Income tax question - How do you report loss?

At first glance it appears that there is an issue with the payments paid by the initial partner after the dissolution of the first S-Corp. While this client continued to pay the mortgage payments, was he being paid rent by shareholder #2? If so, was he reporting the income on a Schedule E?

Other than paying the mortgage, was shareholder #1 involved at all in the operations under the new S-Corp.? Did the new S-Corp. pay rent to the previous partner for their continued occupancy of the building, or were they given a free pass? If they did pay rent, then it would go as rent expense to them to be reported on their K-1 and as rental income to shareholder #1 on a Schedule E.

As to the 50% loss allocation, I question the validity of this given the nature of who was personally liable and who made the payments. I am willing to venture that a lawyer should be involved in this as it seems to move beyond a mere accounting question in my mind. I know this did not provide the concrete solution you are seeking, but these are issues that need resolution prior to any action being taken.

I wish you the best of luck in the matter.

Dear Colleague , 3/18/2013

Beside accounting laws, finance principles and methods, and much more...., let think for a minute, it is a problem of which people like us are looking for an understanding to see clearly how to handle this matter. S corporation before closing had a structure in place, board of directors, shareholders etc...Did S corp articles show how to dissolve it...(Red flag in this case) if all was taken into consideration you should not have any problem showing how to carry this loss over passed or coming years.

As long has you do not have any idea how S Corp did clear its asset, why any client will continue paying for an investment which is no long exist (another red flag);

All I can say is the truth is buried somewhere in this case, hope that you can review all papers like Sheila mentioned and continue to dig for more info.

Best of luck