FINANCE 101- Computational Exercise

Computational Exercise (40 points)

Lisbeth makes the following interest-free loans during the year. The relevant federal interest rate is 5%, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last 6 months of the tax year. Identify the federal income tax effects of these loans. Note carefully the tax position on each borrower for which you should clearly identify and include discussions on a) the differences between imputed interest and market interest on gift loans, b) the importance of loans between individual and, c) the tax recognition of interest income.