Discussion:C Corp Dissolution
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Discussion Forum Index --> Advanced Tax Questions --> C Corp Dissolution
Discussion Forum Index --> Tax Questions --> C Corp Dissolution
| 8 May 2008 | |
| I have a client who with his wife owned a C Corp. It closed in 2004. In 2005, it was liquidated. They had a small equity investment and a large Loan from Shareholder. Th bank took all of the assets. All they got was a large debt to the bank that they had guarenteed and the credit card debt that they had guarenteed. How can they treat this loss and does the fact that they are filing separately affect anything? Thanks in advance. | |
| 9 May 2008 | |
| Were these really corporate debts with a personal guarantee by the stockholders, or was this personal debt that they used to pay company expenses? | |
RoyDaleOne (talk|edits) said: | 9 May 2008 |
| Weddle v. Commissioner, 39 T.C. 493
Held, when petitioner, president, general manager, and owner of 75 percent of the corporation's stock, paid a corporate debt pursuant to a prior personal guarantee of such debt, the corporation having liquidated, she incurred the loss on a nonbusiness bad debt inasmuch as such endorsement was not proximately related to a trade or business carried on by petitioner during that year. Yes,filing separate does affect who can deduct the loss. | |
| 9 May 2008 | |
| Roy, I have always done it that way, but wasn't sure if it was right. Thanks for the post. | |
| 9 May 2008 | |
| Let me add some detail. They had a basis in the stock of $200 and had loaned the corp $120,000. All they got back was a $150,000 liability to pay off. Shouldn't there be a loss of $270,200? Can the loan to shareholder be construed as being equity investment in a thinly capitalized corp and therefore part of a Small Business Stock loss? If so, what kind of loss is the remainder? Does the fact that much of the debt is still unpaid at issue? | |
| 9 May 2008 | |
| Are you saying that this should have been capital? Unquestionably, some of it should have been, if not all of it. Can you argue that at this late date? IRS loves to convert loans to capital when it serves their purpose. When it serves your purpose and not theirs? I don't know.
The key issue in this situation is this: did they have §1244 atock? A look at the corporate record book will tell you that. Loss on liquidation of corporation with §1244 stock is ordinary loss, but you will require documentation. If it wasn't §1244 stock, I hope the attorney who set them up has good E&O insurance. | |
| 9 May 2008 | |
| When the shareholders repay the $150,000, they will be entitled to deduct a loss. In other words, a guarantor may not claim a loss on a guranteed debt until he performs on the guaranty obligation. | |
RoyDaleOne (talk|edits) said: | 9 May 2008 |
| Reg. 1.166-9 | |
| 9 May 2008 | |
| Hi the shhrs get their $120k capital loss now. Only a $200 small business stock loss you cannot convert the loan. bye | |
