Bobby loaned $500,000 to a corporation of which he is the sole shareholder. The corporation signed a valid note for the loan and the interest rate is 10% and is reasonable. The corporation has made principal and interest payments to Bob each year according to the terms of the note. The IRS is threatening to recharacterize the loan as a contribution to capital. Discuss the tax consequences to both Bobby and the corporation if:

(1) the payments are correctly characterized as principal and interest

(2) the IRS is successful in recharacterizing the loan as capital.