Problem
Parrott, Inc., a C corporation, is owned by Abner (60%) and Deanna (40%). Abner is the president, and Deanna is the vice president for sales. All three are cash basis taxpayers. Late in 2015, Parrott encounters working capital difficulties. Therefore, Abner loans the corporation $810,000, and Deanna loans the corporation $540,000. Each loan is on a 5% note that is due in five years with interest payable annually. Determine the tax consequences to Parrott, Abner, and Deanna for 2016 if:
a. The notes are classified as debt.
b. The notes are classified as equity.