Taxable Scorp Loan Repayment

[Harvey Lucas]

My client has Zero basis in the $10,000 he loaned to his scorp 3 years ago because he used that basis to allow the flow thru of Scorp ordinary losses.

In 2009 the Corporation paid him his $10,000 back.

He has a gain of $10,000 from this, ie, TTB Business Edition Page 19-9.

Is the gain Long Term or Short Term?

ThankYou,

Harvey Lucas

[geekgirldany]

Did he have any income items that built his basis back up in the loan? That is applied first before building the stock basis back up.

If not then this is from my other research source:
When a reduced-basis loan to the corporation is repaid, the character of the shareholder’s gain depends on whether the loan is evidenced by a written note. If there is no written note, the gain is ordinary income (Rev. Rul. 68-537). If there is a note, the repayment is considered to be a sale or exchange of a capital asset and, as such, is capital gain [IRC Sec. 1271(a)(1); Rev. Rul. 64-162]. The capital gain is long or short term depending on how long the shareholder held the note.

[Gretel]

Did he have any income items that built his basis back up in the loan? That is applied first before building the stock basis back up.

If not then this is from my other research source:
When a reduced-basis loan to the corporation is repaid, the character of the shareholder’s gain depends on whether the loan is evidenced by a written note. If there is no written note, the gain is ordinary income (Rev. Rul. 68-537). If there is a note, the repayment is considered to be a sale or exchange of a capital asset and, as such, is capital gain [IRC Sec. 1271(a)(1); Rev. Rul. 64-162]. The capital gain is long or short term depending on how long the shareholder held the note.

Smart, there really is common sense in some of the regulations.

[geekgirldany]

Its nice when some things are so clear cut in the regs. So often they are not.

[Harvey Lucas]

Thank you

GeekGirlDany, that is very helpful.

Harvey Lucas