Question

Glow and Bro organized an S corporation and intended to have only one class of stock. They agreed that all distributions should be proportional to their stock ownership. During 2019, Bro withdrew large sums of money from the S corporation without Glow’s knowledge. Glow’s share of pass-through income was $500,000 on the Schedule K–1, but he only received $30,000 of cash distributions. The S corporation became bankrupt. The IRS determined that the two owners did not receive distributions that were proportionate to their ownership, but it taxed Glow (who is in the 37% tax bracket) on the $500,000. Glow argued that a second class of stock was created: these substantially disproportionate distributions appear to create a preference in distribution, creating a second class of stock. Thus, the election was terminated, the entity was a C corporation, and Glow should be taxed only on the $30,000 distribution, taxed as a dividend because the entity was a C corporation. Glow also argued that the S corporation should take a theft loss deduction for Bro’s withdrawals. You are the U.S. Tax Court judge hearing the dispute. What are the proper Federal income tax results? Elaborate.

Answer 1

as per case study stated above glow and bro have started an organisation S whose motive is to sale one type of goods

But Bro has cheated him by withdrawing money without knowledge of Glow and sold other type of goods which is actually breach of contract.

But glow share was $500000 against which he has received only 30000.Tax is levied on income received if same amount has been credited in books of glow then it should be taxable but being income received is only 30000 then tax should be charged on this amount only.

Also it is duty of glow to know every angle to business and because of his lackness in business he got losses and his company got shut so penalty should be levied on him as well as on bro who has theft money and cheated him.Full compensation to be awarded basis on documents and evidences received only.