NASSAUSUFFOLK

Fact Pattern:

·        Many years ago, shareholders and employees loaned LLC money to produce a film. This is in addition to equity contributed by shareholders

·        Formal loan agreements were drafted and signed by each loan holder and LLC's manager

·        Loans are not secured by any property

·        Accrued interest was recognized and reported each year. I.e., 1099s were issued, and the Company took the interest expense deduction

·        The film never made money – this is the LLC's final tax year

Cancelation of Debt for accumulated accrued interest is being treated as income.

The aggregate amount of loans is $600K. I'm seeking advice on how to report the loan cancellation as nontaxable income. I'm thinking of either declaring this as debt forgiveness as a gift (and filing gift tax returns) or converting the LLC to an S-Corp for tax purposes and canceling the debt. I don't think the cancellation of indebtedness is distributed to the shareholders of an S-Corp.

There are 12 members scattered across the country, including one trust (one of the shareholders is now deceased), so converting to an S-Corp could be painful.

Would you do the gift route? Any other thoughts/suggestions?

Thanx in advance for any help/insights you may have.

Fact Pattern:

·        Many years ago, shareholders and employees loaned LLC money to produce a film. This is in addition to equity contributed by shareholders

·        Formal loan agreements were drafted and signed by each loan holder and LLC's manager

·        Loans are not secured by any property

·        Accrued interest was recognized and reported each year. I.e., 1099s were issued, and the Company took the interest expense deduction

·        The film never made money – this is the LLC's final tax year

Cancelation of Debt for accumulated accrued interest is being treated as income.

The aggregate amount of loans is $600K. I'm seeking advice on how to report the loan cancellation as nontaxable income. I'm thinking of either declaring this as debt forgiveness as a gift (and filing gift tax returns) or converting the LLC to an S-Corp for tax purposes and canceling the debt. I don't think the cancellation of indebtedness is distributed to the shareholders of an S-Corp.

There are 12 members scattered across the country, including one trust (one of the shareholders is now deceased), so converting to an S-Corp could be painful.

Would you do the gift route? Any other thoughts/suggestions?

Thanx in advance for any help/insights you may have.

Fact Pattern:

·        Many years ago, shareholders and employees loaned LLC money to produce a film. This is in addition to equity contributed by shareholders

·        Formal loan agreements were drafted and signed by each loan holder and LLC's manager

·        Loans are not secured by any property

·        Accrued interest was recognized and reported each year. I.e., 1099s were issued, and the Company took the interest expense deduction

·        The film never made money – this is the LLC's final tax year

Cancelation of Debt for accumulated accrued interest is being treated as income.

The aggregate amount of loans is $600K. I'm seeking advice on how to report the loan cancellation as nontaxable income. I'm thinking of either declaring this as debt forgiveness as a gift (and filing gift tax returns) or converting the LLC to an S-Corp for tax purposes and canceling the debt. I don't think the cancellation of indebtedness is distributed to the shareholders of an S-Corp.

There are 12 members scattered across the country, including one trust (one of the shareholders is now deceased), so converting to an S-Corp could be painful.

Would you do the gift route? Any other thoughts/suggestions?

Thanx in advance for any help/insights you may have.