On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon?

Question

Quizplus · Accepted Answer

Leon has a $3,000 capital gain because the repayment of the note exceeds his adjusted basis in the note, which was reduced to $2,000. The excess repayment of $3,000 over the $2,000 basis results in a $3,000 capital gain.

On January 1, Leon Purchased a 10% Stock Interest in an S