Assuming s corp debt upon dissolution

Technical topics regarding tax preparation.
#1
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Client is liquidating s corp. He ceased operations in December 2022 and is filing his final tax return for 2022. He received a small amount of cash ($500) in January 2023, however there is credit card debt in excess of cash received that he will have to pay personally ($4000) Is the assumption of this debt an increase in his basis and will result in a loss upon liquidation? He qualifies for sec 1244 loss. Can he claim a loss on his 2022 return even though the liquidation occurred in January 2023?
 

#2
JR1  
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Yes, that counts towards basis. But no, it won't do anything more. Presumably, the expenses are already on the books of the S, so he'll zero out gain/loss as it should be. Normally. Sec. 1244 really doesn't apply to S's because of that, it all ends up 0 and only for original shares, so buying them or inheriting them doesn't count, either.

And I'd just show it all in Dec. and final it.
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#3
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Oh yes that's right JR the expenses on the cc are already on the books so he got the benefit of them over the years. I got myself confused thinking about it. However he has a remaining suspended loss at year end due to no basis. Is that lost for good?
 

#4
JR1  
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Well, that cc debt increases his basis, should get it all back to 0.
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#5
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So the suspended losses would be deductible on his personal return for 2022 and basis would be reduced to zero-correct? thanks for you clarification. For some reason this was getting me confused !!!
 

#6
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Just trying to figure out the logistics for increasing basis. Taxpayer has $3200 in suspended losses due to insufficient basis. Corp is liquidating and he is assuming credit card debt of $4000. Since the expenses paid by the credit card have already been deducted he is not entitled to any further loss due to his assumption of this debt. However to the extent that he has suspended losses due to lack of basis , it appears that he would be entitled to an increase in basis for the credit card debt he is assuming up to the amount of the suspended losses. How is this shown on the taxpayer's form7203?? I thought on line 3m, however the instructions indicate that any items increasing basis on line 3 should be reflected elsewhere on the taxpayer's return. Any ideas? Line 2??
Last edited by theresa d on 31-Jan-2023 6:06am, edited 1 time in total.
 

#7
Nilodop  
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It's best to read the entire CCA 201237017 that this comes from, but timng here seems real important:
Prior to determining gain or loss from liquidating distributions, a shareholder’s stock basis is first adjusted for current-year pass-through items. Treas. Reg. § 1.1367-1(d)(1). Pass-through losses suspended because of basis limitation rules that remain after the basis of the redeemed stock has been reduced to zero do not reduce gain or increase loss resulting from liquidation. If a shareholder is going to increase basis to use up suspended losses, this must be done before the final distribution through additional capital contributions or loans or the loss will be permanently disallowed under the general rule of § 1.1366-2(a)(5). There is no authority allowing a shareholder to restore basis after liquidation is completed as can be done under the post-termination transition period rules. IRC § 1366(d)(3).
 

#8
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Thanks Nilodop. So these suspended losses would be lost unless he makes a capital contribution to the corp. He can put cash into the corp which would unlock the suspended losses and then pay off the credit cards. His year end is 12-31so it is too late to do this now if he wants 2022 to be the final year. What I can't wrap my head around is why the assumption of the corporate debt (the credit cards)wouldn't generate basis for him. If the corp had generated enough income and the credit cards had been paid off his basis would have been increased by the income and the suspended losses offset. There is not enough income in 2022 to generate basis and very little cash so he is personally stuck paying for the credit cards and losses the suspended losses? Am I missing something? Is the fact that he did not make a capital contribution by 12-31 going to sink him even though he is paying for the credit cards personally rather than making a capital contribution?
 

#9
JR1  
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Taking the credit card is the same as putting cash into the corp. Looks line you'd just add to line 2.
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OK that is what I was concluding and hoping for. thanks
 

#11
Nilodop  
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What JR1 says is 100% logical and is consistent with what I thought. Until I read the CCA.

So it seems you'd want to take and support the position that there was a corporate liquidation in 2022. You'd want to have formal adoption of a plan of liquidation and to file a Form 966.

Absent a 2022 dissolution, one might look at reg. 1.752-1T(d)(3)(iii) for what a constructive liquidation is in a partnership context. There's probably some authority for what it is in a corporate context too, but I don't know for sure where it is.
 

#12
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thank you for all the direction
 

#13
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Need to clarify the liquidation process. There is a board resolution to dissolve the corporation as of 12-31-22 and liquidate the assets. A small amount of cash remains in the corporate checking account to cover a sales tax liability that is due by 3-15-23. Taxpayer only has to file an annual sales tax return which is due by 3-15-23 but willed be filed the first week of February. Does this impact the liquidation date?
 

#14
JR1  
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Not to me. There are often a couple of transactions hanging, esp. state taxes. I don't let those hold up the liquidation.
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#15
Nilodop  
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Agree.
 

#16
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do you just leave enough cash in the corp to cover the expenses ?
 

#17
JR1  
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Yep, no biggie.
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#18
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OK thanks-I am probably over thinking this -LOL
 

#19
JR1  
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Just a little bit! ....lol
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