Tonya contributes $150,000 to Swan, Inc., for 80% of the stock. In addition, she loans Swan $600,000. The maturity date on the loan is 5 years and the interest rate is 6%, the same as the Federal rate. Which of the following statements are correct?
A) If the loan is reclassified as equity under § 385, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000).
B) If the loan is not reclassified as equity under § 385, Swan can deduct interest expense annually of $36,000, and Tonya includes in gross income annually interest income of $36,000.
C) If the loan is reclassified as equity under § 385, Swan claims no interest deduction, and Tonya recognizes no income.
D) Only a. and b.
E) a., b., and c.

Question

Quizplus · Accepted Answer

If the loan is not reclassified as equity under § 385, Swan can deduct the interest expense of $36,000 annually, and Tonya must include this interest income in her gross income annually.

Tonya Contributes $150,000 to Swan, Inc