I suggest filing zero returns for the missing years.
To sum my posts above, if you paid debt on behalf of a C-Corp, and you're not a direct 80% owner, then you're going to have to make a choice: It's an equity contribution or a debt that has to be repaid (you would expect 'repayment' from your brothers for your share, or for them to put in an equal share, and the IRS could impute interest on all of you if you treat this like a loan and not a capital contribution). Because the definition of a security can be read as "note, ... or other evidence of indebtedness ... issued by a corporation ... with interest coupons" I think paying the debt of the C-Corp when you didn't have to falls under the investment category ('interest coupons' means interest is to be, or should be, paid, which would be required if you are making a loan and not an equity contribution to the C-Corp).
If this were a sole proprietorship, or you were active in an S-Corp or Partnership, that's one thing, but as an employee it is not normal to loan your boss money to keep the company going, but rather, that is something you do as an investor, which is why the 80% test is the determining factor for an affiliated C-Corp. It's therefore aggressive to go about saying you made this loss in Your trade or business, making it deductible under Section 165... 165(c)(2) applies to capital (investments) assets while (c)(3) personal assets that are stolen or lost due casualty:
(c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to-
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and
(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.
If you're going to do this, get a CPA.
still editing... you've got a tough question for citing code...
Here is another CPA's opinion (presumably anyways, 'jdugancpa'), posted here (he seems to have experience with this particular situation.... I suggest you read the thread):
Jdugancpa (talk|edits) said:
|16 August 2006|
|Most times that will be correct. However, if the shareholder-employee makes the loan to the corporation in order to secure his job, it could be considered a business loan and thus treated as an ordinary loss rather than a capital loss. Better treatment, but be careful that you can show the loan was made for the purpose of securing the employment and not for an investment. |
You've got a tough one. I actually just did quite a bit of work, because I feel for you. Normally, I would never take that much time for $15, which is my share of a $30 question on here, so please recognize that I'm being nice and you're getting a good deal here (it's not all about the money to me on this site...). In the same fashion, given I'm trying to help you here, trust me when I say "Go see a CPA!" There is no one-size-fits all answer. For this kind of money, even though I realize things didn't work out, you should be sitting down face to face with a professional and not paying $30 over justanswers, so I'll assume that was probably already your intention...
I sincerely XXXXX XXXXX the best of luck.
Thank you for your question.
Edited by BK-CPA on 6/3/2010 at 2:47 AM EST