Late filing 1120S

[BulldogTom]

Any help/advice is appreciated.

Two individuals who are shareholders in another corporation - a C corp - were exploring the possibility of doing some work for another customer in the same industry. To avoid having the main customer of the C corp finding out about the other customer, they formed a Corp and filed an S election which was accepted by the IRS in 2007. The new deal fell through and the S corp has just been sitting there. The bookkeeper has been filing the Payroll and Sales tax returns, but no one thought to file the 1120S. Now another opportunity has come up for the shareholders, and they are looking at using the S Corp.

How would you handle this? There is absolutely no activity except the cost of the contractors license, contractors bond, and the annual statement of information fee paid to the state every year. The expenses were paid by individuals and not recorded in the books (there really are no books, just a bank statement with the same amount of cash every month for 2 1/2 years). The S Corp has no sales or other expenses.

Would you file all 3 years and ask for the penalties to be abated? What would be the reasonable cause? Would you file one year and have the IRS request the other years?

The penalties are pretty severe at $89 per month for every month late.

Thanks in Advance.

Tom

Lodi, CA

[kcjenkins]

Tom, I believe since they have filed payroll and sales tax reports, you have little choice but to file the 07, 08, and 09 returns. And the expenses that they paid personally could be reimbursed, or could be treated as capital contributions or as shareholder loans.

Remember, the extra costs that this incurs for them is NOT YOUR FAULT, IT'S THE LAW, and any penalties for not filing, and/or filing late, are THEIR FAULT, NOT YOURS. Your job now is to get them straight in spite of THEIR ERRORS.

[BulldogTom]

Thanks KC. I know this. But it is an expensive education for the client.

Wait till I tell them about not paying the State of CA for the $800 annual tax and penalties and interest. That will be fun as well.

Tom

Lodi, CA

[kcjenkins]

I'm surprised that the state has not already sent them a bill for at least the 2007 year!

[jainen]

>>the expenses that they paid personally could be reimbursed, or could be treated as capital contributions or as shareholder loans.<<

In my opinion, this company has shareholder loans being converted to equity, constituting a second class of stock and a technical termination of S-status. File Form 1120, with late filing penalty being the lesser of $100 or 100% of tax. I don't think you can avoid the $800 minimum franchise tax, but you might get state penalties abated on the grounds that prudent business practices such as paying taxes don't apply when there is no business to be prudent about.

[OldJack]

In my opinion, this company has shareholder loans being converted to equity, constituting a second class of stock and a technical termination of S-status.

There are no shareholder loans to convert to equity!!! There is no second class of stock!! There is no law that keeps a shareholder or non-shareholder from paying anything they wish to pay including the debt of others. In my opinion it is too late for the shareholders to claim reimbursement for expenses that were not claimed in a reasonable time from occurrence.

I would file the tax returns and request abatement of any penalties when they are assessed. I would take the position that filing zero payroll tax returns, and sales tax returns, did not change the fact that the entity never engaged in any business.

[BulldogTom]

There are no shareholder loans to convert to equity!!! There is no second class of stock!! There is no law that keeps a shareholder or non-shareholder from paying anything they wish to pay including the debt of others. In my opinion it is too late for the shareholders to claim reimbursement for expenses that were not claimed in a reasonable time from occurrence.

I would file the tax returns and request abatement of any penalties when they are assessed. I would take the position that filing zero payroll tax returns, and sales tax returns, did not change the fact that the entity never engaged in any business.

I am going to ignore Jainen on this one. That is a far stretch. And neither of the shareholders are looking to get the money back or take a deduction for the amounts paid out of pocket. That is not the issue and the amounts are so small they don't amount to enough to bother with.

The real issue is the company never engaged in business. But, they are a company and there is the minimum tax for CA. That is not an issue either. They will pay it. Interest on the late tax is not an issue either, they should have paid it and it is late. Not and item they are worried about.

The real question is the penalties. They are pretty steep for a company with no taxable (or non-taxable) income. I don't have real hope that the state will have a gracious heart right now. I am more optimistic that the IRS will be forgiving given the circumstances.

Thanks for your reply OldJack.

Tom

Lodi, CA

[Tax Prep by Deb]

The real question is the penalties. They are pretty steep for a company with no taxable (or non-taxable) income. I don't have real hope that the state will have a gracious heart right now. I am more optimistic that the IRS will be forgiving given the circumstances.

Thanks for your reply OldJack.

Tom

Lodi, CA

Tom,

Don't be too quick to dismiss California forgiving the penalty. I recently requested abatement for a client who didn't file her partnership return on time. Granted her circumstances were different, but I was able to get the penatly abated for her. All you can do is give it a try and let them decide.

Deb!

[JohnH]

Tom: I think jainen's reply was intended to directly address the penalty issue. Repayment of the advances or taking a tax deduction was secondary. If a rationale can be advanced that the S-corp election was invalid or terminated due to there being a second class of stock, then it files as a C corp. No income means no penalty for the C corp, and there's no S-corp FTF penalty to worry about or to request a waiver for. It's an interesting concept.

[BulldogTom]

John,

Thanks for interpreting "Jainen speak" for me. I did not think of it that way. I thought he was being a little anal about the expenses, especially after reading all his posts about the loan from a shareholder. I have to remember that Jainen always has a point, but he disguises it well.

Tom

Lodi, CA

[michaelmars]

in NY i have had experiences like this and a letter that the entity was formed but never funded and shares never issued will end the issue, epecially with the irs and tax penalties usually don't pass through to the shareholder for corporate taxes unless the shareholder received benifit from the company

[Pacun]

"I have to remember that Jainen always has a point, but he disguises it well"

That could be true on other posts but he was clear on this one. Now, depending on how much business they will have in the future, they might want to keep the S status.

[jainen]

>>he was clear on this one<<

Sorry-I'll try to be more obscure next time. I would normally argue against the taxpayer in such a situation, but here I was indeed addressing the penalty. As I quoted, it was kc's idea to treat the expenses "as capital contributions or as shareholder loans," and that's just the sort of disclarity the IRS itself likes to call a second class of stock.

Once they dodge the penalty, they can dissolve the corporation and form a new S-corp.

[OldJack]

Get real. This corporation was born dead and should be buried. Even the government doesn't try to collect from the dead. Hold a memorial service with your clients and move on with a new corporation.