Thanks
Lonnie
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  #6  
Old 10-08-2005, 01:27 PM
OldJack
 
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S-corp, form 1120S, page 4, Sch-L, "balance sheet per books":

Line 17 plus line 20 (loan accounts) are to show the full amount owed by the corporation to loans other than to a shareholder (line 19). That normally is debt to a bank or loan company. Payments on a loan that are due within 12 months are commonly shown on line 17 (current loan) with the remainder of the loan payments due shown on line 20 (long-term). Line 16 (accounts payable) and line 18 (other liabilities) are normal debts owed for everyday type purchases of supplies and etc on an open account or credit card type basis verses a long-term type loan.

Line 27 (total liability and shareholder equity) is a balancing figure to agree or balance with line 15 "total assets" simply proving that the books balance. Neither of these figures represent the value of the company as they are just totals. Line 15 shows the book value total of all assets, but due to the corporation liabilities, those assets are normally pledged to the loans inthat the loans would have to be paid off before the proceeds of the assets were available to the shareholders. Book value of the assets on line 15 (total assets) does not represent actual fair market value as the assets may be worth more today then the historical purchase value less expensing that is a result of line 15.

The total of line 22 through 26 (equity accounts) represents the book value of the company for shareholders. This amount would imply that if you sold all the assets for the exact values as totaled on line 15 and then paid off all liabilities shown on lines 16 through 21, you would have the total of line 22 through 26 in cash to distribute to the shareholders on a per share basis.

Your numbers would imply that the total of lines 22 through 26 (equity accounts) would be a negative $40,000. If so this would mean that if the company was liquidated at the values on the books the corporation would not be able to pay all the debts and still owe $40,000, therefore, there would be no cash available to pay the shareholders anything. If the values in the books are correct, if the corporation ended operation, it is in reality owned by the creditors.
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  #7  
Old 10-13-2005, 01:41 PM
MightyBrave MightyBrave is offline
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Jack,
I took a look at the income tax statement and on the lines 22-26 there is $1,000 on line 22, $10,000 on line 23 and -100,000 on line 25. Line 27 has 98,000. So in reality the company would be 9,000 on the positive side?
If I can't get a fair market value for the company at what point in time will he have to pay me my share of the distributions. I find that I have almost no rights because I only owe 15%. The minority share holders can really get jipped.

Thanks
Lonnie
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  #8  
Old 10-13-2005, 02:19 PM
OldJack
 
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I assume you are looking at a tax return 1120S, page 4, for the year 2003 or 2004 when reference to line numbers.

Your math is sure different than what I get.. but then I don't actually see the form you are looking at. The total of line 22-26 appears to be $1,000 + 10,000 - 100,000 = $-89,000 which is not 98,000 so there must be some number on line 21. Please give us the amounts on each line from line 16 through line 27 and maybe we can understand what is going on with this.

Regardless of the numbers... line 25, "Adjustment to Shareholders Equity", should be zero unless there has been an adjustment like the items listed below ********** and that is not likely in your case.

If I were guessing I would think line 25 was either 1) the losses year to date, 2) distributions to the shareholders, or 3) a loan borrowed from someone that should be shown on line 17,19, or line 20.

Line 24, "Retained Earnings" must have a number be it + or -. It would be almost impossible for it the be zero.

In any case.. it would appear that someone other than a professional tax preparer is doing the form 1120S and it would appear that numbers are not correct or at least not on the proper line.


**********
Line 25. Adjustments to Shareholders' Equity

Some examples of adjustments to report on this line include:

• Unrealized gains and losses on securities held "available for sale."

• Foreign currency translation adjustments.

• The excess of additional pension liability over unrecognized prior service cost.

• Guarantees of employee stock (ESOP) debt.

• Compensation related to employee stock award plans.

If the total adjustment to be entered a negative amount, enter the amount in parentheses.
**********
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  #9  
Old 10-13-2005, 02:30 PM
MightyBrave MightyBrave is offline
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line 16 = 19,298
Line 17 = 0
Line 18 = 29649
Line 19 = 0
Line 20 = 138,664
Line 21 = 0
Line 22 = 1000
Line 23 = 10,000
Line 24 = -100,501
Line 25 = 0
Line 26 = 0
Line 27 = 98,110

Thanks
Lonnie
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  #10  
Old 10-13-2005, 05:30 PM
OldJack
 
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Form 1120S, Page 4, Sch-L, Balance Sheet line #:

line 16 = 19,298 Accounts Payables
Line 17 = 0
Line 18 = 29,649 Other Liabilities
Line 19 = 0
Line 20 = 138,664 Loans from other than the owners
Line 21 = 0
Line 22 = 1,000 Initial investment for stock at par value of stock
Line 23 = 10,000 Initial investment for stock above par value
Line 24 = -100,501 Deficit of S-corp since Beginning
Line 25 = 0
Line 26 = 0
Line 27 = 98,110 Net total of lines 16 through line 26, "liability & Equity" to agree and balance with net Assets. This number is more meaningless other than the fact that it balances with net assets.

Per the book value of lines 22,23, and 24 the S-corp is negative worth (1,000+10,000-100,501=negative $89,501 investment equity for shareholders) as the assets of the S-corp sold at book value would not pay the creditors (19,298+29,649+138,664=$187,611). Therefore, according to the book value the company is heavy in debt and worthless, however, this is only book value. True value would be an appraisal of the assets less the amount owed the creditors plus the value of the business as a going concern plus the value of the business for any tangibles or intangibles not recorded on the books.

Line 24 = -100,501: This is a deficit value meaning the company has lost (or distributed to shareholders) more money than it has earned/profit or it earned profits but the profits have been disbursed to the shareholders in excess of earnings/profits. In other words the deficit of $100,501 has been created by the use of creditors money and profits/losses, either to operate the business incurring expenses or paying distributions to the shareholders.
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