BONUS QUESTION 1

A shareholder made a loan of 1,000 to a corporation in which she owned 50% of the stock. The loan is evidenced by a promissory note with the word LOAN printed at the top. The loan has a market interest rate and has fixed repayment terms not dependent on the corporations profitability.

Consider the following additional facts:

A. The loan is subordinated to the claims of other non-shareholder creditors.

B. Including the loan, the corporation has a low debt/equity ratio relative to other companies in its industry.

C. Before the shareholder made the loan, the corporation applied for a 1,000 loan to a bank and was denied due to lack of creditworthiness.

D. The loan entitles the shareholder the right to approve any transaction more than 25% of the loan balance.

E. No other shareholder made a loan to the corporation.

Do you think the loan is likely to be treated as debt or equity by the IRS? Explain your answer.