s-corp sold on installment basis and purchaser is now bankrupt

[GTS1101]

My California clients sold their s-corp on an installment basis in 2021. They received no payments in 2022 and the purchaser of the s-corp has filed bankruptcy. They are owed $40,000. My client spoke with a few lawyers and they said it was going to be very expensive and hard to try and get any money out of them.

Does the balance of the installment note that they did not receive get written off as a loss? And if yes would it be capital loss or ordinary loss?

Thank you!

[JON]

A lot more information is needed, but usually if there is a get anything back you undo the sale - any principle received as a down payment or note payment in 2021 come back as income to the extent of what you received(repossession)???

[kathyc2]

My California clients sold their s-corp on an installment basis in 2021. They received no payments in 2022 and the purchaser of the s-corp has filed bankruptcy. They are owed $40,000. My client spoke with a few lawyers and they said it was going to be very expensive and hard to try and get any money out of them.

Does the balance of the installment note that they did not receive get written off as a loss? And if yes would it be capital loss or ordinary loss?

Thank you!

No, as the unpaid balance would include gains on which they did not pay tax.. Any loss would be if payments received were not enough to cover adjusted basis at time of sale. See Pub 537

[GTS1101]

Thank you JON and kathyc2. Very helpful information and now I can proceed forward with finishing this complicated s-corp tax return. Greatly appreciate your wisdom!