Letter 2.docx - CLIENT LETTER T&G CPAs 1200 Interlaken...

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CLIENT LETTER T&G, CPAs 1200 Interlaken Boulevard Illinois - 45040 September 09, 2017 Mr. Steve Ferguson, President Jaybird Corporation, 555 Industry Lane, Pueblo, CO 81001 Dear Mr. Ferguson: This letter is in response to your questions concerning the tax treatment of loan from the three shareholders of Jaybird Corporation amounting $300,000 each. Jaybird Corporation needs additional capital amounting $900,000 for building construction. Vera, Wade and Wes who are the equal shareholders, proposed to lend $300,000 each in return of $300,000 four-year note with interest payable annually at two points below the prime rate. Current taxable income of Jaybird Corporation is $2 million. Our conclusion is based on these facts outlined in your letter dated September 5 th . Any changes in facts may cause our conclusion to be inaccurate. Jaybird Corporation’s shareholder loan arrangement poses ‘Thin Capitalization’ problem. In situations where the corporation is said to be thinly capitalized, IRS contends that debt is an equity interest and denies the corporation tax advantages of debt financing. Since this debt instrument has too many
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