Bob Dobalina is the only shareholder in Dobalina Manufacturing, Inc. (“DMI”). Bob’s basis in his DMI shares is $100,000 and he estimates the value of the shares is $250,000.

In addition to being the sole shareholder, Bob is also a full-time employee at DMI and pays himself an annual salary of $75,000.  Following the loss of an important DMI customer, Bob believes he needs to contribute another $50,000-$80,000 into DMI to fill some anticipated cash-flow problems that will effect his business operations.

If DMI loses any more customers, it is possible that Bob may be faced with shutting down DMI permanently. Mr. Dobablina is curious as to what the best structure (from a tax standpoint) his $50,000-$80,000 infusion of cash:  (a) capital contribution, (b) loan to protect his ownership interest, or (c) loan to protect his employment position.  

Please provide a written memorandum that discusses the tax consequences of the three structures Bob is considering. Some primary authorities you may find useful in preparing your memorandum, include sections 165(b) and (g) and 351, Treasury Regulation 1.165-5 and Graves v. Commissioner, TC Memo 2004-140.