Closing of C-type corp

[adf]

Hi,

I'll appreciate some help with questions related to the closing of a
*regular* C-type corporation.

The corp issued $2000 worth of stock and also took $5000 in loans from
shareholders, i.e. on the balance sheet it appears as:
Loans Liability $5000
Capital Stock Equity $2000

The corp does not have the money to repay the loans and, since the corp
is loosing money, the shareholders want to dissolve it. The question is
how deal with the loans so the shareholders could claim the losses on
their personal 1040s.

The way I see it the corp should convert the loans to stock and then
repurchase the (worthless) stock from shareholders. Both corp and
shareholders would show the gain and loss respectively on their
"Schedule D" forms. A better way?

Thanks in advance

 

[Thomas Healy]

I'll appreciate some help with questions related to the closing of a
*regular* C-type corporation.

The corp issued $2000 worth of stock and also took $5000 in loans from
shareholders, i.e. on the balance sheet it appears as:
Loans Liability $5000
Capital Stock Equity $2000

The corp does not have the money to repay the loans and, since the corp
is loosing money, the shareholders want to dissolve it. The question is
how deal with the loans so the shareholders could claim the losses on
their personal 1040s.

The way I see it the corp should convert the loans to stock and then
repurchase the (worthless) stock from shareholders. Both corp and
shareholders would show the gain and loss respectively on their
"Schedule D" forms. A better way?

Just dissolve the corporation (depending on the state there might be some
rigmarole to doing this). The loans become bad debts, deductible as
short-term capital losses on Schedule D. The stock may be eligible for
Section 1244 ordinary loss treatment, depending on how the stock was
acquired. Otherwise it would be a capital loss, either long-term or
short-term, depending on when it was acquired.

 

[adf]

Just dissolve the corporation (depending on the state there might be some
rigmarole to doing this). The loans become bad debts, deductible as
short-term capital losses on Schedule D. The stock may be eligible for
Section 1244 ordinary loss treatment, depending on how the stock was
acquired. Otherwise it would be a capital loss, either long-term or
short-term, depending on when it was acquired.

Thanks. Does this mean that shareholders have to "forgive" the bad loans
(in order to claim them as loss on "Schedule D") and, respectively, the
corp should show the bad loans it cannot repay as income?

Thanks in advance

 

[Thomas Healy]

Thanks. Does this mean that shareholders have to "forgive" the bad loans
(in order to claim them as loss on "Schedule D") and, respectively, the
corp should show the bad loans it cannot repay as income?

If the corporation is "insolvent" (debts exceed assets), the relief of debt
is not taxable under Internal Revenue Code Section 108. Then the facts alone
are enough to show that the corporation can't repay the debt.

 

[adf]

If the corporation is "insolvent" (debts exceed assets), the relief of debt
is not taxable under Internal Revenue Code Section 108. Then the facts alone
are enough to show that the corporation can't repay the debt.

Thanks again. I'm wondering though if the corp should provide
shareholders with 1099 (?) or something that would show the amount of
the (bad) loan given to the corp, so they could attach it to their
1040s. Or is it not necessary?

Thanks in advance

 

[Thomas Healy]

Thanks again. I'm wondering though if the corp should provide
shareholders with 1099 (?) or something that would show the amount of
the (bad) loan given to the corp, so they could attach it to their
1040s. Or is it not necessary?

Not necessary. If you are audited, you provide the details to support the
deduction.