"Mike Lewis" <jmpj[at]cableone.net> wrote:

- quote -

First - returns for the early 90s are WAY past fixing so
there isn't much you can do about them no matter how wrong
they are. Their impact on basis is another matter.

Second - if a new client had produced a basis statement for
the prior year and told me it was right, I'm not sure I
would have reviewed the prior 10-years worth of returns to
check. I don't think you did anything wrong, in fact I
think you did the right thing by doing more than most of us
what do. The problem is that now that you know what he gave
you is incorrect I believe you are obligated to correct it.

Third - while it sometimes works out, there is NOT
necessarily ANY direct correlation between retained earnings
+ S/H Loans + Capital to basis. The most common example
would be if I purchased stock from a prior owner. The price
I pay would not get reflected anywhere on the corporate
books, hence no correlation. I'm sure there are other
reasons as well, but they elude me at the moment.

I'd suggest that you are obligated to make your best
calculations to correct his basis to what it should be
because you KNOW what he gave you is wrong. You may have to
generate a blank basis worksheet from your tax software and
do manual calculations from the very beginning. You WILL
have to make adjustments for losses he claimed that he was
NOT entitled to - reducing his basis in later years for the
losses he deducted that he was not entitled to (good luck
with this!).

The short route would be to reduce the basis amount he gave
you by the losses he claimed that he wasn't entitled to
previously, BUT I'd caution you about doing this. If the
prior accountant allowed him to deduct losses in excess of
basis I'd have little confidence in that accountant's
ability to correctly calculate basis to begin with - I'd
feel obligated to check it.

Good luck,
Gene E. Utterback, EA

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"Mike Lewis" <jmpj[at]cableone.net> wrote:

- quote -

I'd adjust basis and leave it at that. As for the second
question, on a cash basis taxpayer using tax depreciation
for book....hmmm. I'd have to think about that one.

Insurance policy proceeds? Tax exempt income? Those would
be OAA adjustments. Even 263A wouldn't apply here. I
dunno. I'm stumped.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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A client who has been an S Corp since inception has a
shareholder basis worksheet from previous accountant that
shows a basis 125K more than the S corp retained
earnings+capital+SH loans. He brought me copies of 1040's
and 1120S's from inception. The variance is due to a couple
of years in early 90's when he had losses above basis but
applied such loss against his other income.

Would you just go with what he gave you, ask him to correct
basis going forward, amend the old returns to rectify the
variance, or what?

What items if any would create a legitamate difference
between book retained income (both cash basis using tax
method of accounting on depreciation) and SH basis?

mike

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