Looking for a CPA's opinion -- Cancelled Debt or Barter Transaction?
I'm hoping there might be a CPA on here who has the time to look through this and give me an opinion -- not official advice.
I'm not sure what else to do...
I have to make a decision on how to handle this before I can file Chapter 7, because I need to finish my previous years' tax returns, and for that, I need to finish my S-Corp's previous years' tax returns.
I'm really sorry for creating the (probable) longest post on bkforum, I'm not sure how to condense it much further without omitting relevant content.
I am in the process of shutting down my S-Corp and filing Chapter 7 bankruptcy, since I unfortunately personally guaranteed most of the S-Corp's debts. I am not a CPA, however have been acting as one for the S-Corp for the past 10 years. I have taken some accounting college classes, and have done a lot of independent reading on accounting, IRS forms, publications, and federal regulations. Whenever I find a situation that I'm not sure how to handle taxwise, I have contacted the IRS to ask for general information to lead me in the right direction. This time, I have an opinion -- and the three business tax law specialists at the IRS that I have spoken with all disagree with me AND EACH OTHER.
I have spoken with a few local CPAs, and none of them want to touch this because it's not straightforward, and they "don't think it's worth the time for how much they could bill for it" -- since I have everything else done, and have no other need for a CPA than this issue. And, I don't have a lot of money to throw at them to convince them to take this on anyways.
BACKGROUND
My S-Corp is insolvent, by about $200,000. I am filing its outstanding tax returns (2005-2007) and will be dissolving the S-Corp, after my personal Chapter 7 bankruptcy case is resolved. (Unfortunately a lot of the S-Corp's debt was personally guaranteed by me.) The S-Corp was clearly insolvent during all three of the tax years that I'm now preparing. The S-Corp not filing corporate bankruptcy unless it does so involuntarily, which is unlikely because the S-Corp has no assets or even preferential payments to go after.
My S-Corp was leasing a commercial space. It was late on about $25,000 of rent, and was evicted from its premises. The eviction judgment on June 21, 2006, stated that we had until July 3, 2006, to vacate the premises or an order forcing eviction by the police would be ordered.
We, of course, decided to leave voluntarily and leave the premises spotless. Unfortunately, one of the landlord's employees decided to come into our premises after the eviction proceedings on June 21, 2006, and stole the following property that my S-Corp owned: a $1,100 computer with monitors that I used with all my business financial and tax records; and $2,200 of computer equipment. He also stole $250 of tools that I personally owned, that I used in the business.
The landlord/tenant clerk agreed with me that this was a case of self help eviction, and amounted to criminal breaking and entering, and theft.
The landlord's attorney (who is the father in law of the employee who stole the property) offered to officially forgive my S-Corp's $25,000 outstanding balance and return the computer with my financial and tax records, and in return, we pledged not to sue the landlord for self-help eviction damages. On a sidenote, I also pledged (and followed through) not to pressure the police to criminally charge his son-in-law, but that wasn't in the written agreement since I don't think giving up that right can be uphold by a contract. The police never arrested or prosecuted anyone, since I told them I considered the matter closed.
Although I felt extremely angry about the situation, I was in the end happy to not have to worry about the $25,000 outstanding balance and losing only the remaining stolen property which I couldn't get them to return.
OPINIONS
As a sidenote for these opinions, for the taxyear involved, my S-Corp is claiming a $1182 loss on Form 4794, which is the amount of undepreciated basis in property that was disposed (“Disposed Property Deduction”). The property disposed were property “left behind” when we left the leased commercial space – a security system (LOL) and additional electrical circuits.
My opinion:
The first business tax law specialist with the IRS's opinion:
The second business tax law specialist with the IRS's opinion:
The third business tax law specialist with the IRS's opinion:
MY QUESTION
Do you agree with one of these four opinions, or (shudder) do you have a fifth opinion?
Should I just go with my opinion, since: (a) I think it’s most correct; (b) the issue is somewhat ambiguous; (c) the IRS hasn’t agreed with itself on how to handle it; (d) I have the federal employee ID numbers of two IRS agents that generally agreed with me, to try getting out of any penalties that would come out of an audit; and (e) the likelihood of me being audited and this ever becoming an issue is very low?
I'm not sure what else to do...
I have to make a decision on how to handle this before I can file Chapter 7, because I need to finish my previous years' tax returns, and for that, I need to finish my S-Corp's previous years' tax returns.
I'm really sorry for creating the (probable) longest post on bkforum, I'm not sure how to condense it much further without omitting relevant content.
I am in the process of shutting down my S-Corp and filing Chapter 7 bankruptcy, since I unfortunately personally guaranteed most of the S-Corp's debts. I am not a CPA, however have been acting as one for the S-Corp for the past 10 years. I have taken some accounting college classes, and have done a lot of independent reading on accounting, IRS forms, publications, and federal regulations. Whenever I find a situation that I'm not sure how to handle taxwise, I have contacted the IRS to ask for general information to lead me in the right direction. This time, I have an opinion -- and the three business tax law specialists at the IRS that I have spoken with all disagree with me AND EACH OTHER.
I have spoken with a few local CPAs, and none of them want to touch this because it's not straightforward, and they "don't think it's worth the time for how much they could bill for it" -- since I have everything else done, and have no other need for a CPA than this issue. And, I don't have a lot of money to throw at them to convince them to take this on anyways.
BACKGROUND
My S-Corp is insolvent, by about $200,000. I am filing its outstanding tax returns (2005-2007) and will be dissolving the S-Corp, after my personal Chapter 7 bankruptcy case is resolved. (Unfortunately a lot of the S-Corp's debt was personally guaranteed by me.) The S-Corp was clearly insolvent during all three of the tax years that I'm now preparing. The S-Corp not filing corporate bankruptcy unless it does so involuntarily, which is unlikely because the S-Corp has no assets or even preferential payments to go after.
My S-Corp was leasing a commercial space. It was late on about $25,000 of rent, and was evicted from its premises. The eviction judgment on June 21, 2006, stated that we had until July 3, 2006, to vacate the premises or an order forcing eviction by the police would be ordered.
We, of course, decided to leave voluntarily and leave the premises spotless. Unfortunately, one of the landlord's employees decided to come into our premises after the eviction proceedings on June 21, 2006, and stole the following property that my S-Corp owned: a $1,100 computer with monitors that I used with all my business financial and tax records; and $2,200 of computer equipment. He also stole $250 of tools that I personally owned, that I used in the business.
The landlord/tenant clerk agreed with me that this was a case of self help eviction, and amounted to criminal breaking and entering, and theft.
The landlord's attorney (who is the father in law of the employee who stole the property) offered to officially forgive my S-Corp's $25,000 outstanding balance and return the computer with my financial and tax records, and in return, we pledged not to sue the landlord for self-help eviction damages. On a sidenote, I also pledged (and followed through) not to pressure the police to criminally charge his son-in-law, but that wasn't in the written agreement since I don't think giving up that right can be uphold by a contract. The police never arrested or prosecuted anyone, since I told them I considered the matter closed.
Although I felt extremely angry about the situation, I was in the end happy to not have to worry about the $25,000 outstanding balance and losing only the remaining stolen property which I couldn't get them to return.
OPINIONS
As a sidenote for these opinions, for the taxyear involved, my S-Corp is claiming a $1182 loss on Form 4794, which is the amount of undepreciated basis in property that was disposed (“Disposed Property Deduction”). The property disposed were property “left behind” when we left the leased commercial space – a security system (LOL) and additional electrical circuits.
My opinion:
1. On Form 4684:
a. Claim the theft loss in the amount of $837 – which is the purchase price of the computer equipment that was stolen that was inventory (“Theft Deduction”). I know that my S-Corp cannot claim a loss for the computer that was returned, and the unreturned: computer equipment with zero basis; and my personally owned tools (although I will be claiming that on my individual return.)
2. AND, on Form 982 (Reduction in Tax Attributes Due to Discharge of Indebtedness):a. Consider the $25,000 of “wiped-out” rent as debt cancellation.
b. Consider the $1182 Disposed Property Deduction as a current year capital loss, and lower that tax attribute to zero (not claim the $1182 Disposed Property Deduction.)
c. Consider the $837 Theft Deduction NOT to be a current year capital loss, and fully claim the Theft Deduction. My reasoning is that IRS Publication 544 on page 25 states that property for sale involuntarily converted is not a Section 1231 (capital) transaction.
d. Not declare the remaining $23,818 as income because my S-Corp was insolvent in the involved tax year
b. Consider the $1182 Disposed Property Deduction as a current year capital loss, and lower that tax attribute to zero (not claim the $1182 Disposed Property Deduction.)
c. Consider the $837 Theft Deduction NOT to be a current year capital loss, and fully claim the Theft Deduction. My reasoning is that IRS Publication 544 on page 25 states that property for sale involuntarily converted is not a Section 1231 (capital) transaction.
d. Not declare the remaining $23,818 as income because my S-Corp was insolvent in the involved tax year
The first business tax law specialist with the IRS's opinion:
She agreed with me, except for point (2)(c). She said the Theft Deduction needed to be considered a current year capital loss, so that tax attribute should be lowered to zero (not claim the Theft Deduction.) She could provide no source to back up her claim.
(Note: this reasoning doesn't make sense to me because IRS Publication 544 on page 25 states that property for sale involtunarily converted is not a capital transaction.)
(Note: this reasoning doesn't make sense to me because IRS Publication 544 on page 25 states that property for sale involtunarily converted is not a capital transaction.)
The second business tax law specialist with the IRS's opinion:
He agreed with me, except for point (2)(b). He said the Disposed Property Deduction was not considered a current year capital loss, and fully claim the Disposed Property Deduction. He cited IRS Publication 544 on page 26 that states that if there is a net section 1231 loss, it is an ordinary loss, rather than capital loss.
[I](Note: this reasoning doesn't make sense to me because under that logic, it would seem there is never such a thing as a capital loss, which makes no sense.)
[I](Note: this reasoning doesn't make sense to me because under that logic, it would seem there is never such a thing as a capital loss, which makes no sense.)
The third business tax law specialist with the IRS's opinion:
I called the IRS a third time, hoping to get someone to agree with one of the three above opinions, so I could go with that opinion, and move past this issue.
The business tax law specialist with the IRS that I got referred me to her “lead”, since I had already received conflicting advice from the IRS. He stated that all three opinions were incorrect. He stated that the $25,000 of “wiped-out” rent needed to be considered a barter transaction. He said that I needed to declare the $25,000 as Gross Receipts on the S-Corporation tax return. He said that I could, of course, deduct the $837 cost of the inventory as Cost of Goods Sold. He furthermore said that under his interpretation, the landlord needed to consider and pay tax on receiving the $25,000 in rent since they had made a barter transaction.
(Note: this reasoning doesn’t make sense to me because the landlord company did not receive anything whatsoever – except for the guarantee that the S-Corp would not sue them for having an employee or contractor violate the eviction agreement. As far as I know, the stolen property unreturned remains with the person who stole the property [most likely the co-owner and attorney of the landlord company’s son-in law.] I don’t see how if he keeps property on a personal basis, how that should lock my S-Corp and the landlord company into a barter transaction, and force the landlord company to pay tax upon having received $25,000 in rent. And, I’m sure there is no way the landlord company filed their taxes with the $25,000 in “wiped-out” debt as income received from a barter transaction.)
The business tax law specialist with the IRS that I got referred me to her “lead”, since I had already received conflicting advice from the IRS. He stated that all three opinions were incorrect. He stated that the $25,000 of “wiped-out” rent needed to be considered a barter transaction. He said that I needed to declare the $25,000 as Gross Receipts on the S-Corporation tax return. He said that I could, of course, deduct the $837 cost of the inventory as Cost of Goods Sold. He furthermore said that under his interpretation, the landlord needed to consider and pay tax on receiving the $25,000 in rent since they had made a barter transaction.
(Note: this reasoning doesn’t make sense to me because the landlord company did not receive anything whatsoever – except for the guarantee that the S-Corp would not sue them for having an employee or contractor violate the eviction agreement. As far as I know, the stolen property unreturned remains with the person who stole the property [most likely the co-owner and attorney of the landlord company’s son-in law.] I don’t see how if he keeps property on a personal basis, how that should lock my S-Corp and the landlord company into a barter transaction, and force the landlord company to pay tax upon having received $25,000 in rent. And, I’m sure there is no way the landlord company filed their taxes with the $25,000 in “wiped-out” debt as income received from a barter transaction.)
MY QUESTION
Do you agree with one of these four opinions, or (shudder) do you have a fifth opinion?
Should I just go with my opinion, since: (a) I think it’s most correct; (b) the issue is somewhat ambiguous; (c) the IRS hasn’t agreed with itself on how to handle it; (d) I have the federal employee ID numbers of two IRS agents that generally agreed with me, to try getting out of any penalties that would come out of an audit; and (e) the likelihood of me being audited and this ever becoming an issue is very low?
341: 05/15/08 
Discharge: 07/15/08 
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