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R. Klein, EA
R. Klein, EA, Enrolled Agent
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I have two C Corps. The shareholders ( H&W) wish to liquidate

Resolved Question:

I have two C Corps. The shareholders ( H&W) wish to liquidate the Corp. Over the years they have accumulated very large loans payable to the Corp. Is there any way to lessen the tax impact?
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Randalltax :

I am assuming you mean loans from the shareholders.

Randalltax :

Oftentimes these "loans" are disguised dividend distributions that were not declared as dividends in the years paid out. This is unfortunate, because dividends are taxed at a lower rate than the distribution of unpaid-back shareholder loans. What normally happens when the corporation closes is that the loans are cleared off the books, but this becomes ordinary income to the shareholders upon the cancellation of the debt.

Randalltax :

Therefore, if there is any way to declare these loans as a dividend rather than canceled debt, you will be subject to a lower tax rate, in general.

Randalltax :

You cannot just "wish" the debts away and close the company. The canceled debt must be accounted for, otherwise you have tax evasion (undeclared money) paid to the shareholders.

Customer:

There is very little in Retained Earnings. I had treated them as distributions in liquidation and reported them on Sch D, taking the capital stock and remaining retained earnings as basis.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2927
Experience: Over 20 Years experience
R. Klein, EA and 3 other Tax Specialists are ready to help you
Expert:  R. Klein, EA replied 1 year ago.
Your creative accounting is interesting, but not correct. Basis is not capital plus retained earnings.

Assets = Liabilities plus Equity.
Equity is not necessarily the same as basis.

Your basis on a C corp is the original cost of your capital contributions, unless adjusted by some rule. Distributions from a C Corporation are undefined. Do you mean taxable dividends? Distributions are a concept used for partnerships and S Corps.

Customer: replied 1 year ago.

These were amounts over a 12 year period that were taken out of the companies by the shareholders. No salaries were taken, no returns were filed so when I got hold of it I made them loans. After your first answer, I switched them to dividends since there was enough retained earnings. Tax rate is the same. Best I can do.


 

Expert:  R. Klein, EA replied 1 year ago.
OK.. Water under the bridge then...
Customer: replied 1 year ago.

Thanks very much for helping me out.

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R. Klein, EA
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