My business partner and I have owned an S-Corp for two years. my partner withdrew about $70,000 during that time, of which only about $25,000 was reported as salary. Last year $21,126 of the difference was reported on our 1120 as a "Loans to Shareholder". During 2008 his Loan has increased to $45,000. The only basis remaining in the company is $5,000 of shares (2,500.00 x 2 ...his and mine) I bought my partner's shares last month. Consideration for the shares was "$1.00 plus the waiving of all obligations loans, etc".

It seems to me that since the waiving of the $45,000 Loan to SH was consideration for the sale of shares that should be considered part of the sale price of the shares for tax purposes. His basis in the shares was $2,500, so his Capital Gain is $42,501. No Social Security or Medicare obligation on the part of the S corp or my former partner or myself... correct?