Discounted Note

[Karen Lee]

I handed this off to a CPA for 2007 when he sold 75% of his Sub S but HE's BACK!!!!

This client is accrual, Sub S. Closed his store front 12/31/08 and sold inventory (he still has A/R and commercial rental). I have no trouble with the selling of inventory and fixtures but I can't get past the discounted note. Here is the story:

Many years ago he bought his mother's stock and has been paying all along. Last year he gave her a lump sum to end the contract. The ending balance of course is zero however there is still over 16,000. in NP. I know to debit the balance and credit ???. Does this make a taxable situation?

That's all for now. I'm sure I'll sun into another brick wall.

Thanks for the help.

Karen

[Maribeth]

I handed this off to a CPA for 2007 when he sold 75% of his Sub S but HE's BACK!!!!

This client is accrual, Sub S. Closed his store front 12/31/08 and sold inventory (he still has A/R and commercial rental). I have no trouble with the selling of inventory and fixtures but I can't get past the discounted note. Here is the story:

Many years ago he bought his mother's stock and has been paying all along. Last year he gave her a lump sum to end the contract. The ending balance of course is zero however there is still over 16,000. in NP. I know to debit the balance and credit ???. Does this make a taxable situation?

That's all for now. I'm sure I'll sun into another brick wall.

Thanks for the help.

Karen

Do you know what the original entry, to record the purchase of the mother's stock, was? I would assume that it was something like a credit to notes payable and a debit to treasury stock. So the discounting of the contract would provide a credit to treasury stock?

Maribeth

[RoyDaleOne]

Generally, the satisfaction of a note payable at less than the amount due results in income.

In this case there may be a gift. Check on the facts.

[Karen Lee]

Maribeth, that is what I keep coming up with and I keep thinking there is a taxable event hapening as well.

RoyDaleOne, all of this is within an S corp so I am confused as how to handle a gift.

I need to book the transaction and also do the tax return so I need to get rid of my confusion. I'll check my old accounting textbooks to book it.

Thanks, maybe I can get some more opinions.

Karen

[RoyDaleOne]

The Mother could have forgiven the debt. dr debt cr capital (APIC).

If the debt was canceled or satisfied for less than face. Cr Income Dr debt.

If the original sales price was renegotiated, dr debt cr treasury stock (maybe). Maribeth covered this option.

The debit is to the debt, now where does that prissy credit go? lol

Check the facts.

[Karen Lee]

Thanks for the 2x4 over the head. You are right about the prissy credit and I get it now. Mother did forgive balance. Thank you Thank you. Just couldn't put gift and corp together. I couldn't get gift to come into the situation.

Thanks again

Karen

[Maribeth]

The Mother could have forgiven the debt. dr debt cr capital (APIC).

If the debt was canceled or satisfied for less than face. Cr Income Dr debt.

If the original sales price was renegotiated, dr debt cr treasury stock (maybe). Maribeth covered this option.

The debit is to the debt, now where does that prissy credit go? lol

Check the facts.

I still think that you need to find out what the original transaction was.

If the mother sold her stock back to the S corp, then the entry would have been cr n/p, dr treasury stock (or some other equity account). Now the mother forgives part of the debt. The entry then is dr n/p, cr treasury stock. No income recognized.

You have to find out how the note payable got recorded on the books.

If the son purchased the stock from the mother, and used proceeds from the corporation to do so, then the note could have been booked by the cash he took out and it never, ever was a real note to the mother. It was a note to the son. In that case, the son still owes the money.

Again, you have to find out what the original transaction was.

And in this stock transaction, I am still not seeing any income. I see a basis reduction on one side and a reduction in sales price on the mother's side.

Maribeth

[RoyDaleOne]

True Maribeth, except you don't know the facts surrounding the cancellation of the debt.

Or did I miss something?

I am sure this was documented in writing so the IRS would understand what is happening.