Both Malcomb and Sandra Shareholders) Loan Crow Corporation $50,000 at the Market

question 113

Multiple Choice

Both Malcomb and Sandra shareholders) loan Crow Corporation $50,000 at the market rate of 6% interest. Which of the following statements are false?

• A) Crow may deduct the interest expense, and the interest income is taxable to Malcomb and Sandra.
• B) When the note principal is repaid, neither Malcomb nor Sandra recognizes gross income from the repayment.
• C) If the IRS were successful in reclassifying the notes as equity, the interest payments would not be deductible by Crow, and Malcomb and Sandra would still recognize income.
• D) If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Malcomb and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Malcomb and Sandra.
• E) All of these are true.

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Definitions:

Interest Rate

The percentage at which interest is charged or paid for the use of money, usually expressed as an annual percentage rate.

Income Earns

The total revenue received by an individual or entity from various sources, including wages, investments, and other financial benefits.

Afford

The ability of an individual or entity to purchase goods or services without financial strain.

Field Experiment

An experiment conducted in a natural setting rather than in a laboratory, allowing researchers to study economic behaviors in real-world contexts.