S-corp shareholder "stole" 50,000

[h0250722]

Husband and wife own each 50% share of a Florida S-Corp. Both performed work for company in previous years. The separated last year and husband is the only one working in the company and on payroll. Wife is not on payroll anymore as she does not work for the S-Corp anymore. 

Now she took/stole 50,000 from the S-Corp bank account and is not willing to return it.

How would I record this?

Reduction to basis? Reduction in Capital? 1099 payment (she did not actually perform any work)? Loan (she is not willing to sign anything)?

I cannot really declare it as distribution as she was still on payroll last year and therefore is considered "active" for another 5 years, as far as I understand. This would mean that at least some of 50,000 would need to be declared payroll (and S-Corp needs to pay payroll taxes on top of it to IRS).

The ultimate goal should be that husband owns 100% but she wants much more money. This all will be decided by the courts in the coming years. Meanwhile I have to do the tax return and don't know how to enter the 50,000.

Nothing is declared in the operating agreement regarding "stolen" money...

Please help!!

[IRonMaN]

Nothing worse than being stuck in the middle of feuding spouses.  Based on what you are saying, it sounds like the $50,000 was a partial buyout of her shares.  In any case, this is a decision that the 2 warriors need to decide on, not you.

[jeffmcpa2010]

" In any case, this is a decision that the 2 warriors need to decide on, not you."

I agree with IRonMaN. This situation could cause you more grief than you need, if you try to come up with your own answer. Use great caution, possibly even consult with your Insurance Carrier, about possible withdrawing from the situation completely.

I use the "no sleep rule" for bad situations, It I am awake at 3 AM thinking about it for a while one night, I may still consider it. 2 nights and the client is gone. My sleep is more valuable than a messy client, and I trust the rule to help keep me out of trouble.

[BobKamman]

"I cannot really declare it as distribution as she was still on payroll last year and therefore is considered "active" for another 5 years, as far as I understand."

Where are you finding that?

And it's unclear what years are involved here -- is "last year" 2020, and still unfiled?  

The real problem here is that you consider the husband your client, not the corporation.  When you have a conflict of interest like that, you say good-bye to both of them.  And hope you don't have to show up at the trial anyway.  

[qbteachmt]

"Now she took/stole 50,000 from the S-Corp bank account and is not willing to return it."

When? The current tax year or a prior (closed) tax year?

I've never heard of not being able to declare it distribution. And if he takes any funds as distribution, she's entitled to the same amount; is that why she did this?

Why is she still on the banking signature card?

Why don't you list it as Shareholder Loan (other asset) and report it to the divorce lawyer so it is taken into consideration in the settlement.

[sjrcpa]

It is not proper to call it a loan without loan docs. In this contentious situation i would not do it.

[h0250722]

2020 was filed in March. So I mean this current year - for me it’s somehow last year already because it’s almost over.

Thanks for all your thoughts and yes, I was ready to disengage both of them and the corporations. Just thought someone else had already a case like that and what the solution was. 

[joshuabarksatlcs]

Good points by Bob, Iron and Jeff.  In case you haven't walked away yet, let me share with you my thoughts the last couple of times when I was in a similar situation.

In general terms, shareholders do NOT make corporate decisions.  The Board does - though the shareholders very much have say in the Board election. 

Thus, in regards to "In any case, this is a decision that the 2 warriors need to decide on, not you," the warriors have to fight it out at the Board level, not as shareholders.  I would suggest viable options to the Board.  The Board had to decide.

So, who are on the Board in your case?  (In on of my last cases, one Board member quit the Board and created a 2 vs 1 situation on the Board.  As the saying goes, the rest is history.)  If they're 50/50 on the board, the divorce proceedings may have to step in.

What did the Board decide regarding the $50K? 

Do you have copies of the Board resolution or minutes when you book the entries?   

I would continue on only if I could go strictly by the book.  Meanwhile, I'd make sure my E&O policy is solid.

(I was also in a case whereby two groups declared they were the legitimate Board.  I ran to the hills that one time, even though one group was headed by a longtime client.  The litigation lasted for over 2 years.  I used Jeff's rule in that case but kept it at ONE awaken night at 12:30 am.)  

The above is along the the practical side of Bob's point: Your client is the corporation.  Hope it helps.

[h0250722]

Husband and wife are the only board members… 

No minutes or resolution was filed for the 50,000 taken out. There is nothing in the operating agreement regarding issues like that unfortunately. 

and yes, I will disengage all of them incl the S-Corp.