S-Corp Question

[taxtrio]

New Client has just gone thru a divorce. He was awarded the s-corp in divorce settlement.

His ex-wife had been the secretary treasurer. She had refused him access to the company records and checkbook for 3 months. (contrary to court order giving him access). Long story...

but back to tax question.

Now that we have the business checkbook and quickbooks records in hand; we can see that she has been writing herself checks from the s-corp checkbook for close to 10,000.00 over the last 3 months and categorizing the checks in quickbooks as "medical reimbursement"!!

She has failed to do her job as secretary-treasurer (yes, she was getting a paycheck, W-2 issued each year). She was supposed to be paying the corporation bills. The phone bills and DSL and Blue Cross are 3 months behind. And the Quarterly taxes for July not paid. The corporation now has bounced check fees for checks she wrote we didn't know about until now.

Embezzlement... is my call. "Misuse of Corporate Funds". At any rate I will have to issue her a 1099-Misc for 2008 for these checks. "medical reimbursement" is not a legitimate corporate expense. And non of this money showed up in the Personal Joint Checking account either.

What a mess!

What say you all?? Agree? Comments?

P.S. :wacko:

[jainen]

>>Embezzlement... is my call.<<

A somewhat dangerous call. Make sure you are actually taking your client's position and not inserting yourself too far into the marital dispute. Unless your client wants to pursue such an inflammatory charge, I suggest you treat the payout as a division of marital property, cash in exchange for stock rights.

As you say, you can't treat it as a corporate expense. I suppose you could call it Box 3 Other Income, but that leaves the basic question unanswered and gives her the right to challenge it. For example, suppose she claims it was an authorized distribution constituting a second class of stock? A highly motivated and unscrupulous former secretary/treasurer just might be able to make that stick. How long does your client want to drag this out?

[kcjenkins]

While there may well have been a breach of fiduciary responsibilities, this is, as Jainen points out, a sticky issue. And your client could be hurt by the fallout, too, since he ended up with the S Corp, and he probably does not want it to be accidentally converted to a C Corp. Nor does he need to have a long drawn-out battle over an amount that will be a lot less than the resulting attorney fees would be, would be my guess.

Why not start by asking for copies of these medical bills that were 'reimbursed'? After all, that is basic to them being non-taxable to the employee. If she has them, then that is one thing. If not, I'd add the payments to her W-2. But I would be very hesitant to start a major war over $10K, when it could well end up being a cheap payment to get her out of his hair.

[taxtrio]

While there may well have been a breach of fiduciary responsibilities, this is, as Jainen points out, a sticky issue. And your client could be hurt by the fallout, too, since he ended up with the S Corp, and he probably does not want it to be accidentally converted to a C Corp. Nor does he need to have a long drawn-out battle over an amount that will be a lot less than the resulting attorney fees would be, would be my guess.

Why not start by asking for copies of these medical bills that were 'reimbursed'? After all, that is basic to them being non-taxable to the employee. If she has them, then that is one thing. If not, I'd add the payments to her W-2. But I would be very hesitant to start a major war over $10K, when it could well end up being a cheap payment to get her out of his hair.

I appreciate all your comments, I still need much more information from my client. He did ask her why she took the "medical reimbusement"... she said she needed the money to make the mortgage payment. At least that was the comment about the last check she wrote herself... the day after the divorce was final... when she was not employed by s-corp anymore.

But as for the S-corp being accidentally converted to a C-Corp?? What circumstances would create that? I'm still learning the many particulars of corporate situations.. would appreciate the input on that one.

As for the money being a payout for her share of the stock.. my understanding that's what the QDRO for 1/2 of his SEP to her is supposed to be for.. .. but then I haven't seen the final divorce decree papers yet..

I need more information.. at least it's not April!!!

Thanks for all your comments and help.

P.S.