I have a C Corp in which stock is owned 1/3 each to brother and sister and 1/3 in an irrevocable trust. They are unsuccessful in selling the business and I want to elect S status so losses flow to the shareholders now. I would have thought someone would buy the corp. for literally pennies on the dollar for the big built in loss on the inventory. But no takers.
So I want the corporation to buy back the units from the trust for $1 or so, elect S Status and then scrap the inventory and have the $1,000,0000 or so loss flow to the Brother and Sister so they can convert IRA to Roth.
Their basis is high from inheriting when things were hot so they have basis for the loss.
It would be ideal for the Trust to have a loss on liquidation, but at this point I am thinking maybe losing that is worth it still.
But does anyone have any thoughts on what I am not thinking of?
Could I have a loss on the shares in the Irrevocable Trust? The related Party rules say this for a Corporate Liquidation (b)
(1)Deduction for losses disallowed
No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.
https://www.law.cornell.edu/uscode/text/26/267
Retained Earnings is about $1,000,000 largely from this inventory that potentially has value, but changing markets make selling it extremely unlikely at this point.