Rocky and Sandra (Shareholders) Each Loan Eagle Corporation $10,000 at the Market

question 92

Multiple Choice

Rocky and Sandra (shareholders) each loan Eagle Corporation $10,000 at the market rate of 10% interest. Which of the following statements are false?

• A) Eagle may deduct the interest expense, and the interest income is taxable to Rocky and Sandra.
• B) When the note principal is repaid, neither Rocky 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 Eagle, and Rocky and Sandra would still recognize income.
• D) If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Rocky and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Rocky and Sandra.
• E) All of the above are true.

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