Reference no: EM131563692

You are a fourth-year associate at a mid-level accounting firm in the metropolitan Atlanta area. One of the first things you did as a new associate four years ago was to help long-time firm client John Doe form ABC, Inc. Pursuant to Mr. Doe’s instructions, you filed an election for ABC to be taxed as an S corporation. Mr. Doe was ABC’s sole shareholder. ABC develops business ties to China, and to strengthen these ties, Mr. Doe sells 25% of ABC stock to Bi Bin Rui, a citizen and resident of China, on February 1, 2010. Mr. Doe continued to operate ABC as an S corporation throughout 2010. When he meets with you to begin preparation of ABC’s 2010 annual tax return, he excitedly tells you about the sale, and happily reports that business is booming in China. With genteel frankness, you explain to Mr. Doe that Mr. Rui, not being a citizen of the US, is ineligible to be a shareholder of an S corporation, and has caused ABC to lose its S election. With sullen face, Mr. Doe leaves your office. One week later, Mr. Doe calls to inform you that he has repurchased Mr. Rui’s shares in ABC, and is once again the sole shareholder of ABC. “The IRS doesn’t need to know about this,” said Mr. Doe. “Just handle the return as if I never sold the shares.” WHAT WOULD YOU DO, AND WHY?