Terminating S Election - need help ASAP

[BHoffman]

This is an LLC that files an 1120S and wants to start filing as a disregarded entity starting Jan. 1, 2011. The default is Sch C as there is only one shareholder.

I have prepared the Statement to Revoke and the Attachment of Shareholders Consent. I have also prepared form 8832 to classify the entity as a disregarded entity. The last classification change was made Jan 1, 2005. I think all of this is OK

Questions, and I sure need some help here:

1. I understand the Assets are distributed to the shareholder at FMV. What about the Liabilities?

2. Does the NOL carryforward on the shareholder's 1040 form remain in place?


Thanks for any timely help. The revocation has to be filed today or tomorrow.

[Golden Rocket]

I'll Try

to respond Beth. I don't consider myself much of an authority on your subject matter but I'm responding because no one else has. And if I respond, others may as well.

I don't know why Liabilities of the corporation to other parties (not the shareholder) would not be netted against the assets.

I am somewhat comfortable that if the taxpayer had an NOL to begin with, this would not change by virtue of absorption of corporate assets and liabilities. After all, if the corporation had losses they would have passed through to the taxpayer and already be included in the NOL, right? (Assuming the losses had not exceeded basis)

[Super Mom]

I'm by far not the authority on this subject either. But I did had a C-Corp and found that they will lose there NOL if they go to a sole proprietorship, don't know if that is in any way the same.

[BHoffman]

Thanks for replies. I think the C-Corp loses the NOL because it was never passed through to the shareholder. I don't think the same is true for pass through entities like S-Corps, but not exactly sure.

I'm giving myself a bump as well

Thanks again!

[BOB W]

A SubS cannot have an NOL. It is a pass-thru entity to the 1040. The 1040 would have reported any operating losses by way of a K-1 over the years.

Now if you are saying he has suspended losses on his 1040 because of basis issues that is different.

[BHoffman]

Hi Bob - No suspended losses. He has an NOL carryforward on his 1040.

I think the assets are distributed at FMV and the liabilities at face value. I also think the NOL stays. This can wait until later on. The paperwork is in the mail, and I've spoken with the client about possible effects. He says he doesn't care and wants out of the S election because of the restrictions and requirements. It's small stuff and his company is winding down.

Thanks everyone for your help and advice.

[veritas]

The net operating losses

do not pass out to the shareholders. They can be used to offset any Built in Gains Tax in the future.

Can you be more specific about the liabilites?

[BHoffman]

do not pass out to the shareholders. They can be used to offset any Built in Gains Tax in the future.

Can you be more specific about the liabilites?

I can if you'll be more specific about that NOL carryforward on the client's 1040 form

I'm tired and can't understand what you're saying about the BIG tax in the future. I'm sharp as spoon.

This is a SMLLC that was formed on 01/01/05, filed 8832 to be taxed as a Corporation on that day and made the S Election that same day. It was never a C-Corp, and is not converting to one. This clients just wants to go back to filing Sch C and be done with the SCorp restrictions and requirements.

The liability is a business line of credit.

[veritas]

Your correct

I can if you'll be more specific about that NOL carryforward on the client's 1040 form

I'm tired and can't understand what you're saying about the BIG tax in the future. I'm sharp as spoon.

This is a SMLLC that was formed on 01/01/05, filed 8832 to be taxed as a Corporation on that day and made the S Election that same day. It was never a C-Corp, and is not converting to one. This clients just wants to go back to filing Sch C and be done with the SCorp restrictions and requirements.

The liability is a business line of credit.

since the corporation was never a C Corp there would be no Built in Gains Tax to worry about. I totally misread your original post.

[BHoffman]

Good. Now I can untie the noose and climb down off my desk.

[veritas]

It would seem to me

if the liabilities assumed exceeds the FMV of the assets distributed there would be income at the corporate level for the difference.

Not saying that is the result in your case but a possibility.

Bob W

What do you think?

[Maribeth]

Questions, and I sure need some help here:

1. I understand the Assets are distributed to the shareholder at FMV. What about the Liabilities?

2. Does the NOL carryforward on the shareholder's 1040 form remain in place?


Thanks for any timely help. The revocation has to be filed today or tomorrow.

The assets will be distributed to the s/h at FMV as will the liabilities which are by definition recorded at FMV. To the extent that the assets exceed the liabilities, there will be a gain on the corporate books which will flow out to the shareholder on his K-1.

The NOL carryforward on the s/h's form 1040 is the shareholder's. The dissolution of the corporation will not affect the NOL carryforward into year 2010.

hth,

Maribeth

[BHoffman]

The assets will be distributed to the s/h at FMV as will the liabilities which are by definition recorded at FMV. To the extent that the assets exceed the liabilities, there will be a gain on the corporate books which will flow out to the shareholder on his K-1.

The NOL carryforward on the s/h's form 1040 is the shareholder's. The dissolution of the corporation will not affect the NOL carryforward into year 2010.

hth,

Maribeth

Hi Maribeth

1. If the S election is revoked on 01/01/2011, then would the deemed sale occur on 12/31/10 so that the gain from the asset distribution appears on the 2010 1120S? I think it would be reported on the 2010 form 4797.

2. Would the 2010 1120S have the box "S election termination or revocation" and the box "Final Return" checked? I think this would be true.

Thank you very much for your response.

[Maribeth]

Hi Maribeth

1. If the S election is revoked on 01/01/2011, then would the deemed sale occur on 12/31/10 so that the gain from the asset distribution appears on the 2010 1120S? I think it would be reported on the 2010 form 4797.

2. Would the 2010 1120S have the box "S election termination or revocation" and the box "Final Return" checked? I think this would be true.

Thank you very much for your response.

Yes, I would record the sale as of 12/31/10 and mark the return "final". The gain will be reported just like any other sale, i.e. recapture, etc.

Maribeth