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Q:9 Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago...

Q:9 Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is Vice-President of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Does Amy have a nonbusiness bad debt deduction this year of $25,000 or is it a business bad debt deduction?   Please explain.

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Answer #1

In this case Amy will have a business bad debt deduction.

This is because Amy is a minority shareholder and hence there will be a compulsion to loan Wren Corporation the amount of $25,000 to safeguard her job.

Moreover her stock investment is stock investment is quite low when compared to her salary.

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