treasury stock

[Lynn EA USTCP in Louisiana]

Under what circumstances (other than corporate dissolution) may the treasury stock item be removed from the corporate balance sheet?

Thank you,

Lynn Jacobs, EA

Kenner, LA

[OldJack]

By vote authorization from a shareholders meeting and by resolution of the board of directors. The officers then reorganize by canceling the treasury shares and make an entry closing the account to the retained earnings account thereby reducing the retained earnings of the corporation. Such transaction must be disclosed in the notes of the financial statement and cannot effect the current year income statement.

[Bart]

By vote authorization from a shareholders meeting and by resolution of the board of directors. The officers then reorganize by canceling the treasury shares and make an entry closing the account to the retained earnings account thereby reducing the retained earnings of the corporation. Such transaction must be disclosed in the notes of the financial statement and cannot effect the current year income statement.

Couldn't you also resell the treasury stock?

[OldJack]

>>Couldn't you also resell the treasury stock? <<

Sure you could resell all of the Treasury stock,but unless you sold it for the exact cost on the balance sheet you would have an adjustment to the retained earnings account that would need to be documented by corporate minutes. However, let me say here for the record that there is no actual requirement, for tax purposes, that a corporation has to have written minutes of meetings.

[Wayne Brasch]

>>Couldn't you also resell the treasury stock? <<

Sure you could resell all of the Treasury stock,but unless you sold it for the exact cost on the balance sheet you would have an adjustment to the retained earnings account that would need to be documented by corporate minutes. However, let me say here for the record that there is no actual requirement, for tax purposes, that a corporation has to have written minutes of meetings.

OldJack,

It has been my experience that every time IRS audits a corporate client of mine, they always insist on having the corporate minute book at their disposal. They haven't all the time looked at it, but they request that it be made available to them.

Wayne

[OldJack]

It has been my experience that every time IRS audits a corporate client of mine

Wayne, the IRS asks for corporate minutes to find something to use against you.

Of course its a good place to document those "written plans", but those plans could be separate and there is no penalty for not having corporate minutes. And they are a good thing to have if you find yourself in a legal battle with a shareholder.

[kcjenkins]

The IRS looks to see that the corp is acting as a corp. because it can be an argument for 'piercing the corporate veil', if the corp has, for example borrowed or loaned money without a resolution of the board to do so.

[OldJack]

The IRS looks to see that the corp is acting as a corp. because it can be an argument for 'piercing the corporate veil', if the corp has, for example borrowed or loaned money without a resolution of the board to do so.

I am not aware of any recent cases where the IRS argued to 'pierce the corporate veil'. That is normally left to disgruntled shareholders. By state statute and corporate bylaws, officers of a corporation are usually authorized to sign loan documents without any board of directors resolutions. It is only the financial institutions that like to have a resolution in their file for their bank auditors.

[kcjenkins]

Well, Jack, the fact is that these seldom get to tax court, because of their very nature. The fact is that the reason banks want the resolutions is because their auditors know that if the corp did not dot the i's and cross the t's, the loan might not be enforceable. It's the same reason that IRS auditors care.

And the biggest issue is with loans to and from shareholders, for the IRS. If they can challenge the shareholder loan, they may be able to turn it into a taxable dividend, for example. Why take the risk?

[OldJack]

And the biggest issue is with loans to and from shareholders, for the IRS. If they can challenge the shareholder loan, they may be able to turn it into a taxable dividend, for example. Why take the risk?

KC, I would agree there was a risk if you could point me to an authority for the IRS that requires minutes of the board of directors of a corporation.

[kcjenkins]

Jack, the IRS allows deductions, but not in contradiction of state laws, generally. Now, in most states, for a loan to be enforceable, it has to comply with the law, and state laws on corporations normally require that loans to and from a corp and its shareholders be approved by the Board of Directors. This is where a properly recorded vote authorizing the loan protects the shareholders.

Here's a sample from the IRS audit guide for a vet practice, that points out what they are looking for:

Auditing a small to medium size veterinary corporate practice is much like an audit of any other type of corporation. The nature of the audit procedures selected and the extent of their application depends upon the degree of reliance that can be placed on the system of internal accounting controls.

Many veterinary practice corporations are closely held and may have related parties working within the corporation. Inquiries into the corporation's accounting procedure and staff are a factor in determining the depth and scope of the audit.

Before beginning the audit, the following may be helpful in planning the depth and scope of the audit:

Articles of incorporation, bylaws, and stock certificate book

Minutes of board meetings

Organization chart

Chart of accounts

Contracts and agreements, such as leases

Description of the accounting system and internal controls

Loan agreements and other evidences of indebtedness and relationship to a debtor (education loans of shareholders)

Copies of any prior audit reports by federal, state, or local agencies

Copies of prior/subsequent returns and related returnsCopy of pension plan, letter of determination, and Form 5500s

[OldJack]

KC... everything you say is true, but there still is no requirement that a corporation has to have board of directors or shareholder minutes to present to an IRS auditor. Naturally the IRS would like to look at them if they exist but the IRS could hardly levy a penalty for not have them. And proper loan documents can't just be ignored/reclassified by the IRS because of no minutes that are not required. Don't misread my intent, I try to help clients with documenting loans and minutes as I agree they should be a matter of record especially in case of lawsuit.

[kcjenkins]

OK, then we are basically in agreement, Jack.