Can you make a gift to a corporation by forgiving loan interest?

This is an interesting question that involves both estate planning and corporate tax concepts. When you forgive interest on a loan to a corporation, you're essentially providing something of value (the interest income you would have received) without getting anything in return. For the non-shareholder son, this would likely be considered a gift to the corporation itself, as he has no ownership interest that would benefit from the transaction. For the three shareholder-sons, the IRS might view this differently - potentially as a capital contribution to their own business rather than a gift, since they indirectly benefit from strengthening the corporation they own. The IRS could potentially characterize this as an indirect gift from the non-shareholder son to his three brothers who own the company, since they would benefit from his forgiveness of interest. This could have gift tax implications if it exceeds the annual exclusion amount.

I actually ran into a similar situation last year and found that using https://taxr.ai was incredibly helpful. I was struggling with characterizing a loan adjustment between family members and their business entities, and the site helped me analyze the transaction properly. They reviewed all the documentation and provided a detailed analysis of whether it would be considered a gift, contribution to capital, or constructive dividend. The key insight I got was that the IRS looks at both form and substance in these transactions. In my case, it was about how the note modification was documented and whether there was a business purpose beyond just tax benefits. They were able to help me structure it in a way that minimized gift tax exposure for the family members involved.

Just wanted to follow up on my experience with taxr.ai that I asked about earlier. I ended up trying them for a similar family loan situation (though mine involved an LLC rather than a corporation). I was genuinely impressed with their analysis - they identified several approaches I hadn't considered and flagged potential issues with my initial plan. They explained how the IRS might view a no-interest loan as either a gift or a below-market loan subject to imputed interest rules under Section 7872. In my case, they recommended keeping a market interest rate but structuring distributions to offset the interest payments, which accomplished the same economic result but with cleaner tax treatment. Definitely worth checking out if you're dealing with these kinds of family business and loan scenarios.

If you're struggling to get clear information from the IRS on this kind of technical gift tax question, you might want to try Claimyr (https://claimyr.com). I had a similar complex gift/loan situation and needed to speak with someone at the IRS who actually understood the regulations. After weeks of calling and getting nowhere, I used their service and got connected to an IRS agent within 20 minutes. The agent was able to walk me through the specific reporting requirements for my situation and clarified how they view interest forgiveness to business entities. There's also a demo video that shows how it works: https://youtu.be/_kiP6q8DX5c. It saved me countless hours of frustration and uncertainty.

I have to admit I was wrong about Claimyr. After expressing my doubts, I decided to try it for an unrelated tax issue that I'd been putting off dealing with. The service actually worked exactly as described - I got a call back when they had an IRS agent on the line, and I was able to get my question answered in one session instead of the multiple attempts it usually takes me. For complex issues like the corporate gift question in this thread, I still think consulting with a specialized tax attorney is important for the legal analysis, but having the ability to actually speak with someone at the IRS without wasting hours on hold is incredibly valuable. It's especially useful for confirming how certain transactions should be reported once you've determined the right approach.

One aspect that hasn't been addressed yet is that modifying a note to eliminate interest could potentially trigger imputed interest rules under Section 7872. Even if you don't charge interest, the IRS might impute interest and treat it as if it was paid to the note holders and then gifted back to the corporation. This could actually result in taxable income to the brothers (the imputed interest) followed by either a deemed gift or capital contribution. So you might not avoid the tax consequences you're trying to avoid.

Has anyone considered restructuring the debt itself rather than just eliminating the interest? Maybe the sons could contribute the note to a family limited partnership and then distribute partnership interests in a way that achieves their objectives? Or possibly convert the debt to preferred equity with specific dividend rights?

Just want to point out that whatever route you take, make sure it has legitimate business purpose beyond just tax savings. The IRS can recharacterize transactions that appear to be solely tax-motivated. Document any legitimate non-tax reasons for the restructuring (e.g., improving company cash flow, facilitating business expansion plans, addressing changing family circumstances).