Academic journal article Journal of Accountancy

Shifting Receivables between S Corps. Increases Basis

Academic journal article Journal of Accountancy

Shifting Receivables between S Corps. Increases Basis

Article excerpt

The Tax Court held that taxpayers could increase the basis of their stock in an S corporation by contributing accounts receivable to it after they had received those receivables in a distribution from a related S corporation. The increased basis in their stock in the first S corporation enabled them to deduct passthrough losses from it.

Taxpayers who own stock in an S corporation may deduct losses that pass through to them from the entity to the extent of their basis in the stock plus their basis in any debt owed to them by the entity Taxpayers can increase the basis in their stock by making additional capital contributions. To make a capital contribution, the shareholder must incur a cost or be poorer after the contribution.

James Maguire owned a majority interest in Auto Acceptance (AA), a car dealership, and with his wife, Joy, a majority interest in CNAC Inc., a finance company that bought customer notes from AA. Both companies were S corporations. Their son, Marc Maguire, owned the remaining interests in the two corporations. CNAC operated at a profit in 2004, 2005, and 2006, while AA had a loss each year. For all shareholders to have sufficient basis in their AA stock to deduct their share of AA's losses in those years, CNAC distributed accounts receivable (owed to CNAC by AA) to the shareholders at the end of each of the three years in proportion to their ownership interests. Then, each year, the shareholders contributed those accounts to AA, increased their respective basis, and deducted their share of AA's losses on their individual income tax returns for the three years. Written shareholder resolutions were prepared, and entries were made on the books of both corporations for the distributions and contributions. …

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