Posted by JHyre in Ohio on May 15, 2000 at 21:38:29:
S-Corp buys MH for $2500 and immediately sells it for $1500 down and $7000 note. Has ordinary gain of $6000 and basis in note of $7000. Now sell note to UNRELATED party for $4500…for an ordinary loss of $2500. Distribute $4500 to shareholders, contribute to LLC and buy $7000 note from unrelated party. Net effect: $4500 ordinary gain and capital asset held for investment(note) with basis of $4500.
Compare if use S-corp to create and hold notes, net effect is $6000 ordinary gain and asset- maybe capital, maybe not- with a basis of $7000.
This technique is in the “grey area”- it is not “black-letter” law. I am confidnet that I could argue it with IRS and either win or get a very favorable settlement. The business purpose is to diversify the notes.