Hello everyone!
Totally new to this forum and I am hoping someone can answer my questions. I should preface my questions by stating I am not an accountant nor the shareholder of the s corp in question. I am helping a friend review some s corp returns in an effort to help her decide if she needs to employ the services of a forensic accountant. I appreciate my questions may seem to have obvious answers but I am hoping to get some confirmation or be shown that I am in way over my head.

It is a known fact that s corp returns are filled with tax avoidance and we believe straight up tax evasion. The sole shareholder has used the s corp as a personal atm machine. Regardless of any legitimate business deductions that can be taken for the personal expenses that have served to reduced corp profit, the shareholder is NOT reporting income beyond wages and little net corp income.

With that being said, for the puposes of calculating basis (and anything else you want to share) is it improper for a shareholder/corp/alter ego to show the distributions (weekly deposits to his bank account) received in year one as repayment of loans from shareholders (16 E) when there was never a loan made to the corp from the shareholder? Additionally, and this is the part the really confuses me, the shareholders parents made a loan to the shareholder as start-up capital and the corp has been making monthly payments to the parents in year one and beyond. The loan from the parents is referred to a "business loan" on some documents and on others as a loan from the parents to the shareholder. This "loan" from the parents is reporting to 1120s schedule L line 19 $45392 and because of the distribution, serves to reduce the shareholders basis (as a return of capital?). Again, the corp is making it own payments to the parents for the same loan + interest and presumably books the expense as a liability deductible on the return likely calculated into cogs, because it is not reported elsewhere and is not reported as a liability on the balance sheet. The receipts for the 6 months of the first year the corp existed are 54373 and cogs are 57124. In all the corp claimed a loss of 31835, which reported to the k-1 with the $25500 16e and $66 c distribution. My friend had exactly the amount of the distribution deposited into the joint account by the corp and the corp bank records evidence this along with the monthly payments made to the shareholders parents. Schedule M2 records the loss, adds 66 bucks in nonreimbursed expenses and shows a balance at the end of the yr here and also on the schedule L of -31901 in retained earnings. I know there must be an issue here, right? Trust me, there are significant issues all over the place however, because in the 5 or so years since the corp began it has reported gross receipts in excess of 1 million dollars since this first partial yr, the returns in subsequent years are incomplete (3rd year there was no balance sheet or M2 completed on the return we have, and this shareholder is claiming some 32k a year income, I thought she should start from the begining to fully appreciate the returns. Unless I am looking at this all wrong, 1. Since there was no shareholder loan, the basis should not include an adding back of that amount. 2. If one was to consider a personal, parental loan a loan from a shareholder, than wouldn't the corp payments to the parents be inappropriate and the deduction take on the corp return for the payments made to the parents be nonqualified? 3. Furthermore isn't this arrangement effectively treating one loan as two, one as a capital contribution and the other a liability? and 4. Knowing with absolute certainty there was only one "loan" made at start-up, isn't it correct to argue the treatment of the parental loan by the corp constitues a liability and therefore, the mischaracterized and incorrectly reported "loan from shareholder" and subsequent distribution treated as such, in fact, constitutes a dividend, extraordinary dividend, nonqualified dividend and just a plain cash distribution to the shareholder? If this is proper thinking, than my friend has all the more reason to retain a forensic expert because I believe when the unreported "income" we know exists in subsequent years in personal expenses reporting to the s corp returns, she can also recalculate the basis that seems to have been intentionally and falsely reported from day one. Of course, I know there is good reason I am not an accountant or CPA so I will not be offended if you all tell me I have it all wrong! Please do, if that is indeed the case! I thank you all in advance for your help in sorting this out!