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When transactions are intended to be loans, the objective factors in the right-hand box must be considered and respected. Otherwise, the IRS can re-characterize the transactions in ways that have negative tax consequences for shareholders, their corporations, or both. Consult with your tax advisor for guidance in your situation. Shareholder Loans: Courts Examine 8 Factors In determining if a payment to a shareholder is proceeds from a tax-free loan from a corporation to a shareholder or a tax-free repayment of a loan from the shareholder to the corporation (as opposed to a potentially taxable corporate distribution to the shareholder), courts look at whether: 1. After the distributing corporation’s E&P is exhausted, subsequent distributions reduce each shareholder’s basis in his or her stock.In other words, distributions up to basis are treated as tax-free returns of shareholder capital.
If money is left after paying bondholders, stockholders are paid a portion of the money.Corporate distributions of cash or property are classified as taxable dividends to the extent of the corporation’s current or accumulated earnings and profits, which is a tax accounting concept that is somewhat similar to the financial accounting concept of retained earnings.Dividends may be formally declared or they may be constructive.Credit unions send this sort of distribution to their depositors when they are liquidated as well. When he receives his payment of , it does not cover his original cost basis in the stock, so Ernie has a loss of .