Elizabeth made the following interest-free loans during the year. Assume that tax avoidance is not a...

Elizabeth made the following interest-free loans during the year. Assume that tax avoidance is not a principal purpose of any of the loans. Assume that the relevant Federal rate is 5% and that the loans were outstanding for the last six months of the year.

Borrower	Amount	Borrower's Net Investment Income	Purpose of Loan
Richard	$2,500	$0	Gift
Woody	$3,000	$350	Purchase stock
Irene	$179,000	$0	Purchase residence

If an amount is zero, enter "0". If required, round your final answer to the nearest dollar.

a. Richard is not subject to the imputed interest rules because the $10,000 gift loan exception does apply. Elizabeth's gross income from the loan is $------.

b. The $10,000 exception does not apply to the loan to Woody because the proceeds were used to purchase income producing assets. Although the $100,000 exception applies to this loan, the amount of imputed interest is $------- . Elizabeth's gross income from the loan is $-------.

c. None of the exceptions apply to the loan to Irene because the loan was for more than $100,000 . Elizabeth's gross income from the loan is $-------.

What are the effects of the imputed interest rules on these transactions? Compute Elizabeth's gross income from each loan.

Expert Solution

a
Richard is not subject to the imputed interest rules because the $10000 gift loan exception does apply. Elizabeth's gross income from the loan is $0
(Since the loan was below $10000 and was not used to purchase any income producing assets so there will be no imputed interest, therefore gross income of Elizabeth from loan will be taken $0)

b
The $10000 exception does not apply to the loan to Woody because the proceeds were used to purchase income producing assets. Although the $1000000 exception applies to this loan, the amount of inputed interest is $0. Elizabeth's gross income from the loan is $0
(Because of purchase of income producing assets $10000 exception does not apply but since $100000 exception applies and net investment income did not exceed $1000 therefore there will be no imputed interest, so Elizabeth's gross income from the loan will be taken $0)

c
None of the exceptions apply to the loan to Irene because the loan was for more than $100000. Elizabeth's gross income from the loan is $4,475

(Gross income = 5% X $179,000 X 1/2 months)

ekkarill92 answered 1 year ago

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