A written loan agreement is a good way to register a loan and clearly describe each party`s obligations in the contract as well as all other conditions. Nariman Teymourian, CEO and Chairman of capsian Corporation, held 60% of the software development company`s shares. Although he did not execute a formal loan contract, in 1999 he used approximately $643,000 of the company`s money to purchase a home and received an additional $927,000 in 2000. The company listed both amounts as balance sheet receivables. In 2000, Teymourian repaid $448,000 of its debt to the company, and Capsian declared $48,000 of that amount as interest. During the 1999 and 2000 tax years, the company did not pay dividends or declared any dividends. The IRS considered the funds received to be a dividend and assessed Teymourian as a gap for 1999 and 2000. He asked the Finance Court for discharge. The court reviews the entire transaction to determine whether it is a loan; No factor is conclusive.
To determine whether both parties wished to treat the transaction as a loan, the court examines the borrower`s ability to repay the loan, the amount of interest, whether there is a note describing the repayment plan and the loan guarantees, and whether the borrower has made repayments. The investor is the initial amount of the loan paid by the shareholder (or „shareholder“) to the company at the time of the loan, before interest is in place. Once the company has begun to repay the loan, the amount of capital relates to the amount that still goes to the shareholder (or „shareholder“) at a given time. Result. For the taxpayer. The court considered the factors that distinguish a real credit from a disguised dividend. Three factors indicated that, in this case, the transfer was a dividend: the absence of a formal loan contract, a specific repayment plan and guarantees for the loan. During the period during which the loan was granted, both parties pretended to be a loan.
Teymourian paid interest to the company ($48,000) and repaid a substantial portion ($400,000) of the principal, and there was a good prospect that he would repay the entire loan. 1. The shareholder agrees to lend the company an amount (the „loan“) and the company promises to repay that principal at the address of the writing, paying interest-rate interest to [insert interest rate] per year that are not calculated in advance each year.