Essay
Albert and Elva each own 50% of the stock of Eagle, Inc. (a C corporation). To cover what is perceived as temporary working capital needs, each shareholder loans Eagle $200,000 with an annual interest rate of 6% (same as the Federal rate) and a maturity date of one year. The loan is made at the beginning of 2013.
a. What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as debt?
b. What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as equity?
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