Corporate mess

[rkamp]

I have a long time customer who has two S Corporations. They are closely-held corporations and he owns 100% stock in both corporations.

In 2005, he purchased Corporation B with a loan from Corporation A. The cost of
Corporation B was $250,000 ($35,000 in tangible assets and $215,000 in Goodwill).
Corporation B has done very very poorly and now he wants to dissolve it.
There is still $200,000 owed on the loan to Corporate A. This is the only liability
of Corporation B. All other loans and credit accounts have been paid off.

How do I treat the loan (from Corporation A's standpoint since it will never be paid off?
What do I do about the Goodwill from Corporation B?

Is this loan forgiveness/cancellation of debt?

Thanks for your assistance.

Regards, Rick

[rkamp]

Corporate closedown

Anybody have any ideas on this one? Thanks, Rick

I have a long time customer who has two S Corporations. They are closely-held corporations and he owns 100% stock in both corporations.

In 2005, he purchased Corporation B with a loan from Corporation A. The cost of
Corporation B was $250,000 ($35,000 in tangible assets and $215,000 in Goodwill).
Corporation B has done very very poorly and now he wants to dissolve it.
There is still $200,000 owed on the loan to Corporate A. This is the only liability
of Corporation B. All other loans and credit accounts have been paid off.

How do I treat the loan (from Corporation A's standpoint since it will never be paid off?
What do I do about the Goodwill from Corporation B?

Is this loan forgiveness/cancellation of debt?

Thanks for your assistance.

Regards, Rick

[Jiggers]

I have a long time customer who has two S Corporations. They are closely-held corporations and he owns 100% stock in both corporations.

In 2005, he purchased Corporation B with a loan from Corporation A. The cost of
Corporation B was $250,000 ($35,000 in tangible assets and $215,000 in Goodwill).
Corporation B has done very very poorly and now he wants to dissolve it.
There is still $200,000 owed on the loan to Corporate A. This is the only liability
of Corporation B. All other loans and credit accounts have been paid off.

How do I treat the loan (from Corporation A's standpoint since it will never be paid off?
What do I do about the Goodwill from Corporation B?

Is this loan forgiveness/cancellation of debt?

Let me think.

A purchased B.

You say that A purchased assets and goodwill.

Why didn't A depreciate the assets and amortize the goodwill?

Something doesn't sound correct.

Who did A buy B from? Did he really buy the assets and goodwill or the stock?

I think that apples and oranges are getting mixed up.

More information please.

[rkamp]

Corporate Mess

Here's some more clarification:

Corporation B is totally separate business from Corporation A. A loan was issued by Corporation A for $250,000 to allow Corporation B to buy the business. The business assets for Corporation B have been fully depreciated except for goodwill which has about $143,000 left of amortization.

Corporation B has been making payments to Corporation A for the loan, but is going to default on the loan. There are no other liabilities.

My questions are:

(1) Do I treat the loan as foregiveness of debt and include it as income to Corporation B?

(2) Can I deduct the left over Goodwill to offset some of #1?

For Corporation A:

(1) Do I treat the loan as non-business bad debt subject to the capital loss limitations?

Thanks for your assistance.

Rick



QUOTE=Jiggers;127477]Let me think.

A purchased B.

You say that A purchased assets and goodwill.

Why didn't A depreciate the assets and amortize the goodwill?

Something doesn't sound correct.

Who did A buy B from? Did he really buy the assets and goodwill or the stock?

I think that apples and oranges are getting mixed up.

More information please.[/QUOTE]

[Gary2]

Here's some more clarification:

Corporation B is totally separate business from Corporation A. A loan was issued by Corporation A for $250,000 to allow Corporation B to buy the business. The business assets for Corporation B have been fully depreciated except for goodwill which has about $143,000 left of amortization.

I'm still confused. This starts out reading as though the owner created B as a brand new corporation, funded with a loan from A, in order to purchase some other business, Z. If so, is it that Z's assets were fully depreciated at the time of purchase - which I think would be irrelevant? Or is it that after purchasing Z's assets, either individually or as an entire business (allocated on Form 8594), B continued to operate until most of those assets were fully depreciated, based on B's purchase price of those assets?

Or is it back to my interpretation of the original post, that the loan was to the owner, not Corporation B, that the funds were used to purchase the stock of B, and that the owner has simply been relying on distributions from B to make the loan payments (without making B directly liable for the loan)?

I don't think anyone could start answering this until the ambiguities have been cleared up. But once that's done, I think there will be additional, serious questions such as whether it was a real loan or a distribution masquerading as a loan, etc., etc.

[rkamp]

Corporate mess

Gary,

Your first paragraph accurately describes the situation:

------------Your comments: ------------------------
I'm still confused. This starts out reading as though the owner created B as a brand new corporation, funded with a loan from A, in order to purchase some other business, Z. If so, is it that Z's assets were fully depreciated at the time of purchase - which I think would be irrelevant? Or is it that after purchasing Z's assets, either individually or as an entire business (allocated on Form 8594), B continued to operate until most of those assets were fully depreciated, based on B's purchase price of those assets?
------------------------------------------------------------

The corporations are both owned 100% by the same person. No other stockholders.
Both are S corporations. Now Corporation B is closing down and the balance sheets
are being zeroed out.

The assets consist of $143,000 of Goodwill and some small amount of cash and inventory.
The liabilities consist of a loan to corporation A for $200,000.

Corporation B has operated independently for over 5 years.

The questions again are:

(1) Do I need to realize income for the unpaid loan to Corporation A?
(2) What happens to the Goodwill?

I agree this is messy. The accountant is confused as I am on how to close down this corporation.

Thanks for your assistance and suggestions.

Regards,

Rick

[Gary2]

The liabilities consist of a loan to corporation A for $200,000.

It's still not clear why you believe this was a loan to B and not to the shareholder. And if that's the case, then you need to ask whether those payments by B to A were really taxable distributions to the owner, instead of deductible business expenses by B.

There may or may not be COD income to the shareholder. I think you'll need to do more research or find someone more experienced to address whether this sort of shareholder loan is ever subject to different treatment.

I agree this is messy. The accountant is confused as I am on how to close down this corporation.

There's an accountant involved, who's not doing the taxes? Small businesses, including S-Corps, are typically the bread and butter of small accounting firms. So now I'm really starting to worry.

[geekgirldany]

I am going to assume that Corporation A loaned money to Corporation B to purchase some business assets to start a new business which included goodwill.

One of the first things you need to to research is related party transactions. A loaned to B. Owned by the same shareholder. Make sure there were loan papers wrote up and everything was documented.

Beyond that Corp A can write off the loan as a Non Business Bad Debt if Corp B has closed up and there is no chance of getting the money back. Again it would be a non business bad debt. An S corporation may have nonbusiness bad debts. If an S corporation has a worthless nonbusiness bad debt, the loss is not deductible by the corporation (Rev. Rul. 93-36). Instead, the loss is initially reported in Part I of Schedule D of Form 1120S. From there, the loss flows to Schedules K and K-1 as a separately stated short-term capital loss.

Corp B, you need to look into insolvency in regards to weather it is taxable income. The goodwill can be written off when the business dissolved.

If the accountant is confused... who is doing the tax return? I use Checkpoint for when such complicated issues like this comes up. Costs alot but can't beat the research materials.

[dsi]

I have a long time customer who has two S Corporations. They are closely-held corporations and he owns 100% stock in both corporations.

In 2005, he purchased Corporation B with a loan from Corporation A. The cost of
Corporation B was $250,000 ($35,000 in tangible assets and $215,000 in Goodwill).
Corporation B has done very very poorly and now he wants to dissolve it.
There is still $200,000 owed on the loan to Corporate A. This is the only liability
of Corporation B. All other loans and credit accounts have been paid off.

How do I treat the loan (from Corporation A's standpoint since it will never be paid off?
What do I do about the Goodwill from Corporation B?

Is this loan forgiveness/cancellation of debt?

Thanks for your assistance.

Regards, Rick

RKAMP,

In reading your OP (above), you say the S/H of Corp A received a loan from Corp A in order to purchase Corp B. Question: Did the S/H purchase the "shares" of Corp B? Or, did the S/H purchase the assets of Corp B?

Also, since the S/H borrowed the $$$ from Corp A, then the S/H is responsible for repaying the $$$ back to Corp A. Corp B should not be paying Corp A anything. It is not Corp B's debt.