Tonya Contributes $150,000 to Swan,Inc

question 104

Multiple Choice

Tonya contributes $150,000 to Swan,Inc.,for 75% of the stock.In addition,she loans Swan $450,000.The maturity date on the loan is 5 years and the interest rate is 8%,the same as the Federal rate.Which of the following statements are correct?

• A)If the loan is reclassified as equity under § 385, Swan qualifies for a deduction of $450,000 when the loan is repaid, and Tonya receives dividend income of $450,000 (assuming that Swan's earnings and profits are at least $450,000).
• B)If the loan is not reclassified as equity under § 385, Swan can deduct interest expense annually of $36,000, and Tonya includes in gross income annually interest income of $36,000.
• C)If the loan is reclassified as equity under § 385, Swan claims no interest deduction, and Tonya recognizes no income.
• D)All of the above.
• E)None of the above.

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Definitions:

Creative Destruction

a concept in economics which suggests that new innovations continually destroy old industries or practices, making way for new growth and advancements.

U.S. Business

Refers to commercial, industrial, or professional activities conducted within the United States aimed at generating profit or economic growth.

Long-Run Supply Curve

A graphical representation that shows how the quantity supplied of a good changes in response to a price change once producers have had enough time to adjust their production decisions fully.

Constant-Cost Industry

An industry in which costs of production do not change as the industry's output changes.