George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum. In the first year of operation, Finch has net taxable income of $40,000. If Finch pays George interest of $6,300 and $7,000 principal payment on the note:
A) George has dividend income of $13,300.
B) Finch Corporation does not have a tax deduction with respect to the payment.
C) George has dividend income of $7,000.
D) Finch Corporation has an interest expense deduction of $6,300.
E) None of the above.

Question

Quizplus · Accepted Answer

Finch Corporation can deduct the interest payment of $6,300 as an interest expense, which is a legitimate business expense. The principal payment of $7,000 is not considered dividend income to George, as it is a repayment of debt, not a distribution of profits.

George Transfers Cash of $150,000 to Finch Corporation, a Newly