Divorce-interest on loan to buy-out spouse deductible?

[equinecpa]

Clients own an S-corporation together. Wife is buying out husband. She will be getting a loan to buy his shares deductible?

I would normally claim this interest on Schedule E page 2 but just not sure since this is divorce related. I know her basis is not increased as this is a tax-free rollover of shares.

[Jiggers]

I would say this is investment interest, deductible up to the amount of investment income.

[Golden Rocket]

What about PUE?

What about "Partners' Unreimbursed Expenses" except this would be adapted to an S-corp and entered on a separate line item on p. 2 of Sch E.

An S-corp can actually have PUE (but they may call it something else). All software I've seen allows for it. What I'm unsure of is whether anything arising from a divorce settlement can qualify for such a deduction.

If it can't, then I think this wife is stuck with having to deduct it on a 4952, as Jiggers says.

[ChEAr$]

What about "Partners' Unreimbursed Expenses" except this would be adapted to an S-corp and entered on a separate line item on p. 2 of Sch E.

Nope! The interest to be incurred has nothing to do with the S corporation's business.

And something in back of my mind says that shareholders may not deduct unreimbursed expenses similar to partners, who may on schedule e page 2 only IF certain i's are dotted and t's are crossed.

[taxea]

Now lets see.,,in order for this interest to be deductible by the business the business would have to be married to the spouse otherwise this is a personal loan not only not deductible by the business but not even a business expense.

Try to remember that the business is a separte entity from the person that owns it.

[jimmcg]

Investment Interest

Third party loan, proceeds of which purchase stock, qualify as investment interest subject to usual statutory limitations.

[taxea]

Third party loan, proceeds of which purchase stock, qualify as investment interest subject to usual statutory limitations.

now that is a stretch that the IRS may take a very detailed interest in

[veritas]

From TTB

Interest expense—S corporations and partnerships. An individual
shareholder of an S corporation or partner of a partnership
reports interest expense in connection with debt-financed
acquisitions on either Schedule E or Schedule A, Form 1040, depending
on the type of expenditure to which the interest expense
is allocated. For example, if a shareholder borrows money to purchase
stock in an S corporation, the interest expense is properly
allocated to a trade or business expenditure of the S corporation.
The interest expense is reported in Part II, Schedule E, on a separate
line and identified as “business interest,” followed by the
name of the S corporation. This interest expense is not subject
to the investment interest expense limitations on Form 4952. For
more details and other examples, see IRS Notice 88-37

I would deduct the interest on Sch E, Part 11. However the material participation rules could limit the deduction.

Note to the authors.

The link to Notice 88-37 is not an active link.

[S T]

Also there is 89-35 ===quote from another post somewhere else

Taxalmanac summarizes the application of IRS's Notice 89-35 as follows:


"Interest Expenses from debt used to acquire an interest in a K-1 activity...


"When ownership in a K-1 activity has been purchased using debt, the interest paid on the loan has to be allocated to the activity for the purposes of applying the passive, investment interest, and personal interest limitations. (IRS Notice 89-35)


"The interest expense is allocated among the assets of the activity. If the partnership or S-Corporation activity is comprised solely of business income, then the interest expense is taken on schedule E and identified as "Business Interest Expense". If the partner or shareholder does not actively [s/b "materially"?] participate in the activity, then the interest expense is included on Form 8582 to be subjected to the passive loss limitations.


"If any portion of the interest expense is allocated to assets that generate portfolio income (Interest, dividends, etc), then a portion of interest expenses is considered investment interest expenses and should be included on Form 4952 "Investment Interest Expense Deduction".

between what "V" posted and this info - would these apply to the OP's questions?

Deduction would be at the Shareholder level - not on the S Corp return.

Sandy

[veritas]

I did not address

the original question.

Can you deduct interest paid to purchase stock in an S Corp from your spouse? Don't know. An ex-spouse I would say yes.

[S T]

Agree with Veritas

Much the same here, as an after-thought to my post and what "V" just posted

I have not been able to find an "inclusion or exclusion" to an interest deduction for shareholder if purchasing the "ex-spouse" shares through a loan to do so. Only that the "incident to divorce" transaction is not taxable.

Guess that is really the question that EquineCPA asked - she pretty much knew that the the interest on a shareholder loan would be deductible.

Sandy