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Jeff, a 52% owner of an S corporation has a stock basis of zero at the beginning of the year. Jeff's basis in a $10,000 loan made to the corporation and evidenced by a corporate note has been reduced to zero by pass-through losses. During the year, Jeff's share of taxable income is $8,000 and there are no distributions. However, the corporation repays the $10,000 loan principal to Jeff. Discuss the tax effects. Additionally, assume that there was no corporate note (i.e. only an account payable). Does this change your answer? describe.

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