Final answer:
When a corporation cancels a loan to a shareholder, the forgiven amount is typically taxable as income to the shareholder, since it is considered a financial benefit. In certain circumstances, it may also be seen as a capital contribution, depending on the nature of the transaction.
Step-by-step explanation:
If a corporation loans money to a shareholder and later cancels the loan, the amount forgiven is generally taxable as income to the shareholder. This is because the Internal Revenue Service (IRS) typically treats the cancellation of debt as income since the borrower gains financial benefit from not having to repay the loan. Therefore, the correct answer to the question is C. It is taxable as income to the shareholder.
It could also be considered a capital contribution depending on the specifics of the transaction and the relationship between the corporation and the shareholder. However, this would generally require a formal change in the shareholder's equity position in the corporation, which is different from merely forgiving a debt. So, in most cases, only option C applies, unless specific circumstances warrant treating it as a capital contribution.