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Subject Author Date
Notes Payable to S-Corp shareholder left after corp dissolution ToddH 03-17-2008
Posted by ToddH on March 17, 2008, 11:13 pm
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 After the sale of all assets in an S-Corp liquidation, the only thing
remaining on the balance sheet is a balance in long-term note payable
to shareholder. Interest was paid to the shareholder regularly.

1) Is the note balance treated as a negative distribution to Retained
Earnings to close the books? What is the treatment on the 1020S tax
return?
2) Is this reported on the K-1? If so, where?

Thank you for your help!

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Posted by Haskel LaPort on March 18, 2008, 10:53 am
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> After the sale of all assets in an S-Corp liquidation, the only thing
> remaining on the balance sheet is a balance in long-term note payable
> to shareholder. Interest was paid to the shareholder regularly.
>
> 1) Is the note balance treated as a negative distribution to Retained
> Earnings to close the books? What is the treatment on the 1020S tax
> return?
> 2) Is this reported on the K-1? If so, where?
>
> Thank you for your help!

How many shareholders in the S-Corp?



>
> --
> << ------------------------------------------------------- >>
> << The foregoing was not intended or written to be used, >>
> << nor can it used, for the purpose of avoiding penalties >>
> << that may be imposed upon the taxpayer. >>
> << >>
> << The Charter and the Guidelines for submitting posts >>
> << to this newsgroup as well as our anti-spamming policy >>
> << are at www.asktax.org. >>
> << Copyright (2007) - All rights reserved. >>
> << ------------------------------------------------------- >>

========================================= MODERATOR'S COMMENT:
Please delete all unnecessary material from the prior post when responding.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by ToddH on March 22, 2008, 3:38 pm
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>
>
> > After the sale of all assets in an S-Corp liquidation, the only thing
> > remaining on the balance sheet is a balance in long-term note payable
> > to shareholder. Interest was paid to the shareholder regularly.
>
> > 1) Is the note balance treated as a negative distribution to Retained
> > Earnings to close the books?  What is the treatment on the 1020S tax
> > return?
> > 2)  Is this reported on the K-1?  If so, where?
>
> > Thank you for your help!
>
> How many shareholders in the S-Corp?
>
Just 2 shareholders. My wife and I.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Haskel LaPort on March 23, 2008, 11:26 am
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>>
>>
>> > After the sale of all assets in an S-Corp liquidation, the only thing
>> > remaining on the balance sheet is a balance in long-term note payable
>> > to shareholder. Interest was paid to the shareholder regularly.
>>
>> > 1) Is the note balance treated as a negative distribution to Retained
>> > Earnings to close the books? What is the treatment on the 1020S tax
>> > return?
>> > 2) Is this reported on the K-1? If so, where?
>>
>> > Thank you for your help!
>>
>> How many shareholders in the S-Corp?
>>
> Just 2 shareholders. My wife and I.

Assuming you and your wife get along, I would make a journal entry on the
books to reclassify the shareholder note Contributed Capital. No reporting
is required on the K-1.



>
> --
> << ------------------------------------------------------- >>
> << The foregoing was not intended or written to be used, >>
> << nor can it used, for the purpose of avoiding penalties >>
> << that may be imposed upon the taxpayer. >>
> << >>
> << The Charter and the Guidelines for submitting posts >>
> << to this newsgroup as well as our anti-spamming policy >>
> << are at www.asktax.org. >>
> << Copyright (2007) - All rights reserved. >>
> << ------------------------------------------------------- >>

========================================= MODERATOR'S COMMENT:
Please delete all unnecessary material from the prior message when
responding.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by eagent on March 24, 2008, 12:03 pm
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<snipped>
Summary - OP has S Corp that is dissolved. S Corp has loan due to
stockholder on the books - interest was paid - and wants to know how
to close out the account. Haskel responded . . .
>
> Assuming you and your wife get along, I would make a journal entry on the
> books to reclassify the shareholder note Contributed Capital. No reporting
> is required on the K-1.
>
>
>
> > --
MORE SNIPPAGE
> responding.
>
> --
> << ------------------------------------------------------- >>
> << The foregoing was not intended or written to be used,   >>
> << nor can it used, for the purpose of avoiding penalties  >>
> << that may be imposed upon the taxpayer.                  >>
> <<                                                         >>
> <<   The Charter and the Guidelines for submitting posts   >>
> <<  to this newsgroup as well as our anti-spamming policy  >>
> <<                  are atwww.asktax.org.                 >>
> <<         Copyright (2007) - All rights reserved.         >>
> << ------------------------------------------------------- >>- Hide quoted
text -
>
> - Show quoted text -

This is why I so HATE loans to stocholders for pass through entities.
It is much simpler and easier to run the money through contributed
capital, add it to basis and treat payments as distributions. Its
also almost always cheaper for taxes too.

The problem I have with Haskel's response is that we may be
reclassifying AFTER-THE-FACT to get a better tax treatment than we're
entitled to. While I would LIKE to follow Haskel's plan - and with
some forethought I would have structrued it this was from the
beginning - with the taxpayer setting up the way he did, this
reclassification could result in a Section 1244 treatment for any
remaining basis that is lost and this may not be appropriate under the
circumstances.

In caes like this we have to look not only to the note but to the
REASON for the loan to begin with - why did the stockholder loan the
company money? Did they fall on hard times or was the corporation too
thinly capitalized to begin with? The answers to these questions -
and a few more - will determine the correct treatment of the
liquidation.

My recommendation is that you get professional help with a local tax
pro and SOON. I also assume that since the business return was due on
March 17 that you've filed the appropriate extensions with both
Federal and state agencies.

Good luck,
Gene E. Utterback, EA, RFC, ABA

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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