Capital Contribution gone bad

[DaveinTexas]

I have a potential client that tried to start a new company in 2006. He was able to gather funds/capital contributions from outside investors in very large amounts.

The business never panned out; fell on its face. There is no capital remaining to reimburse the investors. Investors have a capital loss. If the capital invested is never repaid, is this income to the client?

Facts:
All capital contributions were deposited to the client's personal acct.
Business failed due to lack of interest of product/service
Funds were used for startup business expenses

TIA.

[DaveO]

More information please

When the investors "invested" the money what was their understanding? Did they expect stock, % of profits, joint venture, what? Were loan documents drawn up? I would say he has a loss on the business but if he is not personally liable to the investors he won't be able to use it unless he realizes income to the extent of the investments.

[DaveinTexas]

Investors were buying shares

of his C corporation.

From what he tells me there were stock agreements in place; the investment would be a share in his C Corp, of which he is the President, in hopes that one day the company would go public and the investors could reap the rewards.

I haven't seen any of the agreement documents so I don't know what they were promised beyond the fact that they would own shares of his company, C Corp.

Hope that sheds some light.

[DaveO]

Problem with the personal account

The fact he didn't use the corporate account muddies the water. I would guess on audit the IRS would throw the whole mess back on "C" and disallow any loss to him due to the "at risk" rules.

I'm surprised he found investors, must be a heck of a salesperson.

[veritas]

This one smells

to high heaven.

[BOB W]

If I remember correctly, Federal Tax Laws state a business is considered a corporation if it acts like a corporation even if it is not formally chartered by a state. While I don't know all the particulars, you may want to re-look over this startup business.

I would review where the money was spent by the "President" and look at it as a type of "Con". This has been going on for some time now in which they draw in relatives and friends because they feel that they will not go to the District Attorney to file charges.

[JohnH]

I agree. This thing has the aroma of "lawsuit" all over it. If you prepare the return, you may find yourself testifying in several cases in the coming months & years. You probably can't charge enough to make this one worth your while.

[BHoffman]

"Business failed due to lack of interest of product/service"

Liver potpies?

[DaveinTexas]

More information

"Business failed due to lack of interest of product/service"

Liver potpies?

The business failed due to incompetency of staff and lack of funding to obtain all of the necessary permits/licenses/franchise fees to operate the business in multiple locations; big dreams, not enough money.

The investors invested money and in return was promised a stake in a Corporation that did not exist at the time when the investment was made. This is the reason for depositing the funds in a sole prop acct. Now the IRS is classifying the deposits as income until he can prove otherwise.

I have only been a "free" counselor at this point. I think that my services will remain limited to that and any future contact will require a very long/detailed disclaimer.

Sometimes helping others for the sake of helping others is just not worth it. I'm learning not to be charitable when it may cause a detriment to my career.

[BOB W]

The business failed due to incompetency of staff and lack of funding to obtain all of the necessary permits/licenses/franchise fees to operate the business in multiple locations; big dreams, not enough money.

The investors invested money and in return was promised a stake in a Corporation that did not exist at the time when the investment was made. This is the reason for depositing the funds in a sole prop acct. Now the IRS is classifying the deposits as income until he can prove otherwise.

I have only been a "free" counselor at this point. I think that my services will remain limited to that and any future contact will require a very long/detailed disclaimer.

Sometimes helping others for the sake of helping others is just not worth it. I'm learning not to be charitable when it may cause a detriment to my career.

DON'T FORGET> "NO GOOD DEED WILL GO UNPUNISHED".............