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If the business is the debtor and the owner is the creditor, the transfer can be a distribution, liquidation, or reorganization.

The other type of transfer is from the creditor to the debtor.

S corporation treatment is discussed in Part II of this article.(8) The fact that the shareholder is treated as receiving the installment note for stock bars use of Sec. 453(h)(2) provides that a shareholder who receives liquidating distributions in more than one tax year must, on the liquidation's end, reallocate stock basis among all properties received; this requires (when necessary) amended returns for all appropriate tax years. See TD 8762 (1/27/98).(14) Generally, a taxpayer receiving payments under a contingent-price installment note recovers basis in accordance with the maximum amount receivable (if applicable). Such gain or loss is deemed to result from the sale or exchange of the property for which the note was received; see Sec.

453(h) by shareholders of publicly traded corporations; see Sec. These liabilities do not reduce the amounts received in computing the selling price.(12) A shareholder must take into account distributions and other relevant events or information that he knows (or reasonably could know) up to the date he files his Federal income tax return; see Regs. In the absence of a stated maximum selling price, basis would be recovered in equal annual portions over the fixed payment period (if one exists), over 15 years if there is no such period or under other methods in certain cases. 453B(a)(2), flush language.(17) K's election out of the installment method does not affect its shareholder's right to use Sec. 336(d) limits a liquidating corporation's recognized loss on certain distributions (1) to related persons and (2) of property acquired in certain carryover-basis transactions; see Sec. RELATED ARTICLE: EXECUTIVE SUMMARY* A taxpayer recognizes income or gain on a liquidation as installment payments are received, using the GPR.* Sec.

Many owners prefer to capitalize their closely held business with a combination of equity and debt.

Once again, these loans will be respected and not reclassified as equity if they are bona fide loans.

he frequent transfer of cash between closely held businesses and their owners is very common. As long as the true substance of the transaction is a loan, it will be respected for tax purposes.

If the owner works in the business, the transfer is likely to be either a salary to a shareholder/employee or a Sec. The cash flow is not exclusively from the businesses to the owner.

453(a)(2) was repealed by the Ticket to Work and Work Incentives Improvement Act of 1999, Section 536(a)(1) and reinstated by Section 2(a) of the Installment Tax Correction Act of 2000; see Bruce, Tax Clinic, "Congress Reinstates Installment Method for Accrual-Basis Taxpayers," 32 The Tax Adviser 151 (March 2001).(2) Sec. 15A.453-1(b)(2)(iii) and (iv) in determining gross profit attributable to the disposition.(5) General Utilities & Operating Co., 296 US 200 (1935), repealed by Tax Reform Act of 1986 Sections 631-633.(6) As opposed to a stock sale, a sale of a C corporation's assets may be beneficial when the buyer (1) is unwilling to acquire the entity due to contingent liabilities, (2) seeks a cost basis in the assets or (3) does not want to continue to operate the business in the corporate form. 1.453-11(b) defines a "qualifying shareholder" as a shareholder to which, as to the liquidating distribution, Sec. Thus, a creditor receiving an otherwise eligible installment note in exchange for a claim against the corporation does not qualify for the installment method under Sec. (11) Thus, if the property distributed in Example 5 were subject to ,000 of debt, J's stock basis would increase to 0,000 and her gain would decrease to 0,000. 453(h) computations are performed after adding such liabilities to the shareholder's adjusted stock basis. T recognizes interest as ordinary income as received. The contract price is calculated by subtracting from the selling price the debt not in excess of such basis. Demand notes, notes secured by cash (or cash equivalents) and readily tradable corporate or governmental obligations (Temp. However, in some instances, a C or S corporation may be sold in an actual or Sec. Example 4: The facts are the same as in Example 3, except that K pays its creditors and sells its remaining assets for 0,000 and a 0,000 installment note. Alternatively, J could opt to recalculate her entire gain for the liquidation and file amended returns; in such case, her gross profit, contract price and GPR would be 0,000, 0,000, and 80.952% (0,000/0,000), respectively. 1.453-11(d) does not explicitly address cases in which reasonable estimates are not possible or the amount to be received under the installment note is uncertain. 15A.453-1(b) (2)(v) as the selling price, (3) less the sum of the property's adjusted basis and selling expenses. T's 2002 recognized gain is ,143 (85.714% x ,000); in 2003-2007, it is ,571 (85.714% x ,000) per year. 15A.453-1(b)(3)(i), if the property transferred is secured by debt (whether assumed or taken subject to by the buyer) exceeding the seller's basis in the property, the excess would be additional payment received in the sale year. With the 1986 repeal of the General Utilities (5) doctrine, a stock sale is generally more advantageous for a C corporation; the selling shareholders may qualify to use the installment method. 453(h) enables shareholders to use the installment method on the receipt of notes or other debt in a subsequent actual or deemed liquidation. 331 liquidation can treat the receipt of payments (rather than receipt of the note) as payment for the stock. (8)Accordingly, the shareholder reports gain on the liquidation under the installment method as distributions (cash and property) are received currently and as payments are received in the future. If so, her remaining gain to be reported is 5,294 (0,000-0,000-4,706). Thus, J recognizes 0,452 gain attributable to the 0,000 cash received in 2003, and will recognize 4,842 (0,000 x 80.301%) under the installment method as payments are received; her total gain recognition is 0,000.

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