Birch Corporatio
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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I
![Required information
[The following information applies to the questions displayed below.]
Birch Corporation, 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 Corporation in the
amount of $7,050. Birch Corporation 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 $34,300 business loss.
What amount of the loss clears the tax-basis limitation, and what is James's basis in his Birch Corporation stock and
Birch Corporation debt in each of the following alternative scenarios?
Note: Leave no answer blank. Enter zero if applicable.
b. At the beginning of the year, James's basis in his Birch Corporation stock was $9,650 and his basis in his Birch Corporation debt
was $7,050.
Amount of loss clearing tax basis limitation
Basis in stock
Basis in debt](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F89472806-72bf-4284-995a-7ed59f46cc3b%2F4dbde417-2aa5-4f20-ba23-9c903990a3a9%2F7wts2zg_processed.png&w=3840&q=75)
Transcribed Image Text:Required information
[The following information applies to the questions displayed below.]
Birch Corporation, 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 Corporation in the
amount of $7,050. Birch Corporation 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 $34,300 business loss.
What amount of the loss clears the tax-basis limitation, and what is James's basis in his Birch Corporation stock and
Birch Corporation debt in each of the following alternative scenarios?
Note: Leave no answer blank. Enter zero if applicable.
b. At the beginning of the year, James's basis in his Birch Corporation stock was $9,650 and his basis in his Birch Corporation debt
was $7,050.
Amount of loss clearing tax basis limitation
Basis in stock
Basis in debt
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