Discussion:How to treat exp pd by s/h after s-corp dissolution
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Discussion Forum Index --> Tax Questions --> How to treat exp pd by s/h after s-corp dissolution
| 22 April 2006 | |
| In 2004, the s-corp was formally dissolved. (the s-corp usually had a Gross income of 200K and the stock value on the balance sheet was 5K). In 2005, the sole shareholder paid some legal fees and other expenses that were incurred both before dissolution and after....
How do I deduct the expenses before the dissolution and after dissolution(if different)??? | |
| 23 April 2006 | |
| If the legal fees were really corporate expenses, then the pre-dissolution expenses should be added to the shareholder's loan basis and deducted on the final S return. The post-dissolution legal expenses should be included on Sch. D as a capital loss. | |
| 23 April 2006 | |
| A qualified waffle?...but an intriguing question. Assuming the final S return is 2004, can a cash basis entity contrive an accrual? | |
| 23 April 2006 | |
| I'm opening mouth wide to insert foot and disagree stenuously with Riley. Of course I will lose. Until then...the expenses, whatever they may be, that would have been included on the final S corp return would give rise to ordinary losses. Therefore, the only proper place for them is p 1 of a 4797. If the losses are placed on Sch. D, they'll take on capital status and be limited to the 3k per year without other offsets. The final S is filed, we're discussing the expenses paid after, and there's always something..legal, accounting, a state tax...etc. | |
| 23 April 2006 | |
| Before you can disagree with Riley you have to understand what he is saying. (I do not.) One of the things to consider is what is actually happening on disolution. Stock is being exchanged for the net of a corporation's assets and liabilities. This is a capital transaction. Another thing to consider is the tax treatment of liquidation distributions. | |
| 25 April 2006 | |
| Form 4797 is used to report sales and dispositions of property other than capital assets.
Ideally, the expenses would be paid prior to dissolution and would be eligible for deduction is 2 places (Form 1120S, page 1 and Form 1040, Sch. D); however, oftentimes the final year expenses are paid by the shareholder many years after liquidation. There is a general rule that a shareholder may not deduct a corporate expense. However, if the expenditure increases the shareholder's basis in his stock (or would have if paid earlier), then the expenditure "relates back" to the gain or loss on liquidation, and would take on the same character in the year of payment as the original liqudation gain or loss. | |
| 25 April 2006 | |
| The general rule Riley2 refers to, that when later expenditure "relates back" to an earlier transaction, and is thereby governed by the treatment of the earlier transaction, came from the U.S. Supreme Court case: Arrowsmith v Comm. (1952) It is now such a general rule that it is referred to as the Arrowsmith Doctrine.
It arose from former corporate shareholders who paid expenditures relating to their dissolved corporation. The doctrine now applies to transactions far beyond the corporate-shareholder arena. | |
| 25 April 2006 | |
| I understand that argument. Let me try to illustrate my point, and maybe I'm wrong on this. (Typically, this is moot anyway since these kinds of things are near always under the 3k limit...) If a state income tax bill is paid, after the 1120S is filed, and for whatever reason was not included originally, or final accounting bill that we couldn't compute until all the work was done, is now paid. Those two expenses, if included on the original return, are ordinary K1 expenses, and flow thru the Sch. E. Obviously, the corp. can no longer reimburse for them, so that's not an option. I contend that those expenses are not related to a gain or loss on liq, since in the S, there generally is no such thing when they're dissolved. If there were, maybe I can see your point. But in the case where the shareholders just walk away, which is more usual...there is no Sch. D entry on dissolution. Except for the final $1000 of capital stock for cash if it remained. So in my mind, this is an ordinary expense, which cannot be reimbursed, and should therefore end up on p1 of 4797. Or are you saying, that by definition, it becomes capital since it's after the dissolution? | |
| 25 April 2006 | |
| You should read the case. This was very much along the lines of what the court debated back in 1952. Your fact pattern is "on all fours" with Arrowsmith. | |
- Other discussions involving Arrowsmith
