1. Assume that Betty Borrower borrows $100,000 from Larry Lender on January 1 of Year 1 under a loan agreement that requires Betty to repay the $100,000 after 10 years (on December 31 of Year 10) and also requires that she pay 4% interest, compounded annually, on December 31 of Year 10 when she repays the original principal. In Year 10, she would have to pay to Larry $148,024.43.
a. Is Betty's Year-1 receipt of $100,000 in cash includable in her Gross Income (Rule: § 61's residual clause)?
b. Does Betty's repayment of the $100,000 principal amount in Year 10 constitute a wealth reduction that might generate a deduction for her (Rule: § 61)?
2. Does the existence of § 7872 mean that you have to worry about a Gross Income inclusion when you borrow money from a bank at below-market rates because of a special deal aimed at stealing you away from another bank or because you are a very good customer whose loyalty the bank is massaging?
3. Joy, a landlord, demands a deposit equal to two month's rent before she will rent an apartment to prospective tenant Joey. Under the lease agreement, the deposit will be returned to Joey at the end of the lease term so long as he has not damaged the property or defaulted on any lease payments. Joy pays no interest to Joey with respect to the deposit, but she puts it in a bank account that earns interest and includes the interest in her own Gross Income each year. Joey pays the required deposit and rents an apartment for three years. What are the tax consequences for Joy if she:
a. repays the deposit in full to Joey at the end of Year 3 when he leaves the apartment in good condition and without being arrears in rent payments? (Rule: § 61)?