old corp debt never paid to shareholder

[schirallicpa]

I have a client who was a shareholder in a corp that just dissolved. The corp owed her $98K. Does this go as a worthless investment on Sch D? Or can she take elsewhere?

Little too warm for the brain this afternoon....

[cred65]

Possibly a business bad debt depending on the circumstances. It would be an ordinary loss on Sch 4797.

The business nexus required for deducting a bad debt under section 166(a) exists where the dominant motive in incurring the debt was protecting or enhancing the taxpayer’s trade or business. Dagres, 136 T.C. No. 12 Filed 3/28/2011

[schirallicpa]

ok.....

I found Sec 166 and read up on what I could. Leads me to the next question-

Is her stock in the corp (29K) a 4797 loss or a Sch D loss. I had originally put that on Sch D as worthless stock.

I am also now thinking of another client that had invested in his son's company that went belly up. That I had called worthless on Sch D limited to $3K loss. Maybe that should have been 4797.

[OldJack]

Maybe a form 4797 sec.1244 loss, probably not a form 4797 business bad debt, likely a form Sch-D capital loss.

[cred65]

ok.....

I found Sec 166 and read up on what I could. Leads me to the next question-

Is her stock in the corp (29K) a 4797 loss or a Sch D loss. I had originally put that on Sch D as worthless stock.

I am also now thinking of another client that had invested in his son's company that went belly up. That I had called worthless on Sch D limited to $3K loss. Maybe that should have been 4797.

Her Stock was probably Sch D.

Was the father who invested in son's business active in the trade or business? Ownership %? Did he receive a salary? Was the investment classfied as a loan or for equity?

There are a number of US tax court cases and generally the court finds for nonbusiness bad debt depending on the circumstances. Also review Lykins, T.C. Memo. 1996-273 filed 6/12/96