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Problem 13-38 (LO. 4) Parrott, Inc., a C corporation, is owned by Alfonso (60%) and...

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Problem 13-38 (LO. 4) Parrott, Inc., a C corporation, is owned by Alfonso (60%) and Deanna (40%). Alfonso is the president, and Deanna is the vice president for sales. All three are cash basis taxpayers. Parrott encounters working capital difficulties, so Alfonso loans the corporation $810,000, and Deanna loans the corporation $540,000. Each loan is supported by a 5% note that is due in five years, with interest payable annually. Determine the tax consequences to Parrott, Alfonso, and Deanna if the notes are classified as (a) debt and (b) equity. a. If the notes are classified as debt, Parrott, Inc., will deduct interest expense of $ X. Alfonso will report interest income of $ X, and Deanna will report interest income of $ X each year. Feedback b. If the notes are classified as equity, Parrott, Inc., will report dividends deemed to be paid of $ X. Alfonso will report dividend income of $ X. Deanna will report dividend income of $ each year. When the loan is repaid in five years, assuming adequate earnings and profits, Alfonso will report dividend income of X and Deanna will report dividend income of $ X

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