S-corp Shareholder Died

[OldJack]

The 100% shareholder of a S-corp, one-man service business, died and the S-corp terminates with $100,000 non-recourse loans NOT guaranteed by the shareholder. The S-corp had only one asset that being $8,000 cash which was withdrawn just before death as a cash distribution to pay medical expenses.

The question here is what happens to the $100,000 S-corp debt? Is it "forgiveness of debt" income to the S-corp on the final 1120S tax return flowing thru as taxable income to the shareholder's estate (1041 tax return)?

[BOB W]

Jack....

...Isn't the corporation's liabilities greater than its assets? Then any 1099A or C would not be taxable.

[OldJack]

...Isn't the corporation's liabilities greater than its assets? Then any 1099A or C would not be taxable.

True Bob. Thanks for the response. I wish others would also give me their opinions.

[Bird Legs]

S Corp. liability

Old Jack, I am not very good at this and probably just rambling, however, since this was, is, a corp. would not the stock go into the estate and whoever inherits that stock would be the new owner of the corp.? Then either the estate or the person receiving the stock
could operate or dissolve the corp.? At which time the final 1120-S would be filed? Then as you stated, the beneficiary, or the estate, would report the cancellation of debt.
Question, though, if the 100,000 debt was not loaned to the corp. by the shareholder,
there is no basis to offset the income from cancellation of debt?
What kind of basis would the estate or beneficiary have to offset that income?

[OldJack]

Bird Legs, what you say is true regarding the stock. The S-corp will be terminated in this case and all income and loss for the years operation will pass to the deceased shareholder as before his death and to his estate or beneficiaries for after his death. it is the final 1120S that I was concerned with and not the tax basis for the widow. Thus, the question was does the 1120S-k1 show income from forgiveness of debt since it owes the bank and has no money to pay the same. Does forgiveness of debt apply to a S-corp on the final return or is this not taxable income to the S-corp because of the S-corp being defunct. Neither the shareholder that died, his estate, or beneficiaries are liable as guarantees for the S-corp debt.

I think Bob W's post must answer the question. It appears that if the S-corp liabilities exceed the fair market value of all the S-corp assets, then the S-corp is termed as "insolvent" and the forgiveness of debt is not taxable income to the S-corp, but reduces any tax attributes (ie: carryover losses, tax basis of assets, etc. ) of the S-corp. I should have known that Bob W would know these things.

Thanks for your response.

[BOB W]

Wow.........

Thanks for the compliment..............

[Bees Knees]

I think Bob W's post must answer the question. It appears that if the S-corp liabilities exceed the fair market value of all the S-corp assets, then the S-corp is termed as "insolvent" and the forgiveness of debt is not taxable income to the S-corp, but reduces any tax attributes (ie: carryover losses, tax basis of assets, etc. ) of the S-corp. I should have known that Bob W would know these things.

I also agree with Bob's response. If the corporation is insolvent, then the estate and estate beneficiaries should refuse any claim to the stock.

[Bird Legs]

Old Jack

Bees Knees, Bob, Black Bart and others on this board, wish I had the ability to think
and communicate as clearly and organized as all of you.
Do appreciate all of your feedback and comments.

[OldJack]

Bees

Refusing claim to the stock is a point that I had not thought of, but the deceased 1040 and estate would still get a form 1120S-k1 if they want it or not, thus was my concern about the taxability of the cancellation of debt income being on the k1s. From further reading I agree with you and Bob that its not S-corp taxable income due to insolvency.

Thanks Bees.