Question 56. [LO 4] Assume the same facts as in the previous problem, except that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordina

56. [LO 4] Assume the same facts as in the previous problem, except that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. What amount is Jessica allowed to deduct in year 1? What are her stock and debt bases at the end of year 1? What are her stock and debt bases at the end of year 2?

57. [LO 4] Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $5,000. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $25,000 business loss. What amount of the loss clears the tax basis limitation, and what is James’s basis in his Birch Corp. stock and Birch Corp. debt in each of the following alternative scenarios?

a. At the beginning of the year James’s basis in his Birch Corp. stock was $45,000 and his basis in his Birch Corp. debt was $5,000.

b. At the beginning of the year, James’s basis in his Birch Corp. stock was $8,000 and his basis in his Birch Corp. debt was $5,000.

c. At the beginning of the year, James’s basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $5,000.

58. [LO4] {Research} Timo is the sole owner of Jazz Inc., an S corporation. On October 31 2014, Timo executed an unsecured demand promissory note of $15,000, and he transferred the note to Jazz (Jazz could require Timo to pay it $15,000 on demand).When Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero. On January 31, 2015, Timo paid the $15,000 to Jazz as required by the promissory note. For the taxable year ending December 31, 2014, Jazz incurred a business loss of $12,000. How much of the loss clears the stock and debt basis hurdles for deductibility?

59. [LO 4] Chandra was the sole shareholder of Pet Emporium that was originally formed as an S corporation. When Pet Emporium terminated its S election on August 31, 2013, Chandra had a stock basis and an at-risk amount of zero. Chandra also had a suspended loss from Pet Emporium of $9,000. What amount of the suspended loss is Chandra allowed to deduct, and what is her basis in her Pet Emporium stock at the end of the post-termination transition period under the following alternative scenarios (assume Pet Emporium files for an extension to file its tax returns)?

a. Chandra makes capital contributions of $7,000 on August 30, 2014, and $4,000 on September 14, 2014.

b. Chandra makes capital contributions of $5,000 on September 1, 2014, and $5,000 on September 30, 2014.

c. Chandra makes a capital contribution of $10,000 on August 31, 2014.

d. Chandra makes a capital contribution of $10,000 on October 1, 2014.

60. [LO 4] {Planning} Neil owns stock in two S corporations, Blue and Green. He actively participates in the management of Blue but maintains ownership in Green only as a passive investor. Neil has no other business investments. Both Blue and Green anticipate a loss this year, and Neil’s basis in his stock of both corporations is zero. All else equal, if Neil plans on making a capital contribution to at least one of the corporations this year, to which firm should he contribute in order to increase his chances of deducting the loss allocated to him from the entity? Why?