Jeffrey owns 100% of HR Company. In 20x1, he lent the firm $70,000. In 20x3, he cancelled the debt. The results of this debt cancellation are:

1. HR Company recognizes a $70,000 gain; no effect to Jeffrey
2. HR Company recognizes a $70,000 gain; Jeffrey has a $70,000 bad debt
3. HR company has no income; no effect to Jeffrey
4. HR Company has no income; Jeffrey has a $70,000 bad debt
5. HR Company has no income; Jeffrey increases his basis in HR Company stock