Elusive S Corp Basis

[FDNY]

I have a situation that I need to present to you as I think I'm losing some sleep over it.  I have a client and long time friend who is a  shareholder (non passive) of an S Corp that has been very profitable since 1984.  Only in the last few years due to over zealous expansion with tremendous debt, then a crashing commodity market they have been reporting large losses.  I was able to use 2013 and 14 losses due to the basis provided to me since 2008 by the company's accountant when I started doing his returns.   Looks like they have only been tracking basis from 97 on and cannot attest to accuracy of basis before that date, as if they started from zero.  I asked for a copy of the 97 Corp return but it is not available, oddly nothing before 2007.

Problem is this year basis went negative and the shareholder/friend adamantly disputes it.  I tried to reconstruct his basis but no one seems to have any records before 1997.  SH states (and I tend to believe this to be true), that every year since 84 all income (less 40% for tax payment distributions to each SH) remained in the company as they needed cash to secure financing for base product purchases.  So as I said, I would like to believe him but have no documentation other than his statement that he claims is an extremely conservative estimate of the lost years.   

I tried talking to another shareholder but the only other original is uncooperative, they don't talk anymore.  Others came in much later.  Former personal accountant didn't have any basis when I took over, guess he saw no need as corp was always profitable.  No one has any past tax returns except me, since 2008.   So what do I do?  Tell him SOL and it is what it is, it's all I have .  Or, accept his statement, not sure that would fly in an audit situation.  So, I'm thinking the first one, but in my heart I feel he's right and is getting shafted for non existent retention of records.  He does know this was his responsibility.  Any suggestions (or sleep advice) would be greatly appreciated.  Thanks.

Sleepless in MA,

Bill 

[Elrod]

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...

[Abby Normal]

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.

[Terry D EA]

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.

[jklcpa]

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.

[Abby Normal]

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

[Jack from Ohio]

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.  

 

[Elrod]

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

[FDNY]

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

[BHoffman]

Hi Bill,  one other thing....you might want to meet with the client and go over the nuts and bolts of your basis calculations.  Maybe he has some additional information that will make a difference, or maybe he'll feel more confident that your basis calculation is correct.  Depending on their level of interest and comprehension, I try to get input from the client in some of these weird situations, and especially if we aren't in agreement.

 

 

[FDNY]

Thank you B.  I have my client calling people, running ragged in 2 states, and looking everywhere for anything related to his basis.  This is going to be a monumental task on his part (and probably mine) as he knows the consequences of my so far incomplete analysis, that I only yesterday explained to him.  He's not happy.  This is a client who I send 2 copies of his tax return every year because he always needs it for something, and he still calls me because he can't find it.   He needs a hug.

[FDNY]

Also, I told him I wanted to see balance sheets, they have to be somewhere.