Discussion:C Corp to dissolve -- has NOL and large loan from shareholder
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| Revision as of 13:09, 15 September 2006 Mtmckeecpa (Talk | contribs) (My guess is non-) ← Previous diff |
Revision as of 15:07, 16 September 2006 MSTguy (Talk | contribs) (Rmiya, here you) Next diff → |
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| {{ForumReplyPost|UserID=Mtmckeecpa|Date=15 September 2006|Text=My guess is non-business.}} | {{ForumReplyPost|UserID=Mtmckeecpa|Date=15 September 2006|Text=My guess is non-business.}} | ||
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| + | {{ForumReplyPost|UserID=MSTguy|Date=16 September 2006|Text=Rmiya, here you go -- (citation from CCH): | ||
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| + | In most cases involving advances to corporations, the person making the loans has the dual status of being a corporate employee and a stockholder. If an officer-stockholder can show that the loans are proximately and directly related to his business as a corporate employee, as distinguished from protecting his investment in the corporation, the officer-stockholder can claim a business bad debt loss deduction for advances made to the corporation. This means that such advances will be deductible in full and not subject to the capital loss limitations. | ||
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| + | In determining whether an officer-stockholder has made the loans to protect his investment or to protect his salary, the courts have looked primarily to three objective factors: (1) the size of the taxpayer's investment in the corporation, (2) the size of his after-tax salary, and (3) other sources of gross income available to the taxpayer. The larger the taxpayer's investment, the smaller his salary and the larger his other sources of gross income, the more likely the courts are to find a dominant nonbusiness motive for making the loan --that is, to protect the investment rather than the salary. See R.W. Mills, BC-DC Tenn., 96-1 USTC �50,054, at �10,700.20. The size of the investment is determined by ascertaining the fair market value of the taxpayer's investment at the time the loan was made. Where the taxpayer meets all of the above three factors, the loans will be treated as fully deductible bad debts. See C.L. Hutchinson, Dec. 38,757(M) at �10,700.241. | ||
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| + | --So as Mtmckeecpa said, probably non-business bad debt, but you'll have to decide based on the facts as you know them. Hope that helps. | ||
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Revision as of 15:07, 16 September 2006
Discussion Forum Index --> Tax Questions --> C Corp to dissolve -- has NOL and large loan from shareholder
| 15 September 2006 | |
| We have a C Corp that we are ready to dissolve. Two shareholders. The corporation has $45K in NOL from the past 6 years and about the same in a line of credit owed to shareholder (us). The line of credit agreement was written up at the beginning with reasonable interest, erratic payments were made throughout the last 5 years, interest income was reported on personal returns and interest expense on corporate returns. How can we best structure ourselves at this point so we will be able take at least one of these losses personally? Does electing S status in 07 make any sense? Is it allowed? What about the loan?
Thanks for any insight. I've learned alot from reading postings here. | |
Mtmckeecpa (talk|edits) said: | 15 September 2006 |
| R,
Here is my take, 1) electing S does not make sense since as the NOL will be trapped in the C Corp. 2) if there is nothing else in the corp, you will have a $45k capital loss upon liquidation. 3) I don't believe an ordinary loss is available on the $45k, if so, someone here will correct me. 4) electing S initially would have gotten you an ordinary loss deduction of $45k but too late. 5) although too late as well, 1244 stock could have been a consideration to get you an ordinary loss upon liquidation. Others,I am sure will chime in... | |
| 15 September 2006 | |
| Thanks for the reply. I am a little confused about the capital loss. Is that from the loan that is now uncollectable to us personally or from the NOL within the corp? Will we then be able to report this loss on our personal taxes?
Thanks again! | |
| 15 September 2006 | |
| §1244 would only affect the stock. The loan has to be treated as a business or non-business bad debt, no? ♫ | |
Mtmckeecpa (talk|edits) said: | 15 September 2006 |
| My guess is non-business. | |
| 16 September 2006 | |
| Rmiya, here you go -- (citation from CCH):
In most cases involving advances to corporations, the person making the loans has the dual status of being a corporate employee and a stockholder. If an officer-stockholder can show that the loans are proximately and directly related to his business as a corporate employee, as distinguished from protecting his investment in the corporation, the officer-stockholder can claim a business bad debt loss deduction for advances made to the corporation. This means that such advances will be deductible in full and not subject to the capital loss limitations. In determining whether an officer-stockholder has made the loans to protect his investment or to protect his salary, the courts have looked primarily to three objective factors: (1) the size of the taxpayer's investment in the corporation, (2) the size of his after-tax salary, and (3) other sources of gross income available to the taxpayer. The larger the taxpayer's investment, the smaller his salary and the larger his other sources of gross income, the more likely the courts are to find a dominant nonbusiness motive for making the loan --that is, to protect the investment rather than the salary. See R.W. Mills, BC-DC Tenn., 96-1 USTC �50,054, at �10,700.20. The size of the investment is determined by ascertaining the fair market value of the taxpayer's investment at the time the loan was made. Where the taxpayer meets all of the above three factors, the loans will be treated as fully deductible bad debts. See C.L. Hutchinson, Dec. 38,757(M) at �10,700.241. --So as Mtmckeecpa said, probably non-business bad debt, but you'll have to decide based on the facts as you know them. Hope that helps. | |
