Business bad debt for individual for loans to Sub S

[cred65]

The S corp sold the assets subject to the liabilities which included the stockholders loans of $353K in 2007. No cash received.

The purchaser has defaulted on the buyout (in 2009) and the stockholders received app $20K each in 2008.

I did not prepare the S corp return but the balance sheet for the previous year reported these amounts as shareholder loans vs contributed capital. The S corp issued K-1's to the stockholders that included "Net Section 1231 Gain" of $265K each. As best as I can determine this was for assumption of the liabilities in excess of the basis of the assets. Included in liabilities was the stockholders loans of $353K. The stockholders received no cash since this was a distress sale.

In summary, I am of the opinion that the balance of the loans would be a Business bad debt and reported on Form 4797. How should this be reported on Form 4797.

Any opinions or further questions?

TIA

[jainen]

>>the balance of the loans would be a Business bad debt<<

Generally a loan to a corporation would be considered an investment. Although the corporation itself may have used the money for operations [a fact that can't be assumed], that is not a business purpose in terms of the shareholder. Actually, the way the supposedly secured assets were sold off suggests to me that the books are wrong and the funding should have been treated as an equity contribution, at least now if not originally.