Which of the following interest-free loans is subject to the imputed interest rules (i.e., interest must be imputed on the loan)?
I.Marilyn loans $24,000 to her grandmother and she uses the money to pay personal expenses and take a vacation. Her grandmother's sole income is from Social Security.
II.Pineview Corporation loans $20,000 to Catherine, an employee. Catherine uses the proceeds as a down payment on a house. Catherine's net investment income for the year is $300.
III.Scott loans $65,000 to his son. His son uses the money to open a new business. During the current year, the business shows a loss and his son has no other sources of income.
IV.Alaric Corporation loans $27,000 to its principal shareholder. The shareholder uses the funds to buy additional shares of stock in Alaric. The shareholder is deemed to receive $8,500 of dividends from Alaric during the year.

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

Question

Which of the following interest-free loans is subject to the imputed interest rules (i.e., interest must be imputed on the loan)?
I.Marilyn loans $24,000 to her grandmother and she uses the money to pay personal expenses and take a vacation. Her grandmother's sole income is from Social Security.
II.Pineview Corporation loans $20,000 to Catherine, an employee. Catherine uses the proceeds as a down payment on a house. Catherine's net investment income for the year is $300.
III.Scott loans $65,000 to his son. His son uses the money to open a new business. During the current year, the business shows a loss and his son has no other sources of income.
IV.Alaric Corporation loans $27,000 to its principal shareholder. The shareholder uses the funds to buy additional shares of stock in Alaric. The shareholder is deemed to receive $8,500 of dividends from Alaric during the year.
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A)Only statement II is correct.
B)Only statements I and III are correct.
C)Only statements II and IV are correct.
D)Only statements I and IV are correct.
E)Only statements II and III are correct.

Quizplus · Accepted Answer

Imputed interest rules apply to below-market loans, such as those in statements II and IV. In statement II, the loan to an employee for a down payment on a house is subject to imputed interest if the loan is below-market and does not qualify for any exclusions. In statement IV, a loan to a principal shareholder, which could be seen as a way to transfer value without recognizing income, is also subject to these rules. Statements I and III involve personal loans within families, which may not be subject to the same rules unless they exceed certain thresholds or are used for income-producing purposes, which is not clearly the case here.

Which of the Following Interest-Free Loans Is Subject to the Imputed