1099-C in name of defunct S corp

[oceanlovin'ea]

Client received a 1099-C in the name of his S corp which has been out of business for several years. ID number is the S corp's EIN.

Is Client responsible for this cancellation of debt? Normally any income to the business flows through to the officers. Would that still apply when the business no longer exists.

Thanks

Linda EA

[oceanlovin'ea]

just moving this up

HELP!!!!!! anyone have any ideas.

Linda, EA

[Maribeth]

Did you client receive the assets of the corporation when it closed? If so, those assets were overstated by the amount of the debt that has since been forgiven. So I would probably report the income.

[DaveO]

I would say no unless as Maribeth has noted there were assets in the hands of the former shareholder. The purpose of an S-Corp is to shield the owner from the liabilities of the corporation. The 1099C represents a liability of the corporation not the shareholder. Unless it relates to an asset in the hands of the former shareholder ie car, building or land. Then I would do nothing with it.

[BOB W]

S-corps are a pass-thru entitiy. anything having to do with income and expenses passes on to the shareholders.....................

[ttbtaxes]

I haven't had to wrestle with this situation but my understanding is that COD is income to the S corporation at the corporate level. By contrast, partnership COD is deemed income at the partner level.

The S corporation COD income will flow through to the shareholders. However, the income can be excluded at the corporate level (and thus never reach the shareholder K-1) if the S corporation meets the insolvency exclusion pursuant to IRC Sec 108(a)(1)(B).

Here's a pretty good article about this very topic from The Tax Adviser:

http://www.aicpa.org/publications/taxadviser/2012/december/pages/clinic-story-05.aspx?action=print

[JON]

Assets?

If any assets get past to stockholders it is done at FMV... Now if they were securing the debt forgiven the stockholders have another problem.. It is really tough to say the S Corp was insolvent if it had assets that went to the stockholders in liquidation.

[David1980]

Why did the debt exist? That's how I'd look at it. My concern being whether the taxpayer deducted more losses than their at-risk amount.

Say the taxpayer started the business by investing $100k. They needed more money, so took out a loan in the S-corp name for another $100k. The business ended up being unsuccessful and went out of business. Let's say this all happened in the same year. That the net loss for the business was the $200k exactly and wiped out both the taxpayer's $100k investment and the $100k borrowed funds.

In this scenario, what did the taxpayer actually do with the loss? Did they deduct the full $200k loss on their 1040 return? Or did they only deduct $100k?

[JON]

At risk

is required to be kept at the stockholder level. There are parts missing to this puzzle, but if the information is presented and assets were distributed with debts still owed. I think you do a return - if you cannot show that the corp was bandrupt you record it as income and pass it out to the stockholders. They decide what their basis is, if they have unused losses or taxable income. I think 230 says as preparer you are required to tell the client a return should be prepared. After that who knows??? My humble opinion.!?

[oceanlovin'ea]

small s corp

This is a humble Spanish man who set up an S corp and did home repairs and odd jobs. He had the s corp for maybe 3 years. No assets in the corp. He used an old (1990) van to work out of. Probably had some small tools. Never made much money with it. Didn't file the annual report one year with state and was going to have to pay $450 to re instate the corporation. He just let it stay closed. We haven't filed a tax return for the business for 3 years. He did a schedule C for a couple of years and 2012 had very little SE income and 2013 is just working at HD.

It was never really a corporation. No separate bank account, no books kept.

The 1099-c was for a HD credit card. They cancelled his credit and finally told him if he would pay $1500 they would write off the rest. He didn't have $1500 and didn't pay them. No collateral for this.

I think they would wonder why I am now filing a tax return for a company that hasn't filed in several years. Then they would want those years returns probably.

Linda, EA