Karl is an employee of Cars-R-Us. As part of their employment agreement, Cars-R-Us loans Karl $1,000,000 interest-free to assist in the purchase of a car dealership. Assume the federal rate of interest is 8%. What is the tax treatment of the loan?
I. The arrangement has no tax consequences to Karl.
II. Cars-R-Us is deemed to have paid Karl compensation of $80,000.
III. Karl is deemed to have
paid Cars-R-Us $80,000 of interest.
IV. Cars-R-Us' net income tax effect is zero due to this arrangement.
a. Only statement I is correct.
b. Only statements I, II, and IV are correct.
c. Only statement III is correct.
d. Only statements I, II, and III are correct.
e. Only statements II, III, and IV are correct.
e
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