Albert and Elva Each Own 50% of the Stock of Eagle

question 106

Essay

Albert and Elva each own 50% of the stock of Eagle, Inc. (a C corporation). To cover what is perceived as temporary working capital needs, each shareholder loans Eagle $200,000 with an annual interest rate of 6% (same as the Federal rate) and a maturity date of one year. The loan is made at the beginning of 2016.
a.What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as debt?
b.What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as equity?

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Definitions:

Fats

Molecules composed of triglycerides that are solid at room temperature, commonly found in animals and some plants, and serve as a major energy source.

Oils

Organic substances that are liquid at room temperature and are insoluble in water but soluble in organic solvents.

Fatty Acid Structures

The molecular arrangement of fatty acids, which typically consist of long hydrocarbon chains with a terminal carboxylic acid group; can be saturated or unsaturated.

Acid Base Hydrolysis

A reaction where water and an acid or base catalyze the breakdown of a molecule, often leading to the cleavage of chemical bonds.