Shareholders never designated - H claimed 100% - now divorcing...

[schirallicpa]

I must have sparked the bad tax karma devil somehow this year.  I have never had so many issues. 

H&W have owned and operated a business since 2005 as an S corporation.  They came to me in 2014 and I have prepared 2013 on.  I followed what the previous CPA/Attorney had set up with the H reporting 100% ownership/shareholder.  I did not look thru corporate records ever.  Shame on me for assuming that the CPA/Attorney who did the corporate organization and then did the first 7 tax returns had done things correctly.  But I dropped my ball on due diligence I admit.

H&W are now divorcing.  W has always been more involved in this business than H, but the tax return has shown H as 100% owner so he's trying to take the business in divorce.  They have finally been able to get their corporate documents from the attorney (which has literally taken months.  I know - why didn't the client have the corporate documents to begin with?) And the corporate documents do not assign any shares to either of them??!!!????!!!  

Now what?

The W wants her share - which she contends that without documentation, ownership is 50/50.

If a court agrees - then what do I do with years of tax returns with him as 100% owner.  

Last year was the first year they filed separately.  

I'm ready to run away.

[jklcpa]

3 minutes ago, schirallicpa said:

the corporate documents do not assign any shares to either of them??!!!????!!!  

At incorporation the attorney didn't issue any shares? (I know, symbolic, not actually required.) Nothing in the first year's minutes showing director's actions or approvals, no stock record book?  Are you sure that you or client requested everything related to the incorporation?

What about the state filing at incorporation or the annual filing to keep the corporation active and in good standing?  Could anything be gleaned from there to back up the wife's claim?

Sorry, just reaching and trying to help.  Sorry you are having such a run of difficulties with clients lately.

[Lee B]

At this point, I believe another experienced business attorney will be needed to determine the legal ownership issues.

There is quite likely state and case law that will decide who the owners are?

If this was my client, I don't know how I would move forward until the legal questions were answered.

[Abby Normal]

Tax wise, It's not a big deal if there was one K1 for one spouse or two K1s split 50/50. The 1040 tax will be the same and there are no SE issues.

This more of a divorce settlement issue. Who gets the corporation? This will be part of the overall property split (you get the corp, I get the house, etc.).

[Lee B]

Well since they filed MFS in 2022, it does affect 2022.

[Medlin Software, Dennis]

Do nothing until given something which shows “new” share allocation?  The clients had years to show something other than the 100%. Now that they are not cooperating, with having likely two persons to make the decision, and not agreeing, a court will have to decide. 

[schirallicpa]

Thanks guys.

I will tell her to find an attorney - hopefully a better one than what they started with.

[mircpa]

@schirallicpa

Since wife is contesting ownership, do nothing at this point. Wait until this ends up in court and follow judge's advise.

I am thinking may be you have to retro fix

[BulldogTom]

Another option is to put a Tax Matters Representative form in front of them and make them designate the TMR.   Both must sign.   No tax work until the letter is signed by both.   

Don't get into the middle of their dispute.

Tom
Longview, TX

[JohnH]

Did the Corp ever apply for any loans during its existence?  The application would have included representations regarding stock ownership. 

Same for any personal financial statements submitted for personal loans, either jointly or individually. (Home mortgage, cars, boats, etc)  Somebody (or both) had to claim ownership of the stock  

Also did the company ever do any government contracting or even just apply for the same? There’s always paperwork asking about percent veteran status (if either is a veteran), as well as percent woman owned.

[Lee B]

18 hours ago, schirallicpa said:

Thanks guys.

I will tell her to find an attorney - hopefully a better one than what they started with.

This sounds like a malpractice lawsuit waiting to be filed

[Medlin Software, Dennis]

3 hours ago, JohnH said:

Did the Corp ever apply for any loans during its existence?  The application would have included representations regarding stock ownership. 

Same for any personal financial statements submitted for personal loans, either jointly or individually. (Home mortgage, cars, boats, etc)  Somebody (or both) had to claim ownership of the stock  

Also did the company ever do any government contracting or even just apply for the same? There’s always paperwork asking about percent veteran status (if either is a veteran), as well as percent woman owned.

The years of tax returns they signed. 

[Lee B]

On 6/27/2023 at 8:31 AM, Abby Normal said:

Tax wise, It's not a big deal if there was one K1 for one spouse or two K1s split 50/50. The 1040 tax will be the same and there are no SE issues.

This more of a divorce settlement issue. Who gets the corporation? This will be part of the overall property split (you get the corp, I get the house, etc.).

How about determining stockholders basis?

[DANRVAN]

On 6/28/2023 at 9:58 AM, cbslee said:

How about determining stockholders basis?

In a transfer due to divorce the adjusted basis is also transferred.  Covered under section 1041.

[DANRVAN]

On 6/27/2023 at 6:54 AM, schirallicpa said:

 

The W wants her share - which she contends that without documentation, ownership is 50/50.

If a court agrees - then what do I do with years of tax returns with him as 100% owner.  

For previous years probably nothing.  Just go forward with correct ownership and reporting.

[DANRVAN]

On 6/27/2023 at 8:31 AM, Abby Normal said:

Tax wise, It's not a big deal if there was one K1 for one spouse or two K1s split 50/50. The 1040 tax will be the same and there are no SE issues.

This more of a divorce settlement issue. Who gets the corporation? This will be part of the overall property split (you get the corp, I get the house, etc.).

and determine whether it was marital property or separate property of either spouse.