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 $9,250. 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 $31,000 business loss.
At the beginning of the year, James's basis in his Birch Corp. stock was $9,100 and his basis in his Birch Corp. debt was $9,250.