Shareholder Loans: Courts Examine 8 Factors

In determining if a payment to a shareholder is proceeds from a tax-free loan from a corporation to a shareholder or a tax-free repayment of a loan from the shareholder to the corporation (as opposed to a potentially taxable corporate distribution to the shareholder), courts look at whether:

1. There’s a written promise to repay evidenced by a note or other document.

2. There’s a stated principal repayment schedule or balloon repayment date.

3. Principal payments are actually made on time.

4. Stated interest is charged.

5. Interest is actually paid on time.

6. There’s adequate security for the purported loan.

7. The borrower has a reasonable prospect of being able to repay the loan.

8. The parties conduct themselves as if the transaction is a loan (for example, by shareholders showing loans they purportedly owe to their corporations as liabilities on personal balance sheets).