Tom and Vicki are married and file a joint income tax return. They each purchase 50% of the stock in Guest Corporation from Al for $75,000. Tom is employed full-time by Guest and earns $100,000 in annual salary. Because of Guest’s financial difficulties, Tom and Vicki each lend Guest an additional $25,000. The $25,000 is secured by bonds and is repayable in five years, with interest accruing at the prevailing market rate. Guest’s financial difficulties escalate, and it eventually declares bankruptcy. Tom and Vicki receive nothing for their Guest stock or Guest bonds.
a. What are the amount and character of each shareholder’s loss on the worthless stock and bonds?
b. How would your answer to Part a change if the liability were not secured by bonds?
c. How would your answer to Part a change if Tom and Vicki had purchased their stock for $75,000 each at the time Guest was formed?