S-Corp, Stock Purchase

[geekgirldany]

With a recent post regarding investment interest with the sale of S-Corp Stock I've been reviewing a customer's return.

I may be reading more into this than I should but I would like to know. I have been deducting the interest paid by the new shareholders as investment interest. It may have been listed incorrectly. The above may make a difference.
Thank you

[BOB W]

If the new shareholder is active in the SCorp the interest would go to outside basis, not investment interest subject to investment income.

[ChEAr$]

And

a stock sale between two owners has nothing to do with the corporation, whose name
should be kept out of it.

Of course the corporation will, or should have already, transferred stock certificates.

for a previous owner to "hold" the certificates is not ethical or legal I think.

A sale is a sale.

[geekgirldany]

Yes it is a active shareholder/employee. I know it was wrongly classified as investment interest. But what I am now looking at is that the loan used to purchased the stock.. the interest can be deducted on Schedule E, page 2.

This page tells about it: http://www.nysscpa.org/cpajournal/20...ts/d45500a.htm

One section says:
Active interest expense is interest incurred in connection with a trade or business activity in which the taxpayer materially participates and which is not a rental real estate activity. Active interest expense is not subject to the investment interest limitations or the passive loss limitations. It should be noted that active interest incurred in connection with performing services as an employee is classified as nondeductible personal interest. Otherwise, active interest will generally be deductible.

[geekgirldany]

I will reread about the stock certificates.

[BOB W]

Yes it is a active shareholder/employee. I know it was wrongly classified as investment interest. But what I am now looking at is that the loan used to purchased the stock.. the interest can be deducted on Schedule E, page 2.

This page tells about it: http://www.nysscpa.org/cpajournal/20...ts/d45500a.htm

One section says:
Active interest expense is interest incurred in connection with a trade or business activity in which the taxpayer materially participates and which is not a rental real estate activity. Active interest expense is not subject to the investment interest limitations or the passive loss limitations. It should be noted that active interest incurred in connection with performing services as an employee is classified as nondeductible personal interest. Otherwise, active interest will generally be deductible.

Here is a sentence under "Active Interest" >>"It should be noted that active interest incurred in connection with performing services as an employee is classified as nondeductible personal interest".

Non-deductible interest gets added to the asset (Stock) as an outside basis increase. Schedule E should not be an issue here.

[geekgirldany]

I've been doing some more research. I know what the article I posted says about active interest and performing services as an employee... but isn't being a shareholder/employee consider material participation?