Tax Research- Memo

In: Business and Management

Submitted By klsstar07
Words 858
Pages 4
MEMORANDUM
To: File
From:
Date: October 24, 2012
Re: Craig - Structuring a cash transfer in the case of bankruptcy
Facts
Craig receives a $50,000 salary for running the day to day operations of Canterbury Corporation. He owns 100% of Canterbury’s stock, which is valued at $200,000. Canterbury currently needs $90,000 to meet short-term cash-flow needs, of which Craig is personally sending over to the business. We assume that when Canterbury goes bankrupt, there is no chance of further repayment of debt.

Issues
1. How is debt treated at bankruptcy?
2. What are the tax consequences of contributing capital to a corporation when the company goes bankrupt?
3. If a loan is structured with the intent to protect investment, what are the tax consequences when the company goes bankrupt?
4. If a loan is structured to protect employment, what are the tax consequences at the time of bankruptcy?
5. Which of the above scenarios is the best way to structure a transfer for tax purposes?

Conclusions
1. Debt will become wholly worthless upon bankruptcy.
2. The $90,000 capital contribution may be deducted as a capital loss to the extent of gains from such sales or exchanges, plus the lesser of $3,000 and the excess of such losses over such gains.
3. A nonbusiness bad debt may be deducted as a short term capital loss $90,000 in the year the loan becomes worthless to the extent of short term capital gains, plus the lesser of $3,000 and the excess of such losses over such gains.
4. The $90,000 loan will be considered a business bad debt, and will be deductible as an ordinary loss in the taxable year it becomes worthless.
5. The best way to structure this transfer is as a loan to protect employment.
Support
If a corporation goes bankrupt, Reg. §1.166-2(c)(1) states that it is generally an indication of the worthlessness of at least part of a debt.…...

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