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Perhaps a case could be made but I think it is very unlikely at this point. Basically, the taxpayer would have needed to loan the corporation the TFRP funds. The loan would have needed to be memorialized via a loan agreement and fully executed (signed and dated). Then the corporation could basically memorialize that it is not going to pay back the loan. At that point the taxpayer would have to issue a cancellation of indebtedness income 1099 (Form 1099C) to the corporation. The corporation would then record income to the extent of the cancelled debt and the taxpayer would recognize an ordinary bad debt expense. Note that if the loan was in excess of 10K then the imputed interest rules and apply and the corporation would have had to record interest expense on the loan and the taxpayer would have recognized interest income. (Whether or not the cash was actually paid or received) If the loan was in excess of 10K and the imputed interest was not recorded then this would support the fact that a loan never existed and thus this position futile.
I think that you should have enough records for the 1244 deduction in 2010. The TFRP payment by the taxpayer should have been recorded by the corporation as additional paid in capital giving the taxpayer additional basis in the shares. If this did not happen then this is most likely why the IRS is requesting documentation. Basically the taxpayer needs to provide corporate records of the taxpayers basis in the stock.
Please let me know if you have any further questions.