S Corp distributions, share release and 415

[Guest tmills]

S Corporation distributions on allocated and unallocated shares can be used to make loan repayments. Because they are earnings and not contributions, they are not subject to the requirements of 404 or 415. However, are the shares released by using such distributions to make loan payments subject to 415? If not, and the company makes a contribution in addition to using earnings to make the loan payment, then are the shares released tracked by the source of the funding and only those released as a result of the contribution would be subject to 415? Seems like quite a loophole. Thanks for any responses.

[stephen]

You are correct about the increased contribution amount achieved by using dividends to make debt repayment. The service has said on many occiasions that the dividend must be reasonable. As long as the dividend is reasonable it can be used to pay down the debt and release shares.

The shares released by the debt payment are not subject to 415. Earnings does not count as an annual addition. The shares released by the dividend are usually shown as dividends thus separate tracking is not required.