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Tax Court Disallows Individual Deduction for Sub S Corp Losses Because Corporation Filed Bankruptcy Prior to Year End

In a Tax Court decision, it was decided that an individual was not eligible for losses stemming from an S corporation because he declared bankruptcy.  In the case at hand, the taxpayer filled bankruptcy near year-end.  The taxpayer then attempted to claim the losses from the S corporation on his personal tax return.

The taxpayer claimed the Internal Revenue Code permitted losses on a per diem/ pre share basis.  The Tax Court considered this and stated that the Bankruptcy Code is considered first before the per diem / per share rule is applied.  Thus the court ruled against the taxpayer.

Editor’s Comment

Under the US Bankruptcy Code, the debtor’s estate includes everything the debtor owns.  Included in this are gains and losses from an S Corporation.  The result in this case is somewhat harsh given that the taxpayer filed bankruptcy one month too early.  Tax planning is key during bankruptcy cases.  When dealing with sensitive tax situations, be sure that your bankruptcy attorney is well versed in taxes or another tax professional is employed to deal with the situation(s).

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors