A locked-out shareholder has to report his share of S corporation income. Two doctors set up a medical practice as an S company, splitting the ownership 60-40. The two later had a major falling out, and the 60% shareholder shut out his co-owner.
While the dispute was in court, the 40% owner got K-1 from the firm listing his share o the profits, but he didn’t include it on his return because he didn’t get any cash from the firm. Nevertheless, he still owned the stock and must pay taxes on his share of the income, even though it wasn’t paid out to him. (Kumar, TC Memo. 2013-184)