NPVAdvisor : Hi
NPVAdvisor : Since stock basis has to be reduced to zero before debt basis is available, any distributions in excess of stock basis would be includible in the shareholder’s income as capital gains.
NPVAdvisor : As the corporation repays the debt, the debt basis decreases.
NPVAdvisor : If flow-through losses have depleted stock basis, subsequent basis increases first must restore debt basis.
NPVAdvisor : Nake sense?
NPVAdvisor : Now, in terms of whether it's capitl gain or income?
NPVAdvisor : THAT depends on the nature of the loans in their hands. IRC section 1271(a)(1) provides that retirement of debt instruments are exchanges. Thus, if a loan is evidenced by a note, the income portion of the repayment is considered capital because the note is considered capital in the shareholder’s hands. If the loan is an “open account,” or a loan not evidenced by a note, the income portion of the repayment is ordinary income.
NPVAdvisor : I still don't see you coming into the chat ... Sometimes it helps if I move us to the Q&A" mode ... we can still continue a dialogue there, just not in real-time as we can here
NPVAdvisor : Let me know if you have further questions
NPVAdvisor : If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better. That's the only way they will pay us here
NPVAdvisor : BUt again, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question
NPVAdvisor : Thanks
NPVAdvisor : Lane