Discussion:Bad Debt Deduction for This? Personal credit cards

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Discussion Forum Index --> Tax Questions --> Bad Debt Deduction for This? Personal credit cards

Stevo (talk|edits) said:

16 February 2007
I've read all I can about Business and Nonbusiness Bad Debts, but I can't get my hands around this. A new client dissolved his share of an S-corp in October 2005. In January 2006,he transferred $25k of the company's credit card debt, to his own personal credit card, with the expectation that the company would make payments to him. Why? Not sure. I must disclose that the other S-corp SH is the client's brother, but they had a falling out, and that's why he left the company.

Assuming that he has determined that he will not get paid back, is there any way to deduct as a bad debt? Business or Nonbusiness. Even just the interest he is paying? Maybe it can be said that he assumed the debts of an insolvent business partner? I'm thinking no. But I'm hoping yes for his sake. Thanks.

Kevinh5 (talk|edits) said:

16 February 2007
Hey Stevo, can you fill out your profile edit the page and save it? Thanks.

Kevinh5 (talk|edits) said:

16 February 2007
Did he have anything in writing? Did he try to collect anything? HOw can he prove he did?

PVVCPA (talk|edits) said:

February 16, 2007
Another option to consider would be to amend 2005 and take a $25K Sec 1244 loss, if qualified.

However, as I write this I wonder how I would tell the auditor that I sold my stock back to the corporation, and as payment for the stock the corporation gave me some of it's debt.

Stevo (talk|edits) said:

16 February 2007
Of course, nothing in writing. Collection efforts probably consisted of "c'mon bro, I really need this money back". Now, if he sent collection letters, etc. would that help enough to take a deduction. Kevinh5, I'm going to check out profile right now. Thanks.

Kevinh5 (talk|edits) said:

16 February 2007
I think having the "demand letters" where he asked for repayment would prove he tried to collect. Especially the ones the brother sent back with "Go to HHHH" on them. That kind of implies animosity.

Stevo (talk|edits) said:

16 February 2007
Kevin,

Assuming it is decided that he tried to collect, and it is worthless, is it a business bad debt? It was done after he left the s-corp, so where would he report it? He has no more sch e flow through?

Kevinh5 (talk|edits) said:

16 February 2007
after he left the S Corp it would be hard to say it was business bad debt. If he had charged the amounts while a shareholder, it would be treated as shareholder loans to the CO. I'm inclined to say Sch D subject to 3,000 a year based on the facts as I understand them.

PVV, do we get §1244 treatment for S Corporations? for some reason I didn't think so.

Mtmckeecpa (talk|edits) said:

26 March 2007
S corps should qualify for 1244 loss treatment...but you have to know the oringial capital basis and any additional stock issues.

I remember hearing that 1244 is NOT real common with S corps due to basis being chewed up with pass through losses...

Janakpatel (talk|edits) said:

15 November 2011
At the Gear Up seminar, insturctor said S Corporation does not qualify for 1244 stock loss.

Is there any exception to that? Help please

Captcook (talk|edits) said:

15 November 2011
§1244 can apply to S-corps. Perhaps he was thinking of §1202. I know that does not apply to S-corps.

Kevinh5 (talk|edits) said:

15 November 2011
I think that MtmckeeCPA's answer best explained why we rarely see it.

Ckenefick (talk|edits) said:

15 November 2011
You can definitely obtain 1244 treatment with S-corp stock. But the problem you have is with Code Sec. 1244(d)(1)(B) and Reg § 1.1244(d)-2(a), which basically state that any stock basis increases after initial issuance is allocable to non-1244 stock. In other words, if guys acquires S-stock at intial issuance for $100k, has $25k of K-1 pass-thru income, the $25k post-issuance basis increase cannot be counted as an addition the basis of 1244 stock. In addition, sounds like client disposed of the stock in 2005 anyway. And I don't think this will work either: Actually have the corp issue shares to client with respect to the $25k debt assumption, and then, shortly thereafter, have corp redeem the shares for something much less than $25k. I think IRS would properly view this as a tax-motivated sham to obtain 1244 treatment, with no real economic substance. Moreover, IRS "may" call in question the requirement that, to obtain 1244 treatment, the stock must be issued for money or other property, but I don't think we even need to get into this issue.

If your client was on the hook for the corporate credit card debt, then it *seems* that he should be entitled to some type of bad debt/loss deduction, assuming this was a bona fide loan with repayment terms, etc. Here, it seems that there was a business motive underlying the transaction -to protect client's credit rating. Now, if corp was insolvent at the time of this transaction, then there was probably no expectation of repayment, meaning there was no bona fide indebtedness. In which case, we probably have a gift, especially in light of the fact that the remaining shareholder is a family member.

And if your client was not on the hook for $25k worth of corporate credit card debt, then your client would have to argue that the debt assumption was simply a straight-up loan. And here, the "protect my credit argument" would fall flat. But again, if corp was insolvent at the time of the transaction, and there was no real expectation of repayment, then we don't have bona fide indebtedness. So again, we're probably looking at a gift.

Janakpatel (talk|edits) said:

16 November 2011
Client had some basis left from pass thru income, but to pay off the bank loan he had to pay additional $324K from his pocket.

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