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:

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The interest payment of $6,300 is deductible by Finch Corporation as an interest expense on the debt owed to George. This reduces Finch Corporation's taxable income. The principal payment of $7,000 is not deductible as it is a repayment of the loan principal, not an expense.

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