client is the sole shareholder in s corp. the s corp took out a $100,000 loan. client distributions exceed basis so he is looking at capital gains on the excess distributions. in effect his distibutions include some of the loan proceeds and the result is that they are capital gains to him. better treatment would have been for him to take out the loan personally and make a contribution to the corp of the proceeds. that would have increased his basis. in that situation how would the interest be handled? would it be deductible on Sch E as a seperate line-business interest?
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