Larry owns 10% of the shares of Alpha Corporation, a subchapter S corporation. L

Question

Larry owns 10% of the shares of Alpha Corporation, a subchapter S corporation. Larry also made a $10,000 loan to the corporation. At the beginning of the current year, Larry’s basis in his shares is zero and his basis in the loan receivable is 5,000. On January 1 of the current year, the Alpha Corporation repaid the loan from Larry in full (10,000). What are the consequences to Larry?

There are no income tax consequences to larry because this is a loan repayment.

Larry should report a 5,000 ordinary income gain on the repayment.

Larry should report a $5,000 capital gain on the repayment.

Larry should report a $5,000 ordinary loss on the loan.

There are no income tax consequences to larry because this is a loan repayment.

Larry should report a 5,000 ordinary income gain on the repayment.

Larry should report a $5,000 capital gain on the repayment.

Larry should report a $5,000 ordinary loss on the loan.

Explanation / Answer

Anwer would be Option A

However, it is an objectionable point because whether advance given was a loan or capital contribution depends on many factors as laid down in Scott Singer Installations, Inc., TC Memo 2016-161

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