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Tax liability for your corporation does not pass through to you, unless the government decides to try to "pierce the corporate veil" and hold you liable under the theory that the corporation was simply your alter ego and not a separate legal entity.
Many defunct corporations lie dormant forever, because they have no assets, and there is no resonable means for the government to collect the taxes owed.
Hope this helps.
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Thanks for double checking, because now that I understand your concern, I see the issue more clearly.
You can revoke your S-Corp election under 26 CFR §1.1362-6(a)(3)(i), as follows:
"To revoke an election, the corporation files a statement that the corporation revokes the election made under section 1362(a). The statement must be filed with the service center where the election was properly filed. The revocation statement must include the number of shares of stock (including non-voting stock) issued and outstanding at the time the revocation is made. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including non-voting stock) of the corporation. Each shareholder who consents to the revocation must consent in the manner required under paragraph (b) of this section. In addition, each consent should indicate the number of issued and outstanding shares of stock (including non-voting stock) held by each shareholder at the time of the revocation."
Title 26 CFR §1.1362-2(a)(2), provides "(i) In general. Except as provided in paragraph (a)(2)(ii) of this section, a revocation made during the taxable year and before the 16th day of the third month of the taxable year is effective on the first day of the taxable year and a revocation made after the 15th day of the third month of the taxable year is effective for the following taxable year. If a corporation makes an election to be an S corporation that is to be effective beginning with the next taxable year and revokes its election on or before the first day of the next taxable year, the corporation is deemed to have revoked its election on the first day of the next taxable year.(ii) Revocations specifying a prospective revocation date. If a corporation specifies a date for revocation and the date is expressed in terms of a stated day, month, and year that is on or after the date the revocation is filed, the revocation is effective on and after the date so specified.
Once the election is revoked, there is no pass-thru income. The corporation simply traps the income. If the corporation can't pay the taxes for lack of assets, then the bill will just sit there forever.
Don't apologize. This is a gray-area issue that I do not believe has ever been litigated.
1) At this point, can we specify a revocation date of our "S" election that is prior to MAR 16.
A: Yes. You may have missed it in my previous answer. Under 26 CFR §1.1362-6(a)(3)(ii), "If a corporation specifies a date for revocation and the date is expressed in terms of a stated day, month, and year that is on or after the date the revocation is filed, the revocation is effective on and after the date so specified."
2) When is this cancelled debt considered income?
A: COD date is the date when the debt is "charged off" by the creditor.
If your revocation is too late, then the issue falls into the area of nobody knows. Ordinarily, the COD income would be distributed to the S-Corp shareholders IRC §108. However, you have already discharged your personal obligation for the debt, which would have included this COD income had the creditor sought to collect against you directly.
But, now you receive the same income again, indirectly, only through a nonbankruptcy debt to the corporation. There's no precedent for this, as far as I"m aware, which means that a tax court would get to decide, or, you could ask the bankruptcy could to determine the outcome based on an argument that the two debts are really the same, and you've already been discharged. Either way, you suffer serious litigation costs. So, it may be better that if the revocation date is too late, to Chapter 7 the S-Corp and discharge the debt again, because that cost will likely be less than the cost of fighting with the IRS over the treatment of the COD income.
Yes to all questions, except that you can't specify a revocation date later than the date that you file the revocation with the IRS. So, that date will be after today, no matter what.
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