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I sold an S Corp on 12/01/2006 for $6,067,631. Of that total

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I sold an S Corp...
I sold an S Corp on 12/01/2006 for $6,067,631. Of that total price - $3,743,610 was allocated to Goodwill. All the money was collected except for $666,667 of the Goodwill. The purchasing company went bankrupt in 2011 and is now closed. The Goodwill was reported on an installment sale basis with a 100% gross profit percentage.

Can I now report the loss of the $666,667 as a capital loss for 2011 since that is the remainder of the money I was owed?
Submitted: 5 years ago.Category: Tax
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6/1/2012
Tax Professional: Stephen G., Sr Income Tax Expert replied 5 years ago
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

If I understand what you're saying you would not have a capital loss related to the $666.667. because you have no tax basis in that portion of the installment obligation as you never reported it as income under the installment basis.

Stephen E. Grizey :

The "lucky" aspect to it is that since you were using 100% gross profit in the installment reporting, no adjustment of the installment sale transaction needs to be made; you simply will never report the 666,667. as income and therefore you will have no deduction for a capital loss.

Customer:

You are right, I never recognized the income from that portion of the sale. Thanks for that information. May I ask you another question or do I need to go back and re-submit for a different question?

Stephen E. Grizey :

No. You can ask another question, no problem.

Customer:

What if as the portion of the purchase price of the S-Corp that I sold, a portion of it was allocated to a note that the company was to pay me back. If they then defaulted on the note, would that amount be deductible?

Stephen E. Grizey :

Only if you had reported the principal of the note as income, which you would not have done under the installment method. That's basically the same result as with the 666,667. If the 666,667. were supported by a note, there would be no different in the tax result. In other words, you have no tax basis in the note until it is reported in income.

Stephen E. Grizey :

If you lent someone money & had a note to support their obligation to you & they defaulted, you would have a bad debt deduction.

Stephen E. Grizey :

In that case you would have a tax basis in the note because you gave up money in exchange for the note.

Customer:

In that scenario, you would have had to actually lend them money right, not just "not collected" on a promise to pay.

Stephen E. Grizey :

Correct

Customer:

OK. Thanks for the information. That answers my questions.

Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
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