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Scorp loan forgiven due to death

lledvina
Level 1
A client of mine with an Scorp purchased fixed assets, goodwill, and inventory from his dad three years ago in the amount of $197,000.00. There was a contract drawn up and loan taken for the full $197,000. Currently amortizing and depreciating. His dad passed away last year when the loan balance was $133,000.00. The dad forgave the loan on his deathbed. Trying to avoid COD. Was hoping to figure out a way to cancel things out via inheritance. Any ideas?
 
Thanks
 
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IRonMaN
Level 15

Have you thought about just rolling it into equity instead of a loan to the son?

I'm keeping this job. But I am selling surplus anvils on the side. If you are interested please call 867-5309

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IRonMaN
Level 15

Did he forgive the loan or did he gift the loan to his son?

I'm keeping this job. But I am selling surplus anvils on the side. If you are interested please call 867-5309
lledvina
Level 1

Apparently it states in his dad's will that he forgives the promissory note between him and the Scorp which his son owns.

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qbteachmt
Level 15

"Did he forgive the loan or did he gift the loan to his son?" Or are you trying to pay it off using inheritance? Because now you have Three possible options.

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lledvina
Level 1

It sounds like he forgave the loan.

Was hoping he gifted it so that the Scorp could start making payments to the shareholder but the will states that "I have taken a promissory note for the balance of the sale price due me from the buyer. I forgive the balance due on this promissory note at the time of my death."

Thanks for your help!

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qbteachmt
Level 15

@lledvina 

Whose tax return are you working on: The 1120S, the deceased, or "your friend's individual?"

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"Level Up" is a gaming function, not a real life function.
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lledvina
Level 1

Working on the Scorp (1120S) and shareholder/son (1040)

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IRonMaN
Level 15

Substance over form?  Was it really the father's intent to have his son pay tax on loan forgiveness or was his real intent to just not have the son pay money back to the estate?

I'm keeping this job. But I am selling surplus anvils on the side. If you are interested please call 867-5309
lledvina
Level 1

I'm sure the intent was to not pay taxes on the forgiveness but my worry is that it was between the Scorp and the father. Not sure how much of a difference that makes?

Thought about transferring the loan to the son and have Scorp continue to make payments to the son but not sure if that would fly with the IRS.

 

 

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IRonMaN
Level 15

Have you thought about just rolling it into equity instead of a loan to the son?

I'm keeping this job. But I am selling surplus anvils on the side. If you are interested please call 867-5309

View solution in original post

lledvina
Level 1

That's probably the best and easiest way to do it assuming the IRS doesn't try to say it was a loan between Scorp and lender rather than loan between father and son. But even if it is between Scorp and lender, inheritances are an exception to cancellation of debt.

 

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