diff --git a/engine/runtime/src/main/scala/org/enso/compiler/pass/desugar/LambdaShorthandToLambda.scala b/engine/runtime/src/main/scala/org/enso/compiler/pass/desugar/LambdaShorthandToLambda.scala
index 209fef12a1..3ff92e6b36 100644
--- a/engine/runtime/src/main/scala/org/enso/compiler/pass/desugar/LambdaShorthandToLambda.scala
+++ b/engine/runtime/src/main/scala/org/enso/compiler/pass/desugar/LambdaShorthandToLambda.scala
@@ -200,14 +200,18 @@ case object LambdaShorthandToLambda extends IRPass {
             )
           val newName = newFn.name
           (newFn, Some(newName))
-        } else (fn, None)
+        } else {
+          val newFn = desugarExpression(fn, freshNameSupply)
+          (newFn, None)
+        }
 
         val processedApp = p.copy(
           function  = updatedFn,
           arguments = updatedArgs
         )
 
-        // Wrap the app in lambdas from right to left, lambda / shorthand arg
+        // Wrap the app in lambdas from right to left, 1 lambda per shorthand
+        // arg
         val appResult =
           actualDefArgs.foldRight(processedApp: IR.Expression)((arg, body) =>
             IR.Function.Lambda(List(arg), body, None)
diff --git a/engine/runtime/src/test/scala/org/enso/compiler/test/pass/desugar/LambdaShorthandToLambdaTest.scala b/engine/runtime/src/test/scala/org/enso/compiler/test/pass/desugar/LambdaShorthandToLambdaTest.scala
index c952388d9a..67a0a1eef7 100644
--- a/engine/runtime/src/test/scala/org/enso/compiler/test/pass/desugar/LambdaShorthandToLambdaTest.scala
+++ b/engine/runtime/src/test/scala/org/enso/compiler/test/pass/desugar/LambdaShorthandToLambdaTest.scala
@@ -497,4 +497,68 @@ class LambdaShorthandToLambdaTest extends CompilerTest {
       arg.defaultValue.get shouldBe an[IR.Function.Lambda]
     }
   }
+
+  "Lambda shorthand in nested functions" should {
+    "correctly translate the section-function in an application" in {
+      implicit val ctx: InlineContext = mkInlineContext
+
+      val ir =
+        """(_ + 5) 5
+          |""".stripMargin.preprocessExpression.get.desugar
+
+      ir shouldBe an[IR.Application.Prefix]
+      val app = ir.asInstanceOf[IR.Application.Prefix]
+      app.function shouldBe an[IR.Function.Lambda]
+      val lam = app.function.asInstanceOf[IR.Function.Lambda]
+      lam.arguments.length shouldEqual 1
+      val lamArg1Name = lam.arguments.head
+        .asInstanceOf[IR.DefinitionArgument.Specified]
+        .name
+        .name
+      val lamBody = lam.body.asInstanceOf[IR.Application.Prefix]
+      lamBody.arguments.length shouldEqual 2
+      val appArg1Name = lamBody.arguments.head
+        .asInstanceOf[IR.CallArgument.Specified]
+        .value
+        .asInstanceOf[IR.Name.Literal]
+        .name
+      lamArg1Name shouldEqual appArg1Name
+    }
+
+    "correctly translate the function in an application" in {
+      implicit val ctx: InlineContext = mkInlineContext
+
+      val ir =
+        """(f _ _ b) b
+          |""".stripMargin.preprocessExpression.get.desugar
+
+      ir shouldBe an[IR.Function.Lambda]
+      val firstLam = ir.asInstanceOf[IR.Function.Lambda]
+      firstLam.arguments.length shouldEqual 1
+      val firstLamArgName = firstLam.arguments.head
+        .asInstanceOf[IR.DefinitionArgument.Specified]
+        .name
+        .name
+      val secondLam = firstLam.body.asInstanceOf[IR.Function.Lambda]
+      val secondLamArgName = secondLam.arguments.head
+        .asInstanceOf[IR.DefinitionArgument.Specified]
+        .name
+        .name
+      val app = secondLam.body.asInstanceOf[IR.Application.Prefix]
+      app.arguments.length shouldEqual 4
+      val appArg1Name = app.arguments.head
+        .asInstanceOf[IR.CallArgument.Specified]
+        .value
+        .asInstanceOf[IR.Name]
+        .name
+      val appArg2Name = app
+        .arguments(1)
+        .asInstanceOf[IR.CallArgument.Specified]
+        .value
+        .asInstanceOf[IR.Name]
+        .name
+      firstLamArgName shouldEqual appArg1Name
+      secondLamArgName shouldEqual appArg2Name
+    }
+  }
 }
diff --git a/engine/runtime/src/test/scala/org/enso/interpreter/test/semantic/LambdaShorthandArgsTest.scala b/engine/runtime/src/test/scala/org/enso/interpreter/test/semantic/LambdaShorthandArgsTest.scala
index cee2e6dac4..3e558f2cc3 100644
--- a/engine/runtime/src/test/scala/org/enso/interpreter/test/semantic/LambdaShorthandArgsTest.scala
+++ b/engine/runtime/src/test/scala/org/enso/interpreter/test/semantic/LambdaShorthandArgsTest.scala
@@ -153,5 +153,16 @@ class LambdaShorthandArgsTest extends InterpreterTest {
 
       eval(code) shouldEqual 20
     }
+
+    "work properly when used inside the function of an application" in {
+      val code =
+        """
+          |import Builtins
+          |
+          |main = (_ - 5) 0
+          |""".stripMargin
+
+      eval(code) shouldEqual -5
+    }
   }
 }