Breaking Up is Hard to Do
There used to be a joke that there are three ways to get out of a burned-out tax shelter. The first was to put the interest into a defective grantor trust and then cure the defect. It was a really neat idea. It doesn’t actually work, but it was clever. Then there was dying. Pretty drastic, but it worked (until this year anyway). Finally, there is giving it to your spouse and getting a divorce. Still works.
The Magic of S Corporations – Tax Alchemy in Reverse
There are two observations to be made here. The first is that it is possible that LLC’s would have better served their purposes. The unified basis of partnership interests would likely have prevented this odd result. The other is that just a little bit of paperwork might have also saved the day. If the S corporation loans had had written evidence of indebtedness then the repayment would have been a capital gain.
Follow Me
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.