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    #1

    S-Corp Stock Transfer

    I'm tyring myself in knots on this one, probably needlessly.

    Shareholder A owns 100% of an S-Corp, which he sells to Shareholder B and receives a promissory note for the value of the shares. Shareholder B then sells half the stock back to the S-corp, which assumes liability for half of the note. A&B are related parties, and both are qualified S-corp shareholders (individuals).

    Interest only is paid on the note to former Shareholder A, and it is all being paid directly by the S-Corp. Am I correct in treating the interest as being 1/2 deductible by the S-Corp and 1/2 being income to Shareholder B?

    I'm thinking that this transaction doesn't invalidate the S-corp election, but that more or less nags me as well.

    If anyone has suggestions I'd appreciate any and all input.
    "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith
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    #2
    How can something so simple

    Originally posted by JohnH View Post
    I'm tyring myself in knots on this one, probably needlessly.

    Shareholder A owns 100% of an S-Corp, which he sells to Shareholder B and receives a promissory note for the value of the shares. Shareholder B then sells half the stock back to the S-corp, which assumes liability for half of the note. A&B are related parties, and both are qualified S-corp shareholders (individuals).

    Interest only is paid on the note to former Shareholder A, and it is all being paid directly by the S-Corp. Am I correct in treating the interest as being 1/2 deductible by the S-Corp and 1/2 being income to Shareholder B?

    I'm thinking that this transaction doesn't invalidate the S-corp election, but that more or less nags me as well.

    If anyone has suggestions I'd appreciate any and all input.
    actually be complicated?

    If the corporation assumed responsibility for half the note, it's board of directors must first have authorized it in a resolution to that effect. This paperwork can of course be done
    properly, even now.

    If the corporationis actually making 100% of the interest payments to A, then it deducts
    only half the interest, while the other half is a distribution to B..

    And no problem with the status of the S election.
    ChEAr$,
    Harlan Lunsford, EA n LA

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      #3
      ---> How can something so simple actually be complicated? <--

      Harlan:
      In my case it's easy. Start with a simple situation, add one simple mind, and you get a complicated quandry.
      BTW, thanks for the response - I'll worry less now.
      Last edited by JohnH; 01-29-2009, 01:13 PM.
      "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

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