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Thank you everyone for your thoughtful and supportive comments and advice. I will be sticking to my professional responsibilities on this matter and using your suggestions to be as fair and accurate as possible. I still have until October to try and help him as I feel the need to give extra efforts, not so much that he is a friend, I would do this for anyone. What is at stake is a 6 figure amount with a 3 in front, so this is serious, as is any other tax return. I read this thread before bed last night and must report to you that because of all you said I slept well, no tax nightmares. You should all have RTST after your names, Registered Tax Sleep Therapist. Thank you. Grateful in MA, Bill

What helps me sleep at night: nobody dies when I make a mistake.

Look at the balance sheet. Is total equity negative? When I don't have prior basis, I just use balance sheet equity or zero if total equity is negative. since all shareholders are supposed to take proportionate distributions, the only difference in shareholders will in their capital contributions.

Sleep is a wonderful gift..........

I would take Abby's suggestion one step further. Before reworking any figures, if you have the S corp's return in the first year you bacame your friend's tax preparer, I'd first compare your original starting basis from the company's accountant to that year's tax return. If the two are in close agreement then I'd explain to your friend that you've done the calculations to the best of your ability with the information that was, and is, currently available and try not to lose any more sleep over the matter.

Just because he is your friend does not shift the responsibility for these matters to you. All the replies so far have sage wisdom in them. YOU are not responsible for their irresponsible actions or lack of. Keeping in mind the current environment of the IRS holds you responsible for the tax returns you sign. Keep your professional stance, go forward and sleep well.

My statement here does not help at all but....I totally despise not tracking basis, whatever the excuse maybe. I have had many of these including partnerships and S-Corps. I have a few companies that brought me on at the beginning of their business and all basis is tracked every single tax year. Matter of fact, one partnership bought out one of the partners and their were no questions or disputes over basis. My only suggestion is as you say, is to try to re-create the shareholder basis. I think we all go into this knowing the accuracy is just not there but like you and others, I have had to do the same. I like Abby Normal's suggestion using the balance sheet figures. But... who's to say those figure are a true representation of the equity accounts unless you can see every entry. At best this should be an accumulation of income and loss. However, it may be as you said, all you have. I would keep good notes on how I arrived at the shareholder basis. As far as your client/friend goes, just explain to him that is all you have to work with. Good luck with this and get some rest. It shows the person you are and the desire to do the right thing by your concerns. Again, get some rest my friend.

FDNY, I would tell my friend, with sincere concern, that there is nothing I could do except what is documented in my hand. He would be the primary to get his situation resolved, either by a shareholder meeting, or attaining legal advice with a possible internal audit. I would not lose sleep over it FDNY, The situation as it is, you have, nor had any control over..... I know very well just how exasperating situations like this can be. Best of luck to you... Just remember...It's not in your control..... Sleep well my friend...