Roxanne Jones, owner of Hummingbird Corporation met with me today. She has some concerns regarding a recent downturn in business. Because of this downturn, she needs to come up with an additional $80,000. This money is necessary to assist with her short-term cash-flow needs which include purchasing inventory, making payroll, and paying administrative expenses.

Here is some information about the structure of her business:

She is currently the sole owner of the corporation. The basis and value of her stock investment in Hummingbird are approximately $100,000. Further, this is her full-time job and her annual salary from the business is $40,000.

In my meeting with her, Roxanne believes that she can make the transfer in one of three ways:

1. A capital contribution;
2. A loan made to protect her stock investment; or
3. As a loan intended to protect her job.

Issues to evaluate:

I have reached out to you to determine, from a tax perspective, which alternative would be preferable in the event that Hummingbird’s economic side worsens and bankruptcy results.

Deliverables:

Your primary deliverables will be:

1. A Memo to the File will include a summary of the facts, the issue(s) at hand, the primary authority, and an analysis of the outcome of each possible type of transfer.
2. A Letter to our client, Roxanne Jones indicating the consequences of each classification (1 -3 above)(i.e. the character of the loss ordinary or capital); and what she would need to substantiate in order for the transfer to be considered such.