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Posted by Bill Lentz on February 27, 2007, 3:17 pm
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Fact Situation
C Corp redeemed 48% shareholders stock for a note. Corp was
to pay S/H interest only on the note for 5 years and then
principal and interest on the note for five years.
Corp completed the 1st 6 years of payments and then filed a
Chapter 11 bankruptcy. S/H was classified as an unsecured
creditor and was awarded an amount equal to 28 percent of
pre-petition liability, paid monthly for three years without
interest.
What is the tax nature of the payment now - just principal?
Or for tax purposes is interest imputed.
Thanks
Bill
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Posted by Harlan Lunsford on February 27, 2007, 10:30 pm
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Bill Lentz wrote:
> C Corp redeemed 48% shareholders stock for a note. Corp was
> to pay S/H interest only on the note for 5 years and then
> principal and interest on the note for five years.
>
> Corp completed the 1st 6 years of payments and then filed a
> Chapter 11 bankruptcy. S/H was classified as an unsecured
> creditor and was awarded an amount equal to 28 percent of
> pre-petition liability, paid monthly for three years without
> interest.
>
> What is the tax nature of the payment now - just principal?
> Or for tax purposes is interest imputed.
Principal only.
ChEAr$,
Harlan Lunsford, EA n LA
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Benjamin Yazersky CPA on March 1, 2007, 7:25 am
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> Fact Situation
>
> C Corp redeemed 48% shareholders stock for a note. Corp was
> to pay S/H interest only on the note for 5 years and then
> principal and interest on the note for five years.
>
> Corp completed the 1st 6 years of payments and then filed a
> Chapter 11 bankruptcy. S/H was classified as an unsecured
> creditor and was awarded an amount equal to 28 percent of
> pre-petition liability, paid monthly for three years without
> interest.
>
> What is the tax nature of the payment now - just principal?
> Or for tax purposes is interest imputed.
probably only principal
also, you may have a change in your installment sale profit %
___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Posted by Shyster1040 on March 1, 2007, 9:08 pm
Please log in for more thread options With respect to the question concerning a shareholder who
lent $ to his corporation, and who was granted a
post-petition amount equal to 28% of the pre-petition
liability, to be paid monthly for three years without
interest.
There does not appear to be an exemption from the OID rules
or the unstated interest rules for post-petition debt
recieved in payment of a pre-petition debt. Thus, for
federal tax purposes, you will either have unstated interest
under Sec. 483, or original issue discount under Secs.
1272-1275.
In addition, under Code Sec. 7872, this should be treated as
a shareholder to corporation loan (unless the corporation
was dissolved, in which case it is a loan from the
shareholder to whomever now has liability for the
post-petition debt), and, because there is no stated
interest, as a below-market loan. Thus, assuming the
corporation is still extant, you should be regarded as
having made an additional capital contribution to the
corporation in an amount equal to the net present value of
the interest that would have been paid by the corporation
over the life of the debt if the debt had borne stated
interest equal to the Applicable Federal Rate at the time
the debt was issued (there are some wrinkles to determining
that amount, so you should check with someone who knows the
rules).
This should be the correct characterization under Sec. 7872
because you were a shareholder at the time of the original
debt transaction, and thus under the principles of
Arrowsmith and the Origin of the Claim doctrine, the
character of the post-petition debt should be traced back to
the original pre-petition debt.
As a result, you will have to include in income for each
month the amount of the imputed interest the corporation is
deemed to have paid to you from out of the constructive
additional capital contribution you are deemed to have made.
Alternatively, if there is a good reason to take the
position that Sec. 7872 does not apply (I haven't
comprehensively researched the issue - I'm not getting paid,
after all - so there may be a case or a ruling that excludes
you from 7872 because the initial debt was received in
redemption of your stock), then you will have to
recharacterize a portion of each payment you receive as
interest income under either the unstated interest rules of
Sec. 483 or the OID rules of Secs. 1272-1275.
Under either scenario, the corporation will probably be
entitled to a deduction for interest paid.
In addition, if Sec. 7872 does not apply (because that
section creates imputed interest out of whole cloth, instead
of merely recharacterizing a portion of the payments
received as income), then the effect of recharacterizing a
portion of each payment as interest may be to increase the
amount of any worthless debt deduction you may be allowed to
claim because the net effect is that, instead of being paid
28% of your pre-petition debt in satisfaction thereof, you
would be treated as having received only the deemed or
unstated principal amount in satisfaction of your debt,
which would be that 28% amount, less the net present value
of the recharacterized interest payments.
For example, if the amount you received post-petition was
$280 (i.e., $1,000 pre-petition debt), and the effect of the
imputed interest rules resulted in imputed interest with a
net present value of $80, then for tax purposes you should
be treated as having received a payment of $200 ($280 less
$80 NPV of imputed interest), which would increase any
available bad debt deduction from $720 to $800.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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