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Note Payable at S-Corp Dissolution

Technical topics regarding tax preparation.
#1
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Clients A & B formed S Corp. and purchased assets of an existing business with a loan from A's father, which is shown as a note payable on the corporate books. Clients A, B and A's father formed an LLC and purchased property with a building. S Corp has been renting building from the LLC. Building and land are being sold at a gain. S Corp has not ever been really profitable, just barely breaking even some years and losses in others. Just planning to wind that business down, however, that large note payable is still on the books.

If dad says don't worry about it (not sure at this point), does it become income to the S-Corp at that point? Should A & B take their gain from land, put into the S-Corp, and pay back what they can before dissolution? I'm having problems thinking this through, so any insight would be appreciated!
 

#2
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Los Angeles, California
S corp pays it back or its canceled debt. In general, canceled debt is income unless an exception applies. Seems likely that the S-corp is insolvent.
 

#3
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Any other options? I guess dad could officially say that the money was a gift to each shareholder, and file a gift tax return, correct? I'm just trying to find a way that this is not taxable income, as we are talking around half a million dollars.

If father considers it cancelled debt, is he the one required to file the 1099?

Any other thoughts or ideas?
 

#4
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Why would father be issuing a 1099?
Is he in the business of loaning money?
~Captcook
 

#5
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No, he is not in the business of loaning money. Now I see where he is not responsible for filing a 1099C.

Taxmonkey, I think the business would fall under the insolvency exception. I knew there had to be something that I was missing!
 


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