The defrauded shareholder, who owned 40% of the S corporation he co-founded, was required to report his share of the company’s income on his personal tax return, even though the other owners had stolen funds and made unauthorized, disproportionate distributions to themselves, causing the S corporation to lose its tax status. Despite the taxpayer’s claim that he never received the money due to the other owners’ misconduct, the Tax Court ruled that he was still liable for the taxes owed on his portion of the S corporation’s profits.
Maggard, TC Memo. 2024-77
You have to be extremely careful who you go into business with. There are a lot of very bad people out there and you do not want your finances tied to how they do business.