Most owners of closely held corporations regard their annual meetings as required nuisances. However, these meetings can fulfill important planning and protective functions, besides providing a chance for the corporate attorney and accountant to help finalize year-end planning and review the next year’s agenda.
Minutes of the meetings should recap the year’s significant activities and cite the enabling authorizations. Minutes can also provide additional support for the company’s positions concerning transactions with potential tax consequences.
Some examples: Since dividends are nondeductible to the issuing corporation and taxable to the recipient, the IRS often reclassifies loans to shareholders (nontaxable) as disguised dividends (taxable). The IRS also may recharacterize loans from shareholders as nondeductible contributions to capital and treat later repayments to the shareholders as taxable dividends.
Similar treatment may be applied to shareholder bonuses, which are taxable to the recipient but deductible to the company. Without appropriate justification, the IRS can reclassify bonuses as nondeductible dividends.
Company/shareholder sales and purchases also are carefully scrutinized. If the IRS decides the price of an asset sold to a shareholder is too low, it treats the difference as a constructive dividend. If a shareholder’s price for an asset sold to the corporation is deemed too high, the difference is treated as a dividend to the shareholder and a reduction of the company’s depreciable base.
Detailed minutes can strengthen the company’s position in all of these situations. Minutes can justify loans to or from shareholders by citing reasons and terms. They can explain bonuses by listing the recipient’s continuing contributions to the firm. They can support prices for company/shareholder sales by describing the item’s unusual features or referring to appraisals.
Barry Gilchrist is a certified public accountant at Wessel & Co. of Johnstown. Email him at email@example.com.