On January 1, Sandi Borrows $40,000 from G&H Accounting Firm

On January 1, Sandi borrows $40,000 from G&H Accounting firm, her employer, to pay-off charge accounts and other personal loans. Sandi must repay the $40,000 loan at the end of 5 years. Because Sandi has been loyal to her job, G&H is not charging Sandi interest on the $40,000 loan. The applicable federal interest rate is 6%. If Sandi has total net investment income for the current year of $200: I. Sandi has compensation income of $2,400. II. Sandi has a nontaxable gift from her employer of $2,400. III. G&H is allowed a deduction for $2,400 of compensation paid to Sandi. IV. There are no tax effects because Sandi's net investment income is less than $1,000.

A) Only statement I is correct.
B) Only statement II is correct.
C) Only statements I and III are correct.
D) Only statements II and IV are correct.
E) Only statements II and III are correct.