"Harlan Lunsford" <hlunsfordnoway[at]bellsouth.net> wrote:
- quote -

But they DO show percentage of ownership, whether it be
profit & loss and capital in the case of a partnership, or
stock ownership in the case of an s-corp.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

- quote -

I agree. Unfortunately, I have not seen the K-1. It
arrived only recently (late July - well after the March 31
due date) and by then she was already talking with her
lawyer/CPA friend.

Of the 1099-Rs she received (not 1099-MISC as misstated in
my earlier post) was coded "L," the other was coded "1."
There was no loan agreement, no payback schedule and no
mention of interest.

Back when this saga began, or at least when I got involved
in February, I tried to get information from her about the
nature of this transaction and the nature of the business.
To some degree, I might as well have been speaking Irdu.
But, she ultimately told me that she was told that it was
being set up as an S-Corp and that she would be issued
stock, but none had been issued - at least not that I saw or
that she told me about.

The business was supposedly an art framing company. I'm not
sure why that kind of company need such a large infusion of
start up cash (there are other "investors"/"creditors") or
why they thought that this area (Alexandria, VA - outside
Washington, DC) needs another framing store. But that's
beside the point now.

It's still unclear to me why the K-1 was only for $1,000 and
whether the other $39,000 will be accounted for in future
K-1s in 2003 or beyond. (And, if so, what happens to all
that is being "written off" now?) I have asked her for a
copy of her tax return, once it's completed just to satisfy
my curiosity.

I appreciate all the discussion on this. Any further
thoughts are welcomed.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Dave Woods, EA wrote:

- quote -

But all K-1's do not show details of capital accounts.

Still I wish we knew whether it was a 1065 or 1120s K1

Cheer$,
Harlan Lunsford, EA in LA

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Bernie" <beatcuff[at]aol.comimwith99> wrote:

- quote -

I don't want to appear to be picking nits, but do you mean a
section 1244 (Small Business Corporation) loss? If so, I
agree with your advice, and that it would be more defensible
if the company has ceased operations.

Joel Berry, CPA
Sugar Land, Texas

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

- quote -

We need additional information... you state the business
NEVER got off the ground, yet still exists... And the loss
is limited to $1,000...

Is this company in development (he has the $$$ and is
working towards a product, etc)...

limited loss --- or is the loss simply $1,000 and the
balance is still in the capital account...

lastly --- if the business is bascially dead --- where
is the $40,000???

- quote -

First, you should tell her --- the next time... come today
about last year and i'm a historian, come today about
tomorrow and i can advise.....

Second, you should be concerned that this 'simple'
transaction (she pulled the ira funds, and you have a k-1)
she has consulted a 'friend of a friend'...

Third, it doesn't take long in this business to realize ---
that maybe she only heard from the attorney what she wants
to hear: he may have stated that IF it was a loan and IF
the business failed then you could write it off............

Now, forget about Circular 230.................

even if it is a loan --- this could be considered a
NON business bad debt because she is NOT in the business of
loaning money... AND states (not the IRS) usually review a
business bad debt closely...

a stronger case could be made for a 1245 w/o... but your
feeling of the continued existance of the company would
prevent this... BUT if it folds in 2003 the offset could
elimate the tax in 2002...

- quote -

yes you did... but from above... stock investment is still
a better choice...

- quote -

only if caught... don't scare them... but suggest the 'cost'
is audited... and note that a 2003 1245 w/o is a defenable
position...

- quote -

i'm not convinced it's a bad idea... but more a third hand
part opinion that something is lost in the translation...

give her the 1245 idea... and save the client...

Bernie

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Michael Bratt" <michael.bratt[at]wdn.com> wrote:

- quote -

It might be a good idea to inquire of the 'friend' with whom
she invested the money.

- quote -

This attorney needs to read Circular 230. The probability
of this issue as described here surviving an audit is less
than the probability of my first wife apologizing to me.
It's like slim and none AND slim has skipped the country.

- quote -

You probably overlooked it because you never considered tax
fraud as an option.

- quote -

You did right. I suggest you very strongly advise your client
that if she does this, she is looking at least an additional
$10,000 in interest, penalties, and litigation costs, i.e.,
$20,000 instead of $10,000.

I have read bad ideas and I have read bad ideas. This one is
a really super bad idea.

Dick

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Michael Bratt" <michael.bratt[at]wdn.com> wrote:

- quote -

I see some problems with this, now and in the future.

I agree that the evidence does not support the treatment of
her investment as a loan. Even if you do, however, the
evidence does not support taking the bad debt deduction.
What efforts were made to collect on the "loan"? What
evidence is there that it is a bad debt if, in fact,
it is a loan? If the friend's business is still an
existing legal entity, there is a possibility she can
recover her investment.

But, beyond that, there is the question of how future events
might affect future returns. If she continues to receive K-1s,
how will she explain the omission of this data from her return?
If the company eventually makes money and the K-1s show profits
in excess of her investment, how will she account for those?

If the client insists on taking the bad debt loss on the 2002
return, I think you should decline to do her future returns,
as well.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

I have a client who drained her IRA and 401(k) accounts of
$40,000 in 2002 to invest in a friend's new business. She
received 1099-MISCs to document the withdrawals. As a result,
she owes over $10,000 in income tax and early withdrawal
penalties. She is currently on extension for her 2002 return.

The friend's business never got off the ground although is,
apparently, still a valid legal entity. Only a few weeks ago
she received a Schedule K-1 showing her share of the losses
for 2002 to be limited to $1,000. She had expected to be
able to declare her entire $40,000 as a loss, thereby
eliminating the $40,000 in income. It's not clear why her
loss is limited to $1,000.

She is understandably unhappy with the prospect of paying
nearly $10,000 to the IRS and we had started discussing
installment payment options. She has now consulted a
"friend of a friend" tax attorney (I am not an attorney) who
has told her that the money can be considered a loan to the
friend and "written off" as a bad debt. The attorney has
offered to complete her 2002 tax return on these terms.

Is this an option I overlooked? There is no evidence that
this was a loan; no repayment agreement or other written
documentation. The existence of a K-1 seems to support the
investment classification.

I don't mind losing her as a client for 2002; she has already
agreed to pay for all my work and research and will probably
return next year. I felt very uncomfortable reclassifying
something as a loan that evidence - at least to me - didn't
appear to support as being a loan. I would like other
opinions as whether I did right or could have done better.
And - could this come back to bite her?

Thanks.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->