David Emporium operates a chain of successful retail stores. In order to obtain some finance for its operations, the company entered into a loan agreement with a subsidiary company in which it loaned the subsidiary a substantial sum in return for a right to large interest payments. Three days later (as was always the plan) it assigned the right to these interest payments to a finance company in return for a lump sum payment. Is the profit made from the assignment of these interest payments likely to be ordinary income?

Question

Quizplus · Accepted Answer

The profit from the assignment of these interest payments is likely to be considered ordinary income because the company had a profit-making intention with this arrangement. Even though the transaction may not be a regular occurrence in the business's usual operations, the intention behind it aligns with generating profit, which can classify it as ordinary income.

David Emporium Operates a Chain of Successful Retail Stores