Question about business bad debts for employee-shareholder
Posted: 15-May-2019 9:14pm
Hi pros,
I have an interesting situation here with a client and wonder if anyone has seen anything like this before.
The client was a employee-owner of an S corp for about 20 years. His stock in the company was a small percentage and gave him no control. Over the years he was allocated income on his K-1 well in excess of what his distributions were. The S corp also distributed a note to him, probably because the distributions weren't being made pro-rata. Ultimately he realized he was never going to get any of this money and left the company and took legal action. The settlement amount for the stock and the note is a small fraction of what his basis in each were. Sec 1244 is no good here, the company raised more than $1m by issuing stock by the time he was issued his.
It is a bitter pill to swallow for him to have a capital loss after the years of being allocated ordinary income. He won't be able to use the loss for years.
I am looking for any angles that might make some portion of the loss ordinary. I was wondering about the write off of the note and whether it could be considered a business bad debt. Since the note was originally included in income and was in connection with his employment, it seems to me that this is one area that is worth looking into further. I haven't been able to find a clear answer one way or another here.
Thanks in advance.
I have an interesting situation here with a client and wonder if anyone has seen anything like this before.
The client was a employee-owner of an S corp for about 20 years. His stock in the company was a small percentage and gave him no control. Over the years he was allocated income on his K-1 well in excess of what his distributions were. The S corp also distributed a note to him, probably because the distributions weren't being made pro-rata. Ultimately he realized he was never going to get any of this money and left the company and took legal action. The settlement amount for the stock and the note is a small fraction of what his basis in each were. Sec 1244 is no good here, the company raised more than $1m by issuing stock by the time he was issued his.
It is a bitter pill to swallow for him to have a capital loss after the years of being allocated ordinary income. He won't be able to use the loss for years.
I am looking for any angles that might make some portion of the loss ordinary. I was wondering about the write off of the note and whether it could be considered a business bad debt. Since the note was originally included in income and was in connection with his employment, it seems to me that this is one area that is worth looking into further. I haven't been able to find a clear answer one way or another here.
Thanks in advance.