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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I have a S corp business. in May 08, my other 50% shareholder

Customer Question

I have a S corp business. in May 08, my other 50% shareholder terminated her interest of the corporation. I did't pay her anything. she has a loan basis of 8,000. I am now the only sole shareholder of the company. Will I or my corporation have to pay tax on that $8000 loan that was forgiving by the X-shareholder?
Submitted: 7 years ago.
Category: Tax
Expert:  Ed Johnson replied 7 years ago.

She terminated her interest in the corporation, do I assume she transfered her shares to you at no cost?



Customer: replied 7 years ago.
On May 2008, my other 50% shareholder walk out of the business (so I guess you can said that she transfer her share to me). I didn't pay her anything because the business was making a loss and she no longer interested in the business. However when we both got into the business each of us loan $40,000 to the coporation. but in 2007 the corporation was making a loss of $64,000 so that reduced her loan basis to $8,000, and so as my. Now that she terminated her interest completly without any distribution or cash(nothing was giving to her). In 2008 tax return, we elected section 1377(a)(2). 1. will her loan basis reduce to $0 even if she forgiving the loan or get nothing back. and 2 because she forgiving the loan will I or the Corporation have to pay tax the remaining of her loan, $8,000? also remember we elected section 1377(a)(2) on 2008 tax return. I think this is not a one easy question/answer
Expert:  Ed Johnson replied 7 years ago.

Dear nicy,


Thanks for getting back to me.


Here is the problem I have. Even though she abandoned the company, she may still have a tax liability.


I do not know the terms of any agreement or contract between you. BUT from an IRS perspective, she would still be receiving a K-1 for the tax year in which she walked. (at least).


legally if she did not formally transfer shares to you, she still owns them. She can abandon the share by gifting them back to the S-corp, or selling them back, to the S-corp, or selling them or gifting them to someone else according to the terms of the S-corp. Most S-corp shares are close hold and can not be sold to persons outside the S-corp.


If she is forgiven a loan, then that forgiveness of debt can be considered taxable income to her.


But the corporation and remaining share holder(s) will assume the entire loan and any obligations stemming from that.


1377 election simply means to me that the shares she gives back or sells back (turns back) to the corporation become divisible by the remaining share holder(s).


There has to be some indication of this action besides simply walking away.








Customer: replied 7 years ago.

thanks for reply back. I am online too. I want to get this result today because I will meet with her today. Meg is the shareholder that terminated her interest of the Corporation. She is a good friend of my.


she doesn't want anything. she just want to do something else because the corporation is not making any money.


I pull out the paper work and read it again and see that she sell her share to me for $0. so this is a gift?


I know a little about tax. I prepare last year tax return for this corporation. but this year was a little different because she terminated her interest.


the problem that I have is her loan basis (this is money that she borrow to the corporation) I want to know if she forgive her loan (mean that she will not get any money back for the remaining money, $8000 that the corp. owed her). will this $8,000 become tax liability to the corporation or me since I am now the only shareholder of the corporation?


also how do I lower her loan basis to $0 on the shareholder basis worksheet? also can I lower her loan basis to $0 (will this be correct to lower to $0)? so should I leave it as $8000 because she doesn't get any money.


I will give her a K-1. and the K-1 will be mark Final on the top and also note " Section 1377(a)(2) election made" on the K-1.


my problem is the shareholder's basis worksheet...


please help..

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