S-corp with negative retained earnings when changed from C- to S-

[hgtc]

S-corp is terminated in 2024.  This S-corp had negative retained earnings (-$4200) when it changed from C-corp to S-corp.

At dissolution, S-corp distributed $235 to shareholder (the only cash asset left).  After this distribution, shareholder still has $4200 basis remained.  

My questions,

1.  Should S-corp issue Form 10699-Div for the $235 distribution when company terminated.
2.  Since shareholder still has $4200 basis remained, can he claims capital loss of $4200 on Form 1040, Sch D?

Thank you.

[IRonMaN]

Are you sure he had $4200 basis remaining?  Wouldn't his basis be what he originally paid for the C corp stock plus and minus income and losses during the S corp period?

[hgtc]

Yes.

That $4200 was 1st year C-corp losses before company changed to S-corp on 2nd year.  He had losses on most years.  In 2024, company dissolved (also net losses in 2024; no assets other than bank account).  After paying all liabilities, company only have $235 left in the bank.  So, shareholder received $235 distribution.

Can he claim $4200 capital losses on his Form 1040?

[IRonMaN · Accepted solution]

What the C corp had in losses didn't affect the shareholder's basis.  You are trying to treat C corp shareholder basis like an S corp.  How much did your client originally put into the corporation as equity?  That's your starting point and then you add and subtract subsequent income and losses as an S corp.

[hgtc]

Client contributed $17,500 when established C-corp.  On year 2, C-corp changed to S-corp with  negative retained earnings of $4200.  So, client's cost basis was still $17,500 when changed to S-corp.  Negative AAA of $4200 was recorded in S-corp balance sheet (with $13,300 bank balance to start with S-corp activities).  During the years, client contributed additional $1500.  

At end of 2024 before company dissolved, with 2024 net losses, his basis = $4435.  Less $235 distribution received, basis = $4200.