Converting Assets to Personal Use

[Terry D EA]

Cleint is an S-Corp single shareholder. As in my previous posts, this corp is in the process of dissolving. The owner wants to take possession of a company owned vehicle that has been on the books for a few years and has been completely depreciated out. This vehicle still has some value so how do I record the removal of the asset and show the conversion to personal use? This shareholder is owed money from three different loans given to the company. Can this conversion be a return of capital?

[kcjenkins]

Yes, if the company sells it to him in exchange for a FMV portion of the debt owed him. As long as there are no other issues in the way, no outstanding debt for the car, etc.

[jainen]

>>Can this conversion be a return of capital?<<

Under Section 311(b ), the corporation would probably recognize gain for distributing appreciated property to a shareholder.

I think this taxpayer might need to be referred to someone with more specific training or experience. He has important planning issues as well as questions about reporting on the tax return. Transactions between an S-corp and its sole shareholder can be a nuisance to figure out, and they often are not very well documented in the corporate minutes or the shareholder's basis.

Since you are posting rather general questions, I wonder if you have an engagement letter limiting your role and setting a fee schedule. You need one! At a minimum, you need to decide if the corporation or the shareholder is your client. It can be and probably is both, but then you have to be clear about the inherent conflict of interest. Creditors sometimes get uptight about that when a business is selling and giving stuff away.

[Terry D EA]

You don't know how many times I have tried to get away from this client. She insists that I stay. I have even increased my fees in an attempt to part ways nicely and I. do have an engagement on file with a fee schedule but no mention of limiting my role. I do know these are general questions and most of the time I know the answer but like to get more opinions to confirm my thoughts. I have cautioned her about the creditors and have insisted she obtain legal advice with some of the issues surrounding this situation which she has done. Thanks for looking out for me with this.