Hi All

We just dissolved a 3 partner S-corp. All shareholder loans to the company could not be repaid and were forgiven; this produced COD income for each shareholder.

My question is: How can the bad SH loans be deducted on our personal returns? The loans were never officially documented as such, and our then accountant never generated 1099's for imputed interest. In my case, there are both debt and equity basis plus no carry-forward losses from prior years to offset the COD. I am not sure if I can take a personal deduction for my "bad" loan as ordinary income (Sch E?) or if it must be considered a capital loss (Sch D?) subject to the $3K limitation. Obviously, deducting as ordinary income would be much better. I am also not sure how stock basis affects the calculation.

Secondly, where exactly (form/line numbers) would the individual bad loan deduction info be entered on both the 1120S (K-1) and personal returns?

Thanks