In Uncategorized on 11/16/2017 at 11:01

No, this is not the latest salacious political tale floating about the Internet; rather this is the latest iteration of the pass-through dilemma: how does a Sub S shareholder/LLC member/partner (gen’l or limited) protect him/her/itself when the manager (be said manager a manager, partner, or officer) grabs the goodies and freezes out the rivals?

I’ve discussed this before in my blogposts “Don’t Get Yourself Into A State,” 5/11/11 and “The Big Freeze,” 8/13/13. But Judge Pugh discusses it again in Jay Enis and Sue Enis, 2017 T. C. Memo. 222, filed 11/15/17.

I know I’m a day late and a cliché short, but I spent the time I should have been blogging getting to a worthless discussion of long-term care coverage from which I walked out after fifteen wasted minutes.

Once again, as in the latter of my two above-cited blogposts, a doctor is the alleged villain in the piece. Jay and Sue, specifically Sue, were in some diagnostic-type S Corp with Doc Mark and Sister Ricki. Doc Mark ran the show. Jay and Sue claim Doc Mark looted the operation and stuck Sue with pass-through income to the extent of $413K. With no cash wherewith to pay tax on same, natch.

Jay and Sue stiped away their claim that the Sub S should’a been a C Corp. Comment: Stipulate, but don’t capitulate.

Well, the doings of Doc Kumar and Doc Woody, more particularly bounded and described in the latter of my above-cited blogposts, are the pattern for handing Sue the tax attributes of a Sub S shareholder.

“Petitioners contend that while Mrs. Enis was issued [Sub S] shares, the removal of her power to exercise shareholder rights, as well as the actions of [Doc Mark], removed the beneficial ownership of her shares. Petitioners, therefore, assert that they are not required to include pro rata shares of [Sub S]’ income. Petitioners identified no agreement or provisions in the corporation’s governing articles removing beneficial ownership. Kumar does not support their position that a violation of the shareholders agreement could deprive them of the beneficial ownership of their shares. In Kumar we found that in the absence of an agreement passing the taxpayer’s rights to his stock to another shareholder, a poor relationship between shareholders does not deprive one shareholder of the economic benefit of his shares. Kumar v. Commissioner, at *3. We, therefore, held that the taxpayer retained beneficial ownership. Id.” 2017 T. C. Memo. 222, at p. 16.

But hey, Sue can have whatever pass-through deductions which she can glean.

I’ll quote here from yet another blogpost, “Anti-Freeze,” 3/13/17: “Takeaway- When negotiating a buyout, break-up, shareholder’s agreement, operating agreement, partnership agreement or any other deal that gives rise to passthrough tax, require distribution of cash sufficient to pay tax for all passcatchers.”

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