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Income tax question - How do you report loss?

I have a 1040 client that was a 50% shareholder in an S Corp.  That S Corp owned a building and the mortgage was personally guaranteed by my client and the other 50% shareholder.  The S Corp legally dissolved several years ago (circa 2005) and my client was issued a final K-1.  The other 50% shareholder reincorporated into a 100% owned S Corp and continued to run the business.  However, the bank was never notified and the mortgage never refinanced.  My client kept on paying the mortgage as the personal guarantor when his former partner stopped paying, so as far as the bank was concerned, they got their money and all is well. 

Fast forward to 2012.  Building is paid in full, cost was $242k.  Building is now sold in 2012 for $125k.  My client and his former partner want to recognize 50% of the loss each (net of depreciation, capital improvements, etc).  But I don't know whether to put this on Schedule E under an S Corp that no longer exists, as an individual capital loss limited to $3k, on Form 4797, or somewhere else? 

Any insights are much appreciated. 

Thank you. 


Sheila Cunha
Title: Controller
Company: Florida Level & Transit Co.
LinkedIn Profile
(Controller, Florida Level & Transit Co.) |

At first glance it appears that there is an issue with the payments paid by the initial partner after the dissolution of the first S-Corp. While this client continued to pay the mortgage payments, was he being paid rent by shareholder #2? If so, was he reporting the income on a Schedule E?

Other than paying the mortgage, was shareholder #1 involved at all in the operations under the new S-Corp.? Did the new S-Corp. pay rent to the previous partner for their continued occupancy of the building, or were they given a free pass? If they did pay rent, then it would go as rent expense to them to be reported on their K-1 and as rental income to shareholder #1 on a Schedule E.

As to the 50% loss allocation, I question the validity of this given the nature of who was personally liable and who made the payments. I am willing to venture that a lawyer should be involved in this as it seems to move beyond a mere accounting question in my mind. I know this did not provide the concrete solution you are seeking, but these are issues that need resolution prior to any action being taken.

I wish you the best of luck in the matter.

Mulekye Mukoko
Title: President
Company: Uzima Int'l, Inc
(President, Uzima Int'l, Inc) |

Dear Colleague , 3/18/2013

Beside accounting laws, finance principles and methods, and much more...., let think for a minute, it is a problem of which people like us are looking for an understanding to see clearly how to handle this matter. S corporation before closing had a structure in place, board of directors, shareholders etc...Did S corp articles show how to dissolve it...(Red flag in this case) if all was taken into consideration you should not have any problem showing how to carry this loss over passed or coming years.

As long has you do not have any idea how S Corp did clear its asset, why any client will continue paying for an investment which is no long exist (another red flag);

All I can say is the truth is buried somewhere in this case, hope that you can review all papers like Sheila mentioned and continue to dig for more info.

Best of luck

Laurence Jadrych
Title: CPA, CGMA
Company: Wyman-Gordon Forgings
(CPA, CGMA, Wyman-Gordon Forgings) |

You need to see a good tax lawyer specialist for the following:
Building ownership - Who has title to the building after S-corp owner was dissolved? What percentage did title-holders own at dissolution? What percentage did title-holders own at date of sale?
Former partner stopped paying mortgage - What was his ownership interest in the building? What recourse does the partner who paid have against the partner who did not pay his portion of the mortgage?
Your discription of the various transactions leave many details undisclosed.
Sort out the details, then get good advice.
This venue is not the place for this type of question.


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