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Comment by mikekchar | Hacker News Reader

> The CEO won't go bankrupt.. these loans are backed by the stock as collateral.

I couldn't actually find this out through a google search. What happens if the market rate does not allow the lender to recover the principle? I thought you'd still be liable for the remainder. It's just that they can force a sale if they want to.

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This isn't an ordinary debt from a 3rd party; it's a contract with the company - they can put whatever terms and restrictions they like on that contract, including no other recourse for the debt other than proceeds of the sale of that stock, or it's forfeiture.

If the company forgives the debt, doesn't the IRS treat that as income?

Possibly, But there's a difference between a debt being written off (uncollectable) and forgiven. There's also capital gains losses that might offset potential income; the accounting for all of these cashless transactions is complex - that's what the accountants and lawyers are for :P

Allan who also responded is fairly inline with the answer to this -- except one key point: the company can write whatever they want into the contract regarding recourse, but the IRS will only recognize the loan as legit for tax purposes if it has a liability associated with it beyond the stock as collateral. This liability to the key execs will be reflected as a line item on the company balance sheet. And even if the company doesn't aggressively pursue the debt (which they can sue for), you're still on the hook to the IRS for the reason scurvy mentions below.

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