defunct s corp

[theresa d]

posted this by mistake under " nice to relax". no longer relaxing so will post properly!

i'm working on the 2005 s corp return for a corp that is no longer in business- it ceased operations in ealy 2005 but has not been disolved. this is probably an easy question but i'm not sure i know the answer. can the fixed assets- equipment- be depreciated for the entire year? they are not obsolete just not being used and will ultimely be distributed to the shareholders. In a related vein i believe i can write off the remaining goodwill?

a little history- the corp was a home improvement firm which applied a patented paint product to homes. the distributor of the paint product went bankrupt. the goodwill arose from the purchase of the right to use this product in a specifice territory. prior accountant set it up as goodwill- i would have set it up differently- purchase of terriroty etc however regardless it is still a section 197 intangible that is now worhtless as the product is no longer avalilable.

appreciate any thoughts.

[OldJack]

On liquidation of the S-corp all intangible assets, startup costs, prepaid expenses, leasehold improvements, etc., would be written off as expense.

I would guess that a good case can be made for depreciation to stop or to be allowed for the entire year. My first thought is I would go the safe choice with depreciation for the entire year as the fixed assets are just temporary idle as the S-corp is still in existence. It only makes a difference because you are crossing a year-end before liquidation and it effects the tax situation of the shareholders 1040. The actual tax difference is probably very small but you should calculate to see how much.

In the long run the gain up to the depreciation taken will be recaptured as ordinary income by the S-corp and therefore makes little difference. When the assets are distributed to the shareholders at fair-market-value the S-corp passes the taxable gain on to the shareholders and usually makes them very unhappy but that is one of the disadvantages of an S-corp.

[theresa d]

s corp dissolution

thanks old jack for the response.

the s corp will not be dissolved for several years due to product warranty issues. since the goodwill is non existent at this point couldn't it be written off in 2005? i don't think there will be any gain on the distribution of the equipment to the shareholders. it appears that the fmv is very close to the book value. the only recaputure will be the difference in accelerated depreciation vs straight line since the business use will fall below 50%.

any thoughts on the write off of the goodwill? if i depreciate the assets for the full year the corp will generate an additional loss of $7500 which will pass to the shareholders. not sure what is the proper treatment.

[OldJack]

I don't believe that you have valid justification to write-off goodwill until the corporation liquidates or the amortization period has ended. Just because it appears to have no value is not a reason to write it off. Goodwill in some cases is just a result of purchasing assets at a value in excess of fair market value (foolish purchase) but you can't just write it off.

The question of stopping or continuing depreciation is a judgment call. In your case it would appear that you might consider stopping depreciation as there is no intent to continue use of the equipment.

[theresa d]

disposition of intangible

old jack -i found this reference regarding section 197 intangibles-"a special rule applies when a section 197 intangible is disposed of, but other section 197 intangibles acquired in the same transaction are retained. no loss can be claimed instead the unrecognized loss is added to the basis of the remaining section 197 intangibles acquired in the same transaction. this rule also applies if an intangible is abondoned or becomes worthless. if such an intangilbe is a covenant not to compete its basis must continue to be amortized over the 15 year period until all the interest in the trade or business have been disposed of or become worthless."

no other intangibles were acquired by this corp. this intangible represented the right to apply this patented product in a specific territory. since the product is no longer available it has become worthless and as a result the corporation has ceased operations. i think given the above there is a basis for writing it off. does this influence your postion at all?

[OldJack]

Well.. you make a good case for the product is no longer available. But... the intangible here is a "right to apply" and it would appear to me that your S-corp client still has that right even though your client does not intend to do so. Therefore, I think you can't write off the intangible until the S-corp ends or the right to apply no longer is valid. If this "right to apply" is from a company that no longer exists or has broken the agreement giving that right, then I can agree that the right is worthless and should be written-off to expense.

[theresa d]

thanks old jack

the company that my client purchased the product from and who sold them the right to apply the product is no longer in existence. therefore they no longer have the product to apply. therefore i think the goodwill is worthless and should be written off. thanks for your imput and helping me think this through