Your input (no interest installment agreement)

[ILLMAS]

Lets say XY sold his business to XX for $100K, in the sales contract there is no talk about interest just principal payments. I have heard from many people and from an actual IRS agent that the IRS frowns when a shareholder borrows money from his corporation and pays no interest back, so using the IRS approach, I wanted to get someone else's opinion on this. I have never seen an installment agreement without interest, but there is always a first, I just want to inform XY and XX of the consequences.

Thanks

MAS

[Gail in Virginia]

The term is "imputed" interest and not only the IRS but GAAP insist on it.

[Mr. Pencil]

I wanted to get someone else's opinion on this.

You can get the IRS opinion in Pub 537. For the seller, "you must reduce the stated selling price of the property and increase your interest income by this unstated interest." For the buyer, it's a basis adjustment. The same pub explains that the sale of a business must be allocated among the individual assets, which may not be eligible for installment treatment.

[ILLMAS]

That is the magic word thanks and thank you Mr. Pencil too.

MAS

[TAXMAN]

I have seen some of these on relative to relative land sales. Anyone know what may be the cheapest interest rate they could charge to avoid the imputed or unstated interest. Most what I have seen has been 5 year contracts.

[kcjenkins]

If an installment contract does not provide for adequate stated interest, the amount of interest to be reported for a taxable year will be determined under the provisions of the Code dealing with imputed interest or original issue discount. That is section 7872(g) of the Code,

http://www.irs.gov/pub/irs-drop/rr-99-49.pdf

http://www.law.cornell.edu/uscode/text/26/7872

(e) Definitions of below-market loan and forgone interest
For purposes of this section—
(1) Below-market loan
The term “below-market loan” means any loan if—
(A) in the case of a demand loan, interest is payable on the loan at a rate less than the applicable Federal rate, or
( in the case of a term loan, the amount loaned exceeds the present value of all payments due under the loan.

(2) Applicable Federal rate
(A) Term loans
In the case of any term loan, the applicable Federal rate shall be the applicable Federal rate in effect under section 1274 (d) (as of the day on which the loan was made), compounded semiannually.

http://www.law.cornell.edu/search/site/section%201274%20%28d%29

Every tax professional should really bookmark this link, so you can quickly find the rate for any date.

http://apps.irs.gov/app/picklist/list/federalRates.html

[TAXMAN]

Thanks KC I was headed there. Thought somebody might have a rate that IRS wouldn't look at as long as it was stated in the contract and sales price reduced accordingly.

[ILLMAS]

Thanks KC, I will visit the website from the comfort of my office tomorrow..