There was no blatant copy from any internet source. My answer was extracted from an expensive, subscription tax research database.
You may have found something similar on the internet -- however, if my answer mirrors what someone else may have written, it's only because the tax law "is what it is," so there isn't a lot of room for interpretation. Every competent
professional will provide you with the same answer. If you get something that does not
mirror what I wrote, that's when you start worrying, because the proponent probably doesn't know what he's/she's talking about.
That said, you asked:
It is my understanding, that in order to personally deduct your investment in a failed/dissolved C-Corp, you must have made an investment of money or property in the Corporation on the day it was formed, in exchange for shares.
A: This is false. The fact that the investment was made on the date of corporate formation is irrelevant.
If so, it appears that we do not qualify for this tax relief. Is that correct?
A: In my opinion, you do not qualify for tax relief, not because your didn't exchange the investment for shares on the date of corporate formation (which as previously mentioned, is irrelevant), but rather because you may have exchanged LLC "shares" for shares of the corporation, and the tax law specifically excludes such exchanges. You must have exchanged money or property "other" than stock or securities.
Legally, an LLC cannot issue "shares," because it's not a corporation. So, you could make an argument that your "interest" in the LLC which was exchanged for corporate shares is, in fact, "other" property, not within the scope of the IRC 1244(c)(1)(B) limitation on investment type. Since this issue has never been litigated to my knowledge, the IRS may decide to challenge your deduction, or accept it, or perhaps you will never be audited. Wearing my conservative hat, I would say you're going to lose the argument; wearing my aggressive hat, I would say that maybe it's worth the risk ($50,000/$100,000) in deductions is a lot of money.
Ultimately, you will have to make the call, because you're in the gray area of tax law with your contemplated deduction.
Is there any way for me to deduct this loss on my personal tax returns?
A: The only other way to deduct the loss is as a standard capital loss, subject to the $3,000 per year maximum (with carryforwards to future years, until the loss is completely extinguished).
Hope this helps.
And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!