The first attachment is the question and the second attachment is the answer. Please structure or format the answers for better presentation. Answer any additional questions that has to do with yes or no, facts, issues, analysis and then conclusion.

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One of your wealthy clients, Cecile, invests $100,000 for sole ownership of an electing S corporation's stock. The corporation is in the process of developing a new food product. Cecile anticipates that the new business will need approximately $200,000 in capital (other than trade payables) during the first two years of its operations before it starts to earn a sufficient profits to pay a return on the shareholder's investment. The first $100,000 of this total is to come from Cecile's contributed capital. The remaining $100,000 of funds will come from one of the following three sources: 1. Have the corporation borrow the $100,000 from a local bank. Cecile is required to act as a guarantor for the loan. 2. Have the corporation borrow $100,000 from the estate of Cecile's late husband. Cecile is the sole beneficiary of the estate. 3. Have Cecile lend $100,000 to the corporation from her personal funds. The S corporation will pay interest at a rate acceptable to the IRS. During the first two years of operations, the corporation anticipates losing $125,000 before it begins to earn a profit. Your tax manager has asked you to evaluate the tax ramifications of each of the three financing alternatives. Prepare a memorandum (citing applicable sources, such as the IRC) outlining the information you found in your research. Additional Requirements Min Words: 1 Max Words: 1000 Min Pages: 1 Max Pages: 5 Level of Detail: Show all work Other Requirements: I need a detailed analysis of all three options and which option would be the best one, thank you. Ans: Following are the tax consequences for the financing: (1) If corporation borrows $100,000 with the personal guarantee of Cecile, then the interest amount paid on the borrowed funds may be claimed as Tax Deductions and tax computations would need to be filed by Cecile being he is sole shareholder of the entire entity. (2) If corporation borrow $100,000 from the estate of Cecile's late husband for which Cecile is the sole beneficiary of the estate, there won't be any interest deductions being claimed as this not claimable under the ambits of tax. (3) If Cecile lend to corporation from her personal funds, there won't be any tax advantages and it cannot be claimed as well. Hence corporation borrowing from bank is the best option among all the three given options in order to avail tax benefits. References http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/business-losses-can-generate-lossdeductions.aspx http://www.irs.gov/pub/irs-pdf/i1120s.pdf C:11-67 Section 1366(d)(1) limits the deduction for losses passed through to an S corporation shareholder to the sum of the shareholder's adjusted basis for the S corporation stock at the end of the tax year plus the shareholder's adjusted basis for any indebtedness of the S corporation to the shareholder (determined without any positive or negative adjustment to the debt basis for the tax year). Cecil will take a $100,000 basis for the stock by investing $100,000 in the corporation. Whether Cecil's loss limitation is increased above $100,000 depends on the method used to affect the borrowing. The first alternative--having the corporation borrow the funds with the shareholder acting as guarantor--usually does not increase the shareholder's basis for the debt. In general, a shareholder's guarantee of a loan does not increase his or her loss limitation [Milton T. Raynor, 50 T.C. 762 (1968)]. The basis increase occurs only when the shareholder is called on to honor the guarantee (Rev. Ruls. 70-50, 1970-1 C.B. 178 and 75-144, 1975-1 C.B. 277). Generally, a loan guarantee is permitted to increase the shareholder's loss limitation only when he or she is the primary obligor on the debt obligation. See Edward M. Selfe v. U.S., 57 AFTR 2d 86-464, 86-1 USTC 9115 (11th Cir., 1985). See also the Fourth Circuit Court of Appeals decision that denied a basis increase in Estate of Daniel Leavitt v. CIR, 63 AFTR 2d 89-1437, 89-1 USTC 9332 (4th Cir., 1989). The Leavitt decision has been followed in a number of subsequent judicial decisions dealing with guarantees of debt by an S corporation shareholder. The second alternative--having the corporation borrow the funds from the estate of the shareholder's late husband--does not increase the shareholder's basis for the debt because the corporation is obligated to the estate instead of the shareholder who is the beneficiary of the estate [Ruth M. Prashker, 59 T.C. 172 (1972)]. The third alternative--have the shareholder lend the funds from her personal funds--will increase Cecil's loss limitation. Cecil can accomplish the same effect by borrowing the funds from a bank, lending the funds to the corporation in exchange for a note, and pledging the note to the bank as security for the loan. This sequence avoids the problem with the guarantee not providing a basis increase that was outlined above. Even if the losses are deductible under the general Sec. 1366(d)(1) limitation, the losses may be subject to the at-risk or the passive activity limitation rules. Such limitations, when calculated at the shareholder level, may suspend the losses until a later year when the shareholder again has an amount at-risk, has earned passive income, or disposes of his or her investment