Question

15.       The effects of a below-market loan for $1,000,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

a.         The corporation has imputed interest income and the officer is deemed to have received a gift.

b.         The corporation has imputed interest income and the officer has imputed dividends received income.

c.         The officer has no income unless the funds are invested and produce investment income for the year.

d.         The officer has imputed compensation income and the corporation has imputed interest income, and is not allowed a deduction for the imputed compensation expense.

e.         The officer has imputed compensation income and the corporation has imputed interest income, but is allowed a deduction for the imputed compensation expense.

Answer 1

Below market loans are loans given by company to its executives as addition benefits and be called as compensation income , As these loans are given at a interest rate which are providing undue benefits to its executive as interest rates are very low or free.

As the IRS set rules for the company how these below market loans to be treated in executive and company case

as per Pub 535 on business expenses for below market loans is compensation income in hands of employee

so answer is point D

The officer has imputed compensation income and the corporation has imputed interest income, and is not allowed a deduction for the imputed compensation expense