You always need to be sure whom you do business with as the details of this court case show. Of you have partners have an operating agreement even in an S-Corp.
A locked-out shareholder has to report her share of S corporation income on here individual return.
A woman owned stock in an S firm. After shareholder relations soured, she was shut out of the business. The company nevertheless sent her a K-1 form listing her share of the profits, which she decided not to report on her tax return.
She instead attached a statement claiming that the firm and controlling shareholder barred her from exercising her shareholder rights. However, she owned the stock and must pay tax on her share of the company’s income.
Of course she owed the money; just because she was no longer working for the company she owned a portion of the company. She just did not get any cash from the business to cover the taxes. Just reportable income. So beware who you go into business with!
Enis, TC Memo. 2017-222