Assume the same facts as in Problem 40, except that Jeff’s share of corporate taxable income is only $8,000 and there is no cash distribution. However, the corporation repays the $10,000 loan principal to Jeff. Discuss the tax effects. Assume that there was no corporate note (i.e., only an account payable). Does this change your answer? Explain.

Data From Problem 40:

Jeff, a 52% owner of an S corporation, has a stock basis of zero at the beginning of the year. Jeff’s basis in a $10,000 loan made to the corporation and evidenced by a corporate note has been reduced to zero by pass-through losses. During the year, his net share of the corporate taxable income is $11,000. At the end of the year, Jeff receives a $15,000 cash distribution. Discuss the tax effects of the distribution.